The credit rating of «Glavstroy» Ltd. (hereinafter, the Company, or Glavstroy) is based on the Company’s medium operating risk profile, high profitability, and medium leverage. The rating is constrained by very high industry risk, the below medium assessment of the size of business, and the weak liquidity assessment. The credit rating outlook has been changed to reflect increased leverage and the risk of worse coverage in 2022–2025 on the back of growing uncertainty in the Company's financial performance in the current market conditions.
Glavstroy is a successful player in the Moscow business-class residential real estate market. According to the Company's estimates, the current construction portfolio will amount to 295,900 sq. m by the end of 2022.
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 developer 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 Company's performance in 2021, H1 2022, and the projected performance for 2022. The postponement of new projects and the first stage of the Balance residential complex led to a deterioration in the Company's financial metrics in 2021. On the other hand, the last year's slowdown was caused, to some extent, by the specifics of revenue and cost recognition under IFRS, so that we may expect the opposite effect by the end of 2022. According to the Company, its operating profit for H1 2022 was almost one and a half times higher than that for the whole of 2021. At the same time, sales in the two main current projects (the Balance residential complex and the Beregovoy residential complex) exceeded the plans for the first eight months, regardless the negative situation in the residential real estate market in the second quarter of this year. ACRA expects further improvement in the Company's financial performance in H2 2022, in connection with both the general recovery of the market and the commissioning of the first stage of the Balance residential complex in September 2022.
Medium leverage assessment. In its calculation 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. In 2021, the FFO before net interest declined. ACRA expects the indicator to recover in 2022 to the level comparable to 2020 and to grow further in 2023–2025. The Agency assesses the weighted average ratio of adjusted net debt to FFO before net interest for 2020–2025 at 4.3x, while the Company's leverage is assessed as moderate in view of the low weighted average ratio of adjusted total debt to capital at 0.7x and the very high qualitative assessment of leverage. The weighted average (for 2020–2025) ratio of FFO before net interest to net interest is assessed by ACRA at 8x.
Weak liquidity assessment. ACRA expects the Company's adjusted FCF to be negative by the end of 2023, followed by a recovery in the future. According to the Agency's estimates, to service its debt in 2023, the Company will need raise additional corporate debt, which is reflected in the weak assessment of the Company's liquidity.
KEY ASSUMPTIONS
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Fulfillment of the planned terms of construction and sales.
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ACRA only took into account projects under construction and projects expected to be completed in accordance with the Company’s financial plan.
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No substantial decline in prices in the primary residential real estate market of Moscow in 2023–2025.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of adjusted net debt to FFO before net interest falling below 1.0х;
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Increase in the Company's business size and improved assessments of project diversification and the Group’s structure.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest to net interest falling below 8x;
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Weighted average ratio of adjusted net debt to FFO before net interest exceeding 5x;
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Prices in the primary residential real estate market of Moscow declining by more than 15% in 2023–2025;
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Regulatory changes that entail potential material adverse effects on the Company’s performance.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb-.
Adjustments: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to «Glavstroy» Ltd. 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 assigned to «Glavstroy» Ltd. was published by ACRA for the first time on October 21, 2021. 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 data provided by «Glavstroy» Ltd., information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and «Glavstroy» Ltd. 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 «Glavstroy» Ltd. No conflicts of interest were discovered in the course of credit rating assignment.
