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Rating Action:

Moody's assigns Ba2/NP first-time issuer ratings to Hoist Kredit AB (publ); outlook positive

02 May 2016

London, 02 May 2016 -- Moody's Investors Service has today assigned Ba2/Not Prime long-term and short-term first time issuer ratings to Hoist Kredit AB (publ) -- Hoist. The outlook on the long-term issuer rating is positive. At the same time the rating agency has also assigned a ba3 baseline credit assessment (BCA) to the company. Moody's also assigns a Counterparty Risk Assessment (CR Assessment) of Baa3(cr)/Prime-3(cr) to the company. This is the first time Moody's has assigned credit ratings to Hoist.

Hoist's baseline credit assessment (BCA) of ba3 is underpinned by a 'Strong' macro profile and sound capitalization, coupled with a solid retail deposit-based funding profile and sizeable liquidity portfolio. These strengths are counterbalanced by Hoist's monoline business model, the valuation and pricing risks associated with acquiring non-performing debt portfolios, as well as the concentration risk stemming from a limited number of suppliers.

Hoist's Ba2 long-term issuer rating takes into account the company's ba3 BCA, in conjunction with Moody's view of a low loss given failure based on the protection provided to senior unsecured creditors by the group's senior and subordinated debt.

A list of ratings is provided at the end of this press release.

RATINGS RATIONALE

SOUND CAPITALISATION AND FUNDING PROFILE IMPROVE RISK POSITION

Hoist's nominal leverage ratio, calculated as tangible common equity (TCE) on total assets, was 11.8% at the end of 2015, exceeding Swedish banks and rated debt purchasing peers. Moody's believes that the company's leverage ratio reflects the inherent risks of the debt purchasing industry. This is also evident by Hoist's high risk-weighted assets (RWA) density, calculated as RWA/total assets, of 85% as of end-2015, driven by risk-weights of 100% on non-performing loan portfolios (accounting for 63% of total assets). As a result, despite the high leverage ratio, Hoist's reported Common Equity Tier 1 ratio of 12.3% at end-2015 is relatively modest compared to other rated Swedish banks.

Hoist has managed to remain attractive to savers and has continued to grow its retail deposit base to SEK12.8 billion at the end of 2015 from SEK11.0 billion the previous year, which Moody's considers a credit strength. As of end-2015, market funds stood at 7.2% of tangible banking assets. While customer deposit funding will remain the most important source of funding for Hoist, as they accounted for 89% of total funding at end-2015, the rating agency expects the proportion of market funding to increase as the company plans to take advantage of favourable market conditions to grow its debt purchasing activities.

LARGE LIQUIDITY PORTFOLIO PROVIDES FLEXIBILITY, BUT WEIGHS ON PROFITABILITY

As a deposit taking entity with liquidity requirements similar to regular banks, Hoist has to hold a large stock of liquid assets, as prescribed by regulators. However, the company does not have the same regulatory status as a bank and, as such, does not have access to central bank liquidity. As a result, Hoist has built up a significant liquidity portfolio mainly containing high-quality treasury bills and treasury bonds, adding up to SEK5.2 billion as of end-2015 or 30.4% of tangible banking assets. In Moody's view, the large amount of liquid assets held on the balance sheet is a key credit strength for the company, giving Hoist the flexibility to acquire smaller debt portfolios without seeking additional funding or increasing leverage, and positioning the company well to withstand stressed funding conditions.

Moody's notes that the low-yielding liquidity portfolio does weigh down the company's profitability. Compared with other debt collectors, Hoist is less profitable in terms of return on assets (net income to tangible assets was 1.3% at end-2015), but shows better earnings stability (pre-tax income coefficient of variation over the last three years was 31% compared to 70% average for rated peers).

HOIST'S BCA IS SUPPORTED BY A 'STRONG' MACRO PROFILE

Hoist's operating environment is primarily influenced by developments in the markets in which it acquires debt portfolios, with significant exposures to UK and Germany, countries with a 'Very Strong-' macro profile, accounting for 49% of the company's geographical exposures at end-2015. At the same time, Hoist has exposures in several countries with weaker macro profiles, such as Italy ('Moderate+') and Poland ('Strong-'); this drives the overall macro profile down to Strong+. Moody's further adjusts Hoist's macro profile based on the expectation that the company will acquire debt in other geographies with a weaker or more volatile operating environment, resulting in a 'Strong' macro profile.

SOLID AND DIVERSIFIED MARKET POSITION IN THE EUROPEAN DEBT PURCHASING BUSINESS, BUT LIMITED PRODUCT OFFERING CONSTRAINS THE CREDIT ASSESSMENT

With SEK19.4 billion in estimated remaining collections (ERC) over the next 120 months and SEK4.4 billion acquired portfolios in 2015, Hoist is one of the largest debt purchasers in Europe. The company acquires debt in eight countries across the continent with plans to expand into new markets over the coming years. Hoist's debt purchasing business primarily focuses on the collection and acquisition of financial services' non-performing unsecured consumer receivables.

