Fitch Places Unibanco's DPR Program on Watch Positive
2008-11-18 03:09:02 -
Fitch Ratings has placed the Issuer Default Rating (IDR) of UBB Diversified Payment Rights Finance Company (UBB) on Rating Watch Positive. In addition, Fitch has placed the existing series in the program on Rating Watch Positive.
The notes issued through UBB's diversified payment rights (DPRs) program are backed by the collections generated from future and existing U.S. dollar-denominated DPRs originated by Unibanco-Uniao de Bancos Brasileiros S.A. (Unibanco) DPRs generally refer to electronic payment orders intended for third-party beneficiaries via Unibanco (i.e. international trade financed by Unibanco, export remittances, workers remittances, foreign direct investment, etc.).
Fitch has placed UBB's ratings on Rating Watch Positive as follows:
--Long-Term IDR 'A-';
--Series 2002-1 A&R 'A-';
--Series 2003-2 'A-';
--Series 2003-3 A&R 'A-';
--Series 2004-2 VFN 'A-';
--Series 2005-1* 'A-'.
*Currently backed by an unconditional and irrevocable financial guaranty insurance policy provided by Financial Guaranty Insurance Company (FGIC).
The rating actions follow the announcement of a joint-venture agreement between the controlling shareholders of Banco Itau Holding Financeira (BIHF) and Unibanco on Nov. 3, 2008. This agreement outlines the merger of their financial operations, which will establish the largest private financial conglomerate in Brazil and in Latin America. The closing of this agreement is contingent on approval by the Central Bank of Brazil and other relevant authorities.
The rating actions on the UBB program reflect Fitch's opinion that following the closing of the proposed transaction, Unibanco's risk profile and its ratings would be equalized with those of BIHF. The rating actions also recognize that Unibanco and Banco Itau are expected to continue to autonomously operate their respective DPR platforms (through UBB Diversified Payment Rights Finance Company and Brazilian Diversified Payment Rights Finance Company) given that the banking franchises will remain as separate legal entities for the near term. After reviewing the covenants of each platform and speaking with legal counsel, Fitch does not expect any negative consequences within either structure as a result of the merger.
However, Fitch recognizes that if the two banks were to eventually merge their operations and operate as a single legal entity, only one DPR platform could remain in existence. This subsequent action would necessitate the elimination of an existing program given that only one legal originator would survive.
The proposed merger will result in Brazil's largest financial franchise, with its strength deriving from the combination of diversified businesses across the range of financial services products. On Sept. 30, 2008, the combined financial institutions presented total assets of BRL575 billion, loans of BRL225 billion, deposits and debentures of BRL235 billion, net equity of BRL51 billion and assets and funds under management around BRL265 billion. Fitch notes that both banks have a track record of successfully integrating prior acquisitions, however the magnitude of the proposed merger is far beyond that of past experience, and will present important integration risks, both operational and cultural. Itau Unibanco Holdings will initially operate through the existing Itau and Unibanco franchises, maintaining the respective brands over at least the near term; over time, it is likely that synergies will lead to rationalization of legal entities and brands.
The current outstanding balance of the UBB program notes is approximately $1 billion. Maximum remaining quarterly debt-service is approximately $60 million. Coverage levels for the existing 2002, 2003, 2004 and 2005 series are significantly high, averaging more than 60 times maximum quarterly debt service over the past two years. Fitch has stressed these coverage levels and believes that Unibanco's current and future DPRs business is adequate to support the rating of these future flow notes.
Reports on Unibanco's DPRs program can be found on the Fitch Ratings web site at cts.businesswire.com/ct/CT"id=smartlink&url=http%3A%2F%2Fwww ... A sovereign report regarding the credit rating of Brazil, as well as a full bank update can also be found at cts.businesswire.com/ct/CT"id=smartlink&url=http%3A%2F%2Fwww ...
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ... Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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