The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Rating action

Scope assigns a first-time issuer rating of BB to Cordia International Zrt. The Outlook is Stable. Senior unsecured debt is rated BB.

Rating rationale

The BB issuer rating on Cordia benefits from the company’s well-diversified project pipeline; good asset quality, spread over three different economies and five first- or second-tier cities; and a well-established position in its home market of Budapest. Scope also expects the company’s leverage ratios to remain moderate despite a debt-funded growth plan, and EBITDA interest coverage to remain above 3x.

Rating constraints include the company’s small scale and sole focus on residential real estate development, which results in a high sensitivity to unforeseen shocks and volatile cash flows as well as limited recurring rental and other income. Its historical strong foothold in Budapest also hampers its diversification ambitions.

Positive rating drivers

• Low expected leverage with a 33% loan-to-value (LTV) despite a significant debt-funded growth programme
   
• Strong debt protection (EBITDA interest coverage) with a trough of 3.3x on Scope’s estimates, giving confidence on the company’s ability to service debt
   
• Well-diversified project pipeline and good asset quality across three different economies and five cities classified as either ‘A’ or ‘B' locations by Scope
   
• Well-established market position in residential real estate in Budapest

Negative rating drivers

• Small property developer (compared to Western peers), resulting in high sensitivity to unforeseen shocks and volatile cash flows, and limited recurring income (rental/other)
   
• Negative free operating cash flow driven by continuous portfolio expansion and funded through debt markets
   
• Historically strong home bias in Budapest, with the need to establish a foothold or market share in its other locations 

Liquidity

Scope considers liquidity to be adequate. In detail:

Position: YE 2018 I YE 2019E

Unrestricted cash: HUF 12.3bn I HUF 53.7bn
Open committed credit lines: HUF 26.9bn I HUF 26.9bn
Free operating cash flow (t+1): HUF -30bn I HUF -29.6bn
Short-term debt: HUF 5.2bn I HUF19.2bn

Coverage: 1.8x I 2.7x

The company’s liquidity is judged to be adequate, with unrestricted cash exceeding short-term debt. Free operating cash flows is a drag on coverage. However, open committed credit lines in the form of construction loans cover liquidity comfortably, when taking into account both internal and external sources.

Senior unsecured debt

Scope’s recovery analysis shows a very high sensitivity to attainable prices in a distressed sales scenario. For this reason, and given that secured debt at property SPV level (consisting of fully drawn construction loans) will have to be repaid first at a hypothetical point of default, Scope has limited the notching-up between senior unsecured debt and the issuer rating. This translates into a BB rating for senior unsecured debt.

Recovery is based on a hypothetical default occurring in year-end 2020, upon which Scope assumes outstanding secured financing (including fully drawn construction loans) of HUF 78bn and senior unsecured debt of HUF 40bn.

Outlook

The Outlook for Cordia is Stable and incorporates i) the company successfully executing its growth plan without diluting underwriting standards; and ii) the successful placement of a HUF 40bn (EUR 125m) bond in the second half of 2019.

Rating-change drivers

A positive rating action would require a significant improvement in the business risk profile through a further diversification of development projects, and a much higher share of recurring cash flows independent of continued asset sales.

A negative rating action would be possible in the event of a significant slump in sales volumes, a serious deterioration in real estate conditions in Cordia’s core markets that negatively affect overall business prospects, or a decline in EBITDA interest coverage to below 2.2x.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating and/or rating outlook (Corporate Rating Methodology; Rating Methodology: European Real Estate Corporates) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity and/or its agents participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities' agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Thomas Faeh, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 12 September 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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 does not, 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 other 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 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 GmbH at Lennéstraße 5 D-10785 Berlin.

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