The credit rating of RED SOFT LLC (hereinafter, RED SOFT, or the Company) has been upgraded due to changes in assessments of both the sub-factor Volatility of Demand for Key Products and the size of the Company. The Agency assumes that the transition of public sector companies to Russian-developed infrastructure software reduces the volatility of demand for the Company’s key products, while the consistently high growth rates of its business in a steadily growing market allow it to increase the assessment of the Company’s size. The assessments of market position, geographic diversification, and corporate governance remain unchanged.
The financial risk profile assessment is supported by the Company’s high profitability and low leverage, while liquidity and cash flow metrics, on the contrary, limit the assessment.
The change in outlook from Stable to Positive reflects the Agency’s expectations regarding improvements in leverage and debt servicing.
RED SOFT is a Russian developer of infrastructure software, a resident of Skolkovo, and a member of the RSPA and RUSSOFT. The Company provides various data storage and management services based on proprietary solutions. The Company’s product portfolio includes RED OS, Red Database DBMS, Red Platform, Red Gateway, etc. These products are all included in the Unified Register of Russian Software and Databases authorized for use by government agencies.
KEY ASSESSMENT FACTORS
Medium operational risk profile assessment. RED SOFT continues to dynamically develop in Russia’s emerging domestic infrastructure software market. The Company’s product portfolio includes RED OS, a proprietary operating system (the Company’s main product, which accounts for more than half of its revenues), Red Database DBMS, as well as solutions replicated on the Red Platform developer framework, and Red Gateway, a solution for interagency communications. RED SOFT also continues to develop products using artificial intelligence. The Company’s revenues were sufficiently diversified by products and clients in 2023, although the focus on working with government clients was retained.
The corporate governance assessment continues to be limited by insufficient formalization of strategic processes and the internal control and risk management system, as well as by low financial transparency.
Although the Company was added to the sanctions lists of the United States Department of the Treasury in 2024, the Agency does not expect this to affect its operations in Russia.
High profitability and medium business size. In 2023, the Company’s revenues grew by 60% year-on-year, exceeding RUB 2 bln, and FFO before fixed payments and taxes reached RUB 600 mln, which enabled the Agency to increase its assessment of the size of the Company’s business. In ACRA’s opinion, RED SOFT will be able to maintain high revenue growth rates in the medium term, with FFO before fixed payments and taxes amounting to RUB 622 mln for 2021–2026.
The FFO margin before fixed payments and taxes reached 33% last year after declining to 29% in 2022. The Agency assumes the possibility of this indicator continuing to fluctuate at around 30% and expects weighted average profitability to be 29%.
Low leverage and medium coverage. The loan portfolio includes three ruble-denominated bonds issues to be repaid in 2024 and 2025, as well as a loan granted by one of the participants. The ratio of lease-adjusted total debt to FFO before fixed payments was 1.1x in 2023.
The ratio of FFO before fixed payments to fixed payments increased to 5.3x in 2023 vs 4.7x in 2022. ACRA assumes that the weighted average indicator will be 5.4x.
Medium liquidity and very weak cash flow. ACRA assesses the Company’s liquidity as medium, taking into account the fact that on the one hand, substantial funds were held in accounts as of March 31, 2024 and were sufficient to repay most of the debt liabilities due in May and December 2024, yet on the other hand, there are potential difficulties in obtaining bank lending due to a lack of collateral.
After returning to positive values in 2022, the free cash flow (FCF) margin again fell below zero in 2023. ACRA assumes that this indicator may remain volatile, given the long sales cycle and client budgeting specifics (due to this, most of the Company’s revenues are reflected at the end of the year). The Agency expects the weighted average FCF margin to be -1.8% for 2021 to 2026, and that the Company will use most of its RAS net profit to pay dividends, which will put pressure on FCF. Capital expenditures, according to ACRA’s estimates, will amount to 10% of revenues in 2024, and the weighted average will be 8.5%.
KEY ASSUMPTIONS
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Maintaining the current base of core clients;
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Capital expenditures at 10% of revenues in 2024;
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Maintaining the practice of providing loans to a related party;
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Dividend payments at no more than 90% of RAS net profit;
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Maintaining 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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Weighted average ratio of adjusted total debt to FFO before fixed payments falling below 1.0x at the same time as the weighted average ratio of FFO before fixed payments to fixed payments exceeding 6.0x and the weighted average FFO margin before fixed payments and taxes exceeding 30%;
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Weighted average FCF margin exceeding 5%;
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Substantial improvement of corporate governance practices and financial transparency.
A negative rating action may be prompted by:
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Weighted average FFO before fixed payments and taxes falling below RUB 500 mln;
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FFO margin before fixed payments and taxes falling below 20%;
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Weighted average ratio of adjusted total debt to FFO before fixed payments exceeding 2.0х;
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Weighted average ratio of FFO before fixed payments to fixed payments declining below 3.0х;
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Difficulties in obtaining external liquidity.
rating components
Standalone creditworthiness assessment (SCA): bbb-.
Support: none.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating has been assigned to RED SOFT LLC 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 of RED SOFT LLC was published by ACRA for the first time on December 23, 2020. 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 RED SOFT LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and RED SOFT 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 additional services to RED SOFT LLC. No conflicts of interest were discovered in the course of credit rating assignment.
