ACRA affirms BB+(RU) to RSG International Ltd and assigns BB+(RU) to bond issued by LLC “RSG-Finance”

ACRA affirmed BB+(RU), outlook Stable, to RSG International Ltd (hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, affirmed BB+(RU) to bonds (RU000A0JUAG0, RU000A0JVSA3, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7) issued by LLC “RSG-Finance,” and assigned BB+(RU) to bond (RU000A0ZYA74) issued by LLC “RSG-Finance.”

The credit rating of RSG International Ltd is due to a very high industry risk and a low debt service assessment. On the other hand, a strong operating profile, a high business profitability, and a strong liquidity are factors that support the Company’s credit rating.

KORTROS is a residential real estate developer with a wide geography of presence, including eight regions, and a high project diversification in terms of format: ‘comfort class’ residential projects — 80%, ‘business class’ projects — 16%, and ‘elite class’ projects — 4%. The Company was established in 2005 to implement the Akademichesky project, a large-scale development project (10 million sq. m) in Yekaterinburg by 2048. In 2016, the Company was ranked 13^th in terms of residential areas commissioned among the Russian developers. The total project portfolio of the Company comprises over 9 million sq. m. KORTROS is a part of the Renova group, whose share in the Company is 75% minus 1 share; 25% plus one share in the Company are owned by V. Golubitsky, the President of KORTROS.

Key rating assessment factors

Industry risk is assessed as very high due to pronounced cyclical nature of the sector, high level of overdue liabilities, and substantial number of defaulted companies in the last five years. Company’s industry is a very strong factor limiting its credit rating.

Strong operating profile is based on a highly diversified portfolio of projects and a very strong geographical diversification. About 20% of ‘elite class’ and ‘business class’ residential property and 80% of ‘comfort class’ residential property are expected to be commissioned in 2017–2019. The Company operates in eight regions. Over 39% of the property to be commissioned in 2017-2019 is located in Moscow, the Moscow Region and Saint Petersburg. The share of Moscow and Moscow Region in EBITDA is over 50%. The business is characterized by a stable sales structure and terms, as the Company manages to sell the bulk of a property before it is commissioned.

Medium corporate management level is a result of adequate strategic management, risk management, corporate management system and group structure, as well as a high financial transparency. The Company has long-term targets, including growing construction rates, entering new regions, debt burden, profitability, and dividends. ACRA notes the sustainability of strategy implementation by KORTROS. In ACRA’s opinion, the risk management system in its current form allows the Company to control key operational risks. ACRA notes that the credit, currency and interest risks are low. The Company’s financial risk management function is regulated by the Renova Group. The Group structure is complex; a special-purpose vehicle is created each time a new project is initiated. However, such situation is typical for the industry.

High profitability is mainly caused by the Company's ability to maintain good sales rates and the project selection strategy. The main target the Company focuses in selecting a project is IRR of at least 30%. Outside Yekaterinburg, the Company pursues a niche strategy. Irrespective of their class, most construction projects implemented by KORTROS have unique competitive advantages, which allows the Company to maintain sales rates even in adverse market conditions. The share of business class and elite projects expected to be commissioned in 2017–2019 is high, which is a good prerequisite for growing profitability.

Low debt service indicators and medium debt burden. At the end of 2016, the FFO before net interest payments to interest payments ratio was 0.74x. ACRA expects this ratio to grow up to 1.13x in 2017 and up to 2.22-2.83x in 2018–2019. ACRA notes that if the above ratio is calculated to include the effects from the sale of Top Project, the ratio is 2.38x. The total debt to FFO before net interest payments ratio was 10.69x as of December 31, 2016, however, in the forecast period, with the increase of areas commissioned, the Agency expects this ratio to decrease to 5.55x in 2017, 2.81х in 2018 and 2.12х in 2019. ACRA notes that this ratio is equal to 3.32x for 2016, if the proceeds from the sale of Top Project are taken into account. At the same time, ACRA notes that, due to significant free cash accumulated by the Company, the net debt to FFO before net interest payments ratio amounted to 3.9x (or 1.21x, taking into account the proceeds from the sale of Top Project) by the end-2016. The Agency expects this ratio to decrease to 2.58x in 2017, 1.02x in 2018 and 0.71x in 2019.

Strong liquidity of KORTROS stems from undrawn credit facilities for the total amount of RUB 9.53 billion, as well as a significant amount of free cash on the Company’s accounts. According to ACRA estimates, the current liquidity ratio will be 7.6x in 2017, 8x in 2018 and 2.4x in 2019.

Key assumptions

• Construction projects are completed and sales targets are met in due time as planned;
• ACRA estimations include only projects under construction and projects to be commissioned in accordance with the current financial plan of the Company, as well as the consolidation of the Melkombinat project expected in 2019 and two new projects that are currently at their early planning stages;
• A 3.8% annual average projected increase in real estate prices for the Akademichesky project (Yekaterinburg) over the period of 2017-2019.

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:

• FFO before net interest payments to interest payments ratio increase above 2.5х;
• Improved corporate governance practices.

A negative rating action may be prompted by:

• FFO before net interest payments to interest payments ratio declines below 1.0х;
• Residential real estate prices decline by more than 10% by 2019, while prices for construction works and materials increase as projected;
• Access to external liquidity sources worsens considerably;
• Regulatory changes capable of affecting the Company’s performance.

Rating components

Standalone creditworthiness assessment (SCA): bb+

Adjustments: none.

Issue ratings

RSG International Ltd acts as a guarantor for all bond issues of LLC “RSG-Finance.” The issues represent senior unsecured debt of KORTROS Group. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to the ACRA methodology, the reimbursement rate for unsecured debt relates to category I; hence, the credit rating of the issues is equivalent to that of RSG International Ltd, i.e. BB+(RU).

Key issue properties

Regulatory disclosure

The credit ratings were assigned to RSG International Ltd and bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JVSA3, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYA74) 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.

RSG International Ltd was first rated on July 21, 2017. The credit rating and outlook were revised on September 27, 2017. The credit rating and outlook are expected to be revised within one year following the rating action date (September 27, 2017).

Bonds (RU000A0JUAG0, RU000A0JVSA3, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7) issued by LLC “RSG-Finance” were first rated on August 07, 2017. The credit ratings were revised on September 27, 2017. The credit ratings and outlooks are expected to be revised within one year following the rating action date (September 27, 2017).

The credit rating was assigned to the bond (RU000A0ZYA74) issued by LLC “RSG-Finance” for the first time. The credit rating is expected to be revised within one year following the rating action date (September 27, 2017).

Disclosure of deviations from the approved methodologies: ‘leverage’ factor was assessed not in line with the assessment range specified in the methodology.

The credit ratings were assigned based on the data provided by RSG International Ltd and LLC “RSG-Finance,” information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and RSG International Ltd and LLC “RSG-Finance” participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by RSG International Ltd and LLC “RSG-Finance” in their financial statements were discovered.

ACRA provided no additional services to RSG International Ltd and LLC “RSG-Finance.” No conflicts of interest were discovered in the course of credit rating assignment.