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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable rating on Hungarian holding company LP Portfolio Kft. The senior unsecured debt category has also been affirmed at BB-.

Rating rationale

The ratings continue to reflect Scope’s view on the robust financial risk profile of LP Portfolio (LP) in light of comparatively high recurring cost coverage rates. The ratings are thus still supported by the holding company’s good recurring income generation capacity going forward and its lean cost structure. The ratings also reflect Scope’s view of LP’s conservative ‘buy-and-build’ investment approach around a slightly diversified number of target sectors in largely non-cyclical industries (steel processing, solar energy and real estate). The coronavirus crisis has not had a big impact on operations so far, except for short rental fee delays from smaller tenants in the Kaposvar shopping center as well as a delay on the Almassy hotel project. On a positive note, the engineering business is currently benefitting from the significant rise in steel prices. Family ownership is another plus for the ratings, reflected in a conservative financial policy and good transparency. The overall size of the holding company is still a restraining factor, despite significantly increasing asset values over the last two years.

LP intends to issue another HUF 1.8bn senior unsecured green bond under the Hungarian Central Bank’s (MNB) Bond Funding for Growth programme, with a tenor of 10 years and a fixed coupon of 3.4%. Amortisation of an annual 10% starts in 2026, to be followed by the remaining 50% repayment in 2031. LP’s investment strategy is focused on building diversified income streams in the long run around the 100% owner Peter Lakics’ 33% interest in family asset Lakics Gepgyarto (heavy steel structures – engineering).

Portfolio diversification – a very important ratings driver in Scope’s assessment of holding companies – has already benefited from the attractive investment environment for solar power plants in Hungary under regulated feed-in tariffs. In addition, LP’s real estate division has improved markedly in size over the past year, reflecting investments in the shopping center mentioned above (Petöfi, Kaposvar) as well as in the Budapest hotel project (Almassy) to be developed by LP. More importantly, LP’s investment in the Budapest office park (IT Campus) appears promising as demand for this location benefits from the nearby Buda Part residential and commercial complex. These developments in the real estate division have effectively overcome the strong former concentration on the steel processing and solar energy segments. The real estate division has thus become LP’s strongest division by asset value, already making overall diversification much more balanced at the end of 2020. An additional benefit to diversification is provided by the ambition to invest part of the new bond proceeds in other segments of the real estate division (industrial, logistics) which are not covered so far.

While Scope deems LP’s present exposure to comparatively stable and non-cyclical sectors (relative to GDP) a support from a ratings perspective, the holding company’s still limited scale is not. LP’s estimated net asset value is believed to be around HUF 10bn at present, including the new investments enabled by the two HUF 3.6bn bonds placed as part of the MNB’s Funding for Growth programme in 2020. While already improved with regard to asset values, concentration risk remains very high with regard to dividend income. The solar energy company Solar FM continued to provide all of 2020’s expected dividend income while other participations are projected to pay dividends in the following years.

The rating reflects no expansion into additional – potentially cyclical – sectors. The proceeds of the new envisaged bond to be issued later this year will fund growth in the real estate and solar energy sectors. The rating also reflects the still comparatively limited amount of debt on the holding company’s balance sheet. This includes the new bond as the three bonds continue to account for the only financial debt on LP’s balance sheet. Credit metrics in a holding company context continue to be relatively good, in Scope’s view. This is despite the Covid-19 crisis and despite bond issuance costs having slightly depressed LP’s cost coverage in 2020. Scope focuses on the coverage of recurring holding company costs with recurring income generated. This ratio was at 3.7x in 2020 and is expected to be around 3x for 2021 and 2022, respectively. These comparatively high levels are due to larger dividend income, chiefly from the solar sector companies – continuously received from 2019 – together with still relatively lean cost structures.

Costs increased significantly in 2020, mainly reflecting the bonds' coupon payments as well as fees and additional staffing expenses. At the same time, the income side still reflects the limited interest on intercompany loans provided from the bond proceeds as some SPVs are not allowed to pay interest in the pre-cash generation phase (most notably Almassy). However, Scope believes that LP can achieve the cost coverage ratios projected in its base case thanks to high visibility on the energy sector’s dividend income (operational licenses and guaranteed feed-in tariffs for the 20 small solar energy power plants owned by LP until 2041/42). The holding company’s cost structure also benefits from no dividend payments to the owner. Scope’s rating case assumes that this will not change in the next two to three years at least.

Scope believes that LP’s liquidity situation is adequate, reflecting no short-term debt maturities and increased cash generation.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that LP’s business risk and financial risk profiles will not change significantly in the next one to two years. The Outlook also incorporates total cost coverage by recurring income of at least 1x on a sustained basis and the funding of further investment portfolio growth without additional bank debt.

A potential positive rating action would require improvements in the holding company’s business risk profile in terms of improved concentration risks or significant investment portfolio on an absolute scale. Downward rating pressure could be triggered by total cost coverage dropping to 0.8x on a sustained basis.

Long-term and short-term debt ratings

In its recovery assessment, Scope calculated a liquidation value of about HUF 5.4bn in a hypothetical default scenario in 2022. This value was calculated by applying a conservative 50% discount to the estimated net asset values of LP’s participations, reduced by 10% for insolvency costs. This would be equivalent to a full recovery of the three bonds issued under the MNB programme of HUF 5.4bn in total. Although this would allow the bonds to be rated two notches above the issuer rating under Scope’s methodology, the agency has limited the upside to just one notch (BB-), reflecting the issuer’s single B rating category. 

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, 6 July 2021), 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: the Rated Entity, the Rated Entities' Related 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: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 October 2019. The Credit Ratings/Outlook were last updated on 28 September 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
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