S&P Raises Springleaf Holdings (LEAF) to 'B'; Leverage to Improve on Real Estate Asset Sale

Standard & Poor's Ratings Services said today it raised its issuer credit rating on Springleaf Holdings (NYSE: LEAF) to 'B' from 'B-'. At the same time, we raised our issue ratings on Springleaf's senior unsecured debt to 'B-' from 'CCC+' and on Springleaf's preferred stock to 'CCC' from 'CCC-'. The outlook is stable.

Springleaf announced yesterday that the company entered into a series of transactions to sell $7.2 billion of legacy residential mortgage-backed securities, whole mortgage loans, and servicing assets. The buyers of the assets will assume the securitized debt associated with the assets sold and pay a premium of roughly $575 million to $625 million, in total generating about $3.0 billion of cash for Springleaf. Following the transaction, the company’s total debt to equity will improve to 3.7x from 6.7x at March 31, 2014. "We believe the combination of an improved leverage profile and a bolstered liquidity position support the higher rating," said Standard & Poor's credit analyst Stephen Lynch. Springleaf’s real estate portfolio has been in run-off since the first quarter of 2012, when the former mortgage lender ceased origination of subprime mortgage loans. Since that time, the company’s principal business activity has been underwriting nonprime consumer loans.

In the announcement, which the company released in conjunction with its second-quarter results, Springleaf stated that the proceeds from the sale will aid organic and inorganic growth and minimize the need for incremental debt. We recognize that such growth could increase the company's leverage from the post-transaction 3.7x, but we don't expect the company to again take on so much debt that we would lower the rating. Based on management's comments on their earnings call, we expect that Springleaf will use at least a portion of the proceeds from the sale to fund the repayment of existing debt. Following the transaction, Springleaf will still have $3.9 billion of debt maturing before the end of 2017 ($344 million in 2014, $797 million in 2015, $375 million in 2016, and $2.36 billion in 2017).

Our ratings on Springleaf continue to also reflect the company’s still relatively high leverage, dependence on wholesale funding, financial-sponsor ownership, and onerous debt maturity profile. The company’s limited competition in the nonprime consumer lending market and underwriting policies are strengths to the rating.

Our stable outlook balances the firm's improving earnings and post-transaction reduced leverage against the company’s dependence on wholesale funding and onerous debt maturity ladder over the next four years.

We could lower the rating if Springleaf’s leverage were to unexpectedly increase above 4.5x without a corresponding improvement in the company's business position. We could also lower the rating if management pursues a more aggressive growth strategy or financial policy, or if earning metrics deteriorate.

Over time, we could raise the rating if the company establishes a longer track record in the consumer lending market with continued access to asset-backed financing. An upgrade would also depend on the company diversifying its revenue sources and showing a longer history of containing credit losses. However, the company's profile as a monoline subprime consumer lender is likely to limit the degree of rating upside.

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