Rating Action: Moody's confirms B2 ratings of 4Finance, concluding review; outlook negative
Global Credit Research - 24 Jul 2020
Paris, July 24, 2020 -- Moody's Investors Service, ("Moody's") has today confirmed 4Finance Holding S.A.'s (4Finance) long-term corporate family and long-term issuer ratings of B2, together with the B2 long-term backed senior unsecured debt ratings of 4Finance, S.A., the group's Luxemburg-based debt issuing company. The outlook on both entities has been changed to negative from ratings under review. This rating action concludes the review opened on 3 July 2020, which followed 4Finance's notice of invitation, launched on 29 June 2020, to vote on a nine-month extension to the May 2021 maturity of 4Finance, S.A.'s 150 million senior unsecured bond (ISIN XS1417876163).
Today's rating action is driven by the announcement, on 20 July 2020, that the resolution to extend the maturity of the Euro bonds by 9 months to February 2022 was successfully passed. Over 1,000 investors, representing a participation of 68.0% of outstanding bonds, took part in the vote, while 95.4% by value voted in favour of the resolution, satisfying the 75% Qualifying Majority threshold.
A full list of affected ratings is provided towards the end of the press release.
RATIONALE FOR THE CORPORATE FAMILY RATING
The confirmation of the B2 corporate family rating (CFR) is driven by the temporary relief afforded by the extension to grow 4Finance's near-prime and other loan portfolios as planned, without materially weakening the company's liquidity position.
The coronavirus outbreak is expected to have a material impact on 4Finance's profitability and asset quality, through tightened lending criteria leading to reduced loan issuance volume, and an anticipated increase in impairments given the shift in customers' repayment behavior. Moody's considers that such a deterioration in 4Finance's fundamentals, which is mitigated by the company's high margins and the flexible cost structure which is expected to yield savings through staff reduction, is compatible with a B2 CFR.
RATIONALE FOR THE NEGATIVE OUTLOOK
Moody's nonetheless cautions that the need to resort to such a bond extension highlights the company's weakened liquidity position and the limited options to access additional sources of liquidity in the event of a shock. Additionally, Moody's considers the nonperforming part of the loan book as illiquid, which constrains the issuer's flexibility to repay outstanding debt by means of reducing lending only. The negative outlook therefore reflects that, despite 4Finance's current sound liquidity position, with 90 million in cash as of May 2020, the company could be faced with significant maturity hurdles in 2022 if further impediments to its refinancing ability arise.
RATIONALE FOR THE ISSUER AND DEBT RATINGS
The confirmation of the B2 ratings of 4Finance, S.A.'s backed senior unsecured notes (150 million maturing May 2021, and $325 million maturing in May 2022) are based on the CFR and reflect the results from Moody's "Loss Given Default for Speculative-Grade Companies" methodology published in December 2015 and their positioning within the group's funding structure and the amount outstanding relative to total debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of 4Finance's CFR is unlikely in the short-term, as evidenced by the negative outlook. Over the longer-term, the CFR could be upgraded if 4Finance maintains a strong recurring profitability and high capitalization while containing asset quality volatility and improving its funding profile towards a more evenly distributed debt maturity profile. Upward rating pressure could also materialize if the integration of TBI Bank EAD translates into a successful further expansion of the group's consumer lending business.
An upgrade in 4Finance's CFR would likely result in a corresponding upgrade to its issuer and debt ratings.
4Finance's CFR could be downgraded if (1) the company was unable to adequately lengthen its maturity profile, or put in place alternate access to liquidity to fund forthcoming debt maturities; (2) asset quality were to deteriorate substantially; (3) the company's recurring return on assets were to fall further; or (4) the company's capitalization would continue deteriorating or (5) the company targets a leaner liquidity coverage, resulting in lower volumes of liquid reserves to meet upcoming funding maturities. Unfavorable progress in the integration of TBI Bank EAD could also translate into downward rating pressure.
A downgrade in 4Finance's CFR would likely result in a corresponding downgrade to its issuer and debt ratings. Further, Moody's could downgrade 4Finance's issuer ratings and 4Finance, S.A.'s debt ratings due to adverse changes to their debt capital structure that would lower the recovery rate for senior unsecured debt classes.
LIST OF AFFECTED RATINGS
Issuer: 4Finance Holding S.A.
....Long-term Corporate Family Rating, confirmed at B2
....Long-term Issuer Ratings, confirmed at B2
....Outlook changed to Negative from Rating under Review
Issuer: 4Finance, S.A.
....Backed Senior Unsecured Regular Bond/Debenture, confirmed at B2
....Outlook changed to Negative from Rating under Review
The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Roland Auquier Vice President - Senior Analyst Financial Institutions Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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