Unifin Financiera SAB de CV
BMV:UNIFINA
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Unifin Financiera SAB de CV
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Good morning, and welcome to UNIFIN's first quarter of 2020 Conference Call. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Mr. David Pernas, Head of Corporate Finance and Investor Relations at UNIFIN. Thank you, sir. You may begin.
Good morning, everyone, and thank you all for joining us today to discuss UNIFIN's first quarter 2020 results. First and foremost, on behalf of the entire UNIFIN family, we hope all of you and your relatives are safe and properly coping with these difficult times.
In today's conference call, UNIFIN's Head of Economic Analysis will provide a brief update and strategic outlook on the house view. And our CFO and CEO will discuss the company's first quarter earnings. Afterwards, we will enter in an open Q&A session to address your potential queries.
If you have not received a copy of the earnings release, please contact the Investor Relations team, and they will provide you one immediately. You will also find a copy on our website.
I would like to remind you that forward-looking statements may be made during this conference call. This does not necessarily consider changing economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based on several assumptions and factors that could change, causing actual results to materially differ from current expectations. Therefore, we ask you to refer to the disclaimer located in the earnings release prior to making any investment decision.
We are pleased to introduce Mr. Sergio Camacho, Chief Executive Officer; and Sergio Cancino, Chief Financial Officer; and Nayeli Robles, Head of Economic Analysis team.
At this time, I would like to turn over the call to Sergio.
Thank you, David, and good morning, everyone. A few quarters ago, we talked about all the improvements that we implemented at UNIFIN to provide better advice and service to our clients. Among all the initiatives that we implemented, we talked about the creation of an economic analysis team to provide a daily report of international and national economic and political events, so our business teams could provide, as previously mentioned, a better advise and service to all of our clients but also valuable information to our business intelligence team and also to our credit department for balancing our credit scorecards accordingly to the current economic environment.
In line with other strategic initiatives, we hired Nayeli to create this area. Nayeli spent close to 10 years at Mexico Central Bank in different areas. She holds a BS in economics from ITAM and an MBA degree from the MIT.
Her team encompass a group of economists with similar professional and academic backgrounds.
Now let me pass onto Nayeli.
Thank you, Sergio. Good morning, everyone, and thanks for joining us this morning. We truly wish that you and your loved ones remain healthy and safe. This difficult time shall pass.
During the first quarter of 2020, the rapid global spread of COVID-19 has dramatically shifted the global economic outlook. While a crisis is unavoidable, the intensity and length of the economic shock remains unknown.
Under the current scenario, the International Monetary Fund already foresees that global economic activity will contract by 3% this year, a deeper downturn than the one observed during the 2008 financial crisis.
In Mexico, the dynamics have been similar than abroad. The IMF estimates that as with other emerging economies, Mexican GDP will contract by 6.6% over the year. In addition to the negative effect of local containment measures, Mexico will be impacted by the U.S. recession and the decline in oil prices.
Even though fiscal and particularly monetary measures will help mitigate the contraction in economic activity, at UNIFIN, we are aware that we are facing a new reality. Therefore, our rapid and efficient response is key to adapt our business to this new environment.
As our CEO will mention later, at UNIFIN, we have outlined our priorities, and we are working towards them. Certainly, our main priority remains the well-being of our stakeholders. Their health and security are our main concern. Second, but not less crucial, at UNIFIN, we are aware that this crisis represents an enormous challenge for most of our clients. And we are committed to supporting them through this situation. Therefore, in addition to maintaining continued communication with our clients, at UNIFIN, we have a dedicated economic analysis team that provides daily information and tools that allows them to better navigate through this situation.
In addition, we have developed a specific economic analysis effort to identify those sectors and regions most affected by this pandemic as well as new business prospects. At UNIFIN, we believe that in every challenge lies an opportunity. Our economic analysis shows that the industries most affected will be those that experience both a demand and a production shock.
These industries are led by the energy sector and by some manufacturing activities, such as the automotive industry. Services will certainly take a setback. And for some of those industries, the impact will be persistent.
We believe that this will be the case for companies that provide durable and luxury goods, leisure and cultural events, restaurants and tourism. The latter suffers an oil price contraction where hotel chains and transportation services have been severely affected.
While this valuable information is fitting UNIFIN's internal areas, in order to redefine our recent scorecard and limit our originations in this sector, it has also made us sensitive to the difficult situation that our clients encounter. And we have reached out to them to find solutions together as partners.
Additionally, our analysis points out other sectors with a moderate impact, such as construction, some manufacturing activities of nonessential food and beverage, chemistry, mining and services related to corporate and mass media.
Last but not least, we have identified sectors with an immediate opportunity and those that will benefit from changes in global dynamics in the upcoming months.
These industries with strong benefits are mainly related to the sanitary emergency, such as companies that provide healthcare services, medicines and virus protection equipment and services.
Others have seen a significant upswing in demand, like agricultural, essential food and beverage, personal care, shipping, telecommunication and companies that rely on online sales.
Moreover, in the upcoming months at UNIFIN, we believe that global dynamics will shift dramatically, and we are preparing to raise and leverage from that shift.
SMEs that rely on digital sales and services will likely show sustained growth, while others will require a CapEx renovation to compete in these new markets. SMEs will also find a business niche with remote home care services, such as telemedicine and home schooling.
Finally, at UNIFIN, we foresee a competitive advantage for our country, as implementation of the USMCA moves forward. And while this new trade agreement has a well-known benefit, we believe that supply chain dynamics will evolve to be less dependent on certain countries or regions. And this diversification represents an enormous opportunity for Mexico's manufacturing sector, particularly under this new trade agreement.
In summary, economic analysis team is processing and updating data as available and providing valuable information for our clients and internal teams. At UNIFIN, we believe that difficult times will also provide opportunities. And we continue preparing to embrace and capture them.
I'll now pass the call over to our CEO, Mr. Sergio Camacho.
