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Fitch: Ownership to Play Bigger Role in Finco Credit Profiles

October 16, 2013, 07:11 AM
Filed Under: Industry News

The evolving ownership profiles of a number of U.S. finance and leasing companies suggest that ownership considerations will play an increasingly important role in these companies' future credit profiles, according to Fitch Ratings. Aside from the traditional owners of finance and leasing firms, namely strategic parent companies and long-term public equity shareholders, private equity, activist public equity and nonstrategic ownership groups (including the U.S. government) are among those whose actions could influence finance company (finco) and leasing company credit quality in the future.

Private equity or activist public equity ownership can introduce management discipline and spur change, but we generally view it as more equity-friendly, potentially resulting in actions, such as increasing dividends, share repurchases, greater leverage or acquisitions/divestitures, that adversely affect credit profiles of finance and leasing companies. At a minimum, these investor groups have shorter investment horizons, which could prompt action in the near term.

However, with improving market conditions, a number of private equity owners have been able to successfully exit their investments without materially affecting the credit profiles of the underlying companies, a trend that could continue.

Public activist ownership is most prevalent among aircraft lessors (Avolon, AWAS Aviation Capital), mortgage servicers (Nationstar Mortgage Holdings, PHH), subprime auto lenders (Santander Consumer USA, Exeter Finance, CarFinance Capital) and specialty finance companies (Springleaf Finance Corporation, Ladder Capital Finance Corporation).

Nonstrategic ownership, be it a corporate parent or the U.S. government, raises concern about the long-term strategic direction of the underlying finance and leasing company, but with less acute near-term credit pressure. Such ownership groups have a stated intention to exit their position, but are not likely to take steps that would damage the value of the asset they are looking to monetize, unless other options are limited.

Long-term ownership uncertainty can consume management attention, damage employee morale and, potentially, limit long-term strategic decision making. Ally Financial (74% owned by the U.S. government) and International Lease Finance Corp. (ILFC, 100% owned by AIG) are two notable finance and leasing companies with nonstrategic owners that have stated their intentions to sell the underlying businesses. A sale that introduced greater clarity with respect to long-term strategic direction would be viewed positively by Fitch, although the rating impact would also depend on the post-transaction financial profile of the stand-alone entity.

At the other end of the spectrum, ownership by a strategic corporate parent with improving credit fundamentals could positively affect the credit profile of the finance company subsidiary, provided appropriate parent/subsidiary linkages are in place. General Electric Capital, General Motors Financial and Ford Motor Credit have all benefited from improving parent company credit fundamentals in recent years, and Harley-Davidson Financial Services is currently on Outlook Positive, reflecting improved financial and operating performance at the parent company level.

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