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Fitch Ratings assigned LSR Group (LSE: LSRG; MICEX, RTS: LSRG), a leading real estate developer and building materials producer in Russia, a ‘B+’ rating with outlook — Stable.
Moody’s Investors Service rating agency has confirmed the B1 rating with a stable outlook originally assigned in the summer of 2007. Both agencies made a mention of the potential for upgrading the company’s ratings.
In addition, Fitch has changed the long-term rating of St. Petersburg from ‘Stable’ to ‘Positive’ and confirmed the city’s long-term obligation rating at the BBB level.
Fitch Ratings has assigned OJSC LSR Group a corporate credit rating of ‘B+.’ The Outlook for the Long-term Issuer Default rating (IDR) is Stable.
According to Fitch’s analysts, such rating is supported by good operational diversification across the company’s business divisions — “Real Estate Development and Construction” and “Building Materials, Aggregates and Construction Services,” the presence of a large well diversified land bank, providing up to 20 years of development activity and financial flexibility to preserve operational cash flow by reducing land purchases in case of need. In addition, the agency analysts believe that the rating also reflects the leading market positions of LSR Group across both building materials and real estate development businesses, the advantages of vertical integration of the divisions and the strategy of boosting the company’s real estate development business focused on ‘build & sell’, which more rapidly cycles cash back into the business. Finally, it can be forecasted that the profit margin of the company will keep strengthening, driven by continuing under-supply of building materials in Northwest Russia and planned capital expenditure by LSR in this division.
Fitch has stated that the rating could be higher if LSR Group obtains the necessary financing to refinance its short-term debt and support the extensive investment expenditure over the next three years (LSR Group is implementing a vast investment programme aimed at constructing a brick plant and a cement plant as well as increasing its land bank and actively expanding into Russian regions). Fitch has also noted that the situation is likely to improve on a sustainable basis after new long-term debt facilities are put in place over FY08 and capital expenditure reduces from FY10 (once both the brick and the cement plants of LSR Group go operational). In addition, LSR does have flexibility to delay certain items of expenditure should financing not be available. With respect to potential risks, Fitch stresses the increase in the FY08 gross debt. According to the rating agency, certain geographic concentration of both business divisions in St. Petersburg and the Leningrad region presents constraints, as does general developer risk; while the Russian residential and commercial property markets remain strong, should there be any form of downturn, LSR could be left with a significant partially built development portfolio. However, Fitch stresses that this risk is common to most developers. Lastly, with around USD1.3bn to be spent on building materials capital expenditure over the next three years, there is execution risk stemming from potential delays in operational cash flow contributions but Fitch believes that this execution risk is mitigated by LSR’s experienced management team.
The stable outlook reflects the agency’s expectation that, whilst LSR faces challenges associated with accelerated capital expenditure and a need to refinance a sizeable amount of short-term debt, buoyant market conditions and an experienced management team should support the issuer’s growth plans in the next 24 months.
Commenting on the developments, Igor Levit, CEO and board member of LSR Group, has stated:
“We are pleased at a B+ rating with a stable outlook assigned to us by Fitch Ratings and the B1 rating with a stable outlook confirmed by Moody’s. While the credit ratings forecasts of a number of Russian real estate development companies tend to get lower, the fact that LSR Group has such high ratings assigned and confirmed is yet another proof of the company’s stable and steady performance as well as of the vertical integration advantages, the presence of a strong building materials business, the public openness and transparency of the company. I’m confident that we will successfully implement the extensive investment programme of LSR Group ensuring the company’s dynamic growth for the benefit of its shareholders.”
Notes to Editors:
OJSC LSR Group is a diversified construction company founded in 1993 and operating in a number of complementary market segments. Its core business areas are building materials, construction and real estate development. The Group includes enterprises for extraction and processing of aggregates, production and transportation of building materials, and housing construction — from mass market large-panel housing to elite property built after designs made by leading domestic and foreign architects.
LSR Group has operations and offices in a number of cities in the Leningrad Oblast, in St. Petersburg, Moscow, Yekaterinburg, Lithuania, Latvia, Estonia, Ukraine and Germany. LSR Group employs over 15,000 people.
In 2005 and 2006, the revenues of LSR Group (according to IFRS statements) were $ 463 million and $ 777 million respectively. In 2007, the revenues amounted to $ 1,403 million.
In November 2007, OJSC LSR Group implemented an IPO, and now its GDRs are listed on the London Stock Exchange, and the shares — on MICEX and RTS.
In 2007, LSR Group was bestowed a National Award in the field of business as ‘The Company of the Year’ in the ‘Construction’ category.
For more details please contact:
Press Service, LSR Group
Tel.: +7(812) 314-1044
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