Thank you, Nayeli. As Nayeli mentioned, the COVID-19 crisis is having a wide-ranging impact on the global economy, affecting companies of all sizes. As we have said, at UNIFIN, we redefined our priorities from an early stage, and we are working towards them by taking every operational and financial measures needed.
First, and most important, the health, safety and well-being of our employees, clients and the broader community remains our top priority. We have implemented our corporate business continuity plan, BCP, which allow us to operate with as little disruption as possible and protect the health of our employees and clients with measures like implementing remote working weeks before distance measures were considered in our country.
So far, we have seen no material impact on our operations and our systems. It is also worth mentioning that nowadays, where physical restrictions are imposed and digital platforms are so crucial to subsist, UNIFIN took a step ahead by creating Uniclick. In Mexico and around the world, SMEs are facing challenging dynamics and our response to the situation will dictate the future positioning of UNIFIN. That is why we have dedicated enormous efforts to analyze the current and common risks faced by the company and building different scenarios to better assess the future. Even during this challenging scenario, UNIFIN ended the quarter with a 22% increase in interest income compared to the first quarter of last year and 34.8% increase in our total portfolio, ending at MXN 2.9 billion and MXN 63.3 billion, respectively.
To maintain a sustainable financial position going forward, we implemented a series of measures to protect against risk. First, through our economic analysis team and the credit committee, we redesigned our scorecards, highlighting sectors that are more likely to be affected by the COVID-19 emergency. We have also decided to cut our exposure in the factoring business and stop all new client on-boarding across the board.
As a result of these measures, over the quarter, our total originations decreased by 16% year-over-year. However, the momentum generated by originations throughout 2019 in addition to the first quarter of 2020 originations and the incorporation of our working capital facilities, increased the total loan portfolio by 34.8% by the quarter end.
I would like to mention that the company has a strong collateral enforceability with guarantees in each business line. In leasing, the collateral lies on the tangible property of the assets in addition to the residual value of each lease equipment. In factoring, the collateral is a supplier invoice with a good payment history.
In our loans, the collateral is a vehicle itself. Additionally, we have [indiscernible] the full process in all of our working capital facilities, and around 90% of our total loan portfolio has additional guarantees.
At UNIFIN, we believe this crisis represents an opportunity to enhance our customer service, and therefore, we have created a brand-new division that will solely focus on providing the best customer service. We have created a position that reports to me as Chief Customer Service Officer.
Moreover, during this crisis, our commercial force and prospecting center are focused on reaching the current clients and understanding their situation, particularly those more affected. Like our financial peers, we analyzed granting extension on our portfolio by delaying payments for 3 to 4 months. These measures are at the sole discretion of the company and are reviewed on a case-by-case basis.
As of April 28, out of approximately 8,000 clients, around 900 clients have requested support to delay or restructure payments.
This accounts for approximately 10% of the outstanding portfolio of the company. As previously explained by Nayeli, the sectors struggling the most are tourism, restaurants and entertainment services, which represents around 8.5% of our total portfolio.
In terms of liquidity, at UNIFIN, preserving cash flow is a top priority. And as such, our cost reduction program has already identified potential action, some of them have already been implemented to reduce operational expenses by around 10% to 15% when compared to 2019.
As of now, the company is working to expand its credit lines with development banks for an amount of up to MXN 10 billion, as well as an international bank for an amount of up to $300 million. This, in addition to our cash collections, revolving facilities and securitizations, will allow us to continue safely meeting our financial and operational expenditures.
In the short term, the company has around MXN 8.2 billion in debt coming due in the next 12 months, of which $4 billion corresponds to leasing securitizations in the amortizing period and most of the remaining MXN 4.2 billion have already been renegotiated to extend maturities. And in any case, these maturities are accounted in the company's cash flow as amortization.
Moving onto capital, maintaining solid capitalization ratios remains another priority for the company. Therefore, UNIFIN will cancel dividend payments this year and decrease operations in our stock buyback program. These actions were taken prior to the announcement by Mexico banking regulators recommending banks not to pay any dividends or buybacks on shares during the remaining of the year. In addition to these measures, we are currently analyzing options to enhance the capital structure by diverse needs as a commitment to our stakeholders.
Now let me move to the end of the quarter results. We managed to finish the first quarter with a growth in interest income of 22% versus the same period last year. Insurance cost increased 18% to MXN 1.8 billion, explained by an increase in financial liabilities related to our operational growth. During the quarter, with the weighted average funding costs remain at a 10.1% as a result of quantitative easing policies and strategic financing activities conducted over the last 12 months.
Interest costs have been falling on a sequential basis in the second half of 2019, due to lower cost associated to new funding agreements and Mexico easing cycle.
The financial margin for the quarter was increased by 29%, reaching MXN 1.1 billion compared to the first quarter of last year. This improvement comes from higher interest income from our different business lines and limiting our interest cost during the quarter. As a result, the financial margin as a percentage of sales improved by 210 bps to 38%, showing a recovery in profitability. However, the annualized NIM contracted by 70 basis points to 7.2% in the first quarter versus last year, is explained by the negative coverage showed in the fourth quarter of last year and a proactive deceleration of our business due to current market conditions.
The loan loss provision portfolio for the first quarter increased by 114% to MXN 127 million, consistent with our portfolio growth and current market conditions. As a result, the adjusted financial margin closed at MXN 998 million, a growth of 23% compared to the same quarter of last year.
Administrative expenses consisting of investments in marketing and promotion, administrative services, legal and professional fees and other administrative expenses increased 15%, reaching MXN 373 million compared to the first quarter of last year.
Our marketing campaign and [indiscernible] Mexico and the administrative expenses of Uniclick accounted for most of this expense and explained increase from the first quarter of 2019. However, OpEx as a percentage of sales improved by 80 basis points in the first quarter to 12.7% versus 13.5% recorded in the same period of last year.
