OREANDA-NEWS. Fitch Ratings has downgraded Teller A/S's (Teller) Long-term Issuer Default Rating (IDR) to 'BB-' from 'BB'. The Outlook is Stable. Its Short-term IDR is affirmed at 'B'.

KEY RATING DRIVERS - IDR
The downgrade reflects Fitch's expectation that capital management for Teller will increasingly be handled at parent company level, Nets Holding A/S. While this does not reduce the capitalisation of the overall Nets group, Fitch believes it will leave capital at Teller, which is the only entity in the group that is publicly rated by Fitch, very thin for the current rating level.

Teller is subject to regulatory capital requirements, which it has historically exceeded by a wide margin. However, Fitch now expects Teller to operate with a substantially smaller stand-alone capital base, which will only leave a minimal buffer for unexpected shocks without the need for capital injections from the parent.

The parent group's leverage is high, which in our opinion reduces Nets group's ability to provide Teller with capital if necessary. In addition, cross guarantees in place between Teller and the group for certain group funding facilities mean that excess capital at Teller (above minimum regulatory requirements) could be up-streamed to help service debt repayments in other parts of the group. Consequently, we view the capitalisation as a weakness for Teller, and this has a high influence on the ratings.

The ratings also factor in Teller's monoline business model in Nordic merchant acquiring of international payment cards and potentially large exposures to operational risk. These risks are mitigated by Teller's leading Nordic franchises in the company's business niche, its strong liquidity management and small historical credit losses, which are comfortably absorbed by earnings.

A key risk for Teller is the potential need to bridge a liquidity gap that could be caused by a major operational event, such as a system failure, which would delay payments from credit card issuers. Fitch believes such a scenario is unlikely and the risk is mitigated by a strong track record in managing operational risk and significant holdings of cash.

Credit risk can stem from both fraud and default of a merchant. Losses have consistently remained at low levels and are comfortably absorbed by earnings. Fitch expects that Teller will maintain prudent underwriting standards and strict risk controls, particularly for its high-risk customers with large pre-payments of goods and/or services.

The Stable Outlook on Teller's Long-term IDR reflects Fitch's belief that the absolute amount of capital held in Teller will stabilise at the current level, which is somewhat above minimum regulatory capital requirements, and that the company will continue generating adequate returns without materially increasing its risk appetite.

RATING SENSITIVITIES - IDR
Teller's small stand-alone capital base and monoline business model limit rating upside, especially given the current high parent group leverage and existing cross guarantees. However, a commitment to rebuild and maintain solid capital buffers in Teller, or materially reduced group leverage, could result in an upgrade.