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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 Stable from Negative. Scope has also affirmed its BB- rating on senior unsecured debt.

Rating rationale

The Outlook change back to Stable from Negative is driven the Group’s resilient operating performance with stable growth reflected in improved credit metrics. As the HoReCa (Hotel, Restaurant and Café) segment resumed operations in 2021 after Covid-related restrictions and retail stores remained open for longer hours, the company’s operating performance was sound in 2021. This trend also continued in H1 2022 as confirmed by the company’s interim results. Scope views comparatively current high profitability and the group’s ability to grow as key supports to the rating. Negative free operating cash flow and inadequate liquidity, due to continued reliance on very high short-term credit lines, are negative rating drivers.

Nikora’s business risk profile (assessed at BB-) continues to benefit from being a key national player in the fast-moving consumer goods and retail industries, as well as from its national brand recognition. While the company has a vertically integrated structure, Nikora remains heavily dependent on exchange rates to determine input costs.

Scope highlights the risk of depending on the Russian and Ukrainian markets for primary consumption food import. Management has confirmed that there is no significant disruption or challenges in supply chain management as main suppliers have been delivering reliably. Alternatively, Nikora could turn to markets like Poland, Türkiye and/or Brazil to substitute or diversify suppliers, but at an increased cost.

Scope’s base case includes stable gross margin development without major supply chain disruptions. However, a sudden substitution of supply chain could have a negative impact on the company’s operating performance. Furthermore, the shrinkage and obsolete inventory costs are expected to remain at around 2% of sales and decrease gross margins by 200 bp (credit-negative ESG factor).

Nikora’s financial risk profile (assessed at BB-) is supported by a sound cash conversion cycle reflected in substantial cash generation. The lower-than-expected leverage in 2021 is the result of solid EBITDA and stable Scope-adjusted debt. Scope anticipates a continued strong operating performance in 2022 as HoReCa business is back to normal operations after Covid-related restrictions and expects group’s EBITDA to sustain double digit growth in absolute terms, which is partially confirmed by H1 2022 results. Potential positive effects of foreign exchange gains would further support Nikora’s leverage in short-term as Georgian lari continues to appreciate against USD dollar.

Liquidity remains inadequate. The current debt structure has a significant amount of short-term debt (common for the Georgian market), which significantly weakens Nikora’s liquidity profile. Committed credit lines of GEL 13.2m remain undrawn in 2021 and appear to be insufficient to cover (re)-financing needs.

Liquidity should benefit from the expected GEL 35m of new bond issuance in 2022 as Scope does not anticipate any refinancing difficulties thanks to Nikora’s well established relationships with local banks, a resilient business model and improved leverage. Cash proceeds will be used to refinance existing GEL 28m bond in October 2022.

The assessment of Nikora JSC’s financial risk profile is one notch above that of Nikora Trade’s despite having similar credit metrics as Scope positively regards the group’s larger size, higher level of vertical integration and exposure to perishable consumer goods that support stability of cash flow. However, given the strong interdependencies between Nikora JSC and its main subsidiary Nikora Trade (which represented 75% of the group’s EBITDA in 2021), Scope notes that Nikora Trade’s heightened refinancing risk could negatively impact the group’s financial risk profile.

Scope highlights that the flow of information between management and the rating agency has improved.

One or more key drivers of the credit rating action are considered an ESG factors.

Outlook and rating-change drivers

The Outlook change back to Stable from Negative reflects Scope’s expectations that indebtedness will remain at its current level with Scope-adjusted debt/EBITDA at around 3x and Scope-adjusted funds from operations/debt of over 20%. It also incorporates the assumption that the company will be able to tackle inflation, retain its margins and continue to operate with very limited liquidity due to a heavy investment phase, dividend payments on preferred shares and lease repayments limiting free operating cash flow. Furthermore, the Outlook also incorporates a successful refinancing of senior unsecured debt maturing in October 2022 from proceeds of a new bond (GEL 30m-35m) with similar terms and conditions.

A positive rating action could result from Scope-adjusted funds from operations/debt and Scope-adjusted debt/EBITDA above 30% and below 3x respectively on a sustained basis, with liquidity dramatically and sustainably improving. This could be achieved via deleveraging while maintaining a relatively high level of EBITDA. A positive rating action could also be warranted if the group were to grow significantly, leading to higher market shares and diversification.

A negative rating action could result from a deterioration in credit metrics as indicated by Scope-adjusted funds from operations/debt falling below 15% and Scope-adjusted debt/EBITDA increasing to above 4x on a sustained basis. Such weak financial performance could be triggered by a significant increase of the cost base and/or a supply chain disruption, putting operating profitability and cash flow under pressure. A negative rating action could also occur if liquidity remained inadequate.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB-. 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 2024, 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, (General Corporate Rating Methodology, 15 July 2022; Consumer Products Rating Methodology, 30 September 2021; Retail and Wholesale Rating Methodology, 27 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 15 August 2019. The Credit Rating/Outlook was last updated on 2 September 2021.
The senior unsecured debt Credit Rating/Outlook was first released by Scope Ratings on 14 September 2020. The Credit Rating/Outlook was last updated on 2 September 2021.

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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