OREANDA-NEWS. Fitch Ratings has downgraded Renaissance Financial Holdings Limited's (RFHL, the holding company of the Russia-headquartered investment banking group known as RenCap) Long-term Issuer Default Rating (IDR) to 'B-' from 'B'. The Outlook is Negative. A full list of rating actions is at the end of this comment.

KEY RATING DRIVERS - IDRs, SENIOR DEBT RATING
The downgrade was driven by the more challenging Russian operating environment, which is likely to exert pressure on RFHL's volumes, performance and business development. Russia remains RFHL's key market, accounting for more than 70% of its revenues. Prospects for Russia's economy and financial markets have deteriorated markedly as a result of sharp falls in the oil price and the rouble and the imposition of western sanctions, reducing investor appetite for Russian assets/business;

The downgrade also reflects weaker prospects for recovery of the USD1.1bn exposure to holding company Renaissance Capital Investments Limited (RCIL) and its affiliate, and hence for the strengthening of RFHL's solvency, given the weak performance of sister consumer finance bank (CB Renaissance Credit, Rencredit). Fitch believes that the unwinding of the RFHL's exposures to RCIL and its affiliate (together equal to 1.95x RFHL's equity) would require the sale of Rencredit, which is likely to be problematic in the forseeable future given its weak performance and the negative outlook for the consumer finance sector. In Fitch's view, contingent risks for RFHL in case of Rencredit's failure could also be significant.

The rating action also took into account the greater dependence of RFHL's liquidity on large and apparently unsecured funding contributions from certain counterparties/clients and related parties. A withdrawal by one of the largest customers could put significant pressure on RFHL's liquidity.

At the same time, RFHL's ratings also consider the support which has been made available to the company by its ultimate shareholder, the Onexim Group, the stabilisation of the company's performance during 2013-2014, and the company's capable management and limited risk appetite.

Fitch views RFHL's capitalisation as weak, given the exposure to RCIL and its affiliate, and USD272m (equal to 0.46x end-1H14 equity) of non-core investments, primarily in a Ukrainian agricultural holding. RCIL is fully owned by Onexim, and in turn owns 100% of RFHL and an 85% share of RenCredit. RFHL's exposure primarily comprises USD902m of loans to and placements with RCIL, but also includes USD254m to a subsidiary of RCIL which is RenCredit's holding company. Fitch views RenCredit's ability to generate sufficient profits to repay this loan as weak given its recent weak performance (losses under local GAAP in 2014 equalled to 84% of its equity at the start of the year with shareholder contributions restoring the bank's capital), weak asset quality and the negative outlook for the Russian consumer finance sector.

RFHL's liquidity remains vulnerable, given its high reliance on very short-term funding, primarily repo funding collateralised with equities and bonds. Liquidity could come under pressure in case of a sharp market fall, resulting in additional collateral posting requirements, which RFHL may have to meet before its asset-side counterparties post additional collateral on their funding from RFHL; or a weakening of customer and counterparty confidence. These risks are somewhat offset by the stability to date of repo funding, which is provided by both international and Russian counterparties, and funding support in the form of lumpy deposits/placements from related parties and other counterparties/clients.

Profitability remains weak, but positively the company recorded a small profit of USD9m in 1H14, and management expects a positive net result for the whole of 2014. However, RenCap's revenue base may suffer from a significant slump in trading volumes of Russian equities, which will make it challenging to deliver positive returns in 2015.

Market risk relating to potential proprietary trading is modest, as RenCap has scaled down these operations, reflected in low value at risk (USD2m) and a low USD4m net exposure for delta portfolios.

RFHL has benefited from support provided by Onexim, including USD350m emergency liquidity support in 4Q12 (later repaid) and USD186m to fund a eurobond repayment in April 2014. Onexim continues to express its commitment to RFHL, and provides business to the company, engaging it as an advisor on the group's major transactions. However, uncertainty remains about Onexim's propensity to support over the long term and in all circumstances, in particular given the absence of measures to date to decisively strengthen the company's solvency.

RATING SENSITIVITIES - IDRs, SENIOR DEBT RATING
The Negative Outlook reflects the possibility of RFHL being downgraded further if the weakening of the Russian operating environment results in (i) significant deterioration in the company's performance; (ii) a significant liquidity squeeze; or (iii) continued weakening of the performance of Rencredit, to the extent that this materially increases contingent risks for RFHL. If the operating environment improves and these risks subside, the Outlook could be revised to Stable.

An upgrade would require a considerable strengthening of the company's solvency through the unwinding of at least part of the related-party exposure and non-core investments, or recapitalisation by Onexim.

The rating actions are as follows:
Long-term foreign currency IDR: downgraded to 'B-' from 'B'; Outlook Negative
Short-term IDR: affirmed at 'B'
Senior unsecured debt Long-term rating of Renaissance Securities Trading Limited: downgraded to 'B-' from 'B', Recovery Rating 'RR4'