Commercial Facilities Company - bond rating affirmed at 'BBB'

03/11/2012 08:34 AST

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the 'BBB' Rating of the KWD50mn four-year bond issued by Commercial Facilities Company (CFC) in December 2011.

The Outlook on the Rating is 'Stable'. The Rating is supported by the strong capital base, the improving asset quality, and the widening of the company's funding sources, as a result of the bond issue and the addition of new and/or increased medium-term bank facilities. The main factors currently constraining the Rating are the steady fall in the lending portfolio, and the consequent depressing effect on both operating profit and profitability. In terms of earnings, CFC had historically been a very profitable company, enjoying strong margins and robust portfolio growth. The last four years have seen margin pressures and lower volumes, and earnings have suffered accordingly.

Despite the Company's well-established market position, it has seen its lending volumes shrink, as overall consumer loan volumes decreased in the Kuwait market, due to regulatory changes and more cautious lending policies. This in turn impacted earnings and earnings capacity. Although this market-wide contraction in lending to the personal sector ended in 2011, volumes at CFC continued to contract, and market share fell. Notwithstanding its reliance on wholesale funding, as a result of regulatory constraints, CFC is not immediately vulnerable to liquidity pressures because it has always been careful to match new lending with already arranged new medium-term funding. When funding conditions become tighter, CFC responds by restraining new lending, rather than by depending on short-term borrowing. The funding structure is, therefore, not in itself a constraint on the Rating at its current level.

For the Rating to move upwards, would require sustained net growth in the financing portfolio, as well as improving asset quality in terms of both non-performing financing receivables (NPFR) ratio and provision coverage - preferably with provision coverage again crossing 100%. In addition, it would need significantly higher profits at both the operating and net levels, and improved profitability.

Commercial Facilities Company remains the principal non-bank consumer finance company in Kuwait operating on a non-Sharia'a compliant basis. The Company has a strong market share in vehicle finance, while also offering some personal loans. The well-established franchise has been developed over many years, and CFC is well-regarded in the local market. The business model is one of specialization within a limited product range, with an emphasis on asset quality and superior service.

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