ACRA upgrades credit rating of RSG International Ltd to BBB-(RU), outlook Stable, bonds issued by LLC “RSG-Finance” to BBB-(RU), and assigns BBB-(RU) to bonds issued by LLC “RSG-Finance”

ACRA has upgraded the credit rating of RSG International Ltd (hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, to BBB-(RU), outlook Stable. ACRA has also upgraded the credit ratings of bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYA74, RU000A0ZYLB6) to BBВ-(RU), as well as assigned BBB-(RU) to bonds issued by LLC “RSG-Finance” (RU000A100PS4, RU000A100PM7).

The credit rating upgrades are based on the Company’s decreased relative debt load and increased FCF as a result of an increase in FFO before net interest payments and taxes. The credit rating of RSG International Ltd is constrained by the very high industry risk and low debt service assessment. At the same time, the rating is supported by the Company’s strong operating profile, strong liquidity, high profitability and cash flow, and the high likelihood of support from the key shareholders.

KORTROS is a residential real estate developer with a wide geography of presence and a high project diversification in terms of their format. The Company was established in 2005 to implement the Akademichesky project, a large-scale development project (10 million sq. m) in Yekaterinburg by 2048. According to the data from the Unified Developers Register as of September 2019, the Company ranked 14th among Russian developers by the volume of projects under development.

Key rating assessment factors

Industry risk is assessed as very high due to pronounced cyclical nature of the sector, high level of overdue liabilities, and substantial number of defaulted companies in the last five years. The industry the Company operates in is a strong factor constraining its credit rating.

High likelihood of support from the major shareholders. The high likelihood of support is underpinned by the large-scale HEADLINER project, initially financed by the key shareholders.

Strong operating profile is based on a highly diversified portfolio of projects and a very strong geographical diversification. Nearly 70% of residential property that is expected to be commissioned in 2019–2021 is ‘comfort' and 'comfort+' class, while 30% is ‘business' class. The Company operates in Moscow, Yekaterinburg, Saint Petersburg, and Perm.

More than 31% of projects are expected to be commissioned in the major regions (Moscow and St. Petersburg) from 2019 to 2021. The Company’s business is characterized by a stable project implementation timeline, as the Company has managed to sell most of its projects by the time they are commissioned.

Medium corporate management level is a result of adequate strategic management, risk management, corporate management system and group structure, as well as a high financial transparency. ACRA notes that in 2017–2018, the Company’s strategy underwent changes that had a negative impact on the financial performance in the short term, but in the long term, they will lead to an increase in profitability and strengthen the market positions of KORTROS, which could already be seen in the financial performance indicators for 2018. The strategy for operations in the Moscow region has been revised to focus on high-margin projects in Moscow and abandon projects in the Moscow region. The Company has also cancelled a low-margin project in Yaroslavl.

Low debt service indicators and medium leverage. The Company’s coverage and leverage were affected by the changes in its strategy introduced in 2017 and a relatively low volume of housing construction and a significant share of new projects in the portfolio. However, the growth of sales in new high-margin projects in 2018 led to a significant improvement in the indicators. According to ACRA estimates for 2016–2021, the weighted average ratio of net debt to FFO before net interest is 4.5x, which is high. It should be noted that the ratio reached its annual peaks in 2017–2018. At the same time, the leverage is generally assessed as medium, which is supported by the high capital reserves (the weighted average ratio of total debt to capital is 0.8x) and very high qualitative assessment of debt. The terms of repayment of the Company’s debt are very comfortable, the peak of repayments will be in 2022, which coincides with the completion dates of major projects of KORTROS.

Strong liquidity of KORTROS stems from substantial undrawn credit facilities and a significant amount of free cash on the Company’s accounts.

Key assumptions

  • Construction projects will be completed and sales targets will be met as planned;
  • ACRA estimations include only projects under construction and projects to be commissioned in accordance with the current financial plan of the Company;
  • Prices in the primary real estate market of Moscow will not change significantly.

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 positive rating action may be prompted by:

  • An increase in the weighted average ratio of FFO before net interest payments to interest payments above 2.5х;
  • A decrease in the ratio of net debt to FFO before net interest payments below 3.5x and concurrent growth of FFO margin before net interest payments and taxes above 12% and growth of FCF margin above 10%.

A negative rating action may be prompted by:

  • The FFO before net interest payments to interest payments ratio declines below 1.0х;
  • The ratio of net debt to FFO before net interest payments rises above 5х and FCF margin turns negative;
  • Average residential real estate prices decline by more than 15% in 2019–2020, while prices for construction works and materials increase as projected;
  • Access to external liquidity sources worsens considerably;
  • Regulatory changes that can significantly affect the Company’s performance.

