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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of JSC VIAN (formerly JSC Evex Hospitals) to BB- from BB and revised the Outlook to Negative from Stable. Scope has also downgraded the senior unsecured debt rating to BB- from BB.

Rating rationale

The downgrade is driven by deteriorating credit metrics resulting from the demerger of regional and community hospitals coupled with regulatory changes that have limited utilisation of hospital beds and drove capex high. The Outlook revision reflects uncertainties around the refinancing of the unsecured bonds maturing in November 2024.

VIAN's business risk profile (revised to BB- from BB) remains supported by the low cyclicality and protected nature of the underlying healthcare services industry. Although VIAN remains the largest hospital chain in Georgia's fragmented healthcare service industry, it lost its dominant position in 2023 due to the demerger of regional hospitals from its portfolio. This significantly reduced its market share by number of beds to 7.5% from 14% and its market share by sales in Universal Healthcare (UHC) to 13% from 20%.

Following the demerger of regional and community hospitals, which were more dependent on government-funded healthcare programmes, Scope has observed a slight decrease of five to six percentage points in exposure to these programmes. However, Scope emphasises the substantial risk associated with the still high dependence of VIAN's business model on government-funded revenue streams. This remains a persistent concern (credit-negative social ESG factor).

VIAN's financial risk profile (revised to B+ from BB) is weaker than its business risk profile. The higher-than-expected leverage in 2023 is mainly due to the demerger of regional and community hospitals, which reduced VIAN's EBITDA by GEL 12m. EBITDA development was further constrained by the temporary closure of hospitals for phased renovations following the introduction of a new facility regulation in September 2023, which required certain departments to temporarily halt patient admissions. While foreign exchange gains on USD-denominated liabilities had an immaterial impact on reported debt, significantly higher capex investments associated with the new facility regulation forced the company to increase its indebtedness by GEL 32m. As a result of the demerger, reported debt decreased by approximately GEL 53.4m. The Scope-adjusted debt/EBITDA ratio is expected to be 5.3x at the end of 2023 (up by 1.4x YoY).

Annual capex remains in the low double-digit million range (around GEL 20m), which is expected to keep free operating cash flow constrained. While anticipated capex and dividend payments will constrain the ability to reduce financial debt in the short to medium term, Scope expects a reduction in leverage towards 4.0x in the medium term. Deleveraging is expected to be driven by increasing EBITDA following higher utilisation levels at fully ramped-up hospitals (partially confirmed by operating performance in Q1 2024) despite a slight increase in indebtedness. For the same reasons, Scope expects the Scope-adjusted funds from operations/debt ratio to follow a similar trend, improving to close to 15% in 2025 (2023: 8%).

The relatively high cost of debt in Georgia puts pressure on EBITDA interest cover. While the company kept the cost of debt at 12.3% in 2023 (11% in 2022), Scope-adjusted EBITDA interest cover dropped below 2.0x as a result of weak operating performance and increased indebtedness. Scope expects the ratio to remain at a modest level of close to 2.0x in 2025-26 supported by rising EBITDA.

In 2024, Georgia's central bank lowered the refinance rate by 1.0 percentage point to 8.0%, which should support VIAN's EBITDA interest cover ratio. However, considering that 2024 is an election year and the current political situation remains tense, Scope has made conservative assumptions regarding the projected cost of debt going forward. The agency's base case does not factor in severe impacts from the "transparency of foreign influence" law, which could lead to sanctions on Georgia and significantly constrain international capital inflows. Scope will closely monitor potential developments and review its base case accordingly if such material risks arise.

Although VIAN breached covenants in 2023 due to weak operating performance, it was provided with waiver letters from the European Bank for Reconstruction and Development and the Asian Development Bank. Currently, the company is negotiating with local banks to refinance the existing bond through bank loans, which will feature higher covenant levels.

Scope views VIAN's liquidity as adequate. Although liquidity is weakened in 2024, primarily due to lower operating cash flow and the maturity of GEL 50m in senior unsecured debt, Scope does not foresee refinancing challenges in the future. This is thanks to well-established relationships with local banks and international financial institutions such as the European Bank for Reconstruction and Development and the Asian Development Bank. Additionally, Scope believes it is important to consider the relatively diversified operations and better access to funding of the parent company, which may facilitate downstream funding if required.

No explicit adjustment for additional rating drivers has been made. However, Scope notes that a downgrade may be warranted in the future if the flow of information between management and the rating agency continues to be slow.

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

Outlook and rating-change drivers

The Negative Outlook reflects the risk that leverage will remain at levels - Scope-adjusted debt/EBITDA above 4x - that are not commensurate with the current rating, linked to a delayed recovery in hospital revenues following regulatory changes that have limited utilization levels and led to increased capex. The Negative Outlook also reflects the refinancing risk on the senior unsecured bonds due in November 2024 and covenant breaches that are likely to persist in 2024.

A positive rating action (i.e. a revision of the Outlook to Stable) would require the company to consistently maintain a Scope-adjusted debt/EBITDA ratio of 4.0x or below, a successful refinancing of the senior unsecured debt due in November 2024, as well as Scope's perception of limited spillover risk from the current unrest in Georgia related to the "transparency of foreign influence" Law and uncertainties surrounding this year's elections. Further ratings upside could be warranted by decreasing dependence on state-funded revenue streams and increasing scale while Scope-adjusted debt/EBITDA ratio remain below 4.0x.

A downgrade could occur if the issuer is unable to successfully refinance its senior unsecured debt maturing in November 2024, a scenario which is currently considered unlikely. A downgrade could also occur if the Scope-adjusted debt/EBITDA ratio remains above 4.0x for an extended period. This could be triggered by a lack of significant revenue recovery due to delays in increasing hospital utilization levels and/or the further introduction of regulatory requirements that limit the resumption of hospital operations. A downgrade could also result from Scope's perception of increased spillover risk from the current unrest in Georgia related to the "transparency of foreign influence" Law and uncertainties surrounding this year's elections.

Long-term debt rating

Scope has downgraded VIAN's senior unsecured debt rating to BB- from BB including a GEL 50m bond (ISIN GE2700603881). Scope expects an 'above average' recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on VIAN's distressed enterprise value as a going concern. While the recovery analysis points to an above-average recovery expectation, the debt category rating is constrained to the same level as the issuer rating given the emerging market risks and the risk that VIAN could raise higher-ranking debt that would dilute the recovery for senior unsecured debtholders.

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

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook 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, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 July 2019. The Credit Ratings/Outlook were last updated on 5 June 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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