The credit rating of Setl Group, Ltd (hereinafter, the Company, Setl Group, the Group) reflects the Company's strong market positions, business profile and geographic diversification, as well as the large business size, very high profitability, very low leverage, very high coverage, and strong liquidity. The rating is constrained by a very high industry risk and medium assessments for the corporate governance and cash flow factors.
Setl Group is the largest residential real estate developer in the north-west of Russia, and the third largest player in the Russian construction market. In 2021, the Company commissioned 1.4 mln sq. m of floor space; at the start of June 2022, the total floor space in the portfolio of projects under construction amounted to 1.6 mln sq. m, according to the Unified Developer Resource.
Key assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the industry, high amount of overdue payments, and substantial number of developers that have defaulted over the last five years. Therefore, industry risk is a strong factor that limits the Company’s credit rating.
The Company's performance in 2021 and expectations for 2022. In 2021, the Company's sales volume in monetary terms increased by 14.6%, which was associated with a 32% y-o-y increase in average sales prices and a concurrent 13.7% decrease in sales volume in physical terms. In Q1 2022, against the backdrop of rush demand in March, the average sales prices of the Company's housing projects increased by another 12% compared to the price level at the end of 2021 (the y-o-y price growth amounted to 33%). The Company's sales in monetary terms increased by 22% compared to Q1 2021 and amounted to about RUB 40 bln. In April, sales dropped significantly due to rising mortgage rates and the materialization of pent-up demand of the previous quarter. In May, the demand recovered after the government-backed mortgage rate declined to a fairly comfortable level of 9%.
ACRA expects that a further decline in mortgage rates will help avoid a collapse of demand in the residential housing market. Economic uncertainty is forcing companies to adjourn new projects, while the offer in projects already underway has shrunk following a record demand in 2021 and Q1 2022. In addition, the housing market has continued to consolidate since the transition to escrow accounts in 2019. Therefore, the Agency expects a decrease in supply in the primary housing market by the end of this year. At the same time, unlike previous crises, thanks to the transition to project finance arrangements, companies do not need to sharply reduce prices to raise funds necessary to complete their projects. In addition, like in 2020, in 2022, we observe a reorientation of demand from the secondary market to the primary market. All this hinders the reduction of prices in the primary market and supports the profitability of developers. The Agency expects that the decrease in market sales in physical terms relative to 2021 will be offset by a higher price level, and in monetary terms, the market volume will remain approximately at the level of 2021. ACRA expects that by the end of 2022, the Group's sales in monetary terms will remain at a level close to that of 2021 (RUB 128.7 bln).
Strong business profile and medium corporate governance assessment. Setl Group’s strong business profile is based on the very high diversification of its project portfolio, stable structure of schedules and conditions for project implementation, and the strong market positions of the Company’s proprietary brokerage and consulting divisions in St. Petersburg. The medium level of corporate governance stems from the high quality of strategic management, adequate risk management system, and adequate management and organizational structures of the Group. The Agency notes the Company’s consistency and success in pursuing its strategy.
Very low leverage. In its calculation of the ratio of net debt to FFO before interest and taxes, ACRA has adjusted the Company’s total debt for the amount of borrowed funds fully secured by funds held on escrow accounts and raised from homebuyers. Subject to this adjustment, the ratio of net debt to FFO before net interest amounted to 0.77x for 2021. The weighted average ratio for 2019–2024 is estimated by the Agency at 0.9x.
Very high interest coverage. When assessing interest coverage, the Agency takes into account interest payments for general corporate debt, while project finance interest payments are included in prime costs. In 2021, the Company’s ratio of FFO before net interest to net interest was 23.5x. ACRA assesses the weighted average ratio of FFO before net interest to net interest for the period from 2019 to 2024 at 10.6x.
Medium cash flow assessment. At the end of 2021, the Company's FCF margin was negative as the Company was active in replenishing its land bank. According to the Agency's estimates, the FCF margin of the Group will remain in the negative zone by the end of 2022, mostly due to the completion of sales of projects exempted when the industry switched to escrow accounts and, accordingly, an increase in the share of the Company's sales arranged through escrow accounts. A significant increase in the FCF margin is expected by ACRA starting from 2023 when the volume of funds coming from escrow accounts will grow. The Company's dividend payments also have a significant impact on the FCF margin. Regardless the low FCF margin due to dividend payouts, ACRA believes that the very low leverage, very high interest coverage and strong liquidity offset the impact of FCF margin on the Company's creditworthiness.
Key assumptions
-
Project completion and sales as planned.
-
ACRA's estimates include only projects under construction and projects expected to be completed in accordance with the Company’s current financial plans.
-
No significant decline in prices in the primary real estate market of the Company's regions of presence in 2022–2024.
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:
-
The corporate governance assessment reaching the highest level;
-
The weighted average FCF margin exceeding 5% at the same time as the ratio of commercial, overall, and administrative expenses to revenues falling below 5% and the weighted average ratio of adjusted total debt to capital declining below 0.5x.
A negative rating action may be prompted by:
-
The weighted average ratio of FFO before net interest to net interest falling below 8.0x;
-
The weighted average ratio of adjusted net debt to FFO before net interest exceeding 1.0x;
-
Residential real estate prices in the primary market of St. Petersburg declining by more than 10% in 2022–2024 and prices for construction work and materials increasing as projected;
-
Regulatory changes capable of having a material adverse effect on the Company’s performance.
Rating components
Standalone Creditworthiness Assessment (SCA): a.
Adjustments: none.
Issue ratings
Setl Group, Ltd (ISIN RU000A0ZYEQ9), maturity date: October 27, 2022, issue volume: RUB 5 bln — A(RU).
Setl Group, Ltd (RU000A100MG6), maturity date: January 1, 2023, issue volume: RUB 5 bln — A(RU).
Setl Group, Ltd (RU000A1030X9), maturity date: April 17, 2024, issue volume: RUB 7.5 bln — A(RU).
Setl Group, Ltd (RU000A103WQ8), maturity date: April 18, 2025, issue volume: RUB 7.5 bln — A(RU).
Rationale. The issues represent senior unsecured debt instruments of Setl Group, Ltd. 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. According to ACRA’s methodology, the unsecured debt recovery rate belongs to the first category. Therefore, the credit rating of the issues is equivalent to that of Setl Group, Ltd, i.e. A(RU).
Regulatory disclosure
The credit ratings have 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of Setl Group, Ltd and the credit ratings of the bond issues of Setl Group, Ltd (RU000A0ZYEQ9, RU000A100MG6, RU000A1030X9, RU000A103WQ8) were published by ACRA for the first time on June 19, 2017, November 2, 2017, July 23, 2019, April 21, 2021, and October 22, 2021, respectively. The credit rating of Setl Group, Ltd and its outlook and the credit ratings of the bond issues of Setl Group, Ltd (RU000A0ZYEQ9, RU000A100MG6, RU000A1030X9, RU000A103WQ8) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by Setl Group, Ltd, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and Setl Group, Ltd 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 ancillary services to Setl Group, Ltd. No conflicts of interest were identified in the course of credit rating assignment.
