Research: Rating Action: Moody’s affirms Iris Financial Services Limited’s B1 CFR; outlook stable

New York, September 21, 2022 — Moody’s Investors Service has affirmed Bermuda-based Iris Financial Services Limited’s (Iris) B1 corporate family rating (CFR). The rating outlook is stable.

Affirmations:

..Issuer: Iris Financial Services Limited

…. Corporate Family Rating, Affirmed B1

Outlook Actions:

..Issuer: Iris Financial Services Limited

….Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of Iris’ B1 CFR reflects the company’s adequate capitalization and contained asset risks supported by its focus on payroll-deducted loans in Colombia, a product with a relative lower risk in relation to other consumer lending. However, the B1 rating also incorporates risks related to the company’s limited business diversification and strategic scope to relatively riskier consumer-segment in the highly competitive product. Despite Iris’ strong recurring earnings generation through the cycle, its short-term secured funding mix exposes the company to liquidity risks in times of heightened market volatility and tightening monetary conditions, resulting in profitability pressures. As a holding company, Iris’ consumer lending franchise and insurance operations are conducted through its subsidiaries ExcelCredit SAS (ExcelCredit, domiciled in Colombia) and Golden Tree Reinsurance Limited (Golden Tree, domiciled in Bermuda), respectively.

Iris’ funding profile is predominantly wholesale, therefore, inherently more sensitive to investors’ confidence and market conditions. The short-term nature and high level of secured funding facilities also increases its price sensitivity in a rising interest rate cycle, negative drivers to its earnings and liquidity. Therefore, the tightening of market conditions and the increase of interest rates in Colombia have pressured Iris’ funding costs, challenging its liquidity profile and its profitability metrics as well. However, over the past months, the company has been able to maintain and even extend credit lines with local banks, which supported the affirmation of the B1 rating. In June 2022, the company’s consolidated debt maturity coverage remained at a modest 40%, in line with the level of 2021 year-end and well below the 63% ratio in 2020. However, Iris continues to rely on funding from secured sources, which reached roughly 45% of tangible assets in June 2022, a constrain to its financial flexibility.

In terms of profitability, the quick rise in interest rates in Colombia, with the monetary policy rate up by 725 basis points in the past 12 months, pressured Iris’ net interest margins down to 4.6% annualized in June 2022, down from 6.2% in 2021. Iris consolidated net income remained strong at 3.3% of average managed assets in June 2022, which is higher than that reported by other consumer lenders in Colombia in the same period, but still well below the 6.2% and 4.8% reported by the company. at the end of 2021 and 2020, respectively. In the period, bottom line results were supported by relatively low credit costs compared with other consumer lenders, and loan loss provisions stood at an annualized 1.8% of gross loans in June 2022, with a low non-performing of 2.8%, and no charge. -offs in the period. Iris maintained adequate capital levels, with an estimated tangible common equity to tangible managed assets (TCE/TMA) of 23% as of June 2022, which helps to mitigate the liquidity challenges and provides adequate loss absorption capacity.

Iris corporate structure and related party transactions, including funding and portfolio sales to the group’s affiliates, weigh negatively on its credit profile as it creates opacity and complexity. Its concentrated ownership is also a challenge to the company’s governance risks, despite adequate risk management practices adopted since its inception in 2016.

The stable outlook on Iris’ B1 corporate family rating (CFR) reflects Moody’s view that despite the abovementioned challengng scenario, the company’s risk profile will remain consistent with its B1 rating over the outlook horizon, supported by its adequate capital and contained asset risks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Iris’ CFR could be upgraded if the company improves its funding structure and liquidity profile through access to unsecured resources, that could enhance its financial flexibility. Positive rating pressure would also arise as Iris is able to successfully implement its current growth strategy while maintaining strong earnings, asset quality and capital adequacy.

On the other hand, Iris’ CFR could be downgraded if there is material, and unexpected, deterioration in capitalization, earnings generation and/or liquidity. In particular, given Iris’ high reliance on short-term secured funding, further increase in secured debt relative to its assets or an increased asset-liability maturity mismatch would exert downward rating pressure.

The principal methodology used in this rating was Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed. prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Marcelo De Gruttola
Vice President – Senior Analyst
Financial Institutions Group
JOURNALISTS: 1 800 666 3506
Client Service: 1 212 553 1653

Ceres Lisboa
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

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