Dec 6 - Recently enacted Mexican labor reforms will enhance INFONACOT's
servicing capabilities and increase the number of eligible loans for the largest
consumer ABS issuer in Mexico, Fitch believes. These changes require all
private-sector employers to register with the public lender, INFONACOT, making
the tracking borrowers of consumer loans easier. We believe these enhanced
servicing capabilities might help to mitigate losses on loan pools; however,
this has yet to be seen in the long run. Additionally, registration will also
allow INFONACOT to originate a higher volume of consumer loans.
INFONACOT is a decentralized governmental entity that provides credit to low-
and middle-income workers mostly in the private sector and is a leading sponsor
of consumer ABS. Its main collection tool is an automatic payroll deduction.
Using payroll deductions has proven to be more effective than traditional
collection methods, as it eliminates any willingness to pay issues and isolates
particular operational matters. Historically, when workers change jobs,
INFONACOT was forced to wait for payment until the workers are employed in an
affiliated company or revert to traditional collections if the worker's new job
is at some of the non-INFONACOT-affiliated companies. These reforms increase the
universe of affiliated companies allowing for much better tracking and
consistency on cash flows from securitized pools.
We expect INFONACOT's lending business to escalate. INFONACOT estimates there
are more than 835,000 private-sector companies (working centers) registered in
the system and this represents nearly twenty million of eligible workers. It
services 7% of those companies that account for nearly 50% of potential
borrowers. To avoid common growth problems in the ABS pools, we will monitor how
INFONACOT's risk-management practices and technology platform adapt to the
expected demand for credit. In our view, the eligibility criteria on existing
securitized pools backing rated ABS remain somewhat loose, calling for high
excess spread and full turbo amortization mechanisms when minimum
overcollateralization levels are breached. We expect outstanding ABS
transactions in revolving periods to benefit from a larger set of registered
companies, as they would enable concentration tests by region and employer to
remain within established maximum levels.
Given INFONACOT's well-established zero net leverage policy on its balance sheet
funding, Fitch considers ABS as a natural off-balance sheet financing option in
order to attend the increasing demand for credit in the coming years. ABS
accounts for approximately 60% of total INFONACOT funding structure.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
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expressed are those of Fitch Ratings.