S&P Research on LenSpetsSMU Ratings

22.12.2006

RESEARCH RESEARCH Russia-Based Construction Company LenSpetsSMU (CJSC) Assigned 'B' Ratings; Outlook Stable

Publication Date:22-Dec-2006
Primary Credit Analyst:Lorenzo Sliusarev, Moscow (7) 495-783-41-32;
lorenzo_sliusarev@standardandpoors.com
Secondary Credit Analyst:Izabela Listowska, Frankfurt (49) 69-33-999-127;
izabela_listowska@standardandpoors.com

Rationale

On Dec. 22, 2006, Standard & Poor's Ratings Services assigned its 'B' long-term and 'B' short-term corporate credit ratings to LenSpetsSMU CJSC , a leading St. Petersburg-based Russian construction and development company. The outlook is stable.br>

At the same time, Standard & Poor's assigned its 'ruA-' Russia national scale rating to the company. The senior unsecured Russian ruble bonds previously issued by guaranteed subsidiary CDR CJSC were rated 'ruA-' on the Russia national scale.

The ratings are constrained by LenSpetsSMU's aggressive growth appetite; the evolving and fairly complex regulatory environment in which it operates; the lack of administrative transparency and predictability in Russia; and the company's limited market diversification and size. A further constraining factor is the cyclical nature of the construction and development industry, which is exposed to fluctuating economic dynamics and uncertainty regarding Russia's evolving political, legal, and business climate.

These risks are moderated by robust industry growth in Russia combined with LenSpetsSMU' vertically integrated, competitive business model; sizable market position; established operating track record; and management's effectiveness in controlling costs and maintaining effective administrative relationships. A moderate debt burden and adequate liquidity also benefit the credit profile.

Fueled by favorable economic and market dynamics in Russia, the company is pursuing an aggressive growth strategy, with potential expansion beyond its core market of northwest Russia into Moscow and the regions. In addition to increasing capital requirements (subject to the availability of suitable funding sources), geographic expansion could bring the challenge of risks associated with the competitive, administrative, and market patterns specific to these regions.

Although experiencing a strong boost from current market dynamics, the Russian construction industry is highly sensitive to the country's economic and consumer demand conditions, which in turn are subject to the evolving political, administrative, and business landscape. Furthermore, industry regulation is not yet mature and continues to develop, which could lead to the emergence of new business challenges and the periodic need for LenSpetsSMU to revise its business model. The company's relatively limited size and operational diversification could also exacerbate its sensitivity to exogenous risks.

The business profile is, however, supported by LenSpetsSMU' relatively strong market position in its core market of northwest Russia, combined with its established history and brand recognition. A vertically integrated business model enables management to control project evolution and to prudently manage quality and cost. In addition, effective vertical integration serves as an important competitive enhancement, as reflected by the company's fairly sizable position in this highly fragmented market. LenSpetsSMU' established track record, including management's commitment to prudent cost and financial risk policies and ability to effectively address key administrative and legal risks, is also a credit strength.

The credit profile is further supported by the company's manageable financial leverage. In the short to medium term, estimated total debt to EBITDA should stay at less than 3x, while total assets should exceed total debt by as much as 3x.

Liquidity

Liquidity is adequate, supported by the absence of material short-term maturities and a fairly nononerous overall maturity profile. The company's liquidity position also benefits from sizable cash balances and the availability of untapped credit facilities, further enhanced by manageable debt levels. Although LenSpetsSMU' short-term investment requirements should not require material use of debt, financial flexibility depends on external funding stemming from the inflow of new customer advances as free cash flows are expected to turn negative in the short term.

Outlook

The stable outlook reflects our expectation that LenSpetsSMU' competitive, vertically integrated business should continue to sustain credit quality in the medium term. We expect the business risk profile to remain supported by sound market fundamentals and industry demand, combined with management's proven operating track record and demonstrated commitment to a manageable financial policy and cost control.

Rating upside would require further strengthening of the company's business profile through the careful expansion and diversification of its operations, with persisting commitment to weighted financial policy. This would need to be combined with favorable industry dynamics and the positive evolution of the regulatory and administrative climate.


Conversely, the ratings could come under pressure as a result of materially increased business risk due to aggressive expansion into new, untested markets or adverse regulatory changes; increased administrative uncertainty; or the pronounced deterioration of the company's operating performance combined with a material increase in financial risk.

Business Description

Based in St. Petersburg, Russia, LenSpetsSMU is a vertically integrated construction company, specializing primarily in the development and construction of residential and commercial real estate projects. With more than 19 years of industry experience, the company is one of the leaders in the highly fragmented St. Petersburg market, with an approximate 16% market share in 2005. We estimate that LenSpetsSMU' 2006 revenues will exceed Russian ruble 6 billion (about $228 million).

Ratings List


To
LenSpetsSMU CJSC Corporate credit rating Russia national scaleB/Stable/B ruA-
CDR CJSC Senior unsecured debt*ruA-
*Guaranteed by LenSpetsSMU CJSC.
Additional Contact:Industrial Ratings Europe;
CorporateFinanceEurope@standardandpoors.com

Ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. It can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4017. Members of the media may also contact the European Press Office via e-mail on: media_europe@standardandpoors.com.