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ACRA assigns BBB+(RU) to "Group of Companies FSK" LLC, outlook Stable

The credit rating assigned to "Group of Companies FSK" LLC (hereinafter, the Company, Group, FSK) is based on its strong market position, very strong business profile and geographic diversification assessments, high profitability, low leverage and very high debt coverage, strong liquidity and strong cash flow. At the same time, the Company’s credit rating is limited mainly by a very high industry risk.

"Group of Companies FSK" LLC is one of the largest players in the residential real estate market in the Moscow Region and Russia as a whole (it ranked 4th in terms of projects completed in 2018, according to data of the Unified Register of Developers).

Key rating assessment factors

Industry risk is assessed as very high due to a pronounced cyclical nature of the sector, high amount of overdue debt, and substantial number of defaulted companies in the last five years. The industry the Company belongs to is a very strong factor limiting its credit rating.

Very strong business profile and geographic diversification. The Company’s very strong business profile is due to the high diversification of its project portfolio (mass segment accounts for 73% of the total usable area in the structure of the Company’s own construction projects, while business class accounts for 27%; additionally, nearly half of the revenue stems from external construction services and general contracting), the stable structure of terms and conditions of project implementation, as well as a very high level of self-sufficiency in its own materials (JSC "DSK-1": production capacity of panels and reinforced concrete products is one million square meters per year; CJSC Partner Trade House: production capacity of ready-mixed concrete is 1.5 million cubic meters per year), the large share of construction works performed without involving contractors (when making its analysis, ACRA considered the planned consolidation of JSC "MSU-1" in 2019). The Company participates in the renovation program, as part of which the expected total construction volume under current contracts will amount to 429,000 square meters (RUB 36.8 bln). The total portfolio of external contracts is currently estimated at RUB 93.7 bln (including the renovation program). The Company’s project portfolio is highly diversified geographically: Moscow accounted for 27% of sales in 2018, the Moscow Region for 52%, St. Petersburg for 18%, and Kaluga for 3% (by usable area).

Since 2018, the Company has been implementing procedures to improve the standards of corporate governance and financial transparency, including optimization of operations with affiliated parties. It is planned to novate most of the loans from affiliated parties into shareholder debt on preferential terms (the rate of 3%, repayment not earlier than by the end of 2029, subordination of shareholder debt to other liabilities of the Group) by the end of Q1, 2020. As a result, the share of debt to affiliated parties will decline to 5% of the Company’s total debt. FSK provided the Agency with sufficient information about the financial status of affiliated companies and the nature of operations with them, as well as the planned schedule of novation of debt to affiliated parties into shareholder debt.

Very high debt coverage and low leverage. When calculating the net debt to FFO before interest and taxes ratio, ACRA adjusts the total debt for the amount of debt raised as part of project finance using escrow accounts and fully covered by client funds available on escrow accounts. ACRA considered plans for the novation of debt to affiliated parties into shareholder loans. Taking into account the adjustment, the weighted average ratio of net debt to FFO before net interest payments for 2017–2021 is estimated at 1.5x considering shareholder debt and 0.5x excluding shareholder debt. The Agency expects the weighted average ratio of FFO before net interest payments to net interest payments for 2017–2021 to be 12.1x.

Key assumptions

  • The planned construction and sales rates;
  • The implementation of plans for the novation of loans from affiliated parties into shareholder debt;
  • ACRA took into account only projects under construction and projects expected to be completed in accordance with the financial plan of the Company;
  • Residential housing prices in the primary market of the Moscow Region remain unchanged in 2020–2021;
  • No dividend payments in the forecast period;
  • Consolidation of JSC "MSU-1" in 2019.

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:

  • The improvement of corporate governance and concurrent growth of the weighted average FCF margin above 5%, as well as the weighted average FFO margin before net interest  payments and taxes above 20%.

A negative rating action may be prompted by:

  • A decrease of FCF margin below 2%;
  • A decline in the ratio of FFO before net interest payments to net interest payments below 8x;
  • Non-fulfillment of plans for debt novation;
  • Residential housing prices in the primary market of the Moscow Region going down by more than 10% in 2020–2021;
  • Regulatory changes with potential material adverse effects on the Company’s performance.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was assigned to "Group of Companies FSK" LLC 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.

A credit rating has been assigned to "Group of Companies FSK" LLC for the first time. 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 "Group of Companies FSK" LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and "Group of Companies FSK" LLC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by "Group of Companies FSK" LLC in its financial statements were discovered.

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

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