TRIS Rating has revised the rating outlook of Country Group Securities PLC (CGS) to “negative” from “stable”. The change in rating outlook reflects CGS’s declining market position in securities brokerage and its business restructuring effort that would eventually limit the scope of business conducted by CGS. Under the terms of the Business Restructuring Plan approved by CGS’s shareholders on 29 April 2014, a newly-established holding company will make a tender offer to acquire the ordinary shares of CGS, in exchange for the holding company’s newly issued shares. If the tender offer is successful, CGS’s key lines of business, including investment banking business and its investment division, would be divested to the holding company. CGS’s investment in MFC Asset Management PLC (MFC) would also be transferred to the holding company. After the restructuring, CGS’s remaining business would be limited to securities and derivatives brokerage and providing related services.
In TRIS Rating’s view, the investment in MFC provides CGS with a relatively stable source of recurring income from fund management fees. The profit from CGS’s investment in MFC accounted for 21% of CGS’s pre-tax earnings in 2013. CGS’s market share in securities brokerage used to be 5%-6% in 2010 through 2013, making it one of the top five firms in the industry. However, CGS’s market share declined sharply to 3% for the first four months of 2014. With the declining market position in brokerage business, the contribution from MFC is expected to be even more important to the financial performance of CGS. TRIS Rating views the narrowing of CGS’s business scope, which would lead to a less-diversified mix of revenue sources, to be negative to the credit rating of CGS.
At the same time, TRIS Rating affirms the company rating of CGS at “BBB-”. CGS’s credit rating continues to reflect CGS’s strong capital base and its strategic investment in MFC. These strengths are, however, offset by CGS’s high operating expenses, and the transition risks and uncertainty surrounding the recent changes in its key management positions. In addition, the rating is constrained by the cyclical and volatile nature of the securities industry, as well as the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012.
Rating Outlook: Negative
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