Fitch Ratings - Frankfurt am Main - 07 Jul 2022: Fitch Ratings has affirmed Eleving Group's Long-Term Issuer Default Rating (IDR) and senior secured debt rating at 'B-'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is below. Eleving is the privately-owned Luxembourg-domiciled holding company of a Latvian-headquartered group primarily providing car finance in a number of eastern European, central Asian and African markets (mainly under its "Mogo" brand). At end-1Q22, it had total assets of EUR342 million. KEY RATING DRIVERS IDRs Eleving's IDRs are driven by its nominal franchise in a competitive niche, exposure to potentially volatile markets, large risk appetite, a largely secured funding profile and historically high leverage. The ratings also consider Eleving's strong profitability, experienced management team and improving leverage ratio. The Stable Outlook reflects that, in Fitch's view, Eleving's narrow franchise, high risk appetite, frequent changes in strategy and downside risk from the Russia-Ukraine war for some of its key markets (including second-order impact) offset recent improvements in some of Eleving's financial metrics, notably leverage and funding. Eleving's leverage ratio (defined as gross debt/tangible equity inclusive of subordinated debt to which Fitch has assigned equity credit) stood at 6.8x at end-1Q22 versus around 13x at end-2020. The company also placed two bonds in 4Q21 (EUR150 million senior secured bond in October 2021 and EUR25 million subordinated bond in December 2021) and made some progress in addressing its weak asset quality. Eleving's high risk appetite reflects, in Fitch's view, its targeted higher-risk client base, historically rapid growth and a considerable open foreign-currency (FX) position. Eleving targets below-prime clients in emerging markets who cannot afford newer cars, but which reflect the overall median earner in Eleving's countries of operations. Eleving's asset quality is reflective of its target market (impaired loans ratio of 19% at end-1Q22) and is normally mitigated by strong loan yields (interest income/average gross portfolio was 65% in 2021). Asset quality has been improving since impaired loans peaked at 24% at end-5M20 and Fitch expects that the generation of new impaired loans will remain at about 10% in 2022 of its total loans outside Ukraine (2% of net loans at end-1Q22, about EUR3.5 million at end-May 2022). The portfolio in Belarus is being run down, but remains performing in line with its loans in other countries. Eleving has reduced its FX risk appetite following sizeable credit and FX losses in 2020. However, its open FX position remains large (3.5x tangible equity plus shareholders' loans at end-2021) and Eleving's entry in unsecured high-cost consumer loans (about 20% of the net portfolio) indicates a still higher-than-average risk appetite. Eleving has historically maintained high leverage ratios and, although this has recently been managed down, Fitch still views the current leverage level as high, especially in relation to Eleving's exposure to credit and FX risks. The quality of capital continues to be a weakness, but has improved owing to gradual profit retention and the issuance of long-dated subordinated bonds. Receivables from related parties have also significantly decreased (EUR3.6 million or around 10% of capital at end-1Q22). Subordinated bonds qualify for equity credit under Fitch's criteria (see "Eleving's Ratings Unaffected by Junior Debt Refinancing", published on 29 December 2021 and available at www.fitchratings.com). Funding flexibility improved owing to the two bond issuances in 4Q21, which have materially lengthened the maturity profile of Eleving's liabilities. Eleving's EUR150 million bond has a bullet repayment in October 2026, resulting in refinancing risk from 2025. Eleving's funding profile is further supported by its proven access to Mintos, a peer-to-peer funding platform (EUR68 million at end-1Q22), which is also a modest source of contingent liquidity if needed. Eleving's corporate-governance framework is characterised by limited independent board oversight, a multi-layered holding structure, concentrated ownership and material, albeit declining, related-party transactions. This constrains Eleving's ratings and is reflected in Fitch's ESG scores of '4' for governance structure and group structure. Eleving's expansion into unsecured loans also exposes the company to regulatory risks concerning lending practices and Fitch has assigned Eleving an ESG score of '4' for customer welfare in line with other high-cost lenders'. SENIOR SECURED DEBT Eleving's senior secured debt rating is equalised with its Long-Term IDR to reflect the effective structural subordination to outstanding debt at operating entities, which despite their secured nature leads to only average recoveries, as reflected in a 'RR4' Recovery Rating. RATING SENSITIVITIES IDRs Factors that could, individually or collectively, lead to positive rating action/upgrade: -Rating upside is limited in the short term. In the medium term, a positive rating action could be supported by increased scale, improved corporate governance, a leaner corporate structure and demonstrated stability in Eleving's business model and strategy, combined with stable profitability and improved asset quality -Maintaining access to diversified funding sources and reduction of leverage to 5x, together with a lower open FX position and improved quality of capital could be rating-positive Factors that could, individually or collectively, lead to negative rating action/downgrade: -Marked deterioration in asset quality or further FX losses, ultimately threatening the company's solvency -Marked increases in Eleving's leverage, reducing its buffers to absorb credit and FX losses -Unexpected difficulties in accessing funding sources or increasing cost of funding from peer-to-peer platforms SENIOR SECURED DEBT Factors that could, individually or collectively, lead to positive rating action/upgrade: -An upgrade of Eleving's Long-Term IDR would likely be mirrored on the company's senior secured bond rating -Higher recovery assumptions due to, for instance, operating entity debt falling in importance compared with rated debt instruments, could lead to above-average recoveries and Fitch to notch up the rated debt from Eleving's Long-Term IDR Factors that could, individually or collectively, lead to negative rating action/downgrade: -A downgrade of Eleving's Long-Term IDR would likely be mirrored on the company's senior secured bond rating -Lower recovery assumptions due to, for instance, operating entity debt increasing in importance relative to rated debt or worse-than-expected asset-quality trends (which could lead to larger asset haircuts), could lead to below-average recoveries and Fitch to notch down the rated debt from Eleving's Long-Term IDR BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond 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 Eleving has an ESG Relevance Score of '4' for both governance structure and group structure. The former reflects historically considerable related-party transactions and the material role of the founders in Eleving's strategy. The governance structure score is in line with that of other rated peers where the founder(s) plays a material role in strategy or operations. Group structure reflects our view that Eleving's organisational structure is complex relative to the company's business model. This has a moderately negative impact on the credit profile and is relevant to the rating, in conjunction with other factors. Eleving's '4' ESG Relevance Score for customer welfare reflects Fitch's view that Eleving's entry into the high-cost credit sector means that its business model is sensitive to regulatory changes (such as lending caps) and conduct-related risks. This has a moderately negative impact on the credit profile and is relevant to the rating, in conjunction with other factors. Eleving has an ESG Relevance Score of '3' for GHG emissions & air quality, to reflect possible, but minimal regulatory risk for the value of Eleving's collateral. This is higher than the standard score of '2' for finance and leasing companies, but in line with that of other rated peers with exposure to the automotive sector. Unless otherwise disclosed in this section, the highest level of ESG credit relevance for Eleving 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
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