The credit rating of JSC “Laut” (hereinafter, Laut, or the Company) has been upgraded in view of the improvement of the Company’s profitability metrics due to the growth of its net operating income (NOI) in 2022. The rating is otherwise characterized by a strong business profile and the Company’s strong market position in its segment and location, a strong cash flow, medium leverage, and weak liquidity. The rating is limited by the high industry risk inherent to commercial real estate companies and poorly developed corporate governance.
The Agency expects payment coverage to improve due to anticipated growth in NOI over the forecast period on the condition that there are no new borrowings and the Company continues to make debt repayments as scheduled. This in turn may result in the Company’s credit rating being upgraded, which is reflected in the rating outlook that continues to be Positive.
Laut owns and operates the Salaris shopping center, whose gross building area covers 310,000 square meters, with 105,000 square meters of gross leasable area. The shopping center is managed by Mall Management Group.
KEY ASSESSMENT FACTORS
Strong business profile. Laut owns one property, Salaris shopping center, which has a highly diversified pool of tenants. The Company has successfully replaced international brands that either left the Russian market or suspended their operations in spring 2022. As of the end of May 2023, occupancy of floor area was 98%, while the traffic and turnover of the shopping center are growing.
Very high profitability and medium size of business. The suspension of activities by certain international brands at the beginning of last year did not have a negative impact on Laut’s financial results in 2022. The Company’s NOI was higher than the Agency expected in 2022 and amounted to RUB 2 bln (30% growth vs. the year before). NOI weighted for 2020–2025 is RUB 2.1 bln. The increase in lease income resulted in the Company’s profitability metrics improving to a very high level — weighted average NOI per square meter of leasable area exceeds 20,000 rubles, while the weighted capitalization rate on the horizon of 2020–2025 is 12.1%.
Medium leverage and low coverage. The Company’s debt includes a ruble-denominated non-revolving credit line with a floating interest rate. In March 2023, Laut successfully repaid the expected quarterly payments on the principal of debt and interest according to the schedule, and also made debt payments that were postponed from 2022 to 2023 due to the geopolitical situation.
At the end of 2022, the total debt to NOI ratio was 8.3x and LTV (loan-to-value) was 98%. ACRA expects the total debt to NOI ratio to be 6.7x at the end of 2023, followed by it possibly declining to 5.0–5.8x in 2024–2025. The NOI to payments ratio (including the principal and interest) was 1.2x in 2022. The weighted average indicator for 2020–2025 remains below the boundary level of 1.0x, but ACRA expects it to grow in the forecast period, which may result in an improvement in the coverage factor assessment.
Weak liquidity and strong cash flow. The Company’s liquidity is assessed as medium (the short-term liquidity ratio is 1.2), but the Agency notes that only bank financing is available. The absence of dividend payments and the low level of capital expenditures have a positive influence on the Company’s free cash flow (FCF): the weighted average FCF margin for 2020–2025 is assessed as high and stands at 13.5%.
Low corporate governance. ACRA notes the successful and consistent implementation of the Company’s development strategy. At the same time, the absence of IFRS reporting (the Company compiles RAS reporting), weak governance structure, heightened interest risk, as well as the presence of related party transactions, continue to limit the assessment of Laut’s corporate governance.
KEY ASSUMPTIONS
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No proceeds from the return of issued loans;
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Capital expenditures as per the presented financial model;
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No additional borrowing or dividend payments in the forecast period;
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Very high occupancy of floor space maintained in 2023–2025.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Weighted average ratio of NOI to payments exceeding 1.0x.
A negative rating action may be prompted by:
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Considerable decline in occupancy of floor space;
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Considerable decline of NOI over the forecast period;
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Weighted average capitalization rate falling below 12%;
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Weighted average ratio of total debt to NOI growing above 8.0x;
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Weighted average FCF margin falling below 10%;
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Worsened liquidity assessment;
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Material change to macroeconomic conditions that is capable of having a significant negative impact on the Company’s metrics.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb+.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned to JSC “Laut” 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 credit rating of JSC “Laut” was published by ACRA for the first time on February 4, 2020. 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 data provided by JSC “Laut”, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and JSC “Laut” participated in its assignment.
In assigning the credit rating, 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 JSC “Laut”. No conflicts of interest were discovered in the course of credit rating assignment.
