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Rating action

Scope Ratings has affirmed the B+/Stable issuer rating of SkyGreen Buildings Kft. (SkyGreen) as well as the BB senior unsecured debt rating.

Rating rationale

The affirmation reflects Scope’s view on SkyGreen’s robust financial risk profile, which has benefited from the mainly equity-financed portfolio expansion until 2019, including a low leverage (31% Scope-adjusted loan/value ratio as at FY 2019) and a Scope-adjusted EBITDA interest cover of 2.8x. Given that further portfolio growth is set to be mostly financed with debt, including a HUF 32bn (c. EUR 90m) bond that SkyGreen intends to issue in the coming months, Scope expects leverage, as measured by the Scope-adjusted loan/value (LTV) ratio, to increase to close to 50%. Nonetheless, SkyGreen has some buffer against potential market value declines induced by market shocks such as weaker tenant demand. The rating continues to be supported by SkyGreen’s portfolio exposure to the second-tier investment market of Budapest, with stable tenant demand and high profitability. In the first half of 2020, SkyGreen disposed of its trophy asset, the Eiffel Square Office building, though this will be partially counterbalanced by the expected addition of a newly built office building located in the Váci Corridor, Budapest’s prime office area.

Rating constraints include the company’s limited size, which leads to greater sensitivity to unforeseen shocks and volatile cash flows, as well as the very concentrated portfolio, currently comprising three properties in Budapest (two from the prior portfolio, and Váci Greens E, with completion expected by Q4 2020). An additional office building is expected to be added to the portfolio in Q1 2021 (ca. EUR 95m, minimum expected annual yield of 5.5%). The small portfolio also leads to a weak geographical and tenant diversification, with the top three tenants representing 50% of total rental income as at August 2020 (top 10: 84%). Scope expects tenant diversification to slightly improve once the newer portfolio assets are fully let in 2021.

Scope judges SkyGreen’s liquidity to be adequate, as the short-term debt balance is not high. By the end of 2019, the company refinanced a EUR 40m facility with Raiffeisen Bank, due in 2021, with a new EUR 100m loan (tenor of seven years, coupon of 3-month Euribor + 2% margin). After the disposal of the Eiffel Square building, the company redeemed EUR 51m and a further EUR 4m after the disposal of Millenaris Avantgarde.

After selling the Eiffel Square Office building, SkyGreen lent EUR 45.4m to its ultimate owner (at an interest rate of 5%), Green Ingatlanfejlesztő Investment Fund. The owners will repay the full outstanding balance whenever SkyGreen’s operation requires it or by the end of 2020 according to the company. Funds management confirmed verbally that no further loans will be provided in the future.

SkyGreen was founded in 2016 as Eiffel Square Building Kft. and is owned by an investment fund. The investors in the fund are private, in line with the current legal framework in Hungary. However, for each public offering of securities (both equity and non-equity), the issuer must disclose the ultimate beneficiaries and legal documents.

Outlook and rating-change drivers

The Outlook for SkyGreen is Stable and incorporates: i) the disposal of Millenaris Avantgarde, and the partial bank loan redemption for EUR 4m; ii) the completion of the Váci Greens E acquisition by Q4 2020; iii) an equity contribution of EUR 5m before the end of 2020; iv) repayment of the intercompany loan (granted to Green Ingatlanfejlesztő Investment Fund) by EUR 45.4m in Q4 2020; and v) the successful placement of a HUF 32bn (ca. EUR 90m) secured bond in Q1 2021, with proceeds intended for additional real estate acquisitions (ca. EUR 95m, at a net initial yield of minimum 5.5%). Driven by the expected portfolio expansion, Scope-adjusted EBITDA interest cover is forecast at above 2x and LTV at around 50% in the next few years.

A positive rating action is remote but may be warranted if the company can significantly improve its business risk profile. This could be achieved by the company substantially growing in size, leading to a less concentrated portfolio and strengthening its market position, while sustaining an LTV of below 50%.

A negative rating action is possible if leverage notably increased, indicated by an LTV of over 60%. The LTV could increase if property values in the portfolio significantly drop due to a sudden shock in the Hungarian market or the company continues to finance new acquisitions with external financing and a lower equity share contribution.

Long and short-term debt instrument ratings

The company’s financial debt includes a bank loan (EUR 47.4m as of August 2020) secured by the existing portfolio (Millenaris Classic and Váci Greens D). SkyGreen intends to issue a HUF 32bn (ca. EUR 90m) senior secured corporate bond under the Hungarian National Bank’s Bond Funding for Growth Scheme. The planned bond has a 3% coupon with a tenor of 10 years. Proceeds from the bond are earmarked for the acquisition of new revenue-generating properties. The company intends to provide a first-ranking pledge on the newly acquired assets (Váci Greens E and the asset to be acquired in 2021).

Scope’s recovery analysis assumes a potential default in 2022 and is based on SkyGreen’s liquidation value. According to Scope’s methodology and reasonable discounts on the company’s asset base, an ‘above average’ recovery is expected for senior unsecured debt, allowing for a two-notch uplift on the company’s issuer rating of B+. Scope has therefore affirmed the senior unsecured rating category at BB. The recovery expectations for senior unsecured debt are subject to the final size and conditions of the planned higher-ranked secured bond, the collateral provided to secured bond holders, and the company’s ability to execute its acquisition strategy.

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 ratings and 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 rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, agents of issuer 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: Rigel Patricia Scheller, Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on October 4, 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
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