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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on investment holding STELIUS Zrt (Stelius). Scope has also affirmed its B+ rating on the senior unsecured debt category.

Rating rationale

The affirmation of the issuer rating is supported by the sufficient total cost coverage and the balanced financing structure with only moderate external financial debt. The issuer rating is still constrained by the limited gross asset value and a complex structure with different businesses, cross-ownerships and financing structures.

Scope highlights the continued lack of transparency and limited visibility on cash inflows, driven by the cross ownerships in an already complex organisational structure. However, the current transition phase, reflected in the completed partial portfolio reshaping, is likely to simplify the group structure by FY 2021, with holding activities centralised.

Stelius’ portfolio will remain highly dependent on dividends from two holdings, BAV and Inforg (above 90%), for the next few years. This makes Stelius vulnerable to any unpaid dividends and hence could lead to volatile fixed-cost coverage. However, Scope holds a positive view on the effort to shift income sources away from dividends to less volatile sources such as recurring management and service fees which depends more on top line than the bottom line performance. Management fees contributed around 25% of total cash income in 2020 and will rise further in the forecasted period as Stelius implements its plans to provide more corporate functions to investees.

The limited diversification among dividend-generating assets persists. Five shareholdings contributed roughly 75% of gross asset value as of YE 2020, which Scope expects to further increase in the short to medium term. Scope also expects no additional diversification, as Stelius’ strategy is to streamline investments in existing real estate projects, with the aim to increase rental income. This is despite the stronger investment headroom from bond proceeds and the HUF 3.8bn of extraordinary dividends from Pro cash.

Though lower than expected, cash income remained sufficient to cover operating expenses because management and service fee income could compensate for the Covid-induced dividend cuts at the shareholdings. Scope expects total cost coverage to remain above 1.0x over the next few years, supported by: i) the relatively stable management fees from investees from 2020; ii) the broadly stable net interest on shareholder loans; iii) the likely reduction of dividend payments from core portfolio companies to normal levels; and iv) no significant increase in dividend payouts, shielded by financial bond covenants.

Stelius’ leverage as measured by its loan-to-value ratio remains comfortable at 38% as of FY 2020 (net cash as of YE 2019) despite the significant increase since last year. The loan to value has increased since the previous year with the issuance of the HUF 15bn bond. More than 75% of cash proceeds will be used towards modernising and renovating real estate. Scope anticipates no significant change for leverage in the short to medium term.

Liquidity continues to be adequate. Due to the absence of short-term debt, along with positive free operating cash flow and a significant cash buffer of around HUF 3.0bn as of FY 2020, there are no refinancing risks that would necessitate the sale of any shareholdings.

Outlook and rating-change drivers

The Outlook is Stable and reflects our view that the recurring coverage of mandatory holding costs will remain above 1.0x in the medium term. The Outlook also incorporates the successful structural reorganization envisaged for FY 2021.

A positive rating action might be warranted upon an improvement in diversification and concentration in terms of income streams and/or gross asset value.

A negative rating action may be warranted if limited transparency mainly related to complex organisational structure remained after 2021 and/or the total cost-coverage ratio (recurring) dropped below 1.0x on a sustained basis. This could occur if the financial position of the dividend-paying undertakings deteriorated significantly, requiring a recovery programme and/or limiting their ability to pay dividends or management fees to Stelius.

Long-term debt rating

In the third quarter of 2020, Stelius issued a senior unsecured corporate bond of HUF 15bn under the Hungarian National Bank’s Scheme. Long-term senior unsecured debt issued by Stelius Zrt. has been affirmed at B+, the same level as the issuer rating. 

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

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020), is available on https://www.scoperatings.com/#!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 https://www.scoperatings.com/#!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 https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!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 the 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 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 the 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Zurab Zedelashvili, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 6 July 2020

Potential conflicts
See www.scoperatings.com 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.