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Rating Action:

Moody's assigns first time Ba2 rating to PJSC Group of Companies PIK; stable outlook

25 Jan 2021

London, 25 January 2021 -- Moody's Investors Service ("Moody's") has today assigned a corporate family rating (CFR) of Ba2 and a probability of default rating (PDR) of Ba2-PD to PJSC Group of Companies PIK (PIK), the largest homebuilder in Russia. Concurrently, Moody's has assigned a long-term issuer rating of Ba3 to LLC PIK-Corporation (PIK Corporation), a subsidiary of PIK. The outlook for both entities is stable.

RATINGS RATIONALE

The assignment of the Ba2 CFR reflects PIK's leading market position in the Russian homebuilding market, integrated business model, robust operating and financial performance, and sound credit metrics which are likely to be sustained in 2021-22. The rating also factors in a positive momentum in the market as well as moderately supportive long-term fundamentals. At the same time, the rating takes into account the company's exposure to the volatile residential real estate market in Russia and high concentration in the Moscow city and the Moscow region (the Moscow metropolitan area).

PIK is the largest homebuilder in Russia, with revenue of RUB316 billion ($4.7 billion) in the last 12 months ended 30 June 2020, up 25% from the same period a year earlier, and 6.5 million square meters (sqm) under construction. The company accounts for around 25% market share in the Moscow metropolitan area. The large scale, leading market position and strong brand support PIK's operating efficiency and competitive strength. The company's large land bank of around 11 million sqm of sellable area, which is sufficient for three to four years, and prudent and consistent approach to land replenishment provide for further growth.

The company benefits from its integrated business model which covers the full cycle of residential real estate development from land acquisition and project design to construction, marketing, sales and facility management. The company has construction resources and production facilities of concrete and reinforced concrete structures and building equipment which together with its focus on digitalisation of business processes result in efficient operations and cost savings. The vertical integration and lean operations make the company a competitive bidder for commercial construction orders for third parties which result in some diversification and additional profit. PIK also develops other complementary offerings, such as facility management, brokerage, repair services and digital services, which have a small share in its total financial results but help to attract additional customers for the core business and strengthen brand recognition.

PIK has high exposure to the Moscow metropolitan area where it generates more than 90% of revenue. The concentration risk is partially mitigated by the market's lucrativeness and large size as well as the company's gradual expansion to other regions.

The inherent volatility of the Russian residential real estate market and its susceptibility to economic cycles are balanced by the positive momentum and moderately favourable long-term fundamentals. Contracted interest rates, the state support to subsidise mortgage interest rates and the economic turbulence spurred demand for apartments in 2020, leading to an accelerated price growth of around 10%-15% on the primary market. This upbeat environment may continue through mid-2021 and stabilise by year-end 2021. The relatively low housing stock per capita, considerable share of obsolete houses and the state's focus on improving housing affordability support the Russian residential market in the long-term, although consumers' reduced real disposable income and increased indebtedness may curb growth in demand after 2021. At the same time, the Moscow metropolitan area is characterised by relatively resilient demand for apartments because of (1) its investment attractiveness for individual and (2) the continuing influx of internal labour migrants, including well-paid professionals.

PIK built up its revenue by 20%-25% in 2020 (according to Moody's estimates) and 14% in 2019, and is likely to demonstrate double-digit growth in percentage terms in 2021-22 thanks to (1) an increase in its residential mass market offering, (2) an increase in commercial construction and fee-development for third parties, and (3) development of other services, including the facility management. The economy of scale, continuing focus on operating efficiency and vertical integration should help the company to maintain its solid adjusted EBITDA margin of 19%-20%. PIK should also generate positive free cash flow before dividends over the next two years despite the large increase in working capital because of the implementation of escrow accounts.

Moody's expects PIK to maintain its healthy credit metrics, with Moody's-adjusted gross debt/EBITDA being within 3.0x-3.5x in 2020-21 and adjusted EBIT/interest expense within 5.0x-6.0x. In addition, the company's net leverage (excluding the cash held at escrow accounts) should remain below 1.5x in 2020-21. PIK is likely to retain its large cash buffer, which stood at RUB78 billion as of 30 June 2020. The company's financial policy is prudent, with low net leverage, large liquidity sources, debt financing in roubles, proactive management of its debt portfolio, and reasonable dividends.

The rating also takes into account the company's (1) strong brand recognition, (2) diversified project portfolio, (3) focus on mass market segment which is more resilient to economic downturns, (4) long track record and strong experience in construction and real estate development, and (5) strong liquidity, underpinned by the large cash balance and comfortable debt maturity profile. At the same time, the rating incorporates (1) the industry's ongoing transition to escrow accounts which weigh on the company's operating cash flow generation, (2) weak macroeconomic environment, and (3) the company's exposure to Russia's less-developed political, regulatory and legal framework.

The assignment of the Ba3 long-term issuer rating, which is an opinion of the ability of an entity to honour senior unsecured debt, to PIK Corporation, reflects the structural and legal subordination of its debt. PIK Corporation is a sub-holding entity directly owned by PIK and established for the purposes of holding the group's stakes in operating entities and issuance of debt, including unsecured and unguaranteed local bonds. Its long-term issuer rating is one notch below PIK's Ba2 CFR , to reflect the priority ranking of PIK Corporation's unsecured and unguaranteed debt which is structurally subordinated to the debt held by operating entities and, in addition, legally to the debt provided to PIK's residential real estate projects which is secured by the land and shares in some subsidiaries.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

The rapid spread of the coronavirus pandemic, deteriorated global economic environment, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. However, the impact of the pandemic on PIK's credit quality is limited. The lockdown measures in Russia in the second quarter of 2020 did not lead to materially adverse disruption in the company's operations or significant costs. On the contrary, the company's quick adaptation to the new operating conditions, coupled with the government's support measures for the residential real estate market, has resulted in PIK's strong operating performance over the last nine months, with increasing sales and prices.

Governance considerations include PIK's concentrated private ownership structure, with 59% shares in the company controlled by its president Sergei Gordeev, which creates a risk of rapid changes in the company's strategy, financial policies and development plans. However, the owner's track record of a prudent and consistent approach toward the company's development strategy, financial management and corporate governance practices, as well as its public listing on the Moscow Stock Exchange, with relevant disclosure, governance requirements and four independent board members out of nine, partially mitigate the risks related to corporate governance. The presence of Bank VTB, PJSC (Baa3 stable) among the company's shareholders with a 23% stake also provides additional oversight over PIK's corporate governance, strategy and policies.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects PIK's comfortable positioning within its rating category and Moody's expectation that the company will maintain its high operating efficiency, strong financial performance and solid credit metrics.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's does not anticipate a positive pressure on the rating to build up over the next 18 months. In a longer term Moody's could consider the rating upgrade if the company were to (1) demonstrate a sustainable track record of robust operating and financial results amid volatile industry conditions and continuing implementation of escrow accounts, (2) maintain strong liquidity, and (3) pursue a conservative financial policy. Quantitatively, the rating could be upgraded if PIK's Moody's-adjusted gross debt/EBITDA were to be below 3.0x and EBIT interest coverage above 6.0x on a sustainable basis.

Moody's could downgrade PIK's rating if its (1) Moody's-adjusted gross debt/EBITDA were to increase above 4.0x and EBIT interest coverage fall below 4.0x on a sustained basis; (2) operating performance, cash generation or market position were to weaken materially; or (3) liquidity were to deteriorate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PIK is the largest vertically integrated homebuilder in Russia. The company builds mass market apartment houses in 12 regions with a particular focus on the Moscow city and the Moscow region. In 2019, the company reported revenue of RUB281 billion ($4.3 billion) and Moody's-adjusted EBITDA of RUB60 billion ($930 million). PIK's president Sergei Gordeev owns a 59% stake in the company, Bank VTB, PJSC (Baa3 stable) -- 23%, and the rest is in free float.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Russia
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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