DBRS Confirms ECN Capital’s BBB (low) Long-Term Issuer Rating; Trend Stable

DBRS, Inc. (DBRS) confirmed the BBB (low) Long-Term Issuer Rating and Pfd-3 (low) Preferred Shares rating of ECN Capital Corp. (ECN or the Company). The trend on all ratings is Stable. At the same time, DBRS confirmed the Support Assessment of SA3, which results in the Company’s Long-Term Issuer Rating being equalized with its Intrinsic Assessment (IA) of BBB (low).

KEY RATING CONSIDERATIONS
The confirmation of the ratings considers the significant progress made by ECN in its transformation to an asset-light balance sheet. The Company has successfully executed on several divestitures of legacy assets and redeployed the capital through its acquisitions of asset-light businesses, including Service Finance Company, LLC (Service Finance), Triad Financial Services, Inc. (Triad), as well as the Company’s investment in Kessler Financial Services LLC (Kessler). Each of these businesses enjoy top-tier market shares in their respective sectors. The ratings confirmation also considers the shift to a more efficient funding profile, given that Service Finance and Triad’s originations are funded by their bank and credit union partners. Finally, the ratings consider the evolution of the Company’s risk profile with operating risk the largest risk exposure associated with the Company’s new business profile. The ratings also take into account the charges associated with the exit from legacy businesses and assets which have masked the earnings potential of the new business model, as well as invaded capital.

RATING DRIVERS
ECN’s ratings could be positively impacted by sustained growth in its core businesses along with disciplined capital management and improved core profitability commensurate with the next rating level. Additionally, DBRS would view favorably ECN’s ability to exit its remaining legacy assets without incurring additional significant charges. Conversely, a material loss resulting from an operational misstep and/or significant Partner funding disruptions, could result in negative ratings pressure. Finally, a material increase in leverage, could place negative pressure on the ratings.

RATING RATIONALE
ECN maintains a solid franchise that originates and services unsecured and secured loans as well as provides credit card portfolio advisory services to a number of U.S. banks, credit unions and more recently a life insurance company (the Partners) through its core portfolio companies, Service Finance, Triad, and Kessler. Overall, ECN manages and/or advises assets totaling $31 billion.

Since early 2017, the Company has transformed its balance sheet from an asset-heavy business model that was involved in a number of businesses including rail finance, aviation finance and commercial & vendor finance, into an asset-light model. As of year-end 2018, the remaining legacy assets held by ECN primarily consisted of $249 million of aviation assets that ECN plans to exit in 2019.

Over the last 18 months, ECN has redeployed capital from the sale of legacy businesses and assets to acquire three companies, each of which serves as a reportable segment of ECN. Service Finance, which was acquired in 3Q17, originates and services home improvement loans primarily through exclusive agreements with vendors. Triad, which was acquired in 4Q17, originates and services manufactured housing loans. Finally, the Kessler investment (2Q18) positions the Company as the leading provider of co-branded credit card advisory services.

Overall, earnings performance has been negatively impacted by a number of charges and expenses related to the transformation. Indeed, for 2018, ECN reported a net loss of $156.7 million, as compared to net income of $60.2 million for 2017. However, excluding one-time gains/losses associated with the disposal of legacy assets, other one-time charges, as well as other non-cash expenses, 2018 net income would have totaled $46.4 million, compared to a net loss of $13.7 million in 2017. With the transformation largely complete, DBRS anticipates improving profitability consistent with the strength of the core businesses, driven by solid growth in originations and improving efficiencies of operations. Finally, DBRS views favorably ECN’s diverse fee-based revenue streams that should provide some revenue stability through economic and business cycles.

With the transformation of the business model, ECN’s risk profile has evolved. Credit risk on the balance sheet has diminished materially. DBRS sees operational risk as the Company’s most meaningful risk exposure going forward. DBRS notes that the consumer lending businesses continue to face significant layers of regulatory and compliance related oversight. Service Finance and Triad finance their originations through financial institutions, including FDIC-insured institutions. Meanwhile, Kessler advises FDIC insured credit card issuing banks. As such, any operational issues could damage ECN’s reputation resulting in the financing partners exiting the relationships with ECN. Providing comfort, each of ECN’s businesses have solid track records of operational risk management and credit performance. Meanwhile, credit risk is limited to Triad’s moderately sized floorplan business.

The Company’s funding position has also evolved with the transformation of the business model. Loans originated by Service Finance and Triad are funded at closing by the partner financial institutions on a flow basis. As such, ECN’s funding requirements have been reduced to a very modest level. ECN continues to maintain a senior credit facility, as a “back-up” facility to support operations, should there be a funding disruption with its bank and credit union partners, as well as to finance a small portfolio of floorplan loans on its balance sheet. DBRS considers this contingent liquidity as prudent and supportive of the ratings.

Finally, ratings also consider ECN’s sound capital position reflecting a tangible common equity (TCE) ratio of 26.5% at December 31, 2018.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The applicable methodology is Global Methodology for Rating Non-Bank Financial Institutions (November 2018), 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.

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

For more information on this credit or on this industry, visit www.dbrs.com

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