The credit rating of Selectel Ltd. (hereinafter, Selectel, or the Company) is based on the high assessment of the Company's market position: Selectel is one of the largest IT infrastructure providers in the Russian Federation in terms of both the number of racks and revenues. ACRA positively assesses the Company's business profile due to the high demand for IT infrastructure and data center services and significant market entry barriers, as well as a wide product portfolio of Selectel.
As part of the financial risk profile assessment, the Agency notes that the leverage is medium. After passing the peak of capital expenses in 2022, Selectel will be able to significantly reduce capex, which in turn may lead to the transition of free cash flow (FCF) into a positive zone and a gradual decrease in leverage. However, until that time, ACRA assesses the Company's cash flows as very weak. The factor assessment is strongly supported by a very high profitability and a moderately high liquidity assessment.
Selectel is a Russian provider of IT infrastructure based on its own data centers. The Company leases dedicated servers, creates private and public cloud services, and deploys client server hardware. Selectel operates four data center sites with the total capacity of 3,048 racks located in Moscow, St. Petersburg, and the Leningrad Region. The Company's key ultimate beneficiaries are Vyacheslav Mirilashvili (85.59%), Lev Leviev (11.50%), and Oleg Lyubimov (2.44%).
Key assessment factors
High business profile assessment and strong market positions. Selectel operates in well-developed regions — Moscow (ACRA rating: AAA(RU), outlook Stable) and St. Petersburg (ACRA rating: AAA(RU), outlook Stable). The Company's product portfolio covers the entire range of requirements for the IT infrastructure of clients, including data center services, dedicated server rentals, and cloud products, which allows the Agency to assess the diversification of revenue from key services as moderate. Selectel was one of the largest players in terms of revenue from IaaS and the number of racks in 2020. The entry of foreign players into the Russian market is hampered by regulatory restrictions set forth to keep data sovereignty. A significant amount of capital investments and comparably sophisticated technologies for building infrastructure to ensure uninterrupted operation and information security create certain restrictions for new local players to enter the market.
ACRA notes the continuing sustainability of Selectel's business, which is higher than that of the peers rated A-(RU) and, therefore, maintains the corresponding analytical adjustment.
Very high profitability; low score for business size. As in the previous year, the assessment of the financial risk profile takes into account high revenue growth rates and the organic growth of the Company coupled with its capacity of rapid scaling its data centers in existing sites. In 2020, the Company's revenue amounted to RUB 3.4 bln, which is 44% higher than in 2019, and in 2021, according to ACRA's forecast, the revenue may reach RUB 4.9 bln. The Agency expects Selectel's revenue to grow further to RUB 11 bln by 2024. A significant share in the Company's revenue in 2021 has continued to be contributed by the private cloud and bare metal segment (61%); the share of public cloud platforms is 19%, and that of rack rentals is 11%.
FFO before fixed charges and taxes has been growing at a rate comparable to revenue. By the end of 2021, ACRA expects the indicator to grow to RUB 2.1 bln, which still corresponds to the low score for the size of the Company's business as per ACRA's classification. The Agency forecasts the FFO before fixed charges and taxes to grow to RUB 4.5–5.0 bln by 2024.
The continuing excess of demand over supply in the data center market allows the Company to maintain a very high profitability. The return on FFO before fixed charges and taxes has consistently exceeded 40% and should amount to about 43% by end-2021.
High corporate governance assessment. The financial transparency of the Company is assessed as moderately high: Selectel prepares its consolidated IFRS financial statements on a semi-annual basis, which are audited by EY. Financial statements and key operating indicators are publicly available. ACRA notes the work the Company has been carried out to improve its risk management system. However, regardless the moderately high assessment of the Company's risk management function, the Agency remains concerned that, under the current insurance policy, not all risks are fully insured.
Medium leverage and medium coverage. Selectel's leverage has remained medium. The Agency is positive of the decrease in the share of secured debt and the increased lender diversification of the debt portfolio. As of September 30, 2021, the Company's debt included a bond issue, ruble-denominated non-revolving facilities from AO Raiffeisenbank (ACRA rating: AAA(RU), outlook Stable) and a non-revolving facility from VTB Bank (PJSC) (ACRA rating: AAA(RU), outlook Stable). 89% of the total debt was raised at fixed interest rates.
ACRA expects the ratio of total debt to FFO before net interest to increase from 2.7x in 2020 to 3.3x by the end of 2021. The ratio of lease-adjusted gross debt to FFO before fixed charges is expected to be 2.9x in 2021. According to the Agency's estimates, the peak in leverage will coincide with the peak in capital expenses in 2022, when the figure could reach 3.5x. In 2023–2024, ACRA expects its gradual decline to 3.2x. The leverage growth in 2021 negatively affected the dynamics of debt service indicators: the ratio of FFO before net interest to interest decreased to 4.4x, and the ratio of FFO before fixed charges to fixed charges — to 3.7x. In the next three years, these indicators may fluctuate within 3.0–4.0x.
Moderately high liquidity and very weak free cash flow. As of June 30, 2021, Selectel had the total of RUB 800 mln in committed but undrawn credit lines. In the forecast period, the peak of debt repayments is expected in February 2024, when the bond falls due (repayments, including bank loans, should amount to 53% of the total loan portfolio as of September 30, 2021).
The FCF is still negative under the pressure of significant capital expenses required for the expansion of existing data centers and the construction of a new Yurlovskiy DC. In the forecast period of 2022–2024, the FCF is expected to remain in the negative zone. According to ACRA's estimates, the capex-to-revenue ratio will be 0.7–0.8x in 2021–2022, though it may decline to 0.39x in 2023–2024.
Average annual growth of revenues at 30–40% in 2022–2024;
The return on FFO before fixed charges and taxes being maintained within 35–45%;
The Company's capex program implemented as planned;
No dividend payments until positive FCF is achieved;
Continued access to external liquidity sources.
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:
Weighted average ratio of adjusted total debt to FFO before fixed charges falling below 1.0x and the weighted average ratio of FFO before fixed charges to fixed charges exceeding 10.0x;
FCF margin growing higher than 5% amid the ratio of capex to revenues falling below 10%.
A negative rating action may be prompted by:
Weighted average ratio of adjusted total debt to FFO before fixed charges exceeding 3.5x;
Weighted average ratio of FFO before fixed charges to fixed charges falling below 3.0x;
Return on FFO before fixed charges and taxes falling below 20%;
Worsened access to liquidity sources.
Bond, Selectel Ltd., series 001P-01R (RU000A102SG9); maturity date: February 22, 2024, issue volume: RUB 3 bln — А(RU).
Credit rating rationale. The issue represents senior unsecured debt of Selectel. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. To determine the credit rating of the issue, the Agency applied the simplified approach in connection with a decrease in the share of secured bank lending in the Company's debt portfolio due to its partial refinancing after the placement of bonds. Therefore, the credit rating of the issue is equivalent to that of Selectel, i.e. A(RU).
The credit rating of Selectel Ltd. and the credit rating of the bond (RU000A102SG9) of Selectel Ltd. have 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 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 on the National Scale of the Russian Federation was also used to assign the credit rating to the bond issue listed above.
The credit rating of Selectel Ltd. and the credit rating of the bond issue (RU000A102SG9) was published by ACRA for the first time on December 1, 2020 and February 25, 2021, respectively. The credit rating of Selectel Ltd. and its outlook and the credit rating of the bond issue (RU000A102SG9) 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 Selectel Ltd., information from publicly available sources and ACRA’s own databases. The credit ratings are solicited, and Selectel Ltd. participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Selectel Ltd. No conflicts of interest were identified in the course of credit rating assignment.