The credit rating of J-S.C. “PIONEER GROUP” (hereinafter, Pioneer Group, the Company, or the Group) is based on the strong assessment of operational risk profile, low leverage, very high profitability and coverage indicators, and strong assessments of liquidity and cash flow. The rating continues to be limited by the very high industry risk and medium assessments of the Company’s market position and business size. The change in the credit rating outlook to Negative is due to the risk of the Company’s failure to fulfill plans to reduce leverage against the backdrop of its growth in 2022.
Pioneer Group has operated in the real estate market since 2001, and is a leading developer in Moscow. The Company is focused on the construction of comfort, business and premium class residential buildings, as well as commercial real estate properties. The Group is one of the leaders of the market in terms of sales of office real estate. As of the end of September 2023, the total floor area of projects at construction and design stages in the Company’s portfolio was 736,000 sq. m and 1.003 mln sq. m, respectively.
KEY ASSESSMENT FACTORS
Industry risk is assessed as very high due to the pronounced cyclical nature of the sector, high amount of overdue debt, and substantial number of developers that have defaulted in the last five years. The industry the Company belongs to is a strong factor limiting the credit rating.
Projected performance in 2023. Last year, the Group’s financial metrics declined due to both low sales volumes amid unfavorable market conditions and the low level of readiness of projects for sale. However, Pioneer Group’s results for 9M 2023 show that the volume of sales in monetary terms has recovered to the level that was achieved over the same period in 2021. The Agency notes gradual growth in sales prices for the Company’s commercial real estate. This is largely due to an increase in the share of premium segment projects in the Group’s total revenues (thanks to new projects entering the sales stage at the end of 2022), as well as growth in the average percentage of readiness of projects. This year, ACRA expects the Company’s revenues to grow by more than 60% vs. 2022, taking into account stable demand in the real estate market in H1 2023 and a surge in demand in Q3, a significant increase in the volume of commercial real estate sales, as well as growth in the average percentage of readiness of projects.
ACRA positively assesses the Company’s considerable replenishment of its land bank in 2021 and 2022, which allows it to increase its portfolio of ongoing construction to more than 1 mln sq. m in a short timeframe and materially increase sales and revenues in 2024–2026.
Low leverage and very high coverage indicators. In 2022, the ratio of adjusted net debt to FFO before net interest payments exceeded the comfortable value. Despite the Group’s lower financial results in 2022, the Agency expects that Pioneer Group will be able to return to low leverage in the future. According to ACRA’s calculations, the weighted average ratio of adjusted net debt to FFO before net interest payments for 2021–2026 will be 1.7x. The weighted average ratio of total debt to capital is estimated at 0.9x, which, when coupled with the above ratio of adjusted net debt to FFO before net interest payments, indicates low leverage. ACRA estimates the weighted average ratio of FFO before net interest to net interest for 2021–2026 at 11.6x due to a fall in general corporate debt.
The strong liquidity assessment reflects positive free cash flow expected for the Company in 2023 and 2025–2026 (taking into account adjustments for expenses under projects backed by escrow accounts), a comfortable debt repayment schedule, and the ability to borrow from external sources, including in view of the presence of an unencumbered portfolio of commercial real estate.
KEY ASSUMPTIONS
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Implementation of the construction and sales plans;
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ACRA only took into account projects under construction and projects that are expected to be commissioned in accordance with the Company’s current financial plan;
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No significant fall in prices in Moscow’s primary real estate market in 2024–2026.
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:
- Stronger market positions of the Company, simultaneous growth in the current construction project portfolio above 1 mln sq. m, and weighted average FFO before net interest payments and taxes exceeding RUB 30 bln.
A negative rating action may be prompted by:
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The weighted average ratio of FFO before net interest payments to net interest payments falling below 8.0x;
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The average weighted ratio of adjusted net debt to FFO before net interest exceeding 2.0x;
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Prices in Moscow’s residential real estate market declining by over 15% in 2024–2026;
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Regulatory changes that may impair the Company’s financial metrics.
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 J-S.C. “PIONEER GROUP” 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 J-S.C. “PIONEER GROUP” was published by ACRA for the first time on November 25, 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 J-S.C. “PIONEER GROUP”, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and J-S.C. “PIONEER GROUP” 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 J-S.C. “PIONEER GROUP”. No conflicts of interest were discovered in the course of credit rating assignment.
