NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of Springleaf Finance Corporation (Springleaf) to 'B' from 'B-' and maintained the Stable Rating Outlook. Fitch has also upgraded the preferred stock ratings of AGFC Capital Trust I to 'CCC/RR6' from 'CC/RR6'. A full list of ratings actions is included at the end of this release.
KEY RATING DRIVERS
The rating upgrades reflect the progress made by Springleaf toward repaying debt, improving its debt maturity profile and furthering core profitability while growing its consumer lending business. Fitch also believes that today's announced sale of Springleaf's interests in approximately $7.2 billion of legacy mortgage assets and related servicing for net cash proceeds of approximately $3.0 billion will simplify the company's balance sheet and remove a source of earnings volatility.
That said, further upward ratings momentum will depend on increased clarity regarding the use of sale proceeds which could potentially include debt repayment, acquisitions, and shareholder distributions. Additional rating constraints include Springleaf's monoline business model, material regulatory risk, above-average growth, high reliance on the capital markets for funding, concentrated ownership structure, and higher-risk core demographic, which may be particularly sensitive in a rising interest rate environment.
Springleaf has made significant progress toward reducing its debt load. Over the last year the company prepaid ($2 billion) and terminated its secured term loan while also making progress toward reducing its 2017 unsecured debt maturity wall. At March 31, 2014, 2017 unsecured debt maturities were $2.4 billion, down from $3.3 billion at June 30, 2013. Fitch views these actions favorably as they have reduced leverage and improved the company's debt maturity profile.
Fitch believes the company has adequate sources of liquidity to originate new loans and meet its debt obligations through 2017. That said, the company's ability to meet its remaining 2017 maturities could come under pressure if a significant portion of the company's unrestricted cash is deployed to make acquisitions and/or fund shareholder distributions. Pro forma for the sale of the majority of Springleaf's legacy mortgage assets, Fitch estimates the company would have had approximately $4 billion of unrestricted cash at March 31, 2014, which could be used to repay debt, fund shareholder distributions, make acquisitions and/or support new loan originations.
Springleaf's leverage, as calculated by Fitch, has improved over the past several quarters. Leverage, as measured by adjusted debt-to-adjusted tangible equity, declined to 6.2x at March 31, 2014 from 8.2x at June 30, 2013. However, reported leverage is calculated on a push-down accounting basis following the majority sale of Springleaf to Fortress Investment Group LLC from American International Group, Inc. in 2010. Fitch also calculates leverage on a historical cost basis, which adds back the asset and debt discounts recorded as part of the application of push-down accounting. On this basis, Fitch estimates leverage declined to 8.4x at March 31, 2014, down from 9.4x at June 30, 2013. Pro forma for the sale of mortgage assets, Fitch estimates leverage, including historical cost adjustments, was under 5.0x at March 31, 2014. Under all of these metrics, Fitch views Springleaf's leverage as improved, although it is less clear whether leverage will remain at existing levels going forward.
Credit performance has continued to normalize from trough levels experienced post-financial crisis. Net charge-offs within the company's consumer segment rose to 5.1% in 2Q'14, up from 3.2% (excluding the sale of previously charged-off receivables in June 2013) in the year-ago period. Total consumer delinquencies were 2.28% at June 30, 2014, up from 1.92% in the year-ago period. Fitch believes the increase in charge-offs and delinquencies reflects a modest loosening of underwriting standards from more conservative levels post-crisis combined with loan seasoning. Charge-offs also remain in line with the company's long-term historical average of between 4.75% and 5.75%. That said, the company continues to generate strong growth in personal loan originations. If not prudently managed, Fitch believes above-average growth could potentially lead to higher than expected losses in the future.
The Stable Outlook reflects Fitch's view that Springleaf's liquidity profile and leverage have improved and that operating performance will continue to gradually improve, absent a market stress. These positive factors are counterbalanced by elevated regulatory risk, Fitch's expectation that credit performance will continue to normalize, as well as the incremental risk associated with the company's expansion into direct auto lending. Furthermore, Fitch will assess any potential changes to Springleaf's business model and/or risk profile as the company deploys the cash proceeds generated from the sale of its mortgage assets.
The Recovery Rating of 'RR4' assigned to Springleaf's senior unsecured debt reflects Fitch's expectation that recovery prospects for the notes are average, and could be approximately between 31%-50% in a stress scenario. The Recovery Rating of 'RR6' assigned to the preferred stock of AGFC Capital Trust I reflects Fitch's expectation that recovery prospects for the securities are poor, and could be as low as 0%-10% in a stress scenario.
Longer-term positive rating momentum could be driven by additional actions to improve the debt maturity profile, sustained improvements in profitability and operating performance, measured growth in core lending businesses, successfully executing on new business opportunities, and reducing concentrated ownership while maintaining leverage at levels in-line with similar nonprime consumer finance companies. However, potential upward momentum would remain limited to below investment-grade level, given Springleaf's monoline business model, core demographic, high reliance on the capital markets for funding. Furthermore, Fitch views the elevated regulatory, legislative and litigation risks that exist for Springleaf, as well as a lack of prudential regulation as key rating constraints.
Negative ratings momentum could develop from an inability to access the capital markets for funding at reasonable costs, substantial credit quality deterioration, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership. These factors could also potentially result in notching the senior unsecured rating below the current IDR.
Fitch has upgraded the following ratings:
Springleaf Finance Corporation
--Long-term IDR to 'B' from 'B-';
- Senior unsecured debt to 'B/RR4' from 'B-/RR4'.
AGFC Capital Trust I
--Preferred stock to 'CCC/RR6' from 'CC/RR6'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
Fitch Fundamentals Index (April 2014)
Global Financial Institutions Rating Criteria (January 2014)
Nonbank Financial Institution Interest Rate Sensitivity (January 2014)
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (December 2013)
2014 Outlook: U.S. Finance and Leasing Companies (November 2013)
Recovery Ratings for Financial Institutions (September 2013)
Finance and Leasing Companies Criteria (December 2012)
Applicable Criteria and Related Research:
Finance and Leasing Companies Criteria
Recovery Ratings for Financial Institutions
2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Nonbank Financial Institution Interest Rate Sensitivity
Global Financial Institutions Rating Criteria
Fitch Fundamentals Index