Moving on. Operation income increased 30%, reaching MXN 570 million during the period compared to MXN 440 million in the first quarter of 2019. This is mainly as a result of the containment of our interest expense and profit from our sale of fixed assets. The financing results for the quarter, which consisted of bank commission and fees in addition to gain or losses related to our foreign currency, cash assets and liabilities, resulted in a loss of MXN 55 million. This is mainly due to a foreign exchange loss of MXN 135 million in our operating exposure as a result of the depreciation of the exchange rate by the quarter end.
The consolidated net income for the quarter fell by 13%, finishing at MXN 413 million for the quarter compared to MXN 473 million in the first quarter of 2019, mainly due to the growth in our provisions and a proactive slowdown in new originations.
Total originations, despite the crisis, increased total loan portfolio by almost 35% compared to the first quarter of last year, reaching MXN 63.3 billion. Despite the decrease in origination and ongoing financial struggle facing SMEs, the NPL ratio maintained stable at 4.3%.
Of the total loan portfolio, leasing continue to account for the majority at 47.5 -- MXN 47.1 billion, factoring at MXN 2.8 billion and auto & other loans at MXN 13.3 billion.
The loan loss reserves for the quarter increased to MXN 127 million from MXN 59 million in the first quarter, in line with our portfolio growth and the current economic environment. These provisions are created according to our loan loss reserve policy attached to the guidelines defined by IFRS. The methodology is based on an expected loss basis, the factors we use to determine expected loss provisions for the leasing portfolio, our historic payment behavior, current environment and reasonable provisions for the future payments.
The financial liabilities for the quarter were MXN 77.7 billion, an increase of 50.6% compared to the same period of last year, mainly attributable to FX depreciation, almost 30% as of the first quarter of 2020. However, all of our debt is hedged to a weighted average FX of MXN 19.3 per U.S. dollar, thus not fundamentally impacting the capital structure of the company.
The weighted average term of the liabilities was 46 months versus 30 months for the total portfolio.
Furthermore, the fixed rate debt for the quarter account for 82% of the total debt, while variable debt was 18%. Stockholders' equity for the quarter closed at MXN 12.3 billion, an increase of 31.6% compared to the first quarter of MXN 9.3 billion. This is due to higher retained earnings and other capital accounts, which refers to the difference between the fair value and the acquisition cost of the operating assets.
Moving onto the financial metrics. The return on assets stood at 2.1%, the return on equity was 15.5%. But excluding the perpetual bond, the ROE closed at 27%. Capitalization ratio for the period was 20%, while the financial leverage ratio was 5.2%, affected by the high volatility of the Mexican peso at the quarter end.
Considering that all of our financial debt is fully hedged at the foreign exchange rate, the financial leverage considering this hedge dropped to 4.4x, which is important to mention because given accounting criteria, our financial assets and liabilities denominated in U.S. dollars percent variation at rates and the FX move, hence, virtually offsetting our accounting capital position in our capitalization and leverage metrics.
As always, I would like to reiterate our commitment to Mexico and our stakeholders. We will continue focusing on generating long-term value and overcoming this crisis. We are confident that we will emerge as a stronger company.
Thank you for listening. And now I would like to begin our Q&A session.
[Operator Instructions] Our first question is coming from Nicolas Riva of Bank of America.
I have 2 questions. The first one on your credit line with the bank. So you mentioned in the earnings release that you have MXN 21.2 billion in bank loans, which are outstanding. How much do you have in available unused credit lines? And I guess this would be all uncommitted credit lines. But if you can specify how much you have in available credit line?
And also, more on a qualitative basis, if you have -- can you discuss if you have seen any willingness on the side of the bank to roll over the loans since the economy shut down at the end of March?
And then my second question on your FX hedge. If I look at your capital ratios, we clearly saw improvement, 80 basis points quarter-on-quarter. My question is, was this driven by the mark-to-market gain on the FX derivative? Because, of course, in the P&L, you booked a loss from translating the U.S. dollar debt into pesos because of what happened with the peso. But you also had an increase on the asset side in the balance sheet on the FX hedge. So what are driver for the increase in capitalization in the quarter?
So let me -- Nicolas, thank you, and thank you for joining us. So I'll start with the last question, if that's okay with you. In terms of the mark-to-market, no. There's an offset in -- of course we have never experienced almost 30% depreciation on the FX rate within a quarter, no? And that significantly modifies the valuation of our derivatives. And altogether, there's big moves in the asset side, in the derivatives, both in current and long-term derivatives that are hedging our debt liabilities.
The debt liabilities, of course, are also depreciated, nominally speaking, no? Even though we have already agreed upon a particular FX rate. And just to give you some additional context, the weighted average rate -- FX rate at which the hedges are done, it's basically MXN 19.3 per dollar.
So the significant depreciation impacted the liability side. It's also offset by a portion in the asset side and last but not least, in the capitalization structure of the business. Of course, the catch-up on the capital structure is not necessarily equivalent to the depreciation of both assets and liabilities, and that's why capitalizations tend to be disordered in this scenario.
If you exclude or if you calculate both capitalization and leverage metrics at the FX rate, which is MXN 19.3 per dollar, which I'm giving you, leverage has not increased substantially. And I think that's very important to highlight because in a way -- and we have -- and of course, we have discussed this with our auditors and even with independent firms. These accounting effects are not necessarily reflecting a deterioration on the capital position of the business. So I'm not sure -- I'll stop there, and I'm not sure if I addressed your question.
So the increase in -- the 80 bps quarter-on-quarter increase in the capital ratio, was that driven then by the mark-to-market on the FX hedge or by something else?
It's both. I mean, the mark-to-market has a composition of several variables. So the first and most important one is, of course, the FX, but it also has implicit rates and the rate differential between Mexican peso and the U.S. dollar for -- to give you an example.
So mark-to-markets are offset by those variables. So that's the most important -- I would say, that's the most important thing that drove capitalization, yes, in this specific moment. But if you look at it in the leverage -- as a leverage metric, if you take the depreciation of the peso on the financial liabilities, it looks worse. So that's why we made the adjustment, and we make the clarification that the company has defined an FX rate for its liabilities.
