MOSCOW (Standard & Poor's) Dec. 30, 2014--Standard & Poor's Ratings Services said today that it has lowered its long-term corporate credit rating on Russian residential property developer IFC RFA-Invest OJSC (RFA-Invest) to 'CCC+' from 'B-'. At the same time, we lowered our Russia national scale rating to 'ruBB-' from 'ruBBB-'. The outlook is negative.
The downgrade reflects our view that the company's liquidity sources may be insufficient to repay Russian ruble (RUB) 1.1 billion (US$20 million) of bonds that are scheduled to mature in 2015. We consider that RFA-Invest may not be able to repay these bonds unless, in the next three to six months, it contracts sufficient bank lines, accumulates cash on accounts, or receives extraordinary financial support. This has led us to revise down the stand-alone credit profile (SACP) on RFA-Invest to 'ccc'.
The SACP is based on our assessment of RFA-Invest's business risk profile as "vulnerable" and its financial risk profile as "highly leveraged." It reflects RFA-Invest's short track record of completing and selling residential properties within its current scope of residential developments, and its relatively high leverage and small operating cash flow base.
At the same time, we continue to believe that there is a "moderate" likelihood that the Russian Republic of Sakha, which owns 49% of the company, would provide timely and sufficient extraordinary support to RFA-Invest in the event of financial distress.
In our view, such support could include a capital injection or a loan from Sakha or its wholly-owned government-related entity (GRE), Republican Investment Company (RIC), which guarantees RFA-Invest's outstanding bonds. We understand that Sakha is monitoring RFA-Invest's financial situation. However, it hasn't stepped in yet, as it believes that RFA-Invest's internal liquidity sources will be sufficient to repay its debt by February 2015.
The negative outlook reflects our view that RFA-Invest might not be able to repay its maturing bonds over the next 12 months due to insufficient liquidity sources.
We could lower our ratings over the next 12 months if we considered a default or distressed exchange appeared to be inevitable, leading us to lower the SACP on RFA-Invest. We could also lower the ratings if we thought that the likelihood of timely extraordinary support had decreased. If we were to downgrade Sakha, we would not immediately lower the ratings on RFA-Invest.
We could revise the outlook to stable in the next 12 months if RFA-Invest had enough liquidity sources to refinance its debt over this period and if potential extraordinary financial support mitigated the medium-term risks related to the company's high leverage and weak internal cash flow.