ACRA affirms AAA(RU) to JSC “DOM.RF”, outlook Stable, and AAA(RU) to bonds issued by JSC “DOM.RF”

ACRA affirms the AAA(RU) credit rating to JSC “DOM.RF” (formerly JSC “AMHL”; hereinafter, DOM.RF or the Company), outlook Stable, and AAA(RU) to bonds issued by the Company (BO-05, BO-06, BO-07, BO-08, BO-09, BO-10, 001Р-01R, 001Р-02R, 001Р-03R, 001Р-04R).

The credit rating assigned to DOM.RF is due to the very high likelihood of extraordinary state support to the Company in view of its systemic importance for the Russian economy and the determining influence that the state has on the Company’s creditworthiness. DOM.RF is characterized by its sufficiently high standalone creditworthiness, deteriorating moderately as it obtained 100% of the shares of JSC Bank DOM.RF (formerly BANK “ROSSIYSKY CAPITAL” (PJSC); hereinafter Bank DOM.RF or the Bank). In the long term, certain elements of the Company's standalone creditworthiness assessment (SCA) may also undergo negative changes as a result of the active development assumed in the strategy adopted up to 2020.

In accordance with the law, the Company performs the unique role of unified housing sector development institution, providing full support to the housing sector in the Russian Federation.

ACRA expects that, under a systemic economic stress scenario and/or in the case of significant deterioration of the Company's standalone creditworthiness, the Russian Government will provide it with extraordinary support in the form of capital or liquidity injection sufficient to meet creditor claims. This opinion is based on the following.

Key rating assessment factors

Very high systemic importance. DOM.RF is a development institution that, in accordance with its mandate set by the law, performs the unique function of developing and supporting the housing market in Russia. The Company is included on the list of strategically important institution. The Russian Government participates in managing such institutions in order to provide for strategic state interests, defense and national security issues, as well as ensure the protection of rights and interests of Russian citizens. Available housing is one of the national priorities in Russia, and DOM.RF was established to take part in implementing it. Other contributors to the high systemic importance of the Company are the following:

  • Default on mortgage-backed securities guaranteed by the Company and on its own obligations (risk ratio for investments – 20%) would mean financial and significant reputational losses for the state;
  • At the end of September 2018, DOM.RF bonds in the amount of RUB 49 bln were secured by irrevocable state guarantees;
  • DOM.RF is tasked with supporting mortgage borrowers who are in difficult financial situations (direct financing by the state through an increase in authorized capital in the amounts of RUB 4.5 bln in 2015, RUB 2 bln in 2017, and RUB 0.7 bln in 2018)
  • Strategic focus that expands due to integration of the Bank and creation of a universal mortgage and construction bank; implementation of such a strategy will substantially increase the share of the Company in the primary mortgage market of Russia and in the housing finance sector.

In total, the above circumstances further support the systemic and social importance of the Company and its role in the national economic policy.

Very strong state influence on creditworthiness. The sole shareholder of DOM.RF is the state, represented by the Federal Agency for State Property Management. In addition to shareholder control, the state has the power to determine the Company's strategies and supervise its operating activities. The Company's board of directors (approved by the Russian government) includes representatives of Russian federal authorities and the largest systemically important credit institutions. In addition, a joint working group set by the Bank of Russia constantly monitors the Company’s financial status.

ACRA also notes the following factors that confirm the strong ties between the Company and the government: (1) the legal immunity against bankruptcy procedures; (2) the government's propensity to provide extraordinary support using budgeting mechanisms established by the law; (3) the implementation of current support in various forms (special-purpose loans by VEB in the amounts of RUB 40 bln and RUB 14 bln, income from selling and renting out federal land plots, which was previously handled by the Russian Housing Development Foundation).

Moderate negative impact of the acquisition of the Bank on the consolidated level of the Company’s standalone creditworthiness and the risk of its deterioration with the growth of Company operations. As a result of the consolidation with the Bank, the Company’s financial stability indicators withstood negative changes, which were expressed in the decrease in the ratio of capital to assets and related obligations to 14.2% as of September 30, 2018 (compared to the 32% indicator one year before that). The Company also saw a deterioration in asset quality in general.

In ACRA’s opinion, the further deterioration of the Company’s financial condition and the need for additional state support could be caused by significant growth in the Company’s operations within the current development strategy. This is due to the following:

1) The implementation of the plan to increase the volume of mortgages on the balance sheet via the “MBS Factory” while reducing the volume of bonds secured by irrevocable state guarantees;

2) The Bank’s specialization in the housing finance sector. In 2018, ACRA observed an increase in lending by the Bank to construction enterprises and expects this trend to be maintained in the future. In 2019, DOM.RF will start to provide guarantees on loans that will be issued by banks to builders for residential construction. This will be associated with an increase in credit risk on related obligations.

Therefore, according to ACRA, the Company’s capital adequacy at the consolidated level could continue to decline within the 12 to 18-month horizon. However, the ratio of consolidated proprietary funds to consolidated assets should not fall below 11%, taking into account the conditions of the loan agreement between the Company and the Bank, concluded in 2017.

