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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating of Tegeta Motors LLC and changed the Outlook to Negative from Stable. Concurrently Scope has affirmed the BB- senior unsecured debt rating.

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

Key rating drivers

Business risk profile: BB-. The issuer’s business risk profile is driven by its solid positioning as an automotive retailer, distributing both light and heavy vehicles and providing post-sale services in Georgia and the Caucasian region. Tegeta’s strategy of keeping high stock levels has afforded it the competitive advantage of being able to provide a quick delivery service. The company’s strategic geographical position and strong relationship with its major suppliers, among which Toyota, Volvo, Man and JCB, have allowed it to retain its market share in the region. Tegeta has grown significantly, with revenue increasing by 119% over the last five years, thanks to the favourable economic trend in Georgia and continuous expansion in new brands and in neighbouring countries. Nonetheless, whilst it is large in Georgia, Tegeta is a small retailer compared to international peers. This limit potential benefits from economies of scale and increases the risk of volatile profitability.

Tegeta has historically been resilient to unfavorable economic cycles. This is thanks to its strong market positioning and a significant amount of fleet deals with governments and corporate institutions, which ensured recurring income. Geographical diversification remains the weakest element of the company’s business risk profile: Tegeta’s sales are concentrated in the Caucasian region and its distribution channels are not diversified. However, product diversification provides a line of defence against economic headwinds, in contrast to local competitors that are solely focused on car sales. Tegeta offers parts and accessories as well as repair and maintenance services, which represented 30% of total revenue in 2023.

Profitability drives Tegeta’s business risk profile. With Scope-adjusted EBITDA margins* averaging 10% in 2018-23, the issuer typically has stronger profitability than its peers. Sales have strongly increased in 2023 (+45% compared to 2022) driven by: i) a positive macroeconomic trend; ii) a high order backlog from 2022 when supply chain disruptions made cars unavailable; iii) significant orders of heavy vehicles in Armenia and Azerbaijan; and iv) the introduction of new brand Geely and higher sales in the luxury segment driven by increased GDP per capita. This explains the increase in the EBITDA margin to 11.7% compared to 10% in 2022. After an exceptional 2023, Scope expects a decline in profitability in 2024 (preliminary H1 2024 reports show steady revenue growth and a decline in gross margins) due to the exceptional circumstances of the previous year, followed by a resumption of growth in 2025 and a more normalised future profitability of 10%.

Financial risk profile: B+. The continuous EBITDA growth has historically supported the financial risk profile and partially compensate for debt financed acquisitions and high capex. As EBITDA is anticipated to decline in 2024, Tegeta’s leverage, measured by the debt/EBITDA ratio, is projected to increase in 2024 to 3.7x from 2.9x in 2023. However, Scope expects leverage to remain below 4x and gradually decrease in 2025 as EBITDA returns to growth. Likewise, Scope anticipates that interest cover will fall below 3x temporarily in 2024 but remain within the rating case, also supported by the projected improvement in the interest rate environment. Free operating cash flow/debt is the weakest element of Tegeta’s financial risk profile. This metric has historically been negative due to high capex and negative net working capital changes (Tegeta tends to keep high inventory levels to ensure vehicle availability on both the domestic and non-domestic market). The issuer plans to reduce inventory days and implement a less aggressive capex plan over the next three years, which should at least partially improve cash flow generation.

Liquidity: inadequate. Scope considers liquidity to be inadequate. The high maturity wall in 2025 (approx. GEL 384m, of which GEL 291m bonds) cannot be repaid from internal sources, in Scope's view, given the GEL 33m of cash available at H1 2024 and the projected neutral FOCF. Historically, refinancing has largely been done by rolling over bank debt, but Tegeta has changed its financing strategy in the last 18 months, issuing a significant amount of bonds between 2023 and 2024. Scope also notes that 42% of the current outstanding bonds are denominated in foreign currency and the exposure is unhedged, exposing the company to significant currency risk during the life of the bonds and at maturity given the volatility of the Georgian Lari. This is however partially mitigated by the fact that 27% of Tegeta’s income is derived by international trade, which provides a natural hedge against currency risk. While Tegeta is expected to successfully refinance the bonds maturing in 2025 through the capital markets or banks, Scope points out that the changed debt structure (heavy reliance on 2-year bonds) will create continuous repayment walls that may not be sustainable in the long run.

Supplementary rating drivers: credit-neutral. The ESG factors were neutral in the analysis, but Scope notes the poor quality of management's forecasts, resulting in limited visibility into the company's performance.

Outlook and rating sensitivities

The Negative Outlook reflects the i) deterioration in credit metrics in 2024; ii) deteriorating capital structure with an increased short-term exposure to capital market debt leading to recurring maturity walls and, given its unhedged exposure, significantly increased foreign exchange risk; and iii) lack of visibility due to changing forecasts pointing at weak governance. Scope's base case assumes that the 2025 maturity wall will be refinanced through capital market debt or that the company will revert to bank debt as the expected leverage remains within the bank financing covenants.

The upside scenario for the rating and Outlook is:

• Adequate liquidity: The capital structure is improved by longer-term capital market or bank financing, which reduces the company's current maturity walls, and the company also lowers its currency risk.

The downside scenario for the rating and Outlook is:

• Inadequate liquidity: capital structure remains skewed towards short-term capital market debt, exposing the company to ongoing maturity walls with unhedged currency risk.

Debt rating

Scope has also affirmed the senior unsecured debt at BB-. The recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior secured loans and guarantees ranked prior to senior unsecured debt. Scope expects an above average recovery for Tegeta’s senior unsecured debt, but notes the potential volatility in the company capital structure and has therefore refrained from up notching the rating.

Environmental, social and governance (ESG) factors

Scope notes that the quality of the management forecasts provided as part of the business plan is poor and has changed significantly over the years, resulting in a lack of visibility on the company's short to medium term performance. In addition, the recent unannounced change of management increases uncertainty about the company's future business. Although this has not led to any rating impact yet, Scope highlights this as a governance concern, which will be watched closely going forward.

All rating actions and rated entities

Tegeta Motors LLC

Issuer rating: BB-/Negative, Outlook change

Senior unsecured debt rating: BB-, affirmation

*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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Retail and Wholesale Rating Methodology, 26 April 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 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 March 2019. The Credit Ratings/Outlook were last updated on 4 October 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, 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
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