The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the issuer rating of SunDell Estate Nyrt. at B/Stable. Scope has also affirmed the senior unsecured debt rating at B+.

Rating rationale

The rating affirmation is reflected in the unchanged assessment of the issuer’s business risk profile (assessed at B). The company recorded strong sales in 2022 and has high pre-sales for 2023-2024, but high interest rates and rapidly rising living costs in Hungary are hindering demand and future cash generation. The low share of recurring revenue also constrains the rating, which is exacerbated by the small portfolio of assets and inflation-induced margin pressure that is expected to impair leverage and interest cover, weakening the financial risk profile (revised to BB- from BB+).

Significant inflation in Hungary (14.5% in 2022; 17.6% expected in 2023 by the Hungarian central bank) and interest rates hikes are having a significant impact on the housing market in Budapest, where SunDell operates. Prices of newly built residential properties fell 15%-25% in real terms over the last 12-18 months owing to minimal nominal price growth. Household wages have increased below inflation, and a potential increase in demand has been nullified by rises in retail mortgage interest rates and monthly instalments. As a result, the affordability index in Budapest is now similar to Warsaw’s and Ljubljana’s price-to-income ratios but higher than Bucharest’s. This has resulted in demand shocks, with fewer transactions and a reluctance among banks to grant mortgages. Higher interest rates in western Europe have also caused international investors to shun the market, while Russian investors, major buyers of premium properties, are also no longer present.

Like other large developers in Budapest, SunDell will finish existing projects but will wait to launch new ones until residential mortgage rates reduce, expected after 2025. In any case, SunDell managed to buy new plots, raise equity to add new projects and finish the planning of others while building up a small rental portfolio that provides HUF 0.6bn in annual rental revenue. SunDell has total assets of HUF 60.0bn as at YE 2022 (up 30% YoY) consisting mainly of real estates, more than 1,500 flats to be developed (eight projects being developed with a value of HUF 72bn; six under planning with a value of around HUF 84bn) and a backlog of around two years as at September 2023. However, despite strong growth over recent years, SunDell remains small on a European level.

Revenue (IFRS) more than doubled in 2022, to HUF 15.7bn from HUF 6.1bn in 2021, while Scope-adjusted EBITDA (excluding revaluations) decreased by 23% to HUF 2.0bn in 2022 from HUF 2.6bn in 2021. The decrease in Scope-adjusted EBITDA was driven by realised capitalised construction costs and the accounting reclassification from inventory to investment for rental properties that were sold, causing a change in own work capitalised. The moderate decline in Scope-adjusted EBITDA led to a decrease in the margin to 19.9% in 2022 from 22.9% in 2021. Scope expects the levered internal rate of return to remain above 12% in 2023 (2022: 14%), supported by SunDell’s pricing policy.

The backlog and the planned handover of flats paid or contracted with a deposit of at least 20% of the purchase price will account for up to HUF 23.5bn in revenue in 2023-2024 and HUF 4.5bn in 2025. Most of the backlog relates to affordable housing as SunDell decided to sell luxury apartments developed at the finished stage, which Scope considers speculative and to have been causing volatility in cash flow and profitability metrics. Hence, Scope has applied a high discount on the company’s projections for 2023-2025 and applied delays for handovers.

At end-2022, the company’s Scope-adjusted loan/value ratio (LTV) was 26% (up 1pp YoY) while the Scope-adjusted debt/EBITDA was 8.4x (up from 5.6x). Scope forecasts the LTV to stay at around 30% and Scope-adjusted debt/EBITDA to increase up to 10x in a stressed version without a netting of cash. An LTV of around 30% leaves headroom for leasing properties at sufficient capitalisation rates to cover financing costs or to tap external financing to cover construction costs if needed, or for tackling a moderate downturn of property fair values.

Scope-adjusted EBITDA interest cover is moderate at 3.9x at YE 2022 (compared to 4.4x at YE 2021). Scope expects it to stay at around 3x due to strong cash generation driven by the handover of flats in flagship projects until 2024. The contracted fixed-rate debt is protecting cash flows against the very high interest rates in Hungary.

