OREANDA-NEWS. Fitch Ratings has affirmed Inversiones CrediQ Business, S.A.'s (ICQB) Long-term Issuer Default Rating (IDR) at 'B', Short-term IDR at 'B' and senior unsecured debt rating at 'B'. The Rating Outlook on the IDR is Stable.

KEY RATING DRIVERS - IDRs AND SENIOR UNSECURED DEBT
The ratings of ICQB reflect the financial strength of its subsidiary companies in the region. Those companies have a narrow company profile characterized by moderate franchises in the auto financing business in Costa Rica, El Salvador and Honduras. These challenges are balanced by the group's experience in the segment and the commercial synergies obtained from working together with its main shareholder: Grupo Q Holdings Limited (not rated), one of the most important auto dealers in the region. The challenges of the company profile, together with the subsidiaries' significant reliance on wholesale funding limit ICQB's ratings. Offsetting the challenges are good asset quality metrics, healthy profitability aligned with its risk profile, and sound capitalization. The IDR also factors in ICQB's own improving financial flexibility and low double leverage, defined as equity investments in subsidiaries divided by equity. This ratio reflects debt issued at the parent company level that has been downstreamed as equity into subsidiaries.

ICQB relies primarily on wholesale funding, as it is only able to collect deposits in Honduras. Fitch views market funding as inherently less stable and more susceptible to sudden changes in creditor sentiment; especially when there is significant lender concentration, as is the case in all three subsidiaries of ICQB. Although Fitch acknowledges that increased diversification of funds providers, especially international multilateral lenders and development banks, has allowed ICQB to extend maturities and reduce refinancing risks, asset encumbrance and short-term funding remain significant. Liquidity buffers at the holding company and in some operating subsidiaries are tight, but the company seeks to maintain sufficient liquid assets to cover maturing facilities over the short term.

The company's debt coverage ratios remain weak, but have been improving since 2012. Debt-to-EBITDA has declined from 18.3x at end-2012 to 8.9x at end-2014. Fitch believes such debt levels imply a material refinancing risks. Coverage of interest expense, as measured by EBITDA/interest expenses, is also tight, but has been improving due to ICQB's stable operating performance.

ICQB maintains good asset quality metrics, as the receivables portfolio benefits from an effective collection model, based on quick repossession and disposal of vehicles in case of insolvency. But asset quality metrics are highly sensitive to changes in the economic cycle due to business line concentration. An additional source of credit risk in Costa Rica and Honduras is the high proportion of US dollar lending, which may expose payment capacity in the event of devaluation. The receivables portfolio is highly diversified by obligor in all countries, although some modest concentration by client exists in Honduras, mainly due to the share of the portfolio allocated to fleet financing. Coverage of impaired loans has increased significantly since 2013 as the company established reserves to cover all loans overdue by 360 days. ICQB also supplements coverage with loan reserves booked directly to equity.

Fitch believes ICQB will preserve capital ratios as the result of sound and recurring profitability. With the exception of the Honduran operation, subsidiaries do not have minimum regulatory capital requirements; therefore, equity is largely fungible across the group. All operations are able to generate capital organically and, in Fitch's opinion, retain the capacity to upstream dividends to the holding company, if required. However, double leverage at the holding company is low and has declined significantly in the last few years (2014: 80%, 2011-2013: 108%).

Wider loan spreads applied in the auto lending business underpin ICQB's healthy profitability. The company has been able to sustain high volume growth in combination with low provisioning expenses and sound cost efficiency obtained from synergies with GrupoQ's commercial subsidiaries. In 2014, an increased volume of fees and commissions boosted pre-impairment profitability despite an 84 basis point (bp) contraction in the net interest margin. Fitch expects sound profitability prospects over the short term, but these are sensitive to an increase in funding costs and/or costs of risk.

RATINGS SENSITIVITIES - IDR AND SENIOR UNSECURED DEBT
Upside potential for ICQB's rating would be the result of material advances in funding flexibility that reduced asset encumbrance and short-term secured funding reliance, improved asset-liability matching, reduction of its exposure to foreign exchange risks and improved debt service ratios for both the operative companies and the holding company. In contrast, a material deterioration in the subsidiaries' asset quality, funding and liquidity levels, and capitalization would lead to a negative rating action.

Fitch has affirmed ICBQ's ratings as follows:

--Long-term IDR at 'B'; Outlook Stable;
--Short-term IDR at 'B';
--Senior unsecured debt rating at 'B'.