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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Stable issuer rating of Globe Trade Centre S.A. (GTC) and its subsidiary GTC Real Estate Development Hungary Zrt. The senior unsecured debt rating has been affirmed at BBB-. Concurrently, Scope has affirmed the BBB- rating of the green notes (XS2356039268) issued by GTC Aurora Luxembourg S.A. that GTC unconditionally and irrevocably guarantees.

Rating rationale

The affirmation reflects GTC’s ability to remain within current rating guidelines despite difficult conditions: the recent economic slowdown has hampered tenant demand; rising interest rates are putting pressure on portfolio value and interest coverage. In addition, parts of GTC’s portfolio are facing obsolescence risks.

The company's business risk profile (assessed at BBB-) benefits primarily from GTC's geographically diversified portfolio across six countries in Central and South-Eastern Europe with a broad tenant base. At end-June 2023, the three largest tenants account for 11% of rental income and the 10 largest tenants account for 27% of rental income. Tenants are predominantly investment grade and include blue-chip companies such as Ericsson, IBM and Exxon Mobil, which limits the likelihood of tenant default or delinquency.

GTC's portfolio is diversified across two different property types: retail, with 35% of annualised rental income as at end-June 2023; and office, with 65%.

Retail performance seems to have recovered from the Covid-19 pandemic: turnover in H1 2023 exceeded pre-pandemic levels, having increased by 11% compared to 2022; the occupancy rate is 95%, stable YoY. The office segment, on the other hand, suffered from a declining occupancy rate (down 3 pp YoY; unchanged since December 2022) due to the older portion of the portfolio being less in demand (economic age of at least 10 years) and the ongoing redevelopment of Centerpoint 1 & 2. Nevertheless, Scope notes that vacancy has increased in many Central and Eastern European office markets, reflecting lower space requirements as many tenants switch to hybrid working. Forecasts for weaker economic growth may continue to negatively impact office demand and construction activity has already declined in some of GTC's core markets. GTC’s occupancy is lowest in its office properties in Poland (79% as at end-June 2023) and Romania (78%).

While declining supply could support occupancy in the medium term, Scope expects occupancy rates to continue to decline in the short term in light of the changing working environment, which is negatively impacting tenants' space needs. In this context, Scope views GTC's decision to enlarge its focus on the technology sector via a joint venture investment in Kildare Innovation Campus positively; as demand for data centres, logistics infrastructure and digital hubs is likely to increase.

Scope's adjusted EBITDA margin remains at around 80% (LTM to end-June 2023: 79%), but showed early signs of weakness as the margin year-to-date was 2.9 pp lower than in 2022, as declining occupancy combined with inflation-related increases in property operating costs put pressure on profitability. However, Scope forecasts the Scope-adjusted EBITDA margin to remain at around 80%, driven by a relatively lean organisation and relatively strong revenue growth linked to GTC’s development pipeline.

The company's financial risk profile (assessed at BBB-) benefits from limited external financing needs, mainly focused on refinancing maturing debt, as the execution of GTC's development pipeline with committed capital expenditure of EUR 0.2bn between 2023 and 2025 could be covered by operating cash flow if needed. Scope-adjusted debt is therefore expected to remain at around EUR 1.2bn (end-June 2023: EUR 1.1bn). A steadily growing revenue base, thanks to further deliveries in GTC's development pipeline and CPI-indexed rents, will partly compensate for the increase in yields: between end-2022 and end-2025, Scope expects an increase of around 100 bp (thereof 50bp materialised YTD), so that the portfolio yield should approach 8%. The stronger revenue base will partially balance the increase in portfolio yield and will help to keep leverage, as measured by the Scope-adjusted loan/value ratio, to remain in the current range of 45-50% but trending towards the upper end (end-June 2023: 46%). This range is still commensurate with the present rating. The company’s strategy is to maintain leverage or reduce it, given the ongoing unfavourable cost of funding, and to fund expansion through its own liquidity and equity issuances. However, Scope notes that an additional capital increase of at least EUR 150m announced in September 2022 has not taken place due to market conditions indicating limited access to equity financing for the company. This limits GTC's ability to deal with market value declines that exceed Scope's expectations.

