The outlook for the credit rating of “Brusnika. Stroitelstvo i development” LLC (hereinafter, Brusnika or the Company) has been changed from Stable to Negative in view of the risks of deterioration in the Company’s debt servicing due to a significant increase in loan interest rates as a result of tighter monetary policy of the Bank of Russia, as well as the need to refinance part of the Company’s bond debt during the peak interest rate period in 2025.
The Company’s credit rating is based on its very strong business profile and geographic diversification, high profitability, low leverage, high coverage, and strong liquidity. At the same time, the rating assessment continues to be constrained by the medium assessments of the market position, business size, and cash flow.
Founded in 2004, Brusnika is a developer company focusing on high-quality housing and integrated development of urban areas. The Company is headquartered in Yekaterinburg. The Company’s project portfolio is diversified among 13 regions. According to the Company, the volume of commissioned residential real estate will exceed 470,000 sq. m at the end of 2024. As of the beginning of December 2024, Brusnika ranked eighth in terms of its current construction portfolio according to the Unified Resource of Developers.
KEY ASSESSMENT FACTORS
Industry risk is assessed as very high due to the pronounced cyclical nature of the industry, high amount of overdue payments, and substantial number of developers that have defaulted over the last five years. Therefore, industry risk is a strong factor that limits the Company’s rating.
Expected results for 2024. Despite the consequences of the cancellation of the wide-scale subsidized mortgage program, this year the volume of registered sales and purchase contracts for residential real estate is expected to be roughly the same as last year thanks to the launch of new projects. At the same time, the Company projects that sales in monetary terms will reach around RUB 85 bln, which is a more than 40% increase vs. 2023 and close to the Agency’s expectations. This is due to the significant increase in average contract prices driven by growth in the share of sales for projects in Moscow to 35–40%. ACRA expects revenues recognized by construction readiness under IFRS reporting to exceed 30% year-on-year.
The very strong business profile reflects the very high diversification of the project portfolio, as well as the very high assessment of project terms and deadlines. Throughout 2024, the Company expanded its construction portfolio by carrying out new projects, including the launch of construction of three properties in Moscow. According to the Agency’s expectations, the share of the largest project in projected revenues over the three-year horizon will not exceed 10%. The deadlines and conditions for the Company’s projects are stable and assessed by the Agency at a very high level. Brusnika efficiently manages the deadlines and prime costs of construction by consolidating general contracting, technical supervision and design functions within the Company. This allows processes to be optimized and accelerates project implementation. Digitalization of business processes and investments in R&D boost productivity and lower costs. Brusnika has a developed sales system with diversified sales channels and an actively developing online shopping system. The Dependence on Materials and Subcontracting sub-factor is supported by the presence of production facilities for the manufacture of prefabricated structural elements, which reduces construction time. In addition, the Company began building a production cluster in New Moscow in 2024, which will produce reinforced concrete structures and other prefabricated items.
The Company has a leading position in the Unified Resource of Developers in terms of consumer characteristics of projects. Brusnika was the first residential real estate developer in Russia to successfully pass BREEAM certification and obtain an Excellent rating, and is recognized as an innovative and proactive developer.
The Company’s very high geographic diversification is based on the fact that it is building in major agglomerations in the Ural region, Siberia, Moscow, and the Moscow Region. The Company’s development strategy involves further expansion in St. Petersburg, the Leningrad Region, Lipetsk, Perm and Chelyabinsk, as well as balancing its project portfolio in terms of regions of presence.
The high level of corporate governance reflects the success of the strategy, which is expressed both in terms of growth in the Company’s operational indicators and its market share in regions of presence, as well as in the constantly improving quality characteristics of commissioned objects and increasing brand awareness. The financial transparency score is very high due to the publication of IFRS financial statements in the public domain, quarterly publication of operating results, and work with investors. The high score for the Management Structure sub-factor takes into account the presence of independent directors on the Company’s board of directors.
