The credit rating of Selectel Ltd. (hereinafter, Selectel, or the Company) reflects the high assessment of the operational risk profile that is based on the Company’s steady market positions, the sustainable demand for its services, and sufficiently diversified revenues for key products. ACRA assesses the Company’s corporate governance as medium but expects that the current improvements may result in a better factor assessment and an upgrade of the credit rating, so that the outlook has been changed to Positive.
The Agency assesses the Company’s financial risk profile as above medium thanks to the very high profitability, low leverage, and strong liquidity. The factor assessment is constrained by the medium scores for the size of business and the coverage of fixed charges, and the low score for cash flow.
Selectel is a Russian provider of IT infrastructure. The Company leases dedicated servers (bare metal), creates private and public cloud services, and deploys client server hardware at its own data centers. The Company possesses four Tier III data centers located in Moscow, St. Petersburg, and the Leningrad Region.
key assessment factors
High operational risk profile assessment. The Company continues to be one of the largest providers of IT infrastructure both in terms of the number of racks and IaaS revenues. Selectel’s revenues remain sufficiently diversified. In H1 2023, the bare metal segment accounted for 59% of revenues, the share of public and private cloud platforms accounted for 25%, and data center services accounted for 11%.
ACRA has maintained its assessment of the demand for commercial data center services in Russia. Demand drivers are exponential growth of data volumes, digitalization of the economy, and migration of businesses to cloud services. The increased demand fueled by clients who are moving from foreign cloud services to Russian equivalents, in the Agency’s view, has almost exhausted its potential. The Company’s geographic diversification is assessed as very high as it owns data centers in Moscow (ACRA rating AAA(RU), outlook Stable), St. Petersburg (ACRA rating AAA(RU), outlook Stable), and the Leningrad Region (ACRA rating AA+(RU), outlook Stable).
ACRA notes the success of the Company’s strategy and its work to increase the regulation of corporate governance. The Company’s financial transparency is assessed as high. Selectel continues to improve its risk management system. Nevertheless, the Agency continues to note that not all risks are fully insured under the current insurance policy. Currently, Selectel is taking a range of measures to bring its corporate governance procedures in compliance with the standards of the largest Russian issuers, which, in the Agency’s opinion, may result in an upgrade of the Company’s credit rating and has become a reason for changing the outlook to Positive.
Medium business size and very high profitability. After a sharp increase in the Company’s revenue in 2022 (+68%, up to RUB 8.1 bln), ACRA forecasts a gradual decrease in the revenue growth rate in 2023–2026: in 2023, revenue may exceed RUB 10 bln (+20–30%). The Company manages to maintain a very high level of profitability. ACRA expects the Company’s FFO before fixed charges and taxes margin at 53% in 2023, almost unchanged against 51% in 2022. According to the Agency’s forecast, following a revenue growth amid a sustainably very high profitability, FFO before fixed charges and taxes may reach RUB 5.5 bln by the end of 2023, which corresponds to the medium score for the size of business.
Low leverage and medium coverage of fixed charges. In August 2023, the Company issued a third bond to refinance its first bond in February 2024. At the end of 2023, the ratio of rent-adjusted total debt to FFO before fixed charges may amount to 2.3x, which is slightly higher than the level forecasted by ACRA in the previous rating action. At the same time, after the repayment of the bond issue in 2024, the indicator may drop to 1.3x and then reach 1.0x in 2025–2026. Therefore, ACRA still assesses the Company’s leverage as low. The Agency assumes that the Company’s debt portfolio will continue to include fixed-rate ruble-denominated instruments, mainly bond issues.
The coupon rate of the third issue of the Company’s bonds significantly exceeds the rate of the first issue (13.3% vs 8.5%), so that ACRA’s forecast regarding the coverage of fixed charges exceeding 6.0x in 2023–2024 did not come true. The Agency believes that in the specified period, the ratio of FFO before fixed charges to fixed charges may remain in the range of 5.4–5.7x, which corresponds to the medium coverage of interest payments. ACRA assumes that this factor assessment may move to a higher category in 2025.
Strong liquidity and weak cash flow. ACRA forecasts a decrease in the ratio of capex to revenue to 23% in 2023 against 42% in 2022. Despite this decrease, the ratio remains very high as per the Agency’s methodology. From the viewpoint of the impact on free cash flow (FCF), the positive effect of lower capex in 2023 was offset by dividend payout, so that ACRA expects the Company’s FCF to be in the negative zone by the end of this year, whereas in 2022 it managed to demonstrate a positive FCF (FCF margin was 1%). The Agency believes that in case dividend payments amount to 50% of net profits in 2024–2026, FCF can become steadily positive. Since the Company has already raised funds necessary to refinance the first bond issue, the Agency assesses the level of its liquidity as high. After the repayment of this bond issue, the Company will have a comfortable debt repayment schedule, while the next major payment is expected not earlier than in November 2025.
key assumptions
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FFO before fixed charges and taxes margin within 50–55%.
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The Company’s capex program implemented as planned.
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No dividend payments that may result in FCF turning negative in 2024–2026.
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Continued access to external liquidity sources.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Corporate governance improving to meet best Russian practices and weighted average ratio of FFO before fixed charges to fixed charges exceeding 6.0x;
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Considerably higher diversification of revenues for key products.
A negative rating action may be prompted by:
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Weighted average ratio of adjusted total debt to FFO before fixed payments exceeding 2.0x;
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Weighted average ratio of FFO before fixed charges to fixed charges falling below 3.0x;
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Weighted average FFO before fixed charges and taxes margin falling below 30%;
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Weighted average FCF margin declining below 2%;
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Materialization of uninsured risks that can negatively affect the Company’s financial metrics;
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Worsened access to liquidity sources.
rating components
Standalone creditworthiness assessment (SCA): а+.
Support: none.
issue ratings
Bond, Selectel Ltd., series 001P-01R (RU000A102SG9); maturity date: February 22, 2024, issue volume: RUB 3 bln — А+(RU).
Rationale. The issue represents senior unsecured debt of Selectel. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. In accordance with ACRA’s methodology, the Agency applied the detailed approach to determine the issue’s rating. According to ACRA’s calculations, the recovery rate for unsecured debt is Category I, and therefore the credit rating of the issue is equivalent to that of the Company, i.e. A+(RU).
regulatory disclosure
The credit ratings of Selectel Ltd. and the bond (RU000A102SG9) issued by Selectel Ltd. 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 under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of Selectel Ltd. and the bond (RU000A102SG9) issued by Selectel Ltd. were published by ACRA for the first time on December 1, 2020 and February 25, 2021, respectively. The credit rating of Selectel Ltd. and its outlook and the credit rating of the bond (RU000A102SG9) issued by Selectel Ltd. 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 Selectel Ltd., information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and Selectel 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 additional services to Selectel Ltd. No conflicts of interest were discovered in the course of credit rating assignment.
