Rating Affirmed And Removed From CreditWatch Negative On HC Finance's Russian ABS Notes Following Criteria Update
November 5, 2014 Standard & Poor's
Oct. 31, 2014--Standard & Poor's Ratings Services
today affirmed and removed from CreditWatch negative its 'BBB (sf)' credit
rating on HC Finance LLC's notes.
On April 30, 2014, we placed on CreditWatch negative our rating on the notes
following our lowering of our long-term foreign currency sovereign rating on
the Russian Federation (see "Rating On HC Finance's Russian ABS Notes Placed
On CreditWatch Negative Following Sovereign Downgrade," and "Rating On HC
Finance's Russian ABS Notes Kept On CreditWatch Negative Pending Further Review
," published on July 29, 2014).
Upon publishing our updated criteria for rating single-jurisdiction
securitizations above the sovereign foreign currency rating (RAS criteria) in
September 2014, we placed our rating on HC Finance's notes "under criteria
observation" (see "Methodology And Assumptions For Ratings Above The
Sovereign--Single-Jurisdiction Structured Finance," published on Sept. 19,
2014 and "EMEA Structured Finance, Covered Bond, And Multicedulas Ratings
Placed Under Criteria Observation," published on Sept. 18, 2014). Following
our review of this transaction, our rating is no longer under criteria
Today's affirmation follows our review of the transaction's credit, cash flow,
counterparty, and operational risks in the context of Russia's weakening
economy and sovereign risk. We have based our credit and cash flow analysis on
updated portfolio performance information as of August 2014. We have applied
our RAS criteria and other relevant criteria (see "Related Criteria").
Our rating reflects our view of the following factors:
Our base-case default rate assumption for the portfolio reflects our
expectations of a prolonged slowdown in Russia's economic and per capita
income growth. Our base-case economic scenario for Russia forecasts real GDP
growth of 1% annually in 2014-2017, and real per capita income growth of 1%
annually over the same period (see "Research Update: Ratings On Russia
Affirmed On External And Fiscal Strength; Outlook Remains Negative," published
on Oct. 24, 2014). We have also considered fast growth in the unsecured retail
lending industry from 2011 to 2013, which has resulted in high household
indebtedness and rising default and delinquency rates in industry lenders'
portfolios (see "Banking Industry Country Risk Assessment: Russia," published
on June 17, 2014).
We analyzed the transaction's exposure to credit risk under our updated
consumer finance criteria (see "Global Methodology And Assumptions For
Assessing The Credit Quality Of Securitized Consumer Receivables," published
on Oct. 9, 2014). We have used the most recent transaction performance data,
as well as updated information on the originator's underwriting and collection
practices since closing in November 2013.
Cash Flow Risks
Our cash flow analysis addresses the transaction's amortization scenario that
is the most stressful for the noteholders. Our cash flow stresses are
consistent with our new criteria for cash flow analysis of structured finance
securities (see "Global Framework For Cash Flow Analysis Of Structured Finance
Securities," published on Oct. 9, 2014). Our analysis indicates that the
available credit enhancement for the notes is sufficient to mitigate the
credit and cash flow risks at a 'BBB (sf)' rating level.
Sovereign Default Stress Test
We applied our RAS criteria to test the notes' ability to withstand the
sovereign default stress. We consider the sensitivity of the underlying assets
to country risk as "moderate", which could enable the rating on the notes to
achieve a four-notch uplift above the sovereign foreign-currency rating on
Russia, based on our RAS criteria. The transfer and convertibility (T&C)
assessment for Russia, which stands at 'BBB-' does not constrain our ratings
in this transaction as the notes are payable in local currency. We developed
credit assumptions for a "severe" stress and tested the transaction's ability
to withstand it. The actual level of credit enhancement is such that it
supports a 'BBB' stress only. Therefore, we rate the notes at one notch above
the sovereign rating.
We view Home Credit and Finance Bank LLC's ability to fulfill its obligations
as servicer to be adequate. We have also considered Russian Standard Bank
JSC's availability as the stand-by servicer to replace HCFB if it ceases to be
The transaction is exposed to counterparty risk from Citibank N.A., London
branch, as the transaction account bank. We consider that the downgrade
provisions in the transaction documents adequately mitigate counterparty risk
at a 'BBB' rating level (see "Counterparty Risk Framework Methodology And
Assumptions," published on June 25, 2013 and "Methodology Applied To Bank
Branch-Supported Transactions," published on Oct. 14, 2013).
We consider the issuer to be bankruptcy remote, in line with our European
legal criteria (see "Europe Asset Isolation And Special-Purpose Entity
Criteria--Structured Finance," published on Sept. 13, 2013). We have received
legal comfort that the sale of the assets would survive, if the seller were to
Under our scenario analysis, we ran two stress scenarios and assessed the
transaction's performance. The results of our scenario analysis are
commensurate with our credit stability criteria (see "Methodology: Credit
Stability Criteria," published on May 3, 2010).
Taking into account the above factors and the application of our RAS criteria
and other relevant criteria, we have affirmed and removed from CreditWatch
negative our 'BBB (sf)' rating on HC Finance's notes.
HC Finance is a Russian ABS transaction that securitizes a portfolio of
ruble-denominated consumer loan receivables.
Issue — HC Finance, 01
Country of riskRussia
Redemption (put/call option)
М/S&P/F— / — / —
Company — HC Finance
Full nameHC Finance LLC