Fear of Mexico’s shadow banking ‘Pandora’s box’

Banking in the shadow of Mexico is a whole ‘Pandora’s box’. Photo: Cesar Rodriguez / Bloomberg

(Bloomberg) – Bond investors are concerned that something is wrong with Mexico’s shadow banking system.

The price of Alpha Holding and Crédito Real bonds has plummeted after each entity announced revisions to financial statements in recent days. In addition, the debt of other borrowers in the sector, such as Financiera Independencia and Unifin Financiera, has also been affected, as investors question the quality of loan portfolios and the risk of contagion.

“Once Pandora’s box is opened, you don’t know what will come of it,” said Luis Maizel, co-founder of LM Capital Group in San Diego. It has Credito Real bonds, but says that, for now, it is avoiding increasing its holdings in shadow banks. He said that the quality of the Crédito Real portfolio “was quite well disguised,” so he prefers to be cautious.

Alpha bonds, widely known as AlphaCredit, have lost more than two-thirds of their value to about 26 cents on the dollar since April 20, when accounting errors were disclosed. Meanwhile, the $ 400 million in Credito Real bonds due 2028 have fallen 9.5 cents on the dollar, trading close to 92 cents. The bonds of Crédito Real’s competitors fell to similar levels.

An AlphaCredit spokesperson declined to comment. Representatives for Crédito Real and Unifin did not respond to requests for comment.

The financial director of Financiera Independencia, Enrique Brockmann, said in an interview that although the bonds have been affected by contagion, the company has a solid audit process and does not foresee problems like those of AlphaCredit and Crédito Real.

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Evolution of bonds of alternative financial companies to Mexican banks.  Bloomberg.

Evolution of bonds of alternative financial companies to Mexican banks. Bloomberg.

More surprises are expected in the sector

Analysts who follow the industry say they anticipate more surprises. AlphaCredit said it learned of its accounting problems after an internal review and discussions with audit firms KPMG and Deloitte. The lender detected an error in the accounting of its derivatives, saying that most of the 4.1 billion pesos (US $ 206 million) previously reported as other assets and accounts receivable could be impaired.

The Real Credit situation then shook investors a second time, after the lender announced a review of its 2020 annual statement showing that a portfolio of delinquent loans was approximately 82% larger than previously presented. On Wednesday, it revealed a 71% decline in first-quarter earnings.

Alexis Panton, a strategist at Stifel, says it’s strange that Crédito Real, which makes loans to clients riskier than the mainstream banking sector, has previously reported lower rates on consumer loans than larger banks. “There has been concern that Crédito Real is not reporting delinquencies,” Panton said in an interview.

Is the whole truth being told?

For example, financial columnist Alberto Aguilar reported in January that Crédito Real was having trouble obtaining payment on a US $ 32.5 million loan granted to a related party involved in the sale of radio operator Sistema Radiópolis. The company has not confirmed whether the Radiópolis loan was the one added to the delinquent loans accounted for in its recent filing.

“If the press had not reported on this loan, which has not yet been fully provisioned, would the issue have been left under the rug?” Asked Panton.

In comments during a call with investors, Credito Real CEO Carlos Ochoa sought to minimize the change in figures, adding that he expects the delinquency rate to drop to 3% by year-end. “We don’t have a systemic problem,” he said.

Some investors agreed this week – seeing a buying opportunity from affected lenders – that shadow banking bonds will see a small recovery. “It looked like they had dropped too much” before Wednesday’s rebound, said Omar Zeolla, a strategist at Oppenheimer in New York. “The gains from Crédito Real could put additional pressure on the bonds unless management can convince investors that an upgrade is around the corner.”

It is not the first time that the sector has been affected by accounting problems. Last year, the retailer’s banking unit license was revoked Famsa Group after the regulator discovered illegal loans from related parties. The company subsequently sought bankruptcy protection, first in the United States and then in Mexico. Earlier this year, Crédito Real bought Famsa’s 11 billion-peso (US $ 552 million) payroll portfolio.

Gilberto García, an analyst at Barclays, said that Crédito Real’s payroll loan business did not improve in the first quarter and that the increase in delinquencies led the company to almost breach a 4% threshold in its bank loan agreements. more restrictive. And he was concerned about an increase in money owed by his loan dealers, he said.

“Bad news as the liquidity clock keeps turning,” he said.

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Nota Original:Mexican Shadow Banks Proving a Pandora’s Box for Bond Investors

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