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

Rating action

Scope Ratings has today placed the B+ issuer rating and BB- senior unsecured debt rating of Appeninn Holding Nyrt. under review for a possible downgrade.

Rating rationale

Appeninn Holding’s financial risk profile as per year-end 2019 has developed according to plan with revenues at EUR 7.6m and Scope-adjusted EBITDA at EUR 5.8m, which exceed Scope’s forecasts. The Scope-adjusted EBITDA interest cover at 2.7x and leverage, with a Scope-adjusted loan/value ratio at 40%, were in line with the agency’s expectations. The company successfully placed a HUF 20bn bond under the Hungarian National Bank’s bond programme and is refinancing existing bank debt as outlined in its strategy – with the aim to replace all existing bank loans with the bond proceeds.

In March 2020, the company’s shareholder structure changed: Avellino Holding Zrt (a company controlled by Daniel Jellinek) took over 24% of shares and Zinventive Zrt (a company controlled by Attila Balazs) took over 18.3% of shares. The new owners have suggested changes to the future strategy of Appeninn Holding, which the existing management is now executing. Due to Covid-19 restrictions, the company was unable to hold an extraordinary general meeting and propose new board members and management; this has been rectified on 30 September 2020.

Appeninn Holding’s new strategy is to i) strengthen its existing buy-and-hold commercial real estate portfolio in Budapest; ii) postpone previous plans to acquire performing retail real estate in Central and Eastern Europe; and iii) start to develop its own hotel/leisure exposure in the Balaton and Tokaj areas. The new strategy, which has started to be executed by old management in summer 2020 and will be officially executed by new management from 1 October 2020, has led Scope to place the company’s credit rating under review for a possible downgrade.

The new exposure to development projects adversely alters Scope’s industry risk assessment. Moreover, the new strategy affects to a certain degree the company’s competitive position within the business risk profile, which applies pressure on the rating, especially in terms of profitability. Regarding the financial risk profile, the hotel and leisure development projects will entail elevated risks as the significant capex expenditure spending levels will not be covered by income until completion or beyond. In addition, the new strategy will have a severe negative impact on the currently strong debt protection (which would have remained strong under the previous strategy), with Scope-adjusted EBITDA forecasted to decrease compared to the old strategy, while interest payments simultaneously increase. The elevated interest payments will stem from non-repaid bank debt and the expected strong increase in financial debt as project loans will finance the hotel/leisure projects; this stands in stark contrast to the previous strategy to deleverage.

Outlook and rating-change drivers

Scope has placed the ratings under review for a possible downgrade. This is based on the impending change in management and strategy, which the company has so far not fully communicated as the new management and board are not yet in place, as well as the elevated execution risks of the intended development projects. As part of its review, Scope intends to meet with the new management to understand the new strategy as well as monitor ongoing changes in the company’s capital structure and business model. A potential downgrade by a maximum of one notch could result from a significant worsening in debt protection and leverage compared to 2019 levels as a consequence of a sustained change in the capital structure driven by the new strategy.

Long-term and short-term debt ratings

The initial senior unsecured debt rating was based on the premise that the bond would be the only debt outstanding going forward and that any changes to the company’s debt structure would likely impact the senior unsecured debt rating. As the new strategy will alter the debt structure and has resulted in the issuer rating being placed under review, the senior unsecured rating has also been placed under review for a possible downgrade.

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 these ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: 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 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, the rated entities’ agents 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: Thomas Faeh, Executive Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 1 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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