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Rating action

Scope Ratings has assigned a first-time issuer rating of BBB-/Stable to Globe Trade Centre S.A. and its subsidiary GTC Real Estate Development Hungary Zrt. The senior unsecured debt rating is BBB-.

Rating rationale

GTC’s business risk profile (rated BBB-) benefits from the company’s market position as one of the largest publicly listed real estate companies in Central Eastern and Southeastern Europe, managing approximately 715,000 sq m in office (40 buildings) and retail space (five shopping malls). With its focus on capital cities in Central Eastern and Southeastern Europe (73% of its operating portfolio as at end-June 2020), GTC benefits from decent visibility on these markets, especially as its portfolio predominately comprises relatively new properties (weighted economic age of under 10 years). This relatively young portfolio, backed by a 340,000 sq m development pipeline (58,000 sq m to be delivered up to YE 2021), supports healthy tenant demand. It attracts international, blue-chip tenants with investment grade credit quality, keeping occupancy rates at around 95% (end-June 2020: 94%). The moderate credit quality of most tenants partially mitigates risks associated with GTC’s relatively high tenant concentration (top three: 14% of rental income as at end-June 2020; top ten: 26%).

However, existing tenant concentration and a relatively short weighted average unexpired lease length of around three years leads to ongoing re-letting risk. Scope expects associated risk to be amplified by changing tenant demand as the pandemic accelerates the transformation of Europe’s retail landscape (retail properties account for 35% of GTC’s rental income as at end-June 2020). Demand for retail space will fall faster and e-commerce will receive an extra boost, as consumers increasingly turn to online offers. Scope also expects tenants to adjust their need for office space. However, the agency believes this will lead to a gentle dip in demand rather than a sharp drop, since companies will still need prestigious, high-quality buildings to promote their image and retain workers. Even so, changing demand will leave GTC’s cash flows vulnerable, evidenced by: i) a decrease in occupancy for its retail portfolio, down to 92% as at end-June from 96% at YE 2019; and ii) collection rates (GTC: 91% for the first six months to end-June) under pressure as tenants stop rental payments or enter rental negotiations. Consequently, Scope foresees negative like-for-like rental growth as well as fair value depreciation in the next couple of years, impairing GTC’s cash flow generation and leverage, which will limit headroom under existing covenants. GTC’s comparatively strong profitability with a Scope-adjusted EBITDA margin forecasted to remain above 80% (last twelve months to end-June 2020: 90%) provides a certain buffer to support the company’s current financial risk profile.

GTC’s financial risk profile (rated BB+) benefits from relatively strong Scope-adjusted EBITDA interest cover, which is anticipated to remain above 3x, despite the impact of Covid-19 on the company’s rental income in 2020 and 2021. This is based on Scope’s assumption of: i) a stable weighted average cost of debt (end-June 2020: 2.6%) going forward, balancing a slight increase in Scope-adjusted debt; as well as ii) the expected return of Scope-adjusted EBITDA to pre-crisis levels in 2022 thanks to portfolio growth from GTC’s high-yielding development pipeline (8% estimated yield on costs for projects under construction), benefitting from 79% pre-letting on average. Scope acknowledges the company’s efforts to minimise the impact of Covid-19 on cash generation via: i) a more cautious execution of its development pipeline (committed capital expenditure amounted to EUR 63m as at end-June 2020) with identifiable tenant demand (pre-letting of min 30% and financing covering min 60% of costs) being a prerequisite to start construction; as well as ii) the retention of dividend payments for FY 2019 and the likely suspension of dividends for FY 2020.

The company’s leverage, as measured by its Scope-adjusted loan/value ratio, has ranged between 45% and 50% (end-June 2020: 48%) since the successful restructuring of its liability side in 2015. Following the Covid-19 shock, Scope believes yields for retail properties (around 40% of the company’s gross asset value as at end-June 2020) will widen further, due to weak market fundamentals for retail properties (especially a revision of rental growth prospects) and a sharper differentiation between prime and secondary assets. The impact of widening yields on GTC’s portfolio value is likely to be partially offset by ongoing positive operating cash flow. This will limit external financing needs for the targeted portfolio expansion via developments (investment volume of EUR 200m 30 months from end-June 2020 and 2022) as well as cash accretive property disposals planned for 2020 and 2021. As a consequence, the Scope-adjusted loan/value ratio is anticipated to remain below 50% going forward, in line with the company’s financial policy, thus supporting GTC’s access to external financing.

Scope views negatively the company’s consistently stretched liquidity due to a relatively low weighted average debt maturity of between four to five years (end-June 2020: 3.6 years) as well as negative Scope-adjusted free operating cash flow due to portfolio expansion in the last couple of years. Scope believes that liquidity is generally a manageable risk. However, limited headroom under bank loan covenants poses a continuous threat in the current market environment, leaving GTC dependent on the availability of external financing.

Outlook and rating-change drivers

The Outlook for GTC is Stable and reflects Scope’s view that the company’s portfolio will continue to grow profitably, with the impact of Covid-19 on cash generation addressed by reduced capital expenditure and the suspension of dividends. As a consequence, Scope assumes broadly stable credit metrics going forward, with a Scope-adjusted loan/value ratio around 50% and Scope-adjusted EBITDA interest cover of above 3x.

A positive action would require the company to reduce leverage, as measured by its Scope-adjusted loan/value ratio, to around 40% on a sustained basis, also affording more headroom under the bank loan covenants for its retail properties. This could happen if GTC manages to increase rental cash flow despite the muting effect of Covid-19, thus enlarging its financial headroom to repay debt and support stable or increasing portfolio value.

A negative rating action is possible if either the company’s Scope-adjusted loan/value ratio increases to around 55% on a sustained basis or the limited headroom under its bank loan covenants is lost and breaches cannot be waived or remedied. This could be triggered by an increase in leverage, caused, for instance, by a further drop in the portfolio value of GTC’s assets.

Long-term and short-term debt ratings

GTC has EUR 90m in capital market debt outstanding as at end-June 2020. GTC Real Estate Development Hungary Zrt. plans to issue a HUF 36bn (approx. EUR 100m) ‘green’ bond under the MNB Bond Funding for Growth Scheme and guaranteed by GTC S.A. Proceeds are earmarked to refinance property loans (LEED/Breeam certified properties) in order to reduce overall interest cost (at least 50% of total proceeds) and to finance acquisitions as well as redevelopment and the construction of LEED/Breeam certified assets. The bond’s tenor is 10 years with 10% of its face value subject to amortisation following seven, eight and nine years after its issuance. The coupon will be fixed and payable on an annual basis. The senior unsecured bond as well as all future debt of GTC Real Estate Development Hungary Zrt will be irrevocably and unconditionally guaranteed by Globe Trade Centre S.A.

The issuer’s unencumbered asset ratio stands at 581% prior to the bond issuance (estimated at over 200% following the bond issuance), providing sufficient collateral to bondholders.

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 rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: issuer, public domain, 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 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 Philipp Wass, Executive Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 12 November 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
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