Fitch Ratings has assigned Arval Service Lease SA a Long-Term Issuer Default Rating (IDR) of ‘A’, Short-Term IDR of ‘F1’ and Support Rating of ‘1’. The Outlook on the Long-Term IDR is Negative.
Fitch also assigned Arval’s upcoming senior unsecured notes to be issued under its EMTN programme an ‘A(EXP)’ long-term rating, in line with its Long-Term IDR, reflecting our expectations of average recoveries for the notes. The assignment of a final rating is contingent on the receipt of final documents conforming to the information already received.
Arval is domiciled in France and is 100% owned by BNP Paribas Fortis SA/NV (A+/Negative/F1), itself a wholly-owned subsidiary of BNP Paribas S.A. (BNPP; A+/Negative/F1). Arval is a full-service leasing company with a principal focus on car leasing for corporates and SMEs, and to a lesser extent for individuals.
KEY RATING DRIVERS
IDRS AND SUPPORT RATING
Arval’s Long- and Short-Term IDRs are based on institutional support from BNPP. The Negative Outlook on Arval’s Long-Term IDR mirrors that on BNPP’s. The Negative Outlook on BNPP’s Long-Term IDR reflects downside risks to our baseline economic scenario, as pressure on BNPP’s ratings would substantially increase if the downturn resulting from the coronavirus crisis is deeper or more prolonged than we currently expect.
Arval’s Long-Term IDR is rated one notch below that of Arval’s ultimate parent, BNPP and is driven by Fitch’s assessment of institutional support from BNPP being available for Arval given its strategic importance. While many of Arval’s standalone credit factors such as franchise, business model and risk appetite are comparable with its industry peers, Fitch’s view of Arval’s standalone creditworthiness is constrained by the company’s high leverage (in the context of BNPP’s centralised capital management). As a result, Fitch’s assessment of Arval’s standalone credit profile is materially lower than its support-driven ratings.
Arval’s Long-Term IDR is notched once from BNPP’s, primarily driven by Fitch’s assessment of the subsidiary’s role in the group. Fitch sees Arval as strategically important to BNPP, given its recurring and relevant contribution to group revenue and pre-tax profit. However, the notching also recognises that Arval’s offering is complementary to core banking and other financial services offered by BNPP, such as retail banking, consumer finance or corporate and institutional banking (CIB). It also factors in Arval’s leading and autonomous franchise as a full-service fleet lessor. Arval has fairly strong synergies with BNPP, as highlighted by the significant share of revenue generated with clients from other group entities, including CIB and retail banking operations in France, Belgium or Italy.
Fitch views the integration between Arval and BNPP as strong, as Arval is almost exclusively reliant on intragroup funding and its capitalisation profile is fully embedded into BNPP’s capital planning and management. The fact that Arval shares some of the group’s functions notably for legal, compliance and IT systems also underscores its integration within BNPP. Together these factors imply a high likelihood of support by BNPP, as a default on any of Arval’s external debt would most likely imply significant reputational damage for BNPP. In view of this, extraordinary capital or liquidity support, if ever required, would be highly likely, in Fitch’s opinion, as reflected in Arval’s Support Rating of ‘1’.
Arval’s standalone profile is constrained by the company’s high leverage with a capitalisation and leverage score under Fitch’s finance and leasing company criteria in the ‘b and below’ rating category. However, Fitch also notes that Arval’s current capitalisation reflects BNPP’s centralised capital management and close integration into BNPP in terms of capital management and funding. While Arval’s capital market access is unproven to date, the contemplated notes issuance should support improved funding flexibility.
Positively, Fitch notes that beyond capitalisation & leverage and, to a lesser extent, funding, liquidity & coverage, all other qualitative and quantitative standalone assessment factors compare well with investment-grade rated European and US fleet lessor peers.
Arval’s ‘F1’ Short-Term IDR is equalised with BNPP’s and corresponds to the lower of the two options mapping to a ‘A’ Long-Term IDR. BNPP’s Short-Term IDR is driven by our assessment of the group’s funding and liquidity profile at ‘a+’, which is consistent with an ‘F1’ Short-Term IDR.
SENIOR UNSECURED NOTES
We rate Arval’s upcoming senior unsecured notes at ‘A(EXP)’, in line with its Long-Term IDR, reflecting our expectations of average recoveries for the notes. The expected issue rating is two notches below BNPP’s senior preferred debt ratings, which benefit from an uplift above the bank’s IDRs. There is no assurance that Arval’s external senior unsecured creditors would benefit from the protection offered by the buffers of subordinated and senior non-preferred debt available at BNPP in case of resolution or failure of the group. In addition, according to Arval and BNPP, there is no intention to issue senior non-preferred debt instruments within Arval’s capital structure, which would otherwise increase the level of protection available to protect its external senior unsecured creditors in case of failure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Arval’s IDRs and senior debt ratings will move in tandem with BNPP’s and could be downgraded if BNPP’s IDRs are downgraded.
Arval’s IDRs, Support Rating and debt ratings are also sensitive to changes in the subsidiary’s integration within and importance to the BNPP group and could be downgraded if these diminish. Examples of this could be one or more of the following; a partial sale of Arval to third party investors, a more independent management structure and strategic direction, although Fitch does not currently expect this.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch could upgrade Arval’s Long-Term IDR and senior unsecured debt ratings and equalise them with BNPP’s Long-Term IDR if its strategic importance for the group increased to the point where we would view Arval’s product offering as core among BNPP’s very diverse business lines. Fitch believes this could happen for instance if Arval becomes a material contributor to group revenue and profits and generates very high synergies with BNPP’s core banking businesses, while BNPP would retain full control over Arval.
Arval’s ratings could be upgraded if BNPP’s IDRs are upgraded, which is unlikely in the short term, given the Negative Outlook on the Long-Term IDR of the ultimate parent.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Arval’s ratings are driven by institutional support available from BNP Paribas S.A.