The credit rating of Okhta Group LLC (hereinafter, Okhta Group, or the Company) is based on its very high business profitability, low leverage and strong liquidity, along with high geographic diversification due to the Company’s presence in Saint Petersburg. Besides this, the rating reflects the medium assessments of market position, business profile, and debt service. The rating is constrained by the very high risk of the residential construction industry, small size of business, and a low assessment of corporate governance.
Expected growth of in the volume of disclosure of escrow accounts in 2023–2025 may result in free cash flow (FCF) turning positive, and this served as grounds for changing the outlook from Stable to Positive.
Okhta Group is a residential and commercial real estate developer with a focus on Saint Petersburg. The Company is also carrying out a number of projects in Petrozavodsk. Okhta Group specializes in high-margin residential projects in all segments — from comfort class to elite low-rise housing complexes — and also redevelops industrial sites in order to construct commercial and office buildings and apartments. According to the Company, its current construction portfolio amounted to 109,000 sq. m of total floor space as of August 2023.
KEY ASSESSMENT FACTORS
Industry risk is assessed as very high due to the Company belonging to the residential construction sector, which is a strong constraining factor for its rating. ACRA assumes that the extension of the state-supported mortgage program until July 1, 2024, broadening of conditions for family mortgages, and maintaining joint subsidized programs will avoid a significant reduction in housing demand in the face of current geopolitical and macroeconomic uncertainties. At the same time, a decrease in the volume of commissioning of new projects may not fully offset the existing excess supply in the primary housing market, which leads to stagnation or even a decrease in prices.
The improvement of the business profile assessment is due to the final stage of sales of the third part of the Company’s largest project, the planned completion of the entire project in 2024, and the further reduction of its share in expected sales in 2023–2025. Taking this into account, the project diversification indicator has improved compared to last year’s assessment. The business profile assessment continues to be constrained by the very low assessment of the sub-factor of the Company’s dependence on materials and subcontracting: Okhta Group operates as a classic developer that mainly performs managerial functions. At the same time, the deadlines and conditions for implementation of the Company’s projects are stable and assessed as strong by the Agency.
Medium assessment of market position and low assessment of corporate governance. The Company’s share in the primary real estate market of Saint Petersburg and the Leningrad Region was around 1.2% in 2022, according to IFRS revenues. The business model involves carrying out the lion’s share of projects with co-investors, with Okhta Group holding minority stakes in projects and acting as a managing partner. Thanks to this, the Company broadens its investment opportunities, increasing both the number of projects and income generated by them from management fees. However, this complicates the analysis of the Company’s financial statements and structure, which constrains the assessment of quality of corporate governance.
Low leverage and medium debt service assessments. In its calculation of the ratio of net debt to FFO before interest and taxes, the Agency adjusted total debt by the amount raised as part of escrow-backed project finance and fully secured by buyers’ funds held in escrow accounts. According to ACRA’s calculations, the weighted average ratio of adjusted net debt to FFO before net interest payments for 2020–2025 is 2.5x. The Agency notes the Company’s rather balanced debt repayment schedule over the medium term. The weighted average ratio of total debt to equity is 0.6x, which, along with the abovementioned ratio of net debt to FFO before net interest payments, indicates low leverage. When assessing coverage indicators, ACRA considered interest payments on corporate debt as part of interest payments, while payments on project debt under escrow accounts were included in cost. The Agency estimates the weighted average ratio of FFO before net interest payments to net interest payments for 2020–2025 at 4.7x.
The strong liquidity assessment reflects the sufficient amount of both undrawn credit lines and free cash in the Company’s accounts and a balanced schedule for repayment of corporate debt in 2023–2025.
Very weak assessment of cash flow. The Agency assesses the weighted average FCF margin (adjusted for project debt transactions under escrow) for 2020 to 2025 at -0.7%. At the same time, according to ACRA’s forecast, Okhta Group may achieve positive FCF as soon as 2023. The stabilization of this indicator above zero may lead to an improvement of the assessment of this factor, which is reflected in the Positive outlook for the Company’s credit rating.
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 real estate prices in the primary market of Saint Petersburg 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:
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FCF margin turning positive and remaining at this level;
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Weighted average ratio of adjusted net debt to FFO before net interest payments falling below 1.0х;
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Weighted average ratio of FFO before net interest payments to net interest payments growing above 5.0х.
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 2.5х and weighted average ratio of adjusted net debt to FFO before net interest payments exceeding 3.5х;
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Prices in the primary real estate market of Saint Petersburg declining by more than 15% in 2023–2025;
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Regulatory changes that entail potential material adverse effects on the Company’s performance.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb.
Adjustments: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to Okhta Group LLC 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 Okhta Group LLC was published by ACRA for the first time on September 17, 2021. 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 Okhta Group LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Okhta Group LLC 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 Okhta Group LLC. No conflicts of interest were discovered in the course of credit rating assignment.
