Rating action

Scope Ratings UK Ltd (Scope) has today assigned a first-time issuer rating of B+ to MFO Rico Express LLC along with a first-time short-term rating of S-4. All ratings have a Stable Outlook.

Rating rationale

The B+ issuer rating on Rico Express reflects the following credit rating considerations:

• Rico Express is the largest microfinance organisation in Georgia by total assets. Its market share has been growing steadily since 2016, representing around 28% of the sector’s net loans as of September 2022. The microfinance sector is concentrated and smaller than the banking sector, accounting for around 3% of domestic financial assets. The lending strategies of microfinance organisations are heterogenous. Rico Express stands out with a profitable business model focused on pawn loans secured by gold, precious metals and jewellery, as well as currency trading and international money transfers. Its lending activities are purely domestic. The bulk of its assets and liabilities mature within a year. Scope expects that Rico Express will maintain its business focus and preserve its leading market share. The company does not intend to apply for a microbank licence.

• Geopolitical risk has heightened materially during the last 12 months. However, Scope expects Georgia to maintain one of the most resilient real GDP growth rates over 2023-2024 (above 5% on average) of the Central and Eastern European countries, which is positive for the domestic financial sector, including for microfinance organisations. Rico Express benefited from the recent spike in foreign exchange trading that resulted from the large migration outflow and remittances abroad.

• The governance framework needs improvement in relation to key person risk, management oversight and the separation of functions, and the definition of an articulated risk appetite framework (ESG factor). The company has started addressing these issues, which is likely to be a lengthy process. It includes putting in place an audit and risk committee as well as hiring two independent members for its supervisory board.
   
• Rico Express’ profitability metrics are solid and better than the sector average, which is an adequate first line of defence given its risk profile. About 75% of revenues stem from interest income. The company’s loan book has nearly doubled since 2017, benefiting from dynamic credit demand. The high net interest margin (above 10%) also reflects the optimisation of funding sources. Interbank funding is the main source in local currency while promissory notes subscribed to by individuals are used to access foreign currency funding.

• The maintenance of conservative capital and liquidity metrics is a rating strength. Georgian microfinance organisations are regulated by the National Bank of Georgia. Rico Express operates with large buffers above minimum requirements (respectively 54% and 28.1%) at end-September 2022, broadly in line with levels in previous quarters. Their regulatory requirements include a minimum capital ratio (equivalent to a leverage ratio) of 18% and a liquidity ratio (ratio of average current assets to average current liabilities) of 18%.

• The granularity of the loan book, the high interest rates and the asset-backed nature of the loans are important risk mitigants. The company is highly exposed to gold price volatility because its underwriting criteria allow pawn loans to be granted at around 100% of collateral value, mainly against gold and there is no hedge in place against this risk. It is a key competitive advantage but also a key source of risk.
   
• The Stage 3 loan ratio is low (e.g. below 2% at end-2021) but reflects the company’s active management of problem loans. Scope estimates that about 8% of the loan book at September 2022 was either past-due, restructured or subject to write-offs. The company has a good record of recovery on repossessed collateral. The clearly stated policy to dispose of collateral in an orderly fashion, i.e. with the aim of maximising the value of collateral only when market conditions become attractive, also exposes the company to market price volatility in case of a prolonged market correction.

• Operational risk is also material because the company has to manage physically the collateral provided and is therefore exposed to the risk of fraud, theft or robbery. The company’s ability to continuously benefit from insurance covering these risks is an important mitigating factor.

• The company is exposed to foreign currency risk, which reflects the local economy's dollarisation and the company’s lending activities in dollars (7% of the loan book, though materially reduced in recent years). Foreign currency risk is fully-hedged via currency swaps.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that Rico Express’ credit profile will remain resilient during the next 12-18 months, despite the more challenging operating conditions stemming from high inflation and geopolitical tensions.

What could move the rating up:

• A reduction of the company’s risk profile, along with an improved governance framework.

What could move the rating down:

• Pressure on profitability due to a lower ability to generate sustained revenue, higher funding costs and/or higher impairment charges

• Asset quality issues stemming from rising problem loans or less effective risk mitigants

• A change in strategy, including capital and liquidity management, which materially increases the company’s risk profile

Overview of the rating construct

Operating environment: constraining

Business model: focused

Initial mapping refinement: high

Initial mapping: b/b+

Long-term sustainability: lagging

Adjusted anchor: b

Earnings capacity and risk exposures: neutral

Financial viability management: comfortable

Additional rating factors: neutral

Standalone assessment: b+

External support: not applicable

Issuer rating: B+

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Financial Institutions Rating Methodology, 28 January 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies..
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory
The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Ratings and Outlooks are EU-endorsed.
Lead analyst Alvaro Dominguez Alcalde, Analyst
Person responsible for approval of the Credit Ratings: Nicolas Hardy, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 18 January 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
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