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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Germany-based residential real estate developer Euroboden GmbH to C from B. Scope has also downgraded the senior unsecured debt rating to C from B+. Both remain under review for a possible downgrade.

Rating rationale

Euroboden’s business environment significantly weakened in the last twelve months. As outlined in the last review, with tightened credit conditions constraining demand, several projects were delayed or fully stopped due to clients’ inability to obtain financing. Lack of visibility on Euroboden’s project developments remains high, given the difficult economic environment and persisting uncertainty on the German real estate market.

On 24 July 2023¹ Euroboden’s management announced its intention to restructure the terms and conditions of the 5.5% bond 2019/2024 (ISIN: DE000A2YNQ5) and the 5.5% bond 2020/2025 (ISIN: DE000A289EM6). The intended restructuring contains the following key points:

• Extension of the maturity of the principal claims by three years each, combined with a unilateral extension option of Euroboden GmbH by an additional period of up to two years;
   
• Reduction of the interest accruing from 1 October 2023 on the Euroboden bond 2019/2024 and the interest accruing from 18 November 2023 on the Euroboden bond 2020/2025 to a restructuring interest rate of 2.5% p.a. with the interest due on the maturity date of each Euroboden bond;
   
• Qualified subordination of all claims of the bondholders; and
   
• Changes to termination rights in connection with the restructuring.

The bondholders’ meeting is planned to be held on 22 and 23 August 2023. The rating action is a direct consequence of the planned bond restructuring, as Scope understands that the bond restructuring is an early measure to avoid a potential payment default. Further, Scope has lowered the issuer rating because as a result of the intended restructuring, bondholders’ claims might diminish relative to their original claims, as the annual coupon would be reduced without a corresponding compensation. Scope assesses the potential restructuring as a distressed exchange that constitutes a selective default in the agency’s rating definitions (Scope’s Credit Rating Definitions).

Given the negative cash flows and deterioration in credit metrics, preserving enough liquidity will be crucial. Euroboden still suffers from substantial short-term debt and volatile free operating cash flow. As at end July 2023, the company’s liquidity stands at EUR 10.3m and it remains highly dependent on few projects expected cash generation. Scope therefore views liquidity as inadequate, which weighs negatively on the financial risk profile and overall rating.

Under review

Scope will closely follow the company’s development and intends to resolve the under-review status within one month, once the bond restructuring is successfully completed. Our reassessment will take into consideration the final terms and conditions for the bonds.

In Scope’s view, there is a high probability that Euroboden could face a potential selective default under the terms as outlined in the proposed restructuring and sees also a potential risk of complete default, if no agreement is reached by bondholders.

Long-term debt rating

Following the downgrade and the under-review placement of Euroboden, Scope has downgraded the senior unsecured debt to C from B+ and has continued the under-review status for a possible downgrade.

Based on a hypothetical default scenario referencing the most recent data on property values and liabilities (March 2023), including reasonable discounts on the company’s asset base as well as the likely volatility in the company’s capital structure on its path to default, Scope expects a ‘below average’ recovery for the company’s unsecured debt. Given the imminent default potential, this results in a C rating for this debt class (aligned with the issuer rating).
 
Rating driver references
1. 24 July 2023 Euroboden’s announcement

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 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 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 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 May 2015. The Credit Ratings/Outlooks were last updated on 11 May 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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