KEY RATING DRIVERS - IDRs, SENIOR UNSECURED DEBT, TRUST PREFERRED SECURITIES
The Positive Rating Outlook reflects OneMain's actual and expected continued reduction of leverage following the closing of
The rating affirmations reflect OneMain's leading market position in the personal installment lending segment, above average profitability, proven underwriting history, and seasoned management team. Rating constraints include the substantial increase in leverage of the consolidated entity following the completion of
Since the closing of
At the end of the third quarter of 2016 (3Q16), OneMain's stated leverage ratio was 10.7x, down from 18.5x at the end of 2015. On an adjusted basis, which attempts to strip out the positive impact that purchase accounting adjustments have on the company's leverage ratio and make it comparable to peers, Fitch estimates OneMain's leverage was 13.4x at 3Q16. Although higher than OneMain's stated leverage, Fitch expects this differential to narrow over the next two years as the vast majority of the purchase accounting adjustments amortize through GAAP earnings.
Over the past year, OneMain has improved its funding and liquidity profile by increasing the capacity of its credit facilities through the completion of four term securitizations (including its inaugural securitization of its direct auto product), refinancing a portion of its
Although the cost of issuance on the new notes is greater than the cost of the notes being redeemed, which will have a modestly negative impact on OneMain's future profitability, Fitch views the transaction favorably since it results in a smoother unsecured debt maturity schedule and also demonstrates OneMain's ability to access the capital markets, on an unsecured basis, during a period of market volatility. Fitch expects the company to maintain a roughly even mix of unsecured and secured debt moving forward and to maintain unsecured debt maturities in any one year at less than 20% of the total debt outstanding.
Along with its 3Q16 earnings report earlier this week, management lowered its loan growth expectations for 2016 and 2017, raised its credit loss outlook for next year, and sharply lowered its previous guidance for adjusted net income for its Consumer and Insurance (C&I) segment for 2016 (15% reduction) and 2017 (35% reduction). Management indicated the changes were driven by several factors, most notably the on-going integration of the OneMain branches, which the company believes is temporary in nature, as well as tightening of underwriting for lower credit tier borrowers, which is more strategic in nature. While integration challenges are not unusual for a merger of this size, Fitch will continue to monitor the effects of the integration through the targeted completion by the middle of next year in order to determine the potential impacts on new business originations and existing business collections and loss mitigation.
To the extent the expected moderation in loan growth is driven by a tightening of underwriting to borrowers at lower credit tiers, Fitch would view this trend favorably, particularly if the reduced demand on growth capital supports the company's ability to reach the higher end of its leverage target range of 7x by the end of 2018.
Although OneMain's GAAP financial results thus far in 2016 have been significantly impacted by the effects of purchase accounting adjustments and several non-recurring items, core financial results for the company have been solid. The company reported GAAP net income of
In 3Q16, the company's average net loan portfolio was up 4.3% versus the prior year, ending the quarter at
OneMain's credit performance weakened through the first three quarters of 2016, but charge-offs for the full year are still expected to be within management's guidance at the beginning of the year of 6.8%-7.3%. The company's charge-off rate averaged 6.9% through the first three quarters of 2016, compared to 6.5% over the same period in 2015. In addition to portfolio seasoning, the increase in credit losses was in part attributable to retaining the delinquent balances on its branch/loan sale in
Revenue yield on loans in the Consumer and Insurance (C&I) segment dipped modestly for the first nine months of 2016, averaging 28.2% compared to 28.7% for the same period a year ago. Fitch believes this is largely a function of mix shift of the portfolio toward direct auto loans, which carry lower yields but also are expected to produce lower losses given the secured nature of the loans. Similarly, risk-adjusted margin declined in through the first three quarters of 2016, averaging 21.3% compared to 22.2% for the same period in 2015.
A key component of the strategic rationale behind
The 'B-' rating on Springleaf's senior unsecured debt is equalized with OneMain's IDR and reflects Fitch's expectation of average recovery prospects for the notes as expressed by the Recovery Rating (RR) of 'RR4', which implies a stressed recovery of 31%-50%.
