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Rating action

Scope Ratings affirms the issuer rating of Lisi Lake Development JSC at B+ and changes the outlook on the issuer rating to stable from positive. Senior unsecured debt was downgraded to BB- from BB.

Rating rationale

The change in Outlook to Stable from Positive for Lisi Lake Development (LLD) is driven by delays of the Buknari project (USD: >30m investment volume planned for 2019E to 2021E) that was expected to lead to improved diversification and increased recurring revenue. According to the management, the delay is caused by a hold-up in the building master plan approval process. As a consequence, Scope substantially reduced revenue and profit forecasts for 2019E to 2021E underpinned by the current lack of visibility on the progress of the Buknari project. The revision leads to weaker credit metrics thus a weaker financial risk profile with leverage as measured by the company Scope-adjusted debt to Scope-adjusted EBITDA increasing to 3.3x and 4.5x for 2019E and 2020E, respectively (2018: 0.8x) and no improvements of Scope-adjusted EBITDA interest cover that is forecasted remain within a range of 3.6x to 2.2x for 2019E and 2021E. However, Scope believes that Lisi Lake benefits from good access to external, secured financing given the company’s relatively low loan to value ratio of c. 10% after the placement of the corporate bond.

The B+ issuer rating for Lisi Lake Development (‘LLD’), a Tbilisi, Georgia-based residential real estate developer with a focus on the premium segment, is supported by the company’s:

• conservative financing structure that relies on equity and bears only little net debt compared to its asset base (loan/value ratio of approx. 10%)
• above-average profitability for its main project Lisi Lake in Tbilisi that limits external financing needs.
• local brand recognition and network that enables off-market deals, particularly with regard to the sourcing of new attractive plots that allow the company to develop larger residential projects.

The issuer rating is negatively affected by:

• LLD’s current lack of size and scope, being a small residential property developer that is fully dependent on the sales of properties and/or land to end-customers.
• A lack of substantial recurring revenues leading to high cash flow volatility.
• Low diversification with substantial cluster risk with regards to the Lisi Lake Projects in Tbilisi.
• Risks related to a less resilient economy, inflation and foreign exchange rates as well as limited liquidity in the Georgian premium real estate market compared to more mature Western European premium property markets

Outlook and rating-change drivers

The Stable outlook is supported by Lisi Lake’s progress and sales on its core development Lisi Lake as well as secured funding of the current project stages in the group’s main project Lisi Green Town (Tbilisi).

It also incorporates the company’s loan/value ratio (LTV) to stay at a moderate level of c. 10% going forward and despite Scope-adjusted debt that is expected to grow in the course of the business expansion to between USD 15m and USD 20m. The outlook reflects the agency’s revised forecast that includes the conservative assumption of USD 5m in sunk costs for the Buknari project due to the current delay and only ongoing project sales in Lisi Lake at a similar pace and margin as demonstrated in the previous years.

A negative rating action is possible if Scope-adjusted debt to Scope-adjusted EBITDA were to increase to above 5x on a sustained basis. This could happen, if the LLD’s sales volumes slumped because of i) further delays in the execution of the development pipeline or ii) a serious deterioration of the real estate market environment in Georgia.

Scope would consider a positive rating action if the issuer managed to significantly improve its business risk profile by executing on the planned diversification of its development portfolio and/or creating a substantial share of recurring revenues independent from continued asset sales that limit cash-flow volatility.

Long-term and short-term debt instrument ratings

The company has successfully placed a USD 12m (2018/21 - ISIN GE2700603717) of senior unsecured notes with a coupon of 8% on 17 December 2018. Proceeds have been and will be invested into the development projects in Buknari (Black Sea project) and further project stages within Lisi Green Town. Scope downgraded the instrument rating to BB- from BB reflecting reduced recovery headroom in a hypothetical liquidation scenario as at 2021. The reduced recovery assumptions are driven by higher anticipated risk related to the issuers project development activities, evidenced by delays of the Buknari project.

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

Methodology
The methodologies used for these ratings and/or rating outlooks: Corporate Rating Methodology; European Real Estate Corporates are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process. The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities' agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 10 July 2018. The ratings/outlooks were last updated on 8 February 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.