OREANDA-NEWS. Fitch Ratings has upgraded Falcon Group Holdings (Cayman) Limited's (Falcon) Long-term Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is Stable. The Short-term IDR has been affirmed at 'B'.

The upgrade reflects continued improvements in Falcon's management quality and corporate culture as well as the introduction of more effective corporate governance standards. It also considers Falcon's cohesive strategy and its track record of delivering on business and financial goals.

KEY RATING DRIVERS
Falcon's IDRs are constrained by its small, niche franchise and undiversified business model as a specialised financer. Falcon's business continued to grow by product offering and geography during 2015, translating into on-going improvement in financial performance.

Falcon's corporate governance is a key rating driver, given that it is a privately owned, unregulated, non-bank financial institution. Nevertheless, Falcon has made good progress strengthening corporate governance, including the appointment of an additional two independent directors to its board (now four out of seven directors are independent) and the introduction of various policies and procedures. The founder, chairman and sole shareholder, Mr Kamel Alzarka, remains closely involved in the business, but his day-to-day influence is reducing as senior management take on more responsibilities. We still view Mr Alzarka as a key man risk to the business, given his historical influence, full ownership and importance to business relationships and franchise.

Fitch considers the improved risk framework as credit positive, following the appointment of a new chief risk officer in 2014 who has developed a formalised risk analysis and monitoring process. While Falcon remains focused on expansion and diversification, Fitch believes growth is likely to be manageable from a risk perspective, given Falcon's investment in risk management.

The IDRs also consider Falcon's adequate financial profile; in particular asset quality and leverage. Earnings are improving, but remain concentrated on a fairly small number of customers. Funding sources remain reliant on short-term wholesale funding, but transactions are very short-term and self-liquidating. Falcon has committed to capitalising a minimum level of retained earnings, but the volume of capital is small (end-1H15 tangible common equity of USD134m), leaving Falcon more exposed to any unforeseen financial shocks than institutions with larger buffers to absorb these.

RATING SENSITIVITIES
A significant expansion of Falcon's franchise and diversification of its business model would be required for a further upgrade of its IDRs, which Fitch views as unlikely in the short term. Falcon's IDRs would be sensitive to a change in Fitch's view of its company profile, which could arise from a change in its strategy and a shift in business direction, specifically into non-core or unrelated activities. They are also sensitive to any sharp deterioration in earnings or capital depletion from any weakening of its franchise, unforeseen events or any deviation from its stated dividend policy.