ACRA affirms A+(RU) to LLC Lenta, outlook Stable, and A+(RU) to bond issue

The credit rating of LLC Lenta (hereinafter, Lenta, or the Company) stems from its strong operating profile, very strong corporate governance, high returns, medium leverage, and very strong liquidity. The rating is further supported by a significant share of own selling spaces in the total selling area of the Company, as well as its conservative financial policy.

Lenta is Russia’s third biggest retail chain and the largest hypermarket retail chain in terms of selling space (23% as of the end of 2018). As of end-July 2019, the chain comprises 246 hypermarkets and 131 supermarkets. The Company is present in 88 cities across Russia, including all cities with a million-plus population. As of end-July 2019, Lenta’s total selling space is around 1.47 million sq. m, and its staff includes over 45,800 employees. In June 2019, there were major changes in the Company’s shareholder structure: Severgroup LLC owned by A. Mordashov (beneficiary of PAO Severstal) acquired a 77.99% stake from the main shareholders — the TPG Group and EBRD — and minority shareholders. 21.04% of shares are traded on the stock exchanges in London and Moscow.

Key rating assessment factors

Strong operating profile is based on the low cyclicality of product demand (the Company sells mainly food and FMCG), high brand recognition and elaborate promotion policy: more than 97% of buyers (15.2 million cards as of the end-2018) use loyalty cards that monitor the dynamics of consumer preferences. Diversification of trade formats is assessed as medium since more than 88% of proceeds come from hypermarkets. One of the Company’s strong competitive advantages is that it owns 74.8% of its selling space (data as of the first half of 2019).

Very strong corporate governance is underpinned by a strong management structure of the Company. The Company’s management remained unchanged after the change of shareholders, and it is expected to maintain the management team. The Company accumulates substantial expertise in the relevant spheres, over 20 years on average. The result is a dynamic development of the retail chain. The Company’s board of directors is represented by nine members, three of whom are independent; the board of directors established audit, capital expenditure, nomination and remuneration committees. The new shareholders appointed four people to the board of directors, two board members are employees of the Company. The Agency notes that the Company’s development plans have been shelved considerably, however, a new strategy will be presented in the next two-three quarters. The risk management function is well-regulated to minimize all key types of risk, while the treasury policy is designed to maintain adequate liquidity, diversify funding sources and maintain enough safety cushion for bank covenants. The financial transparency of the Company is very high, and the structure of the Group is maximally simple, as LLC Lenta is a key operating asset and a property holder.

Medium leverage and low fixed charges coverage. ACRA positively assesses the financial policy of Lenta, which is designed to maintain adequate leverage and provides for no dividend payments. As of the end-2018, the total debt to FFO before net interest payments ratio was 3.2х, while the ratio of debt, adjusted for lease capitalization, to FFO before fixed charges was 4.0х. In the forecast period, the Agency expects that this ratio will be 2.3–3.4х amid a lower need in debt financing due to the slower growth pace of the chain. The fixed charges coverage ratio was 3.4x as of December 31, 2018, and is expected to amount to 2.8-6.1x in 2019-2021.

Very high liquidity rests upon substantial undrawn amounts under existing facilities (as of end-July 2019, over RUB 75 bln, or 46% of current liabilities) and the prevalence of long-term loans in the portfolio. According to ACRA estimates, the short-term liquidity ratio weighted for 2019–2021 amounts to 2.5х. The Agency points to the high diversification of lenders and the Company’s access to local and international capital markets.

Additional comfort factors are a high safety margin for covenants in loan agreements and a significant amount of unencumbered assets that can be used to attract funds in case of liquidity shortage.

High returns and large-sized business. The 2018 revenue amounted to RUB 413.5 bln without VAT (+13.2% against 2017). FFO before fixed charges and taxes reached RUB 42.8 bln (+6.6% against 2017). The FFO margin before net interest payments and taxes stood at 10.3% as of the end-2018. According to ACRA estimates, the current returns will remain unchanged over the forecast period, with a potential for a decline by no more than 0.5-1.0 pps in 2019–2021.

Key assumptions

  • The chain will reach 377 stores by the year-end with new stores expected to achieve target sales volumes within 24-36 months;
  • LFL sales of mature stores (over 30 months) to grow by 0.8-1.0% in 2019-2021;
  • Annual growth of main expenses in 2020-2021 in line with the inflation forecasted by ACRA (4.0–4.5%);
  • Retaining the current FFO before fixed charges and taxes margin at around 10%;
  • No dividend payments.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • An increase in FCF margin above 5%;
  • A decline in leverage: adjusted debt below 3.5х for FFO before fixed charges, or the FFO before fixed charges to fixed charges ratio above 2.5х.

A negative rating action may be prompted by:

  • FFO before fixed charges to fixed charges declining below 1.05x;
  • A drop in LFL sales by more than 20%, with sustained new store opening dynamics;
  • A materially deteriorating access to external liquidity sources;
  • Further tighter sector regulation capable of adversely affecting the Company’s financials.

Rating components

Standalone creditworthiness assessment (SCA): a+.

Adjustments: no.

Issue ratings

LLC Lenta BО-001Р-02 (RU000A100782), maturity date — March 14, 2029, issue volume — RUB 10 bln. — A+(RU).

Rationale. The bond issue represents senior unsecured debt of LLC Lenta. Due to the absence of either structural or contractual subordination of the issue, ACRA ranks it pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the reimbursement rate for unsecured debt relates to category II; therefore, the bond issue is rated A+(RU), i.e. on par with LLC Lenta.

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.  To assign a credit rating to the above bond issue, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings assigned to LLC Lenta and bonds (RU000A100782) issued by LLC Lenta were first published by ACRA on August 3, 2017, and March 27, 2019, respectively. The credit rating of LLC Lenta and its outlook and the credit rating assigned to the bonds (RU000A100782) issued by LLC Lenta are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are based on the data provided by LLC Lenta, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and LLC Lenta participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by LLC Lenta in its financial statements have been discovered.

ACRA provided no additional services to LLC Lenta. No conflicts of interest were discovered in the course of credit rating assignment.

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