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

Rating action

Scope Ratings GmbH (Scope) affirms the issuer rating of BB-/Stable for Duna House Holding Nyrt. The debt class rating for senior unsecured debt is affirmed at BB-.

Rating Rationale

The affirmation is mainly driven by the stable business risk profile (assessed at BB-) that benefits from the group’s market position as one of the leading real estate and loan brokerages in its home market Hungary as well as in Poland. Diversification is still deemed robust as the group currently derives its operating profits from four different segments: real estate and loan brokerage, franchise fees, own real estate developments as well as asset management fees.

Moreover, the group is currently active in three different CEE markets, and Scope expects a further geographical expansion in the CEE region. Client base granularity is high and further growing since the group is operating as a service provider to retail clients with little recurring transactions from a single client. The issuer’s business risk profile remains constrained by the small absolute size of the business and the different segments within the relatively fragmented markets it is operating in. The agency expects Scope-adjusted EBITDA margins to remain within a range of circa 14% to 16% in its base case financial forecast, also after a small negative impact from the Covid-19 pandemic.

While Scope expected the execution of business acquisitions in the group’s core real estate and loan brokerage business in 2020 and 2021, this inorganic expansion has been postponed to 2022-2024, due to a change in target companies. However, the management’s intention is still to acquire other brokerage businesses in Central Eastern and Southern Europe to expand its geographical footprint and realise synergies.

The financial risk profile of the issuer (assessed BB) continues to benefit from its strong interest coverage of 5x to 10x, both on a sustained basis historically and expected going forward, as well as relatively low financial leverage, expected to stay below 2.0x going forward. However, the financial risk profile is currently constrained by the high volatility of cash flows caused by the real estate development activities as well as a high dependency on the real estate transactions market in CEE. Scope’s assessment of the financial risk profile also incorporates execution and integration risks for the businesses to be acquired and the resulting limited visibility on operating profit contributions from the targeted companies.

Liquidity is considered adequate considering that currently no further financial debt besides the HUF 6.6bn 10-year bond issued in 2020 exists except for one HUF 4.7bn bank loan. That bank loan is tied to a current construction project that Scope expects to be sold completely in 2021 to 2022.

Outlook and rating-change drivers

The Outlook for Duna House Holding Nyrt. is Stable and incorporates Scope’s view of the stability of the core real estate and loan brokerage business and the company’s ability to generate cash. Moreover, the Stable outlook reflects Scope’s expectation that the issuer will be able to keep financial leverage (SaD/EBITDA) at below 3.0x after the anticipated temporary spike in 2019 and 2020 that was mostly due to the execution of the Forest Hill real estate development project.

A positive rating action would require the issuer to significantly increase visibility on the planned expansion of its business while showing financial leverage of less than 3.0x on a sustained basis including potential acquisitions.

A negative rating action could be warranted if the issuer shows an increase in financial leverage to above 4.0x on a sustained basis. This could be caused by a slump in revenues due to overall transaction market weakness or substantial additional debt-funded investments beyond Scope’s financial base case.

Long-term debt ratings

Scope affirms the debt instrument rating of BB- for all senior unsecured debt issued by Duna House Holding Nyrt. The debt category rating reflects the ranking status of the debt, ranking below any secured bank financing. While Scope has computed an above average recovery rate for the issuer’s outstanding senior unsecured debt in a hypothetical default scenario as of year-end 2022 based on a distressed liquidation value, the agency refrains from any adjustment on the debt instrument rating and rate senior unsecured debt at the same level as the issuer rating. This is due to the material uncertainty on the possible asset values of the group in a hypothetical liquidation scenario.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 15 January 2021), are 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, 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 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: Denis Kuhn, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 31 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.