Fitch Ratings has affirmed Unifin Financiera, S.A.B. de C.V.'s (Unifin) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' and Short-Term Foreign and Local Currency IDRs at 'B'.
The Rating Outlook on the Long-Term IDRs is Negative. Fitch has affirmed Unifin's global senior unsecured debt and perpetual bonds ratings at 'BB' and 'B+', respectively.
Fitch has also affirmed Unifin's Long- and Short-Term National Scale ratings at 'A(mex)'/'F1(mex)'. The Rating Outlook on the Long-Term National Rating is Negative.
KEY RATING DRIVERS
The Negative Outlook reflects with 'high importance' Fitch's assessment of the challenging operating environment (OE) marked by downside risks that will continue to pressure Unifin's company and financial profiles, due to its concentration on small and medium sized enterprises (SME). If Fitch were to lower the OE score, it would continue to maintain the rating relativities between the OE score and Unifin because the company is a mid-sized and less-diversified NBFI. Fitch's assessment of the OE is 'bb+' with a negative trend.
The ratings also factor in with high importance Unifin's company profile, which is characterized by a strong local market position in the leasing industry, as it is the market leader among independent entities and specialized bank subsidiaries. Unifin is gradually diversifying its consistent business model by including new credit products through digital channels and cross selling. However, its size remains moderate when compared to the overall financial industry.
Unifin's ratings also consider as high importance, capitalization and leverage, which continue to be the weakest factors of its financial profile. In Fitch's view, leverage metrics remain sensitive to Unifin's financial performance and growth strategy. However, Fitch expects the company's tangible leverage metrics to remain below 7x due to the headroom provided by a capital injection in 2020, full earnings retention in 2021, better profitability prospects and lower balance sheet growth compared to pre-pandemic levels.
As of 1Q21, Fitch's total debt-to-tangible equity ratio declined to 6.5x from 7.7x at YE19, which is still high for the rating category. However, Unifin's adjusted tangible leverage metrics was 6x as of 1Q21. Fitch applies a 70% haircut to the revaluation surplus related to an asset in leasing (oil platform) and adjusts the temporary impacts from derivative valuations on the balance sheet and capital through other comprehensive income items. These adjustments result in a tangible leverage ratio below Fitch's trigger of 7x.
Fitch expects Unifin's asset quality to remain pressured in 2021 by a still challenging OE and the deferred effects from aid programs. However, the agency expects deterioration to be lower than in 2020 as a result of the company's more prudential growth strategy, reduced exposure to risker credit products, better collection process, lower participation of credits under deferrals than peers, as well as, low exposure by borrower. At 1Q21, Unifin's NPL ratio increased to 4.9% (7.6% plus foreclosed assets and charge- offs), above the 3.9% average of 2017-2020.
Fitch believes Unifin's profitability will improve in 2021 when compared with low earnings in 2020, underpinned by resumed loan growth and cross-selling, better asset quality and controlled financing costs. However, profitability ratios will not return to pre-pandemic levels in the medium term as challenges from the OE remain.
Unifin's pre-tax income to average assets decreased to 0.8% from 3% average of 2017-2020. Its YE20 and 1Q21 profitability ratios have been affected by increased impairment charges, substantially lower credit originations, deferred loans and interest payments of the perpetual bond as defined by Fitch's criteria. These effects in 2020 were highly offset by FX gains from cancellation of derivatives related to the repurchase of bonds during the 3Q20 and optimization of hedging strategies.
In Fitch's view, Unifin's more diversified and unsecured funding structure places the company in a good position to manage the challenging OE relative to its peers. The unsecured debt to total debt ratio was 79% (average 2017-2020: 63%). In 2020 and early 2021, Unifin obtained new financing and rolled-over some existing funds. At 1Q21, its debt maturities over the next 12 months represented about 23% of its total funding. Cash on hand and available credit lines accounted for about 79% of such short-term maturities. Cash collection has been better than Fitch's expectations, and liquidity metrics also benefited from the global note issued in January 2021, which provided further financing flexibility.
Unifin's ratings also considers its aggressive strategy characterized by ample balance sheet growth with less prudent capital management and questions about the robustness of its corporate governance due to non-core strategies to sustain financial metrics such as the acquisition of complex assets (oil platform) and still weaknesses on third party disclosure. This has a moderately negative impact on the ratings.
SENIOR DEBT
The senior global debt rating is at the same level as Unifin's 'BB' rating, as the likelihood of a default of the notes is the same as for the company.
HYBRID SECURITIES
Unifin's hybrids securities are rated two notches below its Long-Term IDR. The two-notch differential represents incremental risk relative to the entity's IDRs, reflecting the increased loss severity due to its deep subordination and heightened risk of non-performance relative to existing senior obligations.
Based on Fitch's analysis, the hybrid qualifies for 50% equity as it meets Fitch's criteria with regard to the ability to defer coupon payments, the existence of a coupon step-up of 500 basis points (bps) in the event of a change of control and its perpetual nature.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material deterioration in asset quality and profitability or aggressive balance sheet growth that results in a sustained increase in Unifin's total debt-to-tangible equity ratio after assets and derivatives valuation adjustments above 7x;
A substantial deterioration of its funding and liquidity profiles;
A lower OE score.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Negative Outlook makes an upgrade highly unlikely in the near term;
The Negative Outlook could be revised back to Stable if the impact of the pandemic on the company's credit profile is well contained, which will also depend on Unifin's ability to confront current challenges and minimize the impact on liquidity, asset quality and profitability, while leverage ratios are sustained at levels commensurate to its current rating;
The ratings could be affirmed and the Outlook revised to Stable if the operating environment stabilizes and economic prospects improve;
Over the medium term, the ratings could be upgraded by the confluence of an improvement of the operating environment and the financial profile of Unifin, specifically, if the company significantly improves its tangible leverage metric, after assets and derivatives valuation adjustments, towards a level consistently below 5.5x, while preserving its other financial fundamentals and a strong competitive position.
SENIOR DEBT and HYBRID SECURITIES
Although the company's debt ratings do not have an explicit Rating Outlook, rating actions would mirror those of Unifin's IDRs. The senior unsecured debt ratings would continue to be aligned with the company's IDRs, while the hybrid securities would remain two notches below.
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
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch reclassified pre-paid expenses as intangibles and deducted from total equity due to low loss absorption capacity under stress.
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.
ESG CONSIDERATIONS
Fitch has revised Unifin's Governance Structure ESG Relevance Score to '4' from '3' due to concerns regarding non-core strategies to sustain financial metrics such as the acquisition of complex assets (oil platform), which have a negative impact on Fitch's assessment of company's credit profile, and are relevant to the ratings in conjunction with other factors.
Unifin has an ESG Relevance Score of '4' for Management Strategy. Unifin's ample balance sheet growth with less prudential capital management that underpin its high risk appetite, which have a negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors.
Unifin has an ESG Relevance Score of '4' for or Financial Transparency. Unifin's third party disclosure weaker than international best practices', which have a negative impact on the credit profile, and are 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.
RATING ACTIONSENTITY/DEBT RATING PRIOR
Unifin Financiera, S. A. B. de C. V. LT IDR BB Affirmed BB
ST IDR B Affirmed B
LC LT IDR BB Affirmed BB
LC ST IDR B Affirmed B
Natl LT A(mex) Affirmed A(mex)
Natl ST F1(mex) Affirmed F1(mex)
senior unsecured
LT BB Affirmed BB
senior unsecured
LT BB Affirmed BB
subordinated
LT B+ Affirmed B+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
UNIFIN FINANCIERA, S. A. B. DE C. V. 
