BERLIN, 17 September 2015: Scope Ratings today affirmed the BBB Rating of the EUR 30m secured corporate bond (6.75% 2012/2019) of the Kassel-based real estate company Immobilien-Projektgesellschaft Salamander-Areal Kornwestheim mbH (IPSAK). The rating Outlook is Stable.

The BBB rating for IPSAK’s EUR 30m secured corporate bond (6.75% 2012/2019) is supported by the company’s high market share in residential developments in Ludwigsburg and Kassel and its sound recurring income position of EUR 9m, partially mitigating volatility of its development business. The company also shows strong financial metrics with a comparably low LTV of 48% as at YE 2014; its moderate FFO fixed charge cover of 2.4x and solid liquidity of 2,900% (YE 2014).

Negative rating factors include IPSAK’s small size, with a total consolidated asset value of about EUR 158m at YE 2014; its strong reliance on top customers with the top 10 accounting for 49% of rental revenues; its concentrated development pipeline with a focus on only a few regional markets and key person risk.

The bond rating strongly benefits from over-collateralisation of 1.6x.

KEY RATING DRIVERS

Market leader for residential developments in Kassel and Kornwestheim/Ludwigsburg: IPSAK’s market share in property development in Kornwestheim/Ludwigsburg and Kassel is expected to reach 30% as from 2016. This dominant market position ensures the company’s projects’ high visibility in respective markets, supporting its business-to-consumer business model.

A small-sized property company: with total consolidated asset value of EUR 158m and FFO of EUR 4m in 2014, IPSAK is a small property company in the highly fragmented German real estate market. The small size and market positioning implies greater sensitivity to unforeseen events, greater volatility in the cash flows as well as greater key man risk.

Moderate loan-to-value of 48% in 2014: With a moderate LTV of 48% (YE 2014), IPSAK is among the least-leveraged property companies in Scope’s rating portfolio. Scope Ratings expects no significant increase of the LTV over the next two years.

Volatile cash flow generation due to concentrated development pipeline: The volatility of IPSAK’s cash flows is amplified by the company’s concentrated development pipeline of four projects. This very modest diversification in its pipeline might negatively affect future cash flow generation if projects were delayed or suffer cost overruns and is judged as a risk factor by Scope.

Sound recurring cash flow position partially mitigates volatility of development business: IPSAK shows sound recurring cash flows of EUR 9m stemming from IPSAK’s letting, power and heat generation activities that are expected to remain stable in the next few years. This foundation fully covers operational and senior financing expenses and partially offsets volatility of development business.

Strong reliance on top customers: IPSAK shows overreliance on top customers, with 49% of rental income from its ‘TOP 10’ tenants as at August 2015, while the ‘TOP 3’ provided around 30%. This lack of tenant diversification is partly offset by the excellent credit quality of some of these tenants reducing risk of a tenant default.

Moderate debt protection: With a FFO fixed charge cover of 2.4x in 2014 that is expected to increase, IPSAK possesses sufficient buffer to meet fixed charges. Increasing fixed charge cover is boosted by expected growing FFO fuelled by the successive disposal of IPSAK’s development pipeline.

Limited geographical diversification with a focus on a few regional markets: IPSAK’s portfolio is situated in the cities of Kassel (4% of total assets), Heidenheim (21%), Ludwigsburg (1%) and Kornwestheim (74%). All classified as ‘B’ or ‘C’ locations by Scope.

Key person risk: Scope Ratings sees key person risk arising from the company’s current structure, with IPSAK’s CEO and founder taking the main strategic decisions.

LIQUIDITY AND DEBT REPAYMENTS

IPSAK’s current liquidity profile is very solid: operating cash flow, cash and equivalents, marketable securities and undrawn bank facilities totalling EUR 19m at YE 2015 provide sufficient cover for its EUR 0.7m of debt due this year.

IPSAK’s debt of about EUR 79m as of December 2015 consists of bank debt at the holding (EUR 26m) and subsidiary levels (EUR 23m) and a corporate bond (EUR 30m). The weighted average maturity of IPSAK’s debt is 7.9 years with no material upcoming loan redemptions until 2017 when EUR 5.3m is due. Scope believes IPSAK can easily redeem this debt out of operating cash flows. The company will also be able to make use of an estimated collateral value of EUR 6m from its unencumbered subsidiary IPSAK Energie GmbH.

BOND

The BBB corporate bond rating reflects IPSAK’s issuer credit quality as well as the seniority and asset pledges of IPSAK’s debt positions. The bond benefits from a very valuable collateral package. This consists of a second-ranked “Buchgrundschuld” on the Salamander Areal (valued at EUR 81m) behind first-ranked debt of currently EUR 26m (maximum of EUR 30m) and a fixed cash deposit of EUR 2m. Scope Ratings acknowledges the estimated over-collateralisation of 1.6x to be a strong factor for the bond rating.

OUTLOOK

IPSAK’s Stable Outlook for its EUR 30m corporate bond is driven by the company’s stable recurring income stream from its letting, power and heat generation activities. The latter enlarges visibility of future cash flows and robust financial metrics.

A positive rating action may be considered if IPSAK i) successfully manages to lower the LTV ratio to a sustainable level around or below 30%, ii) reduce the share of its top ten tenants to below 20% of rental income and iii) increase FFO to a sustainable level above EUR 7m.

A negative rating action may be taken if the company leverages to a sustained LTV above 50%, and if EBITDA margin declines to a level around 30% from the current 52%.

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: Olaf Tölke, Committee Chair

Rating history of the Corporate Bond Rating of Immobilien-Projektgesellschaft Salamander-Areal Kornwestheim mbH
17.09.2015 I Affirmation I BBB Stable
18.09.2014 I Downgrade I BBB Stable
17.09.2014 I Review for possible downgrade I A- No outlook
29.11.2013 I Downgrade I A- Stable
03.12.2012 I Initial Rating I A No outlook

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.

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, External market reports, Interview with the issuer, 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 methodologies applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Real Estate Corporates) are 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.

Conditions of use / exclusion of liability
© 2015 Scope Corporation AG and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Capital Services 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 cannot, 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 otherwise 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 as 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 AG at Lennéstraße 5 D-10785 Berlin.

Rating issued by
Scope Ratings AG, Lennéstrasse 5, 10785 Berlin