TRIS Rating Co., Ltd. has downgraded the company rating of TSFC Securities Ltd. (TSFC) to “BBB-” from “A” and has placed the rating on “CreditAlert” with “negative” implication.
The “negative” CreditAlert is due to the severe deterioration of TSFC’s capital base and its strained financial flexibility. TRIS Rating said TSFC must provide a concrete plan for a recapitalization that will materialize within a very short period of time; otherwise, the rating will be downgraded substantially. In the meantime, TRIS Rating will closely monitor daily performance of the company. If TSFC’s financial performance is further hit by an unfavorable environment of financial or capital markets, the rating will be lowered.
TRIS Rating reported that the rating actions reflect TSFC’s significantly deteriorating business and financial profiles. The deterioration resulted from high provisioning expenses for doubtful accounts of margin loans and a substantial amount of realized and unrealized losses from the equity investment portfolio. A depressed stock market in October 2008 is expected to significantly hurt financial health and capital status of TSFC for the last quarter of 2008 because the company has high exposures in equity investments and margin loans. The downgraded rating and the “negative” CreditAlert also reflect a deterioration of the company’s financial liquidity and flexibility.
TSFC is the only company in Thailand licensed to conduct securities financing, including margin loan refinancing, loans against pledged securities, and securities repurchase agreements. As of June 2008, TSFC had Bt21,825 million in total assets, classified into margin loan portfolio (36%), fixed income investments (34%), unit trust investments (25%), and other assets (5%). The total exposure in equity investments accounted for 48% of total unit trust investments, or 1.6 times of shareholders’ equity as of June 2008. TSFC’s all borrowings were short-term credit facilities from financial institutions and the issuance of bills of exchange.
Impacted by the US subprime crisis and an unfavorable domestic economic and political situation, the SET Index slumped heavily in October 2008. The index fell by 210.26 points (or -35%) from the closing index of 596.54 points on 2 October 2008 to 387.43 points on 27 October 2008 (the lowest level of the month). The SET index slump had led to a rapid decline in the value of margin loan collaterals. The collateral values have fallen to the forced-selling level, and caused TSFC to set high provisions for doubtful accounts of margin loans. At the same time, the mark-to-market value of the unit trust portfolio hurt the company’s net worth, due to unrealized losses on unit trust investments.
As of June 2008, TSFC booked unrealized losses on securities investment of Bt525 million, which weakened shareholders’ equity to Bt1,568 million from Bt2,129 million as of December 2007. At the same time, the ratio of doubtful loans to total loans increased from 2.52% at the end of 2007 to 3.1% at the end of June 2008. For the first half of 2008, TSFC set aside Bt71 million in additional provision for doubtful accounts of margin loans. The provision accounted for 11% of total income. Net income was Bt143 million for the first half of 2008. Non-annualized return on average equity (ROAE) and return on average assets (ROAA) were 0.67% and 7.76%, respectively, compared with 1.89% and 18.41% for 2007.
Looking at TSFC’s performance for the second half of 2008 by taking into account the SET Index nosedive during October 2008, TRIS Rating expects that TSFC is likely to post net losses. The losses will be due to a significant amount of provision expenses for doubtful accounts of margin loans and realized losses from selling the securities investment portfolio. In addition to realized losses on the profit and loss statement, shareholders’ equity will be reduced to a minimal level or may be negative due to a significant amount of unrealized losses on unit trust investments, said TRIS Rating. — End
Company Rating: Downgraded to BBB- from A CreditAlert Designation: Negative
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