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Rating action

Scope Ratings has today affirmed its B+/Stable issuer rating on Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt. (BIF), Scope also affirms the BB- rating for the senior unsecured debt category.

Rating rationale

The rating affirmation is driven by BIF’s solid credit metrics, including relatively high Scope-adjusted EBITDA interest cover (11x for the twelve months to end-June 2020) and low leverage (a Scope-adjusted loan/value ratio of below 20% as of June 2020). In the last twelve months, the company has acquired three properties to expand its portfolio (25,000 sqm of additional gross leasable area), including two office buildings and a former hotel building that is going to be converted into office space. The company plans to invest approx. HUF 30bn, mainly on the development and upgrade of some buildings in its portfolio. Part of this investment will be financed by the issuance of a bond under the MNB Bond Funding for Growth Scheme. BIF initially planned to issue a HUF 20bn bond (approx. EUR 55m) in the first half of 2020. However, it no longer foresees the issuance of this bond in the near future and expects the issue to be done once there is more visibility on the intended developments, most probably in the second half of 2021.

The company’s core office property portfolio has produced relatively stable net rental income, despite the impact of the Covid-19 outbreak on the economy. BIF has not reported a significant effect on its rent collections, with less than 1% overdue rent as of October 2020. The company owns two properties let to hotel operators (approx. 12% of rental income as of October 2020) and has negotiated a rescheduling plan with both tenants for the payment of the partly deferred rents during the lockdown period. Occupancy has remained relatively high (87% in October 2020) but is 6pp lower than in October 2019. Scope expects occupancy to increase to levels closer to 90% in the next few months, based on healthy demand from existing tenants that want to increase the area they occupy, according to BIF.

The rating continues to be constrained by the company’s small size and market share, with total assets of around HUF 60bn (approx. EUR 170m) as of June 2020. This results in a lack of economies of scale, which leads to greater sensitivity to unforeseen shocks and volatile cash flow. BIF’s development activities expose the company to the industry’s inherent cyclicality. Although BIF sold part of its residential development project (Harsánylejtő project) in the first half of 2020, it remains active in the development of office buildings. Weak geographical and tenant diversification (the top 10 tenants account for 69% of rental income as at October 2020) further constrain the rating. Exposure to small to medium-size Hungarian companies and a very short weighted average unexpired lease term of 2.5 years as of October 2020, limiting visibility on future cash flows, are also negative. Cluster risk arises from the relatively short lease on Vigadó Palace, with a lease end in September 2021. The Hungarian Ministry of Agriculture – the sole tenant in the building – is expected to exercise its option and extend its lease.

BIF’s liquidity is adequate, supported by approximately HUF 10bn in cash balances as of June 2020, as well as available open credit lines for HUF 1.5bn provided by the Takarékbank. All financial debt is long term (13 years on average), leading to low refinancing risk in the coming years. The company also has reserves of around HUF 8.5bn (treasury shares) and an unencumbered asset position of HUF 34.5bn as of October 2020, all of which supports liquidity and access to external financing for the time being.

Outlook and rating-change drivers

The Outlook for BIF is Stable and incorporates the lease extension of BIF’s anchor tenant (which expires in H2 2021). Despite the forecasted increase in the company’s indebtedness, Scope anticipates Scope-adjusted EBITDA interest cover above 1.7x and a Scope-adjusted loan/value ratio remaining below 40%.

A positive action would require BIF to significantly improve its business risk profile while keeping its Scope-adjusted loan/value ratio at around 50%. This could be achieved by the company substantially growing in size, leading to a less concentrated portfolio.

A negative rating action is possible if leverage increases significantly, indicated by a Scope-adjusted loan/value ratio of above 60%. Leverage could increase if property values in the portfolio significantly drop due to a sudden shock in the Hungarian market or new property acquisitions via external financing with a lower equity share contribution.

Long-term and short-term debt ratings

BIF plans to issue a HUF 20bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a fixed coupon (to be paid on an annual basis) with a tenor of ten years, and 100% redemption at maturity. Proceeds from the bond are earmarked to co-finance investments of around HUF 30bn in the next few years, mainly to develop existing properties.

Scope’s recovery analysis is based on a hypothetical default scenario in 2022 and on BIF’s liquidation value, considering its planned investments in the next few years. Scope expects an ‘above average’ recovery for BIF’s senior unsecured debt (HUF 20bn). However, Scope has not added two potential notches of uplift to the issuer rating due to risk and the possibility that senior secured debt will increase in the path to default (volatility of capital structure and share of senior unsecured debt). Scope has therefore affirmed the debt class rating of BB-.

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 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, 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 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: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 18 November 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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