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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating on Kopaszi Gát Zrt. (in September 2022, Kopaszi Gát changed its company form, from a Kft. to Zrt.). Scope has also affirmed the B+ rating for the senior unsecured debt category.

Rating rationale

The rating affirmation reflects Scope’s unchanged view on Kopaszi’s business risk profile (assessed at B+), which benefits from its high asset quality portfolio of newly developed properties – BudaPart Project – in the Kopaszi Dam neighbourhood in Budapest with robust sales performance YTD. The BudaPart mixed-use project is the largest real estate development in Budapest. It consists of 26 buildings including residences, offices and a hotel.

Credit-positive aspects are the diversified customer base due to the B2C residential core business and the issuer’s focus on medium- to high-end energy-efficient residential projects (ESG factor: credit positive), which are more in demand in comparison to old or renovated housing and less energy-efficient projects. Robust demand, reflected in the high pre-sale ratio of around 75%, comes despite the increasing interest rates and rapidly rising living costs in Hungary (the consumer price index increased more than 20% YoY) that are making housing significantly less affordable.

Similarly, Scope believes that demand for newly built, energy-efficient offices will remain robust, compared to more obsolete supply, as outdated buildings, independent of their respective locations, are vulnerable to deteriorating tenant demand and will experience more downward pressure on rents.

Profitability as measured by the Scope-adjusted EBITDA margin stood at 28% in 2021. Scope anticipates that Scope-adjusted EBITDA margin, along with levered IRR, to decline in FY 2022 and going forward due to cost inflation (construction, financing) and potential sales delays. However, Scope acknowledges that materials price pressure has recently eased, and projects have not shown significant budget overruns in previous months. At the single project level, profitability has remained relatively stable, providing certainty that profitability is sustainable at around 20%.

The financial risk profile (assessed at B+) reflects Scope’s expectation that credit metrics will return to a level commensurate with the rating in 2023, after an expected weakening in 2022 due to the delay in the disposal of the BOE office building as Kopaszi expects better returns by waiting until 2023 considering the current unsupportive macroeconomic environment. Scope notes the heightened execution risk associated with that strategy, as buyers are understandably more cautious and hesitant to make decisions, preferring a wait-and-see approach in the current economic climate. Nevertheless, the building scores high on quality and energy efficiency with a LEED Gold certification, partially mitigating this risk; more than five international investors having signed the NDA and are interested in acquiring the building.

Scope-adjusted EBITDA interest cover will be squeezed by the sharp decrease in EBITDA anticipated, declining to 0.2x in 2022 from 5.8x in 2021. While Scope expects the ratio to continue fluctuating, depending on the timely delivery and disposal of projects, debt protection will remain solid over the next two years, supported by the strong sales performance of the residential buildings. Scope foresees interest cover sustained at above 2x on average for the period from 2022 to 2024.

Scope-adjusted debt is forecasted to exceed EUR 200m by YE 2024 (H1 2022: EUR 152.4m) and Scope-adjusted debt/EBITDA to approach around 11x by 2024. The company’s net financial debt increased after the unsecured bond placement that was partly used to redeem existing loans of about EUR 51m. The company will repay the remaining shareholder loan of about EUR 31.6m after the BOE office building disposal (ESG factor: credit negative) and Scope assumes additional debt of about EUR 86m in the period to 2024. Whilst Scope foresees some fluctuation, as volatility is typical for a developer, Scope expects the ratio to remain at a level commensurate with a B category financial risk profile.

Kopaszi’s liquidity is adequate, supported by unrestricted cash of EUR 77m as at end-June 2022 and a back-loaded debt maturity profile, with no significant amount due in the next few years. Given the long maturity of the HUF 34.5bn bond, upcoming short-term maturities will be manageable. Scope also expects the company to maintain its low short-term debt levels and ensure these are covered by available liquidity. Even if free operating cash flow turns negative due to investments in the next few years, capex will be mostly discretionary and financed by a combination of available internal resources and open credit lines (more than EUR 89m as of November 2022) available for financing specific developments.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the disposal of the BOE office building and two residential buildings in 2023. While Scope expects weakened credit metrics in 2022, metrics will return to adequate levels for the rating category from 2023 onwards. Scope foresees that Scope-adjusted debt/EBITDA will approach 11x by 2024 and Scope-adjusted EBITDA interest cover is expected to remain above 2.0x on average in the period from 2022 to 2024. The Outlook also assumes ongoing adequate access to external financing to finance the company’s business plan.

A positive rating action is remote but may be warranted if the company grew significantly in size, as measured by its development pipeline, leading to greater diversification and more stable cash flows, while leverage as measured by Scope-adjusted debt/EBITDA stabilised below 8x on a sustained basis.

A negative rating action is possible if Scope-adjusted debt/EBITDA were to reach well above 12x or if liquidity weakened, for example, due to weaker access to bank financing.

Furthermore, senior unsecured bonds issued by Kopaszi include a debt acceleration clause triggering early repayment if the rating falls below B+ and is not restored within two years or if the rating falls below B- the debt acceleration becomes immediate (60 days).

Long-term debt rating

Scope’s recovery analysis is based on a hypothetical default scenario at year-end 2024. Scope estimates the recovery for all senior secured debt to be average driven by high sensitivity to attainable prices in a distressed sales scenario and the structural subordination of the rated entity’s senior unsecured creditors below future secured creditors at the property SPV level (development loans), justifying a debt class rating equal to that of the issuer (B+).

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 Outlooks, (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 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 January 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.
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
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