Bangkok--5 Sep--Fitch Ratings
Fitch Ratings (Thailand) has today assigned a National Short-term rating of ‘F2(tha)’ to Finansa Public Company Limited’s (“FNS”) up to THB1 billion bills of exchange issue with a maturity of up to 270 days. The rating is based on the creditworthiness of FNS - rated National Long-term ‘BBB(tha)’ with a Negative Outlook and Short-term ‘F3(tha)’ - and the credit enhancement from the 50% principal guarantee by the Netherlands Development Finance Company (“FMO”). FMO’s credit rating is similar to the Netherland sovereign rating (rated ‘AAA’/Stable/‘F1+’), given its 51% ownership by the sovereign, and the fact that it receives sovereign support under the 1998 Agreement with the State of The Netherlands.
FNS bills of exchange holders expect to receive payment of principal in the first instance from FNS. In the event FNS fails to meet the payment, FMO will make payment of 50% of principal only. The partial guarantee from FMO reduces the loss to investors when a default occurs. Nonetheless, the guarantee provides that the FMO will have subrogation rights against FNS once it has paid out any amounts in connection with the guarantee and the bills of exchange holders may be claiming in competition with FMO in the event that the bills of exchange are not paid out in full by FNS or if FNS becomes insolvent. This could result in a lower recovery rate for the Bills of Exchange holders.
FMO was established by the State of The Netherlands and the Dutch business community in 1970. Currently, the Dutch State holds 51% while the large Dutch banks hold 42% of its shares. FMO’s main activity is to support the private sector in developing countries and emerging markets in Asia, Latin America and Central and Eastern Europe with an objective of contributing to the structural and sustainable economic growth in these countries and, alongside the private sector, obtain healthy returns. According to the agreement between the State of The Netherlands and FMO signed in 1998, the State of the Netherlands shall prevent situations arising in which FMO is unable to meet its obligations on time. Such obligations include guarantees given to third parties in respect of the financing of private companies in developing countries. As a result, Fitch believes there is an extremely high probability of Netherland government support for FMO in the event this is needed.
The current ratings of FNS reflect the company’s financial holding company structure, its revenue diversification, and its adequate capital and liquidity positions. However, the ratings also take into account FNS’ lack of a strong financial institutional shareholder, its exposure to market and credit risks, and its dependence on volatile brokerage earnings, investments and proprietary trading.
FNS reported a net loss of THB185.1 million in H106, a sharp drop from its net profit of THB123.4m in H105. This is largely due to significant losses on impairment of its investments and losses from its finance subsidiary. The majority of losses on impairment of FNS’s investments stemmed from non-recurring net provisions of THB107m for impairment in the Siam Investment Fund (“SIF”), in which FNS has a 49.5% investment through its wholly-owned subsidiary, Finansa Fund Management (“FFM”). Such provisions were made following the decision by the fund’s shareholders not to extend the maturity of SIF to 2008 as previously expected by FNS, and to liquidate the fund by end-2006. Losses from its finance subsidiary resulted from margin pressure and losses from sales of debt and equity securities.
In May 2006, Fitch revised the Outlook of FNS’s ratings to Negative from Stable following the release of FNS’s Q106 results, which were significantly worse than projected due mainly to an unexpected provisioning for investments and the departures within its retail brokerage team. The departure of much of FNS’s retail brokerage marketing team led to a sharp drop in FNS’s brokerage market share to 0.7% in Q106 from 2.6% in Q105, and hence a sharp reduction in brokerage revenue. Nonetheless, a significant increase in FNS’s investment banking revenue helped offset this in Q206, turning the securities business’s financial performance profitable in H106. Nevertheless, FNS’s brokerage market share remained somewhat flat at around 0.8% in Q206. Fitch also notes that further provisioning risks remain, given its low reserve coverage and its THB90m exposure to Picnic Corporation.
The agency also points out that mitigating the downside risks to FNS’ performance is the recruitment of a new retail brokerage team, which is expected to see its market share improve in H206, new investment flows into its Siam Investment Fund III (“SIF III”), as well as the firm’s plan to improve risk controls and disclosure. If these factors materialise and the operating environment improves in the next 12 months, the Outlook of FNS’s ratings could be revised back to Stable.
Contact: Chaiyapat Paitoon, Vincent Milton, Bangkok +662 655 4762/4759; David Marshall, Hong Kong +852 2263 9963.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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