The credit rating of Setl Group, Ltd (hereinafter, the Company, Setl Group) has been affirmed to reflect the Company’s persistently very low leverage, very high coverage, strong liquidity, and high profitability. The medium cash flow — FCF margin — constrains the general assessment of financial factors. The operating risk profile is based on the strong market position and strong business profile. The corporate governance is assessed as medium, while geographic diversification is strong.
Setl Group is the largest residential real estate developer in the north-west of Russia. In 2023, the Company commissioned projects with a total floor space of 1.4 mln sq. m. According to the Unified Developer Resource as of May 1, 2024, the total floor space of apartments in the portfolio of projects under construction amounted to 1.4 mln sq. m.
Key assessment factors
Very high industry risk. According to the Agency’s methodology, the very high risk inherent to the housing construction industry is a strong deterrent to the Company’s credit rating.
Strong market position and business profile. The Company is the leader among St. Petersburg developers in terms of floor space commissioned in 2023 (according to the Unified Developer Resource, the Company’s share in the market of St. Petersburg is 21.7%). Setl Group is the fifth-largest Russian developer in terms of floor space commissioned in 2023 and it was among the top eight in terms of the volume of construction in progress at the beginning of May 2024. The Company sells the entire volume of floor spaces through its own channel, exclusive broker PDC “Petersburg Real Estate”. This competitive advantage allows the Company to consolidate the housing market data in its key region of presence timely and efficiently (the share of St. Petersburg in the Company’s land bank is over 90%).
By the end of Q1 2024, the Company’s portfolio included 17 projects under construction (mainly of the “comfort” and “high comfort” classes). The terms and conditions for the implementation of the projects are stable; the Company does not have its own production facilities.
Large business size and high profitability. In 2023, the Company’s revenue amounted to RUB 153.6 bln and FFO before net interest and taxes — to RUB 38.4 bln (annual growth by 2.5% and 12.4%, respectively). The weighted average FFO before net interest and taxes for the period from 2021 to 2026 is RUB 42.6 bln, and the volume of the portfolio of projects under construction was 1.4 mln sq. m as of May 1, 2024, which, according to the Agency’s methodology, is an indication of a large business size.
The last year’s sales growth was mainly due to hyped sales in the period from August to December 2023 against the background of the key rate hikes and tightening mortgage conditions (including an increase in the down payment, a decrease in the maximum amount of preferential mortgage loans for St. Petersburg, and an increase in interest rates). In 2023, the average selling price of apartments in the Company’s projects exceeded the indicator of 2022 by 2.3% in all regions of presence.
The FFO before net interest and taxes margin grew by 25% by the end of 2023. The weighted average margin for 2021–2026 indicates a very high profitability of the Company.
Very low leverage and very high interest coverage. The Company’s credit portfolio is well-diversified. In its calculation of the ratio of net debt to FFO before net interest, ACRA has adjusted the Company’s total debt for project finance borrowings secured by homebuyers’ escrow accounts. Subject to this adjustment, the ratio of net debt to FFO before net interest amounted to about 1.0x in 2023. The Agency expects that in the forecast period of 2024–2026, this ratio will not exceed the current level. The weighted average (2021–2026) ratio of total debt to capital is 0.4x.
When assessing the coverage, the Agency takes into account interest payments on the general corporate debt, while project finance interest payments are included in prime costs. By the end of 2023, the ratio of FFO before net interest to net interest amounted to 4.5x (vs. 8.9x in 2022), and the weighted average ratio for the period from 2021 to 2026 indicates a very high coverage of the Company’s debt.
Strong liquidity and medium cash flow assessment. Strong assessment of the Company’s liquidity is due to the presence of significant amounts of undrawn loans and a fairly comfortable repayment schedule for the corporate debt. The FCF margin for 2023 is negative due to, among other things, dividend payments. The FCF margin for the forecast period of 2024 to 2026, in the Agency’s opinion, may enter a positive area as funds held in escrow accounts are disbursed to the Company. ACRA believes that the payment of dividends amid a very low leverage, very high coverage and strong liquidity does not worsen the credit quality of the Company, and therefore the Agency assesses its cash flow as medium as per ACRA’s methodology.
Medium level of corporate governance. The corporate strategy allows the Company to maintain its competitive advantages and market share. The Company prepares and discloses semi-annual IFRS financial statements. In ACRA’s opinion, the existing components of the risk management system allow for controlling all key risks facing the Company. This year, a dividend policy was approved to formalize the main principles of dividend payments that were already applied in recent years. The Agency is positive about the Company’s efforts to improve the corporate governance practices by adopting certain documents (regardless the non-public form of incorporation).
Key assumptions
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Project completion and sales as planned.
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ACRA’s estimates include only projects under construction and projects expected to be completed in accordance with the Company’s current financial plans.
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Dividend payments in the forecast period in line with the Company’s financial model.
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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The weighted average FCF margin exceeding 10%;
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The corporate governance assessment reaching the highest level.
A negative rating action may be prompted by:
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Worse score for the following business profile sub-factors: Project Diversification and/or Sales Terms and Conditions;
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Weighted average FFO before net interest and taxes falling below RUB 30 bln;
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Weighted average FFO before net interest and taxes margin falling below 12%;
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Weighted average ratio of net debt to FFO before net interest exceeding 1.0x;
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Weighted average ratio of total debt to capital exceeding 2.0x;
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Weighted average ratio of FFO before net interest to net interest falling below 8.0x;
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Weighted average FCF margin falling below 2%;
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Much worse liquidity profile.
Rating components
Standalone creditworthiness assessment (SCA): a.
Support: none.
Issue ratings
Setl Group, Ltd (RU000A103WQ8), maturity date: April 18, 2025, issue volume: RUB 7.5 bln — A(RU).
Setl Group, Ltd (RU000A1053A9), maturity date: August 13, 2025, issue volume: RUB 10 bln — A(RU).
Setl Group, Ltd (RU000A105X64), maturity date: March 5, 2026, issue volume: RUB 5.5 bln — A(RU).
Setl Group, Ltd (RU000A1084B2), maturity date: March 14, 2027, issue volume: RUB 12 bln — A(RU).
Rationale. The issues represent senior unsecured debt instruments of Setl Group, Ltd. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the detailed approach is applicable. According to ACRA’s estimates, the unsecured debt recovery rate belongs to the first category. Therefore, the credit rating of the issues is equivalent to that of the Company, i.e. A(RU).
Regulatory disclosure
The credit ratings have been assigned to Setl Group, Ltd and the bond issues of Setl Group, Ltd (RU000A103WQ8, RU000A1053A9, RU000A105X64, RU000A1084B2) 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 Methodology for Assigning Credit Ratings to Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation was applied to assess the regions where the rated entity implements its construction projects (the sub-factor Presence in the Cities of Federal Importance).
The credit rating of Setl Group, Ltd and the credit ratings of the bond issues of Setl Group, Ltd (RU000A103WQ8, RU000A1053A9, RU000A105X64, RU000A1084B2) were published by ACRA for the first time on June 19, 2017, April 21, 2021, October 22, 2021, August 17, 2022, March 9, 2023, and March 29, 2024, respectively. The credit rating of Setl Group, Ltd and its outlook and the credit ratings of the bond issues of Setl Group, Ltd (RU000A103WQ8, RU000A1053A9, RU000A105X64, RU000A1084B2) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by Setl Group, Ltd, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and Setl Group, Ltd participated in their assignment.
In assigning the credit ratings, 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 ancillary services to Setl Group, Ltd. No conflicts of interest were identified in the course of credit rating assignment.
