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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating on Kopaszi Gát Zrt. (Kopaszi). Scope has also affirmed the B+ rating for the senior unsecured debt category.

Rating rationale

The rating affirmation reflects Scope’s improved view on Kopaszi’s business risk profile (assessed at B+), which benefits from its high asset quality portfolio of newly developed properties – BudaPart Project – in the Kopaszi Dam neighbourhood in Budapest. High quality, with high-end energy-efficient residential buildings, has supported the company’s robust performance in term of pre-sales rates of almost 90% as at November 2023, despite high interest rates and rapidly rising living costs in Hungary.

In June 2023¹ the company announced the forward-sale preliminary agreement to develop a portfolio of several office buildings with completion planned for 2026². The construction has already started and Kopaszi has received the first advance payment in H2 2023. The agreement reinforces the company’s pipeline of projects and provides it with a solid revenue medium-term outlook. This is a credit positive as: i) there is slightly improvement in scale (Scope-adjusted total assets will increase to around EUR 500m, compared to EUR 309m as at June 2023); ii) it supports cash flow visibility, as the company will receive pre-defined advances based on project milestones; and iii) the current pipeline of projects (two residential buildings and portfolio of office buildings) has no speculative component and is not subject to sale or letting risk. Initiating new residential projects will be determined by market tendencies.

Whilst execution risk linked to the forward-sale is partially mitigated by the customer’s credit quality (BBB) and the signature of a fixed price agreement with a domestic contractor, the newly signed contract also introduces a cluster risk regarding one significant customer. Scope notes that the project is subject to other risks related to its execution, since the development will be done over the next three years and its completion depends on the construction company’s performance, timely availability of building materials and government policy in the medium term.

Due to its core business of real estate development, the company has a low share of recurring revenue. Different from the original plan, Kopaszi has kept one office building (BOE; delivered in Q1 2021) and one office/hotel building (BOG; delivered in Q2 2023) on its balance sheet. Their disposal was suspended for the time being, considering the current unsupportive macroeconomic and real estate environment, as buyers are understandably more cautious and hesitant to make decisions, preferring a wait-and-see approach. BOE had a significant improvement in the occupancy rate, that increased to 93% in November 2023 from 74% in November 2022, while BOG’s occupancy rate stood at 36%. The buildings score high on quality and energy efficiency with a LEED Gold certification (ESG factor: credit positive). This will support demand and EBITDA generation via recurring rental income.

Profitability, as measured by the Scope-adjusted EBITDA margin, was negative in 2022 as the company’s had no significant disposals of commercial buildings, and only a low number of handovers of residential units. Scope anticipates that the Scope-adjusted EBITDA margin will remain volatile and depending on projection completion, while in terms of levered IRR at the single project level, the company expects yearly returns to range from 15% to 30% in the residential portfolio.

The financial risk profile (assessed at B+) reflects Scope’s expectation that credit metrics will remain volatile. Although the existing portfolio will provide some rental income (two office buildings and one hotel) in the next few years, revenue and EBITDA generation remain strongly dependent on project completions. Revenue from the new forward-sale project will not be reflected in the company’s topline and EBITDA until completion in 2026.

Debt protection benefited from net interest income in 2022. In 2023, financial expenses are expected to increase significantly due to the higher amount of gross debt (about EUR 40m in borrowings to financing current residential developments and additional debt following the refinancing of the BOE office building in Q4 2023) and due to the higher interest rate (20% of debt was subject to a variable interest rate as at November 2023). While Scope expects the ratio will continue to fluctuate, depending on the timely delivery and disposal of projects, debt protection will remain solid, supported by the expected strong sales performance of the residential buildings in 2024 linked to the high pre-sale rate. Scope foresees Scope-adjusted EBITDA interest cover at above 3.5x on average for the period from 2023 to 2026.

As expected, Scope-adjusted debt/EBITDA was negative in 2022, impacted by the low EBITDA that year. Scope expects that leverage will remain volatile as revenue and EBITDA generation strongly depend on project completions. This is reflected in a high Scope-adjusted debt/EBITDA ratio, which is expected around 17x in between 2023-2026.

Kopaszi’s financial risk profile is supplemented by a supportive liquidity position, including cash (EUR 77.3m as at end June 2023), available credit lines (EUR 67.8m) and a back-loaded debt maturity profile, with the next maturity (EUR 8m) at the end of 2024. Given the long maturity of the issued bond (due in 2032), upcoming short-term maturities will be manageable. Even if free operating cash flow turns negative due to working capital requirements in the next few years, committed investment will be financed by a combination of available internal resources and open credit lines available for financing specific developments.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the completion and handover of two residential buildings in 2024. Scope expects the leverage to remain high in 2023 before returning to adequate levels for the rating category in 2024. Scope foresees that Scope-adjusted debt/EBITDA will remain volatile in the next few years and Scope-adjusted EBITDA interest cover is expected to remain at above 3.5x on average in the period from 2023 to 2026. The Outlook also assumes ongoing adequate access to external financing to finance the company’s business plan.

A positive rating action is remote but could be warranted if the company grew significantly in size, as measured by its development pipeline, leading to greater diversification and more stable cash flows, while leverage as measured by Scope-adjusted debt/EBITDA stabilised below 8x on a sustained basis.

A negative rating action is possible if Scope-adjusted debt/EBITDA were to reach well above 12x on a sustained basis that is not being counterbalanced by high pre-sale rate of above 90%. A negative rating action is also possible if liquidity weakened, for example, due to weaker access to bank financing or higher-than-anticipated cash absorption from the execution on Kopaszi development pipeline.

Furthermore, senior unsecured bonds issued by Kopaszi include a debt acceleration clause triggering early repayment if the rating falls below B+ and is not restored within two years or if the rating falls below B- the repayment becomes immediate (60 days).

Long-term debt rating

Scope’s recovery analysis is based on a hypothetical default scenario at year-end 2024. Scope estimates the recovery for all senior secured debt to be average, driven by high sensitivity to attainable prices in a distressed sales scenario and the structural subordination of the rated entity’s senior unsecured creditors below future secured creditors at the property SPV level (development loans), justifying a debt class rating equal to that of the issuer (B+).

Rating driver references
1. 9 June 2023 Kopaszi’s announce-ment on the Budapest Stock Exchange
2. 6 October 2023 Kopaszi’s announce-ment on the Budapest Stock Exchange

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, (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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 January 2022. The Credit Ratings/Outlook were last updated on 15 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.

Conditions of use/exclusion of liability
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