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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BB-/Stable to Infogroup Holding Kft. Scope has also assigned a first-time rating of BB- to the senior unsecured debt of Infogroup Holding Kft.

Rating rationale

Infogroup’s business risk profile (assessed at B+) reflects Scope’s view of the company’s small size and poor diversification within the Hungarian real estate market. Although the issuer has been growing in asset size over the years, driven by the successful execution of its development projects, it remains a small player in a highly fragmented and competitive market, with a total asset value of EUR 128m as at end-June 2022. This exposes the company to a higher risk of cash flow volatility. The business risk profile is, however, supported by a constant and growing profitability, driven by high occupancy rates and a focus on prudent investments in low competition but strategic areas. 

Infogroup focuses on the develop-to-hold business and its portfolio is located exclusively in Hungary, namely in Budapest (offices and hotels) and eastern Hungary (light industrial and logistics). This correlates the company’s performance to the economic trends of only one country. The lack of geographical outreach also limits the potential asset value increase of the portfolio, exacerbated by most of the assets being in suburban areas. Diversification is further constrained by the high tenant concentration, with the top three accounting for 39% of rental income as at 31 December 2022. The associated risk is partially mitigated by the good credit quality of the largest tenants such as Jabil, Lidl and Freudenberg as well as Infogroup's presence in three sectors with slightly different demand patterns (office, hospitality and logistics). Infogroup has built a strong reputation in light-industrial logistics, as evidenced by the large involvement in built-to-suit solutions (two large projects will be delivered in 2023 to host large multinationals logistics centres) and by the historically high occupancy rate of above 96% (97% as at 31 December 2022).

The strong profitability is the main positive driver of the business risk profile. The Scope-adjusted EBITDA margin has been growing over the years and has shown resilience throughout the Covid-19 pandemic. It is expected to range between 65% and 75% going forward. Profitability will benefit from increasing recurring revenues, good cost control, the prudent development strategy (two projects under development and two to be launched in the next two years) and the favourable demand for logistics real estate. This segment, unlike other real estate segments, has ensured stable cash flows, even in the current macro-economic environment, and is expected to further benefit from i) the increased use of e-commerce; ii) companies pursuing supply chain optimisation strategies; and iii) Hungary’s ambition to become a global hub for electric vehicles parts. The latter will be a focal point of Infogroup’s strategy going forward, with major investment positioned close to the big hub of BMW in Debrecen-Polgar and of Mercedes in Kecskemet. Nonetheless, Scope’s assessment of profitability accounts for the potential volatility arising from the uncertainty surrounding the office segment and new projects not yet included the pipeline.
 
The financial risk profile, assessed at BB, reflects the company’s adequate debt protection, measured by the Scope-adjusted EBITDA interest cover. Scope expects the ratio to weaken in the coming years and range between 2x and 4x, compared to 6.3x in 2021, driven by new debt financing at higher interest rates. The unfavourable market conditions are partially mitigated by the stable EBITDA expected and the absence of interest rate risk on current debt (92% at fixed rates or hedged), which will ensure Infogroup’s ability to pay interest obligations and withstand potential cash flow volatility.

Leverage as measured by the Scope-adjusted loan/value ratio materially increased in 2021 following the HUF 4.5bn bond issued for refinancing, development and plot purchases. The ratio decreased in 2022 to 41% (from 46% in 2021) but is anticipated to increase again and remain at between 45-50%, driven by debt-financed developments and a slight decrease in asset values. Likewise, the Scope-adjusted debt/EBITDA ratio has been fluctuating for years, from 16.1x in 2019 (first year of consolidated figures) down to 7.8x in 2022. Scope-adjusted debt/EBITDA is expected to remain at around 8x in the next two years, with new assets generating enough EBITDA to balance out the debt used to finance their development. Despite the anticipated increase in indebtedness, Scope believes that Infogroup has still sufficient headroom to tap external financing, supported by the high pool of unencumbered assets. Moreover, Scope expects the loan/value ratio to remain below 50% in line with the company benchmark as well as no significant dividend distributions or aggressive acquisitions.

Liquidity is adequate, with liquid sources, unrestricted cash and free operating cash flow, fully covering short-term debt. Scope has recognised a debt maturity concentration in 2026 (around HUF 7.4bn), but in view of the company’s established relationships with a large pool of banks, liquidity and refinancing risks are seen manageable.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view that Infogroup will continue to grow at a moderate pace and successfully execute its pipeline while maintaining high occupancy and pre-lease rate. While Scope expects a deterioration of debt protection and leverage, consistent with the continuation of development projects, the agency anticipates that both metrics will remain at above 2x (Scope-adjusted EBITDA interest cover) and below 50% (Scope-adjusted loan/value ratio).

A positive rating action is seen remote at present but could be warranted if the company significantly grew in size leading to an improved tenant diversification, while keeping credit metrics at current level.

A negative rating action could occur if the Scope-adjusted loan/value ratio increased above 55% or Scope-adjusted EBITDA interest cover decreased below 2x. An increase in the loan/value could be caused by a decrease in the company’s asset value or increased leverage due to delays in pipeline execution. A decrease in debt protection could be caused by a decline in occupancy that causes EBITDA to weaken.

Long-term debt rating

In May 2021, Infogroup issued a HUF 4.5bn senior unsecured bond (ISIN: HU0000360433) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 0.8bn) and for acquisitions (HUF 3.7bn). The bond has a tenor of 10 years and a fixed coupon of 3.0%. Bond repayment is in six tranches starting from 2026, with 5% of the face value payable yearly, and 50% balloon payment at maturity. Scope notes that Infogroup’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Infogroup to repay the nominal amount (HUF 4.5bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 5 days after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include a cap on the dividend payment (maximum 50% of profit after tax and if loan/value ratio does not exceed 50%) and loan to value ratio not exceeding 60%.

Scope has assigned a BB- first-time rating to the senior unsecured debt issued by Infogroup Holding Kft. The assessment is based on a hypothetical default scenario in 2024 and on the issuer’s liquidation value. The rating is also supported by the company’s large pool of unencumbered assets. 

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, (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 Rated Entity and 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. Historical data used for these Credit Ratings is limited.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. Scope Ratings notes that the Credit Ratings are based on limited historical data. 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and 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 27 March 2023. 
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability 
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