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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB- issuer rating on JSC Nikora and revised the Outlook to Negative from Stable. Scope has also affirmed its BB- rating for the senior unsecured debt category.

Rating rationale

The Outlook change reflects Nikora’s weakened financial risk profile, driven by lower-than-expected operating performance in 2020. Significantly elevated leverage and inadequate liquidity could shake the issuer rating as both Scope’s downward rating triggers have been breached based on 2020 results. However, the group’s H1 2021 results, confirmed by management, promise recovery.

Nikora’s business risk profile (assessed at BB-) continues to benefit from its position as a key national player in the fast-moving consumer goods (FMCG) and retail industries, including producing entities with high national brand recognition. Nikora benefits from its vertically integrated group structure. While Nikora’s FMCG production arm was negatively affected by the Covid 19 pandemic due to its exposure to HoReCa (hotel, restaurant, cafe) sales, the retail sector remained resilient. Geographical diversification remains a weak element in the group’s business risk profile, exposing the company to macro-economic risk of Georgia.

Group profitability remained in comfortable territory thanks to the flat profitability of Nikora Trade. Overall Scope-adjusted EBIDTA margin decreased slightly to 9.1% due to local currency devaluation. This is because most cash flows are generated in local currency, while a substantial amount of raw materials are imported without any foreign exchange hedging activities - a common characteristic of the Georgian retail market. The heavy dependence on imported materials may put Nikora Trade’s gross margins profile under further pressure if the Georgian currency continues to devalue against the euro/US dollar in 2021-2023. Generally, Scope believes that Nikora’s decreasing profitability trend will continue as market competition coupled with the group’s expansion plans outside of Tbilisi area is likely to put pressure on profitability. This will, however, be partially mitigated by the potential for increased operating efficiency from scale effects or increased bargaining power.

Nikora’s financial risk profile (assessed at B+) is constrained by lower-than-expected operating performance in 2020. There has been a deterioration in both Nikora’s leverage metrics: SaD/EBITDA peaked at 4.5x at YE 2020 versus 4.0x at YE 2019 and funds from operations (FFO)/SaD dropped to 13% versus 17% the year before. This was due to the debt-financed buyback of preference shares in the amount of GEL 18.0m, the fluctuation of foreign exchange rates elevating indebtedness by GEL 13.1m, and a GEL 15.0m deficit in projected EBITDA (absolute terms).

Scope anticipates stronger operating performance for the year 2021. The rating agency expects Nikora’s FMCG arm to perform better after recovery of HoReCa sales and group’s EBITDA to continue double digit growth in absolute terms (partially confirmed by H1 2021 results) further supported by ramping up of newly opened stores of its retail subsidiary Nikora Trade. The repayment of debt in the amount of GEL 15m together with the potential positive effect of foreign exchange gains would further support Nikora’s leverage. Scope expects leverage (SaD/EBITDA) to gradually decline to below 3.5x going forward.

The current debt structure, the amount of short-term debt, significantly weakens Nikora’s liquidity profile. Scope estimates that low cash levels of around GEL 5.0m available at YE 2020 will be insufficient to fully cover (re)-financing needs from expected negative free operating cash flow in 2021-2022 of around GEL 10m and a short-term working capital loan of around GEL 30m. Even if accounting for the group’s undrawn committed lines of GEL 13.2m, the ratio remains inadequate, exposing Nikora to continued refinancing risks and a strong dependency on its banks. Hence, liquidity weighs negatively on Nikora’s overall rating.

While no explicit adjustment for supplementary rating drivers has been made, Scope notes that the flow of information between management and the rating agency was often very slow. Although this has not led to any rating impact so far, it may warrant a downgrade going forward (ESG factor).

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

Outlook and rating-change drivers

The Outlook is Negative and reflects the risk of leverage remaining at elevated levels: SaD/Scope-adjusted EBITDA staying above 4x and FFO/SaD below 15%. It also incorporates the fact that Nikora will continue operating with very limited liquidity due to a heavy investment phase and lease payments limiting free operating cash flow generation.

A positive rating action (i.e. an Outlook change to Stable from Negative) could be the consequence of SaD/Scope-adjusted EBITDA below 4x and FFO/SaD above 15% on a sustained basis. This could be achieved if, for instance, the top line grows more strongly, outpacing the forecasted surge in raw materials prices, or the level of inventory shrinkages is decreased.

A negative rating action could result from credit metrics remaining at weak 2020 levels, as indicated by FFO/SaD below below 15% or SaD/EBITDA above 4x on a sustained basis or if there is no significant improvement in the transparency and consistency of information provided by the group.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB-, including the GEL 28m bond (GE2700603873). This reflects Scope’s expectation of an average recovery for senior unsecured debt positions in the hypothetical event of a group default. The recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior secured debt of GEL 50m, payables and fully drawn committed credit lines.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Retail and Wholesale Corporates, 17 March 2021; Rating Methodology: Consumer Products, 30 September 2020), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Zurab Zedelashvili, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 15 August 2019. The Credit Ratings/Outlook were last updated on 14 September 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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