FE Investments Ltd. 'B' Rating Placed On CreditWatch Negative

  • Contrary to our previous expectations, the FEI consolidated group has been unable to raise its risk-adjusted capital ratio above 15%. We believe that the group also faces challenges in lifting its capital levels.
  • We are placing our 'B' long-term rating on FEI on CreditWatch with negative implications.
  • We see a one-in-two chance that we will lower our long-term rating on the finance company to 'B-' in the next three months.
MELBOURNE (S&P Global Ratings) Feb. 5, 2019--On Feb. 5, 2019, S&P Global 
Ratings placed its 'B' long-term issuer credit rating on FE Investments Ltd. 
(FEI) on CreditWatch with negative implications.

The CreditWatch placement reflects a one-in-two chance that we will lower our 
long-term rating on FEI to 'B-' in the next three months. Contrary to our 
previous expectations, the FEI group has been unable to raise its 
risk-adjusted capital (RAC) ratio (based on S&P Global Ratings' bank capital 
methodology) above 15%. 

We note that the FEI group has successfully raised its RAC ratio since March 
2018 by reducing its property development loan and adding capital. However, 
the positive impact of these measures on the consolidated group's RAC ratio 
has been offset by strong loan growth and material deductions in capital due 
to goodwill and other intangible assets. Furthermore, we believe that recent 
developments on the restatement of financial accounts (to disclose 
related-party exposures, with no restatements in profit and loss statement and 
balance sheet) and retrospective breaches of financial covenants in the 
finance company's debenture program could pose risks for FEI's ability to 
raise capital as well as roll over debentures.

We are likely to lower our long-term rating on FEI to 'B-' within the next 
three months if we form the view that the FEI group is unlikely to be able to 
raise its RAC ratio sustainably above 15% under our RAC methodology. 

We would likely affirm our ratings on FEI if we gained confidence that the FEI 
group is likely to reach a RAC ratio of greater than 15% within a very short 
period and then maintain it at that level on a sustainable basis, and there 
are no other significant adverse developments.