The credit rating of the VIS Group (JSC) (hereinafter, VIS Group, or the Company) is based on its strong business profile and stable market positions. The regional diversification of the Company's business operations is assessed as good. The Company's financial profile includes high profitability and debt coverage. In addition, the Company boasts the good liquidity position and positive free cash flow. The Agency also notes that the Company's debt (except the debt under public-private partnership (PPP) projects, including concessions) is moderate. The rating is restrained by the Company's medium size, industry risks, and adequate quality of the Company's corporate governance. According to ACRA's classification, the infrastructure construction industry, where the Company implements PPP projects, is highly risky, which puts significant pressure on the rating, but at the same time, according to the Agency, road construction is the least risky segment of this industry. In addition, the level of industry risk is reduced partially by the fact that 98% of the Company's portfolio falls on PPP projects, where the risks associated with infrastructure construction are limited by the terms of PPP agreements.
VIS Group is an investment infrastructure holding. The Company has commissioned 98 industrial and infrastructure facilities nationwide and currently has one of the largest portfolio of concessions and PPP projects in Russia, including such large and significant projects as the construction and operation of the Khabarovsk Bypass Highway, construction and operation of bridges across Kaliningrad Bay and over the Lena River near Yakutsk.
99% of the Company's shares are owned by I.A. Snegurov.
Key rating assessment factors
Strong business profile and good geographic diversification. VIS Group is focused on PPP projects, including concessions, acting as a general contractor that provides a full range of construction and maintenance services. The majority of projects in the Company's portfolio belong to transport infrastructure (roads, bridges). Other include public facilities (schools, day-care facilities, hospitals, and cultural facilities like State Philharmonic Hall and Arctic Epic and Arts Center in Yakutsk). The Company's construction division has experience in the construction of social, cultural and industrial facilities (power units for power plants, an administrative and industrial complex of buildings for the gas industry), as well as transport infrastructure. In particular, the first large road construction project of the Company (the Khabarovsk Bypass Highway) is in progress and has been completed by 63%. The Company's construction division has secured the portfolio of contracts until 2025. The current backlog is RUB 485 bln. The public parties in Company's PPP projects include Russian administrative subjects with high credit quality; ACRA notes that there is no concentration on a major customer. The average share of the Company construction division's subcontracting is 46% of revenues over the past three years. To reduce subcontracting risks, the Company has plans to decrease the above share, including through acquisition of sub-contractors. The geography of VIS Group presence is extensive and covers the Republic of Sakha (Yakutia), the Moscow Region, the Novosibirsk Region, the Khabarovsk Krai, the Kaliningrad Region, the Khanty-Mansiysk Autonomous Okrug – Ugra, and the YaNAO.
Medium leverage and good coverage. According to ACRA's forecasts, in 2020, the ratio of total debt (excluding liabilities under concession agreements) to FFO before net interest payments may increase to 3.7x (1.2x in 2019), and in 2021–2022 the average annual value of this ratio is expected at about 1x. The expected debt growth in 2020 is mainly caused by the planned growth in liabilities under construction equipment leasing agreements. In addition, FFO to net interest payments is expected to rise due to the inflow of funds from PPP projects.
In its leverage estimations, ACRA relies on the indicators of adjusted debt, which excludes liabilities under concession and PPP agreements. This is due to the fact that, according to the terms of the Company's concession and PPP agreements, senior (bank) debt and junior debt (concessionaire's/private partner's contribution) are subject to full compensation in the event of early termination of concession or PPP agreements.
As of June 30, 2020, the Company's liabilities included bank loans, loans from associates, and leasing obligations, with loans accounting for the majority of the debt portfolio. The debt repayment schedule will be even for the next three years. Almost all of the Company's debt is denominated in rubles.
According to ACRA's estimates, in 2020 the ratio of FFO to net interest payments to interest payments should be 5.9x (in 2019, it was 3.3x), and the ratio is also expected to grow in the future.
Strong industry positions and good profitability. According to ACRA estimates, by the end of 2020, the Company's FFO before net interest payments and taxes should decrease by 45% against 2019, but in 2021–2022, it is expected to revive and grow further. The decrease in 2020 is explained by the absence of other tax revenues in the forecast, and the subsequent growth would be based on revenues expected from large-scale concession projects. The total volume of the Company's portfolio of PPP projects due for implementation after July 1, 2020 exceeds RUB 200 bln, which corresponds to the good assessment score for this factor. In 2019, the Company's FFO margin before interest and taxes increased and amounted to 28% (in 2018, a negative value was recorded), and in 2020–2022, the average annual value of this indicator is expected to be 22%. This is a result, among other things, of the Company's implementation of major PPP projects in transport infrastructure, including Khabarovsk Bypass Highway, Vinogradovo-Boltino-Tarasovka motor road, bridges over the Kaliningrad Bay, the Lena and Ob rivers.
Good liquidity amid high cash flow. Taking into account the cash balances on the Company's accounts (RUB 4 bln as of July 1, 2020), ACRA expects the Company's short-term liquidity ratio to be 1.3x by the end of 2020. The qualitative assessment of liquidity is high: the Company has been raising funds from the largest banks, including VTB Bank (PJSC), Bank GPB (JSC) and others, as well as from the debt market.
According to ACRA's forecasts, in 2020–2022, the Company's average annual free cash flow should exceed the level of 2019 twofold, taking into account cash inflows from PPP projects.
Adequate corporate governance. The Company's strategy is conservative and provides for the implementation of large and profitable projects in solvent regions. The Company is actively developing its PPP project business, including concessions. The ultimate beneficiary is actively involved in managing the Company. The exposure to foreign exchange and interest rate risks is low. VIS Group includes a large number of legal entities, but this is due to the operational needs and the specifics of business, including PPP projects. The Company has been making its audited consolidated annual IFRS financial statements and it has plans to publish such statements in the future.
- the Company to continue implementation of all current PPP and concession agreements and to increase the portfolio of PPP projects by at least 50% by 2022;
- the Company's FFO before net interest payments and taxes to decrease by 45% against 2019, but in 2021–2022, it is to grow four times up against 2019;
- the annual growth in the prime costs not exceeding the growth of revenue;
- dividends to remain not higher than 20% of the Company's net profit;
- the Company to make its annual investments in PPP projects as planned and contracted;
- obligations under PPP projects, including concessions, to be fulfilled on time and in full.
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:
- FFO to net interest payments and taxes going above RUB 30 bln, the total debt going below 2x FFO to net interest payments, and FCF margin going above 5%;
- FFO to net interest payments and taxes going above RUB 30 bln, the total debt going below 2x FFO to net interest payments, and FFO margin before interest and taxes going above 20%.
A negative rating action may be prompted by:
- FFO to net interest and taxes falling below RUB 5 bln;
- FFO to interest and taxes going below 12%;
- Exclusion from PPP contracts, including concession agreements, of the provision on full compensation of senior and junior debt in case of early termination;
- Significant deterioration in the access to external sources of liquidity.
No outstanding issues have been rated.
The credit rating was 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.
A credit rating has been assigned to VIS Group (JSC) for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by VIS Group (JSC), information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and VIS Group (JSC) participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed
by VIS Group (JSC) in its financial statements have been discovered.
ACRA provided no additional services to VIS Group (JSC). No conflicts of interest were discovered in the course of the rating process.