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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating of Cordia International Zrt. to BB- from BB and maintained the Negative Outlook. Scope has also downgraded the senior unsecured debt rating to BB- from BB.

Rating rationale

The downgrade reflects Scope’s expectations that new contracted sales will remain low in 2024, which could ultimately put credit metrics under pressure. Scope expects the company to keep leverage under control and prudently execute its development pipeline. The Negative Outlook continues to reflect poor business conditions for residential property developers amid high inflation and high interest rates.

The business risk profile (assessed at BB-) reflects Cordia’s solid position in the residential property development market in central Europe, supported by a sizeable and balanced project pipeline of 11,984 units as of end-June 2023. However, two factors continue to constrain the assessment as they present a cluster risk for cash flow: the company’s small size, with Scope-adjusted total assets of HUF 263bn (EUR 683m) as of end-June 2023; and moderate concentration in its core markets of Hungary and Poland, which account for around 85% of projects under construction as of H1 2023. Cordia’s gradual geographical expansion is helping to mitigate its concentration risk. The entry into Romania, Spain and the United Kingdom is exposing the company to different demand patterns, regulations and project financing modes. Customer concentration and exposure to buyer defaults are very limited. At the same time, the rate of pre-sales helps mitigate inherent development risks and secure revenues. Pre-sale rates stood at 87% for completed projects as of Q3 2023 and 33% for projects that were under construction as of H1 2023. Profitability as measured by the Scope-adjusted EBITDA margin is forecasted to remain above 15%, supported by the low cost of land for ongoing projects, robust market sale prices and normalised development costs. The weighted average internal rate of return is solid at around 22% for projects completed in 2022 and an expected 21% for ongoing projects.

The financial risk profile (revised to BB- from BB) reflects adequate credit metrics and robust liquidity. Debt protection as measured by the Scope-adjusted EBITDA interest cover ratio stood at 3.3x as of end-June 2023 (5.2x at end-2022), supported by strong profitability. This is adequate, and it provides a buffer against the cash flow volatility inherent to developers. Floating rate project loans pose a risk, but they are manageable as drawdowns and timely repayments move in sync with the execution of projects. Going forward, Scope expects interest cover to remain volatile and highly dependent on the timely execution of Cordia’s development pipeline. The higher interest burden from project loans and potential earnings volatility are largely balanced out by interest income from excess liquidity. Scope points to the increased risk that contracted sales may decrease further as new reservations remain sparse amid high interest and inflation rates, which respectively weigh on affordability and demand for newly built apartments. These concerns are more pronounced in Hungary, while prospects in other markets are more encouraging. Scope sees heightened risk that interest cover decreases towards 2.5x in the next 12 to 18 months.

Leverage as measured by the Scope-adjusted debt/EBITDA ratio rose to 7.3x as of end-June 2023 (end-2022: 5.3x). Indebtedness increased, with Scope adjusted debt of HUF 89bn in H1 2023 (up by HUF 12.1bn from end-2022). Major debt issuances are unlikely in the foreseeable future as all current projects are funded. Debt will therefore remain primarily driven by project loans, balanced by a gradual reduction in outstanding bonds as the HUF 44bn bond (maturing in 2026) will enter its amortisation phase from 2024. Gross debt is therefore expected to remain between HUF 135bn and 150bn in 2023-24. Potential for higher earnings volatility driven by sluggish demand for newly built apartments will likely lead to pronounced swings in the Scope adjusted debt/EBITDA, raising the ratio to around 10x on average.

Liquidity is adequate. Cash sources, consisting of unrestricted cash of HUF 50.3bn as of end-June 2023 and forecasted free operating cash flow of HUF 9.9bn, fully cover short-term debt of HUF 18.1bn due in the 12 months to end December 2023. Scope’s view on Cordia’s liquidity is supported by the company’s prudent liquidity management, which aims to maintain a minimum cash position of around HUF 18.5bn and sets a 1.5-year cash reserve for bond redemptions. Scope also acknowledges Cordia’s current financial assets of HUF 14.2bn as at end-June 2023, comprised of investments in Hungarian government bonds and treasury bills. In consideration of the issuer’s good relationships with a diverse group of banks and its record in capital markets, liquidity and refinancing risks are manageable, helped by a lack of major upcoming debt maturities.

Outlook and rating-change drivers

The Outlook is Negative and continues to reflect the high likelihood that apartment sales will remain low amid high interest and inflation rates. These adverse conditions will put a strain on Cordia’s credit metrics, which are particularly sensitive to downside revenue movement. Although Scope expects the company to prudently execute its development pipeline, earnings volatility could lead to significant swings in leverage and interest cover, which could impair the rating. The Outlook also reflects the risk that the Scope-adjusted EBITDA interest cover ratio could fall to 2x and the Scope-adjusted debt/EBITDA ratio is likely to approach 10x.

A positive rating action (i.e. Outlook back to Stable) could be warranted if the Scope-adjusted EBITDA interest cover ratio stabilised at above 2x. Further upside is remote but could be warranted if the business risk profile materially improved. This could be achieved if the company increased its size and improved diversification while growing its share of recurring revenue and keeping credit metrics at current levels.

A downgrade could be warranted if the Scope-adjusted EBITDA interest cover ratio fell to 2x or below, or if liquidity deteriorated. This could be triggered by a prolonged, sharp decline in sales volumes or by cost overruns or delays in the pipeline execution.

Long-term debt rating

Scope has downgraded Cordia International Zrt.’s senior unsecured debt rating to BB- from BB. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on the company’s liquidation value. Given an unencumbered asset ratio of above 110%, senior unsecured debt holders could also benefit from a pool of assets not pledged as collateral.

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, (European Real Estate Rating Methodology, 25 January 2023; General Corporate Rating Methodology, 16 October 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 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 and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or 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: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 September 2019. The Credit Ratings/Outlooks were last updated on 26 May 2023.

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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