Credit Union Payment Center Outlook Revised To Positive On Resilient Results And Zero-Debt #BB/B# Affirmed

Stocks and Financial Services Press Releases Thursday May 24, 2018 17:37
MOSCOW--24 May--S&P Global Ratings

MOSCOW (S&P Global Ratings) May 24, 2018--S&P Global Ratings today revised its outlook to positive from stable on Russia-based Credit Union Payment Center (RNKO), a core subsidiary and payment settlement center for Center of Financial Technologies Group (CFT Group). At the same time, we affirmed our 'BB/B' long- and short-term issuer credit ratings on RNKO.

The outlook revision reflects our view that CFT Group's operating efficiency has been resilient to challenging market conditions in recent years, and its enhanced business prospects may now lead to a sustained improvement in its credit quality relative to its peers'. While we still consider that CFT Group's geographic diversification and scale are lagging international peers in both the money transfer market and IT segment, we believe the group will benefit from the stabilization of its operating environment, recovery of the remittance market in Russia and the Commonwealth of Independent States (CIS), and the improving competitive strength in its IT business segment. This could bring its credit strength more in line with international peers'.

Over the past three years, we've observe that, despite a relatively unsupportive macroeconomic backdrop, CFT Group's average margins have remained robust at about 30%. Margins in the processing sector are at the upper end of the average range for international peers (such as Western Union, MoneyGram, and Euronet), and margins in IT are above average for international peers in banking software (such as SS&C, Fiserv, and Intiviti Group). We also understand that in its key markets of Russia and CIS, CFT Group remains a leader in both segments. Considering the recent stabilization of macroeconomic conditions in Russia and CIS and revitalization of remittances in the region, we expect that this solid financial performance will remain sustainable.

Moreover, we observed that over the past years, CFT Group has demonstrated a consistent unlevered financial risk profile. The company has no outstanding debt, and our expectation is that it will not issue any debt through 2020.

While we assume only moderate organic revenue growth of around 5%-6% in the next three years, if the group meets our expectations, this could support an improvement in its 'bb' group credit profile. In our base case for CFT group, we assume:

  • CFT Group will maintain its leading market position in the money transfer industry, especially in Russia and the CIS region, where it has a 70% market share. We consider this somewhat offsets the high country risk in the region. CFT Group is the third-largest global money transfer company, behind market leaders Western Union and MoneyGram.
  • The group will maintain its established position in the banking software development and maintenance segment, which includes the development, sale, installation, and maintenance of software products primarily related to automated banking systems and the sale of related equipment. CFT Group is the market leader (close to 30%-40% market share) in the Russian core banking software market and has a strong customer base that includes Russia's top-tier banks. The software business represented 24% of group revenues at year-end 2017, while amounting to about 40% of EBITDA.
  • No debt issuance over 2018-2020, since the group has comfortable liquidity to cover day-to-day needs, and given our expectation of no material acquisitions by CFT Group in the next 12-24 months, since it already has leading market positions in both segments where it operates.
  • Dividends for the next four years of about 30%-40% of expected net profits. This estimate would reflect a normalized pattern of distributions after the substantial dividend for 2017. CFT Group did not pay dividends for 2015-2016 and had about $100 million is excess capital available for distribution to shareholders.

Our rating on RNKO reflects our view of it as a core subsidiary of CFT Group. CFT Group owns 100% of RNKO, which is the group's settlement center for money transfer and payment systems. RNKO's business, operations, and strategy are closely integrated with those of the group. We view RNKO as an infrastructure vehicle whose primary goal is to secure the settlement of transactions in CFT Group's payment systems. We consider that CFT Group does not have any incentive to sell RNKO, since this would disrupt payment flows. The creation or purchase of another settlement center would be costly and time-consuming, in our view.

The positive outlook on RNKO reflects our view that its creditworthiness may gradually strengthen, aided by a stabilized macroeconomic backdrop and CFT Group's likely improving financial performance and sustained lack of leverage.

We would likely upgrade RNKO in the next 12 months if CFT at least meets our base-case expectations, and we conclude that this has led to a meaningful improvement in its creditworthiness relative to comparable companies in both segments.

We could revise our outlook on RNKO to stable over the next 12 months if, contrary to our expectation, the group's operating conditions falter, impeding improvement in profitability. We could also revise the outlook to stable in the unlikely event that the group raises a significant amount of debt, for example taking its ratio of debt to EBITDA close to 1.0x.


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