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Rating action

Scope Ratings GmbH (Scope) has affirmed its B+/Stable issuer rating on Hungary-based LP Portfolio Kft, together with an affirmation of its BB- senior unsecured debt rating.

Rating rationale

The ratings continue to reflect Scope’s view on LP Portfolio’s (LP) robust financial risk profile in light of comparatively high recurring total cost coverage. The ratings continue to be supported by Scope’s view on the holding company’s good recurring income generation capacity and its lean cost structure. The ratings also reflect Scope’s view of LP’s conservative ‘buy-and-build’ investment approach around a slightly diversified number of core sectors in by and large resilient industries (steel processing, solar energy, real estate). Based on management’s investments over the last twelve months, both portfolio diversification and value generation have benefited. Scope has therefore raised the business risk profile to B+, while at the same time Scope has introduced a negative notch to reflect the overall small size of the holding, which is still a restraining ratings factor in a peer group context. Net asset values are presently around HUF 12bn, compared to about HUF 8bn in 2020.

LP’s investment strategy is focused on building diversified and recurring income streams around the 100% owner’s (Peter Lakics) 33% interest in family asset Lakics Gepgyarto (heavy steel structures – engineering).

LP’s portfolio sustainability and portfolio diversification – important rating drivers in Scope’s new investment holdings methodology – have benefited over the last 24 months from management’s new investments aimed at reducing the formerly large dependence on the solar segment. Solar in 2019 provided by far the largest source of recurring income (100% of dividends received) and asset value (close to 50%) for the holding. This has changed during the past two years to a much more balanced exposure in terms of asset values (31%-39%-31% for engineering, real estate and solar, respectively). The real estate division in particular has markedly improved in size over the past years reflecting value-generating investments mainly in the Budapest office park (EDU Campus) following recently increased occupancy rates, as well as in the Budapest hotel project (Almassy) to be developed by LP. The latest development project is the Komlo Park steel manufacturing project whose investment phase should be completed in the last quarter of 2023. While Scope deems LP’s present exposure to comparatively stable and resilient sectors (relative to GDP) to be a support from a ratings perspective, the holding’s still limited scale is not. Additionally, concentration risk remains very high with regard to dividend income. The solar energy company Solar FM continue to provide the bulk of present and forecasted dividend income for the next two years. While this is expected to gradually change going forward, with diversification away from dividend income for the holding, progress on portfolio sustainability (mature, non-cyclical assets, most companies contributing to recurring income generation) is relatively more evident.

The rating reflects no expansion into additional – potentially more cyclical – sectors. It also mirrors the still comparatively limited and stable amount of debt on the holding’s balance sheet. The three bonds issued by LP with maturities in 2030 and 2031 continue to account for the only financial debt on LP’s balance sheet. Credit metrics in a holding context continue to be on a very comfortable level for the rating, in Scope’s view, as LP maintains an ample cushion relative to its negative ratings trigger (total cost cover of 0.8x). This confirms the agency’s view that the portfolio of investment companies is comparatively non-cyclical and was not at all negatively influenced by the macroeconomic and geopolitical crises in the last two years. Scope focuses on coverage of recurring holding costs by recurring income generated. This ratio was at 3x in 2021-2022 and is expected to be around similar levels in 2023 and 2024, respectively. These comparatively high levels continue to be generated by larger dividend income mainly from the solar sector companies – continuously received since 2019 – while cost structures in the holding are still lean. Although holding costs have increased significantly during recent years, reflecting mainly the bonds’ coupon payments as well as related fees and additional staffing expenses, the income side has expanded recently from gradual dividend diversification (engineering segment) and due to significantly increasing interest income on intercompany loans and on deposits. On the other side, income generation is still held back by some investment companies not being allowed by their financing banks to pay dividends in the pre-cash generation phase (Almassy, most notably). This should improve gradually in the following few years, especially in the real estate segment, as operational progress was good over recent quarters. However, Scope believes that LP can achieve the total cost coverage ratios projected in its base case reflecting high visibility of the solar sector’s dividend income (operational licenses and guaranteed feed-in tariffs for the 17 small and two larger solar energy power plants owned by LP). The holding’s cost structure also benefits from no dividend payments to the owner which was again confirmed to Scope. The rating assumes that this will not change for at least the next two to three years.

Scope’s overall neutral stance on ESG reflects a positive assessment with regard to product innovation (E) regarding LP’s large exposure to renewable energy, as well as negative assessments with regard to key person risk under management and supervision (G) and for stakeholder management (G) with regard to payout of substance for portfolio companies (ESG factor).

Scope believes LP’s liquidity situation to be adequate, reflecting no short-term debt maturities in 2023/2024 and a good cash generation. LP has a cash pooling arrangement with their leading bank KH which manages most of the cash generated via interest payments from investment companies. While this is unusual for a holding, Scope does not see this negatively from a ratings point of view for the time being (arrangement can be cancelled short term).

The supplementary rating drivers assessment now includes a negative notch for the holding’s small size in a peer context, in line with Scope’s recently published investment holding methodology.

One or more key drivers of the credit rating action are considered an ESG factor. 

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that both LP’s business risk and financial risk profile will not change significantly in the next 1-2 years. The rating reflects Scope’s view of a total cost coverage by recurring income of at least 1x on a sustained basis. It also reflects that the funding of further growth of LP’s investment portfolio will not be done via additional bank debt.

For a potential positive rating action Scope would expect improvements in the holding’s business risk profile with regard to improved concentration risks or significant growth of its investment portfolio.

A downside trigger could be provided by total cost coverage dropping to 0.8x on a sustained basis.

Scope notes that LP’s senior unsecured bonds issued under the Hungarian central bank’s bond scheme have an accelerated repayment clause. The clause requires the company to repay the nominal amounts in case of a rating deterioration of the bond ratings below B+ (two-year cure period for a B/B- rating; repayment within 15 business days after the bond rating falls below B-, which could have default implications). From today’s perspective, there is good headroom to a potential covenant breach considering the current BB- rating for senior unsecured debt (which is also applicable to the bond) as well as the underlying B+/Stable issue rating¹.

Long-term debt rating

In its recovery assessment, Scope has calculated a liquidation value of about HUF 7.2bn in its hypothetical default scenario for 2024. This value is calculated by applying a conservative 50% discount to estimated gross asset values expected for that year, reduced by 10% of insolvency costs. This would be equivalent to a full recovery of the three bonds issued under the MNB Programme of in total HUF 5.4bn. While this would leave room for the senior unsecured debt being rated two notches above the issuer rating under Scope’s methodology, Scope has limited the upside to just one notch (BB-), reflecting the issuer’s single B rating category and its small size.

¹Editorial note: we added a paragraph to the section ‘Outlook and rating-change drivers’ on 16 October 2023. In the original publication, this paragraph was missing.

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 Outlook, (General Corporate Rating Methodology, 15 July 2022; Investment Holding Companies Methodology, 19 May 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, the Rated Entities' Related 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 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: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 9 October 2019. The Credit Ratings/Outlooks were last updated on 17 August 2022.

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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