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

Rating action

Scope Ratings Gmbh (Scope) today has affirmed Duna House Holding Nyrt.’s issuer rating of BB-/Stable. Scope has also affirmed the debt class rating for senior unsecured debt at BB-.

Rating Rationale

The affirmation is mainly supported by the improved diversification and scale derived from the announced acquisition of Italy-based loan brokerage provider Hgroup, which benefits the business risk profile. But the rating is constrained by substantially higher leverage after this debt-financed acquisition, which burdens the financial risk profile.

The business risk profile (assessed at BB-) still benefits from the group’s market position as one of the leading real estate and loan brokerage firms in its home market of Hungary and in Poland. It also benefits from the recently announced takeover and resulting addition of the second largest player in the Italian loan brokerage market. Diversification has improved as well via the geographical expansion into Italy, as a substantial portion (about 50%) of future group revenues will be generated in that country. Client base granularity is high and growing since the group operates as a service provider to retail clients with few recurring transactions from a single client. The issuer’s business risk profile remains constrained by the growing but still small absolute size of the business and its different segments within the relatively fragmented markets in which they operate. Scope expects Scope-adjusted EBITDA margins to shrink slightly to a range of 12%-14% in Scope’s base case financial forecast after the relatively weak overall impact of the Covid-19 pandemic. Scope has not incorporated significant synergies from the acquisition in its current base case for now. But Scope would expect the group to return to its old profitability range of roughly 14%-16% as measured by its Scope-adjusted EBITDA margin within one or two business years after successfully integrating Hgroup.

The issuer’s financial risk profile (assessed at BB-, one notch lower than before) continues to benefit from its strong interest coverage of 5.0x-10x on a sustained basis historically and going forward, even after the debt-financed acquisition. Relatively low financial leverage is a strength as well. However, financial leverage in Scope’s new base case scenario is significantly higher than anticipated before the debt-financed acquisition. Its new range is 2.4x-2.9x for 2021-2023, negatively impacting Scope’s assessment of leverage within the financial risk profile. Scope expects the issuer to place additional senior unsecured bonds with a volume of up to HUF 6bn within the coming weeks to refinance the acquisition. Since the acquisition will be conducted in stages, immediate cash needs to pay the first instalment of roughly HUF 4.5bn in 2022 would be covered by cash on hand and the anticipated bond issuance. Scope takes comfort in the company’s strategic objective of keeping financial leverage below 3.0x going forward, regardless of acquisitions, but is also mindful that there are significant additional instalment payments for the Hgroup acquisition after 2023, that are not reflected in the 2022-2023 leverage metrics.

Scope’s assessment of the financial risk profile also incorporates execution and integration risks for the businesses to be acquired and resulting uncertainty regarding cash flow contributions after they are acquired.

Liquidity is considered adequate given that no substantial financial debt currently exists apart from the 10-year bond issued in 2020.

Outlook and rating-change drivers

The Outlook is Stable for Duna House Holding. It incorporates Scope’s view on the stability of the core real estate and loan brokerage business and the issuer’s ability to successfully acquire and integrate Hgroup and refinance the Hgroup transaction.

A positive rating action would require the issuer to successfully integrate Hgroup at the anticipated level of cash profitability while showing credit metrics in line with Scope’s expectations, i.e. Scope-adjusted debt/Scope-adjusted EBITDA of below 3.0x on a sustained basis.

A negative rating action could be warranted if the issuer showed an increase in financial leverage to around 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 has affirmed the debt instrument rating of BB- for all senior unsecured debt issued by Duna House Holding including the contemplated senior unsecured bond issuance within the Central Bank of Hungary’s Bond Funding for Growth Scheme. Scope assumes a 10-year tenor with a HUF 6bn volume and a fixed coupon, paid annually. Amortisation is expected at 20% annually from the fifth year until maturity. The debt category rating reflects the ranking status of the debt, which is below any secured bank financing. Scope has computed an average recovery rate for the issuer’s outstanding senior unsecured debt in a hypothetical default scenario as of year-end 2023E based on a distressed liquidation value. As a result, Scope has rated senior unsecured debt at 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 methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology:European Real Estate Corporates Methodology, 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: Tommy Träsk, Director
The Credit Ratings/Outlook were first released by Scope Ratings on 31 July 2020. The Credit Ratings/Outlook were last updated on 22 July 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.