MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned 'BB-' and 'B' long- and short-term Issuer Default Ratings (IDRs), respectively, to Unifin Financiera S.A.P.I. de C.V. Sofom (Unifin) E.N.R. The Rating Outlook is Stable.
Fitch also expects to rate 'BB-(exp)' a proposed issue of five-year senior unsecured bullet notes for up to USD300 million. Unifin intends to use the net proceeds from the issuance to repay certain indebtedness and, to the extent any proceeds remain, for general corporate purposes. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The IDRs and issue ratings are driven by Unifin's growing business franchise, sustained and sound financial performance, and improved funding structure and maturity matching. The ratings also consider the entity's elevated concentrations per borrower, recent pressures on asset quality due to the impairment of a housing developer in Mexico, and a low loan loss reserve coverage.
The ratings are also constrained by Unifin's tight capitalization that is challenged by the entity's rapid growth, despite its sound internal capital generation and a recent capital injection. However, the agency does not expect further deterioration of capital adequacy, given the recent capital injection for MXN200 million, completed on June 25, 2014 and the long term plans of the company to run with a capital level similar to their current position.
Ratings could be downgraded in the event of a consistent weakening of the capital to assets ratio below 9.5% that could arise from accelerated growth and/or weaker profitability. Downside potential could also arise from a material deterioration of the asset quality metrics or risk concentrations (top 20 concentrations above 4x equity).
A scenario of ratings upgrades has a low probability of occurrence over the foreseeable future, given the risks and challenges from Unifin's aggressive projected growth and its current business model, however ratings could be upgraded if tangible equity ratios are sustained over double digits, while the entity significantly reduces its top 20 concentrations (below 2x equity).
Given that these are senior unsecured indebtedness, the issue rating of the proposed notes will remain aligned to Unifin's IDRs and would mirror any change on the latter.
Unifin's ratings reflect its growing franchise in the operational leases business, aided by the sector consolidation in recent years. Unifin has focused on growing its core business, rapidly increasing its portfolio base and progressively expanding its regional presence. The entity has shown a good execution ability to successfully implement its strategy.
The risk of elevated concentrations per borrower (top 20: 2.9 times equity) is highlighted by the recent troubles in the housing sector in Mexico, which increased Unifin's impairment ratio (+90 days accrued balance) to 6.4% as of March 2014. Impairment reserve coverage is weak (19% at 1Q'14), while the low coverage was further affected by Unifin's decision to just partially provision the factoring related to the defaulted homebuilder (based on its internal expected recoveries), while it also continues to depreciate the leased assets as originally scheduled.
Unifin has historically shown a resilient financial performance under macroeconomic stress, driven by its growing business volume, good spread management and an efficient operational cost base. Fitch considers profits are somewhat overestimated by the low reserve coverage of the entity, relative to other financial institutions. However, if 2013 earnings were adjusted for the insufficiency of loan loss reserves related to the factoring and leased assets in the case of Urbi, overall profitability is still considered good relative to its peers (adjusted ROA 2.1% and adjusted ROE 23.5% at YE13).
Over the past three years, Unifin has focused on reducing its funding concentrations. The entity was able to establish new funding relationships. Unifin has traditionally been largely funded in the debt market; however, it has increased the contribution of bank facilities (representing 43% of its interest bearing liabilities as of March 2014 compared to 20.3% at YE12). The entity is expected to tap the global market and to reduce its reliance to the Mexican capital market. However, Fitch does not anticipate further relevant improvements in funding, given that Unifin's funding model is highly reliant on market securitizations.
Unifin's portfolio growth has progressively stressed leverage indicators that reached 5.6x at 1Q'14 (total liabilities excluding securitizations to total equity). While the equity/assets ratio declined to 9.1% as of the same date. After the recent capitalization, Unifin projects to sustain capital indicators above 11% and a leverage ratio around 8 times (including all liabilities).
After 2008, Unifin improved the matching between assets and liabilities maturities. However, Fitch considers that refinancing risk is yet material, due to the aggressive asset growth plans, the relatively low portion of liquid assets held, and the bullet nature of most of its market-driven funding. The latter is only partially offset by the flexibility provided by the current portfolio securitizations.
Fitch has assigned the following ratings to Unifin:
--Long-term foreign currency IDR 'BB-'; Outlook Stable;
--Short-term foreign and local currency IDRs 'B';
--USD300 million senior unsecured notes 'BB-(exp)'.
Fitch has published the following rating:
--Long-term local currency IDR 'BB-'; Outlook Stable.
Fitch has affirmed Unifin's existing ratings as follows:
--National-scale long-term rating at 'A-(mex)'; Outlook Stable;
--National-scale short-term rating at 'F2(mex)';
--National-scale long-term rating for local issues of senior unsecured debt (UNIFIN 12, UNIFIN 13 & UNIFIN 13-2) at 'A-(mex)';
--National-scale short-term rating senior unsecured debt program not placed at 'F2(mex)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan 31, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria