35573 6/29/2005 13:06 05BUCHAREST1461 Embassy Bucharest UNCLASSIFIED This record is a partial extract of the original cable. The full text of the original cable is not available. UNCLAS SECTION 01 OF 02 BUCHAREST 001461
FOR OPIC/SMEF: DERB
E.O. 12958: N/A TAGS: EAID, OTRA, EINV, EFIN, RO, Credit, Economic Assessment SUBJECT: APPLICATION FOR OPIC FINANCE: DOMENIA CREDIT
REF: OPIC/SMEF E-MAILED CABLE (06/16/2005)
1. This is the Embassy-USAID/Romania's response to OPIC Action Request dated June 16, 2005.
2. Summary: The Mission believes the addition of resources to expand mortgage lending in the country is essential for long- term sustainable growth in the industry. Currently, the legal framework for the primary market is strong on fundamentals. Reform of administration and registration is slow but proceeding and non-judicial foreclosure is an accepted principle, which was tested by the micro-lending activity and found to work reasonably well. The creation of the secondary mortgage market is in an incipient phase. With USAID technical assistance, a Mortgage Legislative Package has been developed waiting for Parliament's approval. It may be concluded that from the legal/regulatory point of view, no real barriers impede Domenia Credit's growth, and the development of the secondary mortgage market will create new opportunities in the longer term. End Summary.
Establishment of Domenia Credit
3. In 2000, USAID proposed to establish a sustainable finance company that would increase the access to mortgage loans to Romanian citizens. In September 2001 the Romanian Mortgage and SME Program was launched as a joint effort between Shorebank Advisory Services (SAS) and the Romanian-American Enterprise Fund (RAEF) with grant funding from USAID in the amount of $1.5 million for start-up costs. SAS provided management support and staffing, while RAEF provided the initial SEED capital of $3 million to the new company. During the start-up phase, RAEF, SAS, and USAID acted as anchor investors that provided the needed credibility for other investors that came later-on and invested in this company, as well as mitigated the start-up risk. This allowed the company to further develop by attracting new sources of capital by itself.
Current Status of Housing and Mortgages in Romania
4. A successful middle class is emerging, comprised of business owners, professionals and entrepreneurs, who have relatively high and stable sources of income, from $400 to $800 a month. Many of these people wished to build, buy a house or an apartment, or upgrade their current residences. The mortgage market is a relatively new industry, but is very attractive to investors as it is rapidly expanding and providing high profit margins. Moreover, the Romanian market displays tremendous growth potential. Based on the experience of the other transition economies, we may infer that the potential growth of the market within the next 5 years is over 7% of the GDP (which would imply a $7 billion over the next 5 years). The risk of mortgage loans is very low, as it has both strong collateral - the house itself - and strong morale value, as Romanians always have traditionally valued homeownership.
5. High entry barriers, however, make this sector difficult for smaller finance companies to enter and compete in the market. The competition has continued to increase. With the exception of two mortgage companies, only banks offer mortgage loan products, which vary in terms of interest rate, procedures, paper work, documents required, and time to process and approve the credit, utilization fees, initial payment, and conditions to be met by borrowers. One element that delayed mortgage market growth was limited access to long-term resources. The situation has been improved beginning in 2003, when banks had access to longer-term financing from EBRD and outside financing from international financial markets. The other issue faced by the banking system that impedes mortgage lending growth is the bureaucratic procedures required by the National Bank of Romania's requirements.
6. After a slow start in 2001, the mortgage portfolio of banking system doubled in the following two years, to around $200 million in 2002, and $400 million in 2003. Based on the latest National Bank of Romania's report, the mortgage market at the end of April 2005 reached $1.34 billion. It is believed that growth might have been even higher if existing lenders would have had greater access to long term capital.
7. Domenia Credit's vision is to become a leader on the mortgage market and the first company to offer secondary mortgage market services to banks by issuing mortgage-backed securities and bonds, therefore differentiating its services from its very strong competitors, the banks, which offer mortgage products, among other banking services.
8. The loan products, underwriting and processing procedures, and technology that were developed by Domenia Credit, were made available to other mortgage lenders in Romania in an effort to standardize the mortgage products and prepare the basis for the secondary mortgage market's development. Due to its top management active involvement in legislation improvement for both primary and secondary mortgage markets, the company has obtained its recognition as having a professional and knowledgeable team. Domenia's lending products cover all surface related to residential property finance: home acquisition, home improvement and home finishing, home construction and acquisition of land for construction purposes. The size of its outstanding portfolio was $15.7 million at the end of April 2005; the weighed average term to maturity was 11.09 years; and the average loan size was $26,600. By the end of April, 2005, Domenia's lending portfolio was arrears free, with a 0% default rate.
9. Until 2003, Domenia was active only in Bucharest. In 2004 it opened branches in Timisoara and Cluj, and early 2005 in Iasi. Currently, Domenia is considering opening a branch in Constanta. The only factor that impeded more rapid geographic expansion is the capital available for lending. On March 2005 Domenia Credit moved its headquarters to a new, larger location in Bucharest. The company has a strong team of professionals, young, dynamic, very well trained, offering professional financial services. Currently, Domenia Credit employs 46 people, out of which 15 are loan officers. Domenia Credit knows that its human resources are a key competitive advantage, therefore, twice per year, devotes to its young loan officers thorough training programs.
10. The company has not yet reached the break-even point. Based on its projections, this will be attained by the end of calendar year 2006 at $77 million. Domenia also projects that in October or November of this year, it will need new funds to keep up with the strong demand. Therefore, it is critical to assure funds for Domenia's expansion plans.
11. Domenia Credit is well positioned on the mortgage market due to its two key elements that differentiate its services from its competitors: speed and excellent financial consulting. Because of these factors, the company succeeded to maintain a higher interest rate than the market's average. Its experts are known throughout the industry to provide excellent services to potential clients and they continue to assist them, even if they are not eligible for Domenia's mortgage products. However, this advantage will eventually be eliminated as more competition enters the market. The company faces the following threats: (i) Increased competition in the market that forces the company to differentiate its services from its competition; and (ii) Limited resources that will be completely lent by November 2005.
Romanian-American Enterprise Fund
12. The Romanian-American Enterprise Fund (RAEF) is a private U.S. corporation whose mission is to promote free enterprise and entrepreneurship in Romania through investments in and loans to small and medium size enterprises. Established by the President and the U.S. Congress in 1994, RAEF is capitalized by a $61 million grant from USAID. RAEF was actively involved in seeking additional capital for Domenia, it has a seat on Domenia's Board, and it is the main engine pushing Domenia's development, its expansion of operations in new regions of Romania, and actively supporting its growth.