The credit rating of "A Development" LLC (hereinafter, the Company) reflects the medium operating risk profile, very high profitability, very low leverage, very high debt service ratio, and strong liquidity assessment. At the same time, the rating is constrained by the very high industry risk, below medium business size assessment, and weak cash flow.
The Company is a consolidating entity of AAG Holding (hereinafter, the Holding, or AAG). AAG is a successful player in the St. Petersburg residential real estate market, mainly in the business class segment. According to the Unified Resource of Developers, in December 2021, the portfolio of current projects of AAG was 47,900 sq. m. The total volume of the portfolio of the Holding's projects in construction and design phases is 134,200 sq. m.
KEY ASSESSMENT FACTORS
The 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 developers that have defaulted in the last five years. The industry the Company belongs to is a very strong factor limiting the credit rating.
The operational risk profile assessment is medium due to medium scores for market position and business profile, adequate score for corporate governance, and high score for geographic diversification. The Company is a successful player in the moderately concentrated residential real estate market of St. Petersburg in the comfort plus, business and premium segments. The portfolio of projects under construction and design includes seven projects. The sale share of the largest project over the next three years, according to the Agency's estimates, will be about 60%; therefore, the diversification of the Company's project portfolio is assessed as low. Construction and sales are well coordinated, and over the past 5 years, the Company has not been in project commissioning delays. The Company's dependence on materials and subcontracting is very high, since the Company is a classic developer who subcontracts all construction work and has no production facilities of its own; most of the functions are outsourced.
Very low leverage; very high debt service ratio. When calculating the ratio of net debt to FFO before interest and taxes, ACRA adjusted the total debt by the amount of client funds raised as part of project finance arrangements and held in escrow accounts. At the end of 2020, the Company's adjusted net debt was negative. The weighted average (for 2019–2024) ratio of adjusted net debt to FFO before net interest is estimated by the Agency at 0.2x. The weighted average (for 2019–2024) ratio of FFO before net interest to net interest is estimated by ACRA at 8.9x.
Strong liquidity; weak cash flow. The weighted average (for 2019–2024) FCF margin (adjusted for operations on the project debt backed by escrow accounts) is estimated by the Agency at 0.6%. The Agency expects the Company's adjusted FCF to remain negative in 2022–2023 due to the insignificant volume of released escrow accounts in this period, as well as the Company's plans to expand the project portfolio. FCF is expected by the Agency to become positive in 2024. The liquidity is assessed as strong since the amount of debt repayments will be insignificant in 2022–2024.
Implementing the construction and sales plans;
ACRA took into account only projects under construction and projects expected to be commissioned in accordance with the current financial plan of the Company;
No significant price fall in the primary real estate market of St. Petersburg in 2022–2024.
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 FFO before net interest and taxes exceeding RUB 5 bln and a concurrent growth of the current project portfolio above 200,000 sq. m;
Significant improvement in the diversification of the Company's projects;
Sustainable growth of the weighted average adjusted FCF margin over 2%.
A negative rating action may be prompted by:
The weighted average ratio of FFO before net interest to net interest declining below 8x, and the weighted average ratio of adjusted net debt to FFO before net interest exceeding 1x;
Prices in the primary residential real estate market of St. Petersburg declining by over 15% in 2022–2024;
Regulatory changes that may impair the Company’s financials.
Standalone Creditworthiness Assessment (SCA): bbb-.
There are no outstanding issues.
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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of "A Development" LLC has been assigned by ACRA 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 "A Development" LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and "A Development" 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 "A Development" LLC. No conflicts of interest were identified in the course of credit rating assignment.