Given the likelihood of state support provided to DOM.RF if required, these risks do not currently affect the Company’s credit rating.

Key assumptions

  • The state maintaining its shareholder and operational control;
  • Implementation of the Company’s development strategy;
  • Total capital adequacy no lower than 11.5% within the 12 to 18-month horizon

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Significant decline in the Company's systemic importance for the Russian economy;
  • Loss of operational or shareholder control over the Company by the state;
  • Significant decline in the standalone creditworthiness of the Company if the state’s willingness to provide regular or extraordinary support decreases.

Rating components

Standalone creditworthiness assessment (SCA): none.

Adjustments: none.

Support: on par with the RF.

Issue ratings

JSC “DOM.RF”, BO-05 (ISIN RU000A0JX2R1); maturity date: December 22, 2049, issue volume: RUB 5 bln; AAA(RU).

JSC “DOM.RF”, BO-06 (ISIN RU000A0ZYF20); maturity date: November 7, 2050, issue volume: RUB 5 bln; AAA(RU).

JSC “DOM.RF”, BO-07 (ISIN RU000A0ZYF38); maturity date: November 7, 2050, issue volume: RUB 5 bln; AAA(RU).

JSC “DOM.RF”, BO-08 (ISIN RU000A0ZYFM5); maturity date: November 13, 2050, issue volume: RUB 5 bln; AAA(RU).

JSC “DOM.RF”, BO-09 (ISIN RU000A0ZYAR5); maturity date: September 17, 2020, issue volume: RUB 10 bln; AAA(RU).

JSC “DOM.RF”, BO-10 (ISIN RU000A0ZYFN3); maturity date: November 13, 2050, issue volume: RUB 10 bln; AAA(RU).

JSC “DOM.RF”, 001Р-01R (ISIN RU000A0ZYLU6); maturity date: December 13, 2027, issue volume: RUB 15 bln; AAA(RU).

JSC “DOM.RF”, 001P-02R (ISIN RU000A0ZYQU5); maturity date: January 21, 2028, issue volume: RUB 15 bln; AAA(RU).

JSC “DOM.RF”, 001P-03R (ISIN RU000A0ZZ1N0); maturity date: March 24, 2028, issue volume: RUB 15 bln; AAA(RU).

JSC “DOM.RF”, 001P-04R (ISIN RU000A0ZZ7C0): maturity date: May 10, 2028, issue volume: RUB 25 bln; AAA(RU).

Rationale. The above issues are senior unsecured debt of JSC “DOM.RF”. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of JSC “DOM.RF”, i.e. AAA(RU).

Regulatory disclosure

The credit ratings have been assigned to JSC “DOM.RF” and bonds (ISIN RU000A0JX2R1, RU000A0ZYF20, RU000A0ZYF38, RU000A0ZYFM5, RU000A0ZYAR5, RU000A0ZYFN3, RU000A0ZYLU6, RU000A0ZYQU5, RU000A0ZZ1N0, RU000A0ZZ7C0) issued by JSC “DOM.RF” under the national scale for the Russian Federation based on the Methodology for Analyzing Relationships Between Rated Entities and the State and the Key concepts used by the Analytical Credit Rating Agency within the scope of its rating activities. Relevant provisions of the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation have been applied to assess certain factors of the standalone creditworthiness of JSC “DOM.RF”. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been applied to rate the bond issues above.

The credit ratings assigned to JSC “DOM.RF” and bonds issued by JSC “DOM.RF” (ISIN RU000A0JX2R1, RU000A0ZYF20, RU000A0ZYF38, RU000A0ZYFM5, RU000A0ZYAR5, RU000A0ZYFN3, RU000A0ZYLU6, RU000A0ZYQU5, RU000A0ZZ1N0, RU000A0ZZ7C0) were published by ACRA on December 29, 2016, January 18, 2017, October 31, 2017, October 31, 2017, November 9, 2017, November 19, 2017, November 9, 2017, December 25, 2017, February 1, 2018, April 5, 2018, and May 17, 2018, respectively. The credit rating of JSC “DOM.RF” and its outlook, as well as the credit rating of the bonds issued by JSC “DOM.RF” (ISIN RU000A0JX2R1, RU000A0ZYF20, RU000A0ZYF38, RU000A0ZYFM5, RU000A0ZYAR5, RU000A0ZYFN3, RU000A0ZYLU6, RU000A0ZYQU5, RU000A0ZZ1N0, RU000A0ZZ7C0) are expected to be revised within one year following the rating action date (December 25, 2018).

The above credit ratings are based on the data provided by JSC “DOM.RF”, information from publicly available sources, as well as ACRA’s own databases. The rating analysis is based on the consolidated IFRS financial statements of JSC “DOM.RF” and the management reports of JSC “DOM.RF”. The credit ratings are solicited, and JSC “DOM.RF” participated in their assignment and affirmation.

No material discrepancies between the provided information and the data officially disclosed by JSC “DOM.RF” in its financial statements have been discovered.

ACRA provided additional services to JSC “DOM.RF.” No conflicts of interest were discovered in the course of credit rating assignment.

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