ACRA affirms AA(RU) to PJSC Magnit, outlook Stable, and AA(RU) to bonds, assigns AA(RU) to bond issues (RU000A1036H9, RU000A1036M9)

The credit rating of PJSC Magnit (hereinafter, Magnit, or the Company) has been affirmed as, in the Agency's opinion, the announced acquisition of DIXY food retail chain 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 Saint Petersburg will become stronger. In ACRA's opinion, this will mostly depend on the successful consolidation of DIXY business and the measures aimed to increase its efficiency. According to the Agency's estimates, 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 very strong operating profile, very large size, high profitability, and very strong liquidity. The rating is constrained by medium coverage, medium leverage, and medium cash flow.

Magnit is one of the two largest retail market players in Russia. As of the end of Q1 2021, the Company’s chain included 15,098 convenience stores, 471 supermarkets, and 6,331 drugstores. The retail chain had about 7.6 million sq. m of total sales space and employed around 316,000 people. The Company is present in all federal districts of Russia except the Far Eastern Federal District.

Key rating assessment factors

Magnit’s very strong business profile is driven by the low cyclicality of demand (the Company’s core activity is retail trade in groceries and staple goods), very strong diversification by store formats as well as high brand strength. Convenience stores account for around 77–78% of the Company’s revenues and almost 68% of sales space. Magnit continues developing this segment as one of the most in-demand retail formats in the market. Drugstores (Magnit Cosmetics-branded non-food stores offering a wide range of cosmetics, household chemicals, and homeware) represent the fastest growing format exhibiting the highest profitability.

Medium leverage and medium fixed charges coverage. As of the end of 2020, the ratio of total debt to FFO before net interest payments was 1.7х, while the ratio of debt, adjusted for capitalized lease, to FFO before fixed charges was 3.9х. According to ACRA's methodology, the operating lease multiplier for retail companies is 7.0x. Financial performance indicators are analyzed using data represented in line with IAS 17, with ACRA's analytical adjustments, while lease liabilities reflected in the Company's balance sheet as per IFRS 16 are excluded.

Magnit’s very strong liquidity is driven by positive free cash flow expected in 2021–2023 (excluding investments in the acquisition of DIXY), as well as by undrawn amounts under existing facilities far exceeding the Company’s total debt. ACRA notes sufficient diversification of the Company's lenders and its access to a wide range of external funding sources.

High profitability and very large size of business. Magnit’s 2020 revenues totaled RUB 1.55 tln. FFO before fixed charges and taxes reached RUB 176.8 bln. The return on FFO before fixed charges and taxes stood at 11.4% as of the end of 2020.

Key assumptions

• Successful implementation of the Company’s strategy;
• Gross margin at 23–25%;
• Dividend payments to remain at levels recorded in the previous periods.

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:

• The weighted average ratio of adjusted total debt to FFO before fixed charges going below 4.0x and FCF margin exceeding 2%;
• FFO before fixed charges to fixed charges ratio exceeding 2.5x and adjusted debt to FFO before fixed charges ratio declining below 2.0х.

A negative rating action may be prompted by:

• FFO before fixed charges to fixed charges ratio falling below 1.5x.

Rating components

SCA: aa.

Adjustments: none.

Issue ratings

PJSC Magnit (ISIN RU000A101PJ1), maturity date: May 19, 2023, issue volume: RUB 15 bln — AA(RU);

PJSC Magnit (ISIN RU000A101MC3), maturity date: April 26, 2023, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A101HJ8), maturity date: March 2, 2023, issue volume: RUB 15 bln — AA(RU);

PJSC Magnit (ISIN RU000A1018X4), maturity date: December 22, 2022, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A100ZS3), maturity date: May 3, 2022, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A1002U4), maturity date: February 1, 2022, issue volume: RUB 10 bln — AA(RU).

Key issue properties (RU000A1036M9)

Key issue properties (RU000A1036H9)

Rationale. The bon issues represent senior unsecured debt of PJSC Magnit. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them as 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 PJSC Magnit.

Regulatory disclosure

The credit ratings were assigned to PJSC Magnit and the bonds (RU000A1002U4, RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1,  RU000A1036H9, RU000A1036M9) issued by PJSC Magnit 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit ratings assigned to PJSC Magnit and the bond (RU000A1002U4) issued by PJSC Magnit were published for the first time on September 23, 2019. The credit ratings assigned to the bonds (RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1) issued by PJSC Magnit were published for the first time on November 5, 2019, December 25, 2019, March 5, 2020, April 29, 2020, and May 22, 2020, respectively. The credit ratings have been assigned to the bonds (RU000A1036H9, RU000A1036M9) issued by PJSC Magnit for the first time. The credit rating of PJSC Magnit and its outlook and the credit ratings of the bonds (RU000A1002U4, RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1, RU000A1036H9, RU000A1036M9) issued by PJSC Magnit are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by PJSC Magnit, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and PJSC Magnit 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 PJSC Magnit. No conflicts of interest were discovered in the course of credit rating assignment.