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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of B+/Stable on Georgian residential developer Lisi Lake Development JSC (LLD), Scope has also affirmed its BB- rating for the senior unsecured debt category.

Rating rationale

The affirmation is supported by LLD’s i) conservative financing structure, which relies on equity and a largely unencumbered asset portfolio that bears little net debt compared to the asset base (Scope-adjusted loan/value ratio of around 10%); ii) successful refinancing of a USD 12m bond last December, fully in line with Scope’s rating base case; and iii) robust results in 2021, with a stable sales volume for apartments and a larger contribution from plots at the main project, Lisi Green Town.

LLD‘s performance has benefited from growing demand, fuelled by the pandemic, for high-quality, modern living space outside of the city centre. Revenues totalled USD 12m in 2020, and LLD expects the figure to reach around USD 18m in 2021. Sales on both apartments and villa plots have grown, with the latter noticeably growing by 32% YoY, representing 60% of total sales in 2021 (from 49% in 2019). In the case of apartments, the main growth driver in 2020 was larger volume (19% YoY more sq m sold), as opposed to price by square metre in 2021 (26% YoY, per company reports). In spite of these positive developments, LLD remains a small real estate developer in the European context and a niche player. This implies greater sensitivity to unforeseen shocks, greater volatility in cash flows and a heightened sensitivity to the performance of single projects due to cluster risks.

The business risk profile (assessed at B+) is constrained by i) LLD’s limited size as a residential property developer, with total Scope-adjusted assets of about USD 185m as of December 2020; ii) its weak diversification in terms of geographies and projects with substantial cluster risk with regards to the Lisi Lake projects in Tbilisi; and iii) economic risks including high inflation, foreign exchange risks and the lower liquidity of Georgia’s premium real estate market compared with the more mature western European market. In addition, the second largest project – Black Sea near Batumi – is still on hold and Scope continues to assume about USD 1.3m in sunk costs per year and zero sales revenue within the forecast period. Credit-positive is the diversified customer base due to the retail residential core business as well as asset quality, with a focus on the premium residential segment. Due to the timing mismatch between cash outflows and inflows (expenses and revenues), Scope calculated a proxy internal rate of return estimated at around 18%. Profitability is supported by the growing volume of the higher-margin villa plot sales.

The financial risk profile (assessed at BB-) continues to reflect LLD’s adequate metrics. Scope-adjusted interest coverage stood at 2.1x in 2020, and Scope expects the interest cover to stabilise at above 3.0x, as financial debt is low compared to the issuer’s size and a high share of debt has a fixed interest rate, resulting in better visibility on financial costs. In addition, financing costs have reduced after the bond refinancing in 2021 (interest rate reduced to 6.5% from 8.0%). However, if projects are delayed significantly or sales slump, LLD may have to depend on external financing to cover future interest payments. Scope forecasts financial leverage (as measured by the company’s Scope-adjusted debt/EBITDA) to remain moderate, averaging 3.9x in 2020-2022, after the temporary increase in 2019 due to the weak Scope-adjusted EBITDA), which excludes operating profits from the Buknari project and is solely based on project sales in Lisi Lake resulting in margins seen in previous years.

Scope deems liquidity as adequate following the successful refinancing of the USD 12m senior unsecured bond in December 2021 and based on the view that the issuer will continue to benefit from good access to external, secured financing given its low loan/value ratio of below 10% as of December 2021.

Outlook and rating-change drivers

The Stable Outlook is supported by the expectation of i) robust sales at the core development, Lisi Green Town, as well as access to funding ensured by low balance-sheet and financial leverage; ii) leverage (Scope-adjusted debt/EBITDA) remaining moderate at 4x on average and interest cover at above 3x on average; iii) USD 1.25m in yearly sunk costs for the Buknari project due to the current delay and limited visibility as of today.

A negative rating action is possible if interest cover reduced below 2x on a sustained basis. This could happen through a sales volume slump caused by either delay in the execution of developments or a serious deterioration in Georgia’s real estate market.

A positive rating action is remote but may be warranted if the business risk profile improved (development pipeline substantially growing in size and diversification improving) coupled by a substantial increase in the share of recurring revenues while credit metrics remain at current levels.

Long-term and short-term debt ratings

Scope has affirmed the debt class rating on senior unsecured debt at BB-, reflecting an 'above-average’ expected recovery rate in a hypothetical liquidation scenario in 2023. The recovery assumptions are driven by elevated risks related to the issuer’s development activities, evidenced by the Buknari project’s delays. Moreover, all unsecured debt may become structurally subordinated to any current and future senior secured debt, given the large, unencumbered asset base. 

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 25 January 2022), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#!governance-and-policies/regulatory-EU. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 10 July 2018. The Credit Rating/Outlook was last updated on 3 February 2021.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 8 February 2019. The Credit Rating was last updated on 3 February 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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