NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed Springleaf Finance Corporation's (Springleaf) 'B' long-term Issuer Default Rating (IDR) and 'B/RR4' senior unsecured debt ratings on Rating Watch Negative.
The rating action follows Springleaf's definitive agreement to acquire OneMain Financial Holdings, Inc. (OneMain) for $4.25 billion. Springleaf expects to fund the transaction with a combination of cash ($3.3 billion) and debt ($1 billion). The transaction is subject to customary closing conditions and regulatory approvals and is expected to close during the third quarter of 2015 (3Q'15) at which point Fitch would expect to resolve the Rating Watch Negative.
Assuming the acquisition is consummated on the agreed-upon terms, is completed without raising additional equity, and absent material credit developments in the interim, Fitch expects it to result in at least a one-notch downgrade of Springleaf's long-term IDR primarily reflecting the increase in leverage and execution and integration risk associated with the transaction, which will likely consume meaningful time and effort from Springleaf's senior management team.
Fitch has concurrently assigned a long-term IDR of 'B' to Springleaf Holdings Inc. (SHI), the parent company of Springleaf and placed SHI on Rating Watch Negative. SHI conducts the majority of its business through its Springleaf subsidiary and essentially all assets and debt outstanding reside at Springleaf.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The placement of the ratings on Watch Negative and the likely ultimate downgrade of the ratings reflect the fact that Springleaf's balance sheet leverage, absent raising additional equity, would significantly increase as a result of the transaction, while available liquidity will be meaningfully reduced, near-term debt obligations will remain material, integration risks will be present for a considerable period of time and regulatory scrutiny will increase.
Fitch believes that combining the company without raising addition equity would result in a material increase in leverage as calculated by Fitch. In this scenario, Springleaf's credit profile would initially become riskier, although Fitch would expect it to improve over time as the acquisition is integrated and equity is built up through retained earnings. The magnitude of the leverage increase will be one of the primary determinants of the degree to which Springleaf's ratings are affected. Fitch believes potential long-term upward ratings momentum would be supported by a conservative capital policy, prudent growth and consistent de-leveraging over time.
Liquidity, defined as unrestricted cash and investment securities, is expected to materially decline as the company uses $3.3 billion of existing cash to fund a portion of the $4.25 billion purchase price. Springleaf has made significant progress over the last few years in repaying maturing debt and improving its debt maturity profile. However, 2017 debt maturities remain elevated. Fitch believes the company has adequate sources of liquidity to originate new loans and meet its debt obligations through 2017. That said, Springleaf's ability to meet its 2017 maturities will be reduced as unrestricted cash is deployed to acquire OneMain. Liquidity could potentially be further impacted depending on the extent to which change of control provisions attached to OneMain's debt obligations are enacted and result in additional cash consumption.
The acquisition will involve material integration efforts, consuming meaningful time and effort of Springleaf's senior management team. Springleaf's balance sheet is expected to roughly double as a result of the transaction. The company will also need to assimilate OneMain's staff, integrate its compliance and underwriting framework and processes and controls to monitor legal and regulatory adherence, and complete planned branch closings while continuing to grow its core consumer franchise and prudently expand new businesses, in particular direct auto lending. Fitch believes these risks are at least partially mitigated by the complementary business models of both entities and Springleaf's experience integrating other businesses (e.g. SpringCastle acquisition).
Fitch believes that the acquisition offers potential long-term benefits for creditors of the combined organization. Springleaf expects to generate significant expense synergies by consolidating branches and integrating systems and employee functions while generating new revenue opportunities by expanding product and service offerings across the combined company. Fitch believes the combined entity may have higher long-term ratings potential reflecting its stronger franchise and competitive positioning, increased scale and operating efficiency and improved earnings profile relative to the smaller, standalone entities.
Post transaction closing, Springleaf will become the leading consumer finance company with a focus on the underbanked population in the United States. The combined company will have over 2.2 million customers served through an extensive branch network of 1,967 branches located across 43 U.S. states. Post-closing, Springleaf expects to consolidate approximately 200 branches which, in combination with other expense synergies (e.g. technology systems, employee functions), is expected to generate approximately $300 million of annual cost savings by 2017. Offsetting these potential long-term advantages, however, is the likelihood that as a significantly larger organization, Springleaf will attract further regulatory scrutiny, particularly from the Consumer Finance Protection Bureau.
Fitch does not believe the transaction represents a significant deviation from Springleaf's business strategy given the complementary business profiles of both entities. Springleaf and OneMain are the two largest market participants with national lending platforms focused on serving the underbanked population in the U.S. Both companies primarily originate fixed-rate amortizing personal installment loans through a national branch network. The loan portfolios of each company are similar although OneMain's portfolio includes a slightly higher average FICO (629 versus 605 for Springleaf) and higher average loan balance ($6,200 versus $3,900 for Springleaf) but a lower risk-adjusted yield (18.6% versus 22.1% for Springleaf). Furthermore, OneMain's loan portfolio is approximately 20% secured which compares to 48% for Springleaf.
The ratings for SHI and Springleaf are equalized, which reflects Fitch's view that Springleaf is core and integral to SHI's business strategy and operations. In December 2013, SHI entered into Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payment of principal of, premium (if any), and interest on Springleaf's outstanding senior notes and junior subordinated debt.
RATING SENSITIVITIES
As mentioned, Fitch expects to resolve the Rating Watch Negative at the time the transaction is consummated, likely in the 3Q'15. At that time, Fitch expects to downgrade Springleaf and SHI by at least one notch primarily depending on the magnitude of the leverage increase associated with the transaction.
Further downside risks to Springleaf's ratings will be elevated until the acquisition is successfully integrated, the company's debt maturity profile improves further and leverage is reduced. Negative ratings momentum could develop from an inability to access the capital markets for funding at reasonable costs, substantial credit quality deterioration, additional asset encumberance, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership. These factors could also potentially result in notching the senior unsecured rating below the IDR.
Longer-term positive rating momentum could be driven by successful integration of OneMain's platform and staff, de-leveraging to levels in-line with similar nonprime consumer finance companies, demonstrated execution on planned strategic objectives, additional actions to improve the debt maturity profile, sustained improvements in profitability and operating performance, measured growth in core lending businesses, successfully executing on new business opportunities, and reducing concentrated ownership. However, potential upward momentum would remain limited to below investment-grade levels, given Springleaf's monoline business model, core demographic and high reliance on the capital markets for funding. Furthermore, Fitch views the elevated regulatory, legislative and litigation risks that exist for Springleaf, as well as a lack of prudential regulation as key rating constraints.
Fitch has assigned and placed the following rating on Rating Watch Negative:
Springleaf Holdings Inc.
--Long-term IDR 'B'.
Fitch has placed the following ratings on Rating Watch Negative:
Springleaf Finance Corp.
--Long-term IDR 'B';
--Senior unsecured debt 'B/RR4'.
AGFC Capital Trust I
--Preferred stock to 'CCC/RR6'.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Fitch Fundamentals Index (4Q14)' (January 2015);
--'2015 Outlook: U.S. Finance and Leasing Companies' (November 2014);
--'Global Financial Institutions Rating Criteria' (January 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (December 2013);
--'Recovery Ratings for Financial Institutions' (September 2013);
--'Finance and Leasing Companies Criteria' (December 2012).
Applicable Criteria and Related Research:
Fitch Fundamentals Index US (4Q14)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=857028
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
2015 Outlook: Finance and Leasing Companies (Stable Credit Profiles Amid Sector Headwinds)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=807208
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Recovery Ratings for Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980662
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