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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of B+/Stable to Biggeorge Property Zrt. (BGP). Scope has also assigned a first-time rating of B+ to the company’s senior unsecured debt.

Rating rationale

The company’s business risk profile (assessed at B+) reflects its position as one of the largest integrated development service providers for residential real estate in Hungary, with a good performance track record and above industry returns on its investments. BGP’s business model mitigates development risk through fund structures whereby co-investors provide the bulk of the capital (with a capped return). The company earns fees on a multitude of services (mainly development and fund management) provided to the funds by its subsidiary Biggeorge Alapkezelo, as well as on capital invested in the funds and other investment vehicles. The level of fees is linked to the size of assets under management, but more so to the pace of growth and composition of the assets. This means visibility is good in the short term but can be volatile over longer time periods. Business risk is constrained by development risk (incl. permitting, construction and sales) directly through on-balance-sheet developments and in-directly through its fund investments. The overall size of BGP, with just over HUF 100bn (EUR 280m) of gross assets under management, its geographic concentration on Hungary and Budapest, and segment concentration on residential and logistics real estate are also constraining factors. BGP is in a rapid growth phase, however, that could see assets under management triple by 2025.

BGP’s financial risk profile (assessed at B+) reflects leverage, as measured by Scope-adjusted debt/EBITDA, expected at around 4x over the next three years. Leverage will largely be a function of the amount and timing of capital invested in real estate projects going forward. The company proposes to issue a HUF 7bn bond under the Hungarian National Bank’s Bond Funding for Growth Scheme to fund two new residential developments to be funded on its own (without co-investors) as well as additional commercial (logistics and office) real estate fund investments. Scope expects interest coverage to remain above 4x given that the cost of most debt (i.e. the proposed bond) will be fixed. BGP’s credit profile benefits from Scope’s expectation of limited shareholder distributions, capped at 35% of net profits under the bond indenture.

When computing credit metrics for BGP, Scope does not consolidate assets and liabilities held in funds controlled by the company, since BGP’s effective economic interest in the funds is low. Instead, dividend income from investments in funds and joint ventures is included in Scope-adjusted EBITDA.

Interest rate and forex risk is mitigated, with most debt at the fund level at fixed rates and residential develop-to-sell projects financed with local currency loans and commercial develop-to-hold projects financed with euro-based loans (matching the euro-based rental income).

Liquidity is considered adequate proforma of the bond issuance, with planned investments to be funded by the proceeds of the bond and project-specific bank loans.

Outlook and rating-change drivers

The Outlook is Stable and reflects current strong demand for residential and logistics real estate in Hungary as well as the company’s track record to date of achieving above industry returns on its investments. Furthermore, the Stable Outlook reflects the expectation of Scope-adjusted debt to EBITDA to average around 4x during 2022-2024.

A positive rating action would require Scope-adjusted debt/EBITDA below 3.5x on a sustained basis. This could happen if market conditions remain strong and the company maintains a disciplined approach to leverage and new on-balance-sheet developments.

A negative rating action is possible if Scope-adjusted debt/EBITDA increases above 5x on a sustained basis. Leverage could increase above the threshold if the company were to pursue a more aggressive debt-funded growth strategy than expected, or if market demand for its products were to decline, reducing returns on investments and growth in assets under management.

Long-term and short-term debt ratings

BGP plans to issue a HUF 7bn (EUR 19.5m) senior unsecured bond under the Hungarian National Bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years with amortisation commencing five years after issuance (10% p.a. followed by 50% at maturity). The coupon, estimated by Scope at around 5%, is to be fixed and payable annually. There is a negative pledge provision preventing the issuer from pledging assets in favour of other bonds (but not other loans).

According to the terms and conditions of the bond, net proceeds are expected to be primarily applied by the Issuer in accordance with its Green Bond Framework, for the funding of its real estate development projects (in particular via a direct investment into real estate fund or other legal entity implementing the project), and/or for other real estate-related transactions (including, among others, acquisition of foreign or domestic real estate directly and/or indirectly through investing in foreign or domestic legal entities, acquisition of business shares, investment fund units, immaterial goods or similar type of securities), and/or acquisition of business shares of construction companies or constructors of pre-fabricated materials, and/or providing loans to subsidiaries with the same purpose.

Scope’s hypothetical default scenario indicates that a liquidation of the business would provide an ‘average’ recovery for senior unsecured debt, which Scope therefore rates in line with the issuer credit rating. Most of the value in the default scenario is expected to stem from accounts receivables and developments in progress, to which bank lenders have a priority claim.

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 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: 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 8 February 2022.

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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