(Bloomberg) -- While Wall Street stock analysts insist that Equifax Inc. will rebound from its troubles, banks that lend to the beleaguered credit-rating firm are taking a harder line.
In the weeks after the company disclosed a massive consumer data breach, some lenders have downgraded their internal assessment of Equifax to a level reserved for junk-rated borrowers. That's based on private default estimates that six banks shared with Credit Benchmark, a firm that compiles this data from lenders anonymously.
Among analysts included in Bloomberg's estimates, there's not a single "sell" recommendation and fewer than half a dozen "holds." But the change in the credit assessment could spur the banks to review their business with Equifax, such as reducing the amount of loans they can make to the company. It could also push up borrowing costs, cutting into Equifax's profit.
"As soon as you go from investment-grade to high-yield, all sorts of things get overhauled," David Carruthers, the head of research at Credit Benchmark, said in an interview. "It has a knock-on effect and impacts the volume of the loans they make and the price at which they do it." It's unusual to see such a large move in internal risk estimates across multiple banks in such a short time, Carruthers said.
Ines Gutzmer, a company spokeswoman, didn't provide a comment. There's been no suggestion of an imminent financial squeeze, and none of the largest U.S. banks have said they're planning to cut back on dealing with Equifax.
A plunging stock, mounting regulatory investigations and public outcry have hounded Equifax after a security lapse at the Atlanta-based company led to the theft of data on more than 145 million people. The stock analysts have remained steadfast that the company should be able to get through the fiasco without much harm.
But the internal bank data culled by London-based Credit Benchmark shows signs of concern among lenders with some exposure to Equifax. Credit Benchmark collects the lending-risk assessments of the biggest banks on their exposures to counter-parties, ranging from institutional borrowers to rival firms. It then pools the data to ascribe consensus ratings similar to the scale employed by Moody's Investors Service and S&P Global Ratings.
Speculative Grade
Since the hack was revealed, Credit Benchmark's data indicate Equifax has lost its status as an investment-grade company with little default risk. The consensus rating on the Credit Benchmark scale was at BBB+ in the two prior months -- in line with opinions from S&P and Moody's -- but has now dropped three levels into speculative-grade territory at BB+.
The sudden change in Equifax's creditworthiness hasn't affected how banks assess their relationship with its two main rivals, TransUnion and Experian. Their lending-risk assessments are in line with their public credit ratings, without much change in recent months.
Equifax has about $2 billion in borrowings in addition to a $900 million revolving credit facility with banks, according to data compiled by Bloomberg. Interest costs the company almost $100 million a year. S&P affirmed its BBB+ rating in September, but the ratings firm said a downgrade could happen because of mounting costs, loss of market share and revenue declines tied to the breach.
Moody's, with a similar outlook, has said the breach will hurt the firm's reputation as a "custodian of consumer data" for more than 200 million people in the U.S., but doesn't expect a bigger dent.
Two-Way Street
The banks also have another close, two-way relationship with Equifax. The company is one of the biggest providers of consumer credit reports used by lenders to decide who gets loans, credit cards and even jobs, pulling in $3.1 billion in total revenue last year. The banks in turn provide information on consumer debts and payments to Equifax, while promising their own depositors and borrowers that the information will be safeguarded.
Equifax previously warned in routine regulatory filings that losing access to such data could hurt its revenue and profit. But Citigroup Inc. Chief Executive Officer Mike Corbat confirmed on an October earnings call that the bank still uses Equifax's services and that dealing with data breaches has become routine to both him and many of his peers.
On another call that same day, JPMorgan Chase & Co.'s Chief Financial Officer Marianne Lake said the hack wouldn't drastically change how the bank deals with consumer credit requests. JPMorgan's Andrew Steinerman rates the stock a buy with a $135 price target.
No Exodus
Past hacks at credit-reporting firms haven't resulted in an exodus of customers and any “slowdown in revenues is likely to be short-lived,” according to an Oct. 5 note from Morgan Stanley's Toni Kaplan, who has a hold-rating on the stock. Larger-than-expected legal fines and regulatory changes are among the biggest risks, Kaplan wrote.
In the weeks since the hack was disclosed, Equifax's stock has erased about a quarter of its worth, losing about $4 billion in market value. The CEO, Richard Smith, stepped down last month along with two other senior executives and the firm is being tested by simultaneous probes in the U.S. and U.K.
All the analysts at major banks tracked by Bloomberg still say clients should buy or hold the stock, though they did trim their average price target to $124 a share from $154 before the hack was disclosed. The shares traded for less than $110 on Monday.
Debtholders have shown less concern. Equifax's $500 million senior unsecured bonds maturing in 2021 -- ranked among the most junior debt -- trade around 98 cents on the dollar, reflecting investor confidence that they'll be paid back as promised.
--With assistance from Saijel Kishan
To contact the reporters on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net, Anders Melin in New York at amelin3@bloomberg.net.
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Rick Green, Dan Wilchins
©2017 Bloomberg L.P.
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