Scope affirms Cordia International Zrt’s BB/Negative issuer rating
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Scope Ratings GmbH (Scope) has affirmed the BB/Negative issuer rating of Cordia International Zrt. Scope has also affirmed the BB senior unsecured debt rating.
The rating affirmation reflects credit metrics that have remained well within Scope’s rating guidance, owing largely to resilient operating performance amid the adverse conditions for real estate developers. Scope expects the company to keep leverage under control and prudently execute the development pipeline. The Negative Outlook continues to reflect poor business conditions for residential property developers.
The business risk profile (assessed at BB-) reflects Cordia’s solid position in the residential property development market in central Europe, supported by a sizeable and balanced project pipeline of 12,631 units as of end-2022. However, two factors continue to constrain the assessment as they present a cluster risk for cash flow: the company’s small size, with Scope-adjusted total assets of HUF 252bn (EUR 673m) as of end-2022, and the moderate concentration in the core markets of Hungary and Poland, which account for around 80% of the project pipeline as of end-2022. Cordia’s gradual geographical expansion is helping to mitigate the concentration risk. The entry into Romania, Spain and the United Kingdom is exposing the company to different demand patterns, regulations and project financing modes. Customer concentration and the exposure to default by buyers are very limited. At the same time, the rate of pre-sales helps to mitigate inherent development risks and secure revenues, at 93% as of end-2022 for completed projects, 65% for projects due for completion in 2023, and 39% for ongoing projects. Profitability as measured by the Scope-adjusted EBITDA margin is forecasted to remain above 15%, supported by the low cost of land for ongoing projects, adequate market sale prices and normalised development costs. The weighted average internal rate of return is solid, around 28% for projects completed in 2022 and expected at 21% for ongoing projects.
The financial risk profile (assessed at BB) reflects sound credit metrics and robust liquidity. Debt protection as measured by Scope-adjusted EBITDA/interest cover, at 5.2x as of end-2022 (3.6x at end-2021), is adequate, supported by strong profitability and providing a buffer against cash flow volatility inherent to developers. Floating-rate project loans pose a risk, but are manageable as drawdowns and timely repayments move in sync with the execution of projects. Going forward, Scope expects interest cover to remain volatile and dependent on the timely execution of Cordia’s development pipeline. Scope points to the increased risk in the market that contracted sales may decrease as customers pull back and new reservations remain low amid high interest and inflations rates, which respectively weigh on affordability and demand for newly-built apartments. The higher interest burden from project loans and the potential for earnings volatility are, to a large extent, balanced out by interest income from excess liquidity.
Leverage of 5.3x as measured by Scope-adjusted debt/EBITDA at end-2022 (end-2021: 4.8x) has remained well below the 2020 peak that followed the bond issuances, a level that is providing some headroom against shifting market prices or a long period of weak demand. This is especially pertinent in these times of high interest and inflation rates. Indebtedness was stable with a Scope-adjusted debt of HUF 77bn in 2022 (up by HUF 2.3bn YoY). As all current projects are financed, major debt issuances are unlikely in the foreseeable future. Debt will therefore be primarily driven by construction loans, with gross debt estimated at HUF 130bn-150bn in 2023-2024. Potential for higher earnings volatility driven by sluggish demand for newly-built apartments will likely lead to pronounced swings in Scope-adjusted debt/EBITDA.
Liquidity is adequate. Cash sources, consisting of unrestricted cash of HUF 57bn as of end-2022, fully cover short-term debt of HUF 18.1bn due in the 12 months to end-December 2023 and the forecasted free operating cash flow of negative HUF 1.5bn. Scope’s view is supported by the company’s prudent liquidity management, which aims to maintain a minimum cash position of around HUF 18.5bn and sets a 1.5-year cash reserve for bond redemptions. In view of the issuer’s good relationships with a diverse group of banks and its record in the capital markets, liquidity and refinancing risks are limited, helped by the lack of major upcoming short-term debt maturities.
Outlook and rating-change drivers
The Outlook is Negative and reflects the increased risk of apartment sales remaining low amid high interest and inflation rates. These adverse conditions will put a strain on Cordia’s credit metrics, which are particularly sensitive to downside revenue movement. While Scope expects that the company will prudently execute its development pipeline, earnings volatility could lead to significant swings in leverage and interest cover, which could impair the rating.
A positive rating action (i.e. Outlook back to Stable) could be warranted if the Scope-adjusted EBITDA interest cover stabilised at above 2.5x. Further upside is remote but could be warranted if the business risk profile materially improved. This could be achieved if the company increased its size and improved diversification while growing its share of recurring revenue and keeping credit metrics at current levels.
A downgrade could be warranted if the Scope-adjusted EBITDA interest cover fell to below 2.5x or Scope-adjusted debt/EBITDA consistently exceeded 10x. This could be triggered by a prolonged and sharp decline in sales volumes, cost overruns or delays in the pipeline execution.
Long-term debt rating
Scope has affirmed the BB debt rating on senior unsecured debt issued by Cordia International Zrt. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on the company’s liquidation value. With an unencumbered asset ratio of above 100%, senior unsecured debt holders could also benefit from a large pool of assets not pledged as collateral.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2023), 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.
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: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 September 2019. The Credit Ratings/Outlooks were last updated on 2 June 2022.
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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