November 16, 2017 / 3:15 PM / a month ago

Fitch Assigns First-Time 'B-(EXP)' IDR to Tegeta Motors LLC; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 16 (Fitch) Fitch Ratings has assigned Georgian auto spare parts and maintenance provider Tegeta Motors LLC a first-time expected Long-Term Issuer Default Rating (IDR) of 'B-(EXP)'. The Outlook is Stable. Tegeta Motors' expected rating of 'B-(EXP)' is underpinned by its leading position in the local market and significant proportion of aftermarket-driven non-cyclical revenues. However, the rating is limited by the group's small scale, lack of geographical diversification, material FX risk, weak operating environment, negative free cash flow (FCF) and weak liquidity position. The expected rating is contingent on the successful issuance of a medium- or long-term local currency bond of approximately GEL30 million by end-1Q18. Failure to proceed with this issuance in 1Q18 or deterioration in key banking relationships could result in a lower final rating. KEY RATING DRIVERS Weak Liquidity: Refinancing needs are high due to the significant proportion of short-term loans. GEL56 million of loans due in 4Q17 and 2018 make up 62% of total debt. Nevertheless the rating assumes that the current credit facilities will be rolled over as the group has good long-term relationships with its key creditors. Tegeta Motors' planned bond issue of GEL30 million will smooth its debt repayment profile, improve liquidity and provide funding diversification. Limited but Stable Business Profile: Tegeta Motors operates in the small and fragmented market of auto spare parts and aftermarket services in Georgia. It has a small scale compared with international peers and limited revenue diversification. However, this is partly offset by its strong positions in some of the segments it covers and its relatively greater size in the local market. In addition, it derives a large proportion of its revenue from spare parts and aftermarket services sales, which are typically less sensitive to economic cycles. This part of the business contributed over half of total revenues and around three-quarters of group earnings in FY16. Geographic Concentration: Tegeta Motors' geographic diversification is limited, as it is primarily focused on Georgia, with the associated risks of operating in more volatile economic conditions typical for emerging markets. With around 1.2 million units (including trucks and light vehicles), the Georgian automotive market is small. Nonetheless, management estimates that around 12% of sales were re-exported in 2016, providing limited exposure to other markets. The group also plans to enter Armenia and Azerbaijan by investing via JVs with reliable partners. Industry Structure Supports Business: The majority of cars in Georgia are very old. Only 1.3% of cars are less than three years old, while around 91% of cars are over 10 years old. This supports constant demand for automotive repairs and car parts sales, which make up the major part of Tegeta Motor's earnings. Product Diversification: Compared with similar automotive repair and distribution groups in larger markets, Tegeta Motors serves a relatively diverse range of product types, for example performing maintenance on industrial equipment and construction vehicles alongside more traditional truck and light vehicle servicing. The group also has a diversified mix of retail, fleet and governmental customers. Weak FCF: As a result of significant investment plans to expand the group's network we expect negative FCF of 2%-4% in the coming three years. Given limited cash reserves this is likely to be primarily debt funded, with a potential minority stake sale raising equity in 2018. Should the expansion plan be executed in such a way that our expectations for funds from operations (FFO) adjusted leverage exceed 4.0x on a sustained basis, we could take negative rating action. Material FX Risk: The group has a material FX mismatch. Operating in Georgia, all revenue is generated in Georgian lari (GEL) while around 80% of operating costs are linked to US dollars and euros. Almost all debt at end-2016 was denominated in foreign currencies (mainly in USD). However, this mismatch is declining, with over 40% of debt now in local currency. The company's planned local currency bond issuance, and intention to further refinance USD and EUR loans with GEL-denominated debt should also help address this exposure. DERIVATION SUMMARY Tegeta Motors' expected rating of 'B-(EXP)' is underpinned by its leading market position in the local market and non-cyclical nature of major sources of revenue and healthy profitability even in times of crisis. However, the rating is limited by its small scale, lack of geographical diversification, material FX risk and weak liquidity position. The business profile is considered more exposed to cyclicality, and operates in an industry with lower barriers to entry than other rated Georgian corporates such as healthcare provider JSC Medical Corporation EVEX (B+/Stable) and incumbent telecoms provider Silknet JSC (B+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of around 20% in 2017, averaging 14% for 2018-2020. - EBITDA margin remaining around 10% over 2017-2020 based on historical data and our conservative view on profitability growth potential. We consider that high competition in the market will cap the profitability near current level. - Capex in line with the company's guidance concerning expansion strategy and increase of the group's network, totalling up to GEL90 million over 2017-2020. - Dividends of GEL3 million per year taking into account existing cap established by covenants. - Increase of share capital in FY18 by GEL12 million. The group plans to raise minority equity capital in order to finance its growth plans. Fitch assumes that should equity not be raised then investment capex would be reduced accordingly. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Improved geographical diversification. - Positive FCF on a sustainable basis. - FFO margin increasing to over 10%. - FFO adjusted gross leverage sustainably below 2.5x (2016: 3.4x; 2017F: 3.3x). Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO margin falling consistently below 5%. - FFO adjusted gross leverage sustainably above 4.0x. - Deterioration in the market environment or the company's market position. - Increasing risks around further refinancing ability, including deterioration in key banking relationships. LIQUIDITY Weak Liquidity: As of 2016Y-end unrestricted cash of GEL5.4 million and available undrawn bank facilities of GEL6.4 million were not sufficient to cover negative FCF and short-term debt of GEL49.3 million. In 3Q17 the group refinanced some facilities, but refinancing needs remained high due to significant short-term loans. Total debt repayment due in 4Q17 and 2018 is GEL56 million (62% of total outstanding). Nevertheless, we consider refinancing risk as low and we expect that facilities will be rolled over as the group has good long-term relationships with its key creditors. Tegeta Motor's planned GEL30 million bond issue will smooth the group's debt repayment profile and improve liquidity. Contact: Principal Analyst Marina Bordakova Associate Director +7 495 956 2400 Supervisory Analyst Thomas Corcoran Associate Director +44 20 3530 1231 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Committee Chairperson Emmanuel Bulle Senior Director +34 93 323 8411 Date of Relevant Rating Committee: 18 October 2017 Summary of Financial Statement Adjustments Operating leases: operating lease expenses were capitalised using a multiple of 6x as the company is based in Georgia. Other Adjustments: off-balance guarantee for Transcaucasian Distribution Company LLC was added to Tegeta Motors group's balance sheet debt, totalling GEL 679 tsd at YE2016. Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. 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