TRIS Rating Co., Ltd. has downgraded the company rating of TSFC Securities Ltd. (TSFC) to “BB-” from “BBB-” and has maintained the “CreditAlert” on the rating with “negative” implication.
TRIS Rating said that the rating actions reflect deteriorating operating environment and capital market situation, which continue to be volatile. Slower growths of both global and local economies and intense political turmoil are expected to further hurt the financial and capital markets as well as TSFC’s business fundamentals. TRIS Rating believes the operating environment will remain fragile due to the depth of global financial crisis and Thailand’s political confrontation. TSFC has submitted a rehabilitation plan to the Securities and Exchange Commission (SEC) of Thailand for approval. The plan includes a new capital injection and the funding sources of liquidity. Under current unfavorable environment and time constraint, there is a high uncertainty for the company to accomplish such plan.
In case TSFC’s rehabilitation plan does not get approval from the SEC, the rating will be downgraded to “C”. On the contrary, if the SEC approves the plan, the rating will remain at “BB-” and the CreditAlert will be revised to “developing” from “negative”. When TSFC successfully executes the capital injection plan and finds sources of back-up liquidity, TRIS Rating will reassess TSFC’s credit profile and announce the rating to the public as soon as possible.
TRIS Rating said, TSFC’s business and financial profiles significantly deteriorated in October 2008, resulting 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 and November 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.
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.
On 7 November 2008, TRIS Rating announced the downgrade to TSFC’s company rating to “BBB-” from “A” and assigned the “negative” CreditAlert to the rating. -- End
Company Rating: Downgraded to “BB-” from “BBB-” CreditAlert Designation: NEGATIVE
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