Fitch Affirms RFHL at 'B-'; Outlook Negative
January 26, 2016
Fitch Ratings has affirmed Renaissance Financial Holdings Limited's (RFHL) Long-term Issuer Default Rating (IDR) at 'B-' with a Negative Outlook. RFHL is the holding company of the Russia-headquartered investment banking group Renaissance Capital, known as RenCap. A full list of rating actions is available at the end of this commentary.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
The ratings reflect RFHL's weak asset quality and solvency, and potentially vulnerable liquidity. The ratings also reflect a challenging Russian operating environment, which will continue to put pressure on RFHL's volumes, performance and business development.
Fitch views RFHL's asset quality and capitalisation as weak primarily due to related party exposures equal to a combined 3x RFHL's equity at end-1H15. These included a USD853m exposure to RFHL's holding company Renaissance Capital Investments Limited (RCIL) and a USD193m exposure to an RCIL subsidiary (equal to a combined 2.3x equity). Fitch believes the unwinding of these exposures would require the sale of sister bank CB Renaissance Credit (Rencredit), also owned by RCIL. However, in our view this will be problematic in the foreseeable future, due to Rencredit's loss-making performance in the last two years and the negative outlook for the consumer finance segment.
RFHL's related-party exposures also included a USD232m (0.5x equity) reverse repo transaction with a company related to Onexim, RFHL's ultimate shareholder (executed on market terms and repaid in July 2015 according to management). Additionally, RFHL had USD100m (0.2x equity) of non-core investments, primarily in a Ukrainian agricultural holding, also with remote recovery prospects.
As a result of the large size of the RCIL exposure and non-core assets, RFHL's short-term liabilities significantly exceed its liquid assets. However, funding has been fairly stable, mainly because of large securities holdings that RFHL borrows from customer brokerage accounts (mainly from one client as at end-1H15) and pledges against on-balance sheet repo funding. In Fitch's view, the non-market terms of the securities borrowings (unsecured and at low cost) suggest that these are likely to be from a related party. The long-term stability of these borrowings, on which RFHL's liquidity largely depends, is uncertain in Fitch's view.
Overall, repo funding comprised 59% of total liabilities at end-1H15, with the remainder mainly comprising broker/customer payables and short positions in securities. The repos are collateralised with equities and bonds with reasonable terms/haircuts, entered into with market counterparties, and finance (in addition to the related-party exposures) similarly collateralised margin loans on the asset side. The company maintains about USD100m-120m of liquidity to finance potential margin calls in case of sharp and rapid market falls (up to 7%), as there may be a small delay (one or two days) in receiving corresponding collateral from its borrowers under margin loans. Liquidity is less sensitive to gradual market falls.
RFHL has to repay a USD56m eurobond in April 2016 and, according to management, currently has sufficient available (unrestricted) liquidity of about USD102m in excess of its operating needs.
Profitability is weak and cyclical, but positively the company managed to achieve a small USD10m net profit in 1H15 and operating profit of USD40m in 2014 (but a net loss of USD112.5 as a result of non-recurring items, primarily a write-down of non-core assets).
Market risk relating to potential proprietary trading is modest, as RenCap has limited amounts of such operations, reflected in low value at risk (USD1m at end-2015). Historical stress value-at-risk reached a maximum of USD2m during 2015, which, we believe, is not significant.
RFHL has benefited from support provided by Onexim, including USD350m emergency liquidity support in 4Q12 (later repaid) and USD186m to fund a eurobond repayment in April 2014. Onexim has expressed its commitment to RFHL and provided business to the company. However, uncertainty remains about Onexim's propensity to provide support over the long term and in all circumstances, in particular given the absence to date of measures to decisively strengthen the company's solvency.
IDRS AND SENIOR DEBT
The Negative Outlook reflects the possibility of RFHL being downgraded if funding, which is used to finance the RCIL exposure/non-core assets, is withdrawn; or (ii) the company's performance deteriorates significantly; or (iii) the performance of Rencredit continues to weaken, to the extent that it materially increases contingent risks for RFHL.
A positive rating action would be contingent on (i) a considerable strengthening of the company's solvency through the unwinding of at least part of the related-party exposure/ non-core investments, or recapitalisation by Onexim/a potential new investor; (ii) a decrease of contingent risks related to sister bank Rencredit and reduced reliance on securities borrowings to support liquidity; and (iii) a stabilisation of the operating environment.
The rating actions are as follows:
Long-term foreign currency IDR: affirmed at 'B-'; Outlook Negative
Short-term IDR: affirmed at 'B'
Renaissance Securities Trading Limited's long-term senior unsecured debt rating: affirmed at 'B-', Recovery Rating 'RR4'
Company — Renaissance Financial Holdings Limited
Full nameRenaissance Financial Holdings Limited