Rating action

Scope Ratings UK Limited (Scope) has today affirmed MFO Rico Express LLC issuer rating of B+ and its short-term debt rating of S-4, both with Stable Outlook.

The full list of rating actions is at the end of this rating action release.

Key rating drivers

Business model assessment: Focused (high). Rico Express is the largest microfinance organisation in Georgia by total assets, with a market share of 28% in terms of net loans within the domestic MFO sector as of June 2024. Rico Express has 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. While the microfinance sector is showing signs of growth and seeking further diversification, Scope expects Rico Express to maintain unchanged its business model and preserve its leading market share.

Operating environment assessment: Constraining (low). Georgia is a small emerging economy that, despite gradual improvements and reforms in recent years, still lags behind regional peers in some macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification). Recent political tensions have not yet changed the economic outlook, but they remain an area of attention. The National Bank of Georgia supervises the microfinance organisation (MFO) sector under a set of regulations that are less stringent than those for licensed banks.

Scope arrives at an initial mapping of b based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing (changed from Constrained). Rico Express has made significant improvements to its corporate governance framework over the past 18 months, ranging from management oversight and segregation of duties to strengthening and formalising its risk management framework. Examples include the establishment of an audit and risk committee, the appointment of an independent supervisory board member and a CFO, initiatives that improve the management structure and reduce the high level of key man risk that has been a concern in the past. A number of key initiatives have also been implemented to improve digital capabilities and modernise the business model, embracing cashless activities while providing lending and currency exchange solutions to customers. Scope considers these initiatives as an improvement of the long-term sustainability of the business, supporting the change of the assessment from Constrained to Developing.

The long-term sustainability assessment leads to an adjusted rating anchor of b.

Earnings capacity and risk exposures assessment: Neutral. Rico Express’ profitability metrics are solid and historically better than the sector average. Interest income accounts for by far the largest share of revenues and is an adequate first line of defence given the company’s risk profile. The company’s loan book has more than doubled since 2017, benefiting from a dynamic domestic credit demand. The high net interest margin (11%) also reflects the optimisation of funding sources. The Stage 3 loan ratio is low (2.1% as of June 2024), given the relatively high risk of consumer loans, and has increased slightly as a result of the recent implementation of a more flexible write-off and loan recovery policy. Strong asset quality is also supported by the company’s good track record in the recovery of repossessed collateral. The policy of selling collateral in an orderly manner to maximise value when market conditions become attractive, benefits the company in terms of collateral pricing, but also exposes it to market price volatility in the event of a prolonged market correction (in particular for gold pricing), which has not been the case recently. The granularity of the loan book, the high interest rates and the asset-backed nature of the loans are important credit risk mitigants.

The company is exposed to the volatility of the gold price as its underwriting criteria allow pawn loans to be made at a maximum of 90% of the value of the collateral, mainly gold. This is a key competitive advantage but also a major source of risk as the company does not have any hedge in place against this risk. Operational risk is also significant as the company has to physically manage the collateral provided and is therefore exposed to the risk of fraud, theft or robbery. The company’s ability to benefit on an ongoing basis from insurance coverage protecting the operations of these risks is an important mitigating factor.

Financial viability management assessment: Comfortable. The company plans to maintain its conservative capital and liquidity ratios. Rico Express is subject to the regulatory requirements applicable for microfinance organisations under the regulatory oversight of the National Bank of Georgia, which include a minimum capital ratio (equivalent to a leverage ratio) of 24% and a minimum liquidity ratio of 25%. While Rico Express operates with large buffers above the minimum capital requirement (47% capital ratio at end-June 2024), the liquidity position has been volatile recently as loan growth has been financed with own funds, putting pressure on the liquidity buffer, situation that has been restated now, reaching a comfortable liquidity ratio of 31% at end-August 2024. Bond and promissory notes are the main source of funding for Rico Express, accounting for over 80% of total funding at end-June 2024. Foreign currency risk is now almost negligible, representing only 3% of the loan book and is fully hedged by currency swaps.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

The upside scenario for the rating and Outlook is:

1. A reduction in the company’s risk profile, e.g. lower sensitivity to potential gold price volatility.

The downside scenarios for the rating and Outlook are (individually or collectively):

1. Challenges to maintain some degree of business diversification, beyond pawn loans, for example in the event of more challenging business dynamics or economic conditions in the country.
    
2. Pressure on earnings capacity, e.g. due to higher funding costs and/or higher impairment charges.
    
3. A change in strategy or risk appetite, that significantly increases the firm’s risk profile, such as tighter buffers above minimum capital or liquidity requirements.

Debt ratings

Short-term debt: S-4/Stable. MFO Rico Express’ S-4 short-term credit rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

MFO Rico Express LLC

Issuer rating: B+/Stable, affirmed

Short-term debt rating: S-4/Stable, affirmed

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, 6 February 2024), 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 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks 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. The Credit Ratings/Outlooks were last updated on 14 February 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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