Fitch Expects to Rate Springleaf's Senior Unsecured Notes 'B/RR4'

Fitch Ratings expects to rate Springleaf Finance Corporation's (Springleaf) $500 million senior unsecured notes maturing in 2019 'B/RR4'. The notes are expected to rank equally with existing and future senior unsecured debt issued by Springleaf.

The net proceeds from the issuances are expected to be used to repurchase $192.2 million of principal from Springleaf's outstanding 6.9% notes due 2017 in a privately negotiated transaction. The net proceeds will also be used for general corporate purposes which may include further debt repurchases and possible acquisitions. Pro forma for the expected debt issuance and repayment, Springleaf would have $2.2 billion remaining of debt maturing in 2017, which is lower than prior levels but still a meaningful debt maturity concentration.

KEY RATING DRIVERS - SENIOR UNSECURED

The expected debt rating is equalized with Springleaf's Issuer Default Rating (IDR) of 'B' reflecting that the notes are senior unsecured obligations of the company that rank equally in payment priority with existing senior unsecured debt.

Springleaf's IDR reflects progress made by Springleaf toward repaying debt, improving its debt maturity profile and furthering core profitability while growing its consumer lending business. Fitch also believes that the sale of approximately $6.7 billion of the $7.2 billion of legacy mortgage assets and related servicing, announced in August 2014, for net cash proceeds of approximately $3 billion, simplified the company's balance sheet and removed a source of earnings volatility.

These strengths are offset by uncertainty regarding the use of balance sheet cash, which could potentially include debt repayment, acquisitions, and shareholder distributions. Additional rating constraints include Springleaf's monoline business model, material regulatory risk, above-average growth, high reliance on the capital markets for funding, concentrated ownership structure, and higher-risk core demographic, which may be particularly sensitive in a rising interest rate environment.

Fitch recognizes that though Springleaf's expected $192.2 million debt repurchase transaction would alleviate some pressure to meet its remaining 2017 maturities, the company's ability to meet its remaining 2017 maturities could come under pressure if a significant portion of its unrestricted cash is deployed to make acquisitions and/or fund shareholder distributions.

The issuance of the senior unsecured notes is expected to increase balance sheet leverage, calculated by Fitch as adjusted by debt-to-adjusted tangible equity, to 3.1x from 2.9x at Sept. 30, 2014. The company's reported leverage is calculated on a push-down accounting basis following the majority sale of Springleaf to Fortress Investment Group LLC from American International Group, Inc. in 2010. Fitch also calculates leverage on a historical cost basis, which adds back the asset and debt discounts recorded as part of the application of push-down accounting. On this basis, Fitch estimates leverage would increase to 4.2x from 4.1x at Sept. 30, 2014.

Despite the incremental net debt issuance, Springleaf has made significant progress toward reducing its debt load. Over the last year the company prepaid $1.3 billion and terminated its secured term loan while also making progress toward reducing its 2017 unsecured debt maturity wall. As a result of this transaction, 2017 unsecured debt maturities are expected to be $2.2 billion, down from $3.3 billion at June 30, 2013. Fitch views these actions favorably as they have only a modest impact on leverage while improving the company's debt maturity profile.

RATING SENSITIVITIES - SENIOR UNSECURED

The expected rating of the senior unsecured medium term notes is equalized with Springleaf's long-term IDR, and therefore is sensitive to any changes in Springleaf's IDR.

Longer-term positive rating momentum for Springleaf's IDR could be driven by additional actions to improve the debt maturity profile, sustained improvements in profitability and operating performance, measured growth in core lending businesses, successfully executing on new business opportunities, and reducing concentrated ownership while maintaining leverage at levels in-line with similar nonprime consumer finance companies. However, potential upward momentum would remain limited to below investment-grade level, given Springleaf's monoline business model, core demographic, high reliance on the capital markets for funding. Furthermore, Fitch views the elevated regulatory, legislative and litigation risks that exist for Springleaf, as well as a lack of prudential regulation as key rating constraints.

Negative ratings momentum for Springleaf's IDR could develop from an inability to access the capital markets for funding at reasonable costs, substantial credit quality deterioration, potential new and more onerous rules and regulations, as well as potential shareholder-friendly actions given the high private equity ownership. These factors could also potentially result in notching the senior unsecured rating below the current IDR.

The Recovery Rating of 'RR4' assigned to Springleaf's senior unsecured debt reflects Fitch's expectation that recovery prospects for the notes are average, and could be approximately between 31%-50% in a stress scenario.

The Stable Outlook reflects Fitch's view that Springleaf's liquidity profile and leverage have improved and that operating performance will continue to gradually improve, absent a market stress. These positive factors are counterbalanced by elevated regulatory risk, Fitch's expectation that credit performance will continue to normalize, as well as the incremental risk associated with the company's expansion into direct auto lending. Furthermore, Fitch will assess any potential changes to Springleaf's business model and/or risk profile as the company deploys the cash proceeds generated from the sale of its mortgage assets.

Fitch expects to assign the following rating:

Springleaf Finance Corporation:

--Senior unsecured 'B/RR4'.

Fitch currently rates Springleaf as follows:

Springleaf Finance Corporation

--Long-term IDR 'B';

--Senior unsecured 'B/RR4'.

AGFC Capital Trust I:

--Preferred stock 'CCC/RR6'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Finance and Leasing Companies Criteria' (December 2012);

--'Recovery Ratings for Financial Institutions' (September 2013);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (December 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Recovery Ratings for Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis - Effective from 23 December 2013 ￢ﾀﾓ 25 November 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934435

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