The credit rating of LLC Lenta (hereinafter, Lenta, or the Company) is based on its strong market position, strong operating profile, strong corporate governance, low leverage, very strong liquidity, and medium profitability. The rating is further supported by the significant share of the Company’s own retail spaces within its real-estate structure, as well as its conservative financial policy. In 2021, the Company completed the acquisition of the food retail chain of Billa Russia GmbH (Billa Russia) and the Familia retail chain, and in 2022, Lenta’s parent company (Lenta IPJSC) acquired the Utkonos online retailer. The acquisition of Billa Russia and Familia allowed Lenta to expand its presence in the segment of small stores, while the acquisition of Utkonos by Lenta's parent company has demonstrated the group's commitment to develop its online segment further.
As of end-2021, the Company was Russia’s fourth biggest retail chain in terms of revenue and the largest hypermarket retail chain in terms of retail space. The Company's chain included 254 hypermarkets and 503 small stores. Lenta operates in 89 cities across Russia. Its total retail space exceeded 1.75 mln sq. m as of end-2021.
KEY ASSESSMENT FACTORS
Strong business profile. In 2021, the Company announced its strategy to actively develop the small format stores segment and closed several M&A transactions, which allowed it to quickly expand its presence in this segment. The Agency notes the growing diversification of the Company's trading formats. The share of Lenta's revenue coming from its small stores grew from 8.58% in 2020 to 12.20% in 2021. According to ACRA's estimates, Lenta prefers a light ownership model when opening new stores, which reduces the Company's need to raise financial debt in the future. The Company uses all major channels for advertising and promoting its brands, which is also a positive factor for the business profile. ACRA notes that sanctions and a likely decline in real disposable incomes are unlikely to have a significant impact on the Company's business since the main products sold by Lenta are staple goods characterized by low elasticity of demand.
Large business size and medium profitability. By the end of 2021, Lenta's revenue grew to RUB 483.6 bln (+8.6% compared to 2020), while FFO before fixed charges, according to ACRA's calculations, increased to RUB 48.2 bln (+3.3% against 2020). The slower growth of FFO before fixed charges, in the Agency's opinion, is associated both with the lower profitability of the Billa Russia supermarket chain and a large number of new stores opened in 2021. ACRA expects that the Company's new stores (including the former Bill Russia and Familia stores) will be able to reach the target returns by 2023. In the Agency's opinion, further reformatting of the former Bill Russia and Familia stores and integrating them into the Lenta business will have a positive impact on the Company's sales in 2022.
Low leverage; medium coverage of fixed charges. According to ACRA’s calculations, at the end of 2021, the ratio of total debt to FFO before net interest was 2.5x (2.3x in 2020), and the ratio of adjusted total debt to FFO before fixed charges was 3.4x (3.0x in 2020). The increase in the leverage is associated both with the acquisition of Billa Russia and with the active opening of new small stores. The Agency notes that the Company's debt was attracted at low rates (as compared to those in March 2022) and for a long term. A portion of the Company's loan portfolio includes exchange-traded bonds. According to ACRA's estimates, the ratio of FFO before net interest to interest was 6.5x (5.1x in 2020), the ratio of FFO before fixed charges to fixed charges was 3.2x (3.2x in 2020). The interest coverage increased because the Company refinanced its debts and made borrowings in the period of low interest rates in Russia in 2021.
The very high assessment of Lenta's liquidity reflects the significant volume of undrawn credit lines (RUB 180 bln as of December 31, 2021, which significantly exceeded the total debt of the Company — RUB 88 bln as of December 31, 2021), as well as the long-term structure of the loan portfolio. The Agency notes that the Company has access to capital markets.
High level of corporate governance. Lenta is the main operating asset of Lenta IPJSC. The Board of Directors of Lenta IPJSC exercises corporate governance and controls the Company's operations. The Board of Directors has committees for audit, operations, capital expenditures, and nominations and remuneration. The risk management function is well-regulated and minimizes all major types of risk, and the treasury policy provides for maintaining a high level of liquidity, diversifying funding sources, and maintaining a reserve for bank covenants. The Company's financial transparency is very high, and its business structure is simplified as much as possible: Lenta is the main operating asset and the property holder.
Key assumptions
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Successful implementation of the Company's strategy.
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Absence of M&A transactions that may significantly affect the Company's business.
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Revenue growth by more than 10% in 2022.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Adjusted total debt to FFO before fixed charges going below 2.0x and return on FFO before fixed charges and taxes sustainably exceeding 10.0%, accompanied by development of omni-channel sales network;
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Coverage on FFO before fixed charges to fixed charges sustainably exceeding RUB 100 bln and return on FFO before fixed charges and taxes sustainably exceeding 10.0%.
A negative rating action may be prompted by:
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Drop in the weighted ratio of FFO before fixed charges to fixed charges below 2.5x;
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Significantly reduced access to external sources of liquidity with a drop in short-term liquidity ratio below 1.5x.
RATING COMPONENTS
Standalone Creditworthiness Assessment (SCA): aa-.
Support: none.
ISSUE RATINGS
LLC Lenta (RU000A1011A7), maturity date: November 1, 2029, issue volume: RUB 10 bln — AA-(RU).
LLC Lenta (RU000A101R33), maturity date: May 31, 2023, issue volume: RUB 10 bln — AA-(RU).
Credit rating rationale. The bond issues represent senior unsecured debt of LLC Lenta. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the bond issues are rated AA-(RU), i.e. on par with LLC Lenta.
Credit rating withdrawal rationale. The credit rating of the RU000A100782 bond of LLC Lenta has been withdrawn due to the full redemption of this issue on March 23, 2022. Before the withdrawal, in accordance with ACRA’s methodology, an AA-(RU) credit rating was affirmed to the bond, i.e. on par with the credit rating of LLC Lenta. The rating has been withdrawn without its concurrent affirmation.
Regulatory disclosure
The credit ratings were assigned to LLC Lenta and the bonds (RU000A1011A7, RU000A101R33, RU000A100782) issued by LLC Lenta 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 under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings assigned to LLC Lenta was published by ACRA for the first time on August 3, 2017. The credit ratings assigned to the bonds (RU000A1011A7, RU000A101R33, RU000A100782) issued by LLC Lenta were published by ACRA for the first time on March 27, 2019, November 14, 2019, and June 3, 2020, respectively. The credit rating of LLC Lenta and its outlook and the credit ratings of the bonds (RU000A1011A7, RU000A101R33) issued by LLC Lenta are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on the data provided by LLC Lenta, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and LLC Lenta 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 LLC Lenta. No conflicts of interest were discovered in the course of credit rating assignment.
