Fitch Ratings has downgraded Unifin Financiera, S.A.B. de C.V.'s (Unifin) Long- and Short-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'C' and 'C' from 'BB-' and 'B', respectively.

The National Scale Long-Term and Short-Term Ratings have also been downgraded to 'C(mex)' and 'C(mex)' from 'A-(mex)' and 'F2(mex)', respectively. In addition, Fitch has downgraded the ratings of the company's senior notes and hybrid securities to 'C' and 'C', respectively. A full list of rating actions is at the end of this commentary.

Key Rating Drivers

The downgrades follow Unifin's announcement on August 8 that it intends to stop paying interest and principal on its debt and seek to negotiate a standstill agreement with its creditors to implement a debt restructuring. The company indicated that the announcements are in response to meaningfully constrained funding sources affecting its capital structure and liquidity.

Fitch believes these developments constitute that a default process has begun. The company's next global bond maturity is Aug. 12, 2022, after which Fitch expects the company will enter into the 30-day grace or cure period afforded under the terms of the debt instrument.

Prior to the announcement, Unifin exhibited reasonable financial flexibility particularly considering the maturity extension of the USD200 million bond due in August 2022 and the addition of a new USD500 million secured credit facility provided by Credit Suisse. Pro forma for these actions and based on 2Q22 financial information, the company's unsecured debt to total debt was 71%, while cash and equivalents covered 25% of next 12 months debt maturities.

Fitch believes Unifin faces significantly elevated execution risks related to the company's revised strategy and uncertainty regarding its franchise and long-term viability. Fitch considers these execution risks to have a negative impact on the ratings in combination with other factors.

SENIOR DEBT

The senior global debt rating is equalized with Unifin's 'C' IDR, as the likelihood of a default of the notes is the same as for the company. Fitch has not assigned a Recovery Rating for the instrument reflecting that the potential recovery outcome for the instrument is highly variable.

HYBRID SECURITIES

Unifin's hybrid securities rating is equalized with Unfin's 'C' IDR. While the instruments were previously notched two notches below the IDR to reflect increased loss severity due to deep subordination and heightened risk of non-performance relative to existing senior obligations, this is no longer feasible at the bottom end of the rating scale, one notch above 'D'/'RD'. Fitch has not assigned a Recovery Rating for the instrument reflecting that the potential recovery outcome for the instrument is highly variable.

Fitch has revised Unifin's Management Strategy ESG Relevance Score to '5' from '4' reflecting significantly elevated execution risk surrounding the company's revised strategy and uncertainty regarding the company's franchise and long-term viability. Fitch considers these execution risks to have a negative impact on the credit profile in conjunction with other factors.

RATING SENSITIVITIES

Fitch will monitor the sufficiency of information for the ongoing evaluation of the entity's creditworthiness, which could result in a rating withdrawal at the current level if the entity does not disclose sufficient information to Fitch and the market.

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

The IDRs would be downgraded to 'RD' if the company enters to a debt restructuring process or distressed debt exchange on a bond, loan or other material financial obligation;

The IDRs would be downgraded to 'RD' in the event of a missed interest or principal payment, after the expiration of the applicable grace period;

The IDRs would be downgraded to 'D' if the entity enters into bankruptcy proceedings, administration, receivership, liquidation or other formal winding-up procedures or if it ceases operations.

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

Although highly unlikely, an upgrade could potentially occur if the company abandons its current intention to cease interest and principal payment of its financial liabilities. Otherwise, upside potential is limited due to current uncertainties;

In the event a debt restructuring process is initiated and sufficient disclosure of the company's plans and financial information is provided, the IDRs and national scale ratings would be reassessed.

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 has an ESG Relevance Score of '4' for Financial Transparency due to weaker third-party disclosures relative to international best practices. In addition, Fitch was not aware of the company's intention to cease debt service payments and seek a restructuring until it was publicly disclosed by the company. Fitch's considers the limited transparency to have a negative impact on the credit profile in conjunction with other factors.

Fitch has revised Unifin's Management Strategy ESG Relevance Score to '5' from '4' reflecting significantly elevated execution risk surrounding the company's revised strategy and uncertainty regarding the company's franchise and long-term viability. Fitch considers these execution risks to have a negative impact on the credit profile in conjunction with other factors.

Unifin has an ESG Relevance Score of '4' for Governance Structure due to concerns regarding the previously-planned expansion into non-core strategies to sustain financial metrics, which has a negative impact on the credit profile 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 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

Unifin Financiera, S. A. B. de C. V.

LT IDR

C

Downgrade

BB-

ST IDR

C

Downgrade

B

LC LT IDR

C

Downgrade

BB-

LC ST IDR

C

Downgrade

B

Natl LT

C(mex)

Downgrade

A-(mex)

Natl ST

C(mex)

Downgrade

F2(mex)

senior unsecured

LT

C

Downgrade

BB-

subordinated

LT

C

Downgrade

B

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire