Fitch Affirms OneMain at 'B-'; Outlook Revised to Positive

NEW YORK--()--Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of OneMain Holdings, Inc. (OneMain Holdings), OneMain Financial Holdings, LLC (OneMain Financial) and Springleaf Finance Corp. (Springleaf) at 'B-'. Fitch has also affirmed the senior unsecured debt ratings of OneMain Financial and Springleaf at 'B/RR3' and 'B-/RR4, respectively. The Rating Outlook has been revised to Positive from Stable. A full list of ratings follows the end of this release.

KEY RATING DRIVERS - IDRs, SENIOR UNSECURED DEBT, TRUST PREFERRED SECURITIES

The Positive Rating Outlook reflects OneMain's actual and expected continued reduction of leverage following the closing of Springleaf Holdings Inc.'s acquisition of OneMain Financial in November 2016, progress in addressing outsized debt maturities in 2017, and continued execution of its integration with OneMain Financial, which is expected to be completed by the middle of 2017.

The rating affirmations reflect OneMain's leading market position in the personal installment lending segment, above average profitability, proven underwriting history, and seasoned management team. Rating constraints include the substantial increase in leverage of the consolidated entity following the completion of Springleaf Holdings Inc.'s acquisition of OneMain Financial last year, elevated integration and execution risks associated with the transaction, a reliance on wholesale funding, the higher credit risk profile of its lending businesses which primarily target subprime borrowers, elevated regulatory and legislative risk and the potential for regulatory restrictions on capital being upstreamed from OneMain's insurance subsidiary.

Since the closing of Springleaf Holdings Inc.'s acquisition of OneMain Financial in November 2016, when consolidated debt-to-tangible equity ratio rose to approximately 20.0x, management has made reducing leverage a key priority. The company has indicated that it targets leverage of 5x-7x, and anticipates reaching the higher end of that range by the second half of 2018, which is within Fitch's Outlook horizon of 12-24 months. While the primary avenue to achieving its leverage target will be through earnings accretion and the amortization of intangibles, the company has taken several other actions including selling its 47% stake in SpringCastle Holdings, LLC, a joint venture formed in 2013 to acquire a distressed consumer loan portfolio from HSBC Holdings plc, and additional sales of real estate loans to accelerate the reduction in leverage. Fitch expects earnings accretion to have a more pronounced impact on reducing leverage as purchase accounting adjustments begin to diminish over the course of next year and into 2018.

At the end of the third quarter of 2016 (3Q16), OneMain's stated leverage ratio was 10.7x, down from 18.5x at the end of 2015. On an adjusted basis, which attempts to strip out the positive impact that purchase accounting adjustments have on the company's leverage ratio and make it comparable to peers, Fitch estimates OneMain's leverage was 13.4x at 3Q16. Although higher than OneMain's stated leverage, Fitch expects this differential to narrow over the next two years as the vast majority of the purchase accounting adjustments amortize through GAAP earnings.

Over the past year, OneMain has improved its funding and liquidity profile by increasing the capacity of its credit facilities through the completion of four term securitizations (including its inaugural securitization of its direct auto product), refinancing a portion of its December 2017 debt maturities, and executing asset and branch sales. In April 2016, OneMain issued $1 billion of senior unsecured notes with a coupon of 8.25% that mature in December 2020, of which $600 million of the proceeds were used to repurchase a portion of the $1.6 billion of 6.9% bonds scheduled to mature in December 2017.

Although the cost of issuance on the new notes is greater than the cost of the notes being redeemed, which will have a modestly negative impact on OneMain's future profitability, Fitch views the transaction favorably since it results in a smoother unsecured debt maturity schedule and also demonstrates OneMain's ability to access the capital markets, on an unsecured basis, during a period of market volatility. Fitch expects the company to maintain a roughly even mix of unsecured and secured debt moving forward and to maintain unsecured debt maturities in any one year at less than 20% of the total debt outstanding.

