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

Rating action

Scope has affirmed the issuer rating of Euroboden GmbH at B+/Stable as well as the BB senior unsecured debt rating, reflecting the company’s updated business plan. The to be issued EUR 75m bond (ISIN: DE000A289EM6) is rated (P)BB.

Rating rationale

The affirmation reflects Scope’s increased revenue and operating profit expectations after the company substantially expanded its development pipeline to more than EUR 1bn within the past 12 months (+83% YoY) and expectation of the successful placement of a EUR 75m senior unsecured bond in Q4 2020.

With regards to the business profile, rated B+, the company remains a small real estate developer, with Scope-adjusted assets of around EUR 400m and geographical concentration around its two core markets of Munich (68%of expected pipeline sales) and Berlin (28%). Scope nevertheless sees improvements in the company’s market shares and visibility in those two cities. Diversification has improved thanks to the enlarged project pipeline, which also implies a greater granularity of project risks. Asset quality remains a major credit-positive factor for the company’s business risk profile, with a continuing focus on ‘A’ locations and thus relatively liquid real estate projects. The issuer’s track record and brand name allow for off-market deals, which ensure the constant replenishment and further growth of the project pipeline, as demonstrated in the past business years. Going forward, profitability is expected to stay volatile but within a high range compared to peers’ levels, at 15% to 30% Scope-adjusted EBITDA margin depending on the timing of project completions.

The financial risk profile, rated B+, benefits from Scope’s expectation of Scope-adjusted interest cover significantly exceeding 1x going forward and of a gradual reduction in the volatility of cash profits via the larger and thus more granular project portfolio. It is constrained by the increase in financial leverage, as measured by the Scope-adjusted loan/value ratio (LTV), which Scope forecasts at between 50% and 60% for the next two business years. Liquidity remains weak since the issuer will remain dependent on ongoing access to external financing to cover short-term financial liabilities. Nevertheless, Scope expects the company to be able to reliably refinance all short-term obligations going forward, which will also benefit from available undrawn committed credit lines and net proceeds from the expected bond placement in Q4 2020.

Outlook and rating-change drivers

The Outlook for EUROBODEN is Stable and incorporates the assumption of a LTV at the upper end of the range between 40% and 60% as well as sales executed at expected prices on the growing project pipeline. Moreover, we expect Scope-adjusted EBITDA interest cover of substantially above 1x and ongoing adequate access to capital markets and bank debt to finance short-term debt positions.

A positive rating action would require an improvement of the company’s business risk profile with more stable cash generation via i.e. increasing recurring revenue streams, while LTV improves to below 40% on a sustained basis.

A negative rating action might be warranted if the issuer shows an LTV of more than 60% on a sustained basis and weakening access to bank financing. This could be caused by the underperformance of its development projects.

Long and short-term debt instrument ratings

As at September 2020, Euroboden has EUR 65m of capital market debt outstanding. According to Scope’s methodology and reasonable discounts on the company’s asset base, a ‘superior’ recovery of more than 71% is expected, allowing a two-notch uplift on the issuer rating.

In addition, Euroboden plans to issue a new five-year senior unsecured bond (up to EUR 75m) in Q4 2020 (ISIN: DE000A289EM6). The bond’s rating will be in line with the rating on the senior unsecured debt class, benefitting from the same recovery expectations as the outstanding senior unsecured bond.

This translates into an affirmation of the BB rating for senior unsecured debt.

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

Methodology
The methodology/ies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology 26 February 2020; European Real Estate Corporates 17 January 2020) are 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 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, the rated entities' agents and third parties.
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: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 28 May 2015. The ratings/outlooks were last updated on 15 August 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
© 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.
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