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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on Hungarian holding company LP Portfolió Kft. The senior unsecured debt category rating has also been affirmed at BB-.

Rating rationale

The ratings continue to reflect Scope’s view on LP Portfolió (LP)’s robust financial risk profile in light of comparatively high recurring cost coverage rates. The ratings thus continue to be supported by Scope’s view on the company’s good recurring income generation capacity and lean cost structure. The ratings also reflect Scope’s view of LP’s conservative ‘buy-and-build’ investment approach around a slightly diversified number of target sectors in mostly non-cyclical industries (steel processing, solar energy, real estate). The various geopolitical crises around the world have not had a sizable negative effect on LP’s credit quality so far. On the contrary, the steel business is presently benefitting from steel shortages and higher selling prices. The overall size of the company still restrains the ratings despite a significant increase in asset values during the last three years. Net assets by book value are presently around HUF 9bn, about twice as high as in 2019.

LP’s investment strategy is focused on building diversified income streams over the long run around the 100% owner (Péter Lakics)’s 33% interest in family asset Lakics Gépgyártó Kft (heavy steel structures – engineering).

Portfolio diversification, a very important ratings driver in Scope’s assessment of holding companies, has already benefited LP due to the attractive investment environment for solar power plants in Hungary under regulated feed-in tariffs. In addition, the real estate division in particular has markedly improved in size over the past year, reflecting investments in shopping centres (Petőfi Center, Kaposvár) and in the hotel project (Budapest, VII district, Almássy Invest) to be developed by LP. More importantly, LP’s investment in a Budapest office park (XI. district IT Campus) seems promising as demand for this location benefits from the nearby Buda Part residential and commercial complex. The latest development project is the Komló manufacturing plant steel manufacturing project, whose investment phase should be completed in the last quarter of 2023. These developments in the real estate division have effectively overcome the company’s previous heavy concentration in the steel processing and solar energy segments. The real estate division has thus already become LP’s strongest division by asset value, having made the company’s overall diversification much more balanced since the end of 2020. While Scope deems LP’s present exposure to be comparatively stable and non-cyclical sectors (relative to GDP) to be a support from a ratings perspective, LP’s still-limited scale is not. Additionally, concentration risk remains very high with regard to dividend income as solar energy company Solar FM continued to provide the bulk of 2021’s dividend income, although part of it appears to have been paid from substance (equity). This is expected to change gradually given that the real estate division started to pay a small contribution in 2021 while the steel business is expected to do so in the current year.

The rating reflects no expansion into additional – potentially more cyclical – sectors. It also mirrors the still relatively low amount of debt on LP’s balance sheet. This includes the new bond. LP’s three bonds continue to account for the only financial debt on its balance sheet. Credit metrics remain relatively good in a holding company context despite the Covid crisis and despite bond issuing costs that have slightly depressed LP’s cost coverage in the last two years. Scope focuses on coverage of recurring holding costs by recurring income generated. This ratio was 2.8x in 2021 and is expected to be stable in 2022 and 2023 respectively. These comparatively high levels are explained by greater dividend income received chiefly from solar sector holdings – interrupted since 2019 – continuing to meet LP’s relatively lean cost structures. Although holding costs increased significantly in 2020 and 2021 (mainly reflecting bond coupon payments, related fees and additional staffing expenses), the income side still reflects the limited interest received on intercompany loans provided from bond proceeds as some SPVs are not allowed to pay interest in the pre-cash generation phase (most notably the hotel development Almássy square). However, this should improve in the current year as the divisions have made good operational progress in recent quarters. Scope believes LP can achieve the cost coverage ratios projected in the agency’s base case, reflecting the high visibility of the energy sector’s dividend income (the operational licenses and guaranteed feed-in tariffs for the 20 small solar energy power plants owned by LP last until 2041-42). LP’s cost structure also benefits from no dividend payments to the owner, which the agency has reconfirmed. The rating assumes this will not change for at least the next two to three years.

Scope consider LP’s liquidity situation to be adequate, reflecting no short-term debt maturities and good cash generation.

Scope’s overall neutral stance on ESG reflects a positive assessment with regard to product innovation (ESG factor) regarding LP’s large exposure to renewable energy, as well as negative assessments with regard to key person risk under management and supervision (ESG factor) and for stakeholder management (ESG factor) with regard to payout of substance for portfolio companies in the solar division.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that LP’s business risk and financial risk profiles will not change significantly in the next one to two years. The Outlook also incorporates total cost coverage by recurring income of at least 1x on a sustained basis and funding of further investment portfolio growth without additional bank debt.

A potential positive rating action would require improvements in LP’s business risk profile in terms of lower concentration risk or a significant investment portfolio on an absolute scale.

Downward rating pressure could be triggered by total cost coverage dropping to 0.8x on a sustained basis.

Long-term debt rating

In its recovery assessment, Scope calculated a liquidation value of about HUF 6.8bn in a hypothetical default scenario in 2023. This value was calculated by applying a conservative 50% discount to the estimated asset values of LP’s expected participations, reduced by 10% for insolvency costs. This would be equivalent to a full recovery of the three bonds totaling HUF 5.4bn issued under the MNB programme. Although this would allow the bonds to be rated two notches above the issuer rating under Scope’s methodology, the agency has limited the upside to just one notch (BB-), reflecting LP’s single B rating category.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022), is 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 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, the Rated Entities' Related Third Parties 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: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 October 2019. The Credit Ratings/Outlooks were last updated on 17 September 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
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