Medium assessment of the size of business and high profitability. The medium size of business stems from the weighted average FFO before net interest payments and taxes from 2022 to 2027, which ACRA assesses at RUB 23.6 bln. The Agency notes that the Company demonstrates effective control of costs and profitability of projects, as well as the optimization of overhead costs, which evidences high operational efficiency. The Company’s weighted average FFO margin before net interest payments and taxes from 2022 to 2027 is estimated at 23.8%.
Low leverage and high debt service ratio. When estimating leverage, ACRA adjusts total debt, excluding the amount of project finance debt secured by buyers’ escrow accounts (but not exceeding project debt). The weighted average ratio of adjusted net debt to FFO before net interest payments for the period from 2022 to 2027 is estimated at 2.9x, while the total debt to equity ratio will be 1.8x, which is in line with the average estimates according to the Agency’s methodology. At the same time, ACRA assesses the Company’s leverage as low due to the very high quality of its assessment, which is due to a balanced debt structure, comfortable repayment schedule, and a highly diversified base of the creditors. The presence of fixed rates for two bond issues also helps lower risks related to interest rate changes. When estimating the debt service ratio, ACRA includes interest payments on project debt in prime costs. The Agency assesses the weighted average ratio of FFO before net interest payments to net interest payments at 5.5x for 2022 to 2027.
Very high liquidity and medium cash flow assessment. The strong liquidity assessment takes into account the fact that Brusnika has diversified sources of internal and external financing and available undrawn limits at banks. To assess the free cash flow (FCF) margin of construction companies, ACRA adjusts FCF by the amount of expenses funded through project finance arrangements. Over the past few years, the Company has actively increased the size of its land bank, which puts pressure on the weighted average adjusted profitability of FCF. At the same time, ACRA estimates that the FCF margin from 2024 to 2027 will be mainly positive.
KEY ASSUMPTIONS
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Adherence to construction and sales targets;
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ACRA’s estimates only include projects being constructed and planned in accordance with the Company’s current financial plan;
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No significant decline of prices in the primary real estate markets of the Company’s regions of presence in 2025–2027.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Weighted average ratio of adjusted net debt to FFO before net interest payments declining sustainably below 1.0x coupled with the weighted average ratio of total debt to equity falling below 1.0x and the weighted average ratio of FFO before net interest payments to interest payments exceeding 8.0x.
A negative rating action may be prompted by:
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Weighted average ratio of adjusted net debt to FFO before net interest payments exceeding 3.5x;
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Weighted average ratio of FFO before net interest payments to interest payments falling below 5.0x;
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Residential real estate prices decreasing by more than 15% in the primary markets of the Company’s regions of presence in 2025–2027;
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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-.
Adjustments: none.
ISSUE RATINGS
“Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9), maturity date: June 10, 2025, issue volume: RUB 5.25 bln — A-(RU).
“Brusnika. Stroitelstvo i development” LLC (ISIN RU000A107UU5), maturity date: March 28, 2027, issue volume: RUB 7.5 bln — A-(RU).
Rationale. The issues represent senior unsecured debt of the Company. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the recovery rate for unsecured debt belongs to category II, therefore the credit ratings of the issues are equivalent to that of the Company, i.e. A-(RU).
REGULATORY DISCLOSURE
The credit ratings of “Brusnika. Stroitelstvo i development” LLC and the bond issues of “Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9, RU000A107UU5) have been assigned 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. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of “Brusnika. Stroitelstvo i development” LLC and the bond issues of “Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9, RU000A107UU5) were published by ACRA for the first time on March 3, 2020, December 14, 2021, and March 7, 2021, respectively. The credit rating of “Brusnika. Stroitelstvo i development” LLC and its outlook, as well as the credit ratings of the bond issues of “Brusnika. Stroitelstvo i development” LLC, 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 “Brusnika. Stroitelstvo i development” LLC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and “Brusnika. Stroitelstvo i development” LLC 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 “Brusnika. Stroitelstvo i development” LLC. No conflicts of interest were discovered in the course of credit rating assignment.
