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

Rating action

Scope Ratings has today affirmed its B+/Stable issuer rating on Hungarian holding company LP Portfolio Kft. The senior unsecured debt rating of BB- has also been affirmed.

Rating rationale

The ratings reflect Scope’s view on LP’s robust financial risk profile in light of comparatively high recurring cost coverage rates. The ratings thus continue to be supported by the holding company’s good recurring income generation going forward and its lean cost structure. The ratings also reflect Scope’s view of LP’s conservative ‘buy-and-build’ investment approach around a somewhat diversified number of target sectors in largely non-cyclical industries (steel processing, solar energy, and real estate). The present coronavirus crisis does not appear to have impacted operations significantly so far, with the exception of some rental fee delays from smaller tenants in the new Kaposvar shopping center. Family ownership is another plus for the ratings as it implies a conservative financial policy and good transparency, in Scope’s view. The holding company’s overall size is a restraining factor. LP placed a HUF 2.5bn bond under the MNB’s Funding for Growth programme in early 2020. The issue of another HUF 1bn bond is envisaged later this year.

LP’s investment strategy focuses on building diversified income streams in the long run around the 100% owner’s (Peter Lakics) 33% interest in family asset Lakics Gepgyarto (heavy steel structures – engineering).

Portfolio diversification – a very important ratings driver in Scope’s assessment of holding companies – has already benefited from the attractive investment environment for solar power plants in Hungary with regulated feed-in tariffs. Scope views the successful build-up of LP’s solar energy position in particular as essential to lessen dependence on the owner’s legacy family business. In addition, LP’s real estate exposure has markedly improved in size over the past year, reflecting investments in the shopping centre mentioned above (Petöfi) as well as the acquisition of real estate in a Budapest hotel project to be developed by LP. This has addressed the former concentration on two segments (steel processing and solar energy), making the holding company’s overall diversification across all group segments more balanced at the end of 2020.

The rating reflects no major expansion into additional – potentially cyclical – sectors. The issuance proceeds of the two bonds combined (HUF 3.5bn) has already and will continue to fund growth in the real estate and solar energy sectors. The rating also reflects the still comparatively limited amount of debt on LP’s balance sheet after the bond issuances. The two bonds are likely to be the only financial debt on the balance sheet. Credit metrics continue to be relatively good in a holding company context. Scope focuses on the total coverage of holding company costs by recurring income generated. This ratio is expected to be around 5x and 4x for 2020 and 2021, respectively. These comparatively high levels are explained by fairly large dividend income, chiefly from the solar sector companies – which already started paying dividends in 2019 – covering holding company cost structures which are still relatively lean.

Costs are expected to increase in 2020, mainly reflecting the bond’s coupon payments as well as fees and additional staffing expenses. However, Scope believes that LP can achieve the cost coverage ratios in its base case, reflecting high visibility of the energy sector’s dividend income (the operational licenses and guaranteed feed-in tariffs for the 20 small solar energy power plants owned by LP are valid until 2041/42). The holding company’s cost structure also benefits from no dividend payments to the owner. The rating incorporates Scope’s assumption that this will not change in the next two to three years at least.

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

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that LP’s business and financial risk profiles will not change significantly in the next one to two years. It further reflects Scope’s view that total costs can be covered by recurring income of at least 1x on a sustainable basis. It also reflects the assumption that the usage of proceeds from the existing MNB bond as well as from a potentially new one, reflecting the only debt of the company, will continue to be for the expansion of LP’s investment portfolio into real estate and solar assets. For a potential positive rating action, Scope would expect improvements in the holding company’s business risk profile with improved concentration risks and significant growth of the investment portfolio. Rating downside could be triggered by total cost coverage dropping to 0.8x on a sustained basis.

Long-term debt ratings

Scope affirms its BB- rating to the senior unsecured debt category, one notch higher than the issuer rating. In addition to the already issued HUF 2.5bn bond under the MNB Bond Funding for Growth programme, the company plans to place another HUF 1bn bond for further corporate expansion. In its recovery assessment, Scope calculated a liquidation value of about HUF 3bn in a hypothetical default scenario in 2021. This value was calculated by applying a 50% discount to the estimated net asset values of LP’s participations, reduced by 10% for insolvency costs. This provides a recovery rate of more than 80% for the already existing HUF 2.5bn bond as well as the new HUF 1bn bond. While this would allow the bonds to be rated two notches above the issuer rating, Scope limited the upside to one notch, reflecting the issuer’s single B rating category.

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 these ratings and rating outlooks (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 rated entity participated in the rating process. 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: the rated entity, the rated entities’ agents, public domain 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: 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
© 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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