The rating is supported by a stronger-than-expected expansion of operations backed by the company’s stable order backlog, the positive perception of its unique selling point by social housing agencies and its ability to source developable land (up by 24% YoY). In addition, credit metrics have remained within the expected bandwidth, stabilising Capelli’s financial risk profile.

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

Business risk profile

Industry risk for Capelli is considered to be high, as the company is exposed to the highly cyclical development segment of the real estate industry. The company’s core activities consist of developing residential buildings as well as land procurement. Scope’s short-term credit view for the industry is positive but accompanied by increasing sensitivity against changes in politics, economic conditions and interest rates.

Capelli’s size remains a negative rating driver despite strong growth in both assets and revenue. Total revenue was EUR 126m (up by 39% YoY) and total assets EUR 227m (up by 28% YoY) both in FY 2016/17. Going forward, Scope anticipates a further double-digit growth in revenues backed by a stable order backlog of EUR 216m. Capelli’s modest size may lead to more vulnerability to unforeseen shocks, higher volatility in cash flows, as well as greater key person risk.

The company is a niche market player with a unique selling point which enjoys a positive perception among social housing agencies. The French government has increased social housing requirements, as well as raising the fines imposed for not adhering to them. Capelli has shown agility in grasping this opportunity with the VillaDuplex® concept – a move which helped boost the company’s market share to 2% of new home reservations in France in 2016. Capelli will further fuel growth with the ongoing expansion of operations in the Swiss and Luxembourg markets which are growing faster than the market in France. The expansion plans in these two markets are deemed realistic, underpinned by a combined order backlog of 34% as at 31 March 2017, up from 20% in the previous year.

Capelli’s gross margin took a hit in FY2016/17 down to 21% from 23% for FY 2015/16. However, the company’s EBITDA margin of 9% is still among the highest for French real estate developers focusing on residential units. Scope believes the company’s gross margin will linger below the target of 25%, with an EBITDA margin remaining around 10% for FY 2017/18. Both margins are driven by a growing share of revenues gained from the block sale of social housing (the sale of multiple housing units to a single buyer) which involves discounts but also lower operating expenses.

Financial risk profile

EBITDA interest cover rose to 3.9x in FY 2016/17 up from 3.0x in FY 2015/16. However, given Capelli’s issuance activity in 2017, focussed only high-yielding debt, including a EUR 22m EuroPP (Euro Private Placement - coupon: 6.25%) and a EUR 12m TSSDI (Super Subordinated Perpetual Bond - 9.75%), coverage is expected to fall to around 3.0x going forward. Nonetheless, anticipated financial headroom with gradually increasing EBITDA as a consequence of anticipated further growth, indicates that Capelli will be in a position to meet its interest payments.

The company is heavily dependent on external financing to sustain the growth of its business, accompanied by: i) a sharp rise in working capital (up by EUR 69m since 2013); and ii) negative free cash flows, with the exception of the last financial year. However, Scope expects negative free cash flows going forward due to Capelli’s goal of continuous business expansion. This ongoing expansion, fuelled by an expected increase in indebtedness, raises refinancing risk should demand drop unexpectedly. However, Scope believes that refinancing risk, triggered by declining demand, is somewhat mitigated as Capelli still has a low loan-to-value ratio of below 40% and a satisfactory Scope-adjusted debt (SaD)/EBITDA of 5.3x for FY 2016/17, which limits its credit risk. Scope expects both ratios to remain stable, with an expected loan-to-value ratio of between 30 to 40% and SaD/EBITDA of between 4.0x and 6.0x. Scope's projections regarding leverage are based on the forecasted growth of revenues and EBITDA supported by the EUR 216m order backlog anticipated to come on stream within the next 24 months. In addition, the planned reduction of the debt-financed portion of the development pipeline, by means of forward sales and a better management of receivables to reduce collection periods for instance, should successfully kick in this year and is expected to slow the growth of SaD compared to Scope's previous year expectations.

Liquidity

Liquidity is anticipated to be below par reflecting weak liquidity over the last years. In detail, available cash of EUR 34m and expected negative cash flow from operations for 2017/18 do not match the EUR 47m of short-term debt. Liquidity is forecasted to remain low due to the high portion of short-term debt and credit lines financing Capelli projects’ special purpose vehicles. However, Scope expects that these credit lines will be extended if projects are delayed; alternatively, they may be repaid in instalments with money received from home buyers in accordance with the French VEFA scheme, at the latest after exiting the project. Although all bank debt is related to the projects’ special purpose entities, the company has guaranteed that it will fully repay each project loan. Although liquidity is below par, Scope believes that this guarantee is mitigated by the high pre-sale rates of 50% required by lenders and the well-diversified development pipeline of over 50 projects, financed by more than 10 reputable banks. Both factors reduce project-related refinancing risks. The debt accrued by these projects’ special purpose vehicles (mostly overdrafts) is of a rolling nature and has been extended by the banks in the past when required.

Outlook

The Outlook is Stable and incorporates Scope’s view of stable financial metrics: an LTV of below 40%, Scope-adjusted debt/EBITDA of below 6x, and EBITDA interest cover of greater than 2.5x. All are supported by further growth anticpated given CAPELLI's stable backlog of EUR216m and its ability to secure -under pre-sale agreements- developable land worth EUR508m of future revenues (+24% YoY) both as at YE2017. 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.

In view of the withdrawal of the issuer rating, Scope is not providing numerical triggers for a rating change.

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

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

Rating history - Capelli S.A.
(Date | Rating action | Rating)
20 September 2017 I Withdrawal
20 September 2017 I Affirmation I BB I Stable
20 Septemebr 2016 I Downgrade I BB I Stable
20 April 2016 I Affirmation I BB+ I Stable
20 April 2015 I Affirmation I BB+ I Stable
17 April 2014 I Downgrade I BB+ I Stable
08 April 2014 I Review for possible downgrade I BBB I na
09 November 2012 I Initial Rating I BBB I 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 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
• Annual financial statements
• Annual reports/semi-annual reports of the rated entity
• Information provided on request
• Data provided by external data providers
• Valuation reports
• External market reports
• Press reports / other public information
• Interview with the rated entity

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.

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