The affirmation and removal from RWN reflect our view that the company's increased capital base will strengthen its loss-absorption capacity and offset remaining downside risks to its asset quality and earnings, in the event of future provisioning requirements.
Fitch has also affirmed the National Long-Term Rating of 'BB(tha)' on DAOLSEC's subordinated unsecured debentures, and removed the RWN on the instrument ratings. These actions also apply to DAOLSEC's upcoming subordinated debentures issue that had initially been rated on 14 December 2022. The deal size on the upcoming issue has been increased to up to THB450 million. The debentures will have a maturity of one year, and the firm plans to use the proceeds for the repayment of maturing subordinated debentures.
KEY RATING DRIVERS
Significant Capital Increase Supports Ratings: DAOLSEC has raised THB400 million in fresh equity through a capital injection on 10 March 2023 from its shareholder, DAOL (Thailand) Company Limited. The equity injection reduces the company's tangible assets/tangible equity ratio to below 4.0x, from 5.9x as of end-2022, and gives it a significant capital buffer to weather any further downside risks.
Legal Process Ongoing: DAOLSEC was one of 11 brokers affected by the irregular trading of shares in More Return Public Company Limited in November 2022. Its exposure in securities receivables was significant. Thai courts have ordered that the assets involved be temporarily frozen, and public prosecutors have filed charges against persons relating to the event. The affected Thai securities companies have filed petitions to pursue compensatory damages from the event, but final resolution may take some time.
Asset Quality Downside Remains: DAOLSEC has booked the assets related to the failed settlement as impaired receivables, and made a partial impairment on the exposure. However, recovery prospects are highly uncertain, and a full write-off cannot be ruled out. In such a scenario, DAOLSEC would have to set aside further provisions against the impairments, risking another full-year loss. Against this, Fitch believes that existing equity levels would allow the company to absorb further provisioning while maintaining leverage levels commensurate with the current rating.
Adequate Franchise: We expect the capital increase to help the company maintain client and investor confidence, and our rating affirmation assumes that there will be no material damage to DAOLSEC's longer-term franchise from this incident. The company's securities brokerage market share fell slightly in the year-to-date to around 0.9%, from 1.3% in 2022. However, DAOLSEC has broadly maintained its market positions in other key business segments, such as derivatives brokerage and bond underwriting.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch may take negative rating action if the company's leverage unexpectedly deteriorates substantially, such as if the tangible assets/tangible equity ratio were above 5.5x for a sustained period. This may be due to the emergence of new asset quality risks that give rise to further provisioning needs, or a much weaker earnings performance than Fitch expects that affects internal capital generation. Further developments that demonstrate weaknesses in risk controls relative to peers, or any long-lasting damage to client and creditor confidence, could also be negative for the ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is limited ratings upside in the near-term due to the company's weakened asset quality, earnings and risk control record, and ongoing provisioning risk.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The National Long-Term Rating on the company's subordinated debentures is one notch below DAOLSEC's National Long-Term Rating to reflect the instruments' higher loss-severity risk relative to senior unsecured instruments. This arises as subordinated noteholders rank after senior creditors in the priority of claims, as per Fitch's Corporate Hybrids Treatment and Notching Criteria.
There is no additional notching for non-performance risks due to the notes' lack of going-concern loss-absorption and equity-conversion features. Fitch has not assigned equity credit to the issue, as the instrument is not designed to be a permanent part of the company's capital structure.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The National Long-Term Rating on the subordinated debentures is sensitive to changes in DAOLSEC's National Long-Term Rating. Any action on DAOLSEC's National Long-Term Rating is likely to lead to similar action on the rating of the subordinated debentures.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings