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Rating action

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

Rating rationale

The rating affirmation reflects the company’s favourable prospects in the Georgian residential property market and its strong credit metrics and liquidity. The rating is constrained by the company’s small size and lack of diversification.

The business risk profile (assessed at B+) remains constrained by the company’s limited size as a residential property developer (with total Scope-adjusted assets of about USD 225m as of end-June 2022, weak diversification in terms of geographies and the high concentration of the project pipeline around Lisi Lake in Tbilisi. The last factor represents a cluster risk for the company’s future cash flows. The high geographical concentration also implies a close correlation between the company’s performance and that of the state and municipality. At present, LLD’s revenue generation is primarily sourced from the development and sale of premium residential properties and serviced land plots. The premium positioning that the company pursues supports prices and customer attractiveness. While its dependency on continuous property sales without additional recurring income streams is credit-negative, Scope sees the revenue share coming from the sale of serviced plots (29% of total revenue in the first nine months to end-September 2022; 55% of revenue in 2021) as a mitigant as it implies reduced development risk while providing attractive cash returns. The lack of recurring and more stable revenue is a natural consequence of LLD’s develop-to-sell model, but Scope acknowledges the company’s strategic ambition to grow a portfolio of income-generating assets. Still in the ramp-up phase, rental income only contributed around 1% of total revenue in H1 2022. The project phasing and high pre-sale rate (between 40% to 100% as of end-June 2022) mitigate development risks. Furthermore, the low cost of the acquired land and the growth in property prices have supported operating profitability. The Scope-adjusted EBITDA margin is expected to remain between 15%-25%, supported by solid sales volumes in core projects and rising market prices, providing a cushion against potential cost overruns.

The financial risk profile (assessed at BB-) continues to reflect adequate metrics despite an anticipated increase in indebtedness. LLD’s debt protection weakened significantly from pre-2018 levels after a USD 12m bond placement that led the Scope-adjusted EBITDA/interest cover ratio to briefly drop below 1x in 2019. As of end-December 2021, interest cover has improved to 3.5x (FY 2020: 2.1x). Scope considers this level sufficient for the company to cover its current and future interest payments as it provides some headroom against potential cash flow volatility. The company’s plan to build a rental portfolio represents a positive factor against volatility but projected recurring revenues are not expected to fully cover interest payments in the near future. The company is not exposed to interest rate risk, with its entire debt portfolio at a fixed rate and denominated in USD. Scope expects interest cover to remain between 2x-4x, supported by stable growth in profitability and a limited need for additional financing.

Liquidity is adequate, with cash sources (unrestricted cash of USD 3.0m as of end-June 2022 and forecasted FOCF of USD 5.3m for the 12 months to end-June 2023) fully covering cash uses (short-term debt of USD 3.8m as at end-June 2022). The successful refinancing of the USD 12m bond concluded in December 2021, and a USD 10m bond placement in December 2022 has supported the liquidity position.

Besides, the company does not have a defined dividend policy in place. Following several years of retained earnings (up to 2021), Scope highlights envisaged distribution of dividends from 2022 onwards, which could potentially affect the company’s cash flow and liquidity profile.

LLD’s rating is also driven by the peer context. Scope acknowledges LLD’s robust financial risk profile but a comparison against real estate developer peers with stronger business risk profiles limits the rating. The company remains smaller and less diversified than peers rated BB- and above.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that the company will successfully execute its development pipeline and benefit from sustained sales volumes. Moreover, the Stable Outlook reflects Scope’s expectation that the company will keep leverage under control, with Scope-adjusted debt/EBITDA below 6x.

A positive rating action is remote but could be warranted if the business risk profile improved. This could be achieved if the company increased its size and improved its diversification, in conjunction with a significant increase in recurring revenues while keeping credit metrics at current levels.

A negative rating action could occur if the Scope-adjusted EBITDA/interest cover ratio fell below 2x for a prolonged period. This could be triggered by a sharp decline in sales volumes, delays in pipeline execution or a pronounced deterioration in the Georgian real estate market.

Long-term debt rating

Scope has affirmed the BB- debt rating on senior unsecured debt issued by JSC Lisi Lake Development. Scope expects an ‘above average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on LLD’s liquidation value. The debt category rating also reflects the company’s large share of unencumbered assets. 

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 Outlooks, (European Real Estate Rating Methodology, 25 January 2023; General Corporate Rating Methodology, 15 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Fayçal Abdellouche, Specialist
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 2022.
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 2022.

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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