ACRA has upgraded the credit rating of RSG International Ltd (hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, to BBB(RU), and changed the credit rating outlook to Stable. ACRA has also upgraded the credit ratings of the bonds (RU000A0JUAG0, RU000A0JXN13, RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” to BBВ(RU).
The credit rating of GC KORTROS has been upgraded to reflect the improved leverage and coverage metrics. The Company's credit rating is based on the low leverage, strong liquidity and cash flow assessments, medium coverage and profitability assessments, and medium operational risk profile assessment, and the high likelihood of support from the key shareholders. The rating is restricted by the very high industry risk and the relatively small size of the Company's business.
GC KORTROS is a residential real estate developer with a wide geography of presence and high diversification of project formats. The Company was established in 2005 to implement the Akademichesky project, a large-scale development project. According to the Unified Register of Developers, as of September 2021, the volume of Company's projects under development was 715,900 sq. m.
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 the substantial number of companies that have defaulted over the last five years. The industry the Company belongs to is a very strong factor limiting its credit rating.
The high likelihood of support from the Company’s largest shareholders is underpinned by the previous cases of support, including the large-scale HEADLINER project, which, at its initial stages, was financed by the key shareholders.
The Company's performance in 2020. Last year, the Company significantly increased its sales (from 234,400 sq. m in 2019 to 327,500 sq. m in 2020) due to the start of new phases in its largest projects. In addition, the favorable pricing environment, as well as the increase in the share of high-margin projects in the Company's portfolio, had a positive effect on the Company's profitability: the return on FFO before net interest and taxes (excluding proceeds from the sale of land lots) increased to 14.6% in 2020 versus 9.4 % a year earlier, and the Company's revenue grew by 28%. In accordance with earlier expectations, the HEADLINER project was consolidated within the Group's perimeter in H2 2020.
Improving leverage and coverage metrics. In its calculations of the ratio of net debt to FFO before interest and taxes, ACRA adjusts the total debt by the amount of debt raised as part of project financing under escrow accounts and fully backed by funds deposited by buyers to escrow accounts. At the end of 2020, the ratio of adjusted net debt to FFO before net interest was 1.27x. ACRA expects the ratio to grow above 2.5x by the end of 2021 due to the planned investments in new projects by the Company. At the same time, the weighted average (for the period from 2018 to 2023) ratio of adjusted net debt to FFO before net interest is estimated by the Agency at 2.2x.
In 2020, GC KORTROS refinanced a significant portion of its public debt by attracting significantly cheaper bank loans, which led to a noticeable decrease in the effective interest rate on the Company's debt. At the end of 2020, the ratio of FFO before net interest to net interest was 1.9x, the weighted average (for the period from 2018 to 2023) ratio is estimated by the Agency at 2.6x.
Strong liquidity and cash flow assessments. The strong assessment of the Company's liquidity is driven by a significant amount of funds held on its accounts, as well as a significant amount of committed credit lines (excluding project debt under escrow).
In its calculations of free cash flow (FCF), the Agency adjusts this indicator for project debt operations. The weighted average (for the period from 2018 to 2023) adjusted FCF margin is estimated by the Agency at 5.8%. Due to growing investments in new projects, ACRA expects the adjusted FCF to decrease to negative values by the end of 2021, followed by a recovery in 2022–2023.
KEY ASSUMPTIONS
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Fulfillment of the planned terms of construction and sales;
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ACRA took into account only projects under construction and planned in accordance with the Company’s financial plan;
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No substantial decline in prices in the primary real estate market in 2022–2023.
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:
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Weighted average ratio of FFO before net interest to net interest increasing above 5.0х;
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Weighted average FFO before net interest increasing above RUB 5 bln and concurrent increase in the portfolio of current projects above 1 mln sq. m.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest to net interest declining below 2.5х;
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Weighted average adjusted FCF margin turning negative;
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Residential real estate prices in the primary market declining by more than 10% in 2022–2023;
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Regulatory changes that can significantly affect the Company’s performance.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb-.
Support: SCA + 1 notch.
ISSUE RATINGS
LLC “RSG-Finance” (ISIN RU000A0JUAG0), maturity date: November 11, 2025, issue volume: RUB 3 bln — ВВВ(RU);
LLC “RSG-Finance” (ISIN RU000A0JXN13), maturity date: April 1, 2022, issue volume: RUB 3 bln — ВВВ(RU);
LLC “RSG-Finance” (ISIN RU000A100PS4), maturity date: August 8, 2024, issue volume: RUB 2 bln — BBB(RU);
LLC “RSG-Finance” (ISIN RU000A100PM7), maturity date: August 11, 2022, issue volume RUB 1.5 bln — BBB(RU).
Rationale. RSG International Ltd acts as the guarantor for all bond issues of LLC “RSG-Finance”. All the issues listed above represent senior unsecured debt of KORTROS Group. 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 in terms of priority. According to ACRA’s methodology, the recovery rate for the unsecured debt belongs to Category II. Therefore, the credit rating of the issues is equivalent to that of RSG International Ltd, i.e. BBB(RU).
REGULATORY DISCLOSURE
The credit ratings have been assigned to RSG International Ltd and the bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JXN13, RU000A100PS4, RU000A100PM7) 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 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 rating assigned to RSG International Ltd was published by ACRA for the first time on July 25, 2017; the credit ratings assigned to the bonds (RU000A0JUAG0, RU000A0JXN13) issued by LLC “RSG-Finance” were first published on August 9, 2017; the credit ratings assigned to the bonds (RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” were first published on September 24, 2019.
The credit rating of RSG International Ltd and its outlook, as well as the credit ratings of the bonds (RU000A0JUAG0, RU000A0JXN13, RU000A100PS4, RU000A100PM7) issued by LLC “RSG-Finance” are expected to be revised within one year following the publication date of this press release.
Disclosure of deviations from the approved methodologies: the level of group support and the final credit rating were determined not in line with the Methodology for Analyzing Rated Entities Associated with a State or a Group. The level of support was assessed using an approach for an unidentifiable group due to a lack of information required to assess the creditworthiness of the Supporting Entity.
The credit ratings were assigned based on the data provided by RSG International Ltd and LLC “RSG-Finance”, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and RSG International Ltd and LLC “RSG-Finance” 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 RSG International Ltd and LLC “RSG-Finance”. No conflicts of interest were discovered in the course of credit rating assignment.
