The credit rating of LLC Lenta (hereinafter, the Company) has been affirmed as, in the Agency's opinion, the announced acquisition of the supermarket chain owned by Billa Russia GmbH (Billa Russia) will have a neutral effect on the Company's credit quality.
It is expected that, after the deal is closed, the Company's market positions in Moscow and the Moscow Region will become stronger. In ACRA's opinion, this will mostly depend on the successful consolidation of Billa Russia's business and the measures aimed to increase its efficiency. The amount of debt raised to close the deal will not affect significantly the leverage of the consolidated business.
The Company's credit rating is based on its strong market position, strong operating profile, strong corporate governance, low 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.
As of 2020-end, the Company was Russia’s fourth biggest retail chain in terms of revenue and the largest hypermarket retail chain in terms of retail space (around 1.519 billion sq. m in total). The chain includes 254 hypermarkets and 139 supermarkets in 88 cities across Russia.
Key rating assessment factors
* According to Company, Infoline, Gfk.
The Company’s market positions have strengthened, which is the result of a further solidifying of the Company's dominant positions in the hypermarket segment, as well as the high geographical diversification of its business. According to the Company's expectations, after the acquisition of Billa Russia, the total share of the Company in the grocery retail market of Moscow and the Moscow Region will amount to about 3%. In 2020, the Company continued to increase its share in the hypermarket segment (as of year-end, the share was 28.0%, i.e. +3 p.p. against 2019*) outrunning the national growth rates in this segment where the total sales declined by 0.5% against 2019, while the Company's sales grew by 7.1%*. In 2020, 91.4% of its revenue came from hypermarkets. The Company's chain includes 114 hypermarkets with the average retail space of about 7,000 sq. m and 140 hypermarkets with the average retail space of about 4,400 sq. m. ACRA notes that the Company is also developing its chain of supermarkets and online sales through partner companies. Moreover, in 2021, the Company released its plans to actively develop its convenience stores, which should further increase the diversification of its sales channels. Ownership over the majority of its retail space in hypermarkets (more than 70% as of December 31, 2020) is a strong competitive advantage that allows the Company to conduct a fairly flexible pricing policy.
Low leverage and high coverage. When assessing leverage, ACRA uses not only the total amount of debt, but also capitalizes payments under operating leases using multipliers (the calculation does not include lease liabilities that are reflected on the Company’s balance sheet in accordance with IFRS 16). ACRA does not expect the Company's leverage ratios to change significantly if the acquisition of Billa Russia is closed in 2021–2023. According to ACRA's estimates for 2020, the ratio of adjusted total debt to FFO before fixed charges was 3.0x and the ratio of total debt to FFO before net interest payments was 2.3x (5.0x and 4.6x, respectively, in 2019); the ratio of FFO before fixed charges to fixed charges was 3.2x and the ratio of FFO before net interest payments to interest payments was 5.1x (2.0x and 2.5x, respectively, in 2019). ACRA does not expect a further decline in leverage ratios in 2021.
The Company’s very strong liquidity is based on significant undrawn amounts under existing credit lines (RUB 187.9 bln as of December 31, 2020, which was much higher than the Company’s total debt of RUB 83.0 bln as of the same date), as well as the long-term structure of the loan portfolio. According to ACRA's estimates, the weighted short-term liquidity ratio is 3.3x. The Agency notes the high diversification of lenders and the Company’s access to domestic and international capital markets. Additional comfort factors include high margins on covenants in loan 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 2020 reached RUB 445.5 bln excluding VAT (+6.7% compared to 2019), and FFO before fixed charges and taxes, according to ACRA's calculations, stood at RUB 46.7 bln (+11.7% compared to 2019). According to ACRA's estimates, the return on FFO before fixed charges and taxes was 10.5% in 2020 (10.0% in 2019), which is in line with the Agency's expectations.
High level of corporate governance. In 2021, the Company updated its strategy, which includes, first, active expansion of convenience stores and online sales. Therefore, the acquisition of Billa Russia is a part of the Company's strategy. The Company is the key operating asset of Lenta IPJSC, which manages and controls the Company. The board of directors of Lenta IPJSC consists of nine members, of whom three are non-executive directors and one is an independent director. The board chairman is the Company’s key shareholder who 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 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.
The operating lease multiplier for retail companies is 7.
Financial performance estimates include data in line with IAS 17, subject to analytical adjustments by ACRA.
For more information, see ACRA's analytical comment Complicated analysis of "light assets" dated April 8, 2021.
Key assumptions
- Growth of like for like sales in line with the inflation in 2021–2023;
- Development of convenience stores;
- Annual growth in certain expenses in 2021-2023 in line with the inflation forecasted by ACRA (3.9–4.5%).
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:
- Adjusted total debt to FFO before fixed charges going below 2.0x and return on FFO before fixed charges and taxes sustainably exceeding 10.0%, accompanied by development of omni-channel sales network;
- Coverage on FFO before fixed charges to fixed charges sustainably exceeding RUB 100 bln and return on FFO before fixed charges and taxes sustainably exceeding 10.0%.
A negative rating action may be prompted by:
- Drop in the weighted ratio of FFO before fixed charges to fixed charges below 2.5x;
- Significantly reduced access to external sources of liquidity with a drop in short-term liquidity ratio below 1.5x;
- Deterioration of corporate governance practices (including a decrease in the level of information transparency).
Rating components
SCA: aa-.
Adjustments: none.
Issue ratings
LLC Lenta BО-001Р-02 (RU000A100782), maturity date: March 14, 2029, issue volume: RUB 10 bln — AA-(RU).
LLC Lenta BO-001P-03 (RU000A1011A7), maturity date: November 1, 2029, issue volume: RUB 10 bln — AA-(RU).
LLC Lenta BO-001P-04 (RU000A101R33), maturity date: May 31, 2023, issue volume: RUB 10 bln — AA-(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 AA-(RU), i.e. on par with LLC Lenta.
Regulatory disclosure
The credit ratings have 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.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to LLC Lenta. No conflicts of interest were discovered in the course of credit rating assignment.
