Fitch Ratings has assigned Mogo Finance S.A. (Mogo), a long-term issuer default rating (IDR) of ‘B-’ with Stable Outlook. A full list of rating actions is at the end of this rating action commentary.

Key rating drivers 

The IDRs of Mogo 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 in placing boards and adequate experience of the management team.

Fitch views Mogo’s franchise as nominal since its operations in a competitive niche of financing used cars (on average 13 years old), which regulated banks do not typically finance. However, Mogo has some economy of scale and diversification benefits through its presence across 15 countries while its competitors focus predominantly on one country or a small number of countries.

The company has an increasing exposure to the generally volatile operating environment in smaller countries in eastern Europe and central Asia.

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 high leverage (gross debt/tangible equity of 14.1x at end-2018, 11.5x if the shareholder loan is treated as equity) and the large unhedged open FX position (4.1x equity at end-2018, 3.4x if the shareholder loan is treated as equity) are major constrains on the ratings. We expect leverage to improve, but remain high, over the next three years due to sound profitability and a low initial capital base.

In recent years Mogo grew faster than its internal capital generation. Mogo needs to grow its lease portfolio further to achieve operational break-even in various countries. This should support profitability and internal capital generation, but we project continued high leverage over the next three years.

Mogo’s business model assumes high credit risks, which are balanced by high-yielding lending (impaired loan ratio of 15% at end-2018). We view the asset quality as unseasoned given the company’s fast portfolio growth. Mogo benefits from decent monetisation of repossessed collateral and from limited additional depreciation of leased assets, due to their age at financing.

Mogo’s net interest margin is consistently above 30% (2018: 37%), but increasing operational costs and high impairment charges have put pressure on profitability. Pre-tax return on average assets declined to 4% in 2018 (2017: 11%).

Mogo has accessed debt capital markets in Riga and Frankfurt, which provided sufficiently long-dated liabilities at fixed interest rates. We see this access as yet untested at times of stress, since Mogo has so far relied on pro-cyclical sources such as high-yield secured funding and the Mintos online platform (a quasi-retail fintech peer-to-peer lending platform).

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 assigned ‘RR4’ Recovery Rating.

Rating sensitivities

Fitch would view positively a sustained reduction in leverage to below 6x and the achievement of operational break-even in individual countries of operations, before further expansion.

Pressure on the 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 (14x at end 2018).

Marked deterioration in Mogo’s asset quality, ultimately threatening the company’s solvency, could also lead to a rating downgrade.

Changes to Mogo’s Long-Term IDR would be mirror in 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.

Conversely, 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.

The rating actions are as follows:

Mogo Finance S.A.
Long-Term IDR assigned ‘B-‘; Outlook Stable
Short-Term IDR assigned ‘B’
Senior secured debt rating assigned ‘B-‘/’RR4’