Fitch Downgrades Springleaf to 'B-' Following Completion of OneMain Acquisition
Today's ratings actions follow the completion of the previously announced acquisition of OneMain Financial Holdings, Inc. (OneMain). The transaction was financed with cash proceeds from the sale of short-term investment securities, roughly $1.9 billion of securitization issuances and subordinated security sales in 1H15, and the $976 million (net proceeds) common equity issuance in May 2015. Upon closing the transaction, SHI is expected to be renamed OneMain Holdings, Inc.
KEY RATING DRIVERS - IDRs AND SENIOR UNSECURED DEBT
The downgrades reflect the substantial increase in consolidated leverage and commensurate reduction in liquidity following the completion of the transaction, and also reflect the integration and execution risks associated with the transaction, which roughly doubles SHI's assets. Furthermore, Fitch believes the substantial increase in the size of the company potentially elevates its already heightened exposure to regulatory and legislative risks. At the time of the announced transaction, Fitch had articulated an expectation to downgrade SHI's ratings by at least one notch, depending on the magnitude of leverage associated with the transaction.
Fitch believes that the acquisition offers potential long-term benefits for creditors of the combined organization. Springleaf expects to generate significant expense synergies by consolidating branches and integrating systems and employee functions while generating new revenue opportunities by expanding product and service offerings across the combined company. Fitch believes the combined entity may have higher long-term ratings potential reflecting its stronger franchise and competitive positioning, increased scale and operating efficiency and improved earnings profile relative to the smaller, standalone entities.
Fitch does not publicly rate OneMain but intends to form a credit view of the subsidiary and its outstanding debt upon further review of the specifics of its credit risk profile and the ultimate integration of the entity over time. Given the terms of OneMain's outstanding debt and the restrictions on capital flows to SHI or SFC from OneMain, Fitch believes there may be potential for OneMain's existing debt to be rated modestly higher than SHI and SFC's IDRs and SFC's unsecured debt. Nevertheless, Fitch's ratings of SHI and SFC reflect a consolidated view of the overall organization including potential restrictions on capital flows between the entities.
As a stipulation of Department of Justice (DOJ) and State Attorneys General antitrust approval of the transaction, SHI has agreed to sell 127 of the combined company's branches encompassing approximately $600 million of personal loans held for sale to Lendmark Financial Services. The sale is expected to be completed by the end of the first quarter of next year. Fitch expects SHI to utilize the proceeds from the branch sales toward meeting upcoming debt maturities. While the asset sale will improve SHI's liquidity position and contribute to balance sheet deleveraging, Fitch believes the sales will have a slight negative impact on the projected earnings accretion from the transaction.
Despite the common equity issuance in May and the expected branch sales in the next few months, SHI's consolidated balance sheet leverage has increased significantly above management's long-term target range for adjusted debt to adjusted tangible equity of 5.0x -7.0x and well above comparable nonprime consumer finance companies. Based on Dec. 31, 2014 pro forma financials published by the SHI in April 2015, Fitch calculates that SHI's leverage would be 14.2x post-acquisition, compared to 3.9x on stand-alone basis. SHI's liquidity position has also been meaningfully reduced as a result of the transaction, while its near-term debt obligations remain material, specifically its 2017 unsecured debt maturities of $1.9 billion.
Furthermore, integration risk will be present for a considerable period of time and regulatory scrutiny, particularly from the Consumer Financial Protection Bureau, will likely increase for the combined company. Fitch views SHI's announced hiring of Scott Parker, former CFO of CIT Group Inc., as CFO of SHI positively given his prior experience in an executive management role at a company going through transformative change.
SHI conducts the majority of its business through its subsidiaries and essentially all assets and debt outstanding reside at subsidiaries. Thus, the ratings of SHI and SFC are equalized.
RATING SENSITIVITIES - IDRs AND SENIOR UNSECURED DEBT
Downside risks to SHI and SFC's ratings will be elevated until OneMain is fully integrated, leverage is reduced, and the company's debt maturity profile improves further. Longer-term negative ratings momentum could also ensue from an inability to access the capital markets at a reasonable cost, greater competitive intensity in the nonprime lending segment from newer entrants including marketplace lenders, substantial credit quality deterioration, additional asset encumbrance, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership.
Longer-term positive rating momentum could be driven by successful integration of OneMain's platform and staff, de-leveraging to levels in-line with similar nonprime consumer finance companies, demonstrated execution on planned strategic objectives, additional actions to improve the debt maturity profile, sustained improvements in profitability and operating performance, measured growth in core lending businesses, successfully executing on new business opportunities, and reducing concentrated ownership.
Fitch believes the combined entity may have higher longer-term ratings potential reflecting its stronger franchise and competitive positioning, increased scale and operating efficiency and improved earnings profile relative to smaller, standalone entities. However, potential upward momentum would remain limited to below investment-grade levels, given SHI's monoline business model, core demographic and high reliance on the capital markets for funding. Furthermore, Fitch views the elevated regulatory, legislative and litigation risks that exist for SHI, as well as a lack of prudential regulation, as key rating constraints.
The rating assigned to SFC's senior unsecured debt is equalized with SHI and SFC's IDRs, and would therefore be expected to move in tandem with any change in SHI and SFC's IDRs, absent a material change in the recovery prospects for the senior unsecured notes, as expressed by the RR. Were SHI or SFC to incur material additional secured debt, such that the recovery prospects for the senior unsecured notes were viewed as below average, this could result in a downgrade of the notes and the RR.
Fitch has downgraded the following ratings:
Springleaf Holdings Inc.
--Long-term IDR to 'B-' from 'B' and removed from Rating Watch Negative.
Springleaf Finance Corp.
--Long-term IDR to 'B-' from 'B' and removed from Rating Watch Negative;
--Senior unsecured debt to 'B-/RR4' from 'B/RR4' and removed from Rating Watch Negative.
The Rating Outlook is Stable.
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