ACRA affirms BB+(RU), outlook Stable, to RSG International Ltd (hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, affirms BB+(RU) to bonds (RU000A0JUAG0, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYLB6, RU000A0ZYA74) issued by LLC “RSG-Finance,” and withdraws the rating of the redeemed bond (RU000A0JVSA3) issued by LLC “RSG-Finance.”
The credit rating of RSG International Ltd is affected by the very high industry risk and low debt service and cash flow assessments. On the other hand, the rating is backed by the strong operating profile, the strong liquidity and the high likelihood of support from the key shareholder, the RENOVA Group.
KORTROS is a residential real estate developer with a wide geography of presence and a high project diversification in terms of their format. The Company was established in 2005 to implement the Akademichesky project, a large-scale development project (10 million sq. m) in Yekaterinburg by 2048. According to the data from the Unified Developers Register, the Company ranked 24th among Russian developers by the volume of projects under development. KORTROS is a part of the RENOVA Group, whose share in the Company is 75% minus 1 share; 25% plus one share in the Company are owned by V. Golubitsky, the President of KORTROS.
Key rating assessment factors
Industry risk is assessed as very high due to pronounced cyclical nature of the sector, high level of overdue liabilities, and substantial number of defaulted companies in the last five years. Company’s industry is a very strong factor limiting its credit rating.
High likelihood of support from the key shareholder reflects a reputation loss for the RENOVA Group that is incomparable with the scope of the activity of KORTROS, in case the Company's socially significant projects are disrupted (primarily, the Akademichesky project in Yekaterinburg). Such high likelihood of support from the RENOVA Group is underpinned by the large-scale HEADLINER project, initially financed by the RENOVA Group.
Strong operating profile is based on a highly diversified portfolio of projects and a very strong geographical diversification. About 76% of ‘comfort' and 'comfort+' class residential property, 20% of ‘business' class residential property and 4% of ‘elite' class residential property are expected to be commissioned in 2018–2020. The Company operates in Moscow, Yekaterinburg, Saint Petersburg, and Perm, and has plans for a large-scale project in Rostov-on-Don.
More than 58% of the commissioned projects are expected to be commissioned in the major regions (Moscow and St. Petersburg) from 2018 to 2020. The Company's business is characterized by a stable project implementation timeline, as the Company has managed to sell most of its projects by the time they are commissioned.
Medium corporate management level is a result of adequate strategic management, risk management, corporate management system and group structure, as well as a high financial transparency. ACRA notes that in 2017-2018, the Company's strategy has undergone changes that have had a negative impact on the financial performance in the short term, but in the long term, they will lead to an increase in profitability and will strengthen the market positions of KORTROS. The strategy for operations in the Moscow region has been revised to focus on high-margin projects in Moscow and abandon projects in the Moscow region. The Company has also cancelled a low-margin project in Yaroslavl.
Low coverage and medium leverage. The coverage and leverage of the Company was affected by the changes in its strategy introduced in 2017 and a relatively low volume of housing construction and a significant share of new projects in the portfolio. According to our estimates for 2015-2020, the weighted average ratio of net debt to FFO before net interest is 6.6x, which is very high. It should be noted that the ratio peaked its maximums in 2017-2018. At the same time, the leverage is assessed as medium, which is supported by the high capital reserves (the weighted average ratio of total debt to capital is 0.9x) and very high qualitative assessment of debt. The terms of repayment of the Company's debt are very comfortable, the peak of repayments will fall on 2020, which coincides with the completion dates of major projects of KORTROS.
Strong liquidity of KORTROS stems from substantial undrawn credit facilities and a significant amount of free cash on the Company’s accounts.
Key assumptions
- Construction projects will be completed and sales targets will be met as planned;
- ACRA estimations include only projects under construction and projects to be commissioned in accordance with the current financial plan of the Company;
- Prices in the primary real estate market of Moscow will not change significantly.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- An increase in the weighted average ratio of FFO before net interest payments to interest payments above 2.5х;
- A decrease of the ratio of net debt to FFO before net interest payments below 3.5x.
