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���������ֳ� - London - 28 Jan 2025: ���������ֳ� has affirmed Silknet JSC's Long-Term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. ���������ֳ� has also affirmed rating on Silknet's senior unsecured debt, including the USD300 million senior unsecured notes at 'BB-' with a Recovery Rating of 'RR3'. A full list of rating actions is below.

The ratings reflect Silknet's stable market position as a strong number two telecoms operator in Georgia, low leverage and positive free cash flow (FCF) generation. They also reflect longer-term 5G strategic uncertainty in a less stable macroeconomic environment.

The company's small absolute size and high FX exposure is a weakness, while a record of related-party transactions entails higher credit risk than suggested by the company's comfortable operating and financial profile.

Key Rating Drivers

Entrenched Market Positions: We expect Silknet to broadly sustain its competitive positions in a highly consolidated but also relatively small market of 5.7 million mobile and 1.1 million internet retail customers. Georgia is predominantly serviced by two large operators, Magticom and Silknet, with the third largest, Celffie, significantly behind, and other smaller players holding just a fraction of the market. Silknet's revenue market shares were 36% in mobile and 34% in fixed-line broadband segments in 3Q24.

Stable Market: The overall market is likely to remain stable as Cellfie has become less aggressive. Cellfie's subscriber base was almost unchanged in 2023-2024, while its average revenue per user (ARPU) significantly caught up with peers, and was equal to 65% of the highest market ARPU in 3Q24, compared with 55% in 3Q22, reducing pricing competition.

No New 5G Spectrum Auctions: Silknet is lacking dedicated 5G spectrum following its decision to not participate in the 5G spectrum auctions in August 2023, and later in October 2024 as it viewed the conditions as onerous. Although sufficient spectrum remains available in Georgia, the regulator may refrain from holding any additional spectrum auctions in the medium term as other operators recently secured their 5G spectrum portfolio, and the second auction was to accommodate the request of empty-handed operators.

5G Strategic Vulnerability: Silknet has limited 5G options with potentially negative implications for its competitive position in the long term. We believe any resolution of its current 5G conundrum is likely to be more expensive than earlier available solutions and it may never reach full 5G parity with its key rival Magticom. The only currently available option is to repurpose some of the available spectrum for 5G use, and potentially apply for a wholesaling agreement with other operators.

5G Spectrum Price Tag: Magticom paid GEL149 million for its 5G spectrum portfolio in October 2024, and we believe Silknet may face an investment of at least equal size if there is an opportunity to acquire a similar 5G spectrum portfolio. This is equal to 0.4x of its 2024 EBITDA, and could be accompanied by additional infrastructure investments.

Limited Wholesaling Options: Accessing the 5G network of other operators on a wholesale basis may not be easy. Only Cellfie, the smallest operator with the least developed infrastructure, has a mandatory obligation to share its 5G network with mobile virtual network operators. Magticom effectively paid a 20% premium to avoid this obligation, and while Magticom is deemed to have significant market power and has to share its network, 5G spectrum may be outside this arrangement.

Macroeconomic Uncertainty: ���������ֳ� revised its Outlook on Georgia sovereign's 'BB' rating to Negative, reflecting weaker international reserve cover and sharply increased political risk that could affect investor and domestic confidence, exert pressure on external liquidity and the exchange rate. ���������ֳ� expects economic growth to remain robust but projects GDP growth moderation to 5.3% in 2025 and 5.0% in 2026 from an estimated 8.7% in 2024.

High FX Mismatch: Silknet has high FX exposure, with leverage sensitive to changes in the lari exchange rate. All of its debt and close to 70% of its capex are FX-denominated, while nearly all revenue is in local currency. The company hedged its expected FX outflows until end-2025 which reduces its short-term exposure. Substantial FX risk is reflected in tighter leverage thresholds relative to peers.

Strong Cash Flow: We project Silknet will maintain strong cash flow generation supported by high, EBITDA margins of above 55% and moderate capex requirements of below 20% of revenues, propelling its pre-dividend FCF margin to close to 30%. With a renegotiated Eurobond covenant that allows higher dividend distributions until leverage reaches 1.75x, we expect most of its free cash to be returned to shareholders but capped by domestic net income regulation.

Low Leverage: Silknet has low leverage (we expect 1.2x net debt/EBITDA at end-2024), which we expect to be sustained well below its 3x negative leverage sensitivity trigger, even with higher shareholder distributions, assuming no dramatic FX movements.

