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Fitch Places IPF on Watch Negative on Proposed Polish Law Change
December 15, 2016 / 1:56 PM / a year ago

Fitch Places IPF on Watch Negative on Proposed Polish Law Change

(The following statement was released by the rating agency) LONDON, December 15 (Fitch) Fitch Ratings has placed International Personal Finance Plc's (IPF) Long-Term Issuer Default Rating (IDR) and senior debt ratings of 'BB+' on Rating Watch Negative (RWN). IPF's Short-Term IDR has been affirmed at 'B'. The RWN follows proposed revisions to consumer credit legislation in Poland. On 9 December the Polish Ministry of Justice initiated a 14-day consultation period for a draft bill limiting non-interest costs that can be charged for unsecured consumer loans IPF is a UK-domiciled finance company that specialises in providing unsecured consumer credit to customers with below-average income. KEY RATING DRIVERS The proposed revisions follow a similar measure that became effective in March this year, which consisted of a flat cap of 25% of the loan value and an additional cap of 30% per annum. Under the new proposal, the flat cap would be reduced to 10% of the loan value and the additional cap per annum would be reduced to 10%. IPF's ratings already reflect a significant exposure to regulatory risk. Fitch has previously highlighted the vulnerability of IPF's business model to similar consumer protection measures, following rate-capping legislations introduced in several markets in 2015, including Poland and Slovakia. IPF subsequently decided to exit the Slovakian market. While the proposed Polish cap is less severe than the one implemented in Slovakia, given the importance of the Polish market for IPF the impact on IPF's financial profile, in the event that the cap is fully implemented, would be material. In particular, the business model and franchise of IPF, together with its business generation and profitability in the Polish market, would be negatively affected. Around one third of customers from IPF's home credit division (and around 40% of average net receivables) are located in Poland-Lithuania, with revenue and profit before tax representing around 40% and 47% of the division's total in 1H16. IPF's company profile (which includes our assessment of its franchise and business model) has a high influence on the entity's ratings. The ratings also reflect IPF's profitable franchise in high risk unsecured consumer lending in emerging markets and the company's low - albeit increasing - balance sheet leverage. Significant arrears and high non-performing loans are a feature of IPF's business model, which are currently compensated with the high prices IPF charges for its lending products. If implemented, the Polish draft legislation could effectively prohibit IPF from charging appropriate risk-adjusted rates. The short-term nature of IPF's assets, including in Poland, should mitigate some pressure on leverage in the event IPF has to severely curtail its Polish business or suffers losses while it adjusts its cost base. Headroom over balance sheet covenants is solid (eg, gearing was 1.6x at end-1H16 versus a covenant of 3.75x). However, in Fitch's opinion, its interest cover covenant (2x covenant versus reported 3.6x at end-1H16 and calculated on a rolling 12-month basis) would be more vulnerable in the event IPF is unable to adjust its cost base. RATING SENSITIVITIES The RWN reflects our view that a downgrade is likely should the draft law be implemented in its current form. Downward pressure would be particularly pronounced, should IPF not be able to mitigate the effect of the cap by quickly adjusting its Polish cost base or by compensating revenue loss in Poland by incremental growth in its other markets. IPF's Long-Term IDR could be removed from RWN and affirmed at 'BB+' if the Polish draft law is implemented with a less punitive cap, which would allow IPF to right-size its Polish cost base and maintain sound overall profitability, or if the draft law is not implemented at all. The senior debt rating, which has also been placed on RWN, is primarily sensitive to a change in IPF's Long-Term IDR. In accordance with Fitch's mapping table, IPF's Short-Term IDR is only sensitive to a downgrade of IPF's Long-Term IDR to below 'B-'. Contact: Primary Analyst David Pierce Director +44 20 3530 1014 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Silvana Gandolfo Analyst +44 20 3530 1301 Committee Chairperson James Longsdon Managing Director +44 20 3530 1076 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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