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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+/Stable issuer rating of Biggeorge Property Nyrt. (BGP). The senior unsecured debt rating has been affirmed at BB-.

Rating rationale

The affirmation is driven by Scope’s expectation that BGP's solid credit metrics will be maintained in line with the rating case, benefiting from a high presale rate of BGP-managed funds, which together with an expected recovery in Hungary’s macroeconomic conditions in the second half of 2024, support adequate cash flow visibility.

The business risk profile (assessed at B+) is primarily driven by BGP's strong profitability and good pipeline visibility, underpinned by high presale rates of property developments of the funds under management. In 2024, the group is set to hand over three projects, launch four new ones, and continue with two ongoing developments, aiming to sell approximately 380 apartments, which mirrors the output levels achieved in 2022. The active engagement in five development projects underscores the group's robust agenda for the year. Looking ahead to 2025, the group plans to maintain its momentum by launching another four projects and handing over three, with the anticipated result of increasing the number of units sold to approximately 475, indicating a sustained growth in their development efforts.

Provided market conditions prevail, the group managed funds are expected to launch a number of new projects in the second and third quarter of 2024, adding a further 700 apartments to the development pipeline for completion in 2026. The lack of geographical diversification – with most funds active in the Budapest region – remains a notable limitation, particularly in terms of mitigating risks associated with regional economic fluctuations. The projects 'Silverbay Residence' and 'Szemesbay Resort' – both located at Lake Balaton – do offer some diversification within Hungary, but BGP's overall geographic footprint remains relatively narrow.

In 2023, the Scope-adjusted EBITDA margin leapt to 31%, primarily due to (i) robust revenue from fund services exceeding initial forecasts, and (ii) proceeds from land disposals. For 2024 and 2025, the Scope-adjusted EBITDA margin is expected to stabilise within the 20 to 30% range, supported by a forecasted recovery in the macroeconomic environment, anticipated disinflation, and the introduction of housing subsidy programmes, which may bolster the housing market and, by extension, demand for BGP’s developments¹. Notably, the geographic concentration of BGP's projects, primarily in the Budapest region and around Lake Balaton where housing prices have shown resilience and even appreciation, positions BGP favourably within this recovering market context. However, the overall high valuation of house prices relative to macroeconomic fundamentals, despite easing, remains a concern. Thus, while Hungarian GDP growth's return to positivity in 2024 suggests a more optimistic outlook, BGP's strategic response to these dynamics, including leveraging high presale rates and navigating the evolving landscape of housing subsidies and loan conditions, will be critical.

BGP’s financial risk profile (assessed at BB-) is bolstered by high presale rates of funds under management, with over 70% of the apartments expected to be delivered in 2024 already sold, and over 40% of those slated for delivery in 2025 similarly pre-sold. These forward sales afford significant visibility on revenue streams for the next 18 to 24 months.

As of year-end 2023, the interest-bearing debt consists of a single bond – issued in February 2022, under the Hungarian Bond Funding for Growth Scheme (NKP) – and some minor shareholder loans. The NKP bond accounts for 98% of the total debt outstanding and is fixed at a rate of 5.1%. The high proportion of fixed-rate debt shields the company from market volatility, especially from fluctuating interest rates as observed in Hungary over the past 18 months, thereby providing better visibility on future interest payments and enabling more predictable cash flows.

In 2024, the group plans to invest HUF 4.4bn in additional funds. Therefore, in the absence of significant profit or further land sales, free operating cash flow is therefore expected to turn negative again before an expected recovery in 2025. Further investment in other line items, such as capital expenditures, is expected to have a minimal impact on cash flow due to the asset light nature of the business.

Biggeorge’s leverage, as measured by its Scope-adjusted debt/EBITDA ratio, improved to 1.4x in 2023 (down 1.6x YoY) bolstered by a spike in Scope-adjusted EBITDA, primarily from one-off land sales. However, leverage is expected to normalise in 2024, ranging from 3.0x to 4.0x, before improving to under 3.0x in 2025. This improvement is anticipated due to an increase in Scope-adjusted EBITDA, attributed to enhanced operational efficiency and the completion of additional developments, while debt levels are expected to remain stable.

Liquidity is adequate as cash sources (HUF 9.1bn in cash as at YE 2023) comfortably cover cash uses (HUF 3.4bn in forecasted negative free operating cash flow and HUF 0.5bn in short-term debt as at YE 2023) by >200% in 2024. BGP benefits from having no significant short-term debt repayments in the coming years, as well as the relatively low CAPEX, due to the asset light nature of the business. Scope believes that cash sources will comfortably cover cash needs going forward.

Scope highlights that BGP’s senior unsecured bond 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 7.0bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is one notch. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope's view that credit metrics will maintain solid levels, with Scope-adjusted debt/EBITDA expected to remain below 4x. The continuation of work across five development sites, supported by strong presales, provides adequate cash flow visibility, underpinned by a more supportive macroeconomic outlook in Hungary. The Outlook also includes the expectation that BGP’s structure will not change.

A positive rating action may be taken if Scope-adjusted debt/EBITDA develops in line with Scope’s expectations toward levels below 3.5x on a sustained basis while BGP manages to increase its group size, leading to improved diversification of cash flow sources.

A negative rating action may be warranted if Scope-adjusted debt/EBITDA increases to above 5x on a sustained basis. This would be the consequence of a weaker operating income that results from lower demand, higher inflation or a lack of visibility that limits the launch of new projects.

Long-term debt rating

Biggeorge has issued one senior unsecured bond through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond was issued in February 2022 with a volume of HUF 7.0bn (ISIN: HU0000361365), a ten-year tenor and a fixed coupon of 5.1%, payable annually. Repayment is in five equal tranches (10% of the face value), commencing from February 2027, with a with a 50% balloon payment at maturity.

Scope’s recovery analysis is based on a hypothetical default scenario in 2025, based on the liquidation value of the company’s assets. Scope estimates the recovery for all senior secured debt to be ‘above average’, and therefore Scope affirms the senior unsecured debt rating of BB- (one notch above the underlying issuer rating).

This affirmation is driven by the above-average recovery rate due to the significant unencumbered asset position, which provides sufficient headroom against severe market value deterioration.

1. MNB – Housing Market Report – November 2023

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; European Business and Consumer Services Rating Methodology, 15 January 2024), 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 these 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: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 8 February 2022. The Credit Ratings/Outlook were last updated on 17 February 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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