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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating on Hungarian holding company Alfa Equity Holding Kft. (AEH) to B- from B+ under review for a possible downgrade. The issuer rating has been placed under review for a developing outcome. Scope has also downgraded AEH’s senior unsecured debt rating to B- from B+ under review for a possible downgrade. Simultaneously, Scope has withdrawn AEH’s senior unsecured debt rating.

Rating rationale

The downgrade is driven by concerns around a number of ongoing transactions, notably i) debt maturing in 2024; ii) execution risk of new asset acquisitions in Romania; and iii) the HA11ER 1 development. AEH has addressed some concerns that Scope expressed in September 2023, notably the absence of audited results for 2022, which have now been provided. There has also been a more frequent flow of information between Scope and AEH. However, Scope remains sceptical of AEH’s inconsistent business strategy and whether the targets around the HA11ER 1 development are achievable, and thus highlights governance concerns (ESG factor: credit negative).

AEH’s business risk profile (assessed at B+) reflects the company’s relatively small size and market share, with total assets of EUR 175.4m as of December 2022. The company is expected to enter the Romanian market with the addition of two new assets. The acquisition of the first asset, a fully operational logistics centre (Clincien Logistic Park), is expected to be closed by end-2023. The acquisition of the second asset, a solar farm (Prahova PV Park), is expected to be closed by end-Q1 2024. This is a greenfield project that is expected to be fully operational by H1 2024, as the construction time for such projects is quite short. If the company successfully executes both projects, it will introduce a new asset category to its investments and strengthen its portfolio.

The financial risk profile (revised to B from BB-) reflects an expected deterioration in credit metrics, primarily caused by the HA11ER development, which could cause a significant drain on the company’s cash resources in 2024.

AEH is currently in the process of refinancing two of its existing income-producing assets (Alfa Hub 11 & Korzo Retail Park) and adding two new credit facilities to co-finance the acquisition of the Romanian assets. While the logistics centre will be able to provide an immediate revenue stream, there is some execution risk related to the solar farm.

AEH currently has EUR 51.7m in bank debt outstanding (end-September 2023), with an average debt maturity of 4.8 years (as at November 2023). After the refinancing, the company’s debt is expected to increase to EUR 71.0m, with an average debt maturity of 8.4 years, which will ease the burden of having to roll over a substantial amount of debt each year. The new debt structure, expected to be fully implemented in Q1 2024, will result in 100% of the company’s bank debt being subject to a floating interest rate. While floating rate debt can be advantageous in a declining interest rate environment, its variability introduces significant risks, particularly in times of economic uncertainty or high interest rates. Scope-adjusted EBITDA interest cover will face additional pressure and is expected to decline to below 2x in 2024.

Liquidity is inadequate. The company had EUR 3.4m in cash at end-June 2023 (unaudited) that will not cover negative free operating cash flow expected for the 18 months to end-2024 and EUR 21.3m in debt that need to be refinanced until end-2024. The debt primarily relates to loans on two income-producing assets (Alfa Hub 11 & Korzo Retail Park) currently in the process of refinancing. Once the refinancing is complete, an additional EUR 12.4m will be available to develop the company’s pipeline (primarily the HA11ER 1 development in 2024) and co-finance the acquisitions in Romania.

However, a delay in refinancing the existing assets would have a significant knock-on effect on the HA11ER 1 development, which depends on this funding for works to restart in February 2024.

The HA11ER 1 development could face further challenges in 2024, given the unfavourable macroeconomic trends, high inflation and high mortgage rates in Hungary. The presale rate of the project is not expected to increase in the short term, and there are no works ongoing at present, which could indicate problems with the project management of HA11ER 1. Furthermore, Scope does not expect a significant increase in pre-sales in 2024, as home buyers in Hungary are primarily cash buyers and this is unlikely to change until mortgage rates drop further.

In addition, the completion of the HA11ER 1 development also relies on additional external financing such as an equity injection, which may not materialise. Affordable bank financing for such developments is remote. Therefore, Scope sees the risk of a liquidity shortfall (assuming no capital increase) in 2024.

Scope has applied one notch down to the standalone credit assessment of B for governance, as Scope expressed concern regarding the quality of the information surrounding the HA11ER 1 project as well as unclear communication around a potential capital raise and disjointed investment strategy.

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

Under review for developing outcome

AEH’s issuer rating is placed under review for a developing outcome, pending better visibility on the refinancing of debt maturities in 2024, the financing of Romanian asset acquisitions and the financing and further execution of the HA11ER 1 project. Scope will resolve the under-review status as soon as possible.

An upgrade could be warranted if i) debt maturing in 2024 were refinanced along the terms and conditions presented to Scope; ii) financing for the acquisition of two assets in Romania were secured; and iii) construction work for HA11ER 1 resumed as expected in Q1 2024 with corresponding cash outflows either covered by the envisaged capital increase or improved pre-sales. An upgrade also requires Scope-adjusted loan/value to remain below 50% and Scope-adjusted EBITDA interest cover to be consistently at least 1.5x.

An improvement in Scope’s perception of AEH’s governance could also trigger an upgrade but is remote.

Factors that could individually or collectively lead to a downgrade of up to (but not limited to) one notch are: i) a worsening of liquidity that could be triggered by an inability to refinance debt maturing in 2024; ii) a further construction freeze on the HA11ER 1 project due to a lack of improvement in pre-sales or no external financing being injected; iii) an increase in the Scope-adjusted loan/value ratio to above 50%; or iv) a decline in the Scope-adjusted EBITDA interest coverage to below 1.5x.

Long-term debt rating (withdrawal)

Scope has downgraded AEH’s senior unsecured debt rating to B- from B+, in line with the issuer rating. Simultaneously, Scope has withdrawn the B- senior unsecured debt rating, as AEH has no senior unsecured debt at present despite AEH’s original plans to issue a HUF 10bn senior unsecured bond in 2021. Scopes base case, assumes the issuer will not issue any senior unsecured debt in the short-to-medium term, but acknowledges that if market conditions change, the issuer may consider such options again.

All of AEH’s income-producing assets are encumbered in favour of its secured lender. 

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, (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 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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings were first released by Scope Ratings on 21 October 2021. The Credit Ratings were last updated on 20 September 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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