Okay. And then on my first question on the credit line?
Yes, on the -- it's Sergio Camacho. On the willingness on how the negotiations with the commercial banks have been going on, I mean, these are relationships that come from many, many, many years ago, with an excellent track record on our side to them. And somehow, we have been partnering with our top clients -- sorry, with our top banks to commit and to go through these difficult times. What I can tell you as of today is that all the revolving facilities that we have with the commercial banks have already been renegotiated. And we do not have any maturity -- significant maturity for the rest of the year.
And one more. Can you tell how much you have in unused credit lines also as well?
As of today? Yes, as of today, Nicolas, we have outstanding lines for MXN 2 billion -- available lines for MXN 2 billion. And we're in the process of -- as you know, and we have been doing this exercise in inbound calls to the company, but just out of giving -- or providing the full context to everyone in the market, we're negotiating different facilities with both development banks in an amount of up to MXN 10 billion.
These are not defined yet, but that's -- those are the negotiations at this point. We're also renegotiating some with our investment banks and commercial banks too. So we think that, overall, around MXN 10 billion to MXN 12 billion will be negotiated in the next -- within the next quarter at the most, and we hope that we can resolve favorably for this.
In addition to that, we have been approached by several entities from different names and different perspectives for analyzing transactions that could provide additional liquidity to the company. And lastly, one very important thing to mention is that -- and this is something that has always helped the company in stress analysis and such scenarios. We also have the available cash that the securitizations carry on a monthly basis because of the excess collections on a month. We can retrieve the excess funds from that by exchanging additional portfolio. So it basically becomes like a revolving facility, too. And that has helped the company through this cycle, and will continue to help the company through this cycle favorably.
Just let me add that to that, Nicolas, that regarding the development banks, the negotiation of these credit facilities is not -- I mean, it's nothing new. We started our talks with these 2 development banks, I will say, in the fourth quarter of last year. So it's not that we are accessing, we are signing or negotiating these lines because of the crisis. This was already in our pipeline, and it was already on their pipeline. So we have gone through different credit committees going through, and we expect to have something in the next 4 to 5 weeks. So it's very important to clarify that we're not touching the doors to this development banks because of the crisis. It was something that has been negotiated many, many months ago.
Perfect. And maybe one just last follow-up on clarification. So you said credit line, you have MXN 2 billion outstanding on available and then negotiating with the development banks for another up to MXN 10 billion. In the case of the development bank, you mentioned that you have been working on getting more funding actually since the end of last year. There was this announcement from Banxico from the Central Bank providing a window for the development banks to also access repo funding from the Central Bank. I would assume then probably you will be getting more funding from the development bank based on that measure. And maybe related to this, it seems that so far, there hasn't been programs to increase the size of the guarantees on SME loans from NAFIN. So it seems that the route seems to be to maybe try to give more funding to NAFIN -- to give you more funding to you guys and other financials rather than NAFIN maybe providing more guarantees on SME loan and is that kind of a fair assessment?
Yes. So I mean, the announcement made by Banxico at least at this point, does not change our negotiations with the development banks. These are individual. We were in a call with Banxico early this week because we wanted to find out whether that -- those announcements were applicable for UNIFIN and other nonbanking financial institutions and how can we collaborate to access basically those lines.
So of course, as a mandate, and by law, the central bank cannot give out any [indiscernible] for additional liquidity to nonbanking financial institutions. However, within the term sheets that the Central Bank is implementing for this liquidity facilities that have been announced, they're defining ways and basically triggers or if the word is correct, covenants to try to direct those fundings not only for the banks but also to try to focus those fundings all the way to the ultimate beneficiary, which is the SME.
And they're trying to use also nonbanking financial institutions for this purpose. This has not been published. They have expected that this will happen within the course of the next 15 days or by mid-May. And of course, we're very close and we're seeing how we can get in the way of that.
In addition to that, we have also have been in the conference calls held by the Inter-American Development Bank among other things. So we're in the lookout of all the funding that could be provided by these institutions. And I think that the name of UNIFIN today is very valuable and very well respected. So in those terms, they know that they can rely on an important name such as -- as a company.
Our next question is coming from Nik Dimitrov of Morgan Stanley.
I have a couple of questions. The first question is going to be -- you mentioned in your statement that you are kind of exploring different ways to enhance capital. Can you please provide more information in terms of like how you could potentially do that? That's going to be my first question.
Sure, Nik. Yes, when you see the current market conditions for the stock of the company, and you analyze that in line with -- I'm not talking about this year, but let me say more on a midterm growth perspective based on our initiatives, let me say, UNIFIN -- the traditional UNIFIN and our digital platform, Uniclick, that as we announced on February 10, we just made a strategic alliance with Google, the growth perspective of the company, it's really, really strong and -- but more important, very strongly fundamental. So in line with that, we have been approached by some firms to seek how they can partner with UNIFIN and basically take the advantage of that expected growth.
And that's what I can tell you right now. We have been carried out very formal discussions with some firms to participate or to put a capital injection in the company. That, of course, in line with the own means of our major shareholder, Mr. Rodrigo Lebois, who can also -- is willing to participate in a capital injection, if needed. That's what I can tell you for now.
But it seems like it's not in imminent, right? You said kind of in the midterm, right? So...
It's in the mid-term, what I can say it's going to be in this year.
Okay. Okay. Also in your earnings release, you basically mentioned that you did a sensitivity analysis of your book. Can you give us some information in terms of what this sensitivity analysis included, the outcome, your assumption, and obviously, the kind of the base case and the worst case?
Yes. We -- that sensitivity analysis have gone through different stages. One has to do with on analyzing our loan reserves vis-à-vis expected value of recovery of the assets, we will need to sell the recovered assets below 50% to start recording a loss. So that provides us with a very, I would say, a sufficient room in the terms of our reserves are fair and are okay.
