The credit rating of Setl Group, Ltd (hereinafter, the Company, Group, or Setl Group) has been upgraded due to positive changes in the assessment of the Company's cash flows. The credit rating is supported by the Company's very strong business profile, medium level of corporate governance, high business profitability, very low leverage, and strong liquidity. At the same time, very high industry risk puts pressure on the credit rating.
Setl Group is the largest residential real estate developer in the North-West of Russia, and the third largest player in the Russian construction market. In 2018, the Company commissioned 1.289 mln sq. m of floor space; in late 2018, the total floor space in the portfolio of projects under construction amounted to 2.98 mln sq. m (1.68 mln sq. m of selling floor space).
Key rating assessment factors
Industry risk is assessed as very high due to a pronounced cyclical nature of the sector, high amount of overdue receivables, and the substantial number of companies that defaulted in the last five years. The industry the Company belongs to is a very strong factor limiting the rating.
Very strong business profile is based on the high diversification and sustainability of the Company's portfolio of projects and the strong market positions of the Company’s proprietary brokerage and consulting divisions in St. Petersburg. The Company’s brokerage division also sells a substantial share of residential real estate offered on the St. Petersburg’s market by third-party developers. Therefore, the Company is able to consolidate up-to-date information on the key trends in the region’s residential real estate market. In view of certain changes in the legislation, the Company's market positions are expected to become stronger due to consolidation of the industry.
Medium level of corporate governance stems from the high quality of strategic management, adequate risk management system, and adequate management and organizational structures of the Group. The Agency notes the Company's consistency and success in pursuing its strategy. ACRA also notes that the Company is ready to start applying the legal framework of escrow accounts. The Company and Sberbank (ACRA rating: AAA(RU), outlook Stable) have concluded an up to RUB 100 bln project funding agreement regulated by the new legal framework. The forecasted project funding rate is expected to be less than 5%, and the first projects under the new framework are scheduled to be launched in H2 2019.
The Company's business profitability is high due to the growing demand and, correspondingly, prices for apartments built by the Group. In 2018, the FFO margin before interest and taxes amounted to 16.2%, and ACRA expects the margin to grow further in 2019–2021; therefore the weighted average margin for the period from 2016 to 2021 is estimated at 17.1%. ACRA notes that the transition to the new project funding framework will affect the Company's profitability insignificantly due to the relatively low funding rate.
Very low leverage. In its calculations of the ratio of net debt to FFO before interest and taxes, ACRA adjusted the total debt for the amount of borrowed funds fully secured by funds held on escrow accounts and raised from homebuyers. Subject to such adjustment, the weighted average ratio of the net debt to FFO before net interest is estimated at 0.6x for the period from 2016 to 2021.
Strong liquidity is based on the positive forecasted FCF before expenses under the real estate projects implemented using funds borrowed against escrow accounts. ACRA also notes that the Company has concluded an up to RUB 100 bln project funding agreement with Sberbank.
The cash flow assessment is strong. Regardless that the FCF margin is low (which is due to dividend payments), ACRA is of the opinion that the very low leverage, very high coverage of interest payments and strong liquidity indicate that the impact of FCF margin on the Company's creditworthiness is neutral, which, jointly with the very low ratio of capital expenditures to revenues, results in the strong assessment of cash flow.
Key assumptions
- The Company will complete its projects and meet sales targets in due time as planned;
- Only projects under construction and projects to be commissioned as set forth in the current financial plan of the Company were included in ACRA's estimations;
- The prices in St. Petersburg's primary real estate market 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:
- The corporate governance assessment going up to the top level, the FFO before net interest and taxes exceeding RUB 50 bln, and the FFO margin before interest and taxes exceeding 20%.
A negative rating action may be prompted by:
- The weighted average ratio of FFO before net interest to net interest going below 8.0x, the weighted average ratio of total debt to equity going up above 2.0x, and the weighted average ratio of net debt to FFO before net interest growing above 1.0x;
- Residential real estate prices in St. Petersburg decline by more than 10% in 2019–2021, while prices for construction works and materials increase as projected;
- 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
Exchange-traded interest-bearing certified unregistered bond issued by Setl Group, Ltd, 001P-01 series (ISIN RU000A0ZYEQ9), maturity date: October 27, 2022, issue volume: RUB 5 bln — A-(RU).
Credit rating rationale. The issue is a senior unsecured debt instrument of Setl Group, Ltd. Due to the absence of either structural or contractual subordination of the issue, ACRA ranks it pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to the ACRA methodology, the reimbursement level under unsecured debt relates to category II; hence, the credit rating of the bond issue is equivalent to that of Setl Group, Ltd, i.e. A-(RU).
Regulatory disclosure
The credit ratings were assigned to Setl Group, Ltd and the bond (ISIN RU000A0ZYEQ9) issued by Setl Group, Ltd 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign the credit rating to the above bond issue.
The credit ratings assigned to Setl Group, Ltd and the bond (ISIN RU000A0ZYEQ9) issued by Setl Group, Ltd were first published by ACRA on June 19, 2017 and November 02, 2017, respectively. The credit rating of Setl Group, Ltd and its outlook as well as the credit rating of the above bond are expected to be revised within one year following the publication date of this press release.
The above credit ratings are based on the data provided by Setl Group, Ltd, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and Setl Group, Ltd participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by Setl Group, Ltd in its financial statements have been discovered.
ACRA provided no additional services to Setl Group, Ltd. No conflicts of interest were discovered in the course of credit rating assignment.
