The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed Duna House Holding Nyrt.’s issuer rating at BB-/Stable. Scope has also affirmed the senior unsecured debt rating at BB-.

Rating rationale

The affirmation is mainly supported by a strong performance in 2021 and H1 2022 but constrained by a slowdown in volumes in H2 2022, driven by rising interest rates in Hungary and Poland, which have negatively impacted the demand for loans.

The business risk profile (assessed at BB-) still benefits from the group’s market position as one of the leading real estate and loan brokerages in its home markets of Hungary and in Poland. It also benefits from the successful acquisition of the second largest loan broker in Italy, Hgroup, completed in January 2022. The acquisition has improved diversification and reduced Duna House’s dependency on CEE markets and real estate products, as a substantial part of Hgroup’s business is related to personal loans and insurance. Client base granularity is high and growing since the group operates as a service provider to retail clients with few recurring transactions from a single client. The issuer’s business risk profile remains constrained by the growing but still small absolute size of the business in the very fragmented markets in which it operates. It is also limited by the shrinking Scope-adjusted EBITDA margin following an aggressive expansion policy in recent years, with the issuer prioritising market share gains over efficiency. Scope expects profitability to further decline in the coming two years based on the general downturn in real estate and loan demand. Scope however expects the Group to return to operating margins of above 10% after a successful integration of Hgroup, which should create substantial economies of scale over time.

The issuer’s financial risk profile (assessed at BB, one notch higher than before) continues to benefit from its strong interest coverage, even after the average interest rate increase (3.1% as at end-June 2022; up from 1.9% at end-2021). Scope expects the company’s ability to benefit from high interest income on its cash deposits in Hungary to drive up net interest income. Even if interest rates on deposits started falling again (unlikely in the short-to-medium term), the issuer’s interest cover should remain above 10x. Leverage as measured by Scope-adjusted debt/EBITDA has suffered from debt-financed acquisitions in recent years, reaching above 3x at YE 2021. Scope forecasts stable leverage at around 3.0x as the delivery of the real estate units developed in Hungary should generate substantial cash flow in 2022 and 2023 to finance the ongoing business. Management has reiterated its strategic objective of keeping financial leverage below 3.0x regardless of acquisitions.

Scope’s assessment of the financial risk profile also incorporates execution and integration risks related to the issuer’s strategic focus on acquisitions, which creates uncertain and volatile cash flow.

Liquidity is adequate given that no substantial financial debt currently exists apart from two bonds that will only be repayable from 2026.

Outlook and rating-change drivers

The Outlook is Stable. It incorporates Scope’s expectation that Duna House will maintain strong debt protection and successfully integrate Hgroup, which provides some diversification and stability to offset the negative market trend in Hungary and Poland. The Stable Outlook also reflects Scope’s expectations that, despite weaker demand, the issuer will be able to maintain key metrics in line with the agency’s base case.

A positive rating action would require the issuer to show credit metrics above Scope’s expectations, i.e. Scope-adjusted debt/EBITDA sustained below 3.0x.

A negative rating action could be warranted if the issuer showed an increase in financial leverage (Scope-adjusted debt/EBITDA) to around 4.0x on a sustained basis. This could be caused by weaker-than-expected revenue due to overall transaction market weakness or substantial additional debt-funded investments beyond Scope’s financial base case.

Long-term debt rating

Scope has affirmed the debt instrument rating of BB- on all senior unsecured debt issued by Duna House. Scope based its recovery assessment on a going concern enterprise valuation and expects an average recovery for bond holders.

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 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 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 31 July 2020. The Credit Ratings/Outlook were last updated on 22 December 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
© 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.