Eleving Group S.A.: Fitch Affirms Eleving Group at 'B-'; Outlook Stable

Fitch Ratings - Frankfurt am Main - 28 Jun 2023: Fitch Ratings has affirmed Eleving Group's Long-Term Issuer Default Rating (IDR) at 'B-', with a Stable Outlook. Fitch has also affirmed Eleving's senior secured debt rating at 'B-' with a Recovery Rating of 'RR4'.

KEY RATING DRIVERS

Opportunistic Strategy Constrains Ratings: Eleving's frequent strategy changes and willingness to grow in volatile countries are rating weaknesses weighing on its Long-Term IDR. Eleving's ratings reflect also its nominal franchise (total assets of EUR376 million in 13 countries at end-1Q23) and its high risk appetite as a high-cost lender for second-hand cars and consumer loans in eastern Europe, central Asia and Africa.

The ratings also factor in Eleving's strong profitability, improved leverage, adequate funding and liquidity profile, and its experienced management team.

Improved Leverage: Eleving's gross debt/tangible equity plus subordinated bonds ratio improved to 5.1x at end-1Q23 from 7.7x at end-2021, largely due to profit retention. Its long-dated subordinated bonds qualify for equity credit under Fitch's criteria. Fitch views the current leverage level as commensurate with Eleving's business model and credit risk exposure.

However, Eleving's open foreign-exchange (FX) position remains wide and the quality of capital remains a weakness, despite significantly lower receivables from related parties (EUR3.4 million at end-1Q23, which are expected to further reduce within the next 6 months).

High Appetite for Credit Risk: Eleving's asset quality reflects its higher-risk client base (impaired loans ratio: 23% at end-1Q23), but is mitigated by high loan yields (with an annualised interest income/ average gross portfolio of 68% in 2022). Fitch expects the generation of new impaired loans will remain below 10% in 2023 (8% in 2022, 11% in 2021).

Its portfolio in Ukraine has been fully impaired, and that in Belarus (4% of net loans at end-1Q23) is being run down (impaired loans ratio of 14% at end-1Q23).

Strong Profitability Reflects Risk Appetite: Eleving's profitability reflects its high-risk, high-yield business model and should remain stable in 2023. Rising interest rates should have a modest impact on Eleving's performance, because its funding is mostly at fixed rates (65% at end-1Q23), while regulatory caps, market competition and adverse selection restrict its flexibility in increasing already high loan yields.

Funding from Mintos, a Latvian-licensed platform for retail investing in loans, has become more expensive (12% on average in June 2023), but it represented only 24% of Eleving's non-equity funding at end-1Q23. Significant income attributable to minority interests (26% of net income in 2022) weighs on Fitch's assessment of Eleving's earnings and profitability.

Bonds Underpin Funding Profile: Eleving has limited short-term funding needs owing to three outstanding bonds (EUR30 million due in March 2024, EUR150 million due in October 2026 and EUR19 million due in December 2031) and has demonstrated access to local funding (EUR11 million bonds issued in Kenya in 2022). Refinancing risk from a bullet repayment in October 2026 is still remote. Access to Mintos (EUR70 million at end-1Q23) provides a flexible, but, in Fitch's view, volatile and expensive alternative to bond funding.

RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A marked and sustained increase in Eleving's gross debt/tangible equity plus subordinated bonds ratio to above 8x, reducing its buffers to absorb credit and FX losses, would likely result in a downgrade of its Long-Term IDR, especially if arising from corporate acquisitions.

A marked deterioration in asset quality or further FX losses, ultimately threatening its solvency, would also lead to a downgrade.

Unexpected difficulties in accessing market-based funding ahead of its large 2026 bond maturity could also lead to a downgrade.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Rating upside is limited in the short term.

In the medium term, further increase in scale and demonstrated stability in Eleving's business model and strategy could support positive rating action, in particular if its gross debt/tangible equity plus subordinated bonds ratio is maintained at close to or below 5x and its pre-tax income/average assets ratio is close to or above 7%.

Maintaining access to diversified funding sources and an improved quality of capital would be rating-positive.

Improved corporate governance and a leaner corporate structure (including lower minority interests) would be rating-positive.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

Structural Subordination: Eleving's senior secured debt rating of 'B-' reflects the bonds' effective structural subordination to outstanding debt at operating entities. Despite the bonds' secured nature, this leads to only average recovery expectations, as reflected in its 'RR4' Recovery Rating and in equalising the debt rating with Eleving's Long-Term IDR.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

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 its 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 its 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

ADJUSTMENTS

The operating environment score of 'b+' is below the 'bb' category implied score due to the following adjustment reason: international operations (negative).

The asset quality score of 'b-' is above the 'ccc' category implied score due to the following adjustment reason: risk profile and business model (positive).

The funding, liquidity and coverage score of 'b-' is above the 'ccc' category implied score due to the following adjustment reason: funding flexibility (positive).

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. Governance Structure reflects issues around material, albeit declining, related-party transactions, limited independent board oversight, a multi-layered holding structure, and concentration of decision-making. Group Structure reflects our view about the appropriateness of Eleving's organisational structure relative to its business model, intra-group dynamics and risks to its creditors. This has a moderately negative impact on the credit profile and is relevant in conjunction with other rating factors.

Eleving has an ESG Relevance Score for Customer Welfare of '4'. In Fitch's view, Eleving's exposure to the high-cost credit sector means that its business model is sensitive to regulatory changes (like lending caps) and conduct-related risks. These issues have a moderately negative impact on the credit profile and is relevant in conjunction with other rating factors.

Eleving has an ESG Relevance Score of '3' for GHG Emissions & Air Quality, compared with the standard '2' for finance and leasing companies. This reflects possible, but minimal, regulatory risk for the value of Eleving's collateral.

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 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.