The credit rating of LLC «ASK-Stroitelstvo» (hereinafter, the Company) is based on the Company’s strong market position, very strong business profile, high business profitability, high assessment of cash flow, very low leverage, very high assessment of debt servicing, and strong liquidity. However, the Company’s very high industry risk, poor corporate governance, and weak geographic diversification limit the credit rating.
The Company is the largest residential real estate developer in Ekaterinburg and the Sverdlovsk Region. The expected cumulative floor space of projects planned for commissioning in 2020-2022 is over 700,000 sq. m.
Key rating assessment factors
ACRA assesses the Company’s industry risk as very high due to the pronounced cyclical nature of the sector, a high level of overdue debt, and a significant number of companies that have defaulted over the past five years. The Company’s sector is a very strong factor limiting the rating.
The Company’s very strong business profile is based on a highly diversified project portfolio, the stable structure of schedules and terms for project implementation, as well as a high amount of self-manufactured materials and a large portion of construction works performed without involving contractors. A strong brand and the high consumer properties of commissioned real estate projects support the Company’s ability to meet sales targets.
The Company’s poor corporate governance assessment is due to poor management structure and very poor group structure. The Company’s management structure is poorly structured, as there is no board of directors. Since shareholders are involved in operational management, there exists the risk of an “irreplaceable person.” The poor group structure is due to the presence of closed-end real estate unit investment funds. Although the financial results of these funds are consolidated in the group’s financial reporting, the Company does not own any shares in them. At the same time, ACRA’s assessment of the Company’s consistent strategy is high and considers its implementation successful. When assessing the management strategy, ACRA also considered the history and development outlook of Atomstroykompleks-Promyshlennost, an industrial division of Atomstroykompleks Group, which had previously implemented a strategy of setting up its own state-of-the-art production facilities that proved to be very successful and had a positive impact on the Group’s competitiveness as a whole. In 2019, Atomstroykompleks-Promyshlennost began construction on a cement plant. The Company granted a guarantee on the loans for this project. ACRA does not consider this guarantee as part of the Company’s leverage due to the strong credit profile of Atomstroykompleks-Promyshlennost.
The Company’s very low leverage and very high debt servicing indicators are the result of its conservative financial policy. The Company favors concluding contracts with landholders, which assume the payment for land by shares in the project. In assessing the Company’s leverage, ACRA adjusts the total debt by the amount of debt raised through project financing and fully secured by funds received in escrow accounts from buyers. According to ACRA, adjusted net debt to FFO before net interest payments in 2017-2022 will average -0.5x, while total debt to capital will average 0.2х. The Company’s leverage is assessed as very low. Debt service indicators are very high, with average weighted FFO before net interest payments to net interest payments expected to be 17.9x for 2017-2022.
The Company’s strong liquidity is based primarily on low debt and substantial amounts of free cash on the Company’s accounts compared to the amount of debt, as well as undrawn credit lines. When calculating the liquidity ratio, ACRA does not consider the funds that will be accumulated on the escrow accounts in the forecast period.
Key assumptions
- Observing the planned construction schedule and meeting sales targets;
- ACRA’s calculations include real estate projects under construction and real estate projects planned to be commissioned based on the Company’s current construction program.
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:
- Improved organizational structure of the group.
A negative rating action may be prompted by:
- Increase in net debt to FFO before net interest payments above 1x, with a concurrent decrease in FFO before net interest payments to net interest payments below 8x;
- Decrease in FFO net margin before interest payments and taxes below 8% or FCF turning negative;
- Regulatory changes that could have a significant impact on the Company’s indicators.
Rating components
SCA: bbb.
Adjustments: none.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned 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 LLC «ASK-Stroitelstvo» was published by ACRA for the first time on December 21, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The assigned credit rating is based on the data provided by LLC «ASK-Stroitelstvo», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and LLC «ASK-Stroitelstvo» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by LLC «ASK-Stroitelstvo» in its financial statements have been discovered.
ACRA provided no additional services to LLC «ASK-Stroitelstvo». No conflicts of interest were discovered in the course of credit rating assignment.
