Rating action

The rating action is as follows:

OTP KMRP I 2031 Notes, HUF 100bn: rated B+

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

Transaction overview

The transaction is set up to finance the acquisition of a portfolio composed exclusively of (i) OTP Bank Plc, ordinary shares, for an aggregate amount of approximately 105bn HUF, and (ii) Hungarian government securities, for an aggregate amount of 5bn HUF. The transaction is intended to facilitate the financing of an employee-backed investment scheme according to a dedicated national law (the KMRP or SESOP law) using dedicated vehicles (the KMRPs) where membership is restricted to employees and management of a company: there will be around 1 300 participants in aggregate to the two KMRPs set-up by the employees of OTP Bank Plc. and the share in each of the KMRPs held by the Board of Directors of OTP Bank Plc. will be 78%.

The bond is guaranteed by MFB, the Hungarian Development Bank Pr. Ltd. (MFB), for 80% of its outstanding notional amount. The guarantee is unconditional, irrevocable and the guarantor will pay on the first written request of the beneficiaries, being the noteholders.

The two main parties to the transaction are thus:

• OTP Bank Plc. currently assigned an issuer rating of BBB+, and
   
• MFB Hungarian Development Bank Private Limited Company currently assigned an issuer rating of BBB+.

The different costs of the structure, including interests on the notes, cost of the guarantee and different fees will be paid out of (i) the interest earned on the government securities, (ii) the dividend paid by the OTP Bank Plc. shares, (iii) potential subsidy by OTP Bank Plc. as allowed under the SESOP law, (iv) sale of the government securities or (v) sale of the OTP Bank Plc. shares themselves. The General Assembly of OTP Bank Plc’s shareholders held on 15 October 2021 has already agreed to pay HUF 2.5bn to the issuer annually for the entire lifetime of the KMRPs as a subsidy under the precondition that a dividend will be paid in the respective year.

At or before the maturity date, the assets of the issuer will be liquidated or acquired by the members of OTP KMRP I in order to redeem the rated notes.

The rated notes mature in bullet repayment structure on 14 July 2031 and pay 4.5% annually*.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction, including the guarantee; ii) the credit quality of the issuer of the ordinary shares and of the guarantor; and iii) the historical evolution of the sponsor share prices.

The assigned rating depends in large part on the notes’ guarantee to the benefit of the noteholders. This guarantee is irrevocable, unconditional and at first demand of the beneficiaries. The assigned rating would not be achievable without the MFB guarantee. In addition to the guarantee, Scope has given credit to potential proceeds coming from the OTP Bank Plc. shares either through the regular dividend payment or through liquidation at maturity.

The rating also addresses exposures to the key transaction counterparties, OTP Bank Plc and MFB. To assess the issuer’s exposure to counterparty risks Scope considered counterparty ratings from Scope.

Key rating drivers

Existence of a guarantee on 80% of the notes’ notional (positive)¹. The single class of notes issued by OTP KMRP I are guaranteed by MFB for a proportional amount of 80% of the notes’ face value.

Credit Rating of OTP Bank Plc. (positive). The credit quality of OTP Bank Plc. is also a reflection of the fundamental drivers of its share price over a long-term horizon.

Share price volatility (negative). Most of the assets of the vehicle are OTP Bank Plc. Shares. These shares are publicly traded with a volatile value, exposing the vehicle to a large market risk.

Availability of liquidity (negative)¹. The liquidity required for the issuer to pay all costs and fees would come from different sources of revenues that are not contractual commitments. However, shares could be liquidated in order to pay any shortfall.

Upside rating-change driver

An increasing value of the assets of the issuer could lead to an upgrade of the issuance rating, by creating a higher overcollateralisation between the assets and the rated liability. Such increase in assets could come either from larger available liquidity amounts due to higher-than-expected dividend payments, or the increase in OTP Bank Plc. Shares’ value. However, any excess of liquidity above a certain threshold could be distributed to the members of OTP KMRP I before maturity, limiting the potential for upgrade.

Downside rating-change drivers

A downgrade of the rating of the guarantor would negatively impact the likelihood of indemnifying the beneficiaries of the guarantee and could therefore lead to a downgrade of the rated notes.

A decreasing value of the assets of the issuer could lead to a downgrade of the issuance rating.

Quantitative analysis and assumptions

Scope has performed a cash flow analysis considering the assets characteristics and the main structural features. Scope’s quantitative analysis reflects the transaction’s strong reliance on the guarantee, the dividend payments, and the final value of the shares. Scope derived the notes’ loss rate distribution from a Monte Carlo simulation, incorporating both revenues and costs of the issuer.

Volatility is a key parameter to project the shares’ value. Scope assumed the shares’ returns follow a normal distribution, in a similar fashion as in the Black & Scholes model. Scope looked at historical volatilities of equity returns on OTP Bank Plc as well as on peer companies (including the largest European banks and smaller CEE banks) over different horizons: one day, one year, or ten years (corresponding to the duration of the transaction). Scope tested several levels of volatility and used a level of 40% for the assigned rating. This level is: i) in line with short-term historical volatilities; and ii) approximately twice the long-term historical volatility. The dividend yield assumed for the duration of the transaction has been defined as a discounted yield corresponding to 50% of the expected dividend yield as derived from equity analysts’ consensus.

Sensitivity analysis

Scope tested the resilience of the rating against deviations of the main input parameters: the share’s volatility. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the OTP Bank Plc. shares volatility assumption is 50%:

• sensitivity to volatility, one notch.

Rating driver references
1. Transaction documents (confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted volatility and dividend yield assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool checked by a dedicated team, taking into account the transaction’s main structural features. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this Credit Rating, (Scope’s General Structured Finance Rating Methodology, 14 December 2020; Methodology for Counterparty Risk in Structured Finance, 13 July 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.

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 Rating: 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 this Credit Rating 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.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Olivier Toutain, Executive Director.
Person responsible for approval of the Credit Rating: David Bergman, Managing Director.
The preliminary Credit Rating was first released by Scope Ratings on 30 November 2021. The final Credit Rating was first released by Scope Ratings on 8 December 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
© 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. 

*Editors note: The sentence was changed on 9 December, before the change the sentence stated "The rated notes mature on 14 July 2031 and pay 4.5% annually."