May 8, 2020
Fitch Revises Outlook on Mogo to Negative; Affirms at ‘B-‘
Fitch Ratings-Frankfurt am Main-07 May 2020:
Fitch Ratings has revised the Outlook on Mogo Finance S.A.’s Outlook Long-Term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B-‘. A full list of rating actions is at the end of this rating action commentary.
The revision of the Outlook to Negative reflects that in Fitch’s view, the risks to Mogo’s credit profile are skewed to the downside, due to the adverse economic effect of the coronavirus pandemic. The affirmation reflects that while rating headroom has been strengthened by recent shareholders’ loans and management actions, risks are still to the downside over the rating horizon.
Key Rating Drivers
Unless noted below, the key rating drivers for Mogo’s IDR and senior debt are those outlined in our Rating Action Commentary published in July 2019 (see “Fitch Rates Mogo Finance ‘B-‘; Outlook Stable” on www.fitchratings.com for further details).
Mogo’s IDRs are driven by its Standalone Credit Profile as a specialised auto finance and leasing company operating across eastern Europe and central Asia. The ratings take into account Mogo’s nominal franchise in a competitive niche, increasing exposure to volatile markets, elevated risk appetite and high leverage. They also reflect sound profitability, a track record of placing public bonds and adequate experience of the management team.
We assess Mogo’s risk appetite as high due to a higher-risk client base, fast capital-depleting growth and large unhedged open FX position. Mogo’s target clients are below-prime individuals who cannot afford newer cars, but they reflect the overall median earner in Mogo’s countries of operations.
Mogo’s asset quality reflects its high risk appetite (impaired loans ratio of 17% at end-1Q20, excluding legacy exposures in Poland). We expect some deterioration from current levels. Residual value risk tends to be contained due to lower car prices as cars financed are on average 13 years old. However, monetisation of repossessed collateral can be slow.
Ongoing quarantine measures, such as the closure of car registries, should slow Mogo’s historically high portfolio growth, which has diluted impaired loans in the past. We expect loan issuance to resume after the summer, as lockdowns end across Mogo’s countries of operations. We project a modest portfolio contraction by yearend compared with end-2019, but the average gross loan portfolio over the whole year should be slightly higher than it was in 2019. The higher average portfolio and cost-cutting measures should support profit generation over the year.
In Fitch’s view, Mogo’s leverage (gross debt to tangible equity and shareholders’ loans of 9.3x at end-1Q20) remains elevated and is sensitive to the material exposure to FX and credit risks. Subordinated shareholders’ loans (EUR 11.9 million at end-1Q20) doubled capitalisation in 4Q19 and 1Q20, but tangible equity remains small (EUR 11.8 million at end-1Q20).
Mogo has limited funding maturities in the next 12 months, thanks to long-dated bonds raised in Riga and Frankfurt. Fitch views positively that Mogo has reduced its funding from the Mintos online platform (a quasi-retail fintech peer-to-peer lending platform), which is untested at times of stress, in our opinion. Funding flexibility is sensitive to pressure on capitalisation given the modest headroom over the covenants on Mogo’s bonds.
In Fitch’s view, Mogo’s corporate governance framework is developing, following the bonds’ listing in 2018, and is in line with privately-held peers. However, limited independent board oversight, a multi-layered holding structure, concentrated ownership, past loans to shareholders and depth of financial disclosures constrain Mogo’s rating. These features are reflected in Fitch ESG scores.
The rating of Mogo’s senior secured debt is equalised with the company’s Long-Term IDR to reflect its effective structural subordination to outstanding debt at operating entities, which despite their secured nature leads to only average recoveries as reflected in the ‘RR4’ Recovery Rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given the Negative Outlook, an upgrade is unlikely. However, over the longer term Fitch would view positively a sustained reduction in leverage to below 6x, the achievement of greater scale and operational break-even in individual countries of operations, a reduction in currency risks and a further expansion of funding options as positive.
Changes to Mogo’s Long-Term IDR would be mirrored on the company’s senior secured bond rating.
Higher recovery assumptions, for instance as a result of operating entity debt falling in importance compared with the rated debt instruments, could lead to above-average recoveries and Fitch to notch up the rated debt from Mogo’s Long-Term IDR.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Negative Outlook reflects heightened sensitivity in the current environment to outsized credit costs and episodic FX losses negatively impacting solvency which in turn could constrain funding flexibility. Pressure on ratings would stem mainly from capitalisation and leverage, a key weakness for Mogo. Fitch could downgrade the rating if growth is not supported by higher capitalisation either via sufficient internal capital generation or the injection of new equity, leading to leverage increasing from its already high levels (9x at end-1Q20).
A marked deterioration in Mogo’s asset quality, ultimately threatening the company’s solvency, could also lead to a downgrade.
Changes to Mogo’s Long-Term IDR would be mirrored on the company’s senior secured bond rating.
Lower recovery assumptions, for instance due to operating entity debt increasing in relative importance or worse-than-expected asset quality trends (which could lead to higher asset haircuts), could lead to below-average recoveries and Fitch to notch down the rated debt from Mogo’s Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance for Mogo is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
Mogo is scored 5 for Governance Structure. This reflects exposure to board independence and effectiveness; ownership concentration; protection of creditor/stakeholder rights; legal /compliance risks; business continuity; key person risk; related party transactions which, on an individual basis, has a significant impact on the rating
Mogo is scored 4 for Group Structure. This reflects exposure to organisational structure; its appropriateness relative to business model; intra-group dynamics which, in combination with other factors, impacts the rating.
Mogo is scored 4 for Financial Transparency. This reflects exposure to quality and timing of financial reporting which, in combination with other factors, impacts the rating.
Mogo Finance S.A.; Long Term Issuer Default Rating; Affirmed; B-; RO:Neg
; Short Term Issuer Default Rating; Affirmed; B
—-senior secured; Long Term Rating; Affirmed; B-
Contacts:
Primary Rating Analyst
Behruz Ismailov,
Director
+49 69 768076 116
Fitch Deutschland GmbH
Neue Mainzer Strasse 46 – 50
Frankfurt am Main D-60311
Secondary Rating Analyst
Luca Vanzini,
Senior Analyst
+49 69 768076 143
Committee Chairperson
Mark Young,
Managing Director
+44 20 3530 1318
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity)
Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 2020)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH’S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the “NRSRO”). While certain of the NRSRO’s credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the “non-NRSROs”) and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.
ENDORSEMENT POLICY – Fitch’s approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosures page. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.