The 'B' rating assigned to OneMain Financial's senior unsecured debt is one notch higher than OneMain's 'B-' IDR, reflecting Fitch's expectation of above average recoveries for the instruments, as indicated by the RR of 'RR3', which implies a stressed recovery of 51%-70%.
OneMain Financial's unsecured debt rating also reflects the restrictive covenants within its existing bond indenture that limit the level of unsecured indebtedness OneMain Financial can incur and the outflow of capital to One Main from OneMain Financial for so long as the existing bonds remain outstanding. As a result, OneMain Financial's stand-alone leverage is expected to remain considerably lower than the consolidated entity. These positive factors are counterbalanced by the ability of the holding company to extract up to 50% of OneMain Financial's cumulative net income generated since 4Q14 in addition to other one-time and annual payments allowable under the bond indenture.
AGFC Capital Trust I is a special-purpose entity that was established in 2007 to facilitate the issuance of trust preferred securities on behalf of Springleaf. The 'CC' rating on AGFC's trust preferred securities is two-notches below Springleaf's IDR, reflecting the subordinated nature of the instrument as indicated by the RR of 'RR6', which implies a stressed recovery of 0%-10%.
RATING SENSITIVITIES - IDRs, SENIOR UNSECURED DEBT, TRUST PREFERRED SECURITIES
OneMain's ratings could be upgraded if consolidated leverage is brought down to the company's targeted level of 5x-7x, near-term debt maturities are appropriately managed, and the integration of OneMain and Springleaf is completed. Fitch expects the resolution of the Rating Outlook to be in the latter part of the 12 to 24 month Outlook horizon as the company does not currently expect to reach its leverage target until the fourth quarter of 2018. In addition, upward momentum would be conditioned upon further evidence that management's revised credit loss expectations are temporary in nature, stable credit performance for the less tenured direct auto loan product, a proportionate reduction in capital held at its insurance subsidiaries, and the absence of developments in the regulatory landscape that significantly impact OneMain's core businesses.
Conversely, negative ratings momentum could be driven by an inability to access the capital markets at a reasonable cost, greater competitive intensity in the nonprime lending segment, substantial credit quality deterioration that is structural rather than temporary (i.e. integration-related) in nature, a significant increase in asset encumbrance, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership. An inability to further deleverage the balance sheet could also result in the Outlook being revised to Stable from Positive.
Although Fitch believes OneMain may have higher longer-term ratings potential reflecting its strong franchise and profitability, potential upward momentum will likely be limited to below investment-grade levels, given OneMain'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 OneMain, as well as a lack of prudential regulation, as key rating constraints.
The rating assigned to Springleaf's senior unsecured debt is equalized with OneMain's IDR, and therefore, would be expected to move in tandem with any change in OneMain's IDR, absent a material change in the recovery prospects for the senior unsecured notes, as expressed by the RR. Were OneMain to incur material additional secured debt, such that the recovery prospects for Springleaf's senior unsecured notes were viewed as below average, this could result in a downgrade of the notes and the RR.
The rating assigned to OneMain Financial's senior unsecured debt is one notch above OneMain's IDR, and would be expected to move in tandem with any change in OneMain's IDR, absent a material change in the recovery prospects for the senior unsecured notes, as expressed by the RR, or material changes to OneMain Financial's bond indenture. Were OneMain Financial to incur material additional secured debt, such that the recovery prospects for the senior unsecured notes were viewed as average or below average, this could result in a downgrade of the notes and the RR.
The ratings assigned to
Fitch has affirmed the following ratings:
OneMain Holdings, Inc.
--Long-Term IDR at 'B-'; Outlook revised to Positive.
--Long-term IDR at 'B-'; Outlook revised to Positive;
--Senior unsecured debt at 'B-/RR4'.
--Long-Term IDR at 'B-'; Outlook revised to Positive;
--Senior unsecured debt at 'B/RR3'.
AGFC Capital Trust I
--Trust preferred securities at 'CC/RR6'.
Additional information is available on www.fitchratings.com
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Source: Fitch Ratings