Scope downgrades Appeninn Holding Nyrt.'s issuer rating to B with a Stable Outlook

      MONDAY, 12/04/2021 - Scope Ratings GmbH
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      Scope downgrades Appeninn Holding Nyrt.'s issuer rating to B with a Stable Outlook

      The downgrade is driven by the company's large development projects, which burden it with significantly more debt and put a strain on credit metrics.

      Rating action

      Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Appeninn Holding Nyrt. to B/Stable from B+. Scope has also downgraded senior unsecured debt to B- from BB-.

      Rating rationale

      Appeninn’s shareholder structure changed in 2020 and the new major shareholders (Mr Jellinek via Avellino Holding Zrt. and Mr Attila Balazs via Zinventive Zrt.) have initiated a change in management, who shifted strategy from buy-and-hold commercial real estate to real estate development for tourism properties. The new strategy is to: i) strengthen the existing buy-and-hold commercial real estate portfolio in Budapest through the selective disposal of non-core properties while acquiring class A buildings; ii) develop a hotel/leisure exposure in the Balaton, Tokaj and Lepence areas (all domestically in Hungary); and iii) thereafter operate and manage the tourism exposure, besides selling some developed apartments and land plots.

      Appeninn’s business risk profile, rated B, is driven by: i) the company’s small overall size, resulting in cash flow volatility; ii) its limited geographic diversification, currently concentrated on Budapest and still only exposed to the domestic market of Hungary through its tourist exposure going forward; and iii) high tenant concentration, with the top three/top 10 tenants accounting for 46%/65% respectively. Further drivers are Appeninn’s asset quality, currently exposed to the second-tier market of Budapest with new developments in C locations, a relatively low weighted average unexpired lease term of three years with many contracts up for renewal in 2021, as well as recently falling occupancy on its commercial real estate (CRE) exposure to 89%, due to Covid-19 and the dated age of its portfolio, which suffers from maintenance underspending in Scope’s view.

      Appeninn’s profitability, as measured by its Scope-adjusted EBITDA margin, has been rather volatile historically. This can be explained by the significant growth of the CRE portfolio. It has achieved levels averaging above 65% for the last five years, including 2020. In 2020 operating cost increases were already putting pressure on the margin – a situation Scope foresees continuing in the future. In addition, the company’s development activities will result in revenue lagging behind costs, taking EBITDA margins down to 20% levels.

      Scope foresees that Appeninn’s financial risk profile, downgraded to B, will take an adverse route given the execution of the new strategy. Scope-adjusted EBITDA interest coverage over the last five years averaged a comfortable 2.4x, but was already showing signs of weakness due to increased cost levels in 2020 at 1.8x. The development of Appeninn’s tourism exposure will add further costs to a largely unchanged revenue-generating CRE portfolio, which will lower Scope-adjusted EBITDA interest coverage to levels around 1x. Appeninn’s cash flows as measured by funds from operations have been positive historically, but will also turn negative based on Scope’s forecast for the next two years. Free operating cash flows have already been negative given previous growth efforts, but will turn significantly negative to EUR-60m in 2021.

      Leverage as measured by the loan-value ratio has come down over the last five years from 54% to 35%. Scope expects the ratio to remain in the 40%-50% area, as significant amounts of state grants will keep the increasing debt load in balance going forward. Leverage as measured by Scope-adjusted debt/EBITDA is moving from 15x at present up to 42x, as a function of debt-funded tourism development. Appeninn is hardly capable of bearing this rise in leverage, as demonstrated by interest coverage.

      Scope judges Appeninn’s liquidity to be adequate, despite the highly negative cash flows which, together with unrestricted cash, are not sufficient to cover limited short-term debt. Nevertheless, as all developments are pre-funded through state grants and construction loans, Scope does not foresee a liquidity issue arising from those contracts that need to be fulfilled.

      Appeninn’s management changed just six months ago. New management therefore naturally has limited internal knowledge of the company and of the real estate industry as a whole. Appeninn has brought in a new senior sales manager to improve the CRE portfolio, relies on external support to plan and execute on developments and will use its minority shareholder to operate the tourism exposure once completed.

      Outlook and rating-change drivers

      The Outlook for Appeninn is Stable and incorporates: i) stable rental income from its CRE portfolio; ii) the development of its tourism exposure according to its business plan with no significant delays in project completion; and iii) no further indebtedness in addition to its planned project loan uptake. Assuming a debt/state-grant driven development into tourism going forward, the Stable Outlook foresees Scope-adjusted EBITDA interest cover of around 1x and a Scope-adjusted loan-to-value ratio of below 50%.

      A positive rating action would require a significant improvement in Appeninn’s financial risk profile. This could be achieved through a slower pace of growth, with less strain on the balance sheet and credit metrics, and Scope-adjusted EBITDA interest coverage exceeding 1.7x on a sustained basis.

      A negative rating action would be possible in the event of an unsuccessful development phase, resulting in time overruns and delayed revenues from development projects. The subsequent performance of these assets below Scope’s base case assumption while the company’s cash levels are depleted, leading to a deterioration in liquidity, could also put downward pressure on the rating.

      Long-term and short-term debt ratings

      Scope’s recovery analysis factors in the low WAULT in Appeninn’s CRE exposure, its somewhat aged portfolio and the non-prime characteristics of its purpose-built tourism assets (whose liquidity Scope assumes to be low, which would weigh on attainable advance rates in a distressed sale scenario). Recovery is based on a hypothetical default scenario at year-end 2022, in which Scope assumes outstanding first-lien ranked debt (customer deposits) of EUR 1.5m, senior secured bank debt of EUR 81.9m and unsecured debt financing of EUR 55.2m. Scope assumes that EUR 24.4m of subordinated shareholder loans are structurally subordinated to the senior unsecured debt class.

      These parameters lead to a ‘below average’ recovery for Appeninn’s senior unsecured debt (EUR 55.2m), resulting in a one-notch downgrade from the issuer rating. This translates into a downgrade to a B- rating for senior unsecured debt. 

      Stress testing & cash flow analysis
      No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

      The methodologies used for these Credit Ratings and Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Real Estate Corporates, 15 January 2021), are available on!methodology/list.
      Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
      Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on!methodology/list.

      The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

      Solicitation, key sources and quality of information
      The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit 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 Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
      Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

      Regulatory disclosures
      These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
      Lead analyst: Thomas Faeh, Executive Director
      Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 1 October 2019. The Credit Ratings/Outlook were last updated on 2 October 2020.

      Potential conflicts
      See under Governance & Policies/EU Regulation/Disclosures 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.

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