DBRS Morningstar Places ECN Under Review Negative Following Announced Sale of Service Finance

DBRS, Inc. (DBRS Morningstar) has placed the ratings of ECN Capital Corp. (ECN or the Company), including the Company’s Long-Term Issuer Rating of BBB (low) and Preferred Shares Rating of Pfd-3, Under Review with Negative Implications. The ratings action follows the Company’s August 10, 2021 announcement that it has entered into a definitive agreement to sell its Service Finance Company, LLC (Service Finance) business to Truist Bank, the wholly owned bank subsidiary of Truist Financial Corporation. The sale is subject to standard licensing and regulatory approvals and the satisfaction of customary closing conditions. The transaction is expected to close in 4Q21.

KEY RATING CONSIDERATIONS
The Under Review with Negative Implications considers the impact of the sale of ECN’s Service Finance business on its credit fundamentals, including a reduction in earnings generation capacity and growth potential. Partially offsetting, is the continuing solid contributions to ECN’s bottom line from its Triad Financial Services, Inc. (Triad) and Kessler Financial Services LLC (Kessler) businesses, despite ongoing headwinds related to the Coronavirus Disease (COVID -19) pandemic.

Upon the close of the transaction, ECN’s franchise will reflect a more moderate scale of operations, including a narrower product offering. Moreover, growth will be impacted, given that Service Finance represents the majority of the Company’s originations. That said, Triad’s growth rate is strong and will continue to contribute to scaling the business going forward. Importantly, Triad and Kessler maintain solid market positions within their respective niches.

Although the sale of Service Finance will pressure ECN’s earnings generation, we expect earnings performance metrics to be solid. Additionally, we view Triad’s strong originations and expanding product offering as enhancing its top line contributions, benefiting future portfolio origination services and portfolio management services revenues. Finally, as its client base activity gains momentum as coronavirus pressures recede, we anticipate Kessler’s marketing services income to improve and positively impact ECN’s bottom line.

After the closing of the transaction, we anticipate the Company’s risk profile to remain sound and well managed.
Credit risk will remain limited, primarily to Triad’s moderately sized floorplan business, as well as Kessler’s support of customer marketing campaigns. Additionally, asset risk related to its legacy asset portfolio, should be moderate, especially after the significant valuation reserves taken over the last few years. Finally, we view the Company’s operational risk to remain a key risk for the Company, given that its consumer businesses have considerable compliance and regulatory oversight, and many of its Funding Partners are FDIC-insured institutions.

We expect that the Company’s funding position to remain acceptable, especially as Triad’s originations are funded on a flow basis with Funding Partners. Overall, Triad’s Funding Partners total 61 including 11 new bank and credit union partners added since the beginning of the year, demonstrating the desirability of the high quality assets originated by Triad. Overall, Triad is entirely funded for 2021and 2022. Additionally, ECN’s liquidity profile is expected to remain solid, including its recently renegotiated $700 million credit line by its bank group. Meanwhile, capital will contract with the sale of Service Finance, and the Company expects to continue paying dividends and buying back shares. We would expect ECN to maintain appropriate capital levels to match their risk profile.
The Under Review with Negative Implications status is generally resolved with a rating action within three months. DBRS Morningstar expects to conclude the review once the sale of Service Finance closes in 4Q21. During its review, DBRS Morningstar will assess the ultimate impact of the divesture on ECN’s franchise, the expected earnings generation of the Company, and capitalization.

RATING DRIVERS
Assuming no material changes upon the closing of the transaction, the ratings would be downgraded by one notch from the current ratings. If the transaction does not close as expected, its funding partners remain committed to the Service Finance business, and other credit fundamentals remain sound, ECN’s ratings would revert back to a Stable trend.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277