New York, April 26, 2018 -- Moody's Investors Service assigned a B2 rating to Gilex Holding S.à
r.l.'s (Gilex) proposed $300 million senior
secured notes. The outlook is stable.
The following rating was assigned to Gilex's proposed $300
million senior secured notes:
...Long-term foreign currency senior secured
debt rating of B2, stable outlook
RATINGS RATIONALE
Gilex (issuer rating B2, stable) is a holding company based in Luxembourg.
The large majority of its asset holdings is represented by its 94.7%
stake in Banco GNB Sudameris S.A. (GNB, deposits Ba2
stable, BCA ba3), a bank based in Colombia. Proceeds
of the notes, which will be secured with a pledge of 50.01%
of the shares of GNB, will be used to refinance Gilex's outstanding
$250 million bridge loan and/or for general corporate purposes,
including the funding of investment opportunities.
The notes will be direct, senior secured obligations of Gilex and
will rank senior in right of payment to all of its existing and future
senior indebtedness to the extent of the value of the pledged shares.
Dividends from GNB will supply nearly all of the cash flow to repay principal
and interest on Gilex's debt. Consequently, the rating is
two notches below GNB's baseline credit assessment (BCA) of ba3,
based on moderate expected interest coverage but relatively high double
leverage. The rating is notched off of GNB's BCA because
unlike GNB's deposit ratings, Gilex's rating does not
incorporate any support from the Colombian government. While Moody's
believes there is a moderate probability that the government will support
GNB's depositors and senior debt holders in an event of stress,
this support will not accrue to the company's shareholders,
i.e. Gilex.
Gilex's double leverage, which is an indication of how heavily a
holding company relies on debt measured by its investments in subsidiaries
divided by shareholders' equity, could rise as high as 140%
if all of the proceeds (except the $25 million minimum liquidity
requirement) of the current issuance were invested in subsidiaries.
Moody's considers double leverage in excess of 115% to be
high.
The ratings also incorporate the risks associated with the dividend inflows
from GNB, which could be blocked by Colombia's regulator if
the bank's regulatory Common Equity Tier (CET1, Patrimonio
Básico) ratio were to fall below 4.5%. Currently,
however, the bank maintains a moderate capital cushion, with
a consolidated CET1 ratio of 6.7% as of year-end
2017. If GNB were to dividend out 100% of its earnings,
Moody's estimates that Gilex's interest coverage would exceed
a relatively robust 4-times and could reach as high as 6-times,
in 2018. However, this would leave the bank with little capacity
to grow. Moody's notes that in recent years, GNB has
actually reinvested 100% of its earnings to fund growth.
Assuming that GNB begins to pay dividends equal to 50% of net income,
Gilex's interest coverage is expected to be more moderate, at 2-
to 3-times, subject to the size of the coupon.
As the bank begins to pay dividends, however, lower earnings
retention coupled with faster asset growth could quickly consume any capital
injected in the bank by Gilex with the proceeds of the current issuance
and ultimately pressure the bank's capitalization. In turn,
this could force the bank to reduce dividend payouts, which would
put further pressure on Gilex's interest coverage ratio.
In addition, dividend payments from GNB, and consequently
interest coverage at Gilex, could be affected by a deterioration
in earnings at the bank. While GNB's profitability has improved
in recent years, with an average yearly growth of net income of
6% from 2015 to 2017, its earnings generation is subject
to volatility given its relatively narrow earnings diversification,
concentrated in a few lending segments. Earnings are also vulnerable
to changes in the bank's cost of funds given its heavy reliance
on wholesale funding, with market funds equal to 24% of tangible
banking assets, as of year-end 2017.
The rating also considers the issuance's key covenants and the security
pledge. Although Gilex is not required to use the proceeds of any
asset sales, including the unpledged portion of its interest in
GNB, to pay down its debt and could use them to purchase or invest
in other assets, it is not permitted to use the proceeds to pay
a dividend to its shareholders. The issuer cannot issue additional
debt if (i) interest coverage is less than 2-times, (ii)
net debt is greater than 4.5-times available cash flow,
or (iii) debt to equity is greater than 60%. Moody's
does not expect net debt to equity to significantly exceed 40%
or cash flow leverage to be more than 3.4-times.
Although the incurrence test is not likely to prevent the company from
issuing additional debt, Gilex will not be able to issue any debt
with a pari passu claim on the security. This will help limit the
impact of additional debt issuances on the current bonds' recovery
rate in an event of default.
Otherwise, however, the security interest in GNB is of limited
consequence for the rating. While it may enhance bondholder control
in an event of default, the value of the security would likely be
highly inversely correlated with the probability of default given Gilex's
dependence on the source of the security for nearly all of its cash flow.
As such, the security will most probably only be enforced when GNB's
ability to provide dividends has been compromised, which will also
adversely affect the value of the bank's shares.
The stable outlook takes into consideration our expectation that Gilex
will not incur in additional debt given the conservative incurrence test.
Also, it is in line with the stable outlook on GNB, which
incorporates our expectation that GNB's asset risks will remain stable,
in line with Colombia's gradual economic recovery, while earnings
generation and reinvestment will continue to sustain capitalization.
WHAT COULD CHANGE THE RATING UP/DOWN
Gilex's ratings will face downward pressure if GNB's BCA is lowered,
which could be driven by (i) increasing reliance on wholesale funding
and/or declining liquidity position; (ii) engagement in further large
scale acquisitions, leading to a significant reduction in capitalization,
and/or (iii) rising asset risks. Gilex's ratings could also face
downward pressure if its double leverage ratio significantly exceeds 140%,
if GNB's dividends fall below 1.5-times interest expenses,
and/or if Gilex faces unexpected operating expenses, which have
historically been minimal.
Gilex's ratings will face upward rating pressures if GNB's BCA is raised,
supported by a substantial improvement in capitalization, a significant
and sustainable increase in core earnings, and/or an improvement
in the bank's funding structure. Also, upward pressures could
derive from a reduction in the company's indebtedness and/or double leverage,
or higher than expected revenues from dividend inflows, provided
this does not impair GNB's ability to reinvest in itself and support
growth.
The principal methodology used in this rating was Banks published in September
2017. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Felipe Carvallo
VP - Sr Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653
M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
