The credit rating of Setl Group, Ltd (hereinafter, the Company, Setl Group) has been affirmed to reflect the Company's still strong market positions, strong business profile, medium level of corporate governance, and high geographic diversification due to implementation of projects mostly in Saint-Petersburg. The still very low leverage and high coverage, along with the strong liquidity profile and very high profitability, result in the high assessment of the financial risk profile, while the medium cash flow continues to constrain the factor assessment.
Setl Group is the largest residential real estate developer in the north-west of Russia, and the second largest player (in terms of the commissioned residential area) in the Russian construction market. In 2022, the Company commissioned 37 projects with the total floor space of 1.8 mln sq. m. According to the Unified Developer Resource as of May 1, 2023, the total floor space of apartments in the portfolio of projects under construction amounted to 1.6 mln sq. m, and, according to the Company, the total selling floor space of all projects under construction including integrated common areas and separate commercial buildings amounted to 1.7 mln sq. m.
Key assessment factors
Very high industry risk. In the Agency's opinion, operation in the housing construction industry is a strong deterrent to the Company's rating. ACRA believes that the extension of the mortgage programs with state support until July 1, 2024, the expansion of terms of the family mortgage program, as well as the preservation of joint subsidized programs for some residential complexes with an increase in the subsidized rate to 4% per annum will prevent a plunge in the housing demand in the continuing geopolitical and macroeconomic uncertainty. At the same time, the reduction in the volume of new projects may not fully smooth out the excess supply in the primary housing market, which leads to a stagnation or even a decrease in prices.
Strong market position and business profile. The Company's strong market position is due to its leadership among St. Petersburg developers in floor space commissioning in 2022 and in terms of demand in St. Petersburg and the Leningrad Region. Setl Group is the second-largest Russian developer in terms of floor space commissioned in 2022 and it is among the top five in terms of the volume of construction in progress at the beginning of May 2023. By the end of Q1 2023, the Company's portfolio included 21 projects under construction (mainly of the "comfort" and "high comfort" classes). The terms and conditions for the implementation of the projects are stable, although the Company has no own production facilities. All sales of the Company are carried out through its own channel — the exclusive broker PDC "Petersburg Real Estate", which allows the Company to quickly consolidate information about the main trends and dynamics of the housing market in the region.
Large business size and very high profitability. Regardless a 20% decrease in sales in physical terms in 2022, the Company's sales in monetary terms increased by 3.9% (to RUB 133.7 bln) compared to 2021, which is due to a 30.7% excess of average apartment sales prices year-on-year. In Q1 2023, the sales volume in monetary terms decreased by 25% y-o-y (to RUB 30 bln). This is explained mainly by the high comparative base, which, in turn, is due to the high demand in March 2022 and a significant increase in mortgage transactions in December 2022 amid expectations for the windup of the preferential mortgage program.
By the end of 2022, the Company's revenue amounted to RUB 149.9 bln (a 20% increase against 2021), and FFO before net interest and taxes was RUB 34.1 bln. ACRA expects a gradual smoothing of the Company's sales in H1 2023 and a moderate decrease (within 5%) in sales at the end of the year. In the Agency's opinion, the decline in sales in physical terms in the market relative to 2022 will probably not be offset by a higher level of average selling prices, as it was before, and the market volume in monetary terms may shrink. By the end of 2023, ACRA expects a slight decrease in the Company's revenue to RUB 147.3 bln.
The weighted average FFO before net interest and taxes for the period from 2020 to 2025 will amount to RUB 30.3 bln, and the volume of the portfolio of projects under construction was 1.6 million sq. m as of May 1, 2023, which, according to the Agency's methodology, is an indication of a large business size. The FFO before interest and taxes margin was 23% by the end of 2022, and in the forecast period (2023–2025), it may decrease to 20%.
Very low leverage and very high interest coverage. The Company's credit portfolio is well-diversified. In its calculation of the ratio of net debt to FFO before net interest, 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 0.3x for 2022. The Agency expects this ratio to grow to 1.5x in 2023–2024. The weighted average (2020–2025) ratio of total debt to capital is 0.6x, which, along with the abovementioned ratio of net debt to FFO before net interest, indicates a very low leverage of the Company.
When assessing the coverage, the Agency takes into account interest payments for general corporate debt, while project finance interest payments are included in prime costs. The interest coverage has remained very high: in 2022, the ratio of FFO before net interest to net interest was 8.9x, and the weighted average ratio for the period from 2020 to 2025 is estimated at 8.0x.
Strong liquidity and medium cash flow assessment. A strong assessment of the Company's liquidity is due to the presence of significant amounts of undrawn loans and a fairly comfortable repayment schedule for corporate debt. The weighted average FCF margin for the period from 2020 to 2025 has remained negative, including due to expected dividend payments. ACRA believes that the payment of dividends amid a very low leverage, very high coverage and strong liquidity does not worsen the credit quality of the Company, and therefore its cash flow is assessed as medium according to ACRA's methodology. Starting from 2024, the Agency expects the FCF margin to increase after escrow accounts are unlocked.
Medium level of corporate governance. ACRA notes the successful and consistent implementation of the Company's development strategy, the presence of a board of directors (which includes an independent director) and board committees, as well as an adequate level of risk management system. The Company prepares annual and interim consolidated IFRS financial statements and discloses key operational indicators, which is positively assessed by the Agency as part of the Financial Transparency sub-factor.
Key assumptions
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Project completion and sales as planned.
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ACRA's estimates include only projects under construction and projects expected to be completed in accordance with the Company’s current financial plans.
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No significant decline in prices in the primary real estate market of the Company's regions of presence in 2023–2025.
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Average dividend payments in the forecast period of 2023–2025 at the level of previous years.
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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The weighted average FCF margin exceeding 10% along with the ratio of selling, general, and administrative expenses to revenues falling below 5% and the weighted average ratio of adjusted total debt to capital declining below 0.5x;
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The corporate governance assessment reaching the highest level.
A negative rating action may be prompted by:
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The weighted average FFO before net interest and taxes falling below RUB 30 bln and the portfolio of projects under construction declining below 1 million sq. m;
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The weighted average FFO before interest and taxes margin falling below 12%;
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The weighted average ratio of adjusted net debt to FFO before net interest exceeding 2.0x;
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The weighted average ratio of FFO before net interest to net interest falling below 8.0x;
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Significantly lower diversification of projects and/or late project commissioning;
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Significantly worse liquidity profile;
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Regulatory changes capable of having a material adverse effect on the Company’s performance.
Rating components
Standalone Creditworthiness Assessment (SCA): a.
Support: none.
Issue ratings
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).
Setl Group, Ltd (ISIN RU000A1053A9), maturity date: August 13, 2025, issue volume: RUB 10 bln — A(RU).
Setl Group, Ltd (RU000A105X64), maturity date: March 5, 2026, issue volume: RUB 5.5 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 detailed approach is applicable. According to ACRA's estimates, the unsecured debt recovery rate belongs to the first category. Therefore, the credit rating of the issues is equivalent to that of the Company, 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 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 (RU000A1030X9, RU000A103WQ8, RU000A1053A9, RU000A105X64) were published by ACRA for the first time on June 19, 2017, April 21, 2021, October 22, 2021, August 17, 2022, and March 9, 2023, respectively. The credit rating of Setl Group, Ltd and its outlook and the credit ratings of the bond issues of Setl Group, Ltd (RU000A1030X9, RU000A103WQ8, RU000A1053A9, RU000A105X64) 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 were, 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.
