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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Negative issuer rating of beverage producer Georgian Beer Company JSC (GBC) along with the BB- rating for senior unsecured debt.

Rating rationale

The rating affirmation is based on the expected improvement in GBC’s financial situation in medium term. The Outlook remains Negative, reflecting continued risk of deterioration in operating performance, due to fierce competition on Georgian beverages market, ongoing consolidation of retail sector and delayed recovery of sales within HoReCa (hotel, restaurant and café) business.

GBC’s business risk profile (assessed at BB-) continues to benefit from its underlying industry of non-durable consumer products. However, fierce competition on the saturated Georgian beer market led to GBC’s beer sales decreasing by 12.4% YoY while local competitors outperformed the market’s modest growth. Despite the decreased overall market share to 23% in 2020 (26% in 2019), GBC remained strong in the upper mainstream market, where sales of its best-selling product, Bavaria, were resilient to the pandemic. In 2020, sales volumes on nearly all GBC’s carbonated soft drinks were either constant or decreased due to the pandemic’s heavy impact on its HoReCa exposure. Strong commercial ties with fast-growing retail chains of Retail Group are expected to support GBC’s sales growth, mainly outside Tbilisi.

Customer concentration deteriorated further after the termination of the Diplomat Georgia contract and the merger between GBC’s customer, Zedazeni Kutaisi, and Zedazeni 2012. The heavy dependence on Zedazeni 2012 constrains of GBC’s diversification. Overall diversification benefits from broad range of products and the significant share of newly launched products including Harp, Ravi, AIA and Civ-Civi. The geographical concentration on Georgia remains a weak element in GBC’s business risk profile and exposes the company to the country’s macro-economic risk.

Profitability remained comfortable thanks to the company’s flexibility in selling-price changes. The Scope-adjusted EBIDTA margin increased slightly to 26% in 2020. The heavy dependence on imported raw materials – also without the use of foreign exchange hedging, though common among Georgian producers – is expected to create further pressure on gross margins. Generally, Scope believes that GBC’s profitability will decrease towards 20% due to the ongoing consolidation in the retail market coupled with the increased competition on operating market.

GBC’s financial risk profile (assessed at BB-) is constrained by the weaker operating performance in 2020 as anticipated. This led to a deterioration in leverage: Scope-adjusted debt/Scope-adjusted EBITDA (SaD/SaEBITDA) increased to 3.1x at YE 2020 from 3.0x at YE 2019 and Scope-adjusted funds from operations (SaFFO)/SaD dropped to 22% from 25% over the same period. This was due to the GEL 5.0m increase in the debt balance due to foreign exchange effects, the increased cost of debt and the limited growth anticipated for EBITDA in absolute terms.

Scope anticipates even weaker operating performance for 2021, with negative EBITDA growth in absolute terms due to the slow recovery of HoReCa sales, the increasing selling costs and fierce market competition. However, elevated export sales, a successful implementation of the newly launched product portfolio, development of sales in draft beer segment and a full recovery of HoReCa sales are expected to fuel EBITDA growth in the medium term. Scope also expects positive operating cash flow, based on the expected annual capex in the mid-single-digit millions of lari in 2021-23 in line with the management forecast and the limited working capital investments, which would give some room for deleveraging.

The current debt structure, consisting of short-term financial leases and bank loans, significantly weakens GBC’s liquidity. Available cash of around GEL 2.0m at YE 2020 and expected free operating cash flow of around GEL 5.0m will be insufficient to fully cover (re-)financing needs from the currently GEL 11.0m-13.0m of debt. Even including undrawn committed lines of GEL 2.1m, the ratio is inadequate, exposing GBC to continued refinancing risks and a strong dependency on bank credit. Moreover, short-term debt is expected to peak in 2022, consisting of GEL 25m of senior unsecured bond and GEL 10.0m of bank debt. Such high debt positions can hardly be redeemed from the operating business alone, but Scope believes GBC can refinance these positions either by issuing new bonds or through the term-loan because by that time expected deleveraging is likely to create headroom of financial flexibility.

Outlook and rating-change drivers

The Negative Outlook on GBC’s rating reflects the continued risk of deterioration in operating performance, due to fierce competition on Georgian beverages market, ongoing consolidation of retail sector and delayed recovery of HoReCa business. This is expected to put further pressure on liquidity and selected credit metrics this year.

A positive rating action (i.e. an Outlook change to Stable from Negative) could be the consequence of the SaD/SaEBITDA remain below 3.5x and the SaFFO/SaD goes back towards 30%. This could be achieved through stronger top line growth due to a recovery in HoReCa sales and an increase in exports that outpace the forecasted surge in raw materials prices.

A negative rating action could result from weaker credit metrics with a SaFFO/SaD remain significantly below 30% and SaD/SaEBITDA above 3.5x. This could be triggered by i) operating profitability pressures from worse-than-anticipated effects from the retail market transition and increased competition; ii) higher-than-expected capital expenditure; and/or iii) debt-financed investment in new projects.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB- including the GEL 25m bond (ISIN GE2700603725). This reflects Scope’s expectation of an average recovery for senior unsecured debt positions in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior secured debt of GEL 25m, payables and fully drawn 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: 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: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 March 2018. The Credit Ratings/Outlook were last updated on 12 October 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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