ACRA has upgraded the credit rating of RSG International, International limited liability company (previously known as RSG International Ltd; renamed following a recommendation in H1 2022; hereinafter, the Company, the Group, GC KORTROS, or KORTROS), a holding company of KORTROS Group, to BBB+(RU). ACRA has also upgraded the credit ratings of the bonds (RU000A0JUAG0, RU000A100PS4) issued by LLC “RSG-Finance” to BBВ+(RU).
The credit rating of GC KORTROS has been upgraded to reflect the improved leverage, profitability, and coverage metrics. The Company’s credit rating is based on its very low leverage, high coverage and profitability assessments, strong liquidity, medium assessments of operational risk profile and business size, and the high likelihood of support from the key shareholders. The rating is constrained by the very high industry risk or the residential construction sector.
GC KORTROS is a residential real estate developer with a wide geography of presence and high diversification of project formats. The Company was established in 2005 to carry out comprehensive development in Yekaterinburg a part of the Akademichesky project. According to the Unified Register of Developers, as of September 2022, the volume of Company’s projects under development was 653,800 sq. m.
key assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the construction industry, high amount of overdue payments, and the substantial number of companies that have defaulted over the last five years. The industry the Company belongs to is a very strong factor limiting its credit rating.
The high likelihood of support from the Company’s largest shareholders is underpinned by previous cases of support, including the large-scale HEADLINER project, which, at its initial stages, was financed by the key shareholders.
Partial refinancing of public debt, and improvement of leverage and coverage indicators. The Group continued refinancing public debt in 2022 using bank debt raised on project debt terms under escrow accounts for projects in which the funds accumulated in escrow accounts significantly exceeded the project debt raised by the Company, which contributed to reducing leverage for adjusted debt and reducing the effective interest rate on the Company’s debt.
In its calculations of the ratio of net debt to FFO before interest and taxes, ACRA adjusts the total debt by the amount of debt raised as part of project financing under escrow accounts and fully backed by funds deposited by buyers to escrow accounts. According to ACRA’s assessment, the weighted average (for the period from 2019 to 2024) ratio of adjusted net debt to FFO before net interest is estimated by the Agency at less than 1x. The Agency assesses the weighted average ratio of FFO before net interest payments to net interest payments for the same period at 5.6x
Strong liquidity assessment. The strong assessment of the Company’s liquidity is driven by a significant amount of funds held on its accounts, as well as a significant amount of committed credit lines (excluding project debt under escrow), and a very comfortable repayment schedule for general corporate debt.
key assumptions
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Fulfillment of the planned terms of construction and sales;
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ACRA only took into account projects under construction and planned in accordance with the Company’s financial plan;
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No substantial decline in prices in the primary real estate market in 2023–2024.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of FFO before net interest payments to net interest payments exceeding 8x coupled with the FFO margin before net interest payments and taxes exceeding 20%;
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Improved project portfolio diversification and concurrent increase in the portfolio of current projects above 1 mln sq. m.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest to net interest declining below 5х and weighted average adjusted FCF margin turning negative;
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Weighted average ratio of net debt to FFO before net interest payments exceeding 2x;
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Residential real estate prices in the primary market declining by more than 15% in 2023–2024;
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Regulatory changes that can significantly affect the Company’s performance.
rating components
Standalone creditworthiness assessment (SCA): bbb.
Support: +1 notch.
issue ratings
LLC “RSG-Finance” (ISIN RU000A0JUAG0), maturity date: November 11, 2025, issue volume: RUB 3 bln — ВВВ+(RU).
LLC “RSG-Finance” (ISIN RU000A100PS4), maturity date: August 8, 2024, issue volume: RUB 2 bln — BBB+(RU).
Rationale. RSG International, International limited liability company acts as the guarantor for all bond issues of LLC “RSG-Finance”. All the issues listed above represent senior unsecured debt of KORTROS Group. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the recovery rate for the unsecured debt belongs to Category I. Therefore, the credit rating of the issues is equivalent to that of ILLC RSG International, i.e. BBB+(RU).
REGULATORY DISCLOSURE
The credit ratings have been assigned to RSG International, International limited liability company and the bonds issued by LLC “RSG-Finance” (RU000A0JUAG0, RU000A100PS4) 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, Methodology for Analyzing Rated Entities Associated with a State or a Group, 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 credit ratings to the above issues.
The credit rating of RSG International, International limited liability company (previously RSG International Ltd) and the credit ratings of the bonds (RU000A0JUAG0, RU000A100PS4) issued by LLC “RSG-Finance” were published by ACRA for the first time on July 25, 2017, August 9, 2017, and September 24, 2019, respectively.
The credit rating of RSG International, International limited liability company and its outlook, as well as the credit ratings of the bonds (RU000A0JUAG0, RU000A100PS4) issued by LLC “RSG-Finance” are expected to be revised within one year following the publication date of this press release.
Disclosure of deviations from the approved methodologies: the level of group support and the final credit rating were not determined in line with the Methodology for Analyzing Rated Entities Associated with a State or a Group. The level of support was assessed using the approach for an unidentifiable group due to a lack of information required to assess the creditworthiness of the Supporting Entity.
The credit ratings were assigned based on data provided by RSG International, International limited liability company and LLC “RSG-Finance”, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and RSG International, International limited liability company and LLC “RSG-Finance” participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to RSG International, International limited liability company and LLC “RSG-Finance”. No conflicts of interest were discovered in the course of credit rating assignment.
