The credit rating of LLC «ASK-Stroitelstvo» (hereinafter – the Company, Atomstroykompleks, or ASK) is based on a very strong business profile of the Company, high business profitability, high assessment of cash flow, very low leverage, very high assessment of debt servicing and strong liquidity. However, very high industry risk, low assessment of corporate governance and weak geographic diversification put pressure on the Company’s credit rating level.
LLC «ASK-Stroitelstvo» is the largest residential real estate developer in Ekaterinburg and the Sverdlovsk Region. The expected cumulative floor space of projects planned for commissioning in 2019-2021 is over 900,000 sq. m.
Key rating assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, a high level of overdue debt, and a significant number of companies that have defaulted over the past five years. The Company’s sector is a very strong factor limiting its rating.
Very strong business profile is based on a highly diversified project portfolio of the Company, a stable structure of schedules and terms for project implementation as well as a high amount of self-manufactured materials and a large portion of construction works performed without involving contractors. A strong brand and high consumer properties of commissioned real estate objects support the Company’s ability to meet sales targets.
Low assessment of the Company’s corporate governance is due to low assessment of the management structure and very low assessment of the Group’s structure. The Company’s management structure is insufficiently formalized; there is no board of directors in the Company. Since shareholders are involved in operational management, a risk of decision-maker’s irreplaceability may arise. Very low assessment of the Group’s structure is due to the presence of closed-end real estate unit investment funds. Although financial results of these funds are consolidated in the Group’s financial reporting, Atomstroykompleks does not own any shares in the above mentioned funds. At the same time, ACRA’s assessment of ASK’s strategy consistently implemented by the Company is high. ACRA deems the strategy implementation as successful. When assessing the management strategy, ACRA also considered the history and development outlook of Atomstroykompleks-Promyshlennost, an industrial division of Atomstroykompleks Group, which had previously implemented a strategy of setting up its own state-of-the-art production facilities that proved to be very successful and had a positive impact on the Group’s competitiveness as a whole.
High profitability. High profitability is largely due to the Company’s ability to hit its sales targets, relatively low construction costs, and a comparatively high pace of construction because the Company performs construction works independently, using high-quality construction materials that are manufactured at the Company’s plants.
Very low leverage and very high debt servicing indicators are the result of the Company’s conservative financial policy. ASK favors concluding contracts with landholders, which envisage the payment for land by shares in the project. According to ACRA estimates, the net debt to FFO before net interest payments ratio will average 0.1x in 2016-2021, while the total debt to capital ratio will average 0,2х. In 2019, the Company plans to start selling real estate using escrow accounts. In 2020, transactions based on escrow accounts may account for nearly 35% of ASK’s total sales. Considering the use of project financing for transactions with escrow accounts, ACRA expects an increase in the total debt burden of the Company. Meanwhile, when calculating ASK’s net debt, ACRA will take into account the funds on escrow accounts, which is why a significant increase in ASK’s net debt is not expected. The Company’s debt burden is assessed as very low. Debt service indicators are at a very high level. As such, the FFO before net interest payments to net interest payments ratio amounted to 17.23x in 2017. ACRA expects it to grow up to 18.89x in 2021.
Strong liquidity of ASK is primarily achieved through low debt and the availability of substantial amounts of free cash on the Company’s accounts compared to the amount of debt, as well as the availability of non-selected credit lines. When calculating the liquidity ratio, ACRA does not consider the funds that will be accumulated on the escrow accounts in the forecast period.
Key assumptions
- Observing the planned construction schedule and meeting sales targets;
- ACRA calculations include real estate objects under construction and real estate objects planned to be commissioned based on the Company’s current construction program;
- Zero price growth in the primary real estate market of Ekaterinburg and the Sverdlovsk Region in 2019-2021.
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:
- Improved organizational structure of the Group.
A negative rating action may be prompted by:
- Net debt to FFO before net interest payments ratio increasing above 1x, with FFO before net interest payments to net interest payments ratio concurrently declining below 8x;
- FFO net margin before interest payments and taxes declining below 8% or FCF margin turning negative;
- Regulatory changes that can have a significant negative impact on the Company’s indicators.
Rating components
Standalone creditworthiness assessment (SCA): bbb.
Adjustments: none.
Issue ratings
No outstanding issues.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of LLC «ASK-Stroitelstvo» was published for the first time on December 21, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 19, 2018).
The assigned credit rating is based on the data provided by LLC «ASK-Stroitelstvo», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and LLC «ASK-Stroitelstvo» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by LLC «ASK-Stroitelstvo» in its financial statements have been discovered.
ACRA provided no additional services to LLC «ASK-Stroitelstvo». No conflicts of interest were discovered in the course of credit rating assignment.
