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Rating action

Scope Ratings has today affirmed the issuer rating of BB-/Stable to Nikora JSC. Scope assigns an initial BB- senior unsecured debt rating.

Rating rationale

The issuer rating continues to reflect Scope’s perception of Nikora JSC as one of the national key players of the fast-moving consumer goods (FMCG) and retail industries. Scope views the comparatively high profitability as well as the company’s ability to grow as key supports to the rating but consider the negative free operating cash flow (FOCF) and inadequate liquidity as a consequence of the company’s continued reliance on very high short-term credit lines, as negative rating drivers.

The rating benefits from Nikora JSC’s dominant market share within the organised retail segment in the country, bolstered by a considerable shop network (through its subsidiary Nikora Trade, rated B+/Stable) and by strong FMCG producing entities with high national brand recognition. In detail, Nikora Trade owns close to 20% of the modern retail market share in the country, spearheaded by a high number of shops across all regions and all formats, ensuring a stable revenue stream. This shop network reinforces the market share of the group’s FMCG-producing companies, which sell to Nikora Trade among others. The agency’s business risk profile analysis highlights the weight of the group’s meat production arm, which is a clear market leader with more than 30% of the national market. Although the rest of the entities are smaller in terms of size, they manufacture a large range of edible products, thus contributing to overall product diversification.

While Nikora Trade remains Georgia’s market leader in terms of retail market shares, Scope expects the increasing competition to put pressure on the future profitability of the retailer. To maintain high national market shares, the currently high profitability is likely to be traded off in the medium term, leading to a lower cash flow generation ability. Scope expects the sizes of both Nikora Trade and Nikora JSC likely to remain small on an international peer comparison due to the diminished growth prospects of the two companies in the coming years, and thus despite the expected progressive disappearance of the unorganised retail scene in the country. That being said, the growing importance of the retail arm in group sales and EBITDA led Scope to underweight the impact of the consumer goods part within the final rating.

Scope expects the Financial Risk Profile to remain on similar level going forward but acknowledges the stronger-than expected impact of the adoption of accounting rule IFRS16 (operating leases) on credit metrics. On a similar fashion as Nikora Trade, the interest cover was heavily impacted by the implementation and led to a drop to 3.5x in 2019 from 4.4x in 2018. Scope expects the metric to remain under pressure going forward given the need of financing of the group and the increase of the financing rate experienced. The inclusion of the operating lease obligation repayments as well as the fixed preferred dividends - whose rate is determined by shareholders - in the FOCF calculation put pressure on the cash flow cover ratio (FOCF to Scope-adjusted debt [SaD]). Scope anticipates the liquidity of the group to remain inadequate over the next years, constraining the rating.

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’s credit metric remains at current level for the indebtedness (SaD/EBITDA < 4x and FFO/SaD > 15%). It also incorporates the fact that both companies (Nikora JSC and Nikora Trade) will continue to obtain waivers concerning the potential future covenant breaches and that they will continue operating with very limited liquidity due to a heavy investment phase limiting the free operating cash flow generation.

A positive rating action could be the consequence of FFO/SaD and the SaD/EBITDA be respectively above 30% and below 3x on a sustained basis and, conjointly, if the liquidity improves drastically on a sustained basis. This could be achieved via a deleveraging of the company while maintaining a relatively high level of EBITDA. Additionally, a positive rating action could be granted in the case of important development of the size of the group.

A negative rating action could result from a deterioration in credit metrics as indicated by the FFO/SaD ratio falling below 15% and the SaD/EBITDA ratio increasing above 4x on a sustained basis.

Long-term and short-term debt ratings

Scope assigns a BB- debt rating to senior unsecured debt issued by Nikora JSC. The debt category rating reflects the ranking status of the debt, ranking below senior secured bank debt. Although the agency’s recovery analysis indicates relatively high recovery rate for a senior unsecured debt, Scope does not grant an uplift for the instrument 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 (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-andpolicies/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 issuer rating/outlook was first released by Scope on 15 August 2019. The senior unsecured debt rating was first released by Scope on 14 September 2020.

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.