NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed five U.S. captive finance companies (captives). The rating action follows the affirmation of each captive's corporate parent rating in a portfolio review on Sept. 30, 2014 and Oct. 1, 2014. A link to the corporate portfolio review follows at the end of this release.
Fitch has affirmed the following Long-term Issuer Default Ratings (IDRs): Boeing Capital Corporation (BCC) at 'A', Caterpillar Financial Services Corporation (CFSC) at 'A', Ford Motor Credit Company LLC (Ford Credit) and its affiliates at 'BBB-', General Motors Financial Company, Inc. (GMF) and its affiliates at 'BB+', and Harley-Davidson Financial Services, Inc. (HDFS) at 'A'. The Rating Outlooks for BCC, CFSC, and HDFS remain Stable, whereas the Rating Outlooks for Ford Credit and GMF remain Positive. A full list of rating actions follows the end of the press release.
KEY RATING DRIVERS
Parent Rating Linkage
Fitch considers each captive 'core' to its respective parent, due to strong operational/financial integration, including support agreements in place between each parent and its captive, and the critical function each captive plays in achieving parent's objectives. These characteristics and Fitch's core designation result in equalization of the ratings between the parents and their captives. Captives also continue to be the dominant issuer of debt relative to their manufacturing parents due to the balance-sheet intensive lending nature of their business. For instance, captives covered in this review, on average, accounted for 67% of the consolidated parent company reported debt levels.
Rise in Short-Term Debt
After sharp declines in captives' usage of short-term debt post-crisis, issuance of short-term debt such as commercial paper (CP) is increasing, with the proportion of short-term debt to total debt for some captives approaching pre-crisis levels. However, short-term debt remained below 20% of total debt in second quarter 2014 (2Q'14) for captives covered in this review. Fitch believes that a reasonable level of short-term debt is manageable for captives who have relatively shorter-dated assets and maintain appropriate back-up committed liquidity facilities. However, a material increase from current levels could adversely impact parent and captive ratings.
Lending Growth Continues
Lending growth in captives' portfolios continued in 2014 driven by increased demand from a gradually improving global economy, improved supply of liquidity in funding markets, and slight loosening in lending standards. Average portfolio growth for the captives in this review (excluding GMF, which experienced significant growth due to an acquisition) was a healthy 3.0% in 2013 and 0.9% in 2Q'14. Fitch expects similar trends will continue to drive portfolio growth for the rest of 2014 and 2015.
Competition Expected to Increase
Fitch expects the captive landscape to get more competitive as banks increase their focus in growth areas such as auto finance and equipment finance, which will likely put pressure on pricing/margins and may lead to further loosening of lending standards. Outsized growth rates that results in deteriorating credit quality would be viewed negatively by Fitch.
Normalizing Asset Quality
The benign credit environment in the U.S. has continued to benefit both consumer and commercial captives. Most captives reported net losses and delinquencies at or near historical troughs in 2013. However, Fitch believes that asset quality improvement has run its course and expects metrics to normalize as increased competition pressures underwriting standards, rising rates increase borrowers' debt service burden, and used vehicle/equipment values continue to moderate, impacting recoveries. Average credit loss rates for captives in this review increased modestly to 0.71% in 2Q'14, from 0.63% in 2Q'13. Still, loss rates and delinquencies remain well below pre-crisis levels which should support solid credit performance in 2H'14 and 2015.
Healthy Profitability Levels
Profitability remained strong for the captive group with average pre-tax profit margins of 29.3% in 2Q'14 driven by higher financing revenues, relatively lower credit losses and lower borrowing costs. Fitch expects profitability to normalize in 2H'14 and 2015 as the industry faces headwinds from tighter pricing due to increased competition, higher provision expense from normalizing credit performance, and increased funding costs in a rising rate environment.
Slight Increase in Leverage
Average leverage for the captives covered in this review increased just over half a turn to 6.6x at 2Q'14, compared to 6.0x at year-end 2013, driven by higher average dividend distributions to parents. Leverage has increased from post-crisis lows and for some captives is approaching pre-crisis levels. Captives' discretion over dividend payments, which can be dialed back or curtailed in times of stress, somewhat mitigates this concern.
Robust Funding Access
Funding access in both secured and unsecured wholesale funding markets has remained robust as investors continue to seek incremental yields in a persistently low interest rate environment. Most captives have taken advantage of these conditions to lengthen their overall debt maturity profile, despite the increased use of CP. A potential increase in interest rates could dampen origination volumes, increase borrowing costs and pressure profit margins, but depending on the type of asset financed, captives should be able to pass on these costs to customers, albeit with a lag.
