The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of JSC Lisi Lake Development (LLD) to CC from B- and revised the Outlook to Stable from Negative. Scope has also downgraded the senior unsecured debt rating to CCC from B.

Subsequently, Scope has withdrawn all ratings on JSC Lisi Lake Development due to business reasons.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: B- (revised from B). The business risk profile remains constrained by the company’s limited size with Scope-adjusted total assets* of around GEL 723m at end-2023 (up 4% YoY), weak geographic diversification and high concentration of the project pipeline around Lisi Lake in Tbilisi. The latter factor poses a cluster risk to the company’s cash flows.

While the Buknari project is expected to benefit LLD’s diversification profile, Scope does not yet consider this recently started project as a mitigating factor to the pipeline’s concentration, as no significant revenue contribution is expected before 2025.

Profitability, as measured by the EBITDA margin remained negative in 2023, confirming LLD’s high sensitivity to earnings volatility, increases in construction and material costs or deviations in project planning. However, Scope notes a significant improvement in profitability in the first half of 2024, paving the way for a measured recovery of operating margins in 2024-25.

Financial risk profile: CCC (revised from B). The financial risk profile reflects LLD’s weak credit metrics, which are largely impaired by the weaker profitability and earnings volatility.

Negative EBITDA in 2022 (GEL -7.6m) and 2023 (GEL -2.7m) have resulted in below-par EBITDA/interest cover and a further increase in debt/EBITDA. Scope anticipates that EBITDA/interest cover may remain below 1x in 2024E, which is limiting the financial risk profile. Furthermore, Scope considers that cash flow generation will remain subject to volatility and timing, leaving the company exposed to potential negative cash flows that will require external financing to bridge. However, Scope acknowledges that there have been notable improvements in operating performance in H1 2024, which may contribute to a gradual easing of pressure on credit metrics.

LLD remains highly dependent on the timely and on-budget fulfilment of contract sales, leaving little headroom to withstand a prolonged period of weak operating performance, reduced sales volumes, cost overruns or delays in the pipeline execution.

Liquidity: inadequate. Liquidity is inadequate and below par for the twelve months to June 2025. The forecasted FOCF of GEL 4.0m and the cash position of GEL 26.1m at the end of June 2024 are insufficient to cover GEL 72m due by the end of June 2024. The proceeds from divestment received in the first half of 2024 have improved the liquidity position. Nevertheless, LLD remains reliant on partial refinancing of its bond liabilities (USD 12m or approximately GEL 32.5m is being sought), which Scope considers will be resolved through the obtention of a bridge loan as a backstop solution. Despite the planned bridge loan, a liquidity gap persists. The significant share of unencumbered assets (approximately GEL 586m at end-2023) acts as a mitigating factor for the necessary refinancing.

Supplementary rating drivers: -1 notch. The assessment includes a negative rating adjustment of one notch stemming from governance issues (ESG factor: credit negative).

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

Outlook

The Stable Outlook reflects the anticipated enhancements in operating profitability from 2024, which should alleviate the pressure on credit metrics, as Scope does not anticipate further deterioration. Scope’s base case assumes the successful refinancing of the senior unsecured bond liabilities, which are due in December 2024.

Debt rating

Scope has downgraded the senior unsecured debt rating to CCC from B. Scope expects an ‘above average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2025 based on the company’s liquidation value. Given an unencumbered asset ratio of well above 110%, senior unsecured debt holders could also benefit from a substantial pool of assets not pledged as collateral.

Environmental, social and governance (ESG) factors

Scope points to the lack of reliable planning and frequent alterations to the pipeline schedule. These factors significantly impair visibility and may indicate underlying operational issues.

All rating actions and rated entities

JSC Lisi Lake Development

Issuer rating: CC/Stable, downgrade, Outlook change to Stable from Negative, withdrawal

Senior unsecured debt rating: CCC, downgrade, withdrawal

*All credit metrics refer to Scope-adjusted figures.

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, 16 October 2023; European Real Estate Rating Methodology, 28 March 2024), 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 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 and/or Outlook were 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: Fayçal Abdellouche, Senior Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 10 July 2018. The Credit Rating/Outlook was last updated on 5 February 2024.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 8 February 2019. The Credit Rating was last updated on 5 February 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties. 

Conditions of use/exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.