Fitch confirms international personal finance at “BB-“; The outlook is stable

Fitch Ratings confirmed International Personal Finance plc’s (IPF) Issuer Default Long-Term Rating (IDR) and Top Unsecured Debt Rating of “BB-“.

The long-term outlook for IDR is stable. A full list of classifications is detailed below.

Main classification engines

Low Leverage, High Impairment: The IPF rating exemplifies the company’s low leverage on the balance sheet and a structurally profitable business model, despite high impairment charges, backed by a short-term cash-generating loan book. Ratings remain restricted due to IPF’s focus on high-risk lending, digital business sophistication, and vulnerability to regulatory risk. IPF funding concentration also remains weak in its credit profile.

Increased asset quality risk: IPF impairment charges/total revenue increased to 15% at the end of H122 from 10% at the end of 2021. However, the latter is an all-time low, as the IPF reduced its appetite for risk in response For the pandemic, cut back on lending and focus on the better quality end of its client base. Thus, a higher rate of impairment was expected in 2022 as management reconstructed the scale of its loan book.

The non-performing loan ratio of the IPF (stage 3 under IFRS 9) (end of the first half of 22: 32%) remains below its historical average of 34% in 2017-2021, but jointly with other lenders, the IPF is facing Near-term pressures as energy prices rise and the cost of living impacts borrowers’ ability to repay.

Dividend recovery: IPF profitability recovered in 2021, buoyed by the normalization of impairment charges that drove the company to losses in 2020. Income/average assets before tax in the first half of the year remained unchanged at 6.5%. Despite potential renewed depreciation pressures in H222, IPF’s profitability remains supported by strong net interest margins and targeting its credit expansion towards better quality clients. We believe its profitability should be enough to absorb the slip in asset quality in the near term.

Low Leverage: IPF leverage is medium and credit strength for a lending business that focuses on high-risk clients and assumes a significant risk of vulnerability. Total debt/tangible equity at 2.3 times at the end of H1-22 remains low compared to the average of 2.6 times in 2018-2021. However, the ratio is likely to rise again in the medium term towards the historical average through renewed expansion of the loan book.

Focused Financing Profile: The IPF’s wholesale financing profile exposes it to the risk of changes in creditor sentiment, making access to financing during market stresses either uncertain or costly. Greater diversification of loans by source and maturity would improve our assessment of financing.

Despite the above, IPF’s short-term liquidity position remains healthy, buoyed by a portfolio of short-term, cash-generating loans (average maturities of 12.6 months at the end of H122). In addition, the IPF had an unrestricted non-operating cash balance 44 million pounds sterling At the end of the first half of the second half of the year, an undrawn revolving credit facility of 58 million pounds sterling, equivalent to 9% of the total assets. The IPF has limited maturities for short-term bonds, with £78 million (7% of total assets at the end of the first half of 22) in 2023 and £37 million (3% of total assets) in 2024.

Classification sensitivities

Factors that could, individually or collectively, lead to a negative rating/downgrading:

Marked deterioration in asset quality amid macroeconomic stress, reflected in poor collection, higher impairment or increase in unbooked receivables.

Difficulty accessing financing markets, which leads to a fundamental shortcoming in their maturity profile or low liquidity

Increased regulatory risk (relating to price ceilings and early settlement discount) with a material negative impact on IPF’s ability to conduct profitable business

Significant solvency impairment with total debt/tangible equity exceeding 5.5x or charter leverage (total debt/total equity) depleted by 3.75x

Factors that can, individually or collectively, lead to a positive appraisal/promotion:

Significant improvement in the financing profile by diversifying by source and removing maturity spikes and

Reducing epidemic pressure on the company’s performance, while continuing to restore its financial profile by increasing volume and enhancing profitability

Debt and Other Instrument Ratings: Key Rating Drivers

The IPF unsecured bond rating is in line with the long-term IDR, which reflects Fitch’s projections for average recovery prospects given that IPF funding is not guaranteed.

Debt and other instrument ratings: sensitivity rating

The IPF’s unsecured debt rating will move in tandem with the long-term IDR

Best/worst case rating scenario

International credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating shifts, 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 shifts, measured in a negative trend) of four degrees over three years. The full range of best and worst case scenario ratings for all rating categories ranges from “AAAto ‘D’. Best and worst case scenario credit ratings are based on historical performance. For more information on the methodology used to determine the best and worst case scenario credit rating for a specific sector, visit https://www.fitchratings.com/site/re/10111579

References to a material source cited as a major driver of classification

The main sources of information used in the analysis are described in the applicable standards.

ESG . considerations

The IPF has an ESG suitability score of ‘4’ for exposure to social impacts arising from its business model that focuses on high-cost consumer lending, and therefore exposure to consumer shifts or social preferences, and increased regulatory scrutiny, including tighter interest-setting rates. This has a negative impact on the credit profile, and is closely related to ratings in combination with other factors.

IPF has an ESG Suitability Score of ‘4’ for Customer Care – Fair Messaging, Privacy and Data Security, driven by the increased risk of losses from litigation including claims by customers for an early settlement discount. This has a negative impact on the credit profile, and is closely related to ratings in combination with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit adequacy is a score of “3”. This means that ESG issues are fiduciary neutral or have little fiduciary impact on the entity, either because of their nature or the way the entity is managed. For more information on Fitch’s ESG related results, visit www.fitchratings.com/esg

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