The credit rating of LLC “MigCredit” (hereinafter, the Company) is based on the Company’s satisfactory business profile, strong capital position, poor funding and liquidity, and poor risk profile.
ACRA has changed the credit rating outlook to Developing based on uncertainties in the Company’s ownership structure and the relationship between owners and bank creditors. According to ACRA, potential scenarios within the 12 to 18-month horizon include the Company making its strategy more aggressive, as well as a change in dividend policy and the ownership structure.
MigCredit is one of Russia’s leading microfinance companies. The beneficial holder of the Company is the family of A. Mamut.
The satisfactory assessment of the Company’s business profile is due to the high risks inherent in the business models of microfinance companies. In addition, ACRA notes that the Company’s creditworthiness may be affected by uncertainties in the ownership structure or relationships between owners and their bank creditors. The Company had to shift to new sources of funding in 2018, which hindered the pace of development for that year. In 2020, additional pressure on capital and liquidity is possible (up to about half of the Company’s total capital as of October 31, 2019, in the worst-case scenario) due to planned changes in the structure of the Company’s minority shareholders, namely bankruptcy proceedings with respect to a minority stake of 25.61%. As such, ACRA forecasts that the growth of the Company’s total microloan portfolio (minus reserves for losses) will stay below 25% in 2020, whereas growth reached about 60% in 2019.
ACRA believes that despite these factors, the Company will retain its leading position in the industry. A strong and recognizable brand, as well as a stable customer base, still have a positive impact on the Company’s business assessment. The quality of the Company’s management and risk management practices correspond to the business specifics and high risks that are typical for the industry, which is confirmed by the Company’s high profitability indicators. A high level of geographical diversification also supports the Company’s relatively stable business in comparison with other microfinance companies, as the Company is represented in 76 cities and 45 regions of the Russian Federation. Developed sales channels, including online issues through the Company’s website and mobile app (about half of all issues), also contribute.
The Company’s strong capital position is based on a highly profitable business. The average return on assets and capital over the past three years has been 18% and 72%, respectively. High income levels provide the Company with a significant buffer to absorb unexpected losses despite high dividend payments in 2018 (about RUB 980 mln) and possible capital pressure this year. ACRA believes that over the next 12-18 months, the Company’s capital adequacy ratio should remain at a comfortable level of about 30%. In addition to high profitability, the Company’s plans to moderate its microloan portfolio will support the capital position.
The Company’s weak risk profile assessment is associated with a high level of problem debt. ACRA estimates that over the past three years, the share of such debt accounted for at least half of the total microloan portfolio on average, which is typical for comparable microfinance companies in Russia. The Company’s credit risks are somewhat mitigated by full portfolio coverage of problem debt by loss reserves, which amounted to 68% of the portfolio as of October 31, 2019.
The weak funding and liquidity assessment reflects ACRA’s view on the Company’s rather aggressive approach to asset and liability management compared to other financial institutions, particularly banks. When liquidity deteriorates, the Company can reduce the volume of new loans and rely on revenues from loans that have already been issued, which are characterized by high turnover and profitability. Given the current lack of other sources of liquidity (such as bank credit lines), ACRA considers the Company’s approach to be high-risk and vulnerable to unexpected drops in the quality of the microloan portfolio.
The assessment is also based on ACRA’s stress test: a negative scenario assumes a 30% reduction in the projected cash flow on loans and a substantial cash outflow associated with uncertainties in the Company’s ownership structure, resulting in the ratio of cash revenues to mandatory payments over the next six months amounting to 0.82.
The structure of liabilities has changed in favor of greater diversification since 2018, when the Company was forced to restructure its funding base. Currently about half of the Company’s liabilities are consumer loans and another 20% is debt securities that were issued in 2019.
The Developing outlook assumes with equal probability either an upgrade or a downgrade of the rating within the 12 to 18-month horizon.
A positive rating action may be prompted by:
A negative rating action may be prompted by:
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Microfinance Organizations on the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating assigned to LLC “MigCredit” was published by ACRA for the first time on February 14, 2019. The credit and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating is based on the data provided by LLC “MigCredit,” information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements and the SAS financial statements of LLC “MigCredit.” The credit rating is solicited, and LLC “MigCredit” participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by LLC “MigCredit” in its financial statements have been discovered.
ACRA provided additional services to LLC “MigCredit.” No conflicts of interest were discovered in the course of credit rating assignment.
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