The other analysis and the stress test that we have carried out has to do with significant percentage of collections for the rest of the year, ranging from 90% up to 50%. What I can tell you is that even though -- or let me put it as this, the worst-case scenario of collecting 50% of our cash flows, we still have the capabilities to continue paying our financial liabilities and the operating expense.
So we continue to do on, I would say, on a weekly basis, this type of analysis because, as you know, the situation across the board is changing significantly every week. So that's what I can tell you for now. But the point here is that everything that we have said in the past of the resiliency -- the resilience of our business model and how strong we are in terms of having a collaterals and so forth so on, now it's proving to be true under these very tough and difficult circumstances.
And just to add a little bit on what Sergio said, Nik, of course, this stress scenarios consider different variables. In the case, collections start to decrease substantially, and we start seeing a cash flow crunch on that perspective. Other measures by the company are being pointed out and taken in the business plan of the company, such as additional OpEx reductions, among other considerations. So of course, these are not entirely reliant on one factor, but the company has different ways to address these concerns. And fortunately, we're -- like I said, in a position that allows us to have those -- or that flexibility.
Right, right. Since we are talking about collections, it's already end of April, right? And the lockdown in Mexico was imposed at the end of March. So what is your experience in terms of collections for the month of April?
So far, the month of April has remained very similar to what we saw in the month of March. I would say that we had a very good collection number considering 2 things: the natural eastern season and the lockdown.
When you say similar, do you see any decline of, let's say, 10 to 15 -- I mean, intuitively, you would expect to see some decline, right?
Let me put it that way that we collect around 85% of our budget.
Okay. Okay. Got it. 85%. Okay. You did say that approximately 10% of your current borrowers opted out to restructure. Can you give us some idea in terms of how the restructuring plan works? Does it continue to accrue interest? When you restructure a leasing obligation, do you set aside a provision? And here I'm trying to kind of get an idea where cost of risk is going to go.
Yes...
And do you -- yes, sorry, and just to finish on that. How does it work in terms of do you approach the Board proactively or they reach out to you or you wait for delinquencies to pick up? And then you kind of reach out to these borrowers that are already delinquent? How does it work?
Yes. It works in all the ways that you can imagine. We started to proactively contact our clients. Based on all the information that we prepared within our business intelligence unit and our economic analysis department, we proactively start to reach clients who we knew that were going to be more affected by the situation. So all of our business guys started talking to our clients to see what -- how they were doing and what were their plans and possible or potential implications of this crisis. So we started developing different products to tackle the different demands that we have for them. The most used is deferring 3 rents -- 3 to 4 rents charging interest only to our clients, and that -- those rents either on the October, November, December or in the sectors, which are going to be or are going -- as we speak, more negatively affected, we are passing those rents to the end of the lease. We also carried out analysis case-by-case with our clients and our credit department to see -- depending on how strong or weak was their position, tackling the COVID-19 crisis, we asked for incremental guarantees to be fully, fully, fully covered in all the different points of view of the situation. So we feel very comfortable in the sense that our portfolio is very well secured. And as I said, this is going to be an ongoing analysis because, as I said, every week, the situation of some industries and on some others is changing dramatically.
So historically, it's been very easy for you to seize the collateral if there is a delinquency and either sell it or release it, right? But in terms of normal circumstances, we're in a very different environment right now, is it fair to assume that, that will be kind of your last option and you give priority to restructuring? And just to kind of throw in a number that I got from one of your competitors, I mean, from what I understand, they approached almost like 90% to 95% of the borrowers, offering them some kind of a restructuring package. Are we going to see something of a similar scale with UNIFIN, do you think?
Yes. Yes. I mean, yes, we're working, as I said, very close. And of course, we are going to prioritize to restructure a good client, no, rather than to collect the assets. We are aware of how difficult is the situation for many, many of our clients, and we are aware as well that if we collect the asset, we're going to kill those businesses because the premise on our origination leases are the assets that we lease, it's an operational asset. So therefore, we're not in that position. I think that our balance sheet and our cash flow holds to support them. And we had that in 2009. Of course, a different crisis, but that's the most recent example. And one of the strengths of the company realized -- this company was founded in 1993. So basically, Rodrigo and some members of the Board and some management here has already gone through the crisis of '94, '95, the crisis of 2001, 2009. So basically, I mean, I won't say that, that this crisis is different. We are well prepared in terms of managing and handling these types of crisis. Now I don't want to sound arrogant, but I want to sound that we are prepared for handling this.
Right. And just to kind of confirm that you do set aside a provision every time you restructure?
Yes. Yes, the NPLs and the provisions are measured and calculated, also including this type of -- let me put the word restructuring cases.
Cost of risk, right? And [indiscernible] has been fairly low. And if we look at Q1, cost of risk actually on a quarter-over-quarter basis declined by almost a percentage point from 1.89 to only 83 basis points, which is a little bit counterintuitive, knowing what's going on and the fact that actually, NPLs increased. NPLs increased from 4.1% at year-end to 4.34% as of Q1. Why did cost of risk decline or the provision expense decline in Q1?
No, because -- it's a natural thing to happen. Of course, this is an effect -- so all the provisioning methodologies and everything gets revised towards the end of the year. That is why in the fourth quarter of 2019, there was, let's say, a one-off effect that is almost consistent every single year towards the end of the year. It's not that the provisioning declined. It's just that we have adjusted the methodologies because the impairments tend to modify on the analysis on recovery of the value and -- sorry, recovery value of the asset and so on tends to have statistical data that confirms that allowance. So that's why there is some modification. It's not a decrease quarter-on-quarter. It's just a natural thing to happen towards the year-end. And then that's the -- that would be the answer.
Okay. Okay. Understood. And since you're on the subject, would you kind of give us some guidance on where you think the cost of risk is going to go in the coming quarters?
No, no...
Not today. But if something dramatic change, we will keep you posted.
