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)

Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Status

Endorsement Policy

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