Scope Ratings has today downgraded the Corporate Issuer Credit Rating (CICR) of Brussels-based CODIC International S.A. (CODIC) to BB from BBB-. The outlook of the CICR is Stable. Scope Ratings simultaneously withdraws the CICR.

This downgrade follows Scope’s review for a possible downgrade, which was initiated on the 1st of April 2014. The downgrade is a result of Scope’s application of its final rating methodology for corporates, which was published on 17 September 2014.

The BB rating is mainly driven by a robust development pipeline and a good geographical diversification, as well as solid market shares of up to 32% in CODIC’s core markets. Another positive rating driver is the moderate Loan to Value (LTV), which stood at 41% in FY 2013/14 and a solid liquidity which is expected to be maintained over the next few years.

Negative rating factors include CODIC’s exposure to the cyclicality of the real estate market and the implicit risks of being a developer, including a high volatility of cash flows and profits. Its relatively small size is another negative rating factor.

KEY RATING DRIVERS

Real estate developer with a limited size. With a total asset value of EUR 219m in 2013/14, CODIC is a small property company in the European market for real estate developers. The small size constrains CODICs opportunity to benefit from economies of scale.

Exposed to cyclicality of the real estate market. A credit negative is CODIC’s exposure to the cyclicality of the real estate sector. This is amplified by the nature of its core operations as a property developer with a time lag between the start and delivery of a project and fluctuating demand depending much on the economic cycle.

Volatility of cash flows. Due to the nature of CODIC’s core operation as a property developer, cash in- and outflows tend to be very lumpy. Free Cash Flows fluctuating between EUR -71.7m (2010/11) and EUR -4.1m (2013/14). Scope expects this volatility to continue.

Volatile EBITDA margin of 6.1%, as well as a low gross margin of 4.6% in 2013/14. CODIC’s profitability measured by its EBITDA margin stood at 6.1% for 2013/14, up from a negative 19.6% in 2012/13. However, the current EBITDA margin is in line with that of peers.

Driven by a time gap in development and disposal of projects CODIC’s gross margin sharply declined to 4.7% in 2013/14 down from 24.3% in 2011/12. This margin is below that of peers (20 to 30%). Scope expects CODIC gross margin to recover to 22% in 2014/15 driven by the pre-sold portion of CODICs solid development pipeline.

Robust development pipeline. CODIC benefits from a robust development pipeline of 300,000 SQM under construction in the next 5 years.

Good geographical diversification. Following the sale of its last Spanish asset in 2013/2014, CODIC focusses its activities on its core markets Luxemburg, France and Belgium. These markets show decreasing yields and increasing investment volume.

Significant market shares. With expected market shares of between 11% in Luxemburg and 32% in Brussels in the next 2-3 years, CODIC is among the major office developers in those markets. CODIC’s significant presence in these strong investment markets is seen as a positive rating factor.

Moderate LTV of 41% at FY 2013/14. With a moderate LTV of 41%, CODIC is among the least-leveraged real estate companies in Scope’s rating portfolio.

Robust liquidity going forward. Due to a recent change in shareholder structure (incl. the families Descours and Mulliez) CODIC is able to tap new sources of financing and expanding its corporate lines. In addition, the expected positive cash flow from operations supports liquidity going forward.

OUTLOOK

The rating outlook is Stable.

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Florian Schoeller.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Dr. Britta Holt, Committee Chair

Rating history of the Corporate Rating of CODIC International S.A.
01.04.2014 Review for possible downgrade BBB- No Outlook
12.07.2013 Initial Rating BBB- Negative Outlook

Usually a credit rating is accompanied by a rating outlook, which can be Stable, Positive or Negative. The Positive and Negative outlooks would normally refer to a time period of 12-18 months. These outlooks do not necessarily signal that a rating upgrade or downgrade, respectively, will automatically follow. The probability of such a rating outcome, however, would be higher than 50%.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Website of the rated entity/issuer, Annual reports/semi-annual reports of the rated entity/issuer,  Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports / other public information.

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the press release by the rated entity prior to publication / Modification of the press release after the examination
The rated entity was given the opportunity to examine the press release prior to publication. Following that examination, the press release was adjusted without an impact on the rating.

Methodology
The methodology applicable for this rating is the current Methodology for corporates and their debt instruments, available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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 default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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