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Rating action

Scope Ratings has today assigned first-time issuer ratings of B+ to Hungary-based holding company LP Portfolio Kft (LP). The Outlook is Stable. The agency also assigned first-time ratings of BB- to senior unsecured debt issued by LP.

Rating rationale

The ratings reflect LP’s robust financial risk profile in light of comparatively high recurring cost coverage rates. This leads to rating support from improved recurring income generation going forward and a lean cost structure. The ratings also reflect Scope’s view of LP’s conservative ‘buy-and-build’ investment approach around a slightly diversified number of target sectors in largely non-cyclical industries (steel processing, solar energy, real estate). Family ownership is another plus for the ratings, while the overall size of the holding company is a restraining factor.

LP’s investment strategy focuses on building diversified income streams in the long run around the 33% interest in family asset Lakics Gépgyártó (an engineering firm which makes heavy steel structures) of its 100%-owner Peter Lakics.

Scope believes that LP’s liquidity situation is adequate, reflecting no short-term debt maturities and increased cash generation.

In its recovery assessment, Scope calculated a liquidation value of about HUF 2bn in a hypothetical default scenario. This value is calculated by applying a 50% discount to the estimated net asset values of LP’s participations (using a 3x multiple on underlying EBITDA), reduced by 10% of insolvency costs. This leaves a recovery rate of about two-thirds for the HUF 3bn bond, translating into an above-average recovery expected for senior unsecured debt, which receives a one-notch uplift above LP’s issuer rating. This reflects LP’s growing investment portfolio and the recoverability of existing solar plants (primarily equity-funded) which are operated under regulated tariffs.

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that LP’s business risk and financial risk profile will not change significantly in the next one to two years. The rating reflects our view of a total cost coverage by recurring income of at least 1x on a sustainable basis. It also incorporates our assumption that the proceeds of a HUF 3bn bond under the MNB Bond Funding for Growth Scheme will be used to expand LP’s investment portfolio into real estate and solar assets.

A positive rating action could be warranted by an improved business risk profile with reduced concentration risk and significant growth in LP’s investment portfolio.

Rating downside could be triggered by total cost coverage dropping to 0.8x on a sustained basis.

Cash flow analysis and Stress testing
Scope performed its standard cash flow forecasting for the company and no stress testing was performed.

Methodology
The methodology used for this rating and rating outlook: Corporate Ratings is 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 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: Olaf Tölke, Managing Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 9 October 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.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.