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
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 (
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
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
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
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:
--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
Fitch Fundamentals Index (
Global Financial Institutions Rating Criteria (
Nonbank Financial Institution Interest Rate Sensitivity (
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (
2014 Outlook: U.S. Finance and Leasing Companies (
Recovery Ratings for Financial Institutions (
Finance and Leasing Companies Criteria (
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
Source: Fitch Ratings
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