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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of BB-/Stable to Tegeta Motors LLC. Scope has also affirmed its BB- rating for senior unsecured debt.

Rating rationale

The affirmation is driven by the company’s solid development despite constrained operations during lockdowns. As Scope anticipated, Tegeta’s overall top line remained in the positive growth area in 2020, benefitting from revenue backlogs for bus and heavy vehicle tenders, while other business line revenues dropped by 10% YoY in 2020. The company is currently in the process of issuing a new bond in the amount of GEL 50-60m, which is expected to improve its liquidity profile.

Tegeta’s business risk profile (assessed at BB-) benefits from a leading position in the Georgian auto retail market in terms of sales. The importance of large-scale operations with prudent supply chain management has been confirmed by the post Covid-19 business environment: some domestic competitors have been bankrupted, while Tegeta has managed to keep all business units functional. During the lockdown, when regulations were at their strictest and imports were suspended, Tegeta suffered from supply bottlenecks. Now Tegeta is able to serve clients without any major interruptions and a sufficient inventory of stock. In addition, Georgia’s fragmented automotive sector means that most of Tegeta’s competitors have limited financial flexibility. This affords the company a competitive advantage with favourable inventory delivery times.

In FY 2020 the top line for light vehicle business line decreased by 7% due to cautious spending patterns for new cars. In contrast, H1 2021 results promise top line growth of light vehicle sales by 68% in FY 2021, supported by the ramping up of the newly opened Toyota Batumi Center together with the Volvo center in Tbilisi. Heavy vehicle sales were hit hard by the Covid-19 pandemic, resulting in a drop in total revenue by 16% YoY in 2020. However, Scope expects the same recovery trend in this business line in 2021 and anticipates an increase in heavy vehicle sales of around 50% YoY in 2021.

Diversification remains a weak point in the company’s business risk profile. There are limited sales outside of Georgia and distribution channels are not diversified. Scope sees product diversification as an important factor for Tegeta as it provides: i) defence against the economic cycle and; ii) differentiation from local competitors, who remain solely focused on car sales.

Scope believes that Tegeta will be able to keep EBITDA margins at 7%-8% going forward. These will be supported by historically stable gross margins of around 25%, benefitting from a complementary product portfolio with advantageous commercial terms. The company’s growth strategy should also continue to enhance its bargaining power, potentially creating higher margins in different markets. The adjusted EBITDA return on assets is gradually decreasing. This is due to Tegeta’s operational strategy of stockpiling, which gives it a competitive advantage in terms of delivery times. Scope expects this metric to remain in the 15%-20% range going forward.

Tegeta’s financial risk profile (assessed at BB-) is supported by the high margins of its scaled project business in 2020-2021, reflected in substantial cash flow generation. Higher-than-expected leverage is the result of our SaD calculation, which additionally includes guarantees and financial obligations at parent level (TGM Group). Foreign exchange losses on foreign currency-denominated debt have also increased the company’s indebtedness. Scope expects indebtedness to increase at YE 2021 for both Tegeta and its parent. Scope’s rating case incorporates leverage staying below 4.0x (2021E: 3.0x, 2022E: 3.9x, 2023E: 3.9x).

While cash flow cover is the weakest element of Tegeta’s financial risk profile, Scope regards positively the company’s financial flexibility in terms of capital spending and therefore has not overweighted this metric. Scope continues to expect annual expected capex in the low double-digit million range (GEL 15-30m), in line with management guidance.

Liquidity is seen as adequate. Although liquidity has historically always been inadequate (internal plus external cover below 100%), Scope expects the issuance of the new bond with a bullet repayment structure to significantly decrease the amount of short-term debt going forward. The anticipated cash buffer of over GEL 30.0m together with positive free operating cash flows appears sufficient to fully cover (re)-financing needs of around GEL 30-40m in short-term debt even without undrawn committed credit lines.

While no explicit adjustment for supplementary rating drivers has been made, Scope notes that the transformation of Tegeta’s organisational structure not only increases transparency but also enhances reporting consistency and operating performance visibility for each company business line.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation of the successful placement of the additional GEL 50-60m senior unsecured bond. A successful bond placement would remove Tegeta’s dependence on short-term funding and dispense with potential liquidity concerns that would otherwise exist. The Outlook also incorporates Scope’s expectation that sales will continue to grow at a low double-digit percentage with modest working capital and capital investments. Scope does not expect any M&A activity in the short term.

A positive rating action could be the consequence of funds from operations/Scope-adjusted debt above 30% on a sustained basis. This could be achieved if Tegeta deleverages while maintaining relatively high EBITDA. A positive rating action could also be warranted if the company grows significantly in size.

A negative rating action could result from a deterioration in credit metrics as indicated by negative free operating cash flow on a sustained basis or Scope-adjusted debt/EBITDA increasing above 4.0x on a sustained basis. Weak financial performance could be triggered by the delayed collection of scaled project-related funds or higher-than-expected capital expenditure. A negative rating action could also be indicated by inadequate liquidity, which could result from the unsuccessful placement of an additional bond.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB-, reflecting the expectation of an average recovery for senior unsecured debt positions in the hypothetical event of a company default. Scope’s recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior secured loans, payables and guarantees ranked prior to the senior unsecured debt category.  

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 Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Retail and Wholesale Corporates, 17 March 2021), 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: the rated entity, public domain and Scope 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 these 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 Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and 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 22 March 2019. The Credit Ratings/Outlook were last updated on 17 November 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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