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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Euroboden GmbH and revised the Outlook to Negative from Stable. Concurrently Scope has downgraded the rating for senior unsecured debt issued by Euroboden GmbH to BB- from BB.

Rating rationale

The change in Outlook reflects the risk of very high leverage for the next two years, driven by weaker operating performance, including lower demand for Euroboden’s developments, potential delays to project execution and handovers. Together with higher financing costs this could potentially weaken Euroboden’s liquidity position.

Scope expects a weaker result for FY 2022 in line with H1 2022 which saw revenues down by 37% YoY resulting from a delay in sales and rescheduling of project timelines. This follows last year’s strong performance which benefited from growing demand, fuelled by the pandemic, for high-quality, modern living space in the top German markets of Munich and Berlin.

The business risk profile (assessed at B+) continues to reflect Euroboden’s relatively small size with a geographical concentration around its two core markets of Munich (70% of estimated pipeline sales) and Berlin (26%). Scope acknowledges the company’s robust market share and visibility in its two core markets. Future revenue potential is backed by a large pipeline totalling EUR 2bn as of June 2022 (up 30% YoY). Asset quality remains a major credit-positive factor for the company’s business risk profile, with a continuing focus on ‘A’ locations and thus relatively liquid real estate projects. The issuer’s track record and brand name allow for off-market deals, which ensure the constant replenishment and further growth of the project pipeline, as demonstrated in the past. However, Scope believes that the current macroeconomic environment paired with rising interest rates, following central bank attempts to stem inflation, will significantly cool down demand from institutional and retail investors alike, leading to a delay in realising the potential returns from the pipeline.

Further, while the Scope-adjusted EBITDA margin of 22% in FY 2021 was in line with expectations, Scope anticipates margins (Scope-adjusted EBITDA margin and levered IRR) to decline in FY 2022 and going forward due to cost inflation (construction, financing) and delays of sales. The agency acknowledges Euroboden’s high asset quality that supports price stability in a distressed sales scenario, as well as the company’s ability to realize significant hidden reserves in its portfolio.

The financial risk profile (assessed B) is characterised by Scope’s expectation of weakening interest cover in FY 2022 and beyond driven by: i) the anticipated squeeze of margins; ii) Euroboden’s high exposure to floating rate debt (most of bank loans); and iii) an increase in interest-bearing debt to finance extended development periods. Scope nevertheless expects Scope-adjusted EBITDA/interest cover to remain around 2x on average, over the medium to long term, driven by the expected cash flow from the delivery of projects, even if somewhat delayed.

Lower sales and rising debt have resulted in higher leverage as measured by Scope-adjusted debt/EBITDA of 21x for the 12 months ending March 2022 (up from 7.1x one year earlier) and is anticipated to remain elevated for the next two years. The very high leverage burdens the company’s debt coverage capacities, thus increasing its dependency on the availability of external financing. However, the associated risk is partially mitigated by the still adequate Scope-adjusted loan/value ratio of 50% as at end-March 2022, and secured loan/value ratio of around 40%, providing access to additional secured financing.

Scope considers Euroboden’s liquidity to be adequate for the coming six months. While liquidity still suffers from substantial short-term debt and negative free operating cash flows because of ongoing real estate developments, it benefits from an increased volume of undrawn committed credit lines lines (EUR 24.5m as at end-June 2022) as well as the fact that most of projects are of a discretionary nature. In the case of a weaker-than-expected liquidity situation, new project acquisitions and constructions starts could be postponed or cancelled. However, Scope highlights that external financing needs could quickly escalate, in light of the current market environment, putting pressure on Euroboden’s liquidity position.

Outlook and rating-change drivers

The Negative Outlook reflects Scope’s expectation of higher leverage as measured by Scope-adjusted debt/EBITDA remaining above 15x over the coming two years because of weaker operating performance with lower margins, higher cost of debt and a delay in sales driven by lower investor demand and/or a shortage of raw materials and labour. It further reflects that external financing needs, which could quickly escalate because of extended disposal periods, will come at higher interest rates, putting pressure on the interest cover and potentially the liquidity position.

A reversion back to a stable outlook would require an improvement of the company’s financial risk profile, with Scope-adjusted debt/EBITDA reduced to below 15x while Scope-adjusted EBITDA interest cover remained above 2x on a sustained basis.

A negative rating action, i.e., a downgrade might be warranted if Scope-adjusted debt/EBITDA were to stay above 15x, Scope-adjusted EBITDA interest cover were to fall below 2x or if access to bank financing weakened. This could happen through a sales volume slump caused by: i) delays in the execution of developments; or ii) a serious deterioration in the German real estate market.

Long-term debt ratings

As of September 2022, Euroboden has EUR 91m of senior unsecured capital market debt outstanding. Scope’s recovery analysis is based on the liquidation value of Euroboden’s assets in a hypothetical default scenario, including hidden reserves estimated by the issuer. According to Scope’s methodology and reasonable discounts to the company’s asset base as well as likely changes to the company’s capital structure on its path to default, Scope assumes an ‘above average’ (previously ‘superior’) recovery leading to a downgrade of the senior unsecured debt rating to BB- (one notch above the issuer rating).

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, (General Corporate Rating Methodology, 15 July 2022; 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 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: 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Tommy Träsk, Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 May 2015. The Credit Ratings/Outlook were last updated on 30 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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