The credit rating of Level Group LLC (hereinafter, the Company, or Level Group) is based on the very high assessments of the Company’s profitability and coverage, very low leverage, and strong assessments of business profile, geographic diversification, management strategy, risk management system, liquidity, and cash flow. The rating is constrained by the very high industry risk (residential construction) and the medium assessment of the Company’s business size.
Level Group is a residential real estate developer. The Company implements development projects of premium, business and comfort classes in Moscow. The Company's land bank is about 2.4 mln sq. m of net sales area (NSA). In 9M 2023, Level Group was third by sales (in physical terms) in the territory of old Moscow.
KEY RATING ASSESSMENT FACTORS
The 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 very strong factor limiting the credit rating.
The Company’s performance in 9M 2023. In January–September 2023, the Company’s residential real estate sales in physical terms grew by 8%, while the sale price showed an increase of 14–27%, depending on the project and relative to prices at the end of 2022. The Agency believes that by the end of 2023, Level Group’s sales volumes will grow by more than 30% (to over 220,000 sq. m) due to increased demand since August against the background of multiple hikes of the key rate by the Bank of Russia and an increase in the minimum down payment on subsidized mortgages from 15% to 20%, which drove purchases before the new conditions come into force. In monetary terms, the Company’s sales will increase by 35–40% (to RUB 83–86 bln) relative to 2022, both due to market trends and due to the start of sales of new projects, Level Nizhegorodskaya and Level Baumanskaya, as well as the third stage of Level Michurinsky.
The high operational risk profile assessment is due to strong assessments of business profile, geographic diversification, management strategy, and risk management system, and the medium assessment of market position. The Company is a successful player in the moderately concentrated Moscow market of newly developed residential real estate with a share of about 5% of sales volume in monetary terms over 9M 2023. ACRA positively views locations of all current projects of the Company within the boundaries of old Moscow, which is the market considered by the Agency as the most capacious, sustainable, and marginal. The Company’s current project portfolio is well diversified by both the number of projects and their classes. The sales and construction timeline is still well-coordinated; which supports the business profile assessment. Level Group subcontracts up to 100% of the construction work, while the Company acts as a general engineering contractor and technical supervisor. In the Agency's opinion, the Company’s strategy allows it to maintain competitive advantages and keep financial risks low.
Medium size of business and very high profitability. The weighted average FFO before net interest and taxes for 2021–2026 is estimated at RUB 21.4 bln, which, according to the Agency’s methodology, corresponds to the medium score for the size of the business. ACRA notes the Company’s effective management of construction costs at each project stage, which allows it to maintain very high profitability. A qualitative analysis of the acquired project sites, high construction quality and the location of all projects within the boundaries of old Moscow also have a positive impact on the profitability of Level Group. The Agency estimates the Company’s weighted average FFO before net interest and taxes margin for 2021–2026 at 31.6%.
Very low leverage and very high coverage assessments. When calculating the ratio of net debt to FFO before interest and taxes, ACRA adjusted the total debt by the debt raised for projects backed by escrow accounts and fully secured by funds deposited to escrow accounts by buyers. The ratio of adjusted net debt (including shareholder debt) to FFO before net interest for 2022 amounted to 0.47x, while the weighted average ratio for 2021–2026 is estimated by the Agency at 0.5x. The weighted average ratio of total debt to equity is 0.4x, which, along with the above ratio of net debt to FFO before net interest, indicates a very low leverage of the Company. The ratio of FFO before net interest to net interest for 2022 is 16.0x, while the weighted average ratio for 2021 to 2026 is estimated by ACRA as 14.9x.
Strong liquidity and high cash flow assessments. The liquidity is assessed as strong because of a comfortable debt repayment schedule, expected proceeds from escrow accounts, and a large enough volume of committed but undrawn credit lines. ACRA expects the Company’s FCF margin to grow with the cash inflow from escrow accounts. In addition, ACRA is of the opinion that dividend payments on the background of very low leverage, very high coverage and strong liquidity does not impair the Company’s credit quality and therefore assesses the cash flow as high.
KEY ASSUMPTIONS
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The Company’s construction and sales plans being implemented on time.
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ACRA took into account only projects under construction and projects expected to be commissioned in accordance with the current financial plan of the Company.
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No significant price fall in the primary real estate market of Moscow in 2024–2026.
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Dividend payments at no more than 50% of net profits in 2024–2026.
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 FFO before net interest and taxes exceeding RUB 30 bln and a concurrent growth in the construction-in-progress portfolio to over 1 mln sq. m;
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Much stronger market positions of the Company.
A negative rating action may be prompted by:
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Weighted average FFO before net interest and taxes margin declining below 20% and weighted average ratio of FFO before net interest to net interest falling below 8.0x;
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Weighted FCF margin below 2% and weighted average ratio of adjusted net debt to FFO before net interest exceeding 1.0x;
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Prices in the residential real estate market of Moscow 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 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 Level Group LLC was published by ACRA for the first time on January 18, 2023. 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 the data provided by Level Group LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Level 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 Level Group LLC. No conflicts of interest were identified in the course of credit rating assignment.
