DBRS Confirms ECN’s BBB (low) LT Issuer Rating Following Announcement of Canadian C&V Business Sale

DBRS, Inc. (DBRS) has confirmed the BBB (low) Long-Term Issuer Rating and Pfd-3 (low) Preferred Shares rating of ECN Capital Corp. (ECN or the Company) following the Company’s announcement that it has entered into an agreement to sell the Company’s Canadian Commercial and Vendor (C&V) business to Canadian Western Bank (CWB) for cash proceeds of approximately CAD 900 million. The transaction is subject to customary approvals and is expected to close in 1Q18. The trend on all ratings is Stable.

The confirmation of the ratings considers that while diversification of earnings will be impacted as the Canadian C&V business accounted for approximately 28% of ECN’s net financial income in 1H17, the overall impact to earnings is expected to be manageable given that the recently acquired businesses (Service Finance Company (SFC) and Triad Financial, Inc. (Triad)) are both expected to be accretive to 2018 earnings. DBRS notes that the SFC acquisition closed in September 2017, while the Triad acquisition is expected to close in 1Q18. The rating confirmation also considers the benefits of the sale to the Company’s overall risk profile. Specifically, the sale of the Canadian C&V business removes the largest generator of credit risk on the balance sheet, with asset risk from the Rail business becoming the Company’s primary exposure to loss, but this risk is viewed as well-managed. The Company’s balance sheet will remain sound with low levels of leverage following the sale of the Canadian C&V business, while available liquidity remains sufficient relative to forward funding requirements, both of which DBRS views as supportive of the ratings.

DBRS notes that the Canadian C&V sale follows the Company’s sale of its U.S. C&V business to PNC Financial Services Group, Inc. in April 2017. Following a strategic review in late 2016, ECN set out to sell both its U.S. and Canadian C&V businesses, which faced pressures on both volumes and pricing due to the renewed interest in the vendor finance market from North American banks. Due to the heightened competition, ECN saw future growth prospects and returns in the business as being compressed and likely to remain so for the medium-term. However, the favorable market valuations for North American C&V platforms from bank expansion provided ECN with an opportunity to sell the businesses to harvest the capital, which could be subsequently redeployed into other specialty lending businesses better aligned with a non-bank finance company model, as well as ECN’s well-established vendor focus and that could potentially provide higher risk-adjusted returns. Given the weakening margins and returns of the C&V business, DBRS sees the ability of ECN’s management to redeploy the capital into the Company’s recently acquired asset-lite businesses, while seeking other opportunities in the specialty lending market as a sensible decision by management.

RATING DRIVERS
Over the medium-term, ECN’s ratings could be positively impacted by the successful integration of both the SFC and Triad businesses as evidenced by continuing growth in originations and further diversification of volumes by vendor. Further, ratings could benefit from successful deployment of capital into platforms and businesses that support growth with returns that meet the Company’s hurdle rates, while maintaining a consistent risk appetite. Sustained earnings growth supported by anticipated revenue diversification from the acquisitions while maintaining historically sound asset quality metrics would be viewed favorably. Conversely, a material charge or loss resulting from integration missteps or a significant increase in credit costs demonstrating that ECN’s risk appetite has increased could result in a ratings downgrade. A noteworthy increase in leverage or an inability to access the capital markets to fund the business at reasonable costs could also lead to ratings pressure.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Finance Companies (October 2016), Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: David Laterza, Head of U.S. Non-Bank Financials, Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG, Global FIG
Initial Rating Date: October 3, 2016
Last Rating Date: June 8, 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.