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Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of BB- and changed the Outlook to Negative from Stable on Hungarian real estate and loan brokerage Otthon Centrum Holding Kft. The senior unsecured debt rating has also been affirmed at BB-.

Rating rationale

The Outlook change follows a weakening performance in H1 2023, with profitability, as measured by Scope-adjusted EBITDA margin, decreasing to 14.4% from 23.6% in 2022, amid the rising interest rates in Hungary which negatively impacted the demand for loans. The recent acquisition of two loan brokers in Poland, which will carry high integration costs in H2 2023 and 2024, will further pressure EBITDA and leverage in the medium term. The issuer’s rating reflects the strong debt protection, with most debt represented by a HUF 2.9bn 10-year bond issued in 2021, and a 3% interest rate, whilst the company currently benefits from much higher deposits rates (around 8%) for its cash balances, resulting in substantial net interest income.

Otthon Centrum’s business risk profile (assessed at B+) is supported by the company’s position as one of two leading real estate and loan brokerages in its home market of Hungary, the other one being Duna House Holding Nyrt. (BB-/Stable). Despite the sharp decline in volume in H1 2023, the company has succeeded in maintaining its market position, with the help of the recent acquisition of Open House adding 30 offices to the Hungarian network. The acquisitions of two real estate brokers in Poland, closed in April and September 2023, are set to improve geographical diversification, although Otthon Centrum will continue to depend on its home market for 90% of its revenue, at least in the short term, when the issuer will focus on the integration of the acquired entities. Revenue diversification is adequate as several segments generate operating profit, the most important of which are the real estate brokerage franchise, credit intermediation services, the physical agency network, and the real estate-related consultancy. Client base granularity is very high since the company is focused on the retail segment, which entails a high number of small transactions.

Profitability, historically high and ranging between 15% and 25%, dropped significantly following the real estate market crisis in Hungary, which caused Scope-adjusted EBITDA margin to shrink by 9.4pp YoY in H1 2023. Even though a slight market recovery is expected in Hungary in H2 2023, the ratio is set to further decline in the medium term due to the high costs planned for integrating the newly acquired entities. Scope expects profitability to range between 6.5% and 9.5% in the next three years.

Otthon Centrum’s business risk profile is constrained by the small absolute size of its business, the relatively fragmented markets in which it operates and a lack of geographic diversity. This could change with the gradual integration of the two Polish entities, which, with a total 120 branches, will combined represent the second largest franchise in Poland in number of offices.

Otthon Centrum’s financial risk profile is assessed at BB+, compared to BBB in Scope’s previous assessment. Following a strong result in 2022, the leverage, measured by the Scope-adjusted debt/EBITDA has increased in H1 2023, driven by weakening profitability. The recent acquisitions in Poland will pressure leverage further as significant integration costs are planned in H2 2023 and 2024. Nonetheless, Scope expects that the ratio will not exceed 3.5x, as no new debt issuance is planned. Free operating cash flow has remained positive throughout the past five years but is expected to weaken as a result of lower EBITDA and increasing capex related to the acquisition.

Liquidity remains adequate, with over HUF 4bn of cash and equivalents at 30 June 2023, minimal short-term debt and cash outflows under Scope’s base case, which are largely discretionary (i.e. growth capex and dividends). Otthon Centrum has traditionally not experienced large swings in working capital and did not see cash balances drop below HUF 300m even at their low point, which was H1 2020.

The weaker assessment of the company’s financial risk profile led to a revision of Otthon Centrum’s standalone credit assessment to BB- from BB.

Scope has previously applied a negative one-notch adjustment to Otthon Centrum’s standalone credit assessment based on peer context to recognize the smaller size and weaker diversification compared to Duna House. The adjusted standalone credit assessment and Otthon Centrum’s improved geographic reach and position as market leader in Hungary, after the acquisitions completed in 2023, no longer justify the negative one notch adjustment. It has therefore been removed.

Outlook and rating-change drivers

The Outlook is Negative and reflects Scope’s expectation that the recent acquisitions of two entities in Poland will carry high integration costs in H2 2023 and 2024, pressuring operating profitability, cash flow and leverage in the medium term. The risk is further exacerbated by the uncertainty on the Hungarian loan market, where weaker-than-expected demand, driven by government incentives not materialising or inflation and interest rates rising again, could easily bring leverage above Scope’s rating case.

A positive rating action including a revision of the Outlook back to Stable, would require Scope-adjusted debt/EBITDA to remain around or below 3x for a sustained period. This could be supported by the successful integration of the two Polish real estate brokers, including a positive EBITDA contribution in 2024.

A negative rating action could be warranted if financial leverage (Scope-adjusted debt/EBITDA) increased to significantly above 3x on a sustained basis. This could be caused by margin pressure due to higher-than-expected challenges in the integration of acquired businesses. growing competition from banks, online retailers or other larger organisations with greater financial muscle.

Long-term debt rating

Scope has rated senior unsecured debt at BB-, the same level as the issuer rating, reflecting limited prior-ranking liabilities (leasing obligations) in the capital structure. Scope bases its recovery assessment on a going concern enterprise valuation and expects an average recovery (30%-50%) for bondholders. Scope would not rate the debt higher due to Otthon Centrum’s asset-light business model and the material uncertainty regarding its asset value in a hypothetical default scenario, which may be driven by increasing competition and/or a loss of confidence in the business and resulting departure of licensees and agents.

Otthon Centrum issued a HUF 2.9bn senior unsecured bond (ISIN: HU0000360391) in April 2021 through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for the acquisition of Open House, Freedom N sp. Zoo, and Investor N. sp. Zoo, and HUF 1,809m is still available. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in eight tranches starting from 2024, with 5% of the face value payable yearly from 2024 to 2027, 10% of the face value payable yearly from 2028 to 2030, and a 50% balloon payment at maturity. Scope notes that Otthon Centrum’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Otthon Centrum to repay the nominal amount in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 60 days after the bond rating falls below B-, which could have default implications). Other bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, and dividend.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 January 2021. The Credit Ratings/Outlook were last updated on 15 November 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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