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

Rating action

Scope Ratings has today assigned a first-time issuer rating of BB-/Stable to Hungarian real estate and loan brokerage provider Duna House Holding Nyrt. All senior unsecured debt has been assigned a rating of BB-.

Rating rationale

The business risk profile (assessed at BB-) is mainly driven by the group’s position as one of the leading real estate and loan brokerage firms in its home market of Hungary as well as in Poland. The group operates an integrated real estate and loan brokerage business consisting of a network of physical offices supported by an online platform. Some diversification arises from operating profits being generated via four different segments: real estate and loan brokerage, franchise fees, own real estate developments, and asset management. Moreover, the group is active in three different markets in Central and Eastern Europe (CEE) and Scope expects further expansion in the region. Client base granularity is very high since the group operates in retail, which entails few recurring transactions from individual clients.

The issuer’s business risk profile is constrained by the small absolute size of its business and the relatively fragmented markets in which it operates. Scope also expects EBITDA margins to weaken to around between 12% and 14% in its base case forecast due to the fierce competition in (online) real estate brokerage and the uncertainties caused by the Covid-19 pandemic.

The financial risk profile (assessed as BB) is driven by the issuer’s strong interest coverage of more than 7.0x on a sustained basis, both historically and going forward, as well as the relatively low financial leverage (Scope-adjusted debt/EBITDA), expected to stay at around 1.0x-1.2x after hitting a temporary peak in 2019 and 2020. However, the financial risk profile is constrained by the currently high volatility of cash flows caused by the real estate development activities as well as the high dependency on real estate transactions in the CEE market. Liquidity is adequate as a large portion of cash outflows expected in Scope’s base case is discretionary.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view of the stability of the issuer’s core real estate and loan brokerage business and its ability to generate cash. Moreover, the Stable Outlook reflects Scope’s expectation that the issuer will be able to again lower its financial leverage to below 2.0x after the anticipated temporary spike in 2019 and 2020 caused by the Forest Hill development.

A positive rating action is a remote scenario at this point and would require the issuer to significantly expand in terms of its size, market shares and geographical outreach while keeping financial metrics along Scope’s expectations.

A negative rating action could be warranted if financial leverage increased to around 4.0x on a sustained basis. This could be caused by a slump in revenues due to a weakness in the overall transaction market.

Long-term debt ratings

Scope has assigned an instrument rating of BB- to all of the issuer’s senior unsecured debt, reflecting the debt’s subordinate ranking below secured bank financing. While Scope has computed a ‘superior recovery’ (70%-90%) for the issuer’s outstanding senior unsecured debt in a hypothetical default scenario as of year-end 2022E based on a distressed liquidation value, the debt instrument rating was not adjusted on this basis due to the material uncertainty regarding the group’s asset values upon a hypothetical liquidation. As a result, senior unsecured debt is rated at the same level as the issuer rating.

Scope’s base case financial forecast also incorporates the successful placement in Q3 2020 of a HUF 6bn senior unsecured bond under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, a 3.5% coupon, 0% amortisation from 2020 to 2025, and 20% amortisation yearly during 2026-2030. The proceeds are earmarked for the acquisition of target companies in a volume of around HUF 3bn in its core segment in the CEE region as well as for the repayment of existing financial debt.

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

Methodology
The methodology used for this rating(s) and/or rating outlook(s): Corporate Rating Methodology 26 February 2020; is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 rating process was conducted:
With Rated Entity or Related Third Party Participation                               [YES]
With Access to Internal Documents                                                            [YES]
With Access to Management                                                                      [YES]
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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 31 July 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
© 2020 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 Director: Guillaume Jolivet.