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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB-/Stable issuer rating on Georgia-based mobile operator Cellfie Mobile LLC (Cellfie). Scope has assigned a BB- rating to the GEL 65m senior secured bond (ISIN: GE2700604608).

Scope has withdrawn the preliminary rating of (P) BB- assigned on 27 December 2023 to the GEL 65m senior secured bond issued by Cellfie. The withdrawal is due to business reasons following the bond's successful placement.

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 (unchanged). Cellfie’s business risk profile continues to benefit from steady demand in the Georgian telecommunication sector, particularly for mobile service operators. The sector has low cyclicality, moderate barriers to entry (licenses, network rollout) and medium-to-low substitution risk.

Cellfie’s market share in terms of subscribers remains at 23%, ranking it number three in the Georgian mobile market. In terms of mobile service revenue, the company has a 17% market share. In 2023, Cellfie's data user base grew by 4.3% year-over-year, maintaining its market leadership in M-Data subscriber penetration within its customer base. Data-driven products have demonstrated steady annual growth, whereas voice services have declined due to the market's transition towards data-focused solutions.

Diversification remains weak as Cellfie only operates in Georgia, in a single industry: telecommunication services. In addition, it only offers mobile services, whereas its two main competitors (MagtiCom and Silknet), also provide fixed broadband, fixed telephony and TV services.

Profitability is good, with an EBITDA margin* of 45% in 2023. In terms of adjusted EBITDA after leases, the margin stands at 38%, a level comparable to that of most large incumbent telecom operators in Europe. At the start of 2024, Cellfie began streamlining its product portfolio and reducing non-profitable service costs, primarily related to A2P transit SMSs. Additionally, following management changes including the appointment of a new CEO in February 2024, the pricing of several services was increased. These measures are anticipated to lead to a 500-basis points improvement in EBITDA margins for the full year, as partially reflected in the actual results for the first nine months of 2024.

As part of its strategic initiatives, Cellfie plans to introduce a loyalty programme aimed at fostering emotional engagement with its customers. While this may involve one-time fixed costs, it is expected to positively impact profit margins and solidify the company’s market position in the medium term.

Financial risk profile: BB (unchanged). Cellfie’s financial risk profile reflects solid credit metrics due to good operating performance, with EBITDA and the cash conversion cycle both improving, thereby leading to substantial cash flow. In 2023, the company successfully repaid co-borrower loans while issuing GEL 65m in bonds. By the end of the year, the company’s debt comprised these bonds and GEL 20m in fixed loans provided by commercial banks (Bank of Georgia and TBC Bank), consistent with Scope’s base case. Following the conversion of shareholder loans into equity, Cellfie achieved positive equity for the first time as of year-end 2023. As a result, leverage, in terms of debt/EBITDA, stood at 1.6x in 2023 (down from 10.9x in 2022). This was further supported by solid operating performance, which strengthened the company’s EBITDA.

Scope foresees debt/EBITDA remaining below 2.0x and funds from operations/debt above 45% in the medium term. While the company’s growth strategy will likely benefit its operating performance, debt-funded capital expenditures will be a constraint.

In 2024, Georgia's central bank reduced the refinancing rate by 150bps to 8.0%, which Scope expects to support Cellfie's EBITDA interest cover ratio. However, Scope projects that an additional debt issuance by the beginning of 2025 will lower EBITDA interest cover to below 7.0x in 2025. Scope has also made conservative assumptions about future debt costs, considering the ongoing political tensions in Georgia. The agency's base case does not include severe impacts from the current political situation, which could lead to sanctions on Georgia and significantly restrict international capital inflows. Scope will closely monitor developments and adjust its base case if such material risks arise.

Cash flow cover remains the weakest element of Cellfie’s financial risk profile, as the company is currently executing a significant capex programme to expand its market coverage and enhance the capacity of its mobile network. This ongoing initiative includes the rollout of 5G, resulting in about GEL 60m in capital expenditures per annum during 2024-25 and increasing operating lease obligations. Consequently, Scope anticipates that free operating cash flow will remain under pressure in the short-to-medium term, with the free operating cash flow/debt ratio expected to remain close to 0%.

Liquidity: adequate. Cellfie’s liquidity remains adequate. This is mainly driven by a limited short-term debt position and sound EBITDA cash conversion. While an expected increase in maintenance and development capex in upcoming years will push free operating cash flow close to nil, the company’s significant cash buffer should be sufficient to fully cover financing and refinancing needs.

Although liquidity is expected to weaken in 2026, primarily due to the maturity of the GEL 65m senior secured bond, Scope does not foresee any refinancing challenges. This is due to well-established relationships with local banks and international financial institutions. Furthermore, existing leverage covenants set below 2.0x are expected to keep the company’s balance sheet healthy.

Supplementary rating drivers: -1 notch (unchanged). The issuer rating incorporates a one-notch negative adjustment for peer group considerations, as Cellfie is noticeably smaller and has a weaker market position compared to larger European telco incumbents, i.e. 4iG Nyrt, which is rated BB-/Stable by Scope but demonstrates much larger scale and higher diversification of revenue streams.

Regarding parent support, Scope did not have access to the financial accounts of Cellfie’s parent companies as these companies do not engage in financial reporting. However, Scope believes that any potential cash outflows from the company are effectively safeguarded by restrictions on transactions involving “affiliated persons” potentially disclosed in debt documentation.

Outlook and rating sensitivities

The Stable Outlook reflects progressive improvements in revenue and profitability together with significant capex and no dividend payments. The Outlook also assumes that the company could use its significant leverage headroom for additional capex and/or M&A but would not risk leverage (debt/EBITDA) rising above 2.0x. Scope also expects that the company's business and financial strength will not be materially affected by the current political developments in the Republic of Georgia.

The upside scenarios (deemed remote for the time being) for the rating and Outlook would require (collectively):

• Removal of the one-notch adjustment for peer comparison
   
• Maintenance of credit metrics in line with current forecasts

The downside scenario for the rating and Outlook would require:

• Scope-adjusted debt/EBITDA to exceed 2.0x on a sustained basis

Debt rating

Scope has assigned a rating of BB- to the GEL 65m senior secured corporate bond (ISIN: GE2700604608), in line with the issuer rating, following its placement. This reflects the expected recovery in light of the pledged security package (tangible and intangible asset owned by the company) and the bond’s ranking in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2026, which assumes that outstanding senior secured bank loans rank superior to the senior secured bond. The recovery expectations for the bond indicate an above-average recovery, taking into account a reasonably high distressed enterprise value at default of about GEL 130m. However, Scope has not provided an uplift to the bond rating, due to emerging market risk and the risk that the company could raise additional senior secured bank loans which could impair the recovery for the bondholders in a company distress.

Scope has withdrawn the preliminary bond rating of (P) BB- due to business reasons following the bond’s successful issuance.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Cellfie Mobile LLC

Issuer rating: BB-/Stable, affirmation

GEL 65m senior secured bond rating (ISIN: GE2700604608): BB-, New

GEL 65m senior secured bond rating: (P) BB-, 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 methodology used for these Credit Ratings and/or 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, third parties 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 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, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 4 December 2023.
The GEL 65m senior secured bond final Credit Rating was first released by Scope Ratings on 11 December 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
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