MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the foreign- and local-currency long-term Issuer Default Ratings (IDRs) of Prestaciones Finmart, S.A.P.I de C.V., SOFOM E.N.R. (Finmart) at 'B+' and the short-term at 'B'. Its national scale long- and short-term ratings were affirmed at 'BBB+(mex)' and 'F2(mex)', respectively. The long-term Rating Outlook was revised to Stable from Positive. Finmart's Reg S 8.5% bonds due 2015 have been also affirmed at 'B+/RR4'. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS
The Outlook revision to Stable reflects Fitch's opinion that the previous assumptions related to a possible upgrade of the entity's ratings are less likely to be achieved. Such view is based on the continued pressure on asset quality metrics (as defined by Fitch) and the insufficient loan loss reserve coverage that may put pressure on Fitch's adjusted capitalization metrics. The revision also considers Finmart's still high reliance on secured debt facilities on balance as well as public and private securitizations. Fitch believes that the recent shift in business model, which now incorporates more frequent non-recourse asset sales of its loans, although benefitting liquidity, could translate into less certain funding availability and recurrence in the long term. This may also result in increased earnings volatility as it is more vulnerable to the investor's appetite for this type of transaction.
Finmart's IDRs, National Scale and Senior Debt Ratings are driven by its consistent profitability ratios, adequate capitalization ratios and its increasingly growing franchise in the pay-roll-deducted loans business amidst a slow growth macroeconomic environment.
Fitch considers that Finmart's consistent profitability metrics are one of its main strengths. Nevertheless, Fitch believes earnings are overstated to a certain extent due to the fact that the company is consistently under-reserved. Also, the fact that interest income is accrued for some loans which are more than 90 days past due, may make operating cash inflows lag reported operating earnings. Operating return on assets (ROA) and operating return on equity (ROE) were 7.5% and 26.2%, respectively, lower than the 9.2% and 34.4% registered during 2013 due to higher loan loss provisions.
As of December 2014, the impairment ratio as adjusted by Fitch (considering partial payments and accounts receivables from employers more than 90 days past due) stood at 22.4% compared to the 15.5% registered in 2013. Fitch believes asset quality is one of Finmart's main challenges. Even though effective credit losses are not expected to be high as long as the borrower is still employed in the public entity - an affirmation supported by the manageable amount of written-off loans - Fitch considers that the delayed collection period represents a moderate liquidity risk to Finmart.
Finmart's tangible common equity represented an adequate 21.6% of its tangible common assets as of December 2014. Nevertheless, after making an adjustment for the under-reserved portion of non-performing loans (NPLs) as defined by Fitch (MXN241.6 million as of December 2014), tangible common equity represents 14.2% of tangible assets (2013: 10.4%), which in Fitch's opinion is tight given its high concentration on a single and sensitive sector, and compares unfavourably to its peers. Potential regulatory risks that may require Finmart to accept more stringent loan loss reserve generation, could further pressure the company's capitalization ratios.
Despite Finmart's efforts to gradually diversify its funding structure, most of it continues to be collateralized (78.7% as of December 2014), while its unencumbered loans represented 30% of gross loans and 97% of unsecured debt. After considering Finmart's unpledged cash equivalents (MXN508 million), unencumbered loans and cash equivalents amply cover the outstanding balance of unsecured debt (2.3x).
Fitch believes that further improving the flexibility of its funding base through the use of unsecured facilities at a reasonable cost, while maintaining maturing mismatches between assets and liabilities to a minimum, remains as one of Finmart's main challenges. Additionally, Finmart's new strategy entails the use of less stable funding sources, dependent on the market's appetite for structured asset sales, which could further limit its financial flexibility.
Fitch considers that, other than traditional credit risks, Finmart is also somewhat exposed to operational, political and event risk. Failure to properly implement the agreements with employers or unwillingness from public sector entities to timely and fully disburse retained collections, changes in municipal and federal leadership, among others, are potential risk factors that could affect Finmart under certain circumstances.
The 'B+/RR4' rating on the notes reflects Fitch's opinion that Finmart has enough available earning assets to ensure an average recovery for bondholders in the case of liquidation. This underpins the Recovery Rating of 'RR4' and the alignment of the notes' rating with Finmart's long-term IDR.
RATING SENSITIVITIES - IDRs, NATIONAL RATINGS AND SENIOR DEBT RATINGS
Finmart's ratings could be upgraded if the entity's new business model proves to be sustained in the medium term and throughout the economic cycle, along with the use of more prudential accounting practices in terms of its non-performing loan classifications and related income and loan loss expense recognition. Additionally, funding mix diversification towards more stable financing channels while maintaining adequate capitalization and profitability ratios would be needed for a positive rating action.
Finmart's ratings could be downgraded if its tangible equity-to-tangible assets ratio adjusted for the unreserved portion of NPLs as defined by Fitch decreases below 10%. Additionally, asset quality deterioration that puts pressure on its profitability ratios (operating ROA below 7%) and negative developments in political and/or business risks could also affect the ratings.
The rating of the senior notes will likely remain aligned with Finmart's IDRs, unless the portion of unpledged assets relative to the outstanding unsecured liabilities decreases materially.
Fitch has affirmed the following ratings:
Prestaciones Finmart, S.A.P.I. de C.V., SOFOM E.N.R.:
--Long-term foreign and local currency IDRs at 'B+';
--Short-term foreign and local currency IDRs at 'B';
--USD30million 8.5% Reg S bonds due 2015 at 'B+/RR4';
--National-scale long-term rating at 'BBB+(mex)';
--National-scale short-term rating at 'F2(mex)'.
The Rating Outlook for the long-term ratings (international- and national-scale) has been revised to Stable from Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012;
-- 'National Scale Ratings Criteria' (Oct. 30, 2013).
Applicable Criteria and Related Research:
National Scale Ratings Criteria
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria