The credit rating of Level Group LLC (hereinafter, the Company, or Level Group) is based on the very high assessments of the Company's profitability and coverage, very low leverage, and strong assessments of business profile, geographic diversification, corporate governance, and liquidity. The rating is constrained by the very high industry risk (residential construction) and the medium assessment of the Company’s business size.
Level Group is a residential real estate developer. The Company implements development projects of premium, business and comfort classes in Moscow. The Company's land bank is about 2.3 mln sq. m of net sales area (NSA). In 2022, Level Group was third by sales (in physical terms) in the territory of old Moscow.
KEY RATING 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 high operational risk profile assessment is due to strong assessments of business profile, geographical diversification, strategic planning, and corporate governance. The Company is a successful player in the moderately concentrated Moscow market. All current projects of the Company are located within the boundaries of old Moscow, which is the market considered by the Agency as the most capacious, stable and marginal. Therefore, the geographical diversification, according to ACRA's methodology, is assessed as high. The Company's current project portfolio is well diversified by both the number of projects and their classes. The sales and construction timeline is well-coordinated; for the entire time of its existence, the Company has commissioned all of its projects on time. Level Group subcontracts up to 100% of the construction work, while the Company acts as a general engineering contractor and technical supervisor. In the Agency's opinion, the Company's strategy is consistent and successful. The risk management and management structure rating factors are assessed as strong.
The very high profitability of the Company is ensured by a very strong degree of cost control at all stages of each project, a thorough analysis of potential project sites, and a high quality of products. The Agency estimates the Company's weighted average FFO before net interest and tax margin for the period from 2020 to 2025 at over 27%.
Very low leverage and very high coverage assessments. When calculating the ratio of net debt to FFO before interest and taxes, ACRA adjusted the total debt by the debt raised for projects backed by escrow accounts and fully secured by funds deposited to escrow accounts by buyers. The weighted average ratio of adjusted net debt to FFO before net interest for the period from 2020 to 2025 is estimated by the Agency at 0.5x. The weighted average ratio of FFO before net interest to net interest for the period from 2020 to 2025 is estimated by ACRA as 11.9x.
Medium cash flow and strong liquidity assessments. The weighted average FCF margin (adjusted for operations on escrow-backed project debt and taking into account dividend payments) for the period from 2020 to 2025 is estimated by the Agency at 3%. The repayment schedule of the Company's debt is comfortable; funding sources are sufficiently diversified.
KEY ASSUMPTIONS
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Implementing the construction and sales plans.
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ACRA took into account only projects under construction and projects expected to be commissioned in accordance with the current financial plan of the Company.
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No significant price fall in the primary real estate market of Moscow in 2023–2025.
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:
- Stronger market positions of the Company and a concurrent growth in the weighted average FFO before net interest and taxes above RUB 30 bln and the current construction project portfolio above 1 mln m2.
A negative rating action may be prompted by:
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The weighted average ratio of FFO before net interest to net interest falling below 8.0x;
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The average weighted ratio of adjusted net debt to FFO before net interest exceeding 1.0x;
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Prices in the residential real estate market of Moscow declining by over 15% in 2023–2025;
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Regulatory changes that may impair the Company’s financial metrics.
RATING COMPONENTS
Standalone Creditworthiness Assessment (SCA): a-.
Adjustments: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
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 was assigned to Level Group LLC 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 Level Group LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Level Group LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Level Group LLC. No conflicts of interest were identified in the course of credit rating assignment.
