The credit rating of Selectel Ltd. (hereinafter, Selectel, the Company, or the Group) is based on the Company’s strong business profile, leading market positions, very high profitability, and moderately high liquidity assessment. The rating is constrained by the average leverage, very weak cash flow, and small size of the Company.
Selectel is a Russian data center operator that provides IT infrastructure services. The Company owns six data centers in Moscow, Saint Petersburg, and the Leningrad Region. The Company’s main ultimate owners are Vyacheslav Mirilashvili (87.52%), Lev Leviev (9.73%), and Oleg Lyubimov (2.44%).
Key rating assessment factors
High assessment of the business profile and strong market positions. New players’ access to the data center market is considerably limited due to the need to make large capital expenditures at the business launch stage and the rather complex nature of infrastructure technology required to ensure uninterrupted operation of servers, information security and so on. This to a large extent protects the Company’s market positions, which ACRA assesses as strong in individual segments and the IT infrastructure provider market as a whole.
Selectel provides a wide range of IT services via its modern infrastructure, including two data centers in Saint Petersburg, one in Moscow, and three in the Leningrad Region (the total number of server racks available for installation in all data centers amounts to 2,854 as of October 31, 2020). ACRA assesses the Company’s business as moderately diversified. Selectel’s core activities include technical solutions and services related to providing dedicated servers, which account for 63% of revenues. In addition, the Company provides cloud technology solutions (19%), rents out server racks in its data centers (12%), and offers other IT infrastructure and information security services (6%). In ACRA’s opinion, these segments are far from saturated in terms of supply, which enables the Group to demonstrate high growth rates and allows it respond in an extremely limited way to economic downturns.
ACRA notes that Selectel’s client base, which numbers more than 17,000, is very highly diversified. At the same time, it is characterized by an extremely low client churn rate, which significantly increases the stability of incoming cash flows.
When comparing Selectel with the peer group with A-(RU) credit ratings, ACRA notes the higher stability of the Company’s business. This has been reflected by the ACRA as part of a corresponding analytical adjustment.
Very high profitability and small size of the Company. Selectel is in the rapid growth phase, with average annual revenues growing by 45% in 2018–2019. ACRA expects the Company’s revenues to reach RUB 3.3 bln in 2020, i.e. a 42% increase compared to last year. ACRA expects the Group to maintain its high revenue growth rates (30–40% annually) in 2021–2023. The Company has recorded similar growth in its FFO before fixed payments and taxes, which ACRA projects may reach RUB 1.4 bln in 2020. According to ACRA’s methodology, this size of FFO before fixed payments and taxes corresponds to the Company’s small size.
Selectel’s profitability is very high and consistently exceeds 40%. In 2019, FFO profitability prior to fixed payments and taxes stood at 46%. ACRA predicts that this indicator may equal 41% in 2020 and range from 43% to 49% in 2021–2023.
Average leverage. Selectel’s debt was RUB 2.4 bln as of June 30, 2020 and was mainly made up of ruble-denominated loans provided by AO Raiffeisenbank (AAA(RU), outlook Stable). According to ACRA’s assessments, the Company’s debt should increase to RUB 3.5–3.7 bln by the end of the year. Selectel’s leverage is assessed as average. According to ACRA’s assessments, the ratio of total debt adjusted for operating lease to FFO before fixed payments will equal 2.7x as of the end of 2020. ACRA expects this indicator to decline to 1.5x by 2023 as business grows. Interest payment coverage is also average; the ratio of FFO before fixed payments to fixed payments may reach 3.6x by the end of 2020 and then potentially grow to 7.9x by 2023.
Moderately high liquidity amid very weak cash flow. Selectel actively invests in developing its own IT infrastructure — in 2019, the ratio of capital expenditures (CAPEX) to revenues equaled 53%. ACRA expects the Company’s CAPEX to peak at 70% in 2020, and then decline to 35–40%. The significant volume of CAPEX is the reason for negative free cash flow (FCF), even in the absence of dividend payments. According to ACRA’s assessments, FCF may turn positive in 2022. The debt repayment schedule involves significant outflows of cash in 2021–2022, which when combined with negative FCF will put considerable pressure on the liquidity assessment. ACRA positively assesses the Group’s liquidity for 2021 taking into account its plans to diversify sources of funding, and also due to available limits of RUB 560 mln (as of October 31, 2020).
Key assumptions
- Average annual growth of revenues at 30–40% in 2021–2023;
- FFO profitability before fixed payments and taxes being maintained within 40–50%;
- No dividend payments until positive FCF is achieved;
- Continued access to external liquidity sources.
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:
- Weighted average ratio of adjusted total debt to FFO before fixed payments falling below 1.0x and the weighted average ratio of FFO before fixed payments to interest payments exceeding 10.0x;
- FCF profitability growing higher than 5% amid the ratio of CAPEX to revenues falling below 10%.
A negative rating action may be prompted by:
- Weighted average ratio of adjusted total debt to FFO before fixed payments exceeding 3.5x;
- Weighted average ratio of FFO before fixed payments to fixed payments falling below 3.0x;
- FFO profitability before fixed payments and taxes falling below 20%;
- Worsened access to liquidity sources.
Rating components
SCA: a.
Adjustments: none.
Issue ratings
No outstanding issues have been rated.
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.
A credit rating has been assigned to Selectel Ltd. for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by Selectel Ltd., information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Selectel Ltd. participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Selectel Ltd. in its financial statements have been discovered.
ACRA provided no additional services to Selectel Ltd. No conflicts of interest were discovered in the course of credit rating assignment.