Along with its 3Q16 earnings report earlier this week, management lowered its loan growth expectations for 2016 and 2017, raised its credit loss outlook for next year, and sharply lowered its previous guidance for adjusted net income for its Consumer and Insurance (C&I) segment for 2016 (15% reduction) and 2017 (35% reduction). Management indicated the changes were driven by several factors, most notably the on-going integration of the OneMain branches, which the company believes is temporary in nature, as well as tightening of underwriting for lower credit tier borrowers, which is more strategic in nature. While integration challenges are not unusual for a merger of this size, Fitch will continue to monitor the effects of the integration through the targeted completion by the middle of next year in order to determine the potential impacts on new business originations and existing business collections and loss mitigation.

To the extent the expected moderation in loan growth is driven by a tightening of underwriting to borrowers at lower credit tiers, Fitch would view this trend favorably, particularly if the reduced demand on growth capital supports the company's ability to reach the higher end of its leverage target range of 7x by the end of 2018.

Although OneMain's GAAP financial results thus far in 2016 have been significantly impacted by the effects of purchase accounting adjustments and several non-recurring items, core financial results for the company have been solid. The company reported GAAP net income of $188 million through the first three quarters of 2016 compared to a loss of $23 million in the prior year period. The company's GAAP results included a negative pre-tax $528 million impact from acquisition related accounting impacts.

In 3Q16, the company's average net loan portfolio was up 4.3% versus the prior year, ending the quarter at $13.4 billion. Excluding the loan sale of $600 million required by the Department of Justice in order to complete the merger, growth would have been roughly 10%. Loan growth was aided by growth in legacy OneMain Financial's secured loan originations, which more than doubled from 3Q16 relative to 3Q15. Management is projecting loan growth of 5% in 2016 and 5%-10% in 2017, down from its previous expectations of 10%-15% for both periods.

OneMain's credit performance weakened through the first three quarters of 2016, but charge-offs for the full year are still expected to be within management's guidance at the beginning of the year of 6.8%-7.3%. The company's charge-off rate averaged 6.9% through the first three quarters of 2016, compared to 6.5% over the same period in 2015. In addition to portfolio seasoning, the increase in credit losses was in part attributable to retaining the delinquent balances on its branch/loan sale in May 2016, and also reflects the impact of non-recurring issues related to the merger. The company's early stage delinquency rate (30 - 89 days) has also trended higher, ending 3Q16 at 2.6% compared to 2.2% in 3Q15. OneMain has indicated that the increase in delinquencies is largely being driven by temporary disruptions from the integration and seasoning of the 2015 loan vintage, which should ease over the course of the next two years. If the shift in credit performance proves to be more structural in nature, it could impact OneMain's ratings and/or Outlook.

Revenue yield on loans in the Consumer and Insurance (C&I) segment dipped modestly for the first nine months of 2016, averaging 28.2% compared to 28.7% for the same period a year ago. Fitch believes this is largely a function of mix shift of the portfolio toward direct auto loans, which carry lower yields but also are expected to produce lower losses given the secured nature of the loans. Similarly, risk-adjusted margin declined in through the first three quarters of 2016, averaging 21.3% compared to 22.2% for the same period in 2015.

A key component of the strategic rationale behind Springleaf Holdings, Inc.'s acquisition of OneMain Financial was the potential for cost rationalization and improved operating efficiency. Over the nine month period ended Sept. 30, 2016, the company lowered its operating expense ratio within the C&I segment from 10.8% in 4Q15 to 9.9% in 3Q16. Return on receivables in the C&I segment of 3.7% thus far in 2016, while below the company's long-term target of 4.0%-4.5%, remained strong.

The 'B-' rating on Springleaf's senior unsecured debt is equalized with OneMain's IDR and reflects Fitch's expectation of average recovery prospects for the notes as expressed by the Recovery Rating (RR) of 'RR4', which implies a stressed recovery of 31%-50%.

The 'B' rating assigned to OneMain Financial's senior unsecured debt is one notch higher than OneMain's 'B-' IDR, reflecting Fitch's expectation of above average recoveries for the instruments, as indicated by the RR of 'RR3', which implies a stressed recovery of 51%-70%.

OneMain Financial's unsecured debt rating also reflects the restrictive covenants within its existing bond indenture that limit the level of unsecured indebtedness OneMain Financial can incur and the outflow of capital to One Main from OneMain Financial for so long as the existing bonds remain outstanding. As a result, OneMain Financial's stand-alone leverage is expected to remain considerably lower than the consolidated entity. These positive factors are counterbalanced by the ability of the holding company to extract up to 50% of OneMain Financial's cumulative net income generated since 4Q14 in addition to other one-time and annual payments allowable under the bond indenture.

