Fitch: New Owner Moderately Positive for RenCap & Rencredit; Deal Terms Key
November 21, 2012 Fitch Ratings
Fitch Ratings says that the planned ownership changes in Renaissance Capital investment banking group (RenCap, consolidated under Renaissance Financial Holdings Limited, RFHL; 'B'/Negative) and Russian consumer finance bank CB Renaissance Capital (Rencredit; 'B'/Stable) should be moderately positive for the credit profiles of both issuers.
However, the extent of any benefit for the entities will depend on whether and to what degree the companies or their new owner, the Onexim group, increase exposure to, or assume liabilities of, the broader Renaissance Group (RG) as part of the acquisition. Uncertainty arises due to the so far limited official disclosures regarding specific deal terms. Nevertheless, Fitch does not expect the ownership changes to result in any immediate positive rating actions.
On 14 November 2012, Onexim and RG announced that Onexim will become the sole shareholder of RenCap, increasing its stake from 50% minus one share, and will also consolidate an 89.5% share in Rencredit (up from 32.2%), in each case as a result of a buyout of RG. The parties have signed binding agreements, but the transactions remain subject to regulatory approvals. Stephen Jennings, the main shareholder of RG, has stepped down as RenCap's CEO, although the rest of the team remains in place.
Fitch believes the ownership change should be moderately positive for RenCap and Rencredit as it should significantly reduce contingent risks resulting from RG's investments and liabilities, unless some of these are transferred to/assumed by the companies, the probability of which is currently uncertain. A more clearly positive factor is that both companies will have a single and relatively strong controlling shareholder. However, both companies, and RenCap in particular, face significant operational challenges which continue to drive their ratings, and it remains to be seen how successful RenCap will be in returning to profitability under full Onexim control.
Contingent risks for RenCap and Rencredit resulted in particular from the significant short-term debt of Renaissance Capital Holdings Limited (RCHL), RG's holding vehicle for its stake in RenCap. Fitch understands that no funding agreements of either RenCap or Rencredit reference RCHL in cross-default clauses. However, RCHL's creditors may also be among RenCap's creditors and clients, which could result in reputational and business risk for RenCap if RCHL were to default on debt soon after the change in ownership. Partly for this reason, and partly due to limited disclosures to date, Fitch cannot rule out the possibility that the assets and liabilities of RCHL and/or other RG entities may have featured in negotiations on the terms and conditions of the acquisition.
In addition, RenCap also retains significant direct exposure to illiquid assets (65% of equity at end-H112), of which most were previously transferred from RG in exchange for intercompany debt cancellation. These will not disappear as a result of the transaction, although the company is expecting to sell some of them in the near term. Regarding loan exposures to/receivables from RG entities (9% of equity, according to Fitch's estimates), it is not clear at this point whether they will remain on RenCap's balance sheet or be repaid.
The Negative Outlook on RFHL continues to primarily reflect its weak recent performance (losses of USD14m in H112 and USD94m in 2011 would have been even bigger if not for one-off/non-core items) and increasing competitive challenges, which will make it difficult to achieve a turnaround. The illiquid asset exposures, recurring funding pressures and uncertainty created by the management changes also weigh on RFHL's ratings. If the company remains loss-making and fails to make considerable progress with sales of non-core assets, or assumes sizable additional obligations and non-core assets from RG, then downward pressure on RFHL's ratings will increase. However, if performance stabilises and the quality of capital improves, the Outlook could be revised to Stable.
Rencredit's ratings reflect its healthy earnings generation, comfortable liquidity and manageable refinancing schedule. However, the ratings also consider high credit risks associated with rapid loan book growth in the mass-market consumer finance segment, significant dependence on retail funding, relatively tight regulatory capitalisation and some risk that the bank may be used to support the financially weaker RenCap. An upgrade of Rencredit would require an improved track record of credit risk management, robust performance and sustained solid capitalisation, as well as containment of remaining group risks. Should the bank suffer material credit losses or large funding outflows, the ratings could come under downward pressure.
Company — Renaissance Capital
Full nameRenaissance Capital