NHMFC’s BALAI Bonds 2 Senior Notes’ Strong Conditional Credit Rating  Affirmed into Final Rating


National Home Mortgage Finance Corporation (NHMFC) closed its fourth securitization transaction called ‘BALAI Bonds 2’, for a portion of its Residential Loan portfolio. The transaction involved a total issuance amount of P319.322 million, consisting of one tranche of Senior Notes and one tranche of Subordinated Notes. The Class A Senior Notes are worth P150.0 million and shall be amortized using the Controlled Amortization method with a pre-defined amortization schedule during the Controlled Amortization Period. The Class B Subordinated Notes are worth P169.322 million, and will be amortized after all Senior Notes have been settled, with variable interest payable quarterly.

Philippine Rating Services Corporation (PhilRatings) affirmed the Conditional Credit Ratings of PRS A plus for the Class A Senior Notes, and PRS Ba for the Class B Subordinated Notes into Final Ratings. 

The Conditional Ratings were affirmed into Final Ratings upon closure of the BALAI Bonds 2 transaction and the submission of final and signed transaction documents and other requirements. PhilRatings determined that all pertinent conditions for the Conditional Ratings have already been fulfilled. 

Obligations rated PRS A have favorable investment attributes and are considered as upper-medium grade obligations. Although obligations rated PRS A are somewhat susceptible to the adverse effects of changes in economic conditions, the obligor’s capacity to meet its financial commitments of the obligation is still strong.

Obligations rated PRS Ba, on the other hand, are less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties relating to business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. 

PhilRatings may also include a ‘plus’ (+) or ‘minus’ (-) sign to further qualify its ratings. 

A Stable Outlook was likewise assigned to the Final Ratings. An Outlook is an indication as to the possible direction of any rating change within a one year period and serves as a further refinement to the assigned credit rating for the guidance of investors, regulators, and the general public. A Stable Outlook is defined as: “The rating is likely to be maintained or to remain unchanged in the next twelve months.”

PhilRatings will continue to monitor significant developments relating to BALAI Bonds 2, particularly with respect to collection, payment, and default.

The Final Credit Ratings and Outlook took into consideration the following: (a) the Asset Pool collection performance, (b) ongoing pandemic and economic recession, (c) senior and subordinated notes structure, (d) prepayment and interest rate risks and (e) transaction participants. 

This is already the fourth securitization transaction entered into by NHMFC for its total Residential Loan portfolio. As such, it may be expected that since the best performing assets of the portfolio have already been securitized previously, the next-best performing assets are backing the latest securitization. It should be noted, however, that since the last securitization transaction, BALAI Bonds 1, completed in 2019, around half of the Asset Pool was originated from 2016 to 2018. Though these may be considered to be from a more fresh batch of loans, the relatively lower seasoning may present a different element of risk to the transaction.

It should also be noted that the asset quality of the first two Asset Pools securitized by the company has deteriorated throughout the life of their respective transactions. The guarantee for both previous securitization transactions has not been called and payments on the transactions have been made on a timely basis. BALAI Bonds 1 and 2 however, do not have guarantees. 

The Asset Pool for BALAI Bonds 2 is composed of 1,291 Residential Loans. PhilRatings notes, however, that 87% of the portfolio, consisting of 1,126 loans had undergone restructuring. In comparison, 72% of accounts were restructured in BALAI Bonds 1. It should be noted, however, that in terms of outstanding principal amounts, around 47% or P150.92 million was restructured. This is lower than the 62% recorded in BALAI Bonds 1.

Due to the ongoing COVID-19 pandemic, the country’s Gross Domestic Product (GDP) contracted by 9.5% in 2020. This was reportedly the sharpest decline on record since 1947 and the first decline since 1998. 

The Class A Senior Notes benefit from additional protection from the subordination of the Class B Subordinated Notes in case the allocation of losses in the Asset Pool can no longer be covered by the excess spread. The Senior Notes also benefit from its higher rank in terms of payment priority. The P169.322 million Class B Subordinated Notes represent 53% of the total issue amount and 113% coverage of the Senior Notes. 

Likewise, there are a total of 11 months’ worth of collections and expected payments to be stored in the various liquidity accounts of the transaction. These are designed to be funded to cover the 11 months right from the closing of the transaction.

Prepayment is an acknowledged source of volatility in terms of cash flows for an asset backed security. Prepayments lessen the interest to be earned from a transaction, possibly reducing expected cash flows. It also inadvertently increases the default rate by lessening the total portfolio. It has been observed, however, that there have been minimal prepayments in NHMFC’s Residential Loan portfolio historically. Furthermore, the Residential Loans and Senior Notes have fixed interest rates. This ensures the relative stability of cash flows and spreads of the transaction compared to having variable interest rates from either the Residential Loans and/or Senior Notes.

Participants in the transaction are well-established institutions which have the likely capability to perform their functions in relation to this transaction. They have also made adjustments in light of the community quarantine to be able to continue to adequately provide their services. Such include: the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), Philippine National Bank (PNB), PwC (Isla
Lipana & Co.), and the law firm of MOSVELDTT (Molo Sia Dy Tuason Ty Coloma Law Offices).