Unifin Financiera#s Proposed Subordinated Perpetual Notes For Up To $250 Million Rated #B#

Stocks and Financial Services Press Releases Friday January 12, 2018 09:00
MEXICO CITY--12 Jan--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) Jan. 11, 2018--S&P Global Ratings assigned today its 'B' issue-level rating to Unifin Financiera S.A.B. de C.V. SOFOM E.N.R.'s (Unifin; BB/Stable/--) subordinated perpetual notes for up to $250 million. The company plans to use the proceeds for working capital and to expand its business.

The rating on the notes is three notches below the issuer credit rating, reflecting:

The notes' contractual subordination to other senior debt. For speculative grade companies, we deduct two notches.An additional notch for its discretionary and mandatory non-payment clause, which allows the instrument to defer coupon payments.

Also, we're assigning intermediate equity content to this hybrid instrument.
Therefore, it's eligible for inclusion of an amount equivalent of up to 33% of our adjusted common equity (ACE) in our total adjusted capital (TAC) calculation in our analysis of Unifin.

The rationale for the intermediate equity content is based on the instrument's following characteristics: Ability to suspend coupons without causing a default;No material restrictions on payment deferrals;Perpetual nature;Step-up clause wouldn't be activated until 2040; andLack of incentives to redeem the notes during their residual life.After incorporating Unifin's proposed $250 million subordinated perpetual notes with intermediate capital content in our risk-adjusted capital (RAC) calculation, we're not changing our capital, leverage, and earnings assessment.

This is because our projected RAC ratio will increase to about 9.7% for the next 12 months from our previous projection of 7.0%-7.5% for the same timeframe.

Although this ratio is close to a stronger capital, leverage, and earnings assessment, we expect it to gradually decrease (as we saw in the past) to around 9.2% by the end of 2019, reflecting Unifin's aggressive loan portfolio growth strategy.

Our base-case scenario for our RAC forecast is: Mexico's real GDP growth of 2.3% in 2018 and 2.4% in 2019. Significant loan growth portfolio of about 45% for the next two years, reflecting the firm's strategy to continue expanding the business.The issuance of subordinated perpetual notes for up to $250 million.

The notes will be eligible for intermediate equity content and will be equivalent to up to 33% of our ACE in our TAC calculation.Bottom-line results of Mexican pesos (MXN) 2 billion-MXN2.5 billion during 2018 and 2019 (year-over-year growth of around 30%).

Return on average assets slightly lower than in previous years--at about 3%--because total assets will grow at a higher pace compared with the firm's core earnings.Manageable asset quality indicators with nonperforming assets (NPAs) below 5% for the next two years.Reserve coverage below those of peers, at 15%-25% of total NPAs, as it has been historically.

Dividend payout ratio of 30% for the next two years. Finally, the proposed issuance wouldn't affect our funding and liquidity analysis.

The proceeds will be primarily for working capital, so we expect banking credit facilities will grow at a slower pace than projected. Debt composition won't change significantly and the firm's funding mix will remain concentrated in local securitizations followed by global issuances, banking lines, and the subordinated perpetual notes:

45%, 30%, 15%, and 10%, respectively. Finally, the firm's stable funding ratio was 90% as of Sept. 30, 2017, and the three-year average was 84%, which is above those of peers we rate. Our liquidity assessment remains supported by the firm's sufficient resources to run daily operations and the ability to raise liquidity if needed by stopping origination and maintaining collection.

After incorporating the subordinated perpetual notes in our cash-flow analysis, our base case and stress scenarios remains positive, and we expect the firm to survive without the need to access market funding for the next 12 months and cover its funding needs on a monthly basis.

The ratings reflect our business position assessment on Unifin, which benefits from stable and growing business operations that are oriented towards pure leasing activities--primarily in the small- to mid-size enterprise lending sector. Moreover, Unifin's risk position takes into account subpar reserve coverage with asset quality metrics in line with those of the company's main competitors.


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