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Rating Action:

Moody's affirms Silknet's B1 CFR; changes outlook to negative from stable

30 Mar 2021

London, 30 March 2021 -- Moody's Investors Service ("Moody's") has today affirmed Silknet JSC's (Silknet or the company) B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR). Concurrently, Moody's has also affirmed the B1 rating on Silknet's USD200 million senior unsecured notes due 2024 (the Eurobond). The outlook has been changed to negative from stable.

RATINGS RATIONALE

The change of outlook to negative reflects (1) the accelerated depreciation of the Georgian Lari (GEL) against the US dollar (USD) in 2020 which negatively impacted Silknet's EBITDA and reported debt resulting in a significant increase in Moody's adjusted gross leverage to 3.8x as of 31 December 2020 from 3.4x a year earlier, (2) Moody's expectation for limited recovery in revenue and EBITDA in 2021 due to the ongoing disruptions related to the COVID-19 outbreak affecting the general level of macro-economic activity, people's mobility and tourism, and (3) the limited free cash flow generation projected in 2021 due to the heightened level of interest paid reflecting the local currency depreciation as well as the relatively high level of capital expenditures projected at around 25% of total revenue.

However, the B1 CFR is still supported by (1) Silknet's strong position in the Georgian telecommunications market as demonstrated by it high market shares of 57% in fixed line, 31% in fixed broadband, 34% in pay television and 34% in mobile services based on the number of subscribers as of 31 December 2020, (2) the potential for a return to sustained revenue growth from 2022 driven by secular trends including increasing smartphone penetration and data usage in Georgia and supported by the company's reasonably invested network, (3) Silknet's high Moody's-adjusted margins of above 50%, and (4) the company's adequate liquidity position supported by its cash balance and undrawn revolving credit facility.

The 10% depreciation of the GEL against the USD in 2020 calculated on an annual average exchange rate resulted in a significant increase in the unhedged USD-denominated Eurobond translated into GEL, Silknet's reporting currency. At the same time the company experienced pressure on revenues due to the coronavirus outbreak. The disruptions related to the pandemic negatively affected Silknet's commercial revenue which increased by only 1% to GEL348 million in 2020 compared to prior year from the temporary suspension of fixed services by the hospitality, retail and entertainment sectors, among others, the slowdown in new customer acquisitions, and the macro environment affecting employment, incomes and exchange rates negatively impacting consumer spending patterns. At the same time mobile revenue was negatively impacted by lower tourism activity impacting roaming revenue, which accounted for 2.8% of total revenue in 2019, data and other services and lower mobility of people as a result of remote work model maintained by most of the large businesses. EBITDA (as reported by the company post IFRS 16) decreased to GEL211 million in 2020 from GEL216 million in 2019 as a result of pressure on revenue and increasing costs following the depreciation of the GEL as approximately 28% of operating expenses are denominated in euros (EUR) and USD while almost all the revenues are generated in the local currency.

Moody's considers there is limited potential for de-leveraging over the next 12 months from 3.8x as of 31 December 2020 due to the rating agency's expectation for only gradual recovery of economic activity in Georgia, including tourism. Our baseline forecast for the recovery of the tourism sector is for visitor arrivals to remain relatively flat overall in 2021, with most borders only reopening in the second half of the year and travel only resuming gradually from there onwards. Additionally Moody's believes that the company's leverage remains exposed to the risk of depreciation of the GEL against the USD.

Silknet's liquidity has remained adequate supported by a cash balance of GEL78 million and full availability under its USD20 million Revolving Credit Facility (RCF) as of 31 December 2020. The RCF was put in place for the sole purpose of securing coupon payments on the Eurobonds. The company also has a USD30 million trade finance facility of which GEL35 million was used for letters of credits and guarantees as of the same date. Moody's projects that Silknet will generate positive free cash flow (FCF) in 2021 of between GEL10 million to GEL20 million compared to GEL29 million in the prior year. In 2020, Silknet's FCF benefitted from a favourable movement in working capital.

Silknet's USD200 million senior unsecured notes due 2024 are rated B1, at the same level as the company's CFR. This rating reflects the pari passu ranking of the notes, which represents the bulk of Silknet's debt, with all the existing and future unsecured obligations of the company.

RATING OUTLOOK

The negative outlook reflects Moody's concern that following a significant increase in Silknet's leverage in 2020 the ratio should remain elevated for the rating category in 2021 leaving limited headroom for further deterioration, including from a potential depreciation of the GEL against the USD or further pressure on earnings from prolonged restrictions related to the COVID-19 pandemic.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure on the rating could arise if (1) Silknet maintains a track record of strong performance as a leading convergent operator, (2) leverage, as measured by Moody's adjusted gross debt/EBITDA, decreases to below 2.5x, (3) the company maintains a good liquidity position, and (4) Silknet adopts a more prudent management of foreign currency risk. Conversely, negative pressure on the rating could arise if (1) adjusted gross leverage increases towards 4.0x, (2) Silknet's coverage ratio measured by retained cash flow/debt weakens to below 15% on a sustained basis, (3) the company's liquidity deteriorates, or (4) the company's business profile weakens due to negative developments in the market, including from increased competition.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Silknet is a leading telecommunications operator domiciled in Georgia in terms of subscribers. Following the acquisition of the country's second-largest mobile operator Geocell in March 2018, Silknet now provides a full range of telecommunications services, including fixed broadband, pay television, fixed line and mobile services, to residential and corporate customers in Georgia. The company also provides wholesale connectivity and related services to domestic and international telecommunications operators. Silknet is privately owned by Rhinestream Holdings Limited through its wholly owned subsidiary Silknet Holding LLC.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sebastien Cieniewski
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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