The credit rating of LLC «ASK-Stroitelstvo» (hereinafter, the Company, or ASK) has been upgraded due to the improved assessment of the group’s structure, taking into account the fall in the share of sales, EBITDA and net assets of the Company attributable to closed-end real estate mutual investment funds (hereinafter, CREMIFs), which are consolidated in the financial statements of ASK on the basis of preliminary sales and purchase agreements. The Company’s credit rating is based on its strong market position, very strong business profile, very low leverage, very high assessment of debt servicing, good liquidity, average business profitability, and average corporate governance. The Company’s very high industry risk, small size, and weak geographic diversification and weak cash flow assessment limit the credit rating.
The Company is the largest residential real estate developer in Yekaterinburg and the Sverdlovsk Region. The expected cumulative floor space of projects planned for commissioning in 2021–2023 is over 800,000 sq. m. The cumulative floor space of the Company’s current project portfolio amounts to 2.2 mln sq. m (including retail and office premises).
Key rating assessment factors
ACRA assesses the Company’s industry risk as very high due to the pronounced cyclical nature of the sector, high level of overdue debt, and a significant number of companies that have defaulted over the past five years. ASK’s sector is a strong factor limiting the rating.
The very strong business profile is based on the Company’s highly diversified project portfolio, 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 the high consumer properties of commissioned real estate projects support the Company’s ability to meet sales targets.
The assessment of the Company’s corporate governance has been upgraded due to the improvement of the structure of the group, which includes CREMIFs. The financial results of the CREMIFs are consolidated in the group’s financial reporting, however, the Company does not hold any shares in these funds. Before this revision of the credit rating, the very low assessment of the group’s structure was related to the significant share of net assets and EBITDA of the Company attributable to CREMIFs (up to 50% of net assets and EBITDA). The sector’s transition to escrow account-based sales means that the relevance of sales via CREMIFs has declined considerably. The share of the Company’s EBITDA and revenues generated by the mutual funds fell to 5–6% in 2019 and H1 2020, while the share of net assets of the CREMIFs in the Company’s capital declined to 23% for six months of 2020. ACRA assumes that in the future, the share of EBITDA and revenues attributable to the mutual funds will remain at 5–6%, but the share of the Company’s capital attributable to the mutual funds will continue to gradually shrink.
Changes to the assessment of the size and cash flow of the Company due to the revision of ACRA’s methodology. Now when assessing the size of the Company, ACRA takes into account the volume of the current construction portfolio, which amounted to 280,000 sq. m as of December 2020 (according to the Unified Resource for Developers). Also as a result of the revision, ACRA no longer takes into account the ratio of capital expenditures to revenues when assessing the Company’s cash flow. This indicator has been determined to be irrelevant for assessing residential real estate construction companies.
The Company’s lower business profitability assessment is based on the declining weighted average FFO profitability before net interest payments and taxes for 2017 to 2022, which is the result of significant growth of revenues in the low-margin construction services and design segment in the period from 2020 to 2022 (in 2021 and 2022, revenues in this segment will grow by more than 90% compared to 2019). ACRA expects a significant increase in profitability from selling the Company’s own real estate assets in 2021–2022.
The very low leverage and very high debt servicing indicators are the result of the Company’s conservative financial policy. In assessing the Company’s leverage, ACRA adjusts the total debt by the amount of debt raised through project financing and fully secured by funds received in escrow accounts from buyers. According to ACRA, adjusted net debt to FFO before net interest payments in 2017–2022 will average -0.1x, while total debt to capital will average 0.2х. In 2019, LLC «Atomstroykompleks-Promyshlennost», (the industrial division of Atomstroykompleks Group) started carrying out a project to construct a cement factory. ASK provided a surety for loans raised to finance this project. ACRA did not regard this surety as part of the Company’s leverage because LLC «Atomstroykompleks-Promyshlennost» has a strong credit profile. The Company’s leverage is assessed as very low. Debt service indicators are very high, with weighted average FFO before net interest payments to net interest payments expected to be 13.4x for 2017–2022.
Key assumptions
- Observing the planned construction schedule and meeting sales targets;
- ACRA’s calculations include real estate projects under construction and real estate projects planned to be commissioned based on the Company’s current construction program.
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:
- Simplification of the organizational structure of the group and simultaneous improvement of the corporate governance structure and growth of weighted average FCF profitability to above 2%;
- Increases in Company’s indicators (weighted average FFO before net interest payments and taxes increasing to over RUB 5 bln and growth of the current construction portfolio to more than 400,000 sq. m).
A negative rating action may be prompted by:
- Increase in the share of the Company’s EBITDA attributable to CREMIFs;
- Weighted average net debt to FFO before net interest payments exceeding 1x, with a concurrent decrease in FFO before net interest payments to net interest payments to below 8x;
- FFO profitability before interest payments and taxes falling below 8% and FCF profitability turning negative;
- Regulatory changes that could have a significant impact on the Company’s indicators.
Rating components
SCA: bbb+.
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.
The credit rating of LLC «ASK-Stroitelstvo» was published by ACRA for the first time on December 21, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
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.
