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Rating Action:

Moody's assigns B2 ratings to Gilex's senior secured notes; stable outlook

26 Apr 2018

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.

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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
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M. Celina Vansetti-Hutchins
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Releasing Office:
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