Liquidity is adequate to cover SunDell’s minimal short-term debt. This is despite a low cash balance at H1 2023 as a high number of flats will be handed over starting from November 2023. Liquidity could come under pressure if all planned projects were to commence and create a significant amount of work in progress and finished inventory while cash generation lags due to slower-than-expected sales on luxury apartments in two projects. Liquidity risk is partially mitigated by the planning flexibility of when to commence construction. Liquidity will significantly improve with the handovers in Q4 2023. The liquidity assessment is also supported by SunDell’s proven good access to capital markets for both debt and equity.

The housing units developed by SunDell are energy-efficient (ESG factor: credit-positive) and well above minimum legal requirements. Such housing is more in demand than old or renovated housing and less energy-efficient projects. SunDell was one of the first in the market to develop environmentally conscious and sustainable residential buildings with low energy and water needs and a high share of green areas. Since SunDell constructs its buildings, its properties are guaranteed to have an energy performance certificate of at least ‘BB’ under Hungarian law, considered a nearly zero-energy building (nZEB).

No notching was applied for supplementary rating drivers. Scope considers SunDell Estate Nyrt. to be a strategic subsidiary of GOPD Nyrt., which holds 54.77% of shares in SunDell as of 30 June 2023. In this regard, Scope notes the significant interlinkages between these companies, as the parent has very limited cash flow generation besides that from SunDell and sells incubated plots to SunDell for housing developments. There is no explicit parent support from SunDell’s parent, GOPD.

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

Outlook and rating-change drivers

The Outlook for SunDell is Stable and factors in a slowdown in sales given the drastic change in affordability in the issuer’s core market of Budapest, with increasing uncertainty beyond 2024. However, the successful delivery of the company’s backlog in 2023 and 2024 will help to keep Scope-adjusted debt/EBITDA at around 8x and Scope-adjusted interest cover at around 3x.

A positive rating action is seen as remote and would require increased visibility on sales to beyond one year, especially for luxury housing, or a substantial share of recurring EBITDA while credit metrics remain in line with Scope’s rating case.

Factors that could individually or collectively lead to a negative rating action are: i) a deterioration in Scope-adjusted interest cover towards 1.0x; ii) an increase in Scope-adjusted debt/EBITDA towards 15x; or ii) a weakening of liquidity. This could be caused by underperformance of development projects due to increasing input prices or demand shocks from mid-2023 due to soaring inflation rates or the inability to dispose of speculative housing developments.

Scope notes that SunDell’s two senior unsecured bonds issued under the Hungarian Central Bank’s scheme have accelerated repayment clauses. The clauses require SunDell to repay the nominal amount (HUF 5.5bn and HUF 11.0bn respectively) in case of a rating deterioration (2-year cure period for a B/B- rating, immediate repayment after the bond rating falls below B-, which could have default implications).

Long-term debt ratings

In November 2020, SunDell issued a HUF 11.0bn senior unsecured bond (ISIN: HU0000360078) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond has a tenor of 10 years and a fixed coupon of 3.25%. Bond repayment is in three tranches: 30% in 2025, 30% in 2027 and 40% balloon payment at maturity.

In July 2021, SunDell issued a HUF 5.5bn senior unsecured bond (ISIN: HU0000360649) under the same bond scheme. The bond has a tenor of 10 years and a fixed coupon of 3.65%. Bond repayment is in five tranches starting from 2026, with 10% of the face value payable yearly and a 50% balloon payment at maturity.

The bond proceeds were used for developing residential housing projects and acquiring a landbank. In addition to the rating deterioration covenant, bond covenants include a list of other soft covenants.

The issuer has issued two senior unsecured bonds totalling HUF 16.5bn. It has minimal outstanding senior secured bank debt. Scope has assumed a hypothetical default at YE 2025 and applied reasonable discounts on assets, resulting in an ‘above-average’ recovery expectation.

This translates into a B+ debt class rating for senior unsecured debt, one notch above the issuer rating, with the up-notching limited by the volatility of the capital structure on a hypothetical path to default (possible introduction of secured debt).

The rating was prepared with the application of Scope’s General Corporate Rating Methodology, 15 July 2022. The application of the General Corporate Rating Methodology, 16 October 2023, does not have an impact on the rating.
 
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, (General Corporate Rating Methodology, 16 October 2023; 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, 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 October 2020. The Credit Ratings/Outlook were last updated on 25 October 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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.