MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has upgraded Tarjeta Naranja, S.A.'s (TN) Foreign and Local Currency (FC & LC) Long-term Issuer Default Ratings (IDRs) to 'B' from 'CCC'. The Rating Outlook is Stable. Fitch has also upgraded TN's senior unsecured long-term debt to 'B/RR4' from 'CCC/RR4'. A full list of rating actions follows at the end of this press release.
The upgrade of TN's LC and FC IDRs was driven by the same action on Argentina's sovereign rating. Fitch upgraded the sovereign's LC IDR and Country Ceiling to 'B' from 'CCC' on March 22, 2016 (see 'Fitch Affirms Argentina's FC IDR at 'RD'; Upgrades LC IDR to 'B'; Outlook Stable'). At the time of the sovereign's LC upgrade, Fitch indicated the resumption of timely debt service on defaulted bonds would lead to the upgrade of the long-term foreign currency IDR, most likely to the level of the long-term local currency IDR.
KEY RATING DRIVERS
VR AND IDRs
TN's VR and IDRs are driven by the still volatile and adverse economic and operating environment, albeit some structural recent improvements of Argentina's policy framework could benefit TN's performance, specifically the lower level of intervention in the financial system. TN's ratings also factor in the company's strong franchise, robust loss absorption capacity made by solid capital ratios and ample loss loan reserves, its adequate and recurring profitability, its sound asset quality, contained liquidity risk, as well as, its concentrated business model.
In Fitch's view, regardless of its overall reasonable financial condition, TN's ratings are currently capped by the LC sovereign rating, due to the weak operating environment, although the sovereign has made big progress to normalize its situation with foreign creditors. Although the new government is taking measures in the right direction and reducing political and regulatory intervention into the banking system, the local environment in Argentina is still characterized by ample economic imbalances and measures are being taken gradually and, therefore, the recovery of the economy will likely take some time to materialize.
TN has built a robust and rapidly growing franchise and business model over the past 20 years, which makes its direct parent company, Tarjetas Regionales (TR), the largest credit card issuer in Argentina and one of the top players in Latin America. As of December 2015, TN had roughly 4.3 million active cards (8.4 million issued), almost twice that of the second-largest player in the country, and the activation rate of new accounts was 90%. TN, together with its ultimate parent company, Banco Galicia, added roughly 13 million active cards. The footprint in the merchant business is also strong and expanding.
TN maintains a sound and recurring operating performance, driven by its wide margins and, more importantly, the ample and stable fee income sourced from both its acquisitions and merchant businesses. Despite the inherently high costs of this model, TN has well contained both non-interest expenses and provisions, driving a robust recurring operating ROAA. In Fitch's view the recent improvements in political and regulatory framework, specifically the reduction of political intervention and controls in TN's main business lines can benefit the profitability going forward. One of the main strengths of TN is its recurrent and stable net fees generated by merchant business and from services charged to customers (61% of total operating revenues as of December 2015), which covered 101% of non-interest expenses (2012-2014 average: 99%).
Despite a slowdown of the local economy since 2010, TN's asset quality remains sound and NPLs are under control. As of December 2015, NPLs represented 4.8% of gross loans, with reasonable loan loss reserves coverage (5.3% of gross loans). TN's impairment loan portfolio plus charge-off ratios at the same date remained adequate (4.8% versus 7.7% at end-2014). TN's asset quality has improved due to adjustment of its underwriting standards and collection processes in order to face the current market conditions.
Fitch also considers positively TN's conservative approach to loan loss provisioning. Since mid-2011, the IFRS-aligned expected loss framework was in place. However, TN maintains the policy that loan loss reserve coverage should remain at least at 100%, and its policy also follows Central Bank requirements although it is not legally required. Fitch estimates that TN's loan portfolio quality will remain at adequate levels given that its credit process has historically been conservative, based on its good risk management and ample expertise of the credit card industry.
Considering its nature as a nonbank financial institution, TN's funding profile is sound and has been resilient throughout different phases of the economic cycle. Roughly 62.3% of TN's funding from third parties comes from the payable accounts to merchants (duration of 45 days), while another 26% is made through local and international issues of unsecured debt (Obligaciones Negocibales, ON), 56.3% of which has a maturity of more than one year. In addition, there are funding facilities from different financial institutions. Liquidity levels are sound given the benefits of its business model on this matter and regardless of the relatively limited stock of liquid assets. As of December 2015, TN's short-term assets were equivalent to 1.4 times short-term liabilities (March 2015: 1.3 times). Fitch regards positively TN's liquidity contingency plan to continuously have available liquid assets equivalent to three months of debt service (four months in stressed situations). Fitch views as positive TN's ample access to local capital markets even in difficult economic cycles.
TN's main exposure, its FX refinancing risk, has decreased due to this year's elimination of FX controls in the country by the new government administration. TN is no longer exposed to the central bank's availability and willingness to sell USD in order to serve foreign debt. TN's foreign debt was USD200 million, and already two-thirds is amortized (last amortization in January 2016). TN's outstanding USD debt is 67 million, and as of today 100% of such debt is hedged with a 'forward' financial derivative instrument, and TN expects to continue with this practice until the bonds mature.
Some of TN's main strengths are its ample capital base and sound capacity to generate equity internally. Capital is mostly composed of tangible equity, and the portion of intangible assets is fairly limited. As of December 2015, the equity to assets ratio remained at a sound 19.5% despite of recurrent payments of dividends (historical pay-out ratio in a range of 20% to 25%). Fitch's more stringent definition of core capital, which excludes intangibles and deferred tax assets, was also a robust 18.1% of total assets. Fitch believes the resilience of capital metrics has yet to be tested under a less benign economic environment, which Argentina is likely to experience over the next 18-24 months.
SENIOR UNSECURED DEBT
The 'B/RR4' rating on TN's senior unsecured notes reflects that these are senior unsecured obligations that rank pari passu with other senior indebtedness and so align with the company's long-term 'B' IDRs.
RATING SENSITIVITIES
VR AND IDRs
Given their low level, TN's ratings would move in line with any change to Argentina's sovereign rating. In addition, TN's ratings could be affected if the worsening operating environment drives material deterioration in asset quality, earnings, and/or loss absorption capacity. Material increases in liquidity and/or refinancing risk could also put downward pressure on TN's ratings.
Under the current circumstances, Fitch considers it unlikely that Argentine financial institutions could be rated above the sovereign. Therefore, upside potential in TN's ratings is heavily contingent upon positive developments in the sovereign rating dynamics.
SENIOR UNSECURED DEBT
TN's notes could move in the same magnitude and direction as its IDRs since the notes are senior unsecured debt.
Fitch has upgraded TN's ratings as follows:
--Foreign Currency Long-Term IDR to 'B' from 'CCC'; Outlook Stable;
--Foreign Currency Short-Term IDR to 'B' from 'C';
--Local Currency Long-Term IDR to 'B' from 'CCC'; Outlook Stable;
--Local Currency Short-Term to 'B' from 'C';
--USD200 million senior unsecured bonds to 'B/RR4' from 'CCC/RR4'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002837
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002837
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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