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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BB-/Stable to German BK Group AG. Scope has also assigned a senior unsecured debt rating of BB-.

Rating rationale

The issuer rating for BK Group is based on the company's diverse range of products and customers, as well as its improved profitability resulting from an ambitious capital expenditure plan to be carried out in 2023.

The BK Group, founded in 2000, is a company that currently develops, implements, and manages sustainable interior design projects for various industries such as retail companies, car dealerships, and fitness studios. Its clients include well-known brands such as Prada, Hermès, Adidas, Mercedes-Benz, Swarovski, Rituals, and Tommy Hilfiger. The company also currently offers facility management services to its customers through its subsidiary, BK services GmbH. With more than 10,000 projects already completed, the company is now planning to expand into complementary businesses that build upon their existing expertise.

To finance its expansion plans, the BK Group intends to issue a 6-year green bond with an expected issue volume of EUR 32m, in March 2023. The expansion plan is expected to generate stable cash flows in the future, facilitating a prompt deleveraging process following post-capex peaks. There are a number of execution risks associated with the company's growth aspirations, however, these risks are partially mitigated by support mechanisms from key clients.

The expansion will be carried out through BK World, which will use the funds to finance the acquisitions of lofts and pizza machines. The lofts are container-sized mobile spaces that will serve the restauration and sanitary needs of passengers visiting the electric vehicle charging stations, while the pizza machines are expected to be cash generative and located on a 30km radius of the charging stations. The business risk profile of the BK Group (assessed at BB-) takes into consideration the fact that if the expansion plan is executed on schedule, it will improve the diversification of the Group’s business model, with their traditional business being additionally supported by the support mechanisms available and the pizza business. Additionally, an efficient integration of BK World into the existing facility management business of BK Group could also result in an improved profitability margin for the Group. Nevertheless, the geographical lack of diversification remains a limitation, as all the initially planned locations are in Germany or in areas close to the German border, leaving BK World with a single country presence. This concentration of revenues in Germany could be a risk if regulations change. However, the German government's goal to create one million electric vehicle charging stations by 2030 presents a significant opportunity for the company.

The company's financial risk profile (assessed at BB-) takes into consideration the fact that the planned green bond's proceeds will substantially increase leverage, likely resulting in a Scope-adjusted debt/EBITDA ratio above 6x and a Scope-adjusted funds from operations/debt ratio close to 0% in FY2023. This is due to a time mismatch between when the bond funds are expected in March 2023 and the gradual start of operations for both the lofts and pizza machines, which will occur on a staggered basis throughout 2023, and into 2024. Any delay or deviation from the scheduled plan could prolong the elevated leverage metrics. The constraints on the financial risk profile are partially mitigated by the fact that economic terms with the suppliers of the pizza machines and lofts have already been fixed, reducing the likelihood of cost overruns compared to Scope's base case. In addition, there is also the risk of execution from the sole suppliers of the lofts and pizza machines.

If the new operations start as planned, the tension on Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt could begin to decline, signalling the start of a deleveraging process. This will be strongly supported in the first full year of operations, thanks to the collaboration with an automaker and the rapid cash flow conversion of the pizza business. Once the business is fully operational, the aforementioned factors, together with the synergies from a more cost-efficient business, could potentially result in improved metrics.

Moreover, BK Group's financial risk profile is underpinned by its solid liquidity position. As of end-December 2022, the company had EUR 640k cash, of which Scope assumes half is unrestricted, added to EUR 8.2m in undrawn committed lines and no short-term debt maturities. While BK Group's investments in 2023 may result in negative free operating cash flow, the majority of the capital expenditures are discretionary and can be financed using a combination of available internal resources and new financial debt, which includes the prospective bond issuance.

At present, the ESG assessment is neutral, as in Scope’s view, the potential benefits of facilitating EV expansion are offset by infrastructure development in greenfield areas.

BK Group did not provide audited consolidated accounts, they are not required as according to HGB it is not a concern considering that less than 20% is in the hands of BK Group as the remaining is in the hands of the Group’s CEO and founder Gerold Wolfarth. However, Management expects that the requirements for a consolidated group report by commercial law will be met by 2024 at the latest.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations that leverage normalizes following a post-capex peak in 2023 with Scope-adjusted debt/EBITDA between 3-4x.

A negative rating action would be possible if Scope-adjusted debt/EBITDA were to remain above 5x following the capex driven peak in 2023 resulting from delayed execution and/or cost overruns of the capex programme.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA declines below 3.5x on a sustained basis, triggered by a quicker ramp-up of new business enabled by a swifter execution of the planned capex programme with no cost overruns.

Long-term debt rating

Scope’s recovery analysis for senior unsecured debt signals an ‘average’ recovery. This is based on a hypothetical default scenario assuming a going-concern in 2025 and considering the fact that all future debt will rank pari passu with current senior unsecured bank debt of EUR 9.9m (as at year-end 2022). Scope has therefore assigned a BB- rating for the unsecured debt, in line with 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 methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), 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: public domain, the Rated Entity, the Rated Entities' Related Third Parties, third parties 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: Iván Castro Campos, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 February 2023.

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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