The credit rating of Setl Group, Ltd (hereinafter, the Company, the Group, or Setl Group) has been upgraded based on the assessment of the Company’s profitability being improved to very high due to weighted average FFO profitability before net interest and taxes exceeding 20%. The Group’s credit rating is supported by its strong market positions and strong business profile, very low leverage, very high interest coverage, as well as very high profitability and strong liquidity. At the same time, the rating is constrained by the very high industry risk and medium level of corporate governance.
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 2020, the Company commissioned 1.5 mln sq. m of floor space; at the start of June 2021, the total floor space in the portfolio of projects under construction amounted to 2.36 mln sq. m according to the Unified Developer Resource.
Key rating assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, high amount of overdue receivables, and the substantial number of companies that have defaulted in the last five years. The industry that the Company belongs to is a strong factor limiting the credit rating.
Strong business profile and medium corporate governance assessment. Setl Group’s strong business profile is based on the very high diversification of its project portfolio, stable structure of schedules and conditions for project implementation, and the strong market positions of the Company’s proprietary brokerage and consulting divisions in St. Petersburg. The medium level of corporate governance stems from the high quality of strategic management, adequate risk management system, and adequate management and organizational structures of the Group. The Agency notes the Company’s consistency and success in pursuing its strategy.
Very high business profitability. In 2020, the Company demonstrated significant growth of commissioned real estate (by total area) to 1.5 mln sq. m compared to 1.33 mln sq. m in 2019. The volume of sales of living space declined slightly year-on-year from 857,000 sq. m to 831,800 sq. m, while the volume of sales of living space grew in monetary terms to RUB 112.3 bln (RUB 105.8 bln in 2019) thanks to growth in the average sales price of the Group’s apartments in 2020 (from RUB 119,900 to RUB 130,900 per sq. m year-on-year). Price growth has continued into 2021 — as of the end of Q1 2021, the average sales price had grown to RUB 155,800 per sq. m.
This price growth, as well as a changed sales structure (increased share of high-margin projects) resulted in FFO profitability before net interest and taxes growing to 26.1% in 2020 compared to 23.4% in 2019. The Agency assesses weighted average FFO profitability before net interest and taxes for the period from 2018 to 2023 at 24.9% (previously this assessment amounted to 18.8%) and due to this ACRA has improved the Company’s business profitability assessment.
Very low leverage. In its calculation of the ratio of net debt to FFO before interest and taxes, ACRA has adjusted the Company’s total debt for the amount of borrowed funds fully secured by funds held on escrow accounts and raised from homebuyers. Subject to this adjustment, the ratio of net debt to FFO before net interest amounted to 0.14x for 2020.
Very high interest coverage. When assessing interest coverage, the Agency takes into account interest payments for general corporate debt, but project financing interest payments are included in the cost price. In 2020, the Company’s ratio of FFO before net interest to net interest was 36.9x. ACRA assesses the weighted average ratio of FFO before net interest to net interest at 19.7x for the period from 2108 to 2023.
- The Company completing its projects according to schedule and meet sales targets;
- Only the Company’s projects under construction and projects to be commissioned as per the current financial plan were included in ACRA’s calculations;
- Prices in St. Petersburg’s primary real estate market not changing significantly from 2021 to 2023 compared to Q1 2021.
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:
- Corporate governance assessment improving to the highest level;
- Weighted average FFO before net interest and taxes exceeding RUB 30 bln at the same time as the ratio of commercial, overall, and administrative expenses to revenues falling below 5% and the weighted average ratio of adjusted total debt to capital declining below 0.5x.
A negative rating action may be prompted by:
- Weighted average ratio of FFO before net interest to net interest falling below 8.0x;
- Weighted average ratio of adjusted total debt to capital exceeding 1.0x;
- Weighted average ratio of adjusted net debt to FFO before net interest exceeding 1.0x;
- Weighted average FFO profitability before net interest and taxes falling below 20%;
- Residential real estate prices in St. Petersburg declining by more than 10% in 2021–2023 and prices for construction work and materials increasing as projected;
- Regulatory changes capable of having a material adverse effect on the Company’s performance.
Exchange-traded interest-bearing certified unregistered bond issued by Setl Group, Ltd, 001P-01 series (ISIN RU000A0ZYEQ9), maturity date: October 27, 2022, issue volume: RUB 5 bln — A(RU).
Exchange-traded interest-bearing non-convertible certified bearer bonds subject to mandatory centralized custody issued by Setl Group, Ltd, 001Р-02 series (RU000A100MG6), maturity date: January 1, 2023, issue volume: RUB 5 bln — A(RU).
Exchange-traded interest-bearing uncertified non-convertible bonds subject to mandatory centralized custody issued by Setl Group, Ltd, 001Р-03 series (RU000A1030X9), maturity date: April 17, 2024, issue volume: RUB 7.5 bln — A(RU).
Rationale. The issues represent senior unsecured debt instruments of Setl Group, Ltd. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the unsecured debt repayment level corresponds to the first category. Therefore, the credit rating of the issues is equivalent to that of Setl Group, Ltd, i.e. A(RU).
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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of Setl Group, Ltd and the credit ratings of the bond issues of Setl Group, Ltd (RU000A0ZYEQ9, RU000A100MG6, RU000A1030X9) were published by ACRA for the first time on June 19, 2017, November 2, 2017, July 23, 2019, and April 21, 2021, respectively. The credit rating of Setl Group, Ltd and its outlook and the credit ratings of the bond issues of Setl Group, Ltd (RU000A0ZYEQ9, RU000A100MG6, RU000A1030X9) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by Setl Group, Ltd, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and Setl Group, Ltd 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 Setl Group, Ltd. No conflicts of interest were discovered in the course of credit rating assignment.