Fitch Ratings has affirmed International Personal Finance plc's (IPF) Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating at 'BB-'.
The Outlook on the Long-Term IDR is Stable. A full list of ratings is detailed below.
Key Rating Drivers
Low Leverage, High Impairment: IPF's rating captures the company's low balance-sheet leverage and structurally profitable business model, despite high impairment charges, supported by a cash-generative short-term loan book. The ratings remain constrained by IPF's higher-risk lending focus, evolving digital business, and vulnerability to regulatory risks. The concentration of IPF's funding also remains a weakness for its credit profile.
Heightened Asset-Quality Risk: IPF's impairment charges/total revenue rose to 15% at end-1H22 from 10% at end-2021. However, the latter represented an all-time low, as IPF lowered its risk appetite in response to the pandemic, reducing lending and focusing on the better-quality end of its customer base. A higher impairment ratio was therefore expected in 2022 as management rebuilt the scale of its loan book.
IPF's impaired loans (Stage 3 under IFRS 9) ratio (end-1H22: 32%) remains lower than its historical average of 34% in 2017 -2021, but in common with other lenders IPF faces near-term pressures as rising energy prices and living costs weigh on borrowers' repayment capacity.
Recovering Earnings: IPF's profitability recovered in 2021, underpinned by normalisation of impairment charges that had pushed the company into losses in 2020. Its 1H22 pre-tax income/average assets remained sound at 6.5%. Notwithstanding likely renewed impairment pressure in 2H22, IPF's profitability remains supported by its strong net interest margins and by targeting its credit expansion towards better-quality customers. We believe its profitability should be sufficient to absorb near-term asset quality slippages.
Low Leverage: IPF's leverage is a credit strength and moderate for a lending business focused on high-risk customers and bearing significant impairment risks. Its gross debt/tangible equity of 2.3x at end-1H22 remains low compared with its average of 2.6x in 2018-2021. However, the ratio is likely to increase again in the medium term towards the historical average through renewed expansion of the loan book.
Concentrated Funding Profile: IPF's wholesale-funding profile exposes it to the risk of changes in creditor sentiment, making access to funding during market stress either uncertain or expensive. Greater diversification of borrowings by source and maturity would improve our assessment of funding.
Notwithstanding the above, IPF's near-term liquidity position remains sound, underpinned by its cash-generative and short-term loan portfolio (with average maturity of 12.6 months at end-1H22). Additionally, IPF had unrestricted non-operational cash balance stood at GBP44 million at end-1H22, and an undrawn revolving credit facility of GBP58 million, equivalent in total to 9% of total assets. IPF has limited near-term bond maturities, with GBP78 million (7% of total assets at end-1H22) in 2023 and GBP37 million (3% of total assets) in 2024.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A marked deterioration in asset quality amid macroeconomic pressures, reflected in weaker collections, higher impairments or an increase in unreserved problem receivables
Difficulty in accessing funding markets, leading to material shortening in its maturity profile or reduction in liquidity headroom
An increase in regulatory risks (related to rate caps and early settlement rebate) with material negative impact on IPF's capacity to conduct profitable business
A significant weakening of solvency with gross debt/tangible equity exceeding 5.5x or depletion of headroom against the gearing (gross debt/total equity) covenant of 3.75x
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A material improvement in funding profile via diversification by source and removing maturity spikes and
A reduction of pandemic pressure on the company's performance, with continuing recovery of its financial profile through gaining scale and strengthening profitability
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
IPF's senior unsecured notes' rating is in line with its Long-Term IDR, reflecting Fitch's expectation for average recovery prospects given that all of IPF's funding is unsecured.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
IPF's senior unsecured debt rating will move in tandem with its Long-Term IDR
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
IPF has an ESG Relevance Score of '4' for Exposure to Social Impacts stemming from its business model focused on high-cost consumer lending, and therefore exposure to shifts of consumer or social preferences, and to increasing regulatory scrutiny, including tightening of interest-rate caps. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
IPF has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security, driven by an increasing risk of losses from litigations including early settlement rebates customer claims. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg