The credit rating of PJSC «INGRAD» (hereinafter, the Company, INGRAD) reflects the strong operational risk profile and the high assessments of profitability, liquidity, and cash flow. At the same time, the main factor constraining the rating is a very high industry risk, as well as medium assessments of leverage, business size, and coverage. ACRA assesses the likelihood of support from the main operating asset of the Company's key shareholder (LLC ROSSIUM Concern), CREDIT BANK OF MOSCOW (ACRA rating: A(RU), outlook Stable), as high.
INGRAD is one of the largest players in the residential real estate market of Moscow, the Moscow Region and Russia as a whole (seventh place in Russia in terms of the current construction portfolio according to the Unified Register of Developers as of August 1, 2021, fifth place in Russia in terms of housing commissioning in 2020). The main shareholders of the Company are LLC ROSSIUM Concern (64.07%) and REGION Group (18.19%).
KEY ASSESSMENT Factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the construction industry, high amount of overdue payments, and substantial number of companies that have defaulted over the last five years. Therefore, industry risk is a strong factor that limits the Company’s credit rating.
High likelihood of extraordinary support from the main operating asset of the key shareholder. The rapid business expansion in 2017–2019 required significant additional funding. A significant portion of funds (RUB 70 bln) was provided by the key shareholder in the form of long-term bond loans granted at comfortable rates. The past cases of support to the Company from its key shareholder indicate a high likelihood of support in the future if the need arises.
Strong operational risk profile. ACRA assesses the Company's strategy as successful. Since the merger of PJSC OPIN and JSC INGRAD in 2017, a sharp expansion of the Company's project portfolio has begun. At the beginning of 2020, the Company took the fourth place in Russia in terms of the volume of current construction (having risen from the 19th place as of the beginning of 2019). At the end of 2020, the Company moved into second place in terms of sales in Moscow in the business and premium segment (the share in the segment was 8%). The high assessment of the Company's business profile is due to the very high diversification of its project portfolio (the portfolio includes 29 projects, the share of sales for the largest of them in the total sales for 2021–2023 is estimated by ACRA at no more than 10%), medium assessments of the terms and conditions of the projects, as well as dependence on materials and subcontracting. The Company's project portfolio is characterized by high geographical diversification: in 2021–2023, according to ACRA's estimates, about 57% of sales will be in Moscow and 43% will be in the Moscow Region.
Medium leverage and coverage assessments. In its calculations of the ratio of net debt to FFO before interest and taxes, ACRA adjusted the total debt by the amount raised as part of escrow-backed project finance and fully secured by buyers' funds held in escrow accounts. At the end of 2020, the ratio of adjusted net debt to FFO before net interest was 6.8x. At the same time, ACRA notes that the amount of funds held in escrow accounts more than two-fold exceeds the escrow-backed project debt. In addition, given the specifics of revenue and cost recognition under IFRS, the growth in sales and profitability that occurred in 2019–2021 has not yet been fully reflected in the Company's financial statements. Starting from 2022, more and more highly marginal projects will be commissioned, so that revenues are going to ramp up; therefore, ACRA expects that by the end of 2022, the ratio of adjusted net debt to FFO before net interest will go down to 2.5x and will continue to decline in 2023–2024. The weighted average (for 2019–2024) ratio of adjusted net debt to FFO before net interest is estimated by the Agency at 3.4x. At the end of 2020, the ratio of FFO before net interest to net interest was 1.4x; ACRA expects this ratio to grow to 5.6x by the end of 2022. The weighted average (for 2019–2024) ratio of FFO before net interest to net interest is estimated by the Agency at 3.1x.
High liquidity and cash flow assessments. The weighted average (for 2019–2024) FCF margin (adjusted for escrow-backed project debt transactions and including dividend payouts) is estimated by the Agency at 9.5%. Beginning from 2021, an increase in the adjusted FCF margin will be driven by a growing inflow of funds disbursed from escrow accounts. The strong liquidity assessment reflects a positive FCF expected in 2021–2024, a substantial amount of free cash in the Company's accounts, and a comfortable debt repayment schedule.
Maintaining planned construction deadlines and sales rates;
ACRA only took into account only projects under construction and projects expected to be completed in accordance with the Company’s current plans;
No significant decline in prices in the primary real estate market of the Moscow area in 2022–2023.
possible 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:
Decline in the weighted average ratio of adjusted net debt to FFO before net interest below 2.0х and growth in the weighted average ratio of FFO before net interest to net interest above 5.0х;
Stronger market positions of the Company and growth in the weighted average return on FFO before net interest and taxes above 20%.
A negative rating action may be prompted by:
Decline in the weighted average ratio of FFO before net interest to net interest below 2.5х;
Growth in the weighted average ratio of adjusted net debt to FFO before net interest above 3.5х;
Prices in the primary real estate market of the Moscow area declining by more than 10% in 2022–2023;
Loss of control over the Company by LLC ROSSIUM Concern;
Regulatory changes capable of having a material adverse effect on the Company’s performance.
Standalone creditworthiness assessment (SCA): bbb.
Support: Group – SCA + 1 notch.
No outstanding issues have been rated.
The credit rating has 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, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating has been assigned to PJSC «INGRAD» for the first time. 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 the data provided by PJSC «INGRAD», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PJSC «INGRAD» 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 PJSC «INGRAD». No conflicts of interest were discovered in the course of credit rating assignment.