Fitch Affirms Tanner's IDR at 'BBB-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Tanner Servicios Financieros S.A.'s (Tanner) foreign- and local-currency long-term Issuer Default Rating (IDR) at 'BBB-'; short-term IDR at 'F3' and long-term National Rating at 'A+(cl)'. At the same time the agency assigned a short-term National Rating of 'N1'. The Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release.
KEY RATING DRIVERS - IDRs, SENIOR UNSECURED DEBT AND NATIONAL RATINGS
Tanner's IDRs and national ratings reflect its consistent performance throughout the economic cycles, characterized by an adequate profitability relative to its business niche, healthy portfolio quality and a good management of its wholesale funding, with good matching in terms of maturities, currency and costs. Tanner's ratings also reflect its improved capital levels which, together with its intention to operate with lower leverage ratios in the medium term, provide the company with additional cushion to continue to expand its business and also to cover unexpected losses.
Tanner's ratings also factor in the challenges associated with its relative smaller size and its concentration of operations in a few business niches, which exposes the company to changes in the economic cycle when compared to other financial institutions of a universal nature. At the same time, the company still faces the challenge of managing the quality of its loan portfolio, which has grown considerably in the past few years and currently does not necessarily reflect its average long-term quality level.
The capital increase, the equivalent of US$200 million in November 2013, significantly reduced Tanner's leverage ratios. At March 31, 2014, the ratio of tangible equity-to-tangible assets was a high 29.9%, significantly above its historical levels. Although Tanner's capital levels will likely decline as the company grows, its strong internal capital generation capacity should help maintain sound solvency levels.
Tanner has shown strong profitability ratios throughout the economic cycles (average ROAA at 4.24% since 2010), which is aligned with the risk profile of the covered segment. Although profitability was lower in first quarter 2014 due to losses incurred by a subsidiary of Tanner and higher loan loss provisions, Fitch expects it to return to closer to its historical average throughout the year, supported by its strong revenue generation.
The adequate management of credit risk, business know-how, the diversification by client and the accelerated growth in loans has favored portfolio quality. Recent consolidation of risk management functions to within only one area, the continuous improvement of the risk management tools, and the creation of a risk committee that reports directly to the Board, should benefit the efficiency and effectiveness of its management. The reserve model and level are aligned with the portfolio risk profile, while consolidation of the improvements in the collection area is key considering the seasoning of the portfolio which has experienced strong growth.
Liquidity is adequate and favored by good management of the maturity of its assets and liabilities and the strong monthly cash flow generated by the high rotation from the factoring portfolio, as well as by the diversification of fund sources (banking debt, short- and long-term issues, both in local and international markets), as well as the heavier weight of the long-term debt within its liabilities.
Tanner's senior unsecured bonds are rated at the same level as its IDR and national rating, considering the absence of credit enhancement or a subordination feature.
RATING SENSITIVITIES - IDRs AND NATIONAL RATINGS
The Rating Outlook for the long-term IDRs and national rating is Stable. Downward ratings pressure would stem from a stronger than expected deterioration in asset quality ratios (delinquency rising and remaining over 5%), which would pressure profitability (ROAA falling and remaining below 2%), as well as from a considerably decrease in the company's financial flexibility and liquidity.
Considering the current business model of the company, upgrades are not likely in the short term. However, higher diversification of its revenues, assets and funding sources could contribute to improve its ratings in the longer term.
Fitch has assigned Tanner a Short-term National Rating of 'N1(cl)' and affirmed its other ratings as follows:
--Foreign and local currency long-term IDR at ' BBB-'; Outlook Stable;
--Foreign and local currency short-term IDR at 'F3';
--Senior unsecured notes due 2018 at 'BBB-';
--Long-Term National Rating at 'A+ (cl)'; Outlook Stable';
--Long-term National Rating of bond program at 'A+(cl)';
--Long-term National Rating of commercial paper program at 'A+(cl)';
--Short-term National Rating of commercial paper program at 'N1(cl)'.
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).
Applicable Criteria and Related Research:
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria