The credit rating of “Garant-Invest Commercial Real Estate” JSC (hereinafter, Garant-Invest, or the Company) has been downgraded due to certain financial metrics of the Company being out of line with the Agency’s initial forecast. Contrary to ACRA’s expectations, the value of the weighted average ratio of net operating income (NOI) to payments, calculated according to ACRA’s methodology, excluding interest received from loans issued, remains no higher than 1.0x against the backdrop of the Company’s high leverage. Garant-Invest’s credit rating is otherwise characterized by high profitability, medium liquidity, a medium market position coupled with a strong business profile, and very strong geographic diversification.
The Company is the main business asset of 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. As of December 31, 2022, the Company owned 16 properties, including 13 functioning shopping centers (Galereya Aeroport shopping center, Moskvoreche shopping center, Retail Park shopping center, PEROVO MALL shopping and entertainment complex, Tulsky retail and business complex, Kolomensky shopping center, Prazhsky Grad shopping and restaurant center, the Small shopping center chain), and WESTMALL multifunctional complex.
KEY ASSESSMENT FACTORS
High profitability and smaller than average business size. NOI amounted to RUB 2.4 bln for 2022 (+6% compared to the year before), and may grow to RUB 2.7 bln by the end of 2023. The weighted average profitability indicator for 2020–2025 (NOI per square meter of leasable area) was RUB 29,000, while the weighted capitalization rate was 8.6%, which indicates that the Company has high profitability.
High leverage and low coverage. Weighted average total debt/NOI over the 2020–2025 horizon is assessed at 9.9x. The weighted average ratio of NOI to payments for 2020–2025 (excluding interest received from loans issued and including interest expenses and part of amortization payments on the nominal part of the debt for the shopping centers, taking into account the refinancing of loans) calculated according to the Agency’s methodology is assessed at 0.98x, which indicates low payment coverage.
In October 2021, Garant-Invest entered into an agreement with Promsvyazbank PJSC (ACRA rating AA+(RU), outlook Stable) which envisages provision of financing for 80% of the expenses for building WESTMALL multifunctional complex. As the conditions of the deal announced by the Company do not involve it providing guarantees, ACRA did not take this debt into account when calculating leverage and, when calculating the FCF margin, excluded construction expenses made using borrowed funds.
The Agency notes that the Company plans to carry out a new project which is comparable in scale to the WESTMALL multifunctional complex, which is currently in the final stage. The new project will require additional financing. ACRA has not factored the implementation of the new project into the forecast horizons and has not assessed its impact on the assessment of the group of financial factors.
Medium liquidity and low cash flow. The weighted average FCF margin for 2020–2025 is low due to a high share of capital expenditures in revenues. Liquidity is assessed as medium due to significant debt repayments scheduled for 2023–2025, while the Agency positively assesses the availability of free credit limits and the potential possibility of debt refinancing.
Strong business profile and medium corporate governance. There have been no significant changes in the business profile and corporate governance since the revision of the Company’s credit rating in January 2023. The shopping centers that generate the highest revenues — Galereya Aeroport shopping center and Moskvoreche shopping center — each account for around 25% of the Company’s total revenues. Tenants are sufficiently diversified and are mainly represented by popular mid-range brands. 51 new tenants opened in 2022 and signed contracts with the Company. The average floor space occupancy at the end of 2022 was over 95%.
The Company compiles annual and interim IFRS consolidated financial statements and publishes financial and operating indicators. ACRA takes into account the presence of key governance bodies (board of directors including independent directors and committees). However, the heightened interest risk for floating-rate bank loans and the presence of transactions with related parties and non-related parties limit the assessment of corporate governance factors.
KEY ASSUMPTIONS
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NOI growing by 17% in 2023 and by 6–7% in 2024–2025;
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Maintaining high floor space occupancy in the Company’s shopping centers in 2023–2025;
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Exclusion of the loan from Promsvyazbank PJSC to build WESTMALL multifunctional complex from the leverage calculation;
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Average annual key rate of the Bank of Russia at 7.3% in 2023, 6.9% in 2024, and 6.6% in 2025;
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Capital expenditures in 2023–2025 according to the provided financial model;
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No dividend payments in the forecast period;
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No new projects in the forecast period.
