The credit rating of G-Group JSC (hereinafter, the Company, the Group, or G-Group) has been upgraded due to a significant improvement in the geographic diversification assessment and better assessments of business profile and leverage. The credit rating is based on the Company’s strong market position and operating risk profile, high profitability, strong liquidity, very low leverage, and high debt coverage. At the same time, the rating is constrained by the very high industry risk and medium assessments of the Company’s size and cash flow.
G-Group operates in the residential and commercial real estate sectors. The Company sells residential and non-residential properties (enjoying a leadership position in Kazan), constructs and leases retail and office properties, and cottages. Unistroy, G-Group’s brand, ranks 39th in Russia in terms of housing projects under construction (as of September 2023) and 34th in terms of housing projects completed in 2022.
key assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, high overdue debt, and substantial number of defaulted companies in the last five years. The Company’s industry is a very strong factor constraining its credit rating.
Performance in 2022 and 8M 2023. The Company’s sales declined to 92,600 sq. meters in 2022. At the same time, the Company has maintained the high marginality of its projects, sustainably demonstrating the high FFO before interest and taxes margin. The Company’s revenue grew by 3.8% to RUB 21.6 bln in 2022 vs 2021 due to the specifics of recognizing revenues in IFRS financial statements. Over January to August 2023, sales of the Company’s residential real estate increased significantly in physical terms (with most of this increase happening in Q3), while the average sale price continued to grow (over 8M 2023 this growth amounted to 7% compared to the average price in 2022.
Very strong business profile. The Project Diversification sub-factor assessment has been upgraded to reflect the increased number of projects and a moderate share of each. In six regions of presence, the Company currently has 16 projects. The high diversification of projects ensures balanced inflow of proceeds from the released escrow accounts and considerably reduces the dependence of financial results on the implementation of a specific project. ACRA continues to apply an additional adjustment for the share of commercial real estate, which is a less risky business segment compared to residential real estate and ensures stable rental flows, which are a stabilizer of the Company's credit metrics and an additional opportunity to receive long-term financing secured by construction projects.
Very strong assessment of geographical diversification. G-Group holds a leading position in terms of sales of residential real estate in the key region of its presence. According to the Company's estimates, its share in the primary residential real estate market of Kazan and the Kazan agglomeration amounted to 14.3% in the first eight months of 2023. G-Group intends to keep the Republic of Tatarstan as an anchor region, while actively entering five more Russian regions, increasing their share in the total sales structure; it also considers expansion into other four regions, which allows the Agency to view G-Group as a federal player in the residential real estate market. At the same time, the market share occupied by the Company in other regions of its presence (St. Petersburg, the Republic of Bashkortostan, Samara and Sverdlovsk Regions, Perm Krai) remains relatively low. According to ACRA’s methodology, a significant improvement in the assessment of the Presence in Federal Cities sub-factor occurred against the background of the implementation of two projects in St. Petersburg and the expected decline in the share of the largest region below 70% in the planned revenues of G-Group in the next three years. The Company's construction business in St. Petersburg is backed by a land bank large enough to use until 2035.
Very low leverage and high coverage. When calculating the ratio of net debt to FFO before interest and taxes, ACRA adjusts the total debt of the Company by the debt raised as part of project finance using escrow accounts and secured by funds deposited to escrow accounts by buyers. The weighted average ratio of net debt to FFO before net interest for 2020–2025 is estimated by the Agency at 0.9x, which is positive for the leverage assessment. The Company’s debt is entirely denominated in rubles and raised mostly at fixed interest rates. The repayment schedule is extremely comfortable. The lender structure is fairly diversified, which gives the Company additional flexibility in terms of financing conditions.
In assessing interest coverage, the Agency took into account the interest payments on general corporate debt, while interest payments on project financing were included in the prime costs. The weighted average ratio of FFO before net interest to net interest for 2020–2025 is estimated by ACRA at 7.6x, which indicates a large margin of safety to cover interest payments on the background of growing borrowing costs pushed up by the increased key rate of the Bank of Russia.
Medium cash flow assessment and strong liquidity. In the calculations of free cash flow (FCF), the Agency adjusts the operating cash flow for changes in project debt secured by escrow accounts and takes into account the payment of dividends as part of FCF. ACRA estimates the weighted average FCF margin for 2020–2025 at 3.4%. The strong liquidity assessment is based on the expected positive FCF due to the release of escrow accounts, the Company’s access to external financing sources, and the comfortable debt repayment schedule.
key assumptions
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Construction projects to be completed and sales targets to be met as planned.
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ACRA’s estimates include only projects under construction and projects to be commissioned in accordance with the Company’s current financial plan.
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No significant price drops in the primary real estate market in 2024–2025.
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:
- Better scores for group structure and financial transparency, increase in the volume of construction-in-progress above 1 mln sq. m, and weighted average ratio of FFO before net interest to net interest exceeding 8.0x.
A negative rating action may be prompted by:
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Ratio of weighted average ratio of adjusted net debt to FFO before net interest exceeding 1.0x;
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Weighted average ratio of FFO before net interest to interest declining below 5.0x;
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Prices in the primary residential real estate market falling by more than 15% in 2024–2025;
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Regulatory changes that may have a significant negative impact on the Company’s performance.
Rating components
Standalone creditworthiness assessment (SCA): a-.
Adjustments: none.
Issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating has been assigned to G-Group JSC 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 G-Group JSC was published by ACRA for the first time on October 2, 2019. 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 G-Group JSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and G-Group JSC 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 G-Group JSC. No conflicts of interest were discovered in the course of credit rating assignment.
