Fitch Expects to Rate Tanner's Upcoming 5-year Senior Unsecured Notes 'BBB-(exp)'
The notes will mature in 2020 and carry a fixed annual interest. The final rating is contingent upon the receipt of final documents to confirm information already received. The notes will initially be guaranteed on a senior unsecured basis by Tanner Leasing S.A. The notes will rank equally with other senior unsecured debt; however, they will be effectively subordinated to all of the secured indebtedness, and certain other obligations that are granted preferential treatment under Chilean law, such as labor and tax claims. The notes will also be effectively subordinated to all indebtedness and other liabilities of the subsidiaries that do not guarantee the notes.
KEY RATING DRIVERS
The expected rating assigned to Tanner's new debt issuance is at the same level as the company's long-term Issuer Default Rating (IDR).
Tanner's ratings reflect its consistent performance throughout the economic cycles, characterized by an adequate profitability relative to its business niche, adequate albeit deteriorating portfolio quality and a sound management of its wholesale funding, with good matching in terms of maturities, currency and costs. Tanner's ratings also reflect its solid 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 higher business concentration when compared to other financial institutions of a universal nature, which exposes the company to changes in the economic cycle more than those more diversified institutions. At the same time, the company still faces the challenge of managing the quality of its loan portfolio, which has deteriorated faster than that of some of its local peers given some riskier segments that the entity approached in the past years (i.e. used cars), also as a result of the portfolio seasoning as it has grown considerably in the past few years, in an economy that is undergoing a prolonged slowdown.
RATING SENSITIVITIES
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 consistently over 5%), which would pressure its profitability (ROAA falling and remaining consistently 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.
The rating for Tanner's new debt issuance would move in line with the company's Long-term IDR.
Fitch currently rates Tanner as follows:
--Foreign and local currency long-term IDR ' BBB-'; Outlook Stable;
--Foreign and local currency short-term IDR 'F3';
--Senior unsecured notes due 2018 'BBB-';
--Long-Term National Rating 'A+ (cl)'; Outlook Stable';
--Short-term National Rating 'N1(cl)';
--Long-term National Rating of bond program 'A+(cl)';
--Long-term National Rating of commercial paper program 'A+(cl)';
--Short-term National Rating of commercial paper program 'N1(cl)'.
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