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

Rating action

Scope Ratings has today assigned a first-time issuer rating of BB-/Stable to Hungarian real estate and loan brokerage company Otthon Centrum Holding Kft. Senior unsecured debt has been rated BB-.

Rating rationale

The business risk profile (assessed at B+) is supported by i) the group’s position as one of the two leading real estate and loan brokerage firms in its home market of Hungary, the other one being Duna House Holding Nyrt. (BB-/Stable); and ii) its above-average profitability in the industry. The group operates an integrated real estate and loan brokerage business consisting of a network of physical offices supported by an online platform. Some diversification arises from operating profits being generated via several segments, the most important of which are the real estate brokerage franchise, credit intermediation services, the own physical agency network, and real estate-related consultancy services. Client base granularity is very high since the group is focused on the retail segment, which entails a high number of small transactions.

The issuer’s business risk profile is constrained by the small absolute size of its business, the relatively fragmented markets in which it operates and lack of geographic diversity. The company is seeking to raise HUF 2.9bn through a bond issuance to fund international expansion. This is the company’s first major inorganic growth initiative into new geographic markets, which entails risk. Scope expects also margins to trend downwards, driven by i) the higher likelihood that near-term revenue growth will be more focused on lower-margin agency acquisitions than higher-margin franchising; ii) the growing competition in (online) real estate and loan brokerage; and iii) uncertainties caused by the Covid-19 pandemic.

The financial risk profile (assessed at BBB-) is driven by the issuer’s low financial leverage as measured by the Scope-adjusted debt/EBITDA ratio. Scope expects this leverage ratio to fall to below 2x in 2022 after a temporary peak of 3x in 2021, due to the full impact of the bond issuance and planned acquisitions but only a couple of months’ contributions from acquired assets. The company has managed the effects of the pandemic relatively well, with a strong recovery in the second half of 2020, growth in credit intermediation offsetting weakness in real estate transactions, and minimal credit losses. Liquidity is adequate, with minimal short-term debt and cash outflows as expected under Scope’s base case being largely discretionary in nature (i.e. growth capex and dividends).

The overall rating outcome of BB- incorporates a one-notch downward adjustment based on a peer comparison, notably vis-a-vis the larger and more geographically diversified Duna House.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view on the relative stability of the issuer’s core business of real estate and loan brokerage and its ability to generate positive free operating cash flow, also under stressed conditions in 2020. Moreover, the Stable Outlook reflects Scope’s expectation that the issuer will use the proposed bond proceeds to acquire property agencies with positive EBITDA contribution and that financial leverage will return below 2.0x after an anticipated temporary spike in 2021 caused by the debt-funded acquisitions.

A positive rating action is remote at this point and would require the issuer to significantly expand in size and diversity while maintaining financial metrics along Scope’s expectations.

A negative rating action could be warranted if financial leverage increased to above 3.5x on a sustained basis. This could be caused by margin pressure due to growing competition from banks, online retailers or other larger organisations with greater financial muscle, adverse regulatory developments, or challenges in the integration of acquired businesses.

Long-term debt ratings

Scope has assigned a debt class rating of BB- to the issuer’s senior unsecured debt, reflecting limited prior-ranking liabilities in the capital structure. The recovery assessment is based on a going concern enterprise valuation and Scope expects an average recovery for bond holders. Scope did not rate the debt higher due to the asset-light business model and the material uncertainty regarding the group’s asset values in a hypothetical default scenario, which may be driven by increasing competition and/or a confidence loss in the business and resulting departure of licensees and agents.

Scope’s base case financial forecast assumes the successful placement in Q2 2021 of a HUF 2.9bn senior unsecured bond with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, with 5% amortisation in 2024-2027, 10% in 2028-2030 and 50% in 2031. The terms of the bond will cap dividends at 50% of net profits. Bond proceeds are earmarked for M&A, primarily to fund international expansion of the group’s real estate and mortgage agency network. In case a transaction cannot be concluded within a reasonable timeframe at a reasonable price, bond proceeds will be used to acquire either domestic targets with significant potential synergies or – as a fallback option – an income-producing rental property.

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 this rating(s) and/or rating outlook(s): (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 Ratings’ 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. The credit rating and/or outlook is UK endorsed.
Lead analyst: Tommy Träsk, Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The credit ratings/outlooks were first released by Scope Ratings on 20 January 2021.

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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.