Rating components

Standalone creditworthiness assessment (SCA): bb+.

Support: one notch up.

Issue ratings

Credit rating rationale. RSG International Ltd acts as a guarantor for all bond issues of LLC “RSG-Finance.” All the issues listed below represent senior unsecured debt of KORTROS Group. 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 the ACRA methodology, the reimbursement rate for unsecured debt relates to category II; hence, the credit rating of the issues is equivalent to that of RSG International Ltd, i.e. BBB-(RU).

Key issue properties

1) ISIN: RU000A100PS4

Issuer

RSG International Ltd

Issuer’s credit rating

ВВВ-(RU), outlook Stable

Actual issuer

LLC “RSG-Finance”

Type of security

Exchange-traded interest-bearing certified unregistered bond,
 BО-09

Issue volume

RUB 2 bln

Final placement date

August 15, 2019

Maturity date

August 8, 2024

 

2) ISIN: RU000A100PM7

Issuer

RSG International Ltd

Issuer’s credit rating

ВВВ-(RU), outlook Stable

Actual issuer

LLC “RSG-Finance”

Type of security

Exchange-traded interest-bearing certified unregistered bond,
 BО-11

Issue volume

RUB 1.5 bln

Final placement date

August 15, 2019

Maturity date

August 11, 2022

 

Key properties of affirmed issues

LLC “RSG-Finance” (ISIN RU000A0JUAG0), maturity date: November 11, 2025, issue volume: RUB 3 bln, — ВВВ-(RU).

LLC “RSG-Finance” (ISIN RU000A0JXN13), maturity date: April 1, 2022, issue volume: RUB 3 bln, — ВВВ-(RU).

LLC “RSG-Finance” (ISIN RU000A0JWLJ7), maturity date: June 18, 2021, issue volume: RUB 1 bln, — ВВВ-(RU).

LLC “RSG-Finance” (ISIN RU000A0ZYA74), maturity date: September 11, 2020, issue volume: RUB 5 bln, — ВВВ-(RU).

LLC “RSG-Finance” (ISIN RU000A0ZYLB6), maturity date: December 17, 2020, issue volume: RUB 2 bln, — ВВВ-(RU).

Regulatory disclosure

The credit ratings were assigned to RSG International Ltd and bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYA74, RU000A0ZYLB6, RU000A100PS4, RU000A100PM7) under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities, and the Methodology for Analyzing Member Company Relationships Within Corporate Groups. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating assigned to RSG International Ltd was first published by ACRA on July 25, 2017; the credit ratings assigned to bonds (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7) issued by LLC “RSG-Finance” were first published on August 9, 2017; the credit ratings assigned to bond (RU000A0ZYA74) and bond (RU000A0ZYLB6) issued by LLC “RSG-Finance” were first published on September 29, 2017, and January 24, 2018, respectively. The credit rating to the bonds (RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” has been assigned for the first time.

The credit rating of RSG International Ltd and its outlook, as well as the credit ratings assigned to bonds (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYA74, RU000A0ZYLB6, RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” are expected to be revised within one year following the publication date of this press release.

Disclosure of deviations from the approved methodologies: the resulting credit rating was determined not in line with the Methodology for Analyzing Member Company Relationships Within Corporate Groups. The level of support was assessed using an approach for an unidentifiable group due to the lack of information required to make the creditworthiness assessment of the Supporting Organization.

The credit ratings were assigned based on the data provided by RSG International Ltd and LLC “RSG-Finance,” information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and RSG International Ltd and LLC “RSG-Finance” participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by RSG International Ltd and LLC “RSG-Finance” in their financial statements were discovered.

ACRA provided no additional services to RSG International Ltd and LLC “RSG-Finance.” No conflicts of interest were discovered in the course of credit rating assignment.

Log in

Forgot password

Sign up

Reset password

Reset password

Termsofuse

Полное использование материалов сайта разрешается только с письменного согласия правообладателя, АКРА (АО). Частичное использование материалов сайта (не более 30% текста статьи) разрешается только при условии указания гиперссылки на непосредственный адрес материала на сайте www.acra-ratings.ru . Гиперссылка должна быть размещена в подзаголовке или в первом абзаце материала. Размер шрифта гиперссылки не должен быть меньше шрифта текста используемого материала.