Despite its strengthening market position and evolving business model, Hoist's credit rating is constrained by the company's monoline business activities. The majority of the firm's revenues are generated by its debt purchasing businesses (90% in 2015) and is supplemented by income from debt collection and other sources (10% of revenues in 2015).

STRONG TRACK RECORD AS DEBT PURCHASER, BUT ACQUIRED NON-PERFORMING CONSUMER LOAN PORTFOLIOS ARE INHERENTLY RISKY

The receivables that Hoist acquires are, or have been, in arrears and therefore are, in Moody's view, speculative in nature. In addition to this, Moody's notes three key risks: (i) model risk in relation to the valuation and pricing of its purchased receivables; (ii) concentration risk relating to suppliers (i.e. debt originators/vendors); and (iii) event risk arising from potential litigation or legislative actions. Mitigating factors include the company's track record of accurately estimating the collections and the fact that the portfolios are acquired at substantially below the principal value, so that a large proportion of the debts is already written off.

Hoist has developed a robust database, which has contributed to it achieving a high level of pricing accuracy over the last twenty years. Pricing of receivables is based on a comprehensive modelling and analytical approach while the portfolio of receivables purchased remains extremely granular. Notwithstanding this, the continued successful operating performance of the business is dependent upon this accuracy, with material mispricing of purchased portfolios potentially leading to underperformance or even losses.

While purchased receivables are extremely granular in terms of its customer accounts, Hoist has a level of concentration relating to its suppliers. Moody's recognises that this supplier concentration is common to debt purchasing companies in Europe, given the limited number of debt originators that have the scale and financial and IT capabilities to sell non-performing loans in the markets. Mitigating this risk, Hoist operates across a variety of geographies, reducing its relative exposure to country-specific factors.

RATIONALE FOR THE LONG-TERM ISSUER RATING

Hoist is domiciled in Sweden, a jurisdiction subject to the EU Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime. Moody's applies its Advanced Loss Given Failure (LGF) analysis to Hoist, since it is a regulated credit market company, not exempted from BRRD. Moody's assumes residual TCE of 3% and losses post-failure of 8% of tangible banking assets, a 5% run-off in preferred deposits, and assigns a 25% probability to deposits being preferred to senior unsecured debt. These are in line with Moody's standard assumptions. Particular to Hoist, Moody's assumes that Hoist does not source deposits considered junior, relative to the standard assumption of 26% of total deposits, due to the company's retail-oriented deposit base.

Based upon the above, Moody's considers that Hoist's senior unsecured debt is likely to face low loss-given failure, due to the loss absorption provided by subordinated debt. This results in a Preliminary Rating Assessment (PRA) of ba2 for senior debt, one notch above the BCA. Since Moody's considers the probability of government support for Hoist's senior liabilities to be low, the rating does not incorporate any uplift from government support, and the final issuer rating is therefore positioned at Ba2.

RATIONALE FOR THE COUNTERPARTY RISK ASSEMENTS

As part of today's rating action, Moody's also assigned a CR Assessment of Baa3(cr)/Prime-3(cr), three notches above the BCA of ba3. The CR Assessment is driven by the banks' BCA and by the considerable amount of subordinated instruments likely to shield counterparty obligations from losses.

Moody's CR Assessment is an opinion of how counterparty obligations are likely to be treated if a company fails and is distinct from debt and deposit ratings, in that it: (1) Considers only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default; and (2) applies to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

RATIONALE FOR THE POSITIVE OUTLOOK

The rating outlook is positive, reflecting Moody's expectation that the protection to senior unsecured debt holders offered by Hoist's liability structure will increase, providing upward rating pressure through the rating agency's LGF analysis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

As signaled by the positive rating outlook, Hoist's issuer rating could be upgraded if the company were to issue a significant amount of debt, reducing the loss-given-failure of senior unsecured obligations. Hoist's BCA could be upgraded if the company: (i) significantly improves its profitability on a sustained basis without increasing earnings volatility; (ii) increases capital targets and demonstrates ability to maintain high capital levels; and/or (3) diversifies its business model.

The company's BCA could be downgraded if: (i) Hoist materially increases its market funding reliance; (ii) the company experiences a protracted decrease in profitability or in its solvency ratios; and/or (iii) the rating agency's assessment of Hoist's asset risk deteriorates. A downward movement in Hoist's BCA would likely result in a downgrade of all ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF ASSIGNED RATINGS

..Assignments:

.... Adjusted Baseline Credit Assessment, assigned ba3

.... Baseline Credit Assessment, assigned ba3

.... Long-term Counterparty Risk Assessment, assigned Baa3(cr)

.... Short-term Counterparty Risk Assessment, assigned P-3(cr)

.... Long-term Issuer Ratings, assigned Ba2 Positive

.... Short-term Issuer Ratings, assigned NP

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.

Dany Castiglione
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Ba2/NP first-time issuer ratings to Hoist Kredit AB (publ); outlook positive
No Related Data.
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