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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB- issuer rating on Georgian Beer Company JSC 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 by GBC’s resilient operating performance with stable growth reflected in improved credit metrics. As the HoReCa (hotel, restaurant, café) segment resumed operations in 2021 after Covid-related restrictions and retail stores remained open for longer hours, the company’s sales to key accounts were sound in 2021. This trend also continued in H1 2022 as confirmed by the company’s interim results. Scope views the current high profitability, the company’s product portfolio and modest leverage as key supports to the rating. The volatile nature of free operating cash flow and inadequate liquidity, due to continued reliance on very high short-term credit lines, are negative rating drivers.

GBC’s business risk profile (assessed at BB-) continues to benefit from the underlying industry of non-durable consumer products. Despite fierce competition in the saturated Georgian beer market, the company managed to maintain their position in the upper mainstream market where its best-selling ‘Bavaria’ beer sales remained resilient. The company’s competitive position on upper mainstream market will be further supported by introduction of new international brand Miller. Nearly all GBC’s carbonated soft drink sales volumes increased in 2021 due to 2020 when the HoReCa business was heavily impacted by the Covid pandemic.

Strong commercial ties with fast growing retail chains continue to support GBC’s sales, mainly outside the Tbilisi area. GBC is heavily dependent on Zedazeni 2012, with the exposure expected to represent 75% of total sales in FY 2022 (70% in FY 2020). While the ‘single distribution channel’ is inherent to Georgian beverage companies, Zedazeni 2012’s low credit quality raises concerns on its operational sustainability and value chain management, which could translate into an impairment of receivables (ESG factor: credit negative). GBC is becoming more diversified due to a broad range of products and after successful new product launch such as Ravi, Civ-Civ and Belgium Standard in economy beer segment. Geographical diversification remains a weak element in the group’s business risk profile, exposing the company to Georgian macroeconomic risk.

The company’s profitability remained in comfortable territory thanks to its flexibility about selling prices. The heavy dependence on imported raw materials, typically without any foreign exchange hedging, is expected to further pressure GBC’s gross margins in medium term. If GBC increases sales to retail customers, that will increase sales costs. In general, Scope believes that GBC’s EBITDA margin will decrease towards 20% as retail market consolidation and competition coupled with the group’s resumed marketing activities which is likely to restrain profitability. Our base case includes a stable gross margin development without major supply chain disruptions. However, a sudden disruption of the supply chain could have a significant negative impact on the company’s operating performance.

GBC’s financial risk profile (assessed at BB-) is supported by modest level of leverage of company. The lower-than-expected leverage in 2021 with Scope-adjusted debt/EBITDA of 3.0x (decreased by 0.2x YoY) is the result of higher-than- anticipated EBITDA after successfully implementation of new product portfolio i.e draft beer and the full recovery of HoReCa sales coupled with foreign exchange gains on non-lari liabilities and repayment of the current portion of debt.

While close to nil free operating cash flow will limit the room to decrease financial debt in the short term, leverage is anticipated to remain below 3.0x. The forecasted deleveraging should be driven by increasing EBITDA following GBC’s expansion of their beer portfolio and export sales. Indebtedness is expected to remain at current levels. For the same reasons, Scope expects Scope-adjusted funds from operations/debt to follow a similar trend, improving towards 30% in the medium term.

To deal with inflationary pressures, the National Bank of Georgia continues to tighten monetary policy. The refinancing rate has risen by 2.0pp over the last 12 months, to 11% from 9%, which will cause higher debt servicing costs. Scope expects the ratio to remain at around 3.0x in the medium term, supported by further growth of EBITDA, driven by the ability to pass on a large share of inflationary pressure to customers.

The expected annual capex of high-single-digit million lari in 2022-2024, with modest working capital investments, will put operating cash flow in positive territory in that period.

Scope estimates that low cash levels of around GEL 4.1m available at YE 2021 will be insufficient to fully cover (re)-financing needs from current debt of GEL 9m after the expected negative free operating cash flow. Even if accounting for the group’s undrawn committed lines of GEL 4.6m, the ratio remains inadequate, exposing GBC to continued refinancing risks and a strong dependency on its banks. Short-term debt is expected to peak in 2022 consisting of a GEL 25m senior unsecured bond and GEL 10.0m in bank debt. While so much debt can hardly be redeemed by using operating profits, we believe GBC can refinance debt either by issuing new bonds or by using a term loan.

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

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 or below 3x and Scope-adjusted funds from operations/debt of over 20%. Furthermore, the Outlook also incorporates a successful refinancing of senior unsecured debt maturing in December 2023.

A positive rating action could result from Scope-adjusted funds from operations/debt towards 35% and Scope-adjusted debt/EBITDA below 3x on a sustained basis, with liquidity sustainably improving. This could be achieved via deleveraging while maintaining a relatively high level of EBITDA.

A negative rating action is possible if Scope sees a deterioration in credit metrics as indicated by Scope-adjusted funds from operations/debt remaining significantly below 30% and Scope-adjusted debt/EBITDA increasing above 3.5x on a sustained basis. Weak financial performance could be triggered by a stronger than anticipated negative effect from the transition of the retail market and increased competition, putting operating profitability under pressure, by higher-than-expected capital expenditures or by debt-financed investment in other expansion 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 2024, which assumes outstanding senior secured debt, payables and fully drawn credit lines of GEL 41m. The significant haircuts were applied to the account receivables as consequence of low credit quality of Zedazeni 2012. 

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), 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: 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 5 October 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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