The credit rating of “Brusnika. Stroitelstvo i development” LLC (hereinafter, the Company, or Brusnika) is based on its very strong business profile, very strong geographic diversification, very high profitability, low leverage, very high coverage, and strong liquidity. The rating is constrained by the medium assessments of market position, company size, and cash flow. The credit rating outlook has been changed due to the risk of the Company failing to fulfil its plans to reduce leverage and increase its free cash flow (FCF).
Founded in 2004, Brusnika is a developer company focusing on high-quality housing and integrated development of urban areas. The Company is headquartered in Yekaterinburg. The Company’s project portfolio is diversified among eight large cities of the Urals, Siberia, and the Moscow area. According to 2022 results, Brusnika retained its position among the 20 largest Russian developers in terms of commissioned floor area. As of the start of February 2023, the Company ranked 13th in terms of its current construction portfolio according to the Unified Resource of Developers.
key assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the industry, high amount of overdue payments, and substantial number of developers that have defaulted over the last five years. Therefore, industry risk is a strong factor that limits the Company’s rating.
The Company’s performance in 2022. Registration of new contracts between buyers and the Company declined by 33% in physical terms last year. At the same time, the size of registered contracts only declined by 22% due to average sales prices growing by 16%. Furthermore, the Agency expects revenues recognized by construction readiness under IFRS reporting will grow by more than 35% year-on-year.
The Company continued to replenish its land bank in 2022, mainly in Moscow and the Moscow Region, under agreements concluded in late 2021. Land plots were purchased primarily at the expense of project debt, which resulted in Brusnika’s net debt growing, but did not lead to a deterioration of leverage indicators. The Company’s failure to meet its initial sales targets due to deterioration of the market situation coupled with higher debt resulted in higher relative leverage indicators. ACRA assumes that this may lead to non-compliance with the restrictive clauses specified in the issuance documents for the Company’s 2022 bond issues. The Agency also assumes that the possible occurrence of an early redemption event for the bonds does not entail additional risks in terms of the Company’s liquidity, since Brusnika has agreed with the holders to amend the decision to issue the series 002Р-01 bonds, and also possesses sufficient effective credit limits and internal funds to cover bondholders’ possible claims on the remaining issues.
The very strong business profile is based on the very high diversification of the portfolio of projects and the high assessment of project terms and deadlines. The Company is on the List of Systemically Important Enterprises of Russia. Brusnika ranks first in the Unified Register of Developers in terms of consumer characteristics of residential projects. The Company was the first developer in Russia to successfully pass the BREEAM certification and obtain the Excellent rating in the residential category and is recognized as an innovative and proactive developer.
Brusnika has effectively manages its construction deadlines and costs due to well-organized general contractor and engineering oversight and design procedures within the Company, digitalization of business processes, also investment in R&D and growth of productivity. In addition, the Company benefits from developed and diversified sales channels, as well as its fast-expanding online sales platform.
Low leverage and very high debt service ratio. When estimating leverage, the Agency adjusts total debt by the amount of project finance debt secured by buyers’ escrow accounts (but not exceeding project debt). The Agency expects the ratio of net debt to FFO before net interest payments to fall below 3x in 2023. When estimating the debt service ratio, ACRA includes interest payments on project debt in prime costs. The Agency expects the ratio of FFO before net interest payments to net interest payments adjusted for project debt interest payments to exceed 11x in 2023.
Strong liquidity and medium cash flow assessment. The Company’s liquidity assessment takes into account the expected positive adjusted FCF of the Company in 2023–2025, a sufficient amount of cash held in the Company’s accounts and undrawn credit lines, including for potential early redemption of the Company’s bonds. To assess the FCF margin of construction companies, ACRA adjusts free cash flow by the amount of expenses funded through project finance arrangements. Significant investments in the replenishment of the land bank in 2021–2022 put pressure on the weighted average adjusted profitability of the Company’s FCF. At the same time, the Agency expects the indicator to turn positive in 2023.
key assumptions
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Adherence to construction and sales targets;
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ACRA’s estimates only include projects being constructed and planned in accordance with the Company’s current financial plan;
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No significant decline of prices in the primary real estate markets of the Company’s regions of presence in 2023–2025.
potential outlook or rating change factors
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Sustainable decline of the weighted average ratio of adjusted net debt to FFO before net interest payments below 1x and expansion of the Company’s current construction portfolio to 2 mln sq. m.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest payments to net interest payments declining below 8x;
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Growth of the weighted average ratio of adjusted net debt to FFO before net interest payments exceeding 3.5x;
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Decrease of residential real estate prices by more than 15% in the primary markets of the Company’s regions of presence in 2023–2025;
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Regulatory changes capable of having a material adverse effect on the Company’s performance.
rating components
Standalone creditworthiness assessment (SCA): a-.
Adjustments: none.
issue ratings
“Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9), maturity date: June 10, 2025, issue volume:
RUB 5.25 bln — A-(RU).
“Brusnika. Stroitelstvo i development” LLC (ISIN RU000A102Y58), maturity date: April 1, 2024, issue volume:
RUB 6 bln — A-(RU).
“Brusnika. Stroitelstvo i development” LLC (ISIN RU000A101HU5), maturity date: March 9, 2023, issue volume:
RUB 4 bln — A-(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 them as equal 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 unsecured debt belongs to category I, therefore the credit ratings of the issues are equivalent to that of the Company, i.e. A-(RU).
regulatory disclosure
The credit ratings of “Brusnika. Stroitelstvo i development” LLC and the bonds of “Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9, RU000A102Y58, RU000A101HU5) 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 the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of “Brusnika. Stroitelstvo i development” LLC and the bonds of “Brusnika. Stroitelstvo i development” LLC (ISIN RU000A1048A9, RU000A102Y58, RU000A101HU5) were published by ACRA for the first time on March 3, 2020, December 14, 2021, April 5, 2021, and March 12, 2020, respectively. The credit rating of “Brusnika. Stroitelstvo i development” LLC and its outlook, as well as the credit ratings of the bonds of “Brusnika. Stroitelstvo i development” LLC, are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by “Brusnika. Stroitelstvo i development” LLC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and “Brusnika. Stroitelstvo i development” LLC 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 “Brusnika. Stroitelstvo i development” LLC. No conflicts of interest were discovered in the course of credit rating assignment.