Okay. Okay. And one last question. In your statement, you have a nice table that shows kind of the different delinquency buckets. I was wondering if you can give us the amount of loans that are 30 days plus delinquent as of the end of April.
I'm not sure, Nik, we have to review that information because we put out the information on a quarterly basis. But we'll get back to you. And if that's delivered to you, then we will definitely deliver it to the rest of the market.
Just -- and I apologize, Nik, but to be mindful of other people in the call, we have a lot of -- we have still a lot of questions. So do you mind if we jump in into another person? And then we can follow up on with you, any time you please.
And just sorry for the clarification. I think and again, to be mindful of everyone in the call, we will try to limit the number of questions to 3 at the most, so that we can have a more efficient call, and everyone can ask what it's needed. And again, if there's any additional follow-ups or questions required, we're more than happy to take those over the course of the next few days.
Our next question is coming from Natalia Corfield of JP Morgan.
So I'll try to be as short as possible. First of all, I just want to confirm something that I heard in the call. So you said that you were negotiating credit lines of MXN 10 billion. And then I'm not sure if I heard something about U.S. dollar-denominated credit line or something of $300 million. I think you mentioned that when you opened the call. Is that correct?
That's correct. That's correct, Natalia.
All right. So you have MXN 10 billion in bank lines and $300 million in international line?
Yes. It's all the negotiation at this point of time.
All right. Then, my second question is with regards to covenants. Can you like just refresh what are your main covenants? And I am also curious to know if you would have any waiver right now because of the COVID-19 situation?
Yes. No, thankfully, we -- at this point, there is no covenant bridge across any of our debt, so we feel comfortable in those terms. And if that were the case, I think we are in a position in which I mean things are completely out of the hands of our creditors and ourselves. So this is an unprecedented crisis. So we believe that there will be willingness to, if that were the case, to renegotiate or waiver some of those covenants on a case-by-case basis. We're far away from that. So at this point, there's no need for having conversations or talks with our creditors on that front.
On the other hand, the most important covenant or the one that is basically replicable across all of our debt is basically the capitalization ratio. As you know, the capitalization ratio is the one that allows us to incur an additional debt and the threshold -- or the limit is 13.5% equity to net loan portfolio. And so we're still at a comfortable level today. If it were the case, and of course, this is an ongoing analysis that we're carrying out for the additional -- for the incurrence of additional debt or to get additional financing, such as the ones that we have been discussing MXN 10 billion and the $300 million, some of it would be used for liability management purposes and some other would be used for cash flow working capital purposes. We have calculated the pro forma on the metrics, and there is no impact or implication that would not allow the company to access that financing tool.
Okay. Clear. And then just a last question. On the collection, you said for the month of April, you had around 85%. Do you have -- and I understand that your worst case is like 50%. So what is your base case in terms of collection?
You mean base case, right?
Yes.
Base case would be somewhat on the line of 80% and 75%, okay? And our analysis considers additional impacts, like we have been mentioning all the way to 50%. Of course, those come with additional measures and things happening by the company.
Our next question is coming from Joe Kogan of Scotiabank.
Thank you very much for the presentation and your willingness to provide a detailed update. I wanted to ask 2 questions, one about the credit lines. I know you've spoken a lot about it, but with bonds at distressed prices, I'm sure people are thinking about it. I'm wondering if you could provide any color on how banks are thinking about the new credit lines you mentioned. I mean, there's a lot of uncertainty right now about the business that has an existed recourse. So to what extent will banks say we need to wait a couple of months to see how things turn out? Or are they fairly comfortable with the industry breakdown that you provided and are comfortable going ahead?. And also related to the credit lines, you mentioned that you weren't asking for any kind of emergency additional lending, whereas I'd imagine some of the development banks are actually looking for kind of opportunities of how they can help with the pandemic. I'm wondering why you're not doing that.
My second question is kind of about government policies. So Mexico has been an outlier in Latin America with regards to how small its stimulus has been with its willingness to help businesses, especially large businesses where that's not happening. But do you get a sense of any more willingness from the government to help SMEs kind of going forward? Do you think there'll be any more programs announced or any other kinds of support?
Thank you, Joe. Okay. So in terms of how the government is addressing this environment, I think for the moment, we can rely on basically what was announced by the Central Bank and of course, by the deployment of the development banks. We haven't and I don't think, altogether, the development banks are basically approving emergency lines at this point. I think they're doing it business-as-usual, and they're partnering up with other financial institutions so that they can basically connect the financing all the way to SMEs, but not in the means of emergency credit lines for the intermediaries. It's more for the end user. And that allows us basically or the environment and the conversations that we have discussed with the development banks are basically in those tenors. And I think it's similar than what anyone else in the financial sector in Mexico could relate to. As to the commercial banks and our principal financials for working capital in Mexico, I think the conversations have been very positive. Like we said, we consider, and I think -- and we believe that they also consider this partnering relationship and not necessarily just a commercial one. In many cases, these relationships have existed for a very long time now. And so we're in very good terms to negotiate all of the maturities that we have for revolving facilities, and I think that's the most important thing. Of course, in terms of handouts of additional cash and approving facilities, the commercial banks are also in a way suffering from liquidity because of the withdrawals from many clients. So it puts them in a tough situation. But altogether, the relationships are very positive, and that's why we have been able to refinance all of the maturities, and we think that this is going to be ongoing.
So they are in a wait-and-see mode for approving additional facilities, but that's not the case to renew those facilities, at least it's not the case with us at this point. And we don't expect that to happen. And in terms of the development banks, we are -- because we have been working with them for such a long time in this sort of facilities, they know how our facilities are specifically molded for the support of the SME sector, which is the most important and is the one thing that this administration is currently addressing. So they see UNIFIN as a partner, and we believe that we can serve up to the expectations that the development banks will have for the company.
Our next question is coming from Adriana De Lozada of Scotiabank.
