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

Rating action

Scope Ratings GmbH (Scope) has affirmed the B+ rating on Wingholding Zrt. (Wing) and revised the Outlook to Stable from Positive. The senior unsecured debt rating has been lowered to B+ from BB-.

Rating rationale

The rating affirmation reflects stronger credit metrics in H1 2021 than in the preceding year, helped by robust market conditions for logistics real estate in Hungary and residential property in Poland as well as an increase in capital gains from the sale of investment properties. Echo-Archicom group sold nearly 4,500 units in 2021, a large year-on-year increase. Asset sales have also boosted the company’s liquidity position.

The Outlook revision to Stable from Positive reflects updates to Scope’s real estate rating methodology (published on 25 January 2022), which increases the EBITDA interest expense thresholds for real estate developers. Scope also expects a higher interest expense burden in 2022 and 2023, given that about 68% of Wing’s debt is floating and just under half of debt is denominated in HUF and PLN. Wing’s asset mix also shifted towards developments in 2021 and Scope’s methodology focusses more on the Scope-adjusted debt (SaD)/EBITDA ratio than on the Scope-adjusted loan/value ratio when assessing leverage for property developers. Scope has revised its ratings upgrade and downgrade triggers for Wing accordingly and therefore sees a near-term rating upgrade as less likely than previously.

Scope maintains its assessment of Wing’s business risk profile at BB, based on its leading market positions in logistics real estate in Hungary and residential property in Poland as well as a young rental portfolio and good tenant quality. Recent acquisitions in Poland have improved geographical diversification and client granularity and led to a substantial increase in size and visibility, strengthening Wing’s market position. At the same time, the acquisitions, together with significant disposals of rental properties in Hungary, have shifted the portfolio towards more volatile revenue and earnings sources, with profitability more driven by ad hoc and opportunistic disposals of investment properties than by real estate rental, development and services.

Scope now assesses Wing’s financial risk profile at B, one notch lower than before. This is because the agency expects Scope-adjusted EBTIDA interest cover of 1.5x-2.0x going forward, compared to over 2.0x previously (3.0x in H1 2021). The change is primarily due to higher BUBOR and WIBOR interest rate expectations. Scope also expects SaD/Scope-adjusted EBITDA of 10-15 x (10.0x in H1 2021).

Liquidity is considered adequate based on strong cash balances (HUF 146bn at YE 2021), following significant investment property disposals during 2021, including Infopark and the Ericsson headquarters buildings in Budapest, as well as company discretion over the size and timing of its capital expenditures.

Outlook and rating-change drivers

The Stable Outlook is based on continued robust market conditions for logistics property in Hungary and residential property in Poland, Wing’s strong liquidity position following significant rental property disposals in 2021, as well as a cautious dividend and investment policy.

A negative rating action might occur if the Scope-adjusted EBITDA interest cover ratio drops to below 1.5x or SaD/Scope-adjusted EBITDA exceeds 15x on a sustained basis. This could result from significant debt-financed acquisitions, weaker demand for real estate in Hungary or Poland, or if Wing is unable to maintain its track record of consistent capital gains from the sale of investment properties.

A positive rating action might be warranted if the issuer can maintain Scope-adjusted EBITDA interest cover above 2x and SaD/Scope-adjusted EBITDA below 8x on a sustained basis. A higher share of earnings derived from recuring (non-transactional) property rental, development and services could also contribute to a ratings upgrade.

Long-term and short-term debt ratings

Scope has lowered its senior unsecured debt rating on Wing to B+ from BB-. This follows a significant change in the composition of its assets away from rental properties and towards development assets. Scope applies a larger haircut to the value of developments in progress and inventories in a default scenario than to income-producing rental properties.

Scope’s updated financial forecast resulted in an ‘average’ (30%-50%) recovery rate for senior unsecured debt holders in a hypothetical default scenario in 2023. Senior unsecured creditors benefit from an unencumbered asset ratio of well above 100%.

Scope’s base case assumes the issuance of about HUF 10bn in senior unsecured corporate bonds under the Hungarian Central Bank’s Bond Funding for Growth Scheme during Q1 2022. The bond’s tenor is 10 years with 10% annual amortisation from year five and 50% in year ten. The coupon will be fixed and payable on an annual basis. Proceeds from the bond are earmarked for investments in real estate assets and refinancing. 

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, 25 January 2022), 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-EU. 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 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 27 August 2019. The Credit Ratings/Outlook were last updated on 3 August 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
© 2022 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.