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Rating action

Scope Ratings GmbH (Scope) has affirmed the BBB-/Stable issuer rating of Globe Trade Centre S.A. (GTC) and its subsidiary GTC Real Estate Development Hungary Zrt. The senior unsecured debt rating has been affirmed at BBB. Concurrently, Scope has assigned a first-time rating of BBB- to the green notes (XS2356039268) issued by GTC Aurora Luxembourg S.A. that are unconditionally and irrevocably guaranteed by GTC.

Rating rationale

GTC entered growth mode in the 12 months to end-September 2021. Scope-adjusted total assets rose to EUR 2.6bn (+13% YoY) and its gross leasable area (GLA) increased by 14%, enabled by available cash, positive FFO and the extensive tapping of capital markets (EUR 670m in debt and EUR 123m in equity issuances) between December 2020 and December 2021. The disposal of the Serbian office portfolio (EUR 267m book value / 122,000 sq m) to Indotek [1] will significantly reduce the company’s portfolio by more than 10%. However, this should be counterbalanced by the ongoing execution on the development pipeline, with 54,000 sq m of GLA to be delivered in the twelve months to end-September 2022, as well as potential acquisitions in the next 12-18 months.

The disposal of the Serbian office portfolio weakens GTC’s geographical diversification. However, GTC remains committed to Serbia, keeping most of its staff following the office disposal, operating the Ada Mall (GLA of 35,000 sq m), developing GTC X (16,800 sq m in office space) and acquiring a new landbank in Belgrade, which allows the development of 79,000 sq m in GLA. Furthermore, improved tenant diversification, with the top three tenants accounting for 9% ( 5pp YoY) of rental income as at September 2021 (top 10: 22% / -4pp YoY) will largely be maintained following the disposal of the Serbian office portfolio. This will reduce risk related to single tenant defaults or bad payment behaviour.

The development pipeline has been cut by more than half in the last twelve months. Scope sees reduced development exposure as positive, especially in light of weaker rental markets causing occupancy to drop (91% as at end-September 2021 / -4pp YoY) driven by the delivery of new developments (ABC II and Matrix B) with occupancy rates of below 85%. Scope sees limited upside potential for the time being. The relocation of ExxonMobil to ‘The Pillar’ property in the company’s portfolio (delivered YE 2021), the successive refurbishment of the Center Point 1+2 properties (previously home to ExxonMobil) and the opportunistic start of Sofia Tower 2 (0% pre-letting) will not be balanced by the expected successful up-letting of delivered developments (ABC II and Matrix B) in the coming months. Risk regarding future occupancy levels is amplified by the relatively short WAULT of 3.4 years as at end-September 2021 (+0.4 years YoY), which exposes GTC to ongoing re-letting risk, especially in light of muted demand.

GTC’s Scope-adjusted EBITDA margin remained above 80% (last twelve months to end-September 2021: 85%). This was despite pressure on cash generation from the company’s retail property portfolio, which was balanced by a sharp reduction in operating expenditures – which, however, became less pronounced in 2021. Consequently, GTC’s Scope-adjusted EBITDA margin should normalise at around 80%, a level that is still comparatively high.

Pressure on cash generation from GTC’s retail portfolio will remain elevated as the Covid-19 pandemic is far from contained, with new cases reaching all-time highs. Consequently, rent collections did not recover sustainably in the first nine months of 2021 (74% collection of annualised in place rents). To preserve cash, the company retained dividends for 2019 and 2020. GTC has also scaled back its development pipeline, with only EUR 37m in capital expenditure committed as at end-September 2021. Paired with ongoing positive operating cash flow, GTC should be able to keep net debt and interest cover stable (Scope-adjusted EBITDA interest cover stood at 3.4x for the last twelve months to end-September 2021). Interest cover also benefits from a further reduction in the weighted average cost of debt, down to 2.1% (-36bp YoY).

GTC’s leverage as measured by its Scope-adjusted loan/value ratio was slightly elevated as at end-September 2021 (54%). However, Scope forecasts that it will fall to around 50% as at YE 2021 thanks to a EUR 123m capital increase executed in December 2021. The disposal of the Serbian office portfolio in January 2022 enlarges financial headroom, bringing the Scope-adjusted loan/value ratio down to the mid 40’s – a level needed to withstand further pressure on fair value, especially for the company’s retail properties. The Scope-adjusted loan/value should remain around 50% going forward thanks to stable net debt and GTC’s proven adherence to its financial policy, which ensures creditor protection.

GTC has successfully improved its liquidity situation, which was consistently stretched due to its relatively low weighted average debt maturity of four to five years (end-September 2021: 5.0 years) as well as negative Scope-adjusted free operating cash flow due to portfolio expansion in the last couple of years. Bolstered by EUR 670m in bond issuances since December 2020, GTC repaid debt to restructure its liability side. Furthermore, the company signed a EUR 75m revolving credit facility in October 2021 (maturity in 2024 plus two one-year extension options). Scope acknowledges the company’s aim of switching financing mainly to senior unsecured debt (targeting a 85%-90% share), providing more headroom under financial covenants ‑ especially by repaying bank debt -, higher flexibility regards portfolio adjustments as well as increased visibility on capital markets.

Outlook and rating-change drivers

The Outlook for GTC is Stable and reflects Scope’s view that the company’s portfolio will continue to grow profitably, with the impact of Covid-19 on cash generation addressed by reduced capital expenditure and the suspension of dividends. As a consequence, Scope assumes broadly stable credit metrics going forward, with a Scope-adjusted loan/value ratio of around 50% and Scope-adjusted EBITDA interest cover of above 3x.

A positive action is seen remote and would require the company to reduce leverage, as measured by its Scope-adjusted loan/value ratio, to around 40% on a sustained basis, supported by commensurate financial policy. This could happen if e.g. GTC manages to increase rental cash flow, thus enlarging its financial headroom to repay debt and support stable or increasing portfolio value.

A negative rating action is possible if GTC’s Scope-adjusted loan/value ratio increases to around 55% on a sustained basis, potentially triggered by a further drop in the portfolio value of the company’s assets beyond Scope’s expectations.

Long-term and short-term debt ratings

GTC has EUR 724m in capital market debt outstanding as at end-September 2021. All issuances are irrevocably and unconditionally guaranteed by Globe Trade Centre S.A.

The issuer’s unencumbered asset ratio stands at 155% as at end-September 2021, providing sufficient collateral to bondholders and thus justifying the senior unsecured debt rating of BBB-.

Rating driver references
1. Company news, 12.01.2022

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 Outlooks, (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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 November 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.

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