The credit rating of Setl Group, Ltd (hereinafter – the Company, Group, or Setl Group) is based on very strong business profile of the Company, its medium corporate governance level, high business profitability, low debt load, and strong liquidity. At the same time, very high industry risk and weak cash flow assessment put pressure on the Company’s credit rating level.
Setl Group is the largest residential real estate developer in the North-West of Russia, and the third largest player in the Russian construction market. In 2016, the Company commissioned 953 th sq m of floor space amounting to 1.2% of the total figure for Russia.
Key rating assessment factors
Industry risk is assessed as very high due to pronounced cyclical nature of the sector, high level of overdue debt, and substantial number of defaulted companies in the last five years. Company’s industry is a very strong factor limiting its rating.
Very strong business profile is based on highly diversified project portfolio, stable structure of schedules and terms and conditions for project implementation, as well as particular advantage related to strong market positions of Company’s proprietary brokerage and consulting divisions in St. Petersburg. Company’s brokerage division also sells a substantial share of residential real estate offered on the St. Petersburg’s market by third-party developers. As a result, the Company is able to consolidate up-to-date information on key trends in the region’s residential real estate market.
Medium corporate governance level is determined by adequate level of strategic management, risk management system, financial transparency, and management and Group structure. Currently, the Company is in the approval process of its long-term development program. In ACRA’s opinion, existing elements of risk management system (bid tender process regulations, budget committee regulation, and automated system for investor control) make it possible to exercise control over key operational risks of the Company. Notwithstanding the observed low level of credit, foreign exchange, and interest rate risks, the Agency notes lack of regulations with respect to financial risk management function at the Company. Group’s structure is complicated, with each project is handled by specific legal entity; however, this is a typical approach across the entire industry.
Low leverage and high profitability are largely based on Company’s ability to reach its sales targets, which enables it to finance the major share of its construction projects by proceeds from co-investment agreements. In addition, the Company manages to sell the bulk of the floor space by the time of commissioning projects. Aside from that, the Company actively enters into contracts with landholders, which implies trading land for a share in the project. This helps to avoid any conflicts of interest between landholders and the developer, and it reduces investment load on the project at the stage of purchasing the land plot and in the initial construction phase. The debt load is marked by low ratio of total debt to FFO before net interest payments: in 2014-2016, this ratio was in the range of 1.03x-1.69x. The Company usually raises debt against letters of credit opened by buyers, which is due to an extensive period (of 30 days or more) deal registration takes. ACRA incorporated these circumstances into Company’s debt load structure when determining its rating; at the same time, we also note that cash deposited by buyers covers these obligations by over 100%. As of year-end 2016, such obligations amounted to 23.5% in the Company’s debt portfolio. Excluding obligations covered by letters of credit, the total debt to FFO before net interest payments ratio was 0.79x as at year-end 2016.
Strong liquidity of Setl Group is achieved through availability of undrawn amounts of financing from open lines of credit (excluding those with respect to letters of credit) totaling RUB 2.03 bln. In the course of liquidity source analysis, ACRA disregarded planned bond issue, and in its calculations, the Agency adjusted free cash flow by the amount of costs to purchase land associated with that borrowing.
Weak cash flow assessment is based on very low FCF (free cash flow) margin, which is primarily influenced by substantial dividend payments. In 2014-2016, FCF margin varied from -6.2% to 1.1%, and according to ACRA’s projections, it will range from -7.1% in 2017 to 5.9% in 2019.
Key assumptions
- Construction is completed and sales targets are met in due time as planned;
- Only projects under construction and projects to be commissioned as set forth in the current financial plan of the Company were included in ACRA estimations;
- A 1.54% annual average projected increase in real estate prices in St. Petersburg over the period of 2017-2019;
- An average price increase of 5.2% per year for construction works and materials over the period of 2017-2019; and a 5.8% increase per year in wages over the same period.
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:
- FCF margin improvement reaching a positive value;
- Improved corporate governance quality and better financial transparency of the Company.
A negative rating action may be prompted by:
- FFO before net interest payments to interest payments ratio declines to 2.5x;
- Residential real estate prices in St. Petersburg decline by more than 13% by 2019, while prices for construction works and materials increase as projected;
- Access to external liquidity sources worsens considerably;
- Regulatory changes capable of having a material adverse effect on Company’s indicators.
Rating components
Standalone creditworthiness assessment (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 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.
A credit rating has been assigned to Setl Group, Ltd for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (June 15, 2017).
The assigned credit rating is based on the data provided by Setl Group, Ltd, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Setl Group, Ltd participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Setl Group, Ltd in its financial statements have been discovered.
ACRA provided no additional services to Setl Group, Ltd. No conflicts of interest were discovered in the course of credit rating assignment.
