Fitch Ratings has assigned ALD S.A. (ALD) a Long-Term Issuer Default Rating (IDR)
of ‘A-‘. The Outlook is Stable. At the same time, Fitch has assigned Long- and Short-Term Ratings of ‘A-‘ and ‘F1’ respectively to ALD’s €6bn medium-term note programme.
A full list of rating actions is at the end of this rating action commentary.
ALD is domiciled in France and listed on Euronext. It is a full-service vehicle leasing company with leading franchises in a number of European markets, notably France and Italy, as well as a number of non-European countries. Following the 2017 IPO, Societe Generale S.A. (SocGen; A/Stable/F1/a) remained ALD’s majority shareholder with an 80% stake in the company.
KEY RATING DRIVERS
IDRS, SUPPORT RATING AND SENIOR DEBT
ALD’s Support Rating and IDRs are driven by support from its majority shareholder, SocGen. Given ALD’s ownership, significant parental funding and relevance for SocGen’s financial services business division, we believe ALD to be of strategic importance for SocGen.
Extraordinary capital or liquidity support, if ever required, would therefore in our opinion be extremely likely, which is reflected in the Support Rating of ‘1’.
We have notched ALD’s Long-Term IDR once from SocGen’s Long-Term IDR. This primarily reflects our assessment of ALD as being strategically important to SocGen due to ALD’s meaningful revenue contribution (and diversification) to the SocGen group, material operations in SocGen’s core market of France, close integration in SocGen’s risk management framework and SocGen’s public commitment to remain ALD’s majority shareholder and principal funding provider.
However, the notching also takes into account ALD’s largely autonomous franchise, which in our opinion creates moderate business synergies between ALD and SocGen, ALD’s size (which means any support from SocGen is in our view manageable but would require meaningful SocGen resources) and SocGen’s majority but not full ownership of ALD.
ALD is integral to SocGen’s financial services business unit and a relevant part of its domestic and wider European franchise.
However, synergies, in particular around distribution channels and shared clients, are more limited than for instance at SocGen’s French consumer finance subsidiaries.
ALD’s management is relatively independent from SocGen’s management, reflecting ALD’s non-banking business model.
However, funding is currently underpinned by SocGen and risk management is integrated into SocGen.
As of end-1H18, SocGen provided around 75% of ALD’s non-equity funding, which increases the likelihood of support, in our opinion. Given the amount of funding provided by SocGen, a default on non-SocGen debt would be viewed extremely negatively by market participants, in our opinion.
ALD’s Long-Term IDR of ‘A-‘ maps to two possible Short-Term IDRs (F1 or F2). As ALD’s IDRs are ultimately underpinned by SocGen’s IDRs, we have assigned the higher of the two Short-Term IDR options given SocGen’s ‘F1’ Short-Term IDR.
ALD’s senior unsecured EMTN programme ratings are aligned with the company’s IDR as in Fitch’s view the likelihood of default on the senior unsecured notes under the programme reflects the likelihood of default of ALD. The ratings of the programme apply only to senior unsecured notes issued by ALD. There is no assurance that notes issued under the programme will be assigned a rating, or that the rating assigned to a specific issue under the programme will have the same rating as the programme.
ALD’s standalone risk profile is underpinned by its well-established, leading franchise in European car leasing, well-articulated and soundly executed strategy and ordinary support from SocGen in its funding profile.
The assessment also considers ALD’s recent aggressive growth, relatively high balance sheet leverage and relatively concentrated funding profile.
ALD has sufficient scale and a degree of pricing power in most markets. Its business model is supported by a sizeable number of well-established partnerships with car manufacturers, banks (both French and international) and US-based fleet lessor Wheels, Inc. (A/Stable).
As primarily an operating lease provider, ALD’s exposure to residual value (RV) risk (including to diesel engines) is ALD’s main risk.
However, RV risk is well-managed, as highlighted by net fleet disposal gains in most market environments. RV setting appears prudent and subject to regular stress tests but ALD remains sensitive to negative developments in second-hand car markets. Credit risk management benefits from SocGen’s risk management framework and adequate diversification by clients.
Growth, including in private leases, has been rapid in recent years and growth plans are relatively ambitious, in our view.
ALD’s profitability compares well with other operating leasing companies. Revenue principally relates to leasing contract and services revenue, which are both primarily driven by fleet growth. Reliance on net gains from selling used fleet units is limited
(typically accounting for less than 10% of operating revenue). Cost discipline is good with a cost/income ratio (excluding the net car sales result) of around 50%, comparing well with peers.
ALD’s pre-tax income/average assets ratio, Fitch’s core ratio for leasing company profitability, remained comfortably above 3% in recent years, providing an adequate buffer against volatility in ALD’s post-lease net car sales result.
As a largely unregulated holding company, ALD is not subject to any meaningful regulatory capital or leverage requirements.
ALD’s balance sheet capitalisation has improved in recent years and management targets an equity/assets ratio of between 15% and 17%. At end-1H18, ALD’s gross debt/tangible equity ratio, Fitch’s core metric for leasing company leverage, stood at around 5.6x, broadly in the middle of Fitch’s ‘bb’ range (5x to 7x) for leasing company leverage. Given the resilience of ALD’s business model and our expectation that leverage should not exceed 7x, we view leverage as just acceptable.
ALD’s balance sheet is well-matched by tenor, interest rate and currency. This limits ALD’s liquidity requirements. Since 2012, ALD has been diversifying its funding profile by accessing European ABS and to a lesser extent third-party bank funding, but its funding profile remains less developed, concentrated and reliant on SocGen (which also provides guarantees for some of ALD’s third-party funding).
IDRS, SUPPORT RATING AND SENIOR DEBT
Any change in SocGen’s Long-Term IDR would likely be mirrored in ALD’s ratings. Given our standalone assessment of ALD and current notching, a downgrade of SocGen below ‘A-‘ would not automatically lead to a downgrade of ALD but could put pressure on ALD’s ratings given the importance of SocGen for ALD’s distribution capabilities and current funding profile.
A material reduction in SocGen’s stake in ALD, in particular if in conjunction with a diminished strategic importance of ALD for SocGen, could lead to wider notching and a downgrade of ALD’s Support Rating.
An increasing strategic importance of ALD for SocGen, for instance by increasing distribution/product synergies, combined with an unchanged ownership structure, could lead to an equalisation of ALD’s and SocGen’s Long-Term IDRs.
The programme’s ratings are sensitive to changes in ALD’s Long- and Short-Term IDRs.
Leverage firmly in the ‘bbb’ range (gross debt/tangible equity of less than 5x) would be positive for ALD’s standalone assessment, as would a more diversified funding profile and more prescriptive liquidity management policies.
A moderation of ALD’s fast recent organic and inorganic growth (which has generated additional goodwill and has increased the demand placed on the company’s control environment) would also be positive.
Materially higher leverage, as a result of either incremental debt or a reduction in tangible equity due to material additional goodwill, would be negative for our standalone assessment.
Any indication that ALD’s RV risk management has weakened (for instance evidenced by outsized net car sales losses) or a weakening of its depreciation policies would also be viewed negatively.
The rating actions are as follows:
• ALD S.A.
• Long-Term IDR assigned at ‘A-‘; Outlook Stable
• Short-Term IDR assigned at ‘F1’
• Support Rating assigned at ‘1’
• Senior unsecured €6bn EMTN long-term programme rating assigned at ‘A-‘
• Senior unsecured €6bn EMTN short-term programme rating assigned at ‘F1’