Fitch Ratings has affirmed Unifin Financiera, S.A.B. de C.V.'s (Unifin) Long- and Short-Term Foreign and Local Currency Issuer Default Rating (IDRs) at 'BB-' and 'B', respectively, and senior unsecured debt and hybrid securities at 'BB-' and 'B', respectively.

The National Scale Long-Term and Short-Term Ratings have also been affirmed at 'A-(mex)'/'F2(mex)'. Fitch has simultaneously removed all ratings from Rating Watch Negative and assigned a Negative Rating Outlook.

Key Rating Drivers

The rating affirmation and the resolution of the Rating Watch Negative reflects reduced near-term refinancing risk following the maturity extension of the USD200 million bond due in August 2022 to May 2024 and the addition of a new USD500 million secured credit facility provided by Credit Suisse (CS). The Negative Rating Outlook reflects execution risk associated with Unifin additional funding strategies including strengthening its local funding structure due to deteriorated investor confidence and increased risk aversion for Mexican Mexican non-bank financial institutions (NBFIs) more broadly.

Unifin's ratings reflect its strong local market position in the Mexican leasing industry. Rating constraints include pressured asset quality and weak earnings, meaningful appetite for balance sheet growth in the past, less prudent capital management, expansion into non-core strategies (i.e. repurchase of bonds to prioritize profitability instead of liquidity preservation), and weaker financial transparency than more highly-regulated entities.

On May 31, Unifin executed an agreement to extend its USD200 million August 2022 bond maturity to May 2024. Based on the specifics of the renegotiation, Fitch does not consider it a Distressed Debt Exchange (DDE). The amended bond has a maturity of less than two years at a fixed rate of 7% with semi-annual interest payments. The issuance may be redeemed at the option of the issuer.

On June 1, Unifin added a USD500 million senior secured credit facility, comprised by USD300 million term-loan and USD200 million of revolving loan. Fitch's expects that the new financing will not materially impact Unifin's adjusted tangible leverage or unsecured debt to total debt metrics as a significant portion will be used for the refinancing of current indebtedness, while another portion can be used for growth.

Fitch believes that the bond maturity extension and new credit facility are incrementally positive developments, which provide Unifin with additional time to adjust its funding structure toward local and secured sources while addressing near-term refinancing needs and loan growth. However, medium-term funding and liquidity risks remain starting in 2023. The company's cash and equivalents as of March 2022 plus the USD300 million term facility cover around 0.8x of upcoming debt maturities between May 2022 to March 2023.

The company has indicated that it plans to address upcoming maturities through the usage of revolving credit facilities, available cash and equivalents, local short- and long-term bond market issuances (the latter with a partial guarantee from local development agencies), access to other secured sources and reduced of originations (the issuer is originating around 80% of collections). Most of these strategies have some execution risks due to sensitivity to investor/market sentiment. On May 5, Unifin issued USD6 million of short-term debt with a three-month maturity and on June 2, Unifin issued USD4 million of short-term debt with a two-month maturity.

Fitch forecasts the adjusted tangible leverage metric to increase to above 7x, but to remain below the rating sensitivity for a downgrade of 8x. As of 1Q22, Fitch's adjusted ratio of total debt-to-tangible equity stood at 6.4x, down slightly from 6.7x at YE 2021. Fitch applies a 70% haircut to the revaluation surplus related to the oil platform owned by the company, and adjusts for temporary impacts from derivative valuations on the balance sheet and capital through other comprehensive income items.

Fitch believes Unifin's earnings and profitability will remain under pressure, as a result of lower than pre-pandemic loan growth and increased financing costs from new credit facilities. At 1Q22, the pre-tax income to average assets ratio was 1.4% slightly lower than YE 2021 and still low for its relatively riskier business model. The company has not disclosed the interest rate on the USD500 million senior secured credit facility, therefore Fitch cannot yet assess the expected impact on the company's net interest margin.

SENIOR DEBT

The senior global debt rating is equalized with Unifin's 'BB-' rating, as the likelihood of a default of the notes is the same as for the company. Fitch expects average recovery prospects for the instrument, given the high level of unencumbered assets.

HYBRID SECURITIES

Unifin's hybrid securities are rated 'B', two notches below the company's Long-Term IDR. The two-notch differential represents incremental risk relative to the entity's IDR, reflecting the increased loss severity due to deep subordination and heightened risk of non-performance relative to existing senior obligations.

Based on Fitch's analysis, the hybrid qualifies for 50% equity credit as it meets Fitch's criteria with regard to the ability to defer coupon payments, the existence of a coupon step-up of at least 500 basis points in the event of a change of control and its perpetual nature.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Reduced liquidity position, increased refinancing risks and failure to complete the company's medium-term funding strategies;

An increase in Fitch's adjusted total debt-to-tangible equity ratio above 8x and a pre-tax income to average assets ratio consistently below 1.5% or a material deterioration of asset quality.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Sustained improvements in the funding, liquidity and coverage profile, including addressing near- to medium-term refinancing risks, could result in the Outlook being revised to Stable;

Although not a baseline scenario due to the current Negative Outlook, ratings could potentially be upgraded over the medium-to-longer term if there is an improvement of the operating environment and market sentiment toward Mexican NBFIs that allows the company to strengthen its business profile, together with an improvement in pre-tax income to average assets ratio consistently above 3%; while maintaining Fitch's adjusted tangible leverage ratio below 5.5x.

SENIOR DEBT and HYBRID SECURITIES

The company's debt ratings would be expected to mirror any changes on those of Unifin's IDRs absent a material change in the capital structure which could impact the recovery prospects, and thus, the ratings of existing debt classes. 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

Summary of Financial Adjustments

Fitch reclassified pre-paid expenses as intangibles and deducted from total equity due to low loss absorption capacity under stress.

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

Unifin Financiera, S. A. B. de C. V. has an ESG Relevance Score of '4' for Financial Transparency due to Unifin's third-party disclosure remains weaker than international best practices. For this revision, Fitch did not have access for the full terms and conditions of new CS credit facility which limited the agency's assessment of the funding and profitability factors. Fitch's considers this have a negative impact on the credit profile, and influences relevantly on the Negative Outlook of the long-term ratings in conjunction with other factors.

Unifin Financiera, S. A. B. de C. V. has an ESG Relevance Score of '4' for Management Strategy due to Unifin's meaningful balance sheet growth and less prudent capital management underpin its high-risk profile and pressure execution, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unifin Financiera, S. A. B. de C. V. has an ESG Relevance Score of '4' for Governance Structure due to concerns regarding the expansion into non-core strategies to sustain financial metrics, such as the acquisition of complex assets (oil platform) and the repurchase of bonds to prioritize profitability instead of liquidity preservation, which 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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