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 NOI exceeding RUB 5 bln;
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Weighted average capitalization rate exceeding 12%;
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Weighted average ratio of total debt to NOI declining below 8.0х;
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Weighted average LTV (by total debt) declining below 60%;
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Weighted average ratio of NOI to payments calculated as per ACRA’s methodology for 2020–2025 sustainably higher than 1.0х;
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Positive weighted FCF margin.
A negative rating action may be prompted by:
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Significant decline in NOI in the forecast period;
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Weighted average ratio of NOI to payments calculated as per ACRA’s methodology for 2020–2025 declining below 1.0х;
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Weighted average ratio of total debt to NOI exceeding 12.0х;
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Negative impact of new project conditions on the projected financial performance of the Company;
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Significant changes in the macroeconomic environment that are able to significantly impair the Company’s performance;
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Worse access to existing sources of liquidity.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb+.
Support: 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, 002Р-02 series (RU000A102LS9), maturity date: December 25, 2023, issue volume: RUB 500 mln — BB(RU).
“Garant-Invest Commercial Real Estate” JSC, 002Р-03 (RU000A102X18), maturity date: March 26, 2024, issue volume: RUB 1.5 bln — BB(RU).
“Garant-Invest Commercial Real Estate” JSC, 002Р-04 (RU000A103WX4), maturity date: May 26, 2023, issue volume: RUB 1.2 bln — BB(RU).
“Garant-Invest Commercial Real Estate” JSC, 002Р-05 (RU000A105GV6), maturity date: November 18, 2025, issue volume: RUB 1.5 bln — BB(RU).
key issue properties (RU000A106862)
Borrower |
“Garant-Invest Commercial Real Estate” JSC |
Issuer’s credit rating |
BB+(RU), outlook Stable |
Actual issuer |
“Garant-Invest Commercial Real Estate” JSC |
Type of security |
Uncertificated exchange-traded interest-bearing non-convertible bond, subject to centralized title registration, series 002Р-06 |
Issue volume |
RUB 2 bln |
Registration number |
4B02-06-71794-H-002P |
ISIN |
RU000A106862 |
Issue date |
May 16, 2023 |
Maturity date |
May 5, 2025 |
Sources: ACRA, issuer’s data
Rationale. The above issues represent senior unsecured debt of “Garant-Invest Commercial Real Estate” JSC. Due to the absence of contractual subordination of the issues, ACRA regards these issues as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to the Agency’s methodology, the detailed approach is applied. According to ACRA’s estimates, the loss recovery 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 “Garant-Invest Commercial Real Estate” JSC.
REGULATORY DISCLOSURE
The credit ratings of “Garant-Invest Commercial Real Estate” JSC and the bond issues of “Garant-Invest Commercial Real Estate” JSC (RU000A1005T9, RU000A102LS9, RU000A102X18, RU000A103WX4, RU000A105GV6, RU000A106862) 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 bonds issued by “Garant-Invest Commercial Real Estate” JSC.
The credit ratings of “Garant-Invest Commercial Real Estate” JSC and the bond issues (RU000A1005T9, RU000A102LS9, RU000A102X18, RU000A103WX4, RU000A105GV6) of “Garant-Invest Commercial Real Estate” JSC were published by ACRA for the first time on December 26, 2018, March 12, 2019, December 29, 2020, April 5, 2021, October 25, 2021, and November 23, 2022, respectively. A credit rating has been assigned to the bond issue (RU000A106862) for the first time. The credit rating of “Garant-Invest Commercial Real Estate” JSC and its outlook and the credit ratings of the bond issues of “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 data provided by “Garant-Invest Commercial Real Estate” JSC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and “Garant-Invest Commercial Real Estate” JSC 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 additional services to “Garant-Invest Commercial Real Estate” JSC. No conflicts of interest were discovered in the course of credit rating assignment.