Fitch Upgrades Springleaf to 'B-'; Outlook Stable
NEW YORK -- August 30, 2013
Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) and
senior unsecured debt ratings of Springleaf Finance Corporation (Springleaf)
to 'B-' from 'CCC' and assigned a Stable Rating Outlook. Fitch has also
upgraded the preferred stock ratings of AGFC Capital Trust I to 'CC/RR6' from
KEY RATING DRIVERS
The rating upgrades primarily reflect the significant progress made by the
company toward repaying near-term debt and extending its liquidity runway,
combined with improved operating performance, highlighted by the return to
profitability in 2Q13. These improvements are counterbalanced by significant
remaining debt maturities in 2017, as well as the monoline nature of
Springleaf's business of lending to subprime consumers, which will attract
increased regulatory scrutiny.
Pro forma for actions taken subsequent to quarter end (e.g. secured loan
paydowns, real estate securitization, termination of swap positions), Fitch
estimates the company had $995 million of unrestricted cash at June 30, 2013,
which could be used to fund new loan originations and/or repay debt. The
company could also elect to sell a portion (or all) of its investment
portfolio ($546 million at June 30, 2013) or securitize unencumbered assets
(estimated pro forma $1.9 billion at June 30, 2013) in order to generate
incremental liquidity. Fitch believes the company has adequate sources of
liquidity to originate new loans and meet its debt obligations through 2016.
That said, Fitch remains concerned with the company's $5.1 billion of debt
maturing in 2017. Fitch expects the company to seek to refinance at least a
portion of this debt via the capital markets, although this strategy carries
execution risk, particularly in a rising rate environment. Absent refinancing
of a material portion of the debt, Fitch believes that Springleaf could be
challenged to meet its 2017 debt maturities.
Leverage, as measured by adjusted debt to adjusted tangible equity, declined
to 8.2x at June 30, 2013 from 9.2x in 2012. However, reported leverage is
calculated on a push-down accounting basis following the majority sale of
Springleaf to Fortress Investment Group LLC from American International Group,
Inc. in 2010. Fitch also views leverage on a historical cost basis, which adds
back the asset and debt discounts recorded as part of the application of
push-down accounting. On this basis, Fitch estimates leverage was 9.4x at June
30, 2013. Under both metrics, Fitch views Springleaf's leverage as improved,
but still higher than other subprime lenders.
The Stable Outlook reflects Fitch's view that Springleaf's liquidity profile,
leverage and operating performance have stabilized, and may potentially
improve over the near to intermediate term, absent a material market stress.
Fitch believes additional upward rating momentum could potentially be
warranted if 2017 debt maturities are proactively addressed, profitability is
sustained over an extended period of time, asset quality is further improved,
and leverage declines to a level more in-line with higher rated consumer
finance companies. That said, potential upward momentum would likely be
limited to a below investment grade level, given Springleaf's monoline focus
on subprime consumer lending and the potential for increased regulatory
Conversely, an inability to refinance existing debt at reasonable costs,
substantial credit quality deterioration, potential new and more onerous rules
and regulations, as well as potential shareholder-friendly actions given the
high private equity ownership, could generate negative rating momentum or may
result in notching the senior unsecured rating below the current IDR.
Fitch has upgraded the following ratings:
Springleaf Finance Corporation
--Long-term IDR to 'B-' from 'CCC'
- Senior unsecured debt to 'B-/RR4' from 'CCC/RR4'
AGFC Capital Trust I
--Preferred stock to 'CC/RR6' from 'C/RR6'
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
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. 19, 2013;
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis, Dec. 13, 2012.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Recovery Ratings for Financial Institutions
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
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