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Rating action

Scope Ratings GmbH (Scope) has today affirmed Duna House Holding Nyrt.’s issuer rating at BB-/Stable. Scope has also affirmed the senior unsecured debt rating at BB-.

Rating rationale

The affirmation is mainly supported by the solid financial metrics, which remain aligned with Scope’s rating case despite the slowing real estate and loan brokerage markets. The lower revenue in H1 2023 will put pressure on EBITDA at year-end, but the effect will be temporary thanks to a stabilisation in the issuer’s main markets of Poland and Hungary and the likely increased market share in Italy.

The business risk profile (assessed at BB-) still benefits from the group’s market position as one of the leading real estate and loan brokerage firms in its home market of Hungary and in Poland. Duna House’s acquisition in early 2022 of one of the top three loan brokers in Italy, Hgroup, has also improved diversification and reduced the dependency on Central and Eastern European markets and real estate products (mostly personal loans and insurance). Nonetheless, the acquisition has increased the exposure to the Italian market, which represented 51% of total sales in H1 2023. Client granularity is high and growing since the group provides retail services (few recurring transactions with any single client).

The business risk profile remains constrained by the growing but still small absolute size of the business in very fragmented markets. The shrinking Scope-adjusted EBITDA margin is also a constraint, a result of the aggressive policy of recent years to prioritise market share gains over efficiency. Scope anticipates profitability to remain at around 9% in 2023 as a result of the general decline in loan demand combined with inflation. Nonetheless a recovery in all markets, started in H2 2023, is expected to continue in 2024, driving Scope-adjusted EBITDA margins back to around 11-12%. Scope expects profitability to improve driven by i) the integration of Hgroup generating substantial economies of scale; ii) revenue growth in the Italian market, benefitting from the new collaboration with major real estate group Professione Casa: the latter will provide real estate loan clients to Duna House for a fee. Scope also expects pressure to alleviate in the issuer’s home markets in H2 2023, driven by more stable interest rates in Hungary and government incentives in Poland.

Duna House’s financial risk profile (assessed at BB) continues to benefit from strong interest coverage even during interest rate rise times, thanks to the large portion of fixed-rate debt. High interest income on cash deposits in Hungary have also been driving up net interest income in 2022 and 2023. Even if interest rates on deposits fell again, the issuer’s interest cover would remain above 10x. Leverage as measured by Scope-adjusted debt/EBITDA has suffered from debt financed acquisitions in recent years, Leverage as measured by Scope-adjusted debt/EBITDA has suffered from debt financed acquisitions in recent years, increasing above 3x from 2019, with a peak in 2020 to around 3.9x. Scope expects leverage to temporarily increase to around 5x in 2023, driven by the profitability downturn and the slower-than-expected delivery of real estate units. Leverage is anticipated to return to around 3x in 2024 as i) profitability is expected to recover, on the back of the positive sales trend in all markets and, ii) the absence of incremental debt issuances.

Scope’s assessment of the financial risk profile also incorporates execution and integration risks related to the issuer’s strategic focus on acquisitions, which creates uncertain and volatile cash flow.

Liquidity is adequate, with HUF 7,260m available cash as of June 30, 2023, forecasted positive free operating cash flow, and minimal short-term debt. The two outstanding bonds will not start amortizing before 2026.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope's expectation that Duna House will maintain strong interest cover, thanks to its net cash position and Scope-adjusted debt/EBITDA, after peaking in 2023, will return below 4x in 2024 due recovering EBITDA. The Stable Outlook also reflects Scope's expectation that the issuer will be able to maintain its credit metrics within the rating case even if demand is weaker than expected.

A positive rating action would require the issuer to show a Scope-adjusted debt/EBITDA of below 3.0x on a sustained basis.

A negative rating action could be warranted if the issuer showed an increase in Scope-adjusted debt/EBITDA leverage to around 4.0x on a sustained basis. This could be caused by weaker-than-expected revenue due to overall transaction market weakness or debt-funded investments substantially beyond Scope’s base case.

Long-term debt rating

Scope has affirmed the debt instrument rating of BB- on all senior unsecured debt issued by Duna House. Scope based its recovery assessment on a liquidation value in a hypothetical default scenario in 2025 and expects an ‘average’ recovery for bond holders.

Duna House has issued two bonds through the Hungarian central bank’s Bond Funding for Growth Scheme. The first bond was issued in September 2020 (HUF 6.9bn, HU0000359914) with a tenor of 10 years and a fixed coupon of 3%. Bond repayment start in 2026 with 20% early amortization. The second bond was issued in January 2022 (HUF 6bn, HU0000361217), with a tenor of 10 years and a fixed coupon of 4.5%. Bond repayment starts in 2028 with a 20% yearly amortization. Scope notes that Duna House’s senior unsecured bond issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires Duna House to repay the nominal amount in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 15 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 and negative pledge.

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, 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 and the Rated Entity.
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 31 July 2020. The Credit Ratings/Outlook were last updated on 14 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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