AGFC Capital Trust I is a special-purpose entity that was established in 2007 to facilitate the issuance of trust preferred securities on behalf of Springleaf. The 'CC' rating on AGFC's trust preferred securities is two-notches below Springleaf's IDR, reflecting the subordinated nature of the instrument as indicated by the RR of 'RR6', which implies a stressed recovery of 0%-10%.

RATING SENSITIVITIES - IDRs, SENIOR UNSECURED DEBT, TRUST PREFERRED SECURITIES

OneMain's ratings could be upgraded if consolidated leverage is brought down to the company's targeted level of 5x-7x, near-term debt maturities are appropriately managed, and the integration of OneMain and Springleaf is completed. Fitch expects the resolution of the Rating Outlook to be in the latter part of the 12 to 24 month Outlook horizon as the company does not currently expect to reach its leverage target until the fourth quarter of 2018. In addition, upward momentum would be conditioned upon further evidence that management's revised credit loss expectations are temporary in nature, stable credit performance for the less tenured direct auto loan product, a proportionate reduction in capital held at its insurance subsidiaries, and the absence of developments in the regulatory landscape that significantly impact OneMain's core businesses.

Conversely, negative ratings momentum could be driven by an inability to access the capital markets at a reasonable cost, greater competitive intensity in the nonprime lending segment, substantial credit quality deterioration that is structural rather than temporary (i.e. integration-related) in nature, a significant increase in asset encumbrance, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership. An inability to further deleverage the balance sheet could also result in the Outlook being revised to Stable from Positive.

Although Fitch believes OneMain may have higher longer-term ratings potential reflecting its strong franchise and profitability, potential upward momentum will likely be limited to below investment-grade levels, given OneMain'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 OneMain, as well as a lack of prudential regulation, as key rating constraints.

The rating assigned to Springleaf's senior unsecured debt is equalized with OneMain's IDR, and therefore, would be expected to move in tandem with any change in OneMain's IDR, absent a material change in the recovery prospects for the senior unsecured notes, as expressed by the RR. Were OneMain to incur material additional secured debt, such that the recovery prospects for Springleaf's senior unsecured notes were viewed as below average, this could result in a downgrade of the notes and the RR.

The rating assigned to OneMain Financial's senior unsecured debt is one notch above OneMain's IDR, and would be expected to move in tandem with any change in OneMain's IDR, absent a material change in the recovery prospects for the senior unsecured notes, as expressed by the RR, or material changes to OneMain Financial's bond indenture. Were OneMain Financial to incur material additional secured debt, such that the recovery prospects for the senior unsecured notes were viewed as average or below average, this could result in a downgrade of the notes and the RR.

The ratings assigned to AGFC Capital Trust I's trust preferred securities are primarily sensitive to changes in OneMain's IDR and to a lesser extent, the recovery prospects of the instrument. That said, Fitch views further downgrades to the trust preferred securities as more limited because a downgrade to 'C' would represent nonperformance. As such, a further downgrade to OneMain would not necessarily result in a downgrade to the trust preferred securities unless they were to defer and Fitch believed that nonperformance would be sustained and not temporary.

Fitch has affirmed the following ratings:

OneMain Holdings, Inc.

--Long-Term IDR at 'B-'; Outlook revised to Positive.

Springleaf Finance Corp.

--Long-term IDR at 'B-'; Outlook revised to Positive;

--Senior unsecured debt at 'B-/RR4'.

OneMain Financial Holdings, LLC

--Long-Term IDR at 'B-'; Outlook revised to Positive;

--Senior unsecured debt at 'B/RR3'.

AGFC Capital Trust I

--Trust preferred securities at 'CC/RR6'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

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Fitch Ratings, Inc.
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or
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+1-212-908-0332
or
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or
Media Relations:
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Contacts

Fitch Ratings
Primary Analyst
Michael Taiano
Director
+1-646-582-4956
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jared Kirsch, CFA
Associate Director
+1-212-908-0332
or
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com