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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating on Wingholding Zrt (Wing). Scope has also affirmed the senior unsecured debt rating of B+.

Rating rationale

The business risk profile (assessed at BB) reflects Wing’s solid market position in Hungary and Poland, supported by a well-diversified portfolio and development pipeline across property asset classes. The company’s size increase in recent years was driven by the successful execution of its development projects and upscaling through acquisitions, balanced by opportunistic value-adding divestments. The issuer’s develop-to-hold commercial projects are predominantly oriented towards industrial and logistics properties (66% of the pipeline), which have benefitted from sustained occupier demand and good rental growth prospects. Wing’s investment portfolio is primarily located in Budapest and consists of good-quality assets, which helps to limit the vulnerability to widening yields and increasing vacancies. The investment in Echo (2019) marked its entry into the Polish residential development market and strengthened its diversification. Another major step will involve an expansion in Germany through the purchase of a majority stake in Bauwert AG, a Berlin-based property developer (closing expected in Q1 2023).

The high interest rates and inflation are putting a severe strain on the property development market. However, Wing’s development activities do not entail extra risk. The inherent development risks are mitigated by the issuer’s high pre-sale rate on residential projects (123% according to Scope’s definition) and high pre-lease rate on commercial projects (46%), ensuring good visibility over future cash flows. At the same time, recurring revenues from leased properties provide some buffer should disposals take longer than expected. Moreover, in response to the weaker market conditions, the company is focusing on the largest markets for new residential projects (e.g. Krakow and Warsaw) while keeping costs under control. Even so, the exposure to the weakening Hungarian economy, the weak demand for newly built apartments and the high development costs are holding back the business risk profile. As such, operating profitability will remain volatile. The Scope-adjusted EBITDA margin is expected in the 15-25% range, supported by i) recurring revenues from the investment portfolio; ii) tighter cost control and the prudent approach towards new projects; iii) sound procurement capacities; and iv) the gradual easing in construction costs in conjunction with lower contracting volume. Scope estimates the internal rate of return to stand between 15-20%.

The financial risk profile (assessed at B) reflects the company’s high indebtedness paired with high interest rate risk, although Scope expects leverage to ease going forward. Leverage as measured by Scope-adjusted debt/EBITDA (excluding netting of cash) has materially increased from pre-2019 levels, owing largely to the debt raised to partly finance the acquisition of the majority stake in Echo. Leverage has since steadied at elevated levels (end-June 2022: 15.6x), with Scope-adjusted debt nearing HUF 509bn (around HUF 459bn as at end-December 2021). A leverage in excess of 8x is high for a real estate developer, thus limiting the rating. Concurrently, the high indebtedness also lifted the Scope-adjusted loan/value (LTV) well above 60%, although this ratio holds less weight in Scope’s assessment given the develop-to-sell focus. In addition, the weaker market conditions have narrowed Wing’s access to external financing given its high leverage. This could ultimately impair its ability to weather volatility in earnings, a rising cost of capital, higher working capital needs, declining property market values and unforeseen operational disruption. However, Scope expects the company to keep the debt level under control, hence allowing a deleveraging path in response to the high interest rate environment. As such, leverage is expected to be sustained between 10-15x, benefitting from a net debt reduction with Scope-adjusted debt reducing below HUF 460bn. Part of the proceeds from planned asset disposals will be allocated towards new investments and the repayment of short-term loans, while maturing bonds will be refinanced at longer terms.

Debt protection weakened significantly from pre-2020 levels and has been constrained by the high share of floating-rate debt (47% indexed to Wibor and/or Bubor reference rates as of end-June 2022). Wing’s current interest cover (1.8x as of end-June 2022) suggests limited headroom against the risk of cash flow volatility, though this risk is mitigated by prudent liquidity management, including the use of collateralised accounts for debt servicing. As such, Scope-adjusted EBITDA/interest cover is expected to remain below 2x, affected by the heavier interest burden, partially mitigated by scheduled debt repayments that will reduce the volume of costly loans (up to HUF 50bn of outstanding floating-rate debt is due before end-June 2023).

Liquidity is adequate, with cash sources (unrestricted cash of HUF 102.9bn as of end-December 2021 and forecasted free operating cash flow of HUF 49.9bn) fully covering short-term debt of HUF 105.9bn due in the 12 months to end-December 2022. Sizeable asset disposals concluded in 2021 and H1 2022 have strengthened liquidity, which is also expected to be sustained by further divestments. In view of the company’s good relationships with a diversified pool of banking partners and its proven record in the capital markets, liquidity and refinancing risks are manageable.

Outlook and rating-change drivers

The Stable Outlook reflects Wing’s sound liquidity as well as Scope’s view that the company will prudently execute on its development pipeline and maintain high pre-sale rate, while keeping leverage under control with Scope-adjusted debt/EBITDA kept between 10-15x. Furthermore, the Stable Outlook reflects Scope’s expectation that business relationship with Resi4Rent will support the issuer’s activity levels, balancing to some extent the drop in retail-sales in H2 2022.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA declined below 8x while Scope-adjusted EBITDA/interest cover reached above 2x on a sustained basis. Given heightened pressure from worsen market conditions, such as scenario is remote for the time being.

A negative rating action could occur if Scope-adjusted debt/EBITDA steadied above 15x or Scope-adjusted EBITDA/interest cover dropped below 1.5x on a sustained basis. This could be triggered by a pronounced decline in sales volume and prolonged disposal periods in a deteriorated market environment.

Scope notes that Wingholding Zrt.’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have an accelerated repayment clause. The clause requires the issuer to repay the nominal amount if the rating falls below B+ and is not restored to that level within two years or immediately if the bond rating falls below B-, which could have default implications.

Long-term debt rating

Scope has affirmed the B+ debt rating to senior unsecured debt issued by Wingholding Zrt. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on Wing’s liquidation value. With an unencumbered asset ratio above 100%, senior unsecured debt holders could also benefit from a pool of assets that have not been pledged as collateral.

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, (European Real Estate Rating Methodology, 25 January 2023; General Corporate Rating Methodology, 15 July 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 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: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlooks were last updated on 27 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.

Conditions of use/exclusion of liability
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