Fitch Ratings-London-20 November 2008: Fitch Ratings has today placed Cattles plc's (Cattles) Long-term Issuer Default Rating (IDR) of 'BBB', senior unsecured debt rating of 'BBB', and Short-term IDR of 'F3' on Rating Watch Negative (RWN).
Cattles has been placed on RWN due to the period of uncertainty faced by the group while it awaits the approval of its banking licence application, then looks to establish a sustainable retail deposit base and enters re-financing discussions with participants in a GBP500m bank syndication maturing next July. Cattles is currently reliant on wholesale funding. The disruption in the wholesale funding markets is contributing to the decline in the group's committed funding headroom. This is expected to fall from GBP227 million at end-September 2008 to around GBP100m by end-2008, as market conditions have not allowed Cattles to raise GBP100m of new debt funding from the capital markets it had planned in Q408. Competition is intense in the UK retail deposit market and the recent high profile failures of several small internet-based deposit-takers and banks in the UK could make it harder for Cattles to attract the sort of quality, term deposits needed to finance its lending business. The RWN will be resolved in the next six months when Fitch is able to make an assessment of initial success of Cattles' retail deposit-taking initiative and the refinancing of a GBP500m bank syndication that matures in July 2009, such that funding headroom returns to a more comfortable level.
Management announced in its recent interim management statement that the banking licence application is progressing well and Fitch believes it will succeed in being granted a licence. Cattles anticipates being able to raise retail deposits early in 2009. A banking licence would be likely to cap leverage at a lower level than it has periodically run to in the past. It would also result in greater scrutiny of the group and enable Cattles to diversify its funding sources. While these may represent longer-term benefits for creditors, in the near-term there are execution risks. The failure to establish a stable deposit base and refinance part of its bank syndication maturing in mid-2009 would be likely to result in further funding strain and a more dramatic slow-down in lending, which could result in a downgrade of the ratings by more than one notch.
Cattles LT IDR was placed on Negative Outlook 3 October 2008, in part reflecting the likely deterioration in asset quality because of the weakening state of the UK economy. Since then, Fitch's assessment of the UK economic outlook has deteriorated further (see Fitch's 'Global Economic Outlook', dated 4 November 2008, at the subscriber site, www.fitchresearch.com). Ratings pressure could, therefore, also arise from ensuing weaker asset quality and performance trends. The latter could be exacerbated by the recently-announced proposed ban of the sale of single premium payment protection insurance (PPI) policies. However, Fitch notes that Cattles should have some degree of flexibility in partially offsetting any loss in PPI revenue through cost cutting and raising loan rates to less-price sensitive customers.
Cattles has moderate balance sheet leverage (tangible equity/assets was 21% at end-H108) and enjoys very high margins, providing capacity to cushion potentially higher impairment charges. However, unusually for a lending-focused financial institution, Cattles' bank loan agreements and US private placements require it to maintain an interest cover covenant of 1.75 times before exceptional items. Fitch believes this to be an inappropriate covenant to measure the creditworthiness of a lending organisation like Cattles, but its existence is an additional concern, given likely medium-term earnings pressures. Fitch believes the tighter funding position is likely to result in Cattles slowing lending in early 2009 and could necessitate the reduction or suspension of the company's traditionally high full year dividend payment.
The current ratings of Cattles are underpinned by its high profitability, experienced management, conservative policy to fund itself longer than it lends, and adequate leverage. They also take into account its reliance on wholesale funding and the risks of lending to the less financially secure members of society - mainly credit risk, but also reputation and legislative risk.
Cattles is listed in London. Its main business is the provision of loan products, collected via direct debit, to individuals who find it difficult to obtain mainstream bank credit.
Contact: Cynthia Chan, London, Tel: +44 207 417 4301; James Longsdon, +44 207 417 4309.
Media Relations: Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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(END) Dow Jones Newswires
November 20, 2008 11:29 ET (16:29 GMT)

Publié le 20 novembre 2008 Copyright © 2008 Dowjones