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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Wingholding Zrt (Wing) and revised the Outlook to Negative from Stable. Scope has also affirmed the senior unsecured debt rating of B+.

Rating rationale

The Outlook change to Negative is driven by the increasing leverage and declining interest cover amid an unsupportive business environment for real estate developers. The Outlook change also reflects the company’s inadequate liquidity, including the uncertainties surrounding the refinancing of the senior unsecured bonds that have financed Hungarian operations and will mature in 2024.

The business risk profile (assessed at BB) reflects Wing’s solid market position in Hungary and Poland, supported by a well-diversified portfolio and development pipeline across property asset classes. The company’s increased size was driven by the successful execution of its development projects and strategic acquisitions, balanced by opportunistic value adding divestments. The issuer’s develop-to-hold commercial projects are largely focused on industrial and logistics properties (71% of the pipeline), which benefit from robust underlying fundamentals. Wing’s investment portfolio is primarily located in Budapest and consists of high-quality assets, which helps to limit the vulnerability to widening yields and increasing vacancies. The investments in Echo and Bauwert have strengthened the issuer’s diversification profile, as it is now exposed to markets with different demand patterns.

The high interest and inflation rates are putting a severe strain on the property development market. However, Wing’s development activities do not entail extra risk as it executes on a balanced number of projects, which Scope considers to be commensurate with current market dynamics. The inherent development risks are partially mitigated by the issuer’s high pre sale rate on residential projects (150% according to Scope’s definitions) and robust pre-lease rate on commercial projects (50%), ensuring good visibility over future cash flows. At the same time, the recurring revenue from leased properties provides some buffer should disposals take longer than expected. The Scope-adjusted EBITDA margin is expected to remain in the 15%-25% range, supported by recurring revenues from standing properties, robust market sale prices for apartments, the vintage of the land bank and easing development costs. Scope estimates the internal rate of return to stand between 15%-20%.

The financial risk profile (revised to B- from B) is characterised by the company’s high indebtedness paired with high interest rate risk, leaving little room of manoeuvre amid an unsupportive business environment for real estate companies. Leverage as measured by Scope-adjusted debt/EBITDA (excluding netting of cash) has materially increased since 2019, owing largely to the debt raised to partly finance the acquisition of majority stakes in Echo and more recently in Bauwert AG. Leverage has since steadied at elevated levels (17.3x for the last twelve months ending June 2023), with Scope-adjusted debt reaching HUF 649bn (an increase of HUF 163bn from end December 2022). A leverage in excess of 8x is seen high for a real estate developer. Concurrently, the high indebtedness also lifted the Scope adjusted loan/value well above 60%, although this ratio holds less weight in Scope’s assessment given the develop-to-sell focus. In addition, the changed market conditions have narrowed Wing’s access to external financing given its high leverage and more cautious stance of lenders. This could ultimately affect its ability to withstand volatility in earnings, rising cost of capital, higher working capital requirements, declining property market values and unforeseen operational disruptions. Debt levels have far exceeded Scope’s previous expectations and leverage is anticipated to remain at around 15x going forward. Scope sees potential for deleveraging coming from planned asset disposals, although this could be challenged by the standstill in the transaction market or weaker cash flow generation.

Debt protection as measured by the Scope-adjusted EBITDA/interest cover stood at 1.4x in the last twelve months ending June 2023 (2022: 1.9x). In an environment of sharply increased financing costs, such level is considered insufficient as it leaves very limited headroom against cash flow volatility. This could be further exacerbated by potential project delays or extended periods to lease commercial properties. The high share of floating-rate debt (51% as of end-June 2023) poses a risk, but remains manageable as timely repayments move in sync with the execution of projects. Going forward, Scope expects interest cover to fall below 1.5x, being highly dependent on the timely execution of projects and external factors beyond the company’s control.

Liquidity is inadequate and below par for the twelve months to end-December 2023, with an anticipated shortfall of HUF 50bn. The company had HUF 133bn of cash available at end-December 2022, insufficient to cover short-term debt of HUF 92bn due until end-2023 and forecasted FOCF of negative HUF 91m. Scope also points to the limited transferability of cash between group companies, which have varying access to funding sources and committed credit facilities. The liquidity assessment also incorporates the refinancing risks arising from the bonds maturing in 2024. Nonetheless, Scope finds comfort in the company’s prudent liquidity management, its consistent record of rolling over or refinancing debt and its strong relationships with a diversified banking pool.

Scope highlights that Wingholding Zrt.’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 89bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (immediate repayment). Such a development could adversely affect the company’s liquidity profile. There is currently no rating headroom to entering the grace period. Given the tightening rating headroom, the company must address its credit weaknesses to avoid entering the grace period or the more severe event of the debt rating being downgraded below B-.

Outlook and rating-change drivers

The Outlook change reflects the risk that Wing’s Scope-adjusted EBITDA interest cover ratio drops below 1.5x and the Scope-adjusted debt/EBITDA is likely to approach 15x. Although Scope expects the company to successfully and prudently executed on its development pipeline, earnings volatility can lead to pronounced swings in credit metrics, which could impair the rating. The Negative Outlook also captures the uncertainties surrounding the refinancing of the senior unsecured bonds in H2 2024, as expressed by below par liquidity.

A positive rating action (i.e. Outlook back to Stable) would require the company to demonstrate a stable Scope adjusted EBITDA interest cover ratio above 1.5x and Scope-adjusted debt/EBITDA below 15x. In addition, a revision of the Outlook requires a comprehensive refinancing plan for the senior unsecured liabilities due in H2 2024 by the end of March 2024. Further upside could be warranted if the Scope-adjusted EBITDA/interest cover steadied above 2x while Scope-adjusted debt/EBITDA declined below 8x. Given heightened pressure from difficult market conditions, such scenario is remote for the time being.

A downgrade could occur if Scope-adjusted debt/EBITDA exceeded 15x consistently or Scope-adjusted EBITDA/interest cover dropped below 1.5x on a sustained basis. This could be triggered by a pronounced decline in sales volume and extended disposal periods in a deteriorated market environment. A downgrade could also occur if the issuer is unable to present a tangible and comprehensive refinancing plan for the senior unsecured debt maturing in H2 2024 by the end of March 2024.

Long-term debt rating

Scope has affirmed the B+ debt rating to senior unsecured debt issued by Wingholding Zrt. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on Wing’s liquidation value. With an unencumbered asset ratio above 100%, senior unsecured debt holders could also benefit from a pool of assets that have not been 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 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, 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 Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlook were last updated on 31 January 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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