Fitch Upgrades Metrofinanciera's IDRs to 'CCC' Following Debt Exchange

MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Metrofinanciera, S.A.P.I. de C.V.'s (Metro) foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'RD' (long-term) and to 'C' from 'RD' (short-term), while its Individual rating was upgraded to 'E' from 'F'. The long-term and short-term national scale ratings were also upgraded to 'CCC(mex)' and 'C(mex)', respectively, from 'D(mex)'. A detailed list of rating actions is at the end of this release.

Metro's upgraded ratings reflect the successful completion of a previously agreed distressed debt exchange through a bankruptcy process, which it had been negotiating since April 2009. This exchange largely mitigated refinancing and liquidity risk. The amount of liabilities was significantly reduced and debt maturities over the short- and medium-term are minor, which provides Metro with flexibility and a relatively ample timeframe to rebuild its financial and business profile. However, the revised ratings also reflect its yet negative core capital (a concept that excludes the hefty amount of loss absorbing hybrids that arose from the debt exchange program), the sizable challenges relating to gradually restoring its commercial and competitive position, and the ample vulnerabilities of a heavily encumbered balance sheet.

Core capital is estimated at negative MXN1.49 billion as of September 2010 (reported equity minus subordinated debt accounted for by Metro as equity and the book value of the first loss pieces arising from mortgage securitizations). Even considering the total amount of highly loss-absorbing hybrids, eligible capital would stand at 15.3% of total assets, a level that is considered low by Fitch in view of the high amount of non-earning assets. Major among these are the land properties that Metro and its land bank vehicle acquired in the past (43% of total assets at third quarter 2010 [3Q'10]) and the sizable impaired loans (12% of total assets on a net-of-reserves basis).

In Fitch's opinion, the major challenge for Metro is rebuilding its business profile to reverse the trend of a rapidly shrinking and worsening loan portfolio, which in turn is critical to restore Metro's ability to generate positive recurring earnings. Metro will have at its disposal MXN12 billion of committed credit lines granted by the housing development bank Sociedad Hipotecaria Federal (SHF), of which MXN4.5 billion will be directed toward resuming disbursements for construction loans, where most of the company's asset quality concerns concentrate. While some of these projects could improve relatively fast as Metro resumes cash disbursements, overall impairment levels will remain high in view of the still tough operating environment within the residential construction sector. Impairments within the mortgage portfolio are also high and have worsened recently, which is another important challenge for Metro. Most mortgage loans are funded with collateralized credit facilities granted previously by SHF, which were not subject to the debt exchange program. Fitch considers that these facilities are another element that demonstrates SHF's willingness to sustain funding for Metro to fulfill the financing needs of the socially important sector of low income housing.

In Fitch's view, any potential rating upgrade in the future is contingent upon Metro's ability to restore positive recurring earnings and achieving a positive amount of core capital. In this regard, its capacity to rapidly improve balance sheet integrity by reducing the proportion of impaired loans and non-earning fixed assets, while enhancing its competitive position, will be critical over the foreseeable future.

Fitch has upgraded the following ratings:

--Foreign and local currency long-term IDR to 'CCC' from 'RD';

--Foreign and local currency short-term IDR to 'C' from 'RD';

--Individual rating to 'E' from 'F';

--Long-term national scale issuer rating to 'CCC(mex)' from 'D(mex)';

--Short-term national scale issuer rating to 'C(mex)' from 'D(mex)'.

Fitch has affirmed the following ratings:

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Fitch has withdrawn the following debt ratings, as these were replaced under the debt exchange program by new unrated securities:

--Long-term national scale ratings for unsecured debt issues of 'D(mex)';

--Short-term national scale ratings for unsecured debt issues of 'D(mex)';

--USD100 million 11.25% perpetual non-cumulative subordinated step-up notes of 'C/RR6'.

Additional information is available at www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria', dated Aug. 16, 2010;

--'Equity Credit for Hybrids and Other Capital Securities', dated Dec. 29, 2009;

--'Rating Hybrid Securities', dated Dec. 29, 2009;

--'National Ratings - Methodology Update', dated Dec. 18, 2006.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Rating Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086

Equity Credit for Hybrids and Other Capital Securities: Market Feedback and Fitch's Responses

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=291784

National Ratings - Methodology Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=305544

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