KBRA Downgrades ECN Capital Corporation’s Issuer Rating

18 Dec 2023   |   New York


KBRA downgrades the issuer rating of ECN Capital Corporation (TSX: ECN, or the “Company”) to BB+ from BBB-. The rating Outlook is Negative.

Key Credit Considerations

The rating downgrade is driven by the challenged profitability and elevated leverage level. The steep increase in interest rates over the past year and extended backlogs of manufactured homes in 2022 and 2023 year-to-date have negatively impacted ECN’s originations and led to compressed profitability in addition to the costs associated with corporate restructurings. While ECN is subject to the general exposure to the consumer finance sector, which is highly cyclical and sensitive to general economic trends, the deterioration of key credit metrics was more than expected. The rating also reflects the much smaller scale and more pronounced impact and volatility on financial metrics as a result of the significant reduction in the business scope and diversification following the sale of Service Finance Company and Kessler Group in the past two years.

The rating considers ECN’s renewed strategy of a simpler business model, the realignment of corporate functions within Triad, seasoned leadership with track record of significant acquisition and divestitures. The rating also reflects the expanded funding sources supporting Triad’s growth, adequate liquidity, and strong asset quality.

The Negative Outlook reflects the downsized operating scale of ECN and the continued challenging economic environment. In addition, a potential spin or sale of the RV/marine business will further reduce ECN’s scale and business diversification. While ECN continues to grow its Triad business, KBRA believes that ECN could be more subject to market volatility and downturns as the originations confined to a narrower set of consumer lending products.

Rating Sensitivities

A rating upgrade in the near-term is not expected. The Outlook could be revised to Stable if the Company’s profitability and leverage metrics significantly improve as Triad executes on its growth plans as a result of the Skyline partnership or improvement in its operating environment as well as reduction in corporate overheads. The rating could be further downgraded if the company’s earnings or free cash flow continue to be depressed, EBITDA margin meaningfully contracts, or leverage remains elevated for a sustained period. The rating could also be downgraded if liquidity deteriorates.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1002867

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