The impact of the changing interest rate environment on GTC's interest coverage in the short-to-medium term is manageable. However, even if 93% of debt is fixed or hedged as at end-June 2023, Scope notes that new debt will be subject to significantly higher interest rates and some caps on existing debt will allow the pass-through of a significant portion of the interest rate increases that have occurred since Q1 2022. As a result, Scope expects the weighted average cost of debt to rise further from 2.4% at end-June 2023 (latest reading). Nevertheless, interest coverage should remain at around 3x, mainly supported by revenue growth from GTC's development pipeline, as rental growth from the existing portfolio is hindered by the challenging economic environment and limited demand for part of GTC's office portfolio, despite the group's inflation-linked revenue base, as evidenced by estimated rental values being around 5% lower than GTC's actual rents.

Liquidity is expected to remain adequate based on debt maturities in the 24 months to end-June 2025 (EUR 101m) that could be covered by cash sources including available cash of EUR 120m, an undrawn revolving credit facility of EUR 94m (both as at end-June 2024) as well as positive free operating cash flow forecasted at EUR 34m for the same period. Still, GTC shows a relatively low weighted average debt maturity of four to five years (end-June 2023: 3.8 years) including major refinancings in 2026 (EUR 763m). These significant debt maturities in 2026 could impact GTC's liquidity profile if the company failed to address related funding requirements through the sale of asset and/or new (bank) debt early on.

Scope notes that the proposed acquisition of Ultima Capital S.A.^a on 17 June 2023¹ is subject to execution risk due to GTC's limited experience in the hospitality business, as well as the potential public tender offer for the remaining Ultima shares, which could result in a cash outflow of around EUR 250m assuming the same premium to the current share price as on the proposed acquisition and a 100% acceptance rate. The transaction itself is expected to lead to a largely unchanged assessment of the combined entities’ business and financial risk profile. However, the ultimate impact of the transaction on GTC’s credit quality will depend on the final terms and conditions of the notes to be issued by GTC to execute this transaction and whether they allow for full equity treatment. Scope notes that since the announcement on 17 June 2023, no progress has been announced in relation to the status of the proposed acquisition and GTC stated in its earnings call on 24 August 2023 that it continues to explore all options, including not proceeding with the transaction.

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation that the company's portfolio will show rental growth driven mainly by deliveries on its development pipeline, offsetting rising financing costs and supporting a Scope-adjusted EBITDA interest cover of around 3x. Pressure on capitalisation rates and limited organic rental growth potential will result in some upwards pressure on the company's Scope-adjusted loan/value, which trends towards the upper end of the 45-50% range, but is still commensurate with the current rating. The Outlook does not take into account the potential acquisition of Ultima Capital S.A.

A positive action is remote and would require the company to reduce leverage, as measured by Scope-adjusted loan/value, to around 40% on a sustained basis, supported by a commensurate financial policy. This could happen if GTC managed to increase rental cash flow, thus enlarging its financial headroom to repay debt and support stable or increasing portfolio value. A positive rating action would also require Scope-adjusted EBITDA interest cover to remain above 3x on a sustained basis.

A negative rating action could occur if the company’s Scope-adjusted loan/value ratio increased to around 55% on a sustained basis; potentially triggered by a drop in the portfolio value of GTC’s assets beyond Scope’s expectations. Ratings pressure could also arise from a deterioration in interest cover to below 2.2x on a sustained basis. Interest coverage could come under pressure if GTC were unable to significantly reduce indebtedness or achieve Scope-adjusted EBITDA growth in line with Scope’s forecasts in order to offset rising financing costs. A negative rating action could also be triggered if significant debt maturities in 2026 are not addressed well in advance.

Long-term debt ratings

GTC has EUR 676m in capital market debt outstanding as at end-June 2023. All issuances are irrevocably and unconditionally guaranteed by Globe Trade Centre S.A. The issuer’s unencumbered asset ratio stands at around 200% as at end-June 2023. This provides sufficient collateral to bondholders, justifying the senior unsecured debt rating of BBB .

a. The acquisition target develops and holds a portfolio of 48 hotels, residences, chalets, villas and land in 16 properties in 11 locations. Ultima is a luxury real estate company with a EUR 1.1bn hospitality portfolio in locations such as the Cote d'Azur, Gstaad, Cannes, etc., offering multi-purpose retreats and high-quality private residences to high-net-worth guests.

Rating driver references
1. Globe Trade Centre S.A. / Company News, 17 June 2023

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 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/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.

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/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 November 2020. The Credit Ratings/Outlooks were last updated on 22 December 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.

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