Just a quick clarification. You said that in line with the guidelines of the CNBV, you would not be giving out any dividends and that you would slow down your repurchase or reduce your repurchase program. The past 2 quarters, your repurchase program was pretty active. So I was just wondering if you can clarify what you mean by reducing or what we can expect in that sense.
Yes. We were very active last year on share repurchases. I but I mean the crisis that we are facing, and we said that we took the decision before the CNBV made that recommendation. We decided not to pay dividends this year and to significantly lower our share buyback program for the rest of the year. I cannot give you an exact amount on how it's going to be that reduction. But what I can tell you it's going to be very, very significant.
Okay. Because your first quarter was already still pretty high. But that's why I guess I wonder what do you mean by a reduction or significant half of...
Maybe MXN 0.01 of what we saw last year. I mean, the first month, we were very active. By starting March, we started lowering significantly that now because as we have explained through the call, the expectations and the perspectives of the whole economy changed dramatically.
Our next question is coming from Guillermo Diego of Santander.
Just for the detailed numbers, just on -- for example, on a short-term basis, you have already mentioned the level of collections, the cash requirements, which, coupled now with available lines, either considering development, commercial investment, foreign and what David was saying about the securitizations flow, doesn't seem to put you in any risk at the current conditions. But for example, on the long-term basis, if you take into account the bonds, they are trading MXN 0.50 on the dollar. If you take into account the equity book value, 0.6 of book value and considering your sensitivity analysis and the liquidation value of 55%, it seems that the market is giving you a 0 value for the portfolio. So in this context, if this ends in a liquidity, not a solvency shock for the companies in the portfolio, how do you expect after this passes the potential growth and profitability of the portfolio to be? You were mentioning in the beginning, some applications in tourism, in restaurants, et cetera. So after this liquidity shock passes, what would be the expectation?
Yes. And of course, we do not agree with the current valuations, neither on the stock or on the bonds. And basically, because we believe that our portfolio is much more collateralized that some other competitors -- on some other peers that you may find out there. The way that we're seeing things is that once that we start getting back to normality, and of course, there are going to be some sectors that are going to be more hurt than others. We are going to allocate all of our commercial efforts to tackle those sectors that we believe are going to perform better. One say that we are confident on the capital injection that I just mentioned through the call. And also, we believe that once that we get on a more normalized life, let me use that word, all of our efforts and all of our improvements that we have done internally and the creation of our digital platform, it's going to position UNIFIN on a very different stage and on a very different perspective. One say that, it's not that we're immune to the current situation. We are working very, very hard to try to minimize the negative effect on the COVID-19 situation and the whole oil sector and everything that it's like a perfect storm as we speak. But we are very positive on the strength that we have as a company. With the quality of our originations, we have a perfect track record on more than 17 market securitizations that we have carried out in the Mexican market. So I will also say that based on our track record, we are confident that we will continue posting good results.
Our next question is coming from Mark [ Berco ] of Alpha Capital.
I have just one question. Where are you in terms of originations at this moment? Obviously, you have changed priorities in terms of sectors that you are willing to give loans to. But in terms of numbers, where are you in terms of origination comparing to, for example, plans that you have for this -- for the month of April, for example, in the beginning of the year before the COVID crisis?
Yes. I mean, it's a significant contraction, but it also has the seasonality weeks that I mentioned on the eastern. Despite the lockdown on averaging, doing the originations and fulfilling all the legal requirements that we post in all of our leases has significantly slowed down, just considering that all the public registration needs on guarantees and on everything, the offices are closed. So we have a significant and very strong pipeline for the upcoming months. But of course, April was a significant slowdown compared to another month in the history -- in the recent history of the company.
So you could say close to 0?
Not 0, but a significant reduction.
Our next question is coming from Jason Mollin of Deutsche Bank.
This is Jason Mollin of Scotiabank. My question, I guess, based on the fact that you talked about this potential capital injection or analyzing new capital structures. And then referencing some of the data that was just mentioned, like where the stock is trading at multiple book and where the debt -- the yield on the debt trading now. I mean, how should we think about that process? I mean, it's impressive the strength of the UNIFIN franchise in the leasing business for SMEs and the growth in that business over prior years. So I do think it makes sense what you said that you could have interested parties looking to invest in the franchise and the company. But at this point, by talking about that, I think it may also be the signaling that there will be dilution, and there will be more -- well, it's hard to say how this will work, but how should investors think about this today? And you even gave a time frame, if I understood that correctly, before the end of the year, to talk about some kind of capital injection. Is that because of just -- I mean, is that a result of where the leverage is now? You're suggesting that the leverage is fine. But what's the dynamic? Are you worried about downgrades or the implication post-crisis of where the balance sheet could be or where the capital level will be?
And my second question is related to FX risk. I just want to make sure that I remember correctly that your debt -- your U.S. dollar debt is hedged into the pesos with the exception of the principal of the perpetual, is that correct?
Yes, that's correct. Let me answer first the second question. Yes, the -- all of our U.S. dollar-denominated debt is fully hedged on principal and interest. And the only principal that is not hedged is a perpetual bond because we cannot hedge by accounting rules.
On the other side, of course, we know that the current market valuation, the current trading of the stock, the dilution will be very, very, very costly. But at some extent and getting to these guys that have approached already to inject capital, we may open that for the rest of our current shareholders and put them the decision if they want to participate or not in this increased capital, therefore, not affecting their dilutions. Those are the discussions that we are taking internally and that are already been taking place with me, the Board, some board members and, of course, our Chairman of the Board, to see what is the best alternative to go with it. I cannot provide you with a specific date, and that's what I said for the rest of the year. But of course, we are taking this as we speak, on a very, very formal and professional analysis and way to tackle the capital injection of the company.
Our next question is coming from Gilberto Garcia of Barclays.
I hope you are well and safe. A couple of clarifications on my side. Were there any extraordinary gains in previous -- the previous quarter related to mark-to-market of assets benefiting the shareholder equity in this quarter? And secondly, if you
[Audio Gap]
Funding from development banks, would you be looking to step up your origination levels even if it was just funding and not also guarantees?
