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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB issuer rating of Cordia International Zrt. and changed the Outlook to Negative. Scope has also affirmed the BB rating assigned to senior unsecured debt.

Rating rationale

The Outlook change reflects Scope’s expectation of Cordia’s ongoing business expansion, despite the weaker anticipated economic environment, which if pursued will be putting strain on the company’s financial risk profile. The Negative Outlook is also driven by the greater uncertainty in the overall market environment, resulting in a potential squeeze on profit margins due to a slowdown of sales, while inflationary pressure, supply chain disruptions and increasing interest rates weigh on the cost side. Cordia’s expansion includes a new build-to-rent development business segment in the UK together with further growth in its core markets in Hungary, Poland and Romania.

In 2021, the company handed over a record 2,185 flats to new owners. Of these, 68% were in its home market of Hungary, 21% were in Poland and the remaining 10% were the first 221 flats to be handed over in Romania. Cordia’s Scope-adjusted assets were almost unchanged YoY, standing at HUF 246bn (EUR 660m) at year-end 2021. However, Scope expects the company to grow significantly over the next three years, if management pursues all its growth plans. Cordia’s market shares remained moderate in its home market of Hungary at around 12% of total new developments or 20% in its addressable mid-market segment. The same applied to Poland and Romania, where its market shares remained modest.

Diversification continues to be a strength, with a geographical spread over four countries (Hungary, Poland, Romania and Germany via its 15.4% share in listed residential property company Argo Properties), a diversified pipeline of 14,200 apartments split across over 60 projects, diversified general contractors in Poland and Romania (and preferred contractor Pedrano in Hungary) and a highly diversified customer base of predominantly single-flat buyers for own use.

At year-end 2021, the average pre-sale rate for ongoing projects was at 48% of total value (translating into around 70% as per Scope’s cost coverage calculation), which is a deterioration compared to previous years. Looking at the projects to be finished in 2022, the rate increases to 60% (around 84% based on Scope’s cost coverage calculation), which is in line with previous years. However, the volatility of this ratio weighs on the rating. Operating profitability was negatively impacted by Covid-19 and the acquisition of Polnord, a Polish real estate developer, in 2020. Cordia has managed to restructure Polnord and increased its gross margin to 20% in 2021, compared to 3.7% in 2020. This turnaround was achieved much faster than anticipated by Scope.

Cordia’s financial risk profile improved significantly in 2021, exceeding Scope’s base case credit metrics. Scope-adjusted loan/value decreased to 30% from 37%, a level Scope also foresees for 2022E. Thereafter Scope’s base case assumes an ambitious growth plan with large development investments in the UK and Cordia’s home markets, lifting loan/value to 45% in 2023E if pursued by management. The same applies to leverage, as measured by Scope-adjusted debt/EBITDA, which fell to 4.8x in 2021 from 12.7x the year before, but is expected to increase somewhat throughout 2022E, before peaking sharply at 17x in 2023E on Scope’s forecast. While volatile, leverage ratios generally improved on a see-through basis. Scope forecasts levels (ex-2023) of around 7x compared to 11x last year. Interest cover improved in 2021 to 3.6x, up from 2.1x, helped by record low fixed interest rates on Cordia’s Hungarian bonds and a reduction of project loans. Given the rising interest rate environment and the expected uptake of significant project loans in 2023E to finance the growth plan assumed under Scope’s base case, Scope believes EBITDA interest cover will deteriorate to 1.5x at worst in 2023E, before improving to above 2x again. Scope also sees mounting risks of an increase in the floating rate loans needed to finance the company’s expansion in light of the rising interest rate environment. Cordia’s expansive growth strategy, if pursued, makes credit metrics highly volatile and weighs on the company’s financial risk profile.

Scope expects Cordia’s liquidity to stay adequate for the next three years despite highly negative cash flows forecasted in 2023 turning the ratio negative. Scope believes the company will be comfortably able to repay debt in the next 12-24 months as all short-term debt is tied to construction projects and is thus only repaid upon project completion.

As a major CEE real estate developer, Cordia is willing and able to significantly contribute to the goals of the EU’s Green Deal to decrease the greenhouse gas emission of buildings in the region. The company also endorses all 17 sustainable development goals as defined by the UN. Cordia’s ambitions regarding green buildings and energy efficiency benefit customers and the company alike, allowing buyers to take out subsidised green mortgages and opening up the potential to issue green bonds at favourable conditions for the latter.

Outlook and rating-change drivers

The Outlook for Cordia is Negative reflecting Scope’s view of a high probability of leverage, as measured by Scope-adjusted debt/EBITDA, averaging 10x for the next three years and interest cover, as measured by EBITDA/interest, below 2.5x on a sustained basis amid lower visibility on business fundamentals i.e. a weaker economic environment and inflationary pressure. Scope’s base case incorporates the following assumptions: i) Cordia will continue to successfully execute its growth plans and integrate acquired entities; ii) a loan/value ratio of below 50% based on Scope-adjusted debt/Scope-adjusted total assets; and iii) volatile EBITDA interest coverage with short-term dips due to project loans and the nature of the business.

A positive rating action, with a return to a Stable Outlook, could be warranted by interest cover of above 2.5x on a sustained basis. This could, for instance, be achieved via significant recurring rental income, a different funding structure for Cordia’s ambitious expansion resulting in less floating rate construction loans and/or a more conservative growth strategy.

A negative rating action, i.e. a downgrade, might be warranted by EBITDA interest cover below 2.5x on a sustained basis. This could be triggered by a deterioration in market conditions, accelerated interest rate growth and a related margin squeeze widening the gap between required EBITDA and interest to be covered.

Long-term and short-term debt ratings

Cordia currently has four senior unsecured bonds outstanding, three in HUF (fixed coupon) and one in PLN (floating rate).

We rate senior unsecured debt at the same level as the issuer rating based on: i) our recovery analysis, with a hypothetical default scenario at year-end 2024, which shows a high sensitivity to attainable prices in a distressed sales scenario; ii) the structural subordination of Cordia’s senior unsecured creditors to construction loans on SPV level; and iii) current and future secured debt at property SPV level, which consists of fully drawn construction loans at the hypothetical point of default. This translates into a BB rating for senior unsecured debt. 

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; European Real Estate Rating Methodology, 25 January 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Rating: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 12 September 2019. The Credit Ratings/Outlook were last updated on 26 June 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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

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.