ACRA affirms BBB-(RU) to RSG International Ltd, changes outlook to Positive, and affirms BBB-(RU) to bonds issued by LLC “RSG-Finance”

ACRA has affirmed the credit rating of RSG International Ltd (hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, at BBB-(RU), and changed the outlook on the rating to Positive. ACRA has also affirmed the credit ratings of the bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYLB6 RU000A100PS4, RU000A100PM7) at BBВ-(RU).

The credit rating of GC KORTROS is based on very high industry risk, a low debt service assessment, and medium assessments of leverage and the operating risk profile. At the same time, the rating is supported by the Company’s strong liquidity, high profitability and very high cash flow, and the high likelihood of support from the key shareholders. The outlook has been changed to Positive based on ACRA’s expectations of higher FFO and lower interest payments, due to which ACRA expects to see improved leverage and debt service indicators.

GC KORTROS is a residential real estate developer with a wide geography of presence and high project diversification in terms of formats. 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 Unified Register of Developers, as of September 2020, the Company ranked 16th among Russian developers by volume of projects under development.

Key rating assessment factors

Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, high level of overdue liabilities, and the 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 Company’s largest shareholders. The high likelihood of support is underpinned by the large-scale HEADLINER project, initially financed by the key shareholders.

In connection with changes to ACRA’s methodology, the portfolio diversification assessment of the Company has been downgraded to medium based on the fact that the three largest projects (Akademichesky, HEADLINER, and iLove) account for a very high share of sales in the Company’s sales structure in 2020­–2022. The assessment of the Group’s dependence on the provision of materials and subcontracting has been improved to low. The quality assessment of the size of the Company has been lowered to medium.

Growth in profitability of sales. Due to growing sales prices both as a result of overall growth in market prices and the larger share of high-margin projects in the Company’s project portfolio, the Company’s average weighted sales price grew by 29% in 2019 amid a 9% increase in average weighted expenses on construction and installation work.

Sales completed in 2019 are not yet entirely reflected by the FFO indicator due to the specific nature of recording revenues and expenses in reporting. The average weighted sales price in 2020 should remain unchanged from 2019 (absence of growth of the average weighted price in the Company’s project portfolio amid growth in market prices is the result of an increased share of sales at early stages of project implementation in connection with launching sales of new stages of the largest projects, iLove and HEADLINER), while growth in the volume of sales should be within 10,000–20,000 sq. m.

Low debt service indicators and medium leverage. When calculating leverage, ACRA adjusts the total debt for the amount of debt raised as part of project finance using escrow accounts and fully covered by client funds available on escrow accounts. According to ACRA’s estimates for 2017–2022, the weighted average ratio of adjusted net debt to FFO before net interest is 3.6x, which is high. At the same time, leverage is generally assessed as medium due to capital reserves (the weighted average ratio of adjusted total debt to capital is 1x) and high qualitative assessment of debt. The terms of repayment of the Company’s debt are comfortable, and the peak of repayments will be in 2022, which coincides with the completion dates of major projects of KORTROS. ACRA assesses the average weighted ratio of FFO before net interest payments to net interest payments for 2017–2022 at 1.3x. ACRA notes that the Company has reached agreements with banks on gradually refinancing its bond debt at the expense of considerably cheaper bank debt, which in the future will lead to a marked lowering in interest payments. Furthermore, higher FFO, which is expected due to increased profitability of sales, should help improve the Company’s leverage and debt service indicators.

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

Key assumptions

  • Construction projects to be completed and sales targets to be met as planned;
  • ACRA’s estimates only include projects under construction and projects to be commissioned in accordance with the current financial plan of the Company;
  • No significant decline in prices in the primary real estate market of Moscow;
  • Consolidation of the HEADLINER project in 2020.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Average weighted ratio of FFO before net interest payments to interest payments increasing above 2.5х;
  • Ratio of net debt to FFO before net interest payments decreasing below 3.5x and concurrent decline in the ratio of adjusted total debt to capital to lower than 1x.

A negative rating action may be prompted by:

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

Rating components

SCA: bb+.

Support: +1 notch.

Issue ratings

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 RU000A0ZYLB6), maturity date: December 17, 2020, issue volume: RUB 2 bln — BBB-(RU);

LLC “RSG-Finance” (ISIN RU000A100PS4), maturity date: August 8, 2024, issue volume: RUB 2 bln — BBB-(RU);

LLC “RSG-Finance” (ISIN RU000A100PM7), maturity date: August 11, 2022, issue volume RUB 1.5 bln — BBB-(RU).

Rationale. RSG International Ltd acts as the guarantor for all bond issues of LLC “RSG-Finance”. All the issues listed above represent senior unsecured debt of KORTROS Group. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the recovery rate for the unsecured debt belongs to Category II. Therefore, the credit rating of the issues is equivalent to that of RSG International Ltd, i.e. BBB-(RU).

Regulatory disclosure

The credit ratings have been assigned to RSG International Ltd and the bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, 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 published by ACRA for the first time on July 25, 2017; the credit ratings assigned to the bonds (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7) issued by LLC “RSG-Finance” were first published on August 9, 2017; the credit rating assigned to the bond (RU000A0ZYLB6) issued by LLC “RSG-Finance” was first published on January 24, 2018; the credit ratings assigned to the bonds (RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” were first published on September 24, 2019.

The credit rating of RSG International Ltd and its outlook, as well as the credit ratings of the bonds (RU000A0JUAG0, RU000A0JXN13, RU000A0JWLJ7, 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 level of group support and the final credit rating were not determined 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 a 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.

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