Dominant Shareholder Influence: Silknet's ultimate parent, Silk Road Group, can exercise significant influence on the company as demonstrated by a number of related party transactions over the last 10 years. This is reflected in an elevated ESG Relevance score for Governance Structure. Its Eurobond documentation has some restrictions on both shareholder distributions and access to cash flows, which we believe offer some creditor protection. Overall, we view Silknet's governance as commensurate with the 'B' rating category.

Derivation Summary

Silknet's peer group includes emerging-markets telecom operators Kazakhtelecom JSC (BBB-/Stable), Kcell JSC (BB+/Stable), Turkcell Iletisim Hizmetleri A.S. (BB-/Stable) and Turk Telekomunikasyon A.S. (BB-/Stable) and also Telekom Srbija a.d. Beograd (B+/Positive)

Silknet benefits from its established customer franchise and the wide network of a fixed-line telecoms incumbent, combined with a strong mobile business similar to Kazakhtelecom's and Turk Telecomunikasyon. However, Silknet is smaller in size, faces high FX risks and is only the second-largest telecoms operator in Georgia. Its corporate governance is shaped by dominant shareholder influence.

Similar to Turkcell and Turk Telecomunikasyon, Silknet's FX risk also results in tighter leverage thresholds for any given rating compared with other rated companies in the sector. Its leverage is low and broadly comparable with its emerging-markets peers.

Key Assumptions

-Mid-single digit revenue growth on average in 2024-2027, with mobile revenues growing ahead of broadband revenues

-���������ֳ�-defined EBITDA margin of 57% in 2024, declining to 53% in 2026-2027, with content-cost amortisation and subscriber acquisition cost amortisation treated as operating cash expenses, reducing EBITDA and capex

-Cash capex of below 20% in 2024-2027

-FCF returned to shareholders subject to domestic regulatory and Eurobond covenant restrictions

-GEL/USD rate weakening by 5% per year

Recovery Analysis

Key Recovery Rating Assumptions

-The recovery analysis assumes that Silknet would be considered a going concern (GC) in bankruptcy and that it would be reorganised rather than liquidated.

-We assume USD200 million of unsecured debt outstanding at end-2024 following buying back USD100 million of the USD300 million bond.

-The GC EBITDA estimate of GEL200 million reflects ���������ֳ�'s view of a sustainable, post-reorganisation EBITDA upon which it bases the valuation of the company.

-An enterprise value/EBITDA multiple of 4.0x is used to calculate a post-reorganisation valuation, reflecting a conservative post-distressed valuation.

-A 10% fee for administrative claims.

-The Recovery Rating for Georgian issuers is capped at 'RR3' and therefore the rating of Silknet's senior unsecured instrument is rated one notch above the Long-Term IDR of 'B+', at 'BB-' with expected recoveries capped at 70%.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

- EBITDA net leverage rising above 3x on a sustained basis without a clear path for deleveraging in the presence of significant FX risks

- A significant reduction in pre-dividend FCF generation driven by competitive or regulatory challenges

- A rise in corporate-governance risks due to, among other things, related-party transactions or up-streaming excessive distributions to shareholders

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- Strong market leadership in key segments in Georgia while maintaining positive FCF generation, comfortable liquidity and a record of improved corporate governance

Liquidity and Debt Structure

Silknet had a comfortable liquidity position at end-September 2024, with GEL232 million of cash and cash equivalents (of which GEL54 million was slated for an October 2024 coupon payment and the rest predominantly invested into FX instruments). The company does not have a revolving credit facility. Silknet is heavily exposed to bullet refinancing risk as its principal debt instrument is a USD300 million Eurobond (USD200 million outstanding at end-September 2024) maturing in January 2027.

Issuer Profile

Silknet is the second-largest telecoms operator in Georgia with over 30% market shares in key mobile, broadband and Pay-TV segments supported by its incumbent fixed-line infrastructure across the country, with the exception of capital Tbilisi.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

to access ���������ֳ�'s latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. ���������ֳ�'s macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

Silknet JSC has an ESG Relevance Score of '4' for Group Structure due to the dominate majority shareholder's influence over the company and related-party transactions, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

Silknet JSC has an ESG Relevance Score of '4' for Governance Structure due to the dominate majority shareholder's influence over the company and related-party transactions, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.

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APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (1)

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