The credit rating of "Garant-Invest Commercial Real Estate" JSC (hereinafter, the Company) has been downgraded and the credit rating outlook has been changed to Negative to reflect ACRA’s opinion on the negative effects of the quarantine introduced by the Government of Moscow on the Company’s financial indicators, as well as on the risks of a slower recovery of consumer traffic and demand against that included in the rating model. Taking into account that the Company's returns are slowing down and the Company will have to make debt repayments in July–December 2020, the risks are high that the Company will have not enough liquidity to go through its peak repayments. At the same time, ACRA is of the opinion that the liquidity risks are limited thanks to the availability of undrawn committed credit lines and possibility to borrow more loans secured by unencumbered assets and to recover loans granted to third parties.
The Company's credit rating is based on the high industry risk, small business size (the net operating income is less than RUB 5 bln), low coverage assessment, high leverage, and medium profitability and liquidity assessments. The credit rating is supported by the Company’s strong business profile and geographic footprint.
The Company is the main business asset of the Financial and Industrial Corporation "Garant-Invest." The Company owns and manages a portfolio of commercial real estate, and develops and redevelops commercial real estate in Moscow. The Company owns seven shopping centers and a network of district shopping centers, with the gross building area of 132 thousand sq. m, of which the gross leasable area is 83 thousand sq. m.
Key rating assessment factors
The revenue is going down due to the restrictive measures taken to combat coronavirus. The Agency expects that in 2020, the Company's revenue will decrease by 15% against 2019. About 54% of the Company's leased area continues to operate during the quarantine period. ACRA notes that the business sector the Company belongs to (medium-sized shopping centers located nearby metro stations and in residential districts) has been least affected by the current crisis. Therefore, the Agency expects that the consumer traffic in this segment will recover at a comparably faster pace.
The Agency believes that the effects of the requirements set forth by the RF Government Decree dated April 3, 2020 No. 439 “On Establishing Requirements to Terms and Conditions for Delaying Lease Payments under Real Estate Lease Agreements” on the Company's operating performance will be limited, and the decline in revenues will be controlled. The Company is actively negotiating with those tenants who prefer discounts to deferrals granted by the above decree. A significant number of tenants has already given their consent to discounted lease payments (mostly for April–August 2020) and six months' advance payments in exchange for discounts.
The leverage and coverage indicators have deteriorated. Following a decrease in the net operating income, the average weighted ratio of total debt to net operating income for the period from 2017 to 2022 is estimated by the Agency at 10.2x compared to 9.0x in the pre-crisis scenario, which indicates the high leverage. The weighted average ratio of net operating income to charges is estimated at 1.2x compared to pre-crisis 1.3x, which downgrades the coverage score from medium to low. ACRA is of the opinion that the likelihood of further decline in the financial indicators is not high, and the Agency will continue to monitor these indicators on a permanent basis.
The liquidity is medium. In July–December 2020, the Company will have to make large principal (RUB 1.14 bln) and interest (RUB 841 mln in June–December) repayments on its bonds, which are covered only partially by cash held on the Company's accounts (RUB 563 mln as of May 1, 2020) and the cash flow expected until the end of 2020 (RUB 1.19 bln in June–December 2020). According to the Agency’s estimates, in order to fulfill its debt obligations by the end of the year, the Company should raise over RUB 200 mln or recover loans granted to third parties. At the same time, in its liquidity assessment, ACRA has taken into account about RUB 651 mln in the unutilized committed credit lines and possible loans, which may be secured by the Company's unencumbered assets.
Key assumptions
- The revenue to decline by 15% in 2020 against 2019;
- The net operating income to reach pre-crisis level by Q4 2020; rental charges in the Company's core shopping centers to grow annually by 5% in 2021–2022;
- The percentage of leasable area in the key shopping centers to remain high after the quarantine is lifted.
Potential outlook or rating change factors
The Negative outlook assumes that the rating may be downgraded within the next 12–18 months.
A positive rating action may be prompted by:
- A fast recovery of the net operating income to its pre-crisis level.
A negative rating action may be prompted by:
- An extension of the quarantine and restrictions on shopping centers beyond June 2020;
- A significant deterioration in the macroeconomic situation in the country and
a critical decline in the consumer purchase power; - A decline in the Company's liquidity indicators and difficulties in servicing the Company's debt obligations;
- The weighted average ratio of total debt to net operating income exceeding 12x.
Rating components
Standalone creditworthiness assessment (SCA): bbb-.
Adjustments: none.
Issue ratings
"Garant-Invest Commercial Real Estate" JSC, 001Р-05 series (RU000A1005T9), maturity date: April 5, 2024, issue volume: RUB 6 bln — BB+(RU).
"Garant-Invest Commercial Real Estate" JSC, 001Р-06 series (RU000A1016U4), maturity date: December 13, 2022, issue volume: RUB 500 mln — BB+(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 these issues as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. When assessing a loss recovery rate, ACRA considered the planned purchase of new commercial real estate.
According to ACRA's methodology, the reimbursement rate for the Issuer’s unsecured debt belongs to Category III. Therefore, the above bond issues are rated BB+(RU), i.e. one notch below the credit rating of the Company.
Regulatory disclosure
The credit ratings were 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 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 ratings to the above bond issues.
The credit ratings assigned to "Garant-Invest Commercial Real Estate" JSC and RU000A1005T9 and RU000A1016U4 bonds issued by "Garant-Invest Commercial Real Estate" JSC were first published by ACRA on December 26, 2018, March 12, 2019, and December 25, 2019, respectively. The credit rating of "Garant-Invest Commercial Real Estate" JSC and its outlook as well as the credit ratings of RU000A1005T9 and RU000A1016U4 bonds issued by "Garant-Invest Commercial Real Estate" JSC are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on the data provided by "Garant-Invest Commercial Real Estate" JSC, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and "Garant-Invest Commercial Real Estate" JSC participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by "Garant-Invest Commercial Real Estate" JSC in its financial statements were discovered.
Disclosure of deviations from approved methodologies: the coverage was assessed with a deviation from the range set forth in the methodology because the debt is represented by loans less depreciation, and the coverage ratio estimations included interest payments only.
ACRA provided additional services to "Garant-Invest Commercial Real Estate" JSC. No conflicts of interest were discovered in the course of credit rating assignment.