A negative rating action may be prompted by:
- FFO before net interest payments to interest payments ratio declines below 1.0х;
- Residential real estate prices decline by more than 15% in 2019–2020, while prices for construction works and materials increase as projected;
- Access to external liquidity sources worsens considerably;
- Regulatory changes capable of affecting the Company’s performance.
Rating components
Standalone creditworthiness assessment (SCA): bb+
Support: 1 notch up.
Issue ratings
LLC “RSG-Finance” (ISIN RU000A0JUAG0), maturity date: November 11, 2025, issue volume: RUB 3 bln, — BB+(RU).
LLC “RSG-Finance” (ISIN RU000A0JWQX7), maturity date: August 22, 2019, issue volume: RUB 3 bln, – BB+(RU).
LLC “RSG-Finance” (ISIN RU000A0JXN13), maturity date: April 01, 2022, issue volume: RUB 3 bln, — BB+(RU).
LLC “RSG-Finance” (ISIN RU000A0JWLJ7), maturity date: June 18, 2021, issue volume: RUB 1 bln, — BB+(RU).
LLC “RSG-Finance” (ISIN RU000A0ZYA74), maturity date: September 11, 2020, issue volume: RUB 5 bln, — BB+(RU).
LLC “RSG-Finance” (ISIN RU000A0ZYLB6), maturity date: December 17, 2020, issue volume: RUB 2 bln, — BB+(RU).
Credit rating rationale. RSG International Ltd acts as a guarantor for all bond issues of LLC “RSG-Finance.” All the issues listed below represent senior unsecured debt of KORTROS Group. 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 Bank in terms of priority. According to the ACRA methodology, the reimbursement rate for unsecured debt relates to category I; hence, the credit rating of the issues is equivalent to that of RSG International Ltd, i.e. BB+(RU).
The credit rating assigned to bond (ISIN RU000A0JVSA3) issued by LLC “RSG-Finance” has been withdrawn on the redemption of this bond issue on September 18, 2018. Previously, according to the ACRA methodology, this bond was rated on par with RSG International Ltd, i.e. at BB+(RU).
Regulatory disclosure
The credit ratings were assigned to RSG International Ltd and bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYLB6, RU000A0ZYA74) 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, the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities, and the Methodology for Analyzing Member Company Relationships Within Corporate Groups. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating assigned to RSG International Ltd was first published by ACRA on July 25, 2017; the credit ratings assigned to bonds (RU000A0JUAG0, RU000A0JVSA3, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7) issued by LLC “RSG-Finance” were first published on August 09, 2017; the credit ratings assigned to bond (RU000A0ZYA74) and bond (RU000A0ZYLB6) issued by LLC “RSG-Finance” were first published on September 29, 2017 and January 24, 2018, respectively.
The credit rating and credit rating outlook for RSG International Ltd and the credit rating assigned to bonds (RU000A0JUAG0, RU000A0JWQX7, RU000A0JXN13, RU000A0JWLJ7, RU000A0ZYA74, RU000A0ZYLB6) issued by LLC “RSG-Finance” are expected to be revised within one year following the rating action date (September 26, 2018).
Disclosure of deviations from the approved methodologies: the resulting credit rating was determined not in line with the Methodology for Analyzing Member Company Relationships Within Corporate Groups. The level of support was assessed using an approach for an unidentifiable group due to the lack of information required to make the creditworthiness assessment of the Supporting Organization.
The credit ratings were assigned based on the data provided by RSG International Ltd and LLC “RSG-Finance,” information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and RSG International Ltd and LLC “RSG-Finance” participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by RSG International Ltd and LLC “RSG-Finance” in their financial statements were discovered.
ACRA provided no additional services to RSG International Ltd and LLC “RSG-Finance.” No conflicts of interest were discovered in the course of credit rating assignment.
