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Rating action

Scope Ratings has affirmed the B+/Stable issuer rating of Biggeorge Property Nyrt. (BGP). The senior unsecured debt rating has been upgraded to BB- from B+.

Rating rationale

The rating affirmation is driven by BGP’s ability to withstand macroeconomic pressures supported by adequate cash flow visibility from relatively high pre-sale rates for different projects held by BGP-managed funds to be delivered over the next two years.

The business risk profile (assessed at B+) is mainly driven by BGP’s good profitability. Scope-adjusted EBITDA margin will remain in line with previous years (averaging around 20%), subject to some volatility, depending on the delivery of outstanding projects in BGP’s pipeline. As a base case, the group's plan contains only one new residential project (Silverbay) to be started during 2023, while the start of other residential projects is subject to the market environment. The launch of two logistics projects is also planned for 2023. Scope anticipates that the current residential pipeline to be developed within the next few years will be sufficient for the group to maintain its market share in Hungary (estimated at 6% in term of total number of apartment units). Diversification remains weak given the absence of significant geographical outreach outside of Budapest but has improved with the addition of a logistics portfolio in the past year, in addition to other income-generating assets, mitigating the reliance on residential real estate developments.

BGP’s financial risk profile (assessed at BB-) is driven by the anticipated, relatively strong EBITDA generation of the group from high pre-sale rates for the underlying development pipeline (40-80% at end-January 2023), despite the negative market conditions prevailing until the anticipated recovery of the market in 12-18 months. Scope-adjusted debt is forecasted to remain stable around HUF 7bn, due to the expected break-even Scope-adjusted free operating cash flow, as BGP plans to launch only one new residential development project (Silverbay) and two logistics projects in the near term. Scope anticipates that the credit metrics will remain at levels close to or below 3.0x (Scope-adjusted debt/EBITDA) and near 30% (Scope-adjusted funds from operations/debt), supported by resilient cash generation in the next 12-18 months, and limited execution risk given the absence of new projects. Interest cover is expected to improve, helped by stable debt levels, fixed rates on existing debt and large financial interest income, related to the non-invested part of a capital injection (HUF 7.3bn) in 2022 which is positively affected by the Hungarian interest rate environment.

Liquidity is adequate due to the absence of short-term refinancing needs, BGP’s unencumbered asset position and high cash balance thanks to the large equity injection of close to HUF 7.3bn in 2022.

Outlook and rating-change drivers

The Outlook is Stable with Scope-adjusted debt/EBITDA expected to remain below 4x, but volatile given the concentrated cash flow sources, the majority of which come from only a few projects that will be finished and realised in 2023 and 2024 (Waterfront City III, Spirit Residence, Westside Garden and Silverbay, as well as four smaller logistic projects). It also reflects BGP's limited execution risk in the coming years, as the group's base case plans include only a limited number of new projects to be launched, which subsequently increases its exposure to a shrinking project pipeline. The Outlook also includes the expectation that BGP’s structure will not change.

A positive rating action may be taken if Scope-adjusted debt/EBITDA develops in line with Scope’s expectations toward levels below 3.5x on a sustained basis while BGP manages to increase its group size, leading to improved diversification of cash flow sources. This assumes large gain on investments in line with the forecasts and a strong recovery of the BGP’s performance-based fund income.

A negative rating action may be warranted if Scope-adjusted debt/EBITDA increases to above 5x on a sustained basis. This would be the consequence of a weaker operating income that results from lower demand, higher inflation or a lack of visibility that limits the launch of new projects.

Scope notes that BGP’s senior unsecured bond – akin to most bonds issued under the Hungarian Central Bank’s bond scheme, has two accelerated repayment clauses. The clauses require the issuer to repay the nominal amount (HUF 7.0bn) in case of rating deterioration (2-year cure period for a B/B- rating, immediate repayment below B-) or change of control at the issuer level.

Long-term debt ratings

The senior unsecured debt rating has been upgraded to BB-. The upgrade is driven by the above-average recovery rate due to the significant unencumbered asset position, which provides sufficient headroom against severe market value deterioration. However, volatility of the capital structure in a path to default continues to weigh negatively on the debt rating.

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 Outlook, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2023), 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 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: 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 Rating was 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: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 8 February 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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