The credit rating of "GROUP OF COMPANIES FSK" LLC (hereinafter, the Company, the Group, or FSK) has been upgraded based on the improvement of leverage, profitability and liquidity indicators. The Company’s credit rating stems from its strong market position, very strong business profile and geographical diversification assessments, high profitability, low leverage, very high debt coverage, strong liquidity, and average cash flow assessment. At the same time, the Company’s credit rating is mainly limited by a very high industry risk, as well as low assessments of the group structure and financial transparency due to the large number of related-party transactions, and also the fact that the credit assessment includes combined reporting.
FSK is one of the largest players in the residential real estate market in the Moscow area and Russia as a whole. According to the Unified Register of Developers, it ranked sixth in the country in terms of volume of the current construction portfolio as of the start of August 2021 and fourth in terms of housing sales in Moscow and the Moscow Region in 2020.
KEY ASSESSMENT FACTORS
Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, high amount of overdue debt, and substantial number of defaulted companies in the last five years. The industry the Company belongs to is a very strong factor limiting its credit rating.
Performance in 2020 and expectations for 2021. In 2020, the Company slightly reduced the volume of sales due to the quarantine restrictions in place in April to May. The volume of sales fell from 494,200 sq. m in 2019 to 479,200 sq. m in 2020. The anti-pandemic restrictions also had a negative impact on the profitability of the Company’s external construction and installation services segment. At the same time, average real estate prices grew considerably, by 14% in Moscow and 10% in the Moscow Region. In 2021, the Company plans to boost sales to 611,600 sq. m, and prices should grow by around 38% compared to 2020, which is related to both the positive market situation and the higher share of new high-margin projects.
Very high debt coverage and low leverage. When calculating the net debt to FFO before interest and taxes ratio, ACRA adjusts the total debt for the amount of debt raised as part of project finance using escrow accounts and fully covered by client funds available on escrow accounts. In 2020, the ratio of adjusted net debt to FFO before net interest payments taking into account shareholder debt was 0.89x (or 0.02x excluding shareholder debt). ACRA expects these indicators to grow slightly in 2021 to 0.91x and 0.26x, respectively. The ratio of FFO before net interest payments to net interest payments was 35.5x in 2020 and is assessed by the Agency at 17.4x in 2021.
Higher profitability. In 2020, the Company’s FFO margin before net interest payments and taxes amounted to 16%. ACRA expects this indicator to increase to 18% in 2021 due to the growth of profitability of both the Company’s own projects and its external construction and installation services.
The Company’s strong liquidity assessment is based on the significant volume of cash in its accounts (which exceeds the volume of loans to be repaid over the next three years), as well as the substantial size of open credit lines, excluding project debt under escrow accounts.
Fulfillment of the planned terms of construction and sales;
ACRA only took into account projects under construction and projects expected to be completed in accordance with the Company’s financial plan;
No substantial decline in real estate prices in the primary market of the Moscow area in 2022–2023.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
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:
- Improvement of the group structure and financial transparency assessments.
A negative rating action may be prompted by:
Ratio of FFO before net interest payments to net interest payments declining below 8x;
Weighted average FFO margin before net interest payments and taxes falling below 12% at the same time as weighted average ratio of adjusted net debt to FFO before net interest payments exceeding 2x;
Residential housing prices in the primary market of the Moscow area falling by more than 10% in 2022–2023;
egulatory changes that entail potential material adverse effects on the Company’s performance.
There are no outstanding issues.
The credit rating has been assigned to "Group of Companies FSK" LLC 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 "Group of Companies FSK" LLC was published by ACRA for the first time on September 2, 2019. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by "Group of Companies FSK" LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and "Group of Companies FSK" LLC participated in its assignment.
In assigning the credit rating, 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 "Group of Companies FSK" LLC. No conflicts of interest were discovered in the course of credit rating assignment.