The rating is supported by the 2016 financial results that closely match the company’s business plan. Groupe Capelli SA (Capelli) increased its market share in France (newly built properties excluding multifamily) to 2.3% from 1.9% in 2015. Assets and revenues increased to EUR 178m and EUR 92m respectively, from EUR 133m and EUR 66m in 2015. Its solid order backlog of EUR 226m as of 31 March 2016 (40% YoY) illustrates its wide geographical and product diversification. Profitability remained stable in 2016 with a 10% EBITDA margin and 4% return on assets.

Negative rating factors include Capelli’s relatively small size and negative free cash flow, which is strained by its growth ambitions and results in higher leverage. Key person risk exists due to the essential contributions of the Capelli brothers as chairperson and director of the board.

Key rating drivers

Niche market player with a unique selling point perceived positively by social housing agencies. The government has increased French social housing requirements, as well as fines for not adhering to them. Capelli shows agility in grasping this opportunity with the VillaDuplex® concept, a unique selling point for the company. The total revenue share of social housing increased to 50% by FY2015/16, thus improving product diversification.

Small property developer. Capelli’s size remains a negative rating driver despite strong growth in both assets and revenue. Total revenue was only EUR 92m in 2016, and the total assets of EUR 178m in 2016 are low. This small size may lead to more sensitivity to unforeseen shocks, higher volatility in cash flows, as well as a greater key person risk.

Solid order backlog of 2.5x. The solid order backlog of EUR 226m at end-March 2016 provides a good visibility of revenue growth expected for the next few years. In addition, with 20% of its order backlog stemming from new markets, the company has proven it can successfully implement its business plan.

Increasing geographical diversification in growing markets. Capelli will fuel growth by expanding operations in the Swiss and Luxembourg markets, which are growing faster than those in France. The expansion plans in these two markets are deemed realistic, underpinned by a combined order backlog of 20%.

Stable and comparatively high profitability, but negative free cash flow. Capelli’s gross margin was down to 23% in 2016 with an EBITDA margin of 10%, which is relatively high for a real estate developer focusing on residential units. Scope believes gross margin will remain below the targeted 25%, and EBITDA margin will remain over 10% for FY2016/17. Both are driven by a growing share of revenues stemming from the bloc sale of social housing (sale of multiple housing units to a single buyer), which has related discounts but lower operating expenses. However, free cash flow (2016: negative EUR 32m; 2015: negative EUR 10m) is expected to remain negative as a result of the company’s growth ambitions.

Increasing leverage with Scope-adjusted debt (SaD)/EBITDA of 7.3x in 2016 and a loan/value ratio of 41%. The rating adjustment is driven by a weakening financial risk profile, with an increase in leverage expressed by debt/EBITDA of 9.0x for FY 2015/16 (FY 2014/15: 8.4x), thus remaining above the rating-conditional threshold of 8.0x. SaD/EBITDA increased to 7.3x in 2016 from 5.8x in 2015.

The higher leverage is driven by strong business growth (backlog: + 40% YoY), with debt comprising 90% of the EUR 41m surge in working capital. The growth in business is expected to bear fruit in terms of higher EBITDA in the coming 24 months. However, higher leverage is a negative factor, as it further increases Capelli’s dependence on external financing, thus weakening its financial risk profile. Scope expects both ratios to remain volatile, estimating a loan/value ratio of between 40% and 50% (currently 41%) and SaD/EBITDA of between 5.0x and 7.5x.

Relatively high fixed-charge cover of 2.8x in 2016 set to recover to above 3.0x in next few years. FFO fixed-charge cover fell to 2.8x in 2016 from 3.6x in 2015. However, both ratios are expected to stabilise at above 3.0x, indicating that Capelli can meet its fixed charges which include operating lease payments and interest obligations.

Liquidity and debt repayments

Liquidity is expected to be below 1.0x for 2016 (2015: negative 0.1x; 2014: 0.5x; 2013: 0.8x) and remain low due to the EUR 50m of short-term debt positions and credit lines that finance its projects’ special purpose vehicles. Scope expects that these credit lines will be extended if projects are delayed, or repaid by instalment payments due under VEFA, at the latest after exiting the project.

All bank debt is related to Capelli’s project special purpose vehicles, but the company has guaranteed to fully repay each project loan. While liquidity is below par, Scope believes this is mitigated by (i) the high pre-sale rates of 50% required by lenders and (ii) the well-diversified development pipeline of over 40 projects, financed by more than 10 reputable banks. Both factors reduce project-related refinancing risks.

Outlook

The Outlook is Stable. Disregarding the still weak condition of its core home market of France, Scope expects further strong growth for the company and greater diversification, leading to an improving business risk profile. The rating is valid given Scope’s understanding to maintain pre-sale rates of more than 50% and the management’s ability to secure access to bank funding.

A positive rating action is remote given the company’s current prospects.

A negative rating action would be considered if the company’s SaD/EBITDA increased to above 8.0x or if FFO fixed-charge cover fell below 2.0x.

Regulatory disclosures

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: Torsten Hinrichs, Dr Stefan Bund, Dr Sven Janssen.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history
Date; Rating action; Rating
20.09.2016; Downgrade; BB Stable
20.04.2016; Affirmation; BB+ Stable
20.04.2015; Affirmation; BB+ Stable
17.04.2014; Downgrade BB+ Stable
08.04.2014; Review for possible downgrade; BBB n/a
09.11.2012; Initial Rating; BBB Stable

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
Website of the rated entity, Detailed information provided on request, Valuation reports, other opinions, Data provided by external data providers, Current performance record, External market reports, Unaudited annual financial statements, 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.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) 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.

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.

Conditions of use/exclusion of liability
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