RATING SENSITIVITIES
Fitch expects ratings on captives that are considered core to move in tandem with the ratings of their respective parent. Fitch does not envision a scenario where a captive would be rated higher than its parent. That said, a material increase in leverage, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio for a captive, could become restraining factors on the respective parent's ratings.
Fitch has affirmed the following ratings:
Boeing Capital Corporation:
--Long-term Issuer Default Rating (IDR) at 'A; Outlook Stable;
--Senior unsecured notes at 'A'.
Caterpillar Financial Services Corporation
--Long-term IDR at 'A'; Outlook Stable;
--Senior unsecured bank credit facilities at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F1';
--CP at 'F1'.
Caterpillar Financial Australia Limited
--Short-term IDR at 'F1';
--CP at 'F1'.
Caterpillar International Finance Limited
--Long-term IDR at 'A';
--Senior unsecured bank credit facilities at 'A';
--Senior unsecured notes at 'A'.
Caterpillar Finance Corporation (CFC)
--Long-term IDR at 'A'; Outlook Stable;
--Senior unsecured bank credit facilities at 'A'.
Ford Motor Credit Company LLC
--Long-term IDR at 'BBB-'; Outlook Positive;
--Short-term IDR at 'F3';
--Senior shelf at 'BBB-';
--Senior unsecured at 'BBB-';
--Commercial paper (CP) at 'F3'.
Ford Credit Europe Bank Plc
--Long-term IDR at 'BBB-'; Outlook Positive;
--Short-term IDR at 'F3';
--Senior unsecured at 'BBB-';
--CP at 'F3';
--Short-term deposits at 'F3'.
Ford Capital B.V.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Senior unsecured at 'BBB-'.
Ford Credit Canada Ltd.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Short-term IDR at 'F3';
--Senior unsecured at 'BBB-';
--CP at 'F3'.
Ford Credit Australia Ltd.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Short-term IDR at 'F3';
--CP at 'F3'.
Ford Credit de Mexico, S.A. de C.V.
--Long-term IDR at 'BBB-'.; Outlook Positive;
Ford Credit Co. S.A. de C.V.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Senior unsecured at 'BBB-'.
Ford Motor Credit Co. of New Zealand Ltd.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Short-term IDR at 'F3';
--Senior unsecured at 'BBB-';
--CP at 'F3'.
Ford Motor Credit Co. of Puerto Rico, Inc.
--Short-term IDR at 'F3'.
Ford Holdings, Inc.
--Long-term IDR at 'BBB-'; Outlook Positive;
--Senior unsecured at 'BBB-'.
General Motors Financial Company Inc.
--Long-term IDR at 'BB+'; Outlook Positive;
--Senior unsecured debt at 'BB+';
--Euro Medium-Term Note Programme at 'BB+';
--Short-term IDR at 'B'.
GMAC Bank GmbH
--Long-term IDR at 'BB+'; Outlook Positive;
--Senior unsecured debt at 'BB+';
--Short-term IDR at 'B';
--Commercial paper at 'B';
GMAC (UK) Plc
--Long-term IDR at 'BB+'; Outlook Positive;
--Short-term IDR at 'B';
--Short-term debt at 'B'.
General Motors Financial International B.V.
--Long-term IDR 'BB+'; Outlook Positive;
-- Euro Medium Term Note Programme at 'BB+'.
HDFS
--Long-term IDR at 'A'; Outlook Stable;
--Senior unsecured rating at 'A';
--Short-term IDR at 'F1';
--Commercial paper rating at 'F1'.
Harley-Davidson Funding Corp. (HDFC)
--Senior unsecured rating at 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- Global Financial Institutions Rating Criteria (Jan. 31, 2014);
-- Finance and Leasing Companies Criteria (Dec. 11, 2012);
-- Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012).
--Fitch Affirms 12 U.S. Automotive and Capital Goods Companies' Ratings (Oct. 1, 2014)
--U.S. Auto Asset Quality Review: 2Q14 (August 2014)
--Captive Finance Companies: 2013 Review - Strong Performance Faces Emerging Headwinds (May 2014)
--Nonbank Financial Institution Interest Rate Sensitivity (January 2014)
Applicable Criteria and Related Research:
Nonbank Financial Institution Interest Rate Sensitivity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723766
Captive Finance Companies: 2013 Review (Strong Performance Faces Emerging Headwinds)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748676
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=889374
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