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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of B-/Stable to Jaka Trade Kft.

Rating rationale

Jaka Trade’s business risk profile suffers from the company’s small size, its associated key person risk (negative ESG factor), and volatile cash flow from a highly concentrated portfolio of six properties with a 32% contribution of top three tenants to rental cash flow (as at end-September 2021; top10: 60%). The company’s portfolio, while benefitting from relatively good property locations, is somewhat aged, resulting in weak key performance indicators (weighted average unexpired lease term of 1.6 years and occupancy of 73% both as at end-September 2021), limiting cash flow visibility, below peer profitability with Scope-adjusted EBITDA margins (9M to end-September 2021: 47%), and increased capex needs.

While planned capex will certainly have a positive impact on asset quality, it comes at the expense of an increase in leverage caused by negative free operating cash flow that will be debt funded. As capex-related top line growth is expected to kick in with an 18 to 24-month delay, Jaka Trade will suffer from below-par (<1x) interest coverage during the first part of the upcoming investment phase (2022 to 2023). Furthermore, Jaka Trade’s liquidity is seen as weak since cash uses are not fully covered by cash sources, pointing to a continued dependence on external financing, at least during the upcoming investment phase. However, liquidity is seen a manageable risk as the company’s properties are mostly unencumbered (except for the retail property in Bicske).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook for Jaka Trade is Stable and reflects Scope’s expectation that the company will execute the development of the first phase of the workers’ hostel (to be delivered between 2023-26) financed with secured investment loans as well as the housing project (2024). The Outlook further reflects a substantial increase in leverage triggered by the debt funded development activity, with a Scope-adjusted loan/value ratio of between 50% and 60% and Scope-adjusted debt/Scope-adjusted EBITDA significantly above 10x during the first phase of the investment phase.

A positive action is remote and would require the company to grow significantly, which could occur after the planned investment phase, while keeping Scope-adjusted loan/value ratio sustainably below 60%, paired with adequate liquidity.

A negative rating action is possible if liquidity weakens further, and the company loses access to external financing, on which the development projects rely.

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 this Credit Rating and/or Outlook, (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-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 Rating if the Credit Rating was 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 Rating: 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 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.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Philipp Wass, Executive Director
Person responsible for approval of the Credit Rating: Tommy Träsk, Director
The Credit Rating/Outlook was first released by Scope Ratings on 24 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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