Apologies, Gilberto. The line cut off a little bit. So we weren't able to hear properly both of the questions. Can you repeat them, please?
Of course. Can you hear me now?
I can, yes, yes.
Okay. So the first question is, if there were any extraordinary gains related to mark-to-market of assets that benefited the shareholders equity line this quarter as in previous quarters? And the second question was, if you were to receive additional funding from development banks, but not additional guarantees, would you still be willing to step up your origination levels?
Yes. Okay. As to the first one, in terms of mark-to-market, yes, there was a revaluation, positive revaluation of the mark-to-market that goes to OCI. It used to be in the fourth quarter around MXN 1.5 billion. These are rough numbers, MXN 1.5 billion negative. And we basically made up for that amount across the quarter on the equity -- on the OCI, so, yes.
On the other question related to development banks and actually, it's good that you mentioned it. We are discussing the facilities for financing purposes. But parallelly speaking, and this is a conversation that we have with Banco de Mexico, like we said early this week, they're also looking to issue guarantee programs for the -- basically to make the portfolio secured. And we are also considering those alternatives. But if we don't have any access to additional guarantees from development banks or external or global players, I don't think we're in a position to assume that we're going to be a little bit more relaxed in terms of originations on the contrary. And like we've been mentioning we are trying to basically analyze case-by-case and review every single transaction that we closed with clients, specifically, if those are not previous clients of the company or new clients. So we're not by any means trying to jeopardize the financial health of the business. And in those cases, we're being very, very conservative towards new origination. And that shouldn't change even if we have access to guarantee programs by the development banks. One other very important thing that I would highlight at this point is that in the negotiations that we have with development banks, there's no need for us to approve on discretionary clients that they decide to. It's to the company's complete discretion how we develop the financing.
Our next question is coming from Adrian Garcia of Invesco.
A very quick question on my side. You have mentioned that you have been negotiating these credit lines of MXN 10 billion and $300 million. And I'm curious as to what would be the usual process of that. I think during the call, you made a quick remark about liability management. But I'm curious if you have a more detailed plan as to what would be the usual projects of these new proceeds. And as people have been alluding to the depressed prices in the secondary market, would you be considering buying bonds?
Yes, I mean there is not much information we can disclose at this point. But liability management is within the company's analysis. Not targeting any specific tranche of debt, we are analyzing across the board. And mostly, what we will try to prioritize is the short-term liquidity of the business. So I think that's mostly the focus. On a secondary level, liability management is an option too.
Our next question is coming from [ Luciano Costa ] of Goldman Sachs.
Just curious about leasing portfolio concentration. I know you guys are really disciplined with diversification. So I just wanted to know if possible, could you remind us, let's say, like your top 5 counterparties in the leasing portfolio? Like what percentage of the whole portfolio today make up?
Yes. So I mean top 20 exposures represent or account more -- top 25 exposures represent roughly around 20% of the outstanding book. The weighted -- or the average ticket per client in leasing, for instance, is around MXN 8 million. So it's a vast diversification. And yes -- I mean, across sectors, we're focused on 5 main sectors; services, industry and manufacturing, commerce and transportation, which would be the most dominant in the portfolio. But of course, within those -- there's many different subsectors that are completely differentiated from one another.
Next question is coming from Tanja Kusterer of First Main -- MainFirst.
Our next question is coming from [ Jorge Morro ] of Fundamental.
Yes. My question is regarding the leasing portfolio. If you look at the balance at the end of the fourth quarter was MXN 43 billion, and the end of the first quarter was MXN 47.2 billion. So it's an increase of MXN 4 billion of the leasing portfolio -- the gross leasing portfolio. Yet your originations in the quarter were MXN 3.7 billion. I'm trying to understand what am I losing here? Because I mean, historically, the portfolio should be a bit lower, as on top of your originations, you have the maturity on the quarter. So did you have any maturity in the quarter that was postponed?
Yes. So this was a very particular effect across the quarter, and you're right to point it out. Basically what happened is that we also have receivables denominated in foreign exchange, specifically in U.S. dollars. So there's almost like a mark-to-market to those receivables in leasing portfolio. And that's why the outstanding balance tends to increase. You only see this because typically, this is not a predominant amount of portfolio, but because of the significant depreciation, this made an increase in the leasing book.
Perfect. How much of your leasing book is in the denominated dollars?
I'll follow up, but I think somewhere along the line of $200 million or something like that.
Perfect. And if I may, can you give us an update on the rig platform. Has it started operations? What the latest news on that line?
Yes. The last information or the last report that I received regarding the operation on the platform is that it's going to start operations in 15 days.
Our next question is coming -- I'm sorry. [Operator Instructions] Our next question is coming from [indiscernible] of Clarion.
Hello.
Yes, we can hear you.
Yes. So my primary concern was regarding the NPLs. Does management have any guidance for the same? Like there has to be some expectation of increase in NPLs in this quarter and you have witnessed April. So can you give us any guidance for at least next quarter, how much increase you are expecting in the NPLs?
No, we are not providing guidance on that because, as I said, we are in a very unprecedented times in which it's really difficult to forecast what is going to be the outcome for the next couple of quarters. What I can tell you is as we have gone through the whole conference call, the different actions that we are putting in place to better attack and tap the situation on -- being very close to the customers, to the clients to anticipate, in some cases, with some of them because we have somehow forecasted some businesses in Mexico and so forth so on. So it's really difficult to provide you with a number with a guidance on that. Once again, what I can tell you is that we are doing everything on our own to mitigate and to lower the risk under these circumstances.
At this time, I'd like to turn the floor back over to Mr. Pernas for closing comments.
Thank you all for joining us today and for your interest in the company. We hope we answered all your questions. And if there's any follow-up, please feel free to contact the Investor Relations team with any other questions you may have. Have a good day, and we look forward to speaking with you again. Bye-bye.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.