MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned foreign and local currency long-term Issuer Default Ratings (IDRs) of 'B+' and short-term IDRs of 'B' to Mexico's Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. (Finmart). National scale ratings of 'BBB+(mex)' and 'F2(mex)' were also assigned. The long-term Rating Outlook is Stable. Fitch also expects to rate an upcoming issue of medium-term Reg S bonds 'B+/RR4'. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
All of Finmart's ratings are driven by its core profile. Thus, the ratings reflect its favorable business model, granting personal loans to stable public sector employees with direct debit to their payrolls. However, the ratings also factor in the relatively high operational, political, and reputational risks associated with this sector, as well the exposure to fierce competition and the potential for rapidly changing market dynamics.
Finmart's ratings also consider its gradually growing franchise and overall competitive position, sound operating and risk management practices, and improving performance and capital adequacy metrics, although these have been somewhat volatile in recent years. More important, Finmart's ratings are constrained by its relatively expensive, concentrated funding base, which is faced with burdensome terms and conditions.
The expected rating on the proposed notes reflects Fitch's opinion that, upon completion of such issue, FinMart would have enough available earning assets to ensure an average recovery for bondholders in the case of liquidation. This underpins the Recovery Rating of 'RR4' and the alignment of the notes' rating with Finmart's IDR.
RATING SENSITIVITIES
Finmart's ratings could be eventually upgraded if the flexibility of funding is materially improved, with more diversified sources, an increasing portion of more stable financing alternatives, and a material shift in the funding mix, with the majority of this coming from unsecured lending. Also, sustained profitability and capital adequacy metrics might be positive ratings factors.
In turn, Finmart's ratings could be affected if the company is not able to sustain the performance, capital, and asset quality metrics recorded at end-2012. The ratings could be negatively affected by operating return on assets (ROA) below 2%, a capital-to-assets ratio lower than 20%, and/or impairment and charge-off ratios above 7% and 4%, respectively.
The rating of the proposed notes will likely remain aligned with Finmart's IDRs. However, it could be downgraded to a level below the IDR if Finmart does not improve the availability of unpledged earnings assets materially after completion of the issuance.
CREDIT PROFILE
Finmart, established in 2003, grants personal loans secured by payroll withholdings to unionized public sector employees in Mexico. These employees, federal, state, and municipal governments, often have limited access to financing products, given their relatively lower income and limited credit track record. However, public sector unionized jobs are usually stable and have low turnover ratios. Finmart offers medium-term loans that are repaid in fixed installments.
In early 2012, EzCorp Inc. (NASDAQ: EZPW), a consumer finance company based in Austin, Texas, acquired 60% of Finmart through a capital infusion of USD12 million which, coupled with new capital contributed by original shareholders, increased Finmart's capital base by USD20 million. These resources enabled Finmart to expand its loan growth capacity, implement a strategy to improve its funding structure, and clean up its loan portfolio. As a result, capital metrics and franchise improved materially, although profitability and asset quality were somewhat affected, but these have been gradually improving since 2012.
For many years, Finmart's funding mix has been relatively expensive and concentrated, with burdensome terms and conditions. Tenors, interest rates, and required collateral have been improving steadily and materially, which has boosted recurring earnings and improved the entity's financial flexibility. Nonetheless, funding remains concentrated in wholesale sources, while the company remains challenged to further improve the conditions of its credit facilities while reducing its reliance on collateralized funding.
Fitch has assigned the following ratings:
Prestaciones Finmart:
--Long-term foreign and local currency IDRs 'B+';
--Short-term foreign and local currency IDRs 'B';
--Upcoming issue of MXN750 million 3-year Reg S bonds 'B+/RR4(EXP)';
--National-scale long-term rating 'BBB+(mex)';
--National-scale short-term rating 'F2(mex)'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- 'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
-- 'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
-- 'Recovery Ratings for Financial Institutions' (Aug. 15, 2012);
-- 'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research
Recovery Ratings for Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686295
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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