The credit rating of “GROUP OF COMPANIES FSK” LLC (hereinafter, FSK, the Company, or the Group) is based on its strong market position, very strong business profile and geographic diversification assessments, as well as a medium level of corporate governance. The financial risk profile assessment takes into account the low leverage, very high scores for debt service and profitability, strong liquidity, and large size of business.
FSK is one of the largest players in the residential real estate market of the Moscow area and Russia as a whole. According to the Unified Register of Developers, it ranked fourth in the country in terms of volume of the current construction portfolio as of July 1, 2024 and third in terms of housing sales in Moscow and the Moscow Region in 2023. According to the Company’s estimates, its share in the total sales in the Moscow area grew to 7.0% in 2023 compared to 5.7% a year earlier.
key assessment factors
Very high industry risk. According to the Agency’s methodology, the very high risk of the housing construction industry is a serious factor limiting the Company’s credit rating.
Performance in 2023 and expectations for 2024. Last year (mainly the second half of it) was characterized by soaring demand for housing amid changes to preferential mortgage program conditions and the market’s recovery following the slump in 2022. The volume of the Group’s sales increased by 61.6% in 2023, overtaking the market. The Company sold 680,000 square meters of housing, its best result for the past five years. At the same time, average sales prices recorded restrained growth, having increased by 4% year-on-year in all of the Group’s regions of presence. As a result, sales increased by 68.8% in monetary terms. This year, the Company aims to continue growing sales due to a significant number of projects moving Sinto the implementation stage, good demand in the first half of the year, and the adaptation of sales conditions in the second half of the year after the cancellation of the mass preferential mortgage program. According to the Company’s forecasts, average house prices will be approximately at last year’s level in 2024.
The high assessment of the operational risk profile stems from the strong market position, very high assessments of the business profile and geographic diversification, as well as the medium assessment of corporate governance. The Company is one of the leading players in the market of Moscow and the Moscow Region, and has improved its standing in Russia’s north-west and joined the 10 largest developers of Saint Petersburg by volume of current construction. This was achieved thanks to the launch of new projects and acquisition of developer Bonava (the deal included seven projects in the design and construction stages). ACRA also notes the success of the Company’s strategy in its key area (development), as well as in developing a production cluster formed around manufacturers of glass and double-glazed windows (Larta Glass and STiS Group of Companies) and plants for the extraction and processing of quartz glass sand (Larta Minerals), which improves revenue diversification.
Large size of business and higher profitability. Weighted average FFO before net interest payments and taxes for 2021–2026 amounts to RUB 59.9 bln, which, when coupled with the volume of current construction (around 2 mln sq. m) explain the strong assessment of the Company’s business size. In 2023, the FFO margin before interest and taxes increased to 24% (vs. 19% in 2022). Growth of profitability of the developer segment, achieved at the expense of market recovery and the Group entering other economically developed regions, as well as the high profitability of the production cluster, had a positive influence on the indicator. The weighted average FFO margin before interest payments and taxes is estimated at 20.3% for 2021–2026, which allowed the Agency to increase its assessment to very high.
Continued low leverage and very high assessment of debt service. When calculating the ratio of net debt to FFO before interest and taxes, ACRA adjusts total debt for the amount of debt raised as part of project finance using escrow accounts and fully covered by clients’ funds available in escrow accounts. In 2023, the ratio of adjusted net debt to FFO before net interest payments was 1.15x. The Agency assumes that in the forecast period of 2024–2026, this indicator will be in the range of 1.0–1.5x. The weighted average ratio of total debt to equity was 1.0x, which, along with the abovementioned ratio of net debt to FFO before net interest payments, shows that the Company’s leverage is low. The ratio of FFO before net interest payments to net interest payments was 11.4x in 2023, and the weighted average indicator for 2021–2026 is estimated by the Agency at 9.9x.
Strong liquidity and weak cash flow. The strong liquidity assessment is due to the Company having significant amounts of undrawn credit lines and a fairly comfortable repayment schedule for its general corporate debt. In its calculations of FCF, the Agency adjusts funds from operations for variations in the project debt under escrow accounts, and includes dividend payments in FCF. The FCF margin was negative in 2023, including due to dividend payments. ACRA assumes that the payment of dividends amid low leverage, very high debt service, and strong liquidity does not worsen the Company’s credit quality. In the forecast period of 2024–2026, in the Agency’s opinion, this indicator may turn positive as funds are transferred from escrow accounts.
key assumptions
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Fulfillment of the planned terms of construction and sales;
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ACRA only took into account projects under construction and projects expected to be completed in accordance with the Company’s financial plan;
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No substantial decline in real estate prices in the primary market of the Moscow area in 2024–2026;
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Average dividend payments in the forecast period of 2024–2026 at the level of the past 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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Weighted average ratio of adjusted net debt to FFO before net interest payments declining below 1.0x, coupled with the weighted average ratio of total debt to equity declining below 0.5x and the quality assessment of leverage being improved to the highest;
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Stable growth of the weighted average FCF margin above 2%.
A negative rating action may be prompted by:
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Weighted average FFO margin before net interest payments and taxes falling below 20% coupled with the weighted average FCF margin falling below 0%;
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Weighted average ratio of adjusted net debt to FFO before net interest payments exceeding 2.0x coupled with the weighted average ratio of FFO before net interest payments to interest payments falling below 8.0x;
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Residential housing prices in the primary market of the Moscow area falling by more than 10% in 2024–2026;
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Regulatory changes that entail potential material adverse effects on the Company’s performance.
rating components
SCA: a-.
Adjustments: none.
issue ratings
There are no outstanding issues.
regulatory disclosure
The credit rating has been assigned to “Group of Companies FSK” 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 “Group of Companies FSK” LLC was published by ACRA for the first time on September 2, 2019. 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 “Group of Companies FSK” LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and “Group of Companies FSK” 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 “Group of Companies FSK” LLC. No conflicts of interest were discovered in the course of credit rating assignment.
