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Rating action

Scope Ratings has today confirmed its BB-/Stable issuer rating on Georgia-based Tegeta Motors LLC and resolved the review for a possible downgrade. The BB- senior unsecured debt rating has also been confirmed.

Rating rationale

Scope placed the ratings under review in May 2020, mainly due to the potential effects of the Covid-19 pandemic on Tegeta’s financial risk profile, including its liquidity situation. The potential implications for Tegeta’s business risk profile were not as significant for the ratings in Scope’s view, assuming an only temporary decline in demand. Scope has confirmed the ratings based on ample visibility regarding its base case projections. The resulting key credit metrics are not likely to trigger our rating-change drivers.

Scope expects Tegeta’s overall top line to remain in the positive growth area in the short-to-medium term, benefiting from buses and heavy vehicles tender revenue backlogs and only limited cautious spending patterns for new cars. According to Tegeta’s management, results for the first nine months of 2020 show an overall increase in sales of about 7%, in a year-on-year comparison. This is a much stronger top-line performance than initially expected, including a period which was significantly burdened by the closure of a large number of business operations (all non-food retailers), which only gradually reopened after May.

Diversification remains the weakest part of Tegeta’s business risk. While the Nagorno-Karabakh conflict may negatively affect the company’s geographical diversification risk, it would not change Scope’s assessment of Tegeta’s business risk. Scope believes that Tegeta will be able to keep profitability margins at around 9%. Profitability will be supported by a flexible cost structure, temporary cost containment during the pandemic (reduced marketing costs) and a temporary personal income tax break from the government. However, these factors will be partially offset by price-sensitive demand on the Georgian market and forex risk.

Scope believes that Tegeta’s financial risk profile (rated BB) is likely to improve in 2020, benefiting from sound operating performance and only limited cautious spending on the company’s products. The agency’s former concern that Tegeta’s credit quality could suffer badly in 2020 has therefore been allayed. Scope understands that Tegeta will focus on growth opportunities over the next few years. Significant working capital and capital expenditure requirements hamper Tegeta’s operating cash flow generation potential. Annual expected capex of around GEL 30m in 2021-2022, as confirmed by management, does not leave room for deleveraging. Scope’s rating case incorporates positive free operating cash flows in 2021-2022. Scope expects leverage, expressed by funds from operations/Scope adjusted debt to remain in the area of 30% (2021E: 24%; 2022E: 25%).

Tegeta’s liquidity is inadequate based on the measures in Scope’s Corporates methodology. Although Scope expects free operating cash flow to be positive in 2020-2022, it appears insufficient to fully cover (re)-financing needs. Despite the bullet repayment structure of the GEL 30m bond issued in 2019, liquidity is weakened by relatively high short-term debt (around 25% of reported gross debt) and restricted cash positions.

Although Scope’s base case is more conservative than that of Tegeta’s management, the resulting key credit metrics do not violate ratio guidelines. Scope has therefore confirmed the ratings and resolved the review for a possible downgrade.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations that Tegeta’s financial risk profile will not deteriorate in the short-to-medium term as the impact of the Covid-19 pandemic appears to be softer than initially anticipated, reflected in expected positive free operating cash flows in 2020.

A positive rating action could be warranted if Tegeta achieves funds from operations/Scope-adjusted debt of above 30% on a sustained basis or improves liquidity. The latter may be achieved via the successful delivery/supply of bus and truck tenders and a faster than expected recovery of automotive product sales.

A negative rating action is possible if credit metrics deteriorate, as indicated by negative free operating cash flow/Scope-adjusted debt for a sustained period. Weak financial performance could be triggered by an extended Covid-19 effect, delayed tender deliveries or higher-than-expected capital expenditure.

Long-term debt rating

Scope has confirmed the senior unsecured debt category at BB- which includes the GEL 30m (ISIN GE2700603790) bond.

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) (Corporate Rating 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 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 rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Zurab Zedelashvili, Analyst
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 22 March 2019. The ratings/outlooks were last updated on 15 May 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
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