TRIS Rating Co., Ltd. has affirmed the company rating of EASY BUY PLC at “BBB” with a revised outlook to “stable” from “negative”. At the same time, TRIS Rating has affirmed the ratings of the guaranteed debentures of EASY BUY at “A+” with “negative” outlook. The company rating reflects EASY BUY’s strong market position in Thailand’s non-bank consumer finance businesses and strong support from its parent company, ACOM Co., Ltd., and major shareholders. The rating is constrained by EASY BUY’s low capitalization and the fact that the credit quality of its customers is sensitive to an unfavourable economy. The rating is also constrained by industry competition, which might limit business growth, profitability, and lead to a deterioration in asset quality.
The issue ratings reflect the weaker financial profile of ACOM, who is the guarantor of the debentures. ACOM’s financial performance is expected to be pressured by higher provision expenses for both possible loan losses and refunds of overpaid interest, the full implementation of the new Money Lending Business Law effective in June 2010 in Japan, and the worsening business environment in Japan.
The issue ratings also reflect a full guarantee by ACOM, which is rated “Baa3” with a “negative” outlook by Moody’s Investors Service (Moody’s) and “BBB” with a “negative” outlook by Standard & Poor’s (S&P). The ratings of ACOM are supported by its strong market position in the consumer finance business, a sound and experienced management team, diverse lines of business, and a strong alliance with Mitsubishi-UFJ Financial Group Inc. (MUFG). MUFG currently holds a 40.04% stake in ACOM and has included ACOM as its consolidated subsidiary since 25 December 2008. These strengths are constrained by a fiercely competitive environment and regulatory risk, which negatively affect the performance of non-bank consumer finance companies in Japan.
TRIS Rating reported that under the guarantee agreement, which is governed by Japanese law, the guarantor irrevocably and unconditionally guarantees to promptly make full payments of obligations of the rated debentures in any merger or consolidation of ACOM, the successor of ACOM shall assume these guaranteed obligations. If the guarantor fails to pay the amount due after receiving notice, the debentureholders’ representative can commence legal action against the guarantor in commercial court, in Japan, for the defaulted amount. The obligations of the guarantor under this guarantee agreement rank equally with other unsecured and unsubordinated debts of the guarantor.
ACOM reported a net loss totaling Bt7 billion yen in FY2010 (ending March 2010), a sharp reversal from net profits of Bt14 billion yen in FY2009 (ending March 2009) and Bt35 billion yen in FY2008 (ending March 2008). The net loss was derived mainly from the additional provisions for losses related to refunds of overpaid interest and extraordinary losses related to management reforms. However, capitalization remained strong. The ratio of shareholders’ equity to total loans increased from 25.98% in FY2007 (ending March 2007) to 34.52% in FY2010 (ending March 2010). The rise was due mainly to a decline in outstanding loans.
As of March 2010, the loan receivables of EASY BUY made up 5.4% of ACOM’s consolidated receivables, up from 4.3% at the end of FY2009 (ending March 2009). The amount of EASY BUY’s liabilities guaranteed by ACOM totalled 57,658 million yen as of March 2010, representing 13% of ACOM’s total shareholders’ equity, on par with FY2009 figures. EASY BUY is ACOM’s first overseas subsidiary in Southeast Asia, and figures significantly in ACOM’s strategy to be a major regional player in the consumer finance industry. ACOM has shown a strong commitment to EASY BUY, providing financial and business support by passing along technology and business practice know-how, as well as developing new products for the Thai market. However, despite the weakening of ACOM’s financial profile during the last three years due to regulatory changes, TRIS Rating believes the guarantee of ACOM given to EASY BUY remains strong.
TRIS Rating said, the experience of almost 15 years in the non-bank consumer finance industry has provided EASY BUY with a sufficient track record and good brand recognition. Strong financial and business support from the parent company is crucial for EASY BUY’s future market position and to sustain growth. Although the nature of its business, providing small loans to a large number of customers, helps diversify risk, the company is still exposed to credit risk as the credit profiles of its customers are generally lower than customers of commercial banks. In addition, the company is also exposed to regulatory risk as regulators strive to protect consumers’ rights.
Asset quality is a crucial determinant of EASY BUY’s credit profile as the company has been pressured by its low capitalization and a changing business environment. EASY BUY has adopted many of ACOM’s business operation and risk management tools, including a modern credit-scoring model and effective vendor and information management systems, plus ACOM’s loan collection methods and standards to ensure asset quality control. However, EASY BUY had high provision expenses (bad debts and doubtful accounts) during 2005-2007 due to high non-performing loans (NPL) in the motorcycle hire-purchase business. NPLs were also high during a controversial period when a new interest rate cap was implemented. As a result, EASY BUY reported a loss of Bt113 million in 2006 and Bt95 million in 2007.
EASY BUY’s net income turned positive after 2007 with net profits of Bt310 million in 2008, Bt329 million in 2009, and Bt244 million for the first three months of 2010. The turnaround mainly came from continued growth in the personal loan business, efficient control of operating costs, and improved customer credit profiles, though provision expenses remained high during the unfavorable economic environment in 2009. Capitalization improved but remained weak. The ratio of total shareholders’ equity to total assets fell substantially to 5.70% in 2007 from 7.16% in 2006, before rising to 6.50% in 2008 and 8.36% at the end of March 2010.
TRIS Rating said about the outlook for the company rating of EASY BUY that it is revised to “stable” from “negative”, which reflects the turnaround in performance as a result of improved asset quality and careful control of operating expenses. However, TRIS Rating remains concerned over the capital base of EASY BUY which might not be sufficient to absorb the downside risk from competition and adverse changes in the economy. The “negative” outlooks for EASY BUY’s issue ratings reflect the remaining uncertainty surrounding the financial performance of ACOM, the guarantor of EASY BUY, in FY2010. The profitability of ACOM will be pressured by higher provision expenses for possible loan losses and refunds of overpaid interest, said TRIS Rating. -- End
Company Rating: Affirmed at BBB Rating Outlook: Stable from Negative Issue Ratings: EB108A: Bt320 million guaranteed debentures due 2010 Affirmed at A+ EB108B: Bt100 million guaranteed debentures due 2010 Affirmed at A+ EB128A: Bt125 million guaranteed debentures due 2012 Affirmed at A+ EB128B: Bt2,710 million guaranteed debentures due 2012 Affirmed at A+ EB128C: Bt3,500 million guaranteed debentures due 2012 Affirmed at A+ EB133A: Bt1,000 million guaranteed debentures due 2013 Affirmed at A+ Rating Outlook: Negative
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