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TEXT-S&P rates CFG Holdings proposed notes 'B'
Overview -- CFG Holdings Ltd. and its subsidiary CFG Finance LLC (unrated) are issuing notes, which will be guaranteed on a senior secured basis by CFG Holdings' parent, affiliate, and existing and future subsidiaries. -- We are assigning a 'B' rating to the proposed issuance of up to $178 million seven-year senior secured notes, reflecting the consolidated group's creditworthiness. -- We are affirming our 'B-' counterparty credit rating on CFG Holdings, reflecting its status as a non-operating holding company. -- The positive outlook on the counterparty credit rating reflects CFG Holdings' improved profitability, cash flow generation, and asset quality and our view that the company might maintain this trend in 2013. Rating Action On Oct. 19, 2012, Standard & Poor's Ratings Services assigned its 'B' long-term rating to the up to $178 million seven-year senior secured notes to be co-issued by CFG Holdings Ltd. (CFGLTD) and its Delaware-based subsidiary CFG Finance LLC (not rated), subject to receiving final documentation. We are also affirming our 'B-' counterparty credit rating on CFGLTD. The outlook is positive. Rationale Our rating on the proposed notes is based on an unconditional and irrevocable guarantee by Caribbean Financial Group Holdings L.P. (parent company), by Caribbean Financial Group Inc. (affiliate of CFGLTD), and by CFGLTD's subsidiaries: -- Island Finance Trinidad & Tobago Ltd. (operating subsidiary), -- CaribFin LLC (operating subsidiary), -- Financiera El Sol S.A. (operating subsidiary), -- CFG NA Holdings B.V. (subsidiary), -- Island Finance (Bonaire) N.V. (operating subsidiary), -- Island Finance (Curacao) N.V. (operating subsidiary), -- Island Finance (Sint Maarten) N.V. (operating subsidiary), -- CFG Aruba Holdings N.V. (subsidiary),and -- Island Finance (Aruba) N.V. (operating subsidiary). All of them, jointly and severally with each other, guarantee the full and punctual payment of the notes. The rating assigned to the notes reflects the creditworthiness of the consolidated operating subsidiaries. The rating is limited by the highly concentrated funding structure of the group, its current unfavorable maturity profile, and its modest profitability despite its focus on consumer lending. The satisfactory market position in each of the markets where the subsidiaries operate, the adequate consolidated asset quality for its profile, and solid capitalization metrics are positive credit factors. The counterparty credit rating on CFGLTD is one notch lower than the notes rating to reflect its status as a non-operating holding company. CFGLTD is a holding company that offers unsecured personal loans to low- and middle-income customers through its subsidiaries located in the Caribbean (Aruba, Curacao, Saint Maarten, and Trinidad and Tobago) and Panama. Though the company faces competition from consumer-oriented banks and nonbank finance companies, in our opinion, it's well positioned thanks to its long-track record of operations in the region and wide branch network under the "Island Finance" and "El Sol" brands. We believe the company has a satisfactory market position based on its loan portfolio, which holds about 2% of total consumer loans in Trinidad and Tobago and Panama, more than 11% in the former Netherland Antilles, and nearly 17% in Aruba. We consider CFGLTD's funding structure as its major rating weakness, since it is highly concentrated and undermines its financial flexibility. CFGLTD relies on a single funding source, a revolving credit facility from a commercial bank, which matures in March 2013, causing a significant maturity gap in the balance sheet, since the loan portfolio has a 45-month average maturity. CFGLTD plans to use the proceeds from the notes to pay down its existing credit line as well as transaction fees and expenses. In addition, the company plans to obtain a new $25 million facility. Although this would slightly diversify the company's funding structure, it would remain highly concentrated compared with that of most of its peers. Although we normally view market debt as riskier than bank debt, if the company is able to place the issuance with the desired term of seven years, the balance sheet will be better matched with the loan portfolio, in our view. We also think refinancing risk would be mitigated in the medium term. In addition, paying down the current bank facility might provide financial flexibility to CFGLTD, as it will allow it to obtain funding from local sources. As we had expected, a higher net interest margin, lower loan loss provisions, and the absence of nonrecurring charges have improved CFGLTD's profitability. As of June 30, 2012, return on average assets and revenues stood at 4.9% and 19.4%, respectively, up from 3.9% and 16.3% as of June 30, 2011. Nonetheless, we view these profitability metrics as moderate for consumer finance, and below that of its rated peers'. Under current market conditions, we do not expect further impairments of goodwill or the divestiture of any subsidiaries that could weaken CFGLTD's bottom-line results. CFGLTD's adjusted capitalization and internal capital generation have improved. In our opinion, the company's capitalization levels are solid and sufficient to cover unexpected losses and support its growth. As of June 30, 2012, adjusted capitalization (measured as adjusted total equity to adjusted assets) was nearly 32.6%, up from 28.5% for the same quarter in 2011, and total debt to equity was 1.3x. Because we expect moderate growth of its loan portfolio, a positive trend in its internal capital generation, and no dividend payments, we also expect the company's capitalization ratios to continue improving gradually. We consider CFGLTD's loan performance to be satisfactory. In our opinion, the company has good credit risk management practices and tools for portfolio monitoring and reporting. Although the company's nonperforming loan ratio has remained relatively stable, net charge-offs decreased as a result of the divestiture of the Mexican operation and the centralization of the recovery functions. Contractual delinquencies (loans more than 60 days past-due) represented 11.7% of the portfolio at the end of the second quarter of 2012, while loans more than 90 days past-due 5.1%, with a 94.5% reserve coverage. Net charge-offs accounted for 3.9% of the portfolio at the end of 2011 (down from 7.1% in 2010), and 3.9% as of June 2012. Outlook The positive outlook on CFGLTD's counterparty credit rating reflects the improvement in its financial performance, cash flow generation, and asset quality since 2011, and our view that the company might maintain this trend in 2013. We expect moderate growth of the company's loan portfolio in the next two years, no deterioration of its asset quality, and a gradual strengthening of adjusted capitalization. We could upgrade the company if it maintains the current trend in its profitability and asset quality metrics and cash flow generation in next 12 months. Improved financial flexibility and the diversification of its funding sources could also be positive for the ratings. On the other hand, an increase in nonperforming loans, a sustained decrease in profitability or capitalization, or unfavorable financing conditions that increase refinancing risk in the short-term, could have a negative impact on the ratings. Related Criteria And Research -- CFG Holdings Ltd. and Subsidiaries Outlook Revised To Positive, 'B-' Rating Affirmed, Aug. 24, 2012 -- Group Methodology (Guarantees), April 22, 2009 -- Analytical Approach To Assessing Nonoperating Holding Companies, March 17, 2009 -- Criteria For Reliance On Upstream Guarantees Modified In Response To Legal Reforms In Latin America, Oct. 25, 2005 -- Rating Finance Companies, March 18, 2004 -- Finance Company Ratios, March 18, 2004 Ratings List Ratings Affirmed CFG Holdings Ltd. Counterparty Credit Rating B-/Positive/-- New Rating CFG Holdings Ltd./CFG Finance LLC Seven-year senior secured notes B Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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