Credit rating agency Standard & Poor's has revised its outlook on Avanti Finance's BB- credit rating to positive from stable, saying Avanti could be in line for an upgrade to BB if it can sustain its ambition to grow its receivables portfolio.
However downward rating pressure could arise if Avanti had a rate of loan growth that suggested it was loosening its underwriting standards or changing its business focus such that this contributed to an increase in its credit risk profile, S&P credit analyst Peter Sikora said.
See S&P's comments on Avanti Finance below:
Melbourne, July 26, 2011—Standard & Poor’s Ratings Services said today that it has revised its outlook on the ratings on Avanti Finance Ltd. (Avanti) to positive, from stable. At the same time, we affirmed the ‘BB-/B’ counterparty credit ratings on Avanti.
“The positive outlook reflects Standard & Poor's view that Avanti’s long-term counterparty credit rating could be raised by one notch to ‘BB’ if the company can sustain its business and financial profile as it executes its broad strategic ambition to grow its receivables portfolio,” said credit analyst Peter Sikora, of the Financial Services Ratings group.
“Avanti’s ability to sustain its business and financial profile this will become more evident after our assessment of its financial results for the year ending March 31, 2012--although such assessment could take longer.”
“Key to any rating upgrade will be ongoing evidence that Avanti is able to effectively manage its margins and credit losses while securing additional funding in both the debenture investor market and from its bankers as it grows its balance sheet,” continued Mr. Sikora.
“Specifically, Standard & Poor’s is keen to observe and understand that Avanti’s credit risk profile will not materially deteriorate, and its earnings and capital positions are not materially weakened as a result of its planned stronger growth ambitions to what it has targeted in the past.
“Additionally, upward rating prospects would require evidence that this could be done without a detrimental impact on the company’s debenture maturity profile, its debenture reinvestment experience, and the favorable terms and available liquidity headroom in its bank facility.”
The counterparty credit ratings on Avanti reflect the company's focus on higher-risk lending segments, which have higher loan arrears and are more susceptible to credit losses when operating conditions deteriorate or if underwriting standards or arrears management is relaxed.
The ratings also recognize Avanti’s sound and stable track record of operating performance, which has been underpinned by Avanti’s ability to generate good returns from its receivables portfolio and effective asset-quality management.
Avanti’s funding profile has benefitted from an improvement in its bank facility, which has been increased by facility amount to NZ$40 million, from NZ$30 million, and the maturity has been expended from one year to two years (reviewed for extension to 24 months each year). The improvement in facility terms has increased Avanti’s funding flexibility and represents good evidence of ongoing banker support.
Continued evidence by Avanti of its ability to satisfactorily source funding is important at the current rating level and in the context of its high-growth strategy.
The outlook would be revised back to stable if Avanti were unable to sustain its financial profile while executing its measured growth strategy. Downward rating pressure would result from a rate of loan growth that suggested Avanti were loosening its underwriting standards or changing its business focus such that this contributed to an increase in its credit risk profile.