Fitch Revises Outlook on RFHL to Stable; Affirms at 'B-'
23 Jan 2017 9:01 AM
Fitch Ratings-Moscow/London-23 January 2017: Fitch Ratings has revised the Outlook on Renaissance Financial Holding Limited's (RFHL) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'. RFHL is the holding company of the Russia-headquartered investment banking group Renaissance Capital (RenCap). A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
The revision of the Outlook to Stable reflects (i) reduced pressure on RFHL's performance and risk profile due to the stabilisation of the Russian operating environment; (ii) an extended record of stable operations and liquidity management since the takeover of the company in 2012, in part due to shareholder support; and (iii) reduced contingent risks from sister retail bank Rencredit as the latter's performance somewhat improved in 2016.
RFHL's 'B-' Long-Term IDR continues to reflect weak asset quality and solvency due to a large USD1.3bn related party exposure (40% of RFHL's assets, 3x of Fitch Core Capital at end-1H16). Of this, USD0.9bn represents an exposure to RFHL's holding company Renaissance Capital Investments Limited (RCIL), USD0.2bn comprises a loan to an RCIL subsidiary, which is the holding company of Rencredit, and USD0.2bn includes loans to companies of the broader Onexim group, RFHL's ultimate owner.
According to management, the unwinding of these exposures would require some form of shareholder support as part of the attraction of a new strategic investor. In Fitch's view, finding such an investor could be challenging, given RFHL's limited franchise and moderate performance prospects. Capital is further undermined by a non-core USD0.1bn investment in an agricultural holding in Ukraine, although according to management, the company is performing reasonably.
Repo funding comprised 41% of total liabilities at end-1H16, with the remainder mainly made up of broker/customer payables and short positions in securities. RFHL's short-term liabilities consistently exceed its liquid assets due to large non-core and related party assets significantly exceeding equity. The company therefore relies on unsecured borrowings of securities (about USD0.8bn) from some of its broker clients (some of them could be related parties, in Fitch's view) to be able to raise market repo funding. About half of repo funding was collateralised with these securities. In Fitch's view continued access to these securities or other shareholder funding support is crucial for the liquidity profile of the company and its ability to continue to service its liabilities.
In addition to partially funding non-core/related-party exposures, repo funding is used to finance similarly collateralised margin loans on the asset side of the balance sheet. A liquidity buffer of about USD100m-USD150m is usually maintained to mitigate potential gaps in variation margin requirements, as there may be a small delay (one or two days) in receiving corresponding collateral from borrowers under margin loans.
Market risk relating to potential proprietary trading is modest, as RenCap has limited amounts of such operations, reflected in low value at risk (USD1m at end-1H16).
Profitability is weak and cyclical, but positively the company managed to achieve a small USD3m net profit in 1H16 (annualised ROAE of 1%). However, net of interest income less interest expense associated with related party exposures, the company would have reported a net loss of USD7m (-3% ROAE).
RFHL has benefited from support provided by Onexim, including USD350m emergency liquidity support in 4Q12 (later repaid), USD186m to fund a eurobond repayment in April 2014 and USD100m (later repaid) in 4Q14 to support short-term liquidity allowing to benefit from market volatility at that time. Onexim has expressed its commitment to RFHL and provided business to the company. However, uncertainty remains about Onexim's propensity to provide support over the long term and in all circumstances, in particular given the absence to date of measures to decisively strengthen the company's solvency.
The bond rating of 'B-' is driven by the Long-Term IDR and Fitch's assessment of average recovery prospects in the event of a default.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
RFHL could be downgraded if (i) it is no longer able to borrow securities from its broker clients or otherwise support its access to short-term funding; (ii) the company's performance deteriorates significantly; or (iii) Rencredit's performance continues to weaken, to the extent that this materially increases contingent risks for RFHL.
Positive rating action would be contingent on (i) a considerable strengthening of the company's solvency through the unwinding of at least part of the related-party exposure/ non-core investments, or recapitalisation by Onexim/a potential new investor; (ii) reduced reliance on securities borrowings to support liquidity; or (iii) a further decrease of contingent risks related to sister bank Rencredit.
RFHL's senior bond's rating is likely to move in tandem with the company's Long-Term IDR.
The rating actions are as follows:
Long-Term Foreign Currency IDR: affirmed at 'B-'; Outlook revised to Stable from Negative
Short-Term IDR: affirmed at 'B'
Long-Term senior unsecured rating: affirmed at 'B-'/'RR4'
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