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Rating action

Scope Ratings has today affirmed the issuer rating of BB-/Stable for Georgian-based Georgian Beer Company JSC. The agency has also affirmed the rating of BB for the senior unsecured debt category and the corporate bond (ISIN- GE2700603725).

Rating rationale

GBC’s business risk profile (rated BB-) benefits from the company’s significant market shares in Georgia’s beer sector, a fiercely contested and saturated market. Scope expects GBC to not only maintain its domestic market shares but to also increase exports. GBC’s Bavaria beer remains one of its bestsellers locally, generating around 30% of its total beer sales. An extension of the license to sell Bavaria together with the launch of new brands would help the company keep its overall market shares in the beer sector. In the short-to-medium term, Scope expects no significant deterioration in market share, supported by new product launches in small but fast-growing niche sub-sectors, including Gurieli iced tea and alcohol-free beer Zedazeni.

Despite a gradual increase in the share of exports in total sales in recent years, diversification continues to be the weakest aspect of GBC’s business risk profile, due to the limited exposure to one country and one industry. GBC is seeking to grow organically through several measures, including enhancements to distribution channels and operating efficiency. EBITDA margins weakened in 2019 due to the consolidation of the Georgian retail market, increased raw material prices, and higher-than-estimated selling costs caused by new entrants onto the Georgian beer market. Scope believes GBC can keep profitability margins above 20% going forward, supported by: i) lower maintenance expenses for new fridges, as these are covered by insurance; ii) a reduced marketing cost threshold for upcoming years, which offsets potential profitability pressures from key accounts; and iii) a decrease in procurement prices.

GBC’s financial risk profile is rated BB. The slight deterioration in credit metrics in 2019 was mainly driven by decreasing profitability and high capex. Scope assumes that leverage, measured by Scope-adjusted debt (SaD)/EBITDA, will rise significantly from below 2.3x to around 3.0x and that funds from operations (FFO)/SaD will fall below 30%. Management has confirmed annual expected capex in the mid single-digit million range (GEL) for 2020-2021. This leaves GBC room to deleverage with free operating cash flows. Scope’s rating case incorporates free operating cash flows and discretionary cash flows of above GEL 5m throughout 2020-2021 and leverage gradually returning to below 3.0x. The 2019 increase in the National Bank of Georgia’s refinance rate by 300 bps will put pressure on the company’s EBITDA interest coverage in the short-to-medium term. Scope expects debt protection, as measured by Scope-adjusted EBITDA interest coverage, to remain at a modest level, in the range of 4x in 2020-2021.

Even though committed credit lines of GEL 4.5m were partially drawn in 2019, expected positive free operating cash flow in 2020-2021 in the range of GEL 5m should be sufficient to fully cover (re)-financing needs. This also contributes to an adequate liquidity profile. In addition, the company’s liquidity profile benefits from the bullet repayment structure of the GEL 25m bond, which matures in 2023.

Most cash inflows from operations (90%) are exposed to the domestic market. There is also significant exposure to imported raw material and packaging material positions (hops, malt, bottles). This may affect GBC’s gross margin profile further if the Georgian currency continues to devalue against the euro/US dollar in 2020-2021. Going forward, the impact of potential downside/turbulence on small-scale economies vulnerable to external shocks (e.g Covid-19 or fluctuation of oil prices), reflected in the continued devaluation of the Georgian currency against the Euro/US dollar, may be felt by market players in the Georgian beer sector. Forex risk is one of the main constraints on GBC’s financial risk profile.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that restructuring of sales channels approach and organic growth strategy will improve FFO/Scope-adjusted debt to around 30% and without significantly exceeding a SaD/EBITDA ratio of 3x.

A positive rating action could be warranted if FFO/SaD exceeds 35% on a sustained basis and SaD/EBITDA ((Scope-adjusted figures) consistently trends below 3x. The decrease of leverage may be indicated by increase of profitability under organic growth strategy, such scenario is deemed unlikely for the time being because of increased competition on domestic market.

A negative rating action could result from a deterioration in credit metrics, as indicated by an FFO/SaD of below 30% and a SaD/EBITDA of above 3.5x on a sustained basis. An increase in leverage could be triggered by an adverse operational development leading to reduced profitability or externally financed capital expenditures.

Long-term and short-term debt ratings

Scope maintains one notch rating uplift on the GEL 25m (ISIN GE2700603725) senior unsecured bond compared to the issuer rating, based on a recalculated recovery rate. Although our recovery analysis indicates relatively high recovery rate for an senior unsecured debt, we have limited the uplift for the instrument to one notch (above average recovery) due to uncertainty surrounding the resolution of distress/default and small-scale emerging market risk.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s), Rating Methodology: Corporate Ratings, is available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, public domain, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 30 March 2018. The ratings/outlooks were last updated on 14 March 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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