Fitch Affirms Tarjeta Naranja's IDRs at 'CCC'
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
TN's ratings are driven and constrained by the weak and deteriorating operating environment in Argentina, characterized by ample economic imbalances, and the risk of increasing political or regulatory intervention on the financial system. TN's ratings also considers the restrictive default of the Argentine sovereign, which triggered in July, 2014 a downgrade of the country's sovereign long-term LC IDR and Country Ceiling to 'CCC' from 'B-'.
TN's ratings also reflects company's strong franchise, robust loss absorption capacity, its adequate and recurring profitability, its sound but weakening asset quality, as well as, its sound funding and liquidity with FX risks.
In Fitch's view, regardless of TN's overall reasonable financial condition, its ratings are currently capped by the LC sovereign rating, due to the weak and worsening operating environment, and the challenges posed by the sovereign's delicate position with foreign creditors.
TN's senior unsecured debt rating is aligned to the company's LT LC IDR, given Fitch's perception that these notes would have average recoveries in the event of liquidation.
TN has built a robust and rapidly growing franchise and business model over the past 20 years, which makes its direct parent company, Tarjetas Regionales (TR), the largest credit card issuer in Argentina and one of the top players in Latin America. The footprint in the merchant business is also strong and expanding.
Some of TN's main strengths are its ample capital base and sound capacity to generate equity internally. Capital is mostly composed of tangible equity and the portion of intangible assets is fairly limited. As of March 2015, the equity to assets ratio remained at a sound 18.7%. Fitch's more stringent definition of core capital, which excludes intangibles and deferred tax assets, was also a robust 16.7% of total assets. Moreover, dividend pay-out and the approach for loan loss provisioning were also conservative.
TN maintains an adequate and recurring operating performance, driven by its wide margins and, more importantly, the ample and stable fee income sourced from both its acquisitions and merchant businesses. As of March 2015, TN significantly improved its profitability ratios (ROAA and ROEA) compared to that shown in previous years. Such improvement is expected to be sustainable in the near future due to TN's good and stable profit generation.
Despite the inherently high costs of this model, TN has well contained both non-interest expenses and loan loss provisions, driving a robust recurring operating ROAA. Nonetheless, the possibility of increased intervention and controls in this business line cannot be ruled out.
TN's non-performing loan (NPL) ratio has been growing over the past three years, in line with the gradually deteriorating economic and operating environment. In Fitch's view, the impairment and charge-offs ratios as of March 2015 remained reasonable (5.72% and 1.13%, respectively). Despite its monoline nature, albeit stable, Fitch regards positively TN's approach to monitor and control systematic risks.
TN has a strong and stable funding profile, which is composed of payables to merchant businesses, local issues of short- and medium-term unsecured notes and bank facilities. The overall duration of liabilities is twice the duration of average loans (eight versus four months, respectively). However, TN's ability to repay the principal of its USD200m global notes is heavily reliant on macroeconomic and political developments. As of today, one-third of such debt has already been amortized and the remaining is already hedged with a forward.
RATING SENSITIVITIES
IDRS AND SENIOR DEBT
Any downgrade of Argentina's sovereign rating could trigger further downgrades in TN's ratings.
Also TN's ratings could be affected if the worsening operating environment drives material deterioration in asset quality, earnings, and/or loss absorption capacity. Material increases in liquidity and/or refinancing risk could also put downward pressure on TN's ratings.
Upside potential of TN' ratings is heavily contingent upon positive developments in the sovereign rating dynamics.
Fitch has affirmed the ratings as follows:
TN
--FC and LC long-term IDRs at 'CCC';
--FC and LC short-term IDRs at 'C';
--USD200 million senior unsecured bonds at 'CCC/RR4'.
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