The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings has today affirmed its issuer rating of B+/Stable on Nikora Trade JSC. The rating of senior unsecured debt is affirmed at BB-.

Rating rationale

The rating is supported by Nikora Trade’s reinforced market position. The group has grown in terms of market shares and overall size, mainly due to the decline of the unorganised retail market in Georgia over the last year. It is highly likely that organised retail will continue to develop over the next few years, leading to an automatic increase in the market shares and size of all the country’s retailers. However, market competition has increased quickly in recent years, with new competitors and the development of new formats. In this rapidly developing environment, Nikora Trade has appeared as a market leader, bolstered by high market shares and growing sales. Scope believes that Nikora Trade’s growth is likely to slow down in the coming years due to the increased competition, notably in Tbilisi.

While profitability at YE 2019 decreased slightly, Scope understands that this was mainly for one-off reasons (a delay in the development of shops among others). While the Scope-adjusted EBITDA margin (above 9%) remains extremely comfortable for a food retailer and above that of peers (both rated by Scope and local), it has led to a deterioration in metrics, especially when taking the implementation of IFRS16 into consideration. In 2019, the group suffered from significant financial losses due to the need to revalue existing operating leases, the majority of which are denominated in USD. The operating leases component of Scope-adjusted debt (SaD) was also underestimated due to the complexity of the Georgian leasing system (under 3 months) and is 16% higher than initially anticipated. The transition especially took its toll on interest cover, with the interest component of operating leases close to 2.5 times higher than expected, causing the ratio to decrease to 2.8x at YE 2019 versus 4.4x at YE 2018. Currently leverage measured by SaD/EBITDA and funds from operations (FFO)/SaD stands at 3.8x and 16% respectively at YE 2019. The ratios are forecasted to improve to 3.2x and 20% for the end of 2020 with further improvement in the following years.

Liquidity is inadequate. As we forecast that FOCF will remain negative in the short to medium term, we expect short-term debt to remain high. This is based on the group’s considerable reliance on short-term debt. Multiyear open committed credit lines (accounting for GEL 10.6m) nonetheless provide a liquidity buffer. Although they are on a one-year basis, they are provided and extended every year. Their amounts are, however, too low to effectively counterbalance short-term liabilities.

Scope notes that the flow of information between management and the rating agency was often very slow. While this has not led to any rating impact so far, it may warrant a downgrade going forward (ESG rating driver).

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

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that Nikora Trade’s credit metrics will remain at the current level for indebtedness (SaD/EBITDA under 4.0x and FFO/SaD above 15%). It also incorporates Scope’s expectation that the retailer will continue to obtain waivers for any potential covenant breaches and that it will continue operating with very limited liquidity, due to a heavy investment phase limiting free operating cash flow generation.

A positive rating action could be the consequence of FFO/SaD and SaD/EBITDA above 30% and below 3x respectively on a sustained basis as well as a dramatic improvement in liquidity on a sustained basis. This could be achieved via deleveraging while maintaining relatively high EBITDA. A positive rating action could also be warranted if the group grows significantly in size.

A negative rating action could result from a deterioration in credit metrics as indicated by FFO/SaD falling below 15% and SaD/EBITDA increasing above 4.0x on a sustained basis.

Long-term and short-term debt ratings

Scope affirms its BB- debt rating on senior unsecured debt issued by Nikora Trade JSC. The debt category rating reflects the ranking status of the debt, ranking below substantial senior secured bank debt.

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 and rating outlook (Corporate Ratings Methodology, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list. 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: public domain, the rated entity, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Adrien Guerin, Senior Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 30 March 2018. The ratings/outlooks were last updated on 15 August 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.