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Rating action

Scope Ratings has assigned first-time issuer rating of B+ to Budapesti Ingatlan Nyrt. The Outlook is Stable. Senior unsecured debt is rated at BB-.

Rating rationale

Budapesti Ingatlan Hasznosítási¹ és Fejlesztési Nyrt. (BIF), founded in 1994, lets, develops and manages properties (buy-and hold), and develops residential projects for sale. As of 31 December 2018, BIF is classified as a Regulated Real Estate Investment Company (REIT/SZIT in Hungary).

The B+ issuer rating on BIF benefits from the portfolio’s exposure to the second-tier investment market of Budapest, and stable tenant demand indicated by a relatively high occupancy rate of 93% as at October 2019. Furthermore, the rating is supported by the company’s relatively strong credit metrics including: i) high debt protection combined with a low leverage; and ii) strong liquidity. Scope expects its credit metrics to remain adequate.

Rating constraints include the company’s small size and market shares, which leads to greater sensitivity to unforeseen shocks and volatile cash flow. In addition, Scope considers BIF’s exposure to the development business as negative because it exposes the company to the industry’s inherent cyclicality. Weak geographical and limited tenant diversification paired with exposure to small-to-medium size Hungarian companies, as well as a very short weighted average unexpired lease term (WAULT) mean visibility on the company’s future cash flows is limited.

The BB- rating for BIF’s senior unsecured debt reflects the high probability of recoupment for investors, with Scope’s view based on the company’s moderate leverage and adequate unencumbered asset ratio of above 2.0x forecasted for YE 2020.

Rating drivers

Credit positive

• Portfolio across primary and secondary locations in the second-tier investment market of Budapest, a market with strong tenant demand
• Relatively high occupancy rate of 93% as at October 2019
• Stable profitability, with EBITDA margin of around 50% forecasted to remain at that level going forward
• Strong credit metrics, with EBITDA interest cover forecasted to remain above 1.7x (2018: 8.7x) and LTV ratio forecasted to stay below 50% (YE 2018: 22%)
• Strong liquidity supported by available undrawn credit lines of HUF 12.4bn as at October 2019

Credit negative

• Small property company compared to western European peers with high sensitivity to unforeseen shocks and volatile cash flows
• Small market shares in an increasingly competitive environment
• Exposure to development activities leads to volatile cash flow pattern, partially mitigated by stable recurring rental income
• Limited tenant diversification and exposure to small-to-medium size Hungarian companies, partially mitigated by credit quality of main tenant (Hungarian Ministry of Agriculture)
• Weak diversification across geographies with portfolio solely focused on Budapest
• Cluster risk in 2022 resulting from short WAULT (2.7 years as at October 2019), slightly mitigated by well-developed network, long-term relationships with tenants and prime location of core assets
• Key person risk due to heavy dependence on management /owner Ungár family
• Forecasted negative free operating cash flow due to portfolio expansion in 2020 and 2021

Liquidity

Scope considers liquidity to be adequate. In detail:
Position YE 2018 I H1 2019
Unrestricted cash: HUF 9.8bn I HUF 6.9bn
Open committed credit lines: HUF 20.0bn I HUF 12.4bn
Free operating cash flow (t+1): HUF 0.6bn I HUF 1.9bn
Short-term debt: HUF 0.8bn I HUF 0.8bn
Coverage: 39.6x I 27.6x

Scope excludes discretionary expansion capex from the liquidity calculation, as such investments are made only if external financing is available. BIF’s liquidity is judged to be adequate, supported by available undrawn credit lines of HUF 12.4bn as at October 2019. All financial debt is long term (10 years), leading to low refinancing risk in the coming years. Moreover, the company benefits from reserves of around HUF 9.3bn (treasury shares) and an unencumbered asset position of HUF 19.6bn as of October 2019; all of which provide indirect security for the HUF 20bn senior unsecured bond to be issued (the agency expects the unencumbered asset ratio to remain above 2x after the bond issuance).

Senior unsecured debt

Scope’s recovery analysis for senior unsecured debt indicates an ‘above average’ recovery based on BIF’s relatively high share of unencumbered assets, allowing a one-notch uplift on the company’s issuer rating. Consequently, Scope assigns a debt class rating of BB-.

Recovery is based on a hypothetical default scenario in FY 2020 with a company liquidation value of HUF 39.0bn. This value is based on a haircut of roughly 40% applied to the assets, reflecting a market value decline of 14%, liquidation costs of around 21% for the assets and 10% for insolvency proceedings. This compares to secured financing of a forecasted HUF 14.8bn, a fully drawn credit line of HUF 12.4bn and senior unsecured debt of HUF 20.0bn.

Outlook

The Outlook for BIF is Stable and incorporates the successful placement of a HUF 20bn bond in Q1 2020 with 10 years’ maturity and a coupon of 1.8% under the Hungarian national bank’s Bond Funding for Growth Scheme. Bond proceeds will be used to co-finance investments of around HUF 45bn in the next three years, mainly to develop existing properties. Although Scope forecasts an increase in the company’s indebtedness and anticipates EBITDA interest cover at levels above 1.7x and a loan/value (LTV) ratio increasing at levels around 40%.

Scope’s rating scenario assumes the following:

• No extension or re-letting of expired lease contracts/vacated lease area, and assuming 6 months’ notice period in the case of open-ended leases
• 3.2% inflation rate used for operational expenditure and rental growth
• Interest to increase by 50bp for floating-rate and newly issued debt from 2019 onwards, based on a weighted average cost of debt of 1.8% as at H1 2019
• HUF 20bn bond issuance in Q1 2020 (1.8% coupon; 10 years) to co- finance development of existing portfolio properties
• Expansion capex of HUF 1.7bn in 2019, HUF 16bn in 2020 and HUF 17bn in 2021
• Dividend payments according to the REIT/SZIT regulation in Hungary, and in line with previous years

Rating-change drivers

A positive rating action would require a significant improvement in BIF’s business risk profile. This could be achieved by the company growing in size and strengthening its market position, increased geographical and tenant diversification of the portfolio, and more cash flow visibility through longer WAULTs while sustaining an LTV below 50%.

A negative rating action would be possible if leverage increased notably, indicated by an LTV ratio of over 60%, or a fall in the unencumbered asset ratio to below 1.7x.

* This paragraph was added on 18 November 2019 after the initial publication.
1 The name was amended on 18 November 2019 after the initial publication.

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

Methodology
The methodologies used for these ratings and rating outlook (Corporate 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 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, 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: Rigel Patricia Scheller, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 18 November 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
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