Credito Real CREAL -10.15%
built a booming business by lending at high interest rates to Mexican teachers and other government officials. The loans were repaid by payroll deduction, thus reducing the risk of non-payment.
It is now considering filing for bankruptcy in Mexico after facing growing skepticism about how it reported earnings and measured the size of its loan book. Investors unplugged the lender amid speculation why about half the value of its loan portfolio, or about $1.1 billion, was in unpaid interest, which the company still hasn’t said. not explained.
It would be the second non-bank lender in Mexico specializing in payday loans to restructure after scrutiny of their accounting and allegations of hidden losses. There was no explanation for the missing money from either institution.
Crédito Real opened in 1993 and today serves more than one million borrowers, mostly low to middle income, who have no credit history and cannot obtain loans. from more conservative retail banks. Its main borrowers are mostly unionized government employees such as teachers.
Payday loans, a cousin of payday loans, account for more than a quarter of total consumer loans in the country, according to the Bank of Mexico. Typically, loans average about $1,000 to repay over three years, with borrowers using them to open side businesses, cover health emergencies, buy school supplies or pay off more expensive loans, executives say. Of the industry.
Crédito Real’s average salary loan was around $3,200 in Q4 2021, with an average annual interest rate of 53.4%.
Credito Real did not respond to requests for comment. The company on Thursday fired its financial adviser and abandoned plans to file for Chapter 11 in the United States. Instead, it will seek to restructure under Mexican bankruptcy law, according to people familiar with the matter.
In February, Crédito Real said its inflows remained stable through 2021, with a non-performing loan ratio of 2% to 3%. He did not explain the discrepancies in his accounting.
Wall Street investors have poured billions of dollars over the past decade into non-bank lenders like Credito Real, lured by their strong growth and earnings. Goldman Sachs Group Inc..
and Barclays PLC all arranged high-yield debt deals to fund the shadow bank.
Investors started noticing something wrong at the start of 2020, when Crédito Real’s earnings suddenly crashed. About a year later, in its audited annual statements for 2020, Crédito Real revealed that around 46% of its loan portfolio was in unpaid interest.
The company did not disclose that it had difficulty collecting the loans, and it did not mark them as delinquent, said Alexis Panton, corporate credit analyst at Stifel Financial Corp. Losses of this magnitude “would cast significant doubt on the company. solvency,” Mr. Panton wrote in a note to investors.
The figures suggest the company carried over outstanding amounts on some loans and added them to the total outstanding amount, a practice known as perpetuation or capitalization of interest. This potentially made the total portfolio perform better even if the cash didn’t come in, Panton wrote.
AlphaCredit Capital SA, the first of these lenders to sink, reported similar accounting discrepancies for years until it replaced its auditor and announced hundreds of millions in write-downs. One of its subsidiaries filed for bankruptcy in 2021 and began Mexican insolvency proceedings two months ago. The lender did not return requests for comment. On its website, AlphaCredit said it was no longer issuing new loans.
Crédito Real said a market sale of its own bonds was the result of a disinformation campaign by short sellers. But in November, the company revealed in a private call with some banking analysts that collection action on its loan portfolio was not as high as it had said a month earlier.
Although several Wall Street analysts said Credito Real was still on a stable footing, the company was unable to raise new debt to repay an approximately $180 million Swiss franc-denominated bond due in february. The missed payment left the company vulnerable to cross-defaults and demands for payments on approximately $2.7 billion in debt, though creditors held off calling a formal default with the prospect of a dossier by Crédito Real in the United States, according to people familiar with the matter.
Creditors may not receive answers about the $1.1 billion in accrued interest and other accounting discrepancies given the relative lack of transparency in the Mexican insolvency system compared to the U.S. process, the sources said.
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But those Mexican nonbank lenders have avoided strict scrutiny because they don’t take deposits, said Mario Di Costanzo, a former head of the financial consumer protection agency that oversees lenders such as Credito Real.
“One day they are going to give us a big financial scare,” Mr Di Costanzo said.
A number of payday lenders have had problems collecting payday loans in some Mexican states and municipalities, where government agencies deduct loan payments from salaries but instead of sending the money to the lenders, use the funds for other purposes or delay payment for months, said Gustavo Martín del Campo, who heads an association representing nonbank salaried moneylenders.
The problem with municipal governments is that the administration changes every three years. “Suddenly, the new municipal president arrives and does not recognize what the previous one signed. It can take years to be recovered by local courts,” he said.
Credito Real said in July last year that all government agencies were up to date with their payments on its payday loans.
Mexican authorities say the bankruptcies will not affect the financial system. Still, fallout from the accounting debacle threatens funding from similar lenders in Mexico and Latin America, which could limit the only source of credit for a large unbanked segment of the population.
“The situation in Mexico has had a number of ripple effects for us,” said David Seinjet, chief executive of Colombian lender Credivalores. Investors were unwilling to provide new funds ahead of a bond due in July. Fitch Ratings recently downgraded the company’s credit rating, citing impending maturity.
—Santiago Pérez contributed to this article.
Write to Alexander Saeedy at [email protected]
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