CRÉDITO REAL, S.A.B. DE C.V., SOCIEDAD FINANCIERA DE OBJETO MÚLTIPLE, ENTIDAD NO REGULADA
Fitch Ratings has downgraded
The Short-Term (ST) IDRs were affirmed at 'B'. The senior unsecured debt and hybrid notes were also downgraded and place on RWN. The LT and ST national scale ratings have also been downgraded to 'A-(mex)' from 'A(mex)' and to 'F2(mex)' from 'F1(mex)', respectively, and both were placed on RWN.
Credito Real's rating downgrade is driven by heightened refinancing risk and worsened funding conditions. Some of the previously proposed strategies to address the
Fitch will continue to monitor closely within the next several weeks the refinancing risk evolution and the company's actions to address it, and further negative rating actions cannot be ruled out if Fitch does not assess a stabilization of the funding and liquidity pressures.
Key Rating Drivers
The detailed existing funding and liquidity options that Credito Real provided to Fitch, which more than covers the full amount of the upcoming bond maturity, show that the company maintains some degree of financial flexibility consistent with the 'BB' rating category. However, some of those alternatives are still pending formalization and are reliant on market sentiment, while expected cash from the recent MXN1,500 million SME portfolio sale is pending approval from regulator. If refinancing strategies are unsuccessful, the company may seek to reduce loan origination as it has a highly cash generating business model.
Credito Real's ratings reflects with high importance its funding and liquidity profile, with a still high proportion of unsecured funding sources (80.8% of total debt) although highly reliant on financial market-driven sources (debt issuances represented 63.3% of total funding as of
Fitch's downward revision of the assessment of the company's funding to 'bb-' from 'bb' with a negative trend reflects the increased refinancing and liquidity risks arising from a deteriorated market sentiment toward the payroll loans to public-sector employees' industry that could hinder the company's short-term financing strategies.
Fitch's view also incorporates the company's existing financial flexibility in the form of access to several alternative sources of funding and its capacity to use the loan portfolio as collateral. Fitch estimates that if Credito Real modestly increases the use of secured funding, it can maintain a proportion of unsecured funding sources consistent with the 'bb' rating category as per Fitch's criteria, and sufficient unpledged assets to remain in compliance with its total unencumbered assets to total unsecured debt covenant of 110%, although with a narrower buffer. As of
The modest profitability of Credito Real which compares unfavorably against peers with a similar business model, is also a high importance factor. Decreased profitability is explained by a tighter interest margin due to a less dynamic loan portfolio and increased funding and credit costs. The pre-tax income to average assets was 0.9% compared to the 4.1% average of 2017-2020, although with a slight improvement from the 0.5% reported in the 2Q21. Fitch believes the company can progressively increase earnings as business volume recovers and if its plans to sell some assets are successfully executed. However, In Fitch's opinion, profitability will remain pressured due to changes in the payroll segment that may strain its margins.
Credito Real's asset quality metrics remain challenged by effects of the pandemic over its loan portfolio dynamic and by the deterioration of its SMEs portfolio. As of September of 2021 (3Q21), the adjusted NPL's ratio including 12-month charge-offs, the amount owed by distributors and foreclosed assets, stood at 11%. Fitch expects the company's NPL ratio to improve once the recent announced payment in kind for one specific SME past due loan completes, which is a positive development from Fitch's recent review.
Further improvement could come if the company completes its announced asset sale plans which will reduce the exposure to the SME segment in which the entity has lower expertise. Fitch's asset quality assessment also considers remaining pressures from the prevailing operating environment conditions.
Credito Real's tangible debt-to-capital ratio improved to 5.0x as of
The company has a good company profile underpinned by its national leadership in the payroll deductible loans to unionized state and federal public-sector employees, and ample expertise in the payroll segment in
SENIOR DEBT
The senior global debt rating has been downgraded to 'BB-' and remains at the same level as Credito Real's 'BB-' rating, as the likelihood of a default of the notes is the same as for the company. The senior notes rated at 'BB-(EXP)' have not yet been placed on the financial market.
HYBRID SECURITIES
Credito Real's hybrid securities have been downgraded to 'B' from 'B+' and remain rated two notches below its LT IDR to reflect the increased loss severity due to its deep subordination and heightened risk of non-performance relative to existing senior obligations.
Based on Fitch's assessment, the hybrid qualifies for 50% equity as it meets Fitch's criteria.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch expects to resolve the RWN upon assessing the progress in the funding and liquidity plans established by the company and the impact on the company's financial profile. If refinancing risk significant heightened, Fitch does not rule out a multi-notch downgrade;
A downgrade of Credito Real's ratings could result from further and sustained deterioration on asset quality and if the company does not show a clear recovery trend in profitability metric above 1%;
A total debt-to-tangible equity ratio consistently above 7.0x;
A multi-notch downgrade of the national ratings is possible if the IDRs are downgraded by more than one notch.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The RWN could be removed and ratings be affirmed if the company's strategies progress as expected reducing refinancing risk and improving the funding and liquidity profile of the company;
The current RWN makes an upgrade highly unlikely in the near term;
Over the medium term, the ratings could be upgraded if Credito Real strengthen its financial profile and asset quality metric stabilizes, while preserving its good company profile.
SENIOR DEBT and HYBRID SECURITIES
The company's debt ratings would mirror any changes on those of Credito Real's IDRs. The senior unsecured debt ratings would continue to be aligned with the company's IDRs, while the hybrid securities would remain two notches below.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Credito Real,
Credito Real,
Credito Real,
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Prior
Credito Real,
LT IDR
BB-
Downgrade
BB
ST IDR
B
Affirmed
B
LC LT IDR
BB-
Downgrade
BB
LC ST IDR
B
Affirmed
B
Natl LT
A-(mex)
Downgrade
A(mex)
Natl ST
F2(mex)
Downgrade
F1(mex)
senior unsecured
LT
BB-
Downgrade
BB
senior unsecured
LT
BB-(EXP)
Downgrade
BB(EXP)
subordinated
LT
B
Downgrade
B+
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
(C) 2021 Electronic News Publishing, source
