Fitch Places Crystal on Rating Watch Negative on Refinancing Risk
The rating action reflects elevated refinancing risk, as new funding from foreign lenders, a key source for principal repayments due in 2Q21 and 3Q21, remains difficult to attract cost-effectively in current conditions.
The RWN reflects that a downgrade would result if none of Crystal's credible options to address its refinancing needs, including ongoing negotiations with foreign leaders and local banks, is successful or if its funding options continue to narrow.
Crystal did not access external funding since the onset of the pandemic, after it offered its clients a three-month payment holiday, in line with the National Bank of Georgia's (NBG) recommendation. In this context, Crystal's refinancing plan carries elevated execution risk, but the company has still room to implement contingency plans over the coming months, although at a potentially higher cost. In this regard, Fitch views as credit positive that Crystal has obtained covenant waivers and amendments for end-2020 from all its lenders.
Crystal's liquidity has benefitted from a credit line from the NBG (GEL68 million) and from liquid assets, as the company had pre-funded a then-canceled acquisition. However, portfolio growth and debt repayments during 2020 have narrowed liquidity flexibility. Fitch expects further strain on Crystal's liquidity position due to portfolio growth still planned for 1H21.
Asset quality performed better than under initial projections (loans past due over 30 days, restructured loans and trailing-12-months write-offs totaled 8.9% of the total by end-2020), thanks to Crystal's proactive management of credit risk, higher remittances in 2020, and state support measures. However, Fitch expects asset-quality risks to remain tilted to the downside in the short term, as the pandemic continues to affect the country.
Profitability remains under pressure (the company reported a net loss of GEL1.1 million in 2020), as Crystal's modest operational margin provides the limited capacity to absorb losses. This pressure is likely to continue, particularly if funding costs remain high for a prolonged period.
This has reduced Crystal's internal capital generation capacity, but the company has a relatively modest leverage profile (capital adequacy ratio of 19.34% at end-2020) and a recent reduction in the minimum capital requirement by the NBG mitigates the risk of regulatory breaches.
Crystal's IDR also takes account of the company's market leadership in the Georgian microfinance sector and high key-person risk, with the latter reflected in an ESG score of '4'. The key-person risk has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An affirmation of Crystal's ratings at current levels with a Stable Outlook could stem from a proactive funding strategy that pushes the current funding shortfall for 2021 well into 2022 through proven access to new funding and a credible strategy for portfolio growth, without further impairing franchise and profitability.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Failure to access market-based funding in 1H21 that addresses any liquidity shortfalls for the rest of2021
- Signs of significantly constrained funding access either in the form of materially higher funding costs or the provision of direct extraordinary funding support from the authorities
- Crystallization of asset-quality risks leading to significant losses that threaten the solvency
Crystal has an ESG Relevance Score of 4 for governance structure, as outlined above.