The credit rating of LLC Lenta (hereinafter, the Company) is based on the Company’s strong operating profile, strong corporate governance, medium leverage, very strong liquidity, and medium profitability. The rating is further supported by the significant share of the Company’s own retail spaces within its real-estate structure, as well as its conservative financial policy.
The Company is Russia’s fourth biggest retail chain in terms of revenue and the largest hypermarket retail chain in terms of retail space. As of June 2020, the chain comprised 248 hypermarkets and 131 supermarkets. The Company is present in 88 cities across Russia. As of June 2020, the Company’s total retail space was around 1.482 billion square meters.
Key rating assessment factors
The Company’s strong operating profile is based on dominant positions in the hypermarket segment, as well as the high geographical diversification of its business. Almost all revenue comes from the mass market segment under the current trade format (more than 90% of revenue comes from hypermarkets in H1 2020). ACRA notes that the Company is also developing its supermarket format and online sales, as well as attracting partner companies. Ownership over the majority of its retail space (more than 75% as of December 31, 2019) is a strong competitive advantage that allows the Company to conduct a fairly flexible pricing policy. The Company is developing its loyalty program and participants accounted for 97% of turnover in 2019. The total number of cardholders reached 15.8 million people (up 10.1% compared to 2018), which allows the Company to quickly track consumer sentiment.
In H1 2020, the Company’s revenue from online sales amounted to RUB 1.9 bln.
High level of corporate governance. The Board of Directors consists of nine members, three of whom are independent members. However, the Chairman of the Board is the Company’s main shareholder and is directly involved in the strategic management of the Company. The Board has established audit, capital expense, appointment, and remuneration committees. The Company has considerable expertise, as each of the key management representatives has on average more than 20 years of specialized experience. The Company’s strategy is not currently finalized, which limits the predictability of its areas of development. The risk management function is well regulated to minimize all key types of risk, while the treasury policy is designed to maintain adequate liquidity, diversify funding sources, and maintain an adequate safety cushion for bank covenants. The financial transparency of the Company is very high, and the structure of the Group is very simple, as the Company is a key operating asset and a property holder.
Average leverage and coverage. When assessing leverage, ACRA uses not only the total amount of debt, but also capitalizes payments under operating leases using multipliers (in accordance with IFRS 16, the calculation does not use lease obligations that are reflected on the Company’s balance sheet). For 2019, the Company’s total financial debt, represented by loans and bonds, increased by 18.5% and at the end of the year amounted to RUB 150.5 bln. According to ACRA, the ratio of adjusted total debt to FFO before fixed payments and the ratio of FFO before fixed payments to fixed payments were 5.0x and 2.0x, respectively, in 2019. However, the repayment of a significant part of the debt in H1 2020 led to a decrease in the total debt to RUB 94.4 bln (on June 30, 2020). ACRA estimates that the ratio of adjusted total debt to FFO before fixed payments and the ratio of FFO before fixed payments to fixed payments may be 3.6x and 2.9x, respectively, at the end of 2020. ACRA expects these figures to improve due to reduced leverage and reduced interest rates in Russia, which could positively affect the Company’s credit quality.
The operating lease multiplier for retail companies is 7.
The Company’s very strong liquidity is based on significant undrawn balances on existing credit lines (RUB 164.7 bln as of June 30, 2020, which is more than 70% higher than the Company’s total debt of RUB 94.4 bln as of the same date), as well as the long-term structure of the loan portfolio. According to ACRA, the weighted short-term liquidity ratio is 3.4x. ACRA notes the high diversification of creditors and the Company’s access to domestic and international capital markets. Additional supporting factors include a high margin of safety for covenants in credit agreements and the absence of encumbered assets, which can be used to attract financing in the event of a liquidity shortage.
Large size and medium profitability. The Company’s revenue in 2019 reached RUB 417.5 bln excluding VAT (up 1.0% compared to 2018), and FFO before fixed payments and taxes, according to ACRA, stood at RUB 41.8 bln (down 2.4% compared to 2018). Return on FFO before fixed payments and taxes was 10.0% for 2019. However, taking into account the Company’s positive results in H1 2020, ACRA expects an increase in profitability and revenue for the year.
Key assumptions
- Growth of comparable sales and profitability in 2020;
- Annual growth in certain expenses in 2020-2021 in line with the inflation forecasted by ACRA (3.9–4.5%);
- No dividend payments.
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:
- Return on FFO before fixed payments and taxes stably exceeding 10.0% while maintaining a conservative dividend policy;
- Stable excess of coverage on FFO before fixed payments to fixed payments above 2.5x while maintaining a conservative dividend policy.
A negative rating action may be prompted by:
- Drop in the weighted ratio of FFO before fixed payments to fixed payments below 1.5x;
- Significantly reduced access to external sources of liquidity with a drop in short-term liquidity below 1.5x;
- Deterioration of corporate governance practices (including a decrease in the level of information transparency).
Rating components
SCA: a+.
Adjustments: none.
Issue ratings
LLC Lenta BО-001Р-02 (RU000A100782), maturity date: March 14, 2029, issue volume: RUB 10 bln. — A+(RU).
LLC Lenta BO-001P-03 (RU000A1011A7), maturity date: November 1, 2029, issue volume: RUB 10 bln. — A+(RU).
LLC Lenta BO-001P-04 (RU000A101R33), maturity date: May 31, 2023, issue volume: RUB 10 bln. — A+(RU).
Rationale. The bond issues represent senior unsecured debt of LLC Lenta. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the bond issues are rated A+(RU), i.e. on par with LLC Lenta.
Regulatory disclosure
The credit rating has been assigned 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, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. To assign a credit rating to the above bond issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.
The credit ratings assigned to LLC Lenta and bonds (RU000A100782, RU000A1011A7, RU000A101R33) issued by LLC Lenta were first published by ACRA on August 3, 2017, March 27, 2019, November 14, 2019, and June 3, 2020, respectively. The credit rating of LLC Lenta and its outlook and the credit ratings assigned to the bonds (RU000A100782, RU000A1011A7, RU000A101R33) issued by LLC Lenta are expected to be revised within one year following the publication date of this press release.
The assigned credit ratings are based on the data provided by LLC Lenta, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and LLC Lenta participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by LLC Lenta in its financial statements have been discovered.
ACRA provided no additional services to LLC Lenta. No conflicts of interest were discovered in the course of credit rating assignment.
