Fitch Ratings has downgraded Oragroup S.A.'s Long-Term Issuer Default Rating (IDR) to 'CCC-' from 'CCC' and Viability Rating (VR) to 'f' from 'c'.

The IDRs remain on Rating Watch Evolving (RWE). A full list of rating actions is below.

The downgrade of the IDR reflects Fitch's view that the risk of non-payment to senior creditors, albeit not yet probable, has increased since its last rating review in October 2023 due to significantly tighter liquidity at the bank holding company (BHC).

The downgrade of the VR to 'f' reflects that in Fitch's view, the group has failed as per the agency's definitions, as it will need extraordinary capital support to restore its viability.

Fitch will resolve the RWE on the IDRs once the core capital contribution from the prospective new shareholder is made and there is clarity on compliance with regulatory capital requirements, considering high capital encumbrance by impaired loans, credit concentration risk and exposure to weak sovereigns, or if Fitch perceives an increased risk of regulatory intervention or non-payment to senior creditors.

Key Rating Drivers

Oragroup's IDR of 'CCC-' reflects a real possibility of default on senior obligations in the context of the prolonged breach of capital requirements and tight liquidity at the BHC level. We consider senior creditors still have a limited margin for safety given the potential capital contribution, which reduces the risk of regulatory intervention and default on senior obligations.

The RWE on the IDRs reflects the heightened probability of a downgrade should the acquisition not be approved or if capital compliance is not restored in a timely manner, which would increase the risk of regulatory intervention and default on senior obligations. It also reflects the heightened probability of an upgrade should the breach of the group's minimum capital requirements be addressed by the core capital contribution.

Oragroup's 'f' VR reflects Fitch's opinion that the group has failed as the agency considers it will not be able to address the prolonged material breach of its regulatory capital requirements without a core capital contribution planned by its prospective new shareholder currently pending regulatory approval. We would view the expected capital contribution as extraordinary support to address a material capital shortfall. The 'f' VR is below the implied VR of 'ccc' because of the following adjustment reason: capital and leverage.

New Shareholder Pending Approval: The group has a presence in 12 west and central African countries, but has only moderate market shares in the larger economies in which it operates and a small balance sheet (end-2022: USD7.7 billion). The majority shareholder, ECP Financial Holding LLC, aims to sell its 50% shareholding along with some minority shareholders. These shareholders have signed a share purchase agreement with Burkina Faso-based Vista Group Holding SA. If approved, the transaction will raise Vista Group's stake in Oragroup to 64%-77%.

High Credit Concentration Risk: Single-borrower credit concentration risk is high, with the largest 20 loans representing 363% of total equity at end-2022. The group has high exposure to high-risk sovereigns in west and central Africa through holdings of government securities.

Weak Asset Quality: The group's impaired loans (Stage 3 loans under IFRS 9) ratio (end-2022: 16%) is high due to distressed loan quality at certain subsidiaries and delays in resolving legacy exposures, partly influenced by strict write-off requirements. Specific loan loss allowance coverage of impaired loans (end-2022: 51%) is weak.

Modest Profitability: The group delivers modest profitability, with operating returns on risk-weighted assets (RWA) averaging just 1.6% between 2019 and 2022. Revenue diversification is supported by high fees and commissions and a broad geographical footprint, but profitability is constrained by high costs and high loan impairment charges (LICs). The group delivered a large net loss in 9M23 due to a sharp increase in LICs.

Prolonged Capital Requirements Breach: Oragroup's capital ratios (end-2022: common equity Tier 1 (CET1): 5.3%; Tier 1: 5.5%; Total: 7.0%) have breached regulatory requirements (CET1: 7.9%; Tier 1: 8.9%; total: 11.9%, including buffers) since a revision in the risk weights applied to certain loan portfolios in 1H22 caused a large increase in RWA. Capital is viewed as particularly weak in the context of high encumbrance by net impaired loans, high credit concentration risk and exposure to high-risk sovereigns.

Tight BHC Liquidity: Fitch believes the BHC is reliant on sourcing new external funding to meet some large debt maturities coming due before the acquisition by Vista Group Holding SA. While liquidity risks are higher at the BHC level than the group level, a BHC default on its senior creditors could lead to deposit outflows at subsidiaries across the group due to a loss of confidence.

Rating Sensitivities

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

Oragroup's Long-Term IDR would be downgraded in the event of a prolonged breach of regulatory capital requirements that may result from the acquisition by Vista Group Holding S.A. not receiving regulatory approval in a timely manner or a sufficient capital injection not materialising, which would increase the risk of regulatory intervention and default on senior obligations.

The Long-Term IDR could also be downgraded following a material tightening of the BHC's liquidity, which could result from an acceleration of debt due to a covenant breach, or from an inability to raise funding in time to repay senior creditors.

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

Upon receipt of extraordinary capital support, Oragroup's VR and IDR would be upgraded to a level commensurate with the its subsequent risk profile, capitalisation and liquidity.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Oragroup's Government Support Rating (GSR) of 'ns' reflects our opinion that support for the BHC cannot be relied upon from any sovereign authority. Fitch believes that some of the group's key banking subsidiaries could be supported by their respective national authorities, but this support is unlikely to extend to the BHC itself.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The GSR is unlikely to be upgraded as we believe the government's propensity to support the BHC is unlikely to increase.

VR ADJUSTMENTS

The business profile score of 'ccc+' is assigned below the 'b' category implied score, due to the following adjustment reason: group benefits and risks (negative).

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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