ACRA downgrades JSC «Laut» to B+(RU), with the status “Rating under revision: developing”

The credit rating of JSC «Laut» (hereinafter, the Company) has been downgraded due to a fall in the Company’s operating income and, as a result, its cash flows due to the restrictions imposed on shopping centers in response to the COVID-19 coronavirus pandemic. The “Rating under revision: developing” status indicates ACRA’s opinion regarding the possibility the Company’s financial indicators changing amid the current macroeconomic uncertainty, and also the significant influence on creditworthiness from expected support provided by the shareholder.

The rating takes into account the Company’s high leverage, very low interest payment coverage, and weak liquidity. The rating continues to be supported by the Company’s strong business profile and the expectation that the shareholder will provide liquidity.

The Company owns and operates the Salaris shopping center, whose gross building area (GBA) covers 308,000 square meters, with 105,000 square meters of gross leasable area (GLA). The Company is part of the Plaza B. V. group (hereinafter, the Group), which operates and manages commercial real estate. The Group is also involved in investment activities and development. The Group’s projects include the Salaris shopping center, the Paveletskaya Plaza shopping center, and IFC Columbus.

Key rating assessment factors

Fall in expected operating income in 2020. The Company’s net operating income (NOI) is expected to fall considerably compared to the pre-crisis scenario in connection with the restrictive measures that have been imposed in the fight against COVID-19. ACRA’s calculations are based on the assumption that the aforementioned measures will be in place until the end of May 2020, and that the Company’s operating indicators will be effected by the requirements introduced by Directive No. 439 of the Russian Government dated April 3, 2020 “On establishing requirements with regard to the conditions and periods for deferral of rent payments under real estate lease agreements”. According to this document, tenants are able to defer 100% of rent payments during the period the restrictions are in place, and 50% of payments starting from the date the measures are terminated until October 1, 2020. These conditions do not apply to the part of rent payments that is tied to turnover. Revenue is expected to gradually recover starting from the third quarter of 2020, but the Company should only start achieving its target indicators when the rent deferral requirements expire in October 2020.

Leverage and debt service indicators are expected to grow due to the fall in NOI. The Company’s weighted average total debt to NOI ratio should amount to 16.9x for 2020–2022. The weighted average NOI to payments ratio should amount to 0.8x for 2020–2022. By 2022, ACRA expects the leverage indicators to decrease and payment coverage to improve to 7.2x and 1.8x, respectively. Several factors have a positive impact on the Company’s short-term financial sustainability: the absence of scheduled debt repayments in 2020; the rescheduling of interest payments for the first two quarters of 2020 to the end of the third quarter this year, and an anticipated provision of liquidity by the shareholder.

Key assumptions

  • NOI for 2020 falling by 50% compared to the pre-crisis scenario;
  • The shareholder providing RUB 1.7 bln in liquidity in 2020;
  • Growth in rental rates by 15% in 2021 and 2022 and by 5% annually in subsequent years;
  • Return to the pre-crisis (very high) utilization rate in 2021–2022.

Potential outlook or rating change factors

The “Rating under revision: developing” status assumes that the rating may be changed within the next 90 days.

Removal of the “Rating under revision: developing” status and affirmation or upgrade of the credit rating may be prompted by:

  • Timely provision of funds by the shareholder;
  • Recovery of pre-crisis NOI indicators.

Removal of the “Rating under revision: developing” status as well as downgrade of the credit rating may be prompted by:

  • The shareholder’s late provision of funds needed to service interest payments in September 2020;
  • Extension of the quarantine and continued limitations on shopping centers after June 2020
  • Significant worsening of the macroeconomic situation in Russia and critical worsening of the population’s purchasing power;
  • Deterioration of the Company’s liquidity indicators and difficulty in servicing debt obligations.

Rating components

SCA: b+.

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 JSC «Laut» was published by ACRA for the first time on February 4, 2020. The credit rating and its outlook are expected to be revised within 90 days following the publication date of this press release.

The credit rating was assigned based on the data provided by JSC «Laut», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC «Laut» participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by JSC «Laut» in its financial statements have been discovered.

ACRA provided no additional services to JSC «Laut». No conflicts of interest were discovered in the course of credit rating assignment.

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