MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned an expected long-Term rating of 'BB(EXP)' to Unifin Financiera, S.A.B. de C.V., SOFOM E.N.R.'s (Unifin) proposed senior notes. The final rating is contingent upon the receipt of final documents conforming to the information already received.
Proposed senior notes, up to USD500 million, will have a maturity of seven years (due 2023) with semi-annual fixed-rate interest payments and the principal will be paid on the maturity day. The notes will be Unifin's direct, unconditional and unsecured general obligations.
KEY RATING DRIVERS
The expected rating of 'BB(EXP)' reflects that these are senior unsecured obligations of Unifin that rank pari passu with other senior indebtedness, and therefore this rating is aligned with the company's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB'.
Unifin's ratings reflect its moderately sized franchise in the financial sector and its sound national market position in leasing. It also reflects its business know-how and robust legal resources for collection purposes which have allowed it to consistently generate earnings and maintain adequate asset quality under sustained expansion and ambitious targets. Unifin's ratings also consider its enhanced capitalization due to last year's IPO, although this is gradually decreasing due to accelerated loan growth. In addition, Unifin's ratings also factor in its aggressive growth and high business concentration, as well as the company's improved but still concentrated securitizations funding profile.
Unifin is the national leader for specialized independent (i.e. not related to a banking-holding company) leasing in Mexico and still holds third place within the total leasing sector. Fitch believes that Unifin's growth targets are aggressive. At end of June 2016, Unifin's loan portfolio has grown more than 195x over the last 14 years and strong growth is expected to continue for the next few years.
Unifin's ample expertise drives its strong ability to consistently generate earnings through economic cycle. Over the past four years, operating profit-to-average assets averaged 5.4% and 50% of average equity (Operating ROE). As of June 2016, operating profit-to-average assets and operating ROE were 5% and 31.5%, respectively. The entity's good financial results are driven by controlled operational expenses and its reasonable interest margins as a result of loan portfolio growth, controlled funding costs and its business focus on SMEs. However, Fitch considers Unifin's profits as somewhat overestimated because of its low reserve coverage relative to other institutions.
Unifin's asset quality is adequate and has had reasonable non-performing loans (NPLs) levels, almost no charge-offs and low levels of foreclosed assets. However, it still exhibits limited reserve coverage. In Fitch's view, Unifin's adherence to its credit policy, adequate collection practices, ownership of the leased assets and the solid legal methods to recover them ensure no material deterioration of its asset quality. Under Fitch's metrics, the NPL ratio (NPLs at 90-days overdue plus the remaining contractual rents) averaged around 3.8% in the past three years (June 2016: 2.9%) with loan loss reserve coverage of less than 25% on average.
Concentration per client relative to capital has improved as a result of last year's IPO. Recent capital enhancement reduced the relative importance of the top 20 obligors with respect to equity; these obligors represented 0.8x Unifin's total equity as of June 2016 (March 2015: 1.8x). However, concentration by client continues to be exacerbated by the low loan-loss reserve cushion, which does not even cover the main debtor.
Unifin's relatively recent IPO strengthened its leverage and capitalization. Unifin's leverage indicators (with recourse to Unifin) measured as debt excluding securitizations-to-tangible equity reached 3.3x at the same date compared to levels of 8x-10x in the years pre-IPO. Total leverage (total debt-to-tangible equity) was 5.6x. The recent IPO alleviated some pressures the company had in terms of capitalization. Given the expected aggressive growth of the company and its limited loan loss reserves, Fitch believes Unifin's challenge is to maintain healthy levels of capitalization.
Unifin has diversified its funding sources over the past years; however, in Fitch's view it still holds important concentrations in market debt issuances. Unifin is heavily reliant on wholesale debt through local debt issuances via securitizations and international bonds (72% of its total interest-bearing liabilities) and the company has proven stability in the debt markets since 2006.
In addition, Unifin has access to national and international development banks and commercial bank facilities. Fitch believes Unfin's business model will continue favoring securitization as the main funding source. As a result of its latest global debt issuance Unifin increased the average maturity of its financial liabilities and improved its liquidity profile, thereby reducing its tenor mismatches. Also the currently rated expected issuance will also be positive for maturity matching. This partially mitigates refinancing risk arising from the entity's high reliance on market securitizations, its aggressive asset growth plans and the bullet nature of most of its market-driven funding. The latter is also partially offset by the flexibility provided by the current portfolio securitizations.
RATING SENSITIVITIES
Given their senior unsecured nature, these notes will typically be aligned with the company's IDRs, and the rating of the notes will mirror any potential change to Unifin's IDRs.
Specifically, Unifin's International scale ratings could be downgraded in the event of a consistent weakening of its leverage and capitalization. Specifically, under a scenario of a sustained total debt-to-tangible equity ratio above 7x and/or a capital-to-assets ratio adjusted by the unreserved portion of the impaired portfolio (as calculated by Fitch) below 11.5%. Downside potential could also arise from a material deterioration of asset quality metrics or risk concentrations (top 20 concentrations above 2.0x equity).
In turn, controlled growth accompanied by risk diversification and consistent financial performance could benefit Unifin's ratings. Specifically, the ratings could be upgraded if leverage reaches and remains at levels consistently below 5x and/or its tangible equity-to-tangible asset ratios are sustained over 10%. Additional improvements in Unifin's funding profile (i.e. diversification, length and staggering of debt maturities), as well as top 20 concentrations consistently below 1x company's equity could be positive for the ratings.
For further information about the rating sensitivities for Unifin's ratings please see Fitch's press release 'Fitch Affirms Unifin's IDRs at 'BB'; Outlook Stable', available at www.fitchratings.com.
Date of Relevant Rating Committee: June 23, 2016
Summary of Financial Statement Adjustments - Pre-paid expenses were re-classified as intangibles and deducted from Tangible Equity.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Non-Bank Financial Institutions Rating Criteria -- Effective 4/28/2015 to 7/15/2016 (pub. 28 Apr 2015)
https://www.fitchratings.com/site/re/865351
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/site/re/720082
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011759
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.