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Rating action

Scope Ratings has today assigned a first-time issuer rating of B/Stable to Crown Holding Kft. A first-time rating of B+ was also assigned to the company’s senior unsecured debt.

Rating rationale

The rating is driven by the portfolio’s exposure to second-tier investment markets with stable tenant demand, indicated by a relatively high occupancy rate of 91% for FY 2019. The rating is further supported by Crown’s relatively good credit metrics, including adequate debt protection combined with low leverage, providing the financial headroom to execute its planned portfolio expansion.

The rating is mainly constrained by the company’s small size and limited geographical diversification, with exposures to only Hungary and Romania, both small markets in a European context. Given its limited size, the company does not have substantial market power and is highly exposed to unforeseen shocks and volatile cash flow. The rating is also constrained by low tenant diversification, with top tenants accounting for 49% of rental income as of FY 2019.

Crown’s liquidity is adequate from 2020 on. Liquidity benefits from a back-loaded debt maturity profile, with the next significant amount due in 2024. The low liquidity ratio in 2019 is related to the Radisson Hotel project (approx. EUR 11m of investment), which is backed by a credit line from OTP Bank that has not been drawn yet. While the company has more than EUR 15m of additional available credit lines provided by OTP bank, they are tied to a particular purpose, namely, the Lotus Center and the Nymphaea Resort, projects that are currently on hold. The credit lines were therefore excluded from the liquidity coverage calculation.

Crown’s management has extensive industry knowledge in both real estate and the specific sectors (e.g. hospitality). However, owner and CEO Sandor Mudura poses key person risk, as the company depends heavily on his ability and expertise in the Romanian and Hungarian real estate markets, factors that will shape the company’s future development. In addition, the company has no independent board providing oversight as well as no consolidated accounts, which are not a regulatory necessity due to its small size. However, it will consolidate all of its holdings and produce consolidated financial statements from FY 2020 onwards.

Outlook and rating-change drivers

The Outlook is Stable and incorporates: i) the successful execution of the Radisson project and its commencement of operations in 2021; and ii) the successful placement of a EUR 86m bond in Q2 2020, with a 10-year maturity and a 3% coupon, under the Hungarian national bank’s Bond Funding for Growth Scheme. Bond proceeds will be used to finance the acquisition of properties to be added to Crown’s revenue-generating portfolio as well as the development of a 3-4 star hotel on one of its properties. Although Scope forecasts an increase in the company’s indebtedness, it also anticipates EBITDA interest cover of at least 1.7x and an increase in the loan/value (LTV) ratio to around 55%.

The Outlook also incorporates Scope’s view that Crown subsidiaries outside the scope of the bond issuance will maintain their current debt levels, i.e. maximum EUR 4.1m (included in Scope-adjusted debt). Furthermore, Scope expects all subsidiary profits to be cashed out to the issuer, ensuring it can pay its obligations on time, such as debt service and operating expenditure. In addition, cash proceeds of the bond issuance are assumed to be transferred to SPVs, via equity and shareholder loans, so that new properties can be acquired without the need for additional bank debt or other senior-ranked financing. The same would apply if the issuer were to directly acquire and hold the properties.

A positive rating action is seen to be remote but would require a significant improvement in Crown’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 weighted average unexpired lease terms while sustaining an LTV below 50%.

A negative rating action would be possible if leverage increased notably, indicated by an LTV of over 60%, or if liquidity were to worsen. LTV could increase if the value of portfolio properties dropped significantly due to a sudden shock in the Romanian or Hungarian markets. Liquidity could worsen if, for example, i) subsidiary profits are not transferred to the parent to ensure the timely payment of obligations; or ii) if tenants delay payments significantly.

Long-term and short-term debt instrument ratings

Crown plans to issue a EUR 86m senior unsecured corporate bond under the Hungarian national bank’s Bond Funding for Growth Scheme. The planned bond has a 3% coupon with a tenor until 2030. Proceeds from the bond are earmarked for the acquisition of new properties to be added to Crown’s revenue-generating portfolio (EUR 76m) as well as the development of a 3-4-star hotel on one of its properties in Budapest (EUR 10m).

Scope’s recovery analysis is based on a hypothetical default scenario in FY 2021 with a company liquidation value of EUR 177m. This value is based on a haircut of 21% to reflect liquidation costs for the assets and 10% for insolvency proceedings. This compares to secured financing of a forecasted EUR 38m, and senior unsecured debt of EUR 86m. Scope estimates an unencumbered asset ratio of below 1x after the bond issuance.

The agency expects an ‘above average’ recovery for Crown’s senior unsecured debt (EUR 86m), allowing a one-notch uplift on the company’s issuer rating. Scope therefore assigns a debt class rating of B+.

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(s) and 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 rated entity and/or its agents participated in the rating process.
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. Historical data used for this rating is limited.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. Scope notes that the rating was based on limited historical data. 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 Scheller, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 30 March 2020.

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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