OREANDA-NEWS. June 09, 2015. Fitch Ratings has assigned Falcon Group Holdings (Cayman) Ltd's forthcoming USD250m five-year senior secured term loan B (TLB) an expected rating of 'BB-(EXP)'/RR3.

The final rating for the loan is contingent upon the receipt of final documents conforming to information already received by Fitch.

KEY RATING DRIVERS - TLB
Falcon's Long-term Issuer Default Rating (IDR) of 'B+' serves as the anchor rating for the TLB. The expected rating of 'BB-(EXP)'/'RR3' assigned to the TLB reflects Fitch's analysis of good recovery in a distressed scenario. The proceeds of the loan are expected to be used to diversify and extend Falcon's funding profile, expand the balance sheet, broaden its client base and product offering and to support international growth.

The recovery analysis was based on a liquidation value approach taking into consideration the TLB's structure, Falcon's business model and its balance sheet at FY14 (12 months to end-January 2015), with a range of discounts applied to asset values assuming sales will be conducted in a distressed market.

In its recovery assessment, Fitch has also taken into account the 'RR4' soft cap that is applicable to some of the jurisdictions where a material part of Falcon's assets can be based, as per Fitch's cross-sector criteria Country-Specific Treatment of Recovery Ratings. In some of these countries the law is relatively unfriendly to creditors, and or there can be significant volatility in the application of law and legal enforceability of any claim materially limits the practical chances of recovery or greatly increases the volatility of recovery prospects. However, Falcon's geographical exposure can fluctuate substantially over time and recovery prospects are supported by sizeable exposure to countries that are creditor-friendly.

Key features of the TLB include security pledges over the cash, accounts receivable and equity interests held by Falcon and certain key operating subsidiaries as well as financial covenants of a maximum debt (on balance-sheet debt) to shareholders equity ratio of 3.00:1.00 and a minimum interest coverage ratio of 2.00:1.00. Falcon plans to increase issued share capital to USD150m by end-2015, and thereafter limit dividend pay-outs to 50%.

In January 2015, Fitch upgraded Falcon's Long-term IDR to 'B+' and affirmed the Short-term IDR at 'B' , reflecting improvements to the company's organisational structure, including the development of a formal risk management framework as well as it addressing some of its corporate governance weaknesses.

Falcon's IDRs reflect its evolving governance structure and niche, but expanding franchise and undiversified business model. As a specialised trade financer, Falcon's business has continued to grow strongly by volume and geography, translating into an improving financial performance.

While Falcon's strategy remains focused on expansion and diversification, Fitch believes growth should be in line with the existing expertise of the business. The IDRs also consider Falcon's adequate financial profile; in particular asset quality and leverage.

RATING SENSITIVITIES - TLB
The TLB's expected ratings are sensitive to movements in Falcon's IDR, including a change in Fitch's view of its company profile, which could arise from a change in its strategy and a shift in business direction, specifically into non-core or unrelated activities, as well as operational risks. The expected ratings are also sensitive to any change in Fitch's assumptions about recovery prospects in the event of default.

A stronger company profile and Falcon demonstrating a track record of improved governance and risk frameworks could benefit Falcon's IDRs. In turn, this may result in an upgrade of the TLB's ratings.