The credit rating of Ilon, LLC (hereinafter, Ilon, or the Company) is based on the high assessment of the operational risk profile, medium business size, very high profitability, medium assessments of leverage and interest coverage, and strong liquidity. The credit rating is constrained by the very weak free cash flow due to a high volume of the investment program.
Ilon is a fast-growing company that has been offering fitness services and developing its own chain of fitness clubs branded DDX Fitness since 2018. As of June 2024, the Company’s chain included 53 fitness clubs located in different Russian regions, including 41 clubs in Moscow and the Moscow Region; 34 more clubs are in their pre-launch stage. The number of DDX Fitness clients amounted to 285,000 in 2023.
KEY ASSESSMENT FACTORS
The operational risk profile is strong in view of high scores for the Company’s business profile and geography of presence, medium market position, and medium corporate governance. Ilon is a successful player in the fragmented Russian market of fitness services: according to FitnessData, in 2024 the Company’s market share exceeds 5%, and its share in the key and most capacious market of Moscow and the Moscow Region is about 10%. ACRA notes that the fitness services market in Russia demonstrates a long-term trend of increasing demand due to the relatively low level of penetration of fitness services in comparison with developed countries, as well as the popularization of a healthy lifestyle, while the industry is characterized by increased cyclicality.
The DDX Fitness chain is characterized by smart design and high quality of club equipment, which, along with an affordable pricing policy, allows the Company to achieve high efficiency in floor space utilization. In the Agency’s opinion, DDX Fitness is currently a strong recognizable brand, and the Company’s promotion policy that benefits from diversified sales channels is highly efficient, which is reflected in the short time it takes for new clubs to reach the designed capacity. An additional advantage of the DDX Fitness chain in terms of attracting client is the unique subscription business model for Russia where client accounts are debited automatically each month, which reduces the price threshold for fitness beginners.
The Company’s corporate governance assessment is a combination of medium scores for management structure and risk management, and the high score for group structure. ACRA notes the adequacy of the corporate governance level to the current stage of business development, as well as the Company’s plans to improve management practices (including independent members to the board of directors, establishing a risk management body, beginning the disclosure of financial reports, etc.).
Medium size and very high profitability. According to ACRA’s estimates, the weighted average FFO before net interest and taxes margin for the period from 2022 to 2027 will be 45%, and the weighted average FFO before net interest and taxes for the same period will be RUB 5.8 bln. The Agency expects that the growth rates of FFO before net interest and taxes will remain high in the medium term.
Medium leverage and medium interest coverage. Since rent accounts for a significant share in the Company’s costs, when analyzing the leverage, the Agency proceeded from the indicators calculated both with and without capitalized lease debt. According to ACRA’s calculations, the weighted average ratio of total debt to FFO before net interest for the period from 2022 to 2027 is 3.1x, the ratio of capitalized rent-adjusted total debt to FFO before fixed charges is 4.0x, which corresponds to the medium leverage as per the Agency’s methodology. The weighted average ratio of FFO before net interest to interest for the specified period is estimated by the Agency at 3.7x, while the ratio of FFO before fixed charges to fixed charges is 2.4x, which is assessed as the medium level of coverage of interest and fixed charges.
High liquidity assessment and very weak free cash flow. Given the long-term nature of debt obligations and a comfortable repayment schedule, Ilon has significant external and internal sources of liquidity. The very weak score for free cash flow is due to significant capital expenses associated with the rapid expansion of the Company’s business.
KEY ASSUMPTIONS
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Capex and the implementation of the program for opening new clubs in 2024–2027 in line with the Company’s plans.
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Sales growing in line with the Company’s projections for 2024–2027.
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The Company retaining the access to external liquidity sources.
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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FCF margin sustainably entering the positive area;
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Weighted average ratio of total debt to FFO before net interest falling below 2.0x and weighted average ratio of FFO before net interest to interest exceeding 5.0x;
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Weighted average ratio of adjusted total debt to FFO before fixed charges falling below 2.0x and the ratio of FFO before fixed charges to fixed charges exceeding 2.5x;
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Better corporate governance practices.
A negative rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest exceeding 3.5x and weighted average ratio of FFO before net interest to interest falling below 2.5x;
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Weighted average ratio of rent-adjusted total debt to FFO before net interest exceeding 4.0x and the ratio of FFO before fixed charges to fixed charges falling below 1.5x.
rating components
Standalone creditworthiness assessment (SCA): bbb+.
Support: none.
issue ratings
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned to Ilon, LLC under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings 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.
A credit rating has been assigned to Ilon, LLC for the first time. 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 Ilon, LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Ilon, 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 Ilon, LLC. No conflicts of interest were discovered in the course of credit rating assignment.
