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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of B+/Stable to Alfa Equity Holding Kft. Scope has also assigned a first-time rating of B+ to the company’s senior unsecured debt.

Rating rationale

AEH’s business risk profile (assessed at B+) reflects the company’s relatively small size and market shares, with total assets of around EUR 100m at December 2020, a relatively short weighted average unexpired lease term (WAULT) of 3.1 years at June 2021, and a significant development pipeline of EUR 97m of gross development value over the coming five years. The lack of scale and disruption of some assets due to refurbishment (now completed) is reflected in a fairly low EBITDA margin of 40%-50% over the past two years. We expect margins to improve to above 50% in 2022-2023 on higher occupancy. These weaknesses are countered by a diverse portfolio by asset type, focused mainly on commercial real estate (retail, logistics and office), and a development pipeline with an emphasis on residential property, as well as good tenant diversity. The company’s assets are in Budapest (Hungary) and Bratislava (Slovakia), providing an element of geographic diversity. Finally, the occupancy rate stood at 92% at June 2021, reflecting good asset quality, particularly in the logistics segment.

The financial risk profile (assessed at BB) reflects moderate leverage, as measured by the Scope-adjusted loan/value (LTV) ratio, expected at 40%-50% in 2022 and 2023. We expect leverage to remain at this level, since most investments over the coming two years will be in assets for sale rather than for rent. Investments over the next one year will largely be funded by the proposed EUR 27m bond. We believe the company will continue to rotate the portfolio and not pay dividends, to enable funding of its development pipeline, while maintaining leverage at a moderate level. AEH managed the Covid-19 crisis relatively well, with lower occupancy mainly in the office segment and some concessions in the retail segment. We expect a significant increase in revenue and EBITDA in 2022, helped by higher expected occupancy across the portfolio, 7871 sq m of additional net leasable area at Alfa Hub 11 (a logistics asset in Budapest) and the completion and sale of phase 1 of the Haller development (a residential development in Budapest). Interest rate and forex risk are low with most debt at a fixed rate and a natural currency hedge.

The overall rating is lowered by one notch based on our peer comparison and AEH’s small size compared to rated peers.

We consider AEH’s liquidity adequate. In addition to the proposed bond, the company has secured a total of EUR 33m of construction bank loans, EUR 6m in the form of a signed facility agreements and EUR 27m in a signed binding term sheet. Free operating cash flow is deeply negative in 2021, with significant investment in phase 1 and 2 of the Haller residential real estate development and the Alfa Hub 11 logistics renovation/expansion project, both located in Budapest. The two new loans and part of the proceeds of the bond will be used to help fund these two developments. We expect the situation to be very different in 2022, when phase 1 of the Haller development is completed and sold, which should provide significant working capital inflow and strong free operating cash flow.

Outlook and rating-change drivers

The Outlook is Stable reflecting a high pre-let ratio of 75% at the Alfa Hub 11 expansion and strong demand for AEH’s residential real estate developments with current price expectations above budget. We expect the EBITDA margin for rental operation to improve to above 50% in 2022 and 2023 based on higher occupancy. The rating and Outlook assume that the proposed HUF 9.7bn bond is successfully placed and that the contracted asset swaps (Haller development) with related parties are confirmed by the banks and the relevant authorities.

A positive rating action would require AEH to achieve a larger size and Scope-adjusted EBITDA interest cover sustainably above 3x.

A negative rating action would be possible if the Scope-adjusted LTV increased above 60%, interest cover fell below 2x or liquidity worsened materially. Leverage could increase if the value of portfolio properties dropped due to a widening of yields or weakening rental cash flow. Liquidity could worsen if, for example, the company suffered project delays, tenant payment delays, or subsidiary profits were trapped because of covenant breaches at the bank borrowing entity level.

Long-term and short-term debt ratings

AEH plans to issue a HUF 9.7bn (EUR 27m) senior unsecured bond. The bond’s tenor is 10 years with 7% amortisation in 2024-2029, 8% in 2030 and 50% in 2031. The coupon is to be fixed and payable annually. Proceeds will be invested primarily in rental properties and inventory of residential units for sale.

In our hypothetical default scenario, we assumed that all AEH’s income-producing assets are encumbered in favour of its secured lender. Nevertheless, we expect an ‘average’ recovery for AEH’s HUF 9.7bn senior unsecured bond and therefore rate it in line with the issuer credit rating of B+. 

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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 October 2021.

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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