Scope Ratings (“Scope”) has today assigned a B Corporate Issuer-Credit Rating (CICR) to EUROBODEN with Stable Outlook, and a BB- with Stable Outlook for its unsecured corporate bond.

The BB- rating of the unsecured corporate bond (2013/18) reflects the expected high probability of recouping the investment thanks to hidden reserves disclosed by EUROBODEN, and its very well located development portfolio.

The B Corporate Issuer-Credit Rating for EUROBODEN – a real estate developer with a focus on the high quality segment – is supported by the company’s A–located, highly liquid development portfolio. The rating reflects positive growth prospects in its core markets of Munich and Berlin, and the firm’s profound market knowledge, as well as the company’s comparably high profitability in the industry, with strong brand recognition that makes off-market deals possible.

Negative rating factors are EUROBODEN’s market position as a small niche player in the high quality residential real-estate development and its volatile cash flow generation. Full exposure to the cyclical real estate market and dependence on external financing and refinancing risk with 60 % of EUROBODEN’s debt due in the next 24 months are also credit negative. Key man risk exists due to Mr. Höglmaier’s vital contribution as both CEO and founder.

KEY RATING DRIVERS

A small niche market player in the development of prime residential real estate: With total assets of EUR 36m at end-September 2014 and FFO of EUR 0.2m for the year to September 2014 EUROBODEN is a small company in the highly fragmented German real estate developers market. The company’s activities are focused on the niche high quality residential real estate development market, characterised by elastic demand and generally volatile price levels. The small size and market positioning indicate a heightened sensitivity to unforeseen shocks, stronger volatility in cash flows, and increased key man risk.

Positive market growth prospects for the company’s core markets of Munich and Berlin: Scope believes asset prices and demand for EUROBODEN’s core markets Munich and Berlin will keep growing after both markets enjoyed average 40% price rises since 2011.The lack of new apartments and growth expectations for both cities point to a continuation of this trend. The company could profit from these positive developments by strengthening its business model in the coming years.

Volatile cash flow generation due to concentrated development pipeline: EUROBODEN’s cash flow volatility is exacerbated by its concentrated development pipeline, consisting of six projects, the largest of which alone represents 30% of expected future turnover. The company’s very modest pipeline diversification might affect future cash flow generation if projects are delayed or suffer cost overruns.

Full exposure to cyclical real estate market: EUROBODEN is highly exposed to inherent cyclicality in the real estate market with 99% of its revenue sources linked to development activity. Scope judges this a credit negative.

An ‘A’ located, highly liquid development portfolio: The company’s development portfolio is situated predominately in the ‘A’ locations of Munich and Berlin. Scope believes this supports the fungibility/liquidity of EUROBODEN’s properties and lowers potential price haircuts in a distressed sales scenario.

High profitability with sustainable adjusted 16% EBITDA margin: EUROBODEN’s profitability decreased with its EBITDA margin to 7% in 2014 down from 12% in 2013. However, Scope believes EUROBODEN’s profitability will increase to levels well above 10%. This is supported by the company’s adjusted sustainable EBITDA margin of 16% for the last ten projects, as well as the high-quality pipeline with targeted margins above 30%. The reliability of the targeted margins is supported by the firm’s profound market knowledge and brand recognition that makes off-market deals possible.

With its sustained 16% EBITDA margin, EUROBODEN exhibits a comparably higher margin than many of its peers.

A comparably high leverage with a loan/value ratio (LTV) of 61% and a Net Debt/EBITDA of 13.4x in 2014: The company is highly leveraged, reflected in its comparably high LTV of 61% (2014), high net debt/EBITDA of 13.4x, and the partial tenor mismatch in its project debt structure. Scope judges this level of leverage to be credit negative, because it increases the company’s reliance on external funding and successful disposal of its projects.

Corporate governance issues and key person risk: Due to the company’s size there is no official advisory or supervisory board in place. Strategic decisions are taken by EUROBODEN’s owner. This gives the company a speedier decision process, but creates key person risk in the shape of CEO Stefan Höglmaier.

LIQUIDITY AND DEBT REPAYMENTS

The company’s liquidity improved and stood at an adequate 2.0x in 2014 (2013: -0.9x; 2012: -0.5x) but is expected to be volatile going forward due to EUROBODEN’s volatile cash flow generation. Cash flow volatility and sensitivity to EUROBODEN’s chunky project pipeline significantly increases risk with regard to the repayment of EUR 9.9m of debt due in the next 12 months and an additional EUR 7.7m in the next 24 months (2015: EUR 2.0m; 2016: EUR 13.0m; 2017: EUR 2.6m). EUR 12.4m of debt at EUROBODEN’s project SPV does not match the expected lifetime of the respective project (including construction phase) with redemptions 1 to 2 years prior to delivery. However, Scope expects maturing debt to be refinanced through the company’s available credit lines of EUR 4.5m, and in case of project delays via the extension of current debt facilities or proceeds after projects exit.

BOND

Due to the bond’s unsecured position, its credit quality is tightly linked to the credit quality and performance of EUROBODEN. That limits the possibility of a strongly enhanced credit quality of the bond compared to the CICR. Given the hidden reserves disclosed by EUROBODEN and its very well located development portfolio, Scope believes the potential recovery to be well above market average, ultimately allowing for a two-notch uplift from the CICR.

OUTLOOK

The rating Outlook is Stable. It is supported by the EUROBODEN’s high quality development pipeline in booming core markets of Munich and Berlin.

A positive rating action may be considered if EUROBODEN successfully manages to lower the LTV ratio to a sustainable level around 50% and/or reduce the share of its top three projects of expected total turnover volume to below 10%. A negative rating action would be considered if the company fails to increase its sustainable adjusted EBITDA margin to above 20%, or to refinance its maturing debt.

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, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

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

Rating history of EUROBODEN GmbH
28.05.2015 I Initial Rating I B I Outlook Stable

The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Rating history of EUR 15m unsecured corporate bond (2013/2018) of EUROBODEN GmbH
28.05.2015 I Initial Rating I BB- I Outlook Stable

The rating concerns a financial instrument, which was evaluated for the first time by Scope Ratings AG.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

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 issuer of the investment/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

Prospectus, Website of the rated entity/issuer, Valuation reports, other opinions, Annual reports/semi-annual reports of the rated entity/issuer, Current performance record, Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity/issuer, 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 rating by the rated entity prior to publication

Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology

The methodology applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Real Estate Corporates) is 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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