CRÉDITO REAL, S.A.B. DE C.V., SOCIEDAD FINANCIERA DE OBJETO MÚLTIPLE, ENTIDAD NO REGULADA
Fitch Ratings has downgraded
Credito Real's unsecured debt and hybrid notes were also downgraded to 'CC'/'RR4' from 'B-'/'RR4' and to 'C'/'RR6' from 'CCC'/'RR6', respectively. The LT and ST national scale ratings were downgraded to 'CC(mex)' from 'B(mex)', and to 'C(mex)' from 'B(mex)', respectively. All ratings remain on Rating Watch Negative (RWN).
Key Rating Drivers
The downgrade reflects increased concerns regarding Credito Real's ability to address its upcoming
Credito Real's main strategies to meet the bond payment, including the signature of the syndicated secured facility and the confirmation of additional financing strategies that the non-bank lender was negotiating, have not materialized yet. As per Fitch's rating definitions, the 'CC' rating primarily reflects that default of some kind appears probable. The RWN reflects that further negative rating actions could be taken in the following days in the event of failure to secure the additional financing alternatives to meet the payment of the bond.
Fitch downgraded the company's funding and liquidity factor to 'cc' from 'b-' with a negative trend as it remains highly subject to creditor sentiment. The very close payment date of the bond signals material room for improvement in management execution and internal control, while it also raises concerns about the company's corporate governance that are no longer consistent with the previous ratings.
The rating downgrade also considers the downward revision of Fitch's evaluations of the rating factors 'business profile' to 'b+' from 'bb-', reflecting the agency's perception of a diminished business profile due to the deterioration of Credito Real's funding franchise, which hinders its future business prospects; 'management and strategy' to 'ccc+' from 'b+' based on Fitch's opinion of a slower than anticipated execution of refinancing strategies to stabilize Credito Real's liquidity position; and 'risk profile' to 'b- from 'b+' due to a less conservative liquidity risk management and increased execution risks in view of the proximity of the maturity payment.
The agency will reassess the impact on the company and financial profile after the maturity of the Swiss franc global bond.
SENIOR DEBT
The senior global notes are rated at the same level as Credito Real's 'CC' international rating, as the likelihood of a default of the notes is the same as for the company. The senior notes rated 'CC(EXP)' have not yet been placed on the financial market. The Recovery Rating of 'RR4' assigned to the notes indicates 'Average' recovery prospects of current principal and related interest upon default.
HYBRID SECURITIES
Credito Real's hybrid securities rated at 'C' reflects the increased loss severity due to its deep subordination and heightened risk of non-performance relative to existing senior obligations. The Recovery Rating of 'RR6' assigned to the notes indicates 'Poor' recovery prospects of current principal and related interest upon default. Based on Fitch's assessment, the hybrid qualifies for 50% equity credit under Fitch's criteria.
Fitch has revised Credito Real's ESG Relevance Score for the Governance Structure factor to '5' from '3' given the agency's concerns over intrinsic governance practices as well as the effectiveness of the supervisory board regarding protection of creditor's rights. Fitch changed Credito Real's ESG Relevance Score for Management Strategy to '5' from '3' as management's ability to handle risks and controls to service debt obligations on time has relevantly deteriorated. This has a negative impact on the credit profile and is highly relevant to the rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade could occur if current negotiations to close the secured syndicated loan or additional funding strategies fail, which would lead to a restricted default;
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade could occur if the company timely meets the principal payment of its Swiss bond.
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 rated below its IDRs.
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 '
Summary of Financial Adjustments
Pre-paid expenses and other deferred assets were reclassified as other intangibles and deducted from capital. Results from investments in associates were reclassified as operating income. Income from leasing and factoring operations were reclassified as interest income. Its operational lease portfolio and factoring operations were included in gross loans, with the portion of delinquent leases classified as impaired loans. The coupons of the perpetual notes were reclassified as interests.
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
Fitch has changed Credito Real's Governance Structure ESG Relevance Score to '5' in contrast to a typical relevance score of '3'. Fitch believes this reflects significant concerns over the effectiveness of the supervisory board with regards to perceived weakness towards the protection of creditors' rights. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Fitch has changed Credito Real's Management Strategy ESG Relevance Score to '5' in contrast to a typical relevance score of '3' due to Fitch perceiving management's diminishing ability to manage risks and control to service debt obligations on time, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Credito Real has an ESG Relevance Score of '4' for Exposure to Social Impacts due to its exposure to shifts in social or consumer preferences or changes in government regulation, or contract agreements on payroll deduction loan products, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Credito Real has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to its exposure to reputational and operational risks, as its payroll deduction loans business targets government employees and dependencies offering relatively high interest rates, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Credito Real has an ESG Relevance Score of '4' for Financial Transparency due to the issuer's approach for reporting and registering accrued interest and the loan portfolio differ from practices disclosed by other payroll lenders, and Credito Real's public information disclosure is weaker than international best practices and lack sufficient detail in some accounts. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
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.
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