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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating of Infogroup Holding Kft. Scope has also affirmed the BB- senior unsecured debt rating of Infogroup Holding Kft.

Rating rationale

The rating affirmation is based on the expectation that strong operating performance will offset temporary pressure on leverage and interest cover, both driven by debt financed development activity.

Infogroup’s business risk profile (unchanged at B+) reflects Scope’s view of the company's small size – albeit steadily growing due to the successful execution of its development projects, with total assets of EUR 196m as of end-June 2023 (up 31% YoY) - and its exclusive focus on the Hungarian real estate market. This exposes Infogroup to a high risk of cash flow volatility because of limited opportunities to diversify cash generation. However, the business risk profile is underpinned by the strong profitability, which is resilient to the market downturn, thanks to the prudent investments in less competitive but strategic areas and the focus on the growing light-industrial/ logistics market.

Infogroup focuses on the develop-to-hold business and its portfolio is located exclusively in Hungary, namely in Budapest (offices and hotels) and Eastern Hungary (light-industrial/ logistics). This correlates the company’s performance to the economic trends of only one country. Diversification is further constrained by the high tenant concentration, with the top three accounting for 39% of rental income as of 31 December 2023. Scope believes this risk is partially mitigated by the good credit quality of the largest tenants such as Jabil, Lidl and Freudenberg, and Infogroup's presence in three real estate segments with slightly different demand patterns (office, hospitality and light-industrial/ logistics). Infogroup has built a strong reputation as evidenced by its high exposure to built-to-suit solutions and occupancy of 96% as of 31 December 2023 (96.7% as of December 2022) and WAULT of 5.5 years (up 2.4 years YoY) providing adequate visibility on future cash generation.

Strong profitability is the main driver of the issuers business risk profile. Infogroup achieved a Scope-adjusted EBITDA margin of 67.5% in 2023 (based on preliminary results; down 0.3pp YoY). In 2024 Scope expects profitability to decline to 40%, due to exceptionally strong Scope-adjusted EBITDA from a develop-to sell project subject to a forward deal. Scope expects profitability to return to above 60% in 2025, driven by recurring rental income, which is expected to grow at a rate of 20-30% until 2025, supported by two new projects to be delivered in 2024, which are 100% pre-let.

The focus on the light-industrial/ logistics segment continues to support the profitability assessment. This segment, unlike other real estate segments, has ensured stable cash flows, even in the current macro-economic environment, and is expected to further benefit from i) the increased use of e-commerce; ii) companies pursuing supply chain optimisation strategies; and iii) Hungary’s ambition to become a global hub for electric vehicles parts. Nonetheless, Scope’s assessment of profitability accounts for the potential volatility arising from the uncertainty surrounding the office segment and new projects not yet included in the pipeline.

The financial risk profile (unchanged at BB) reflects the company’s adequate debt protection, measured by the Scope-adjusted EBITDA interest cover. While the interest cover will be exceptionally high in 2023 (13.5x based on preliminary results; up 8.1x YoY), driven by the strong increase in Scope-adjusted EBITDA thanks to a pre-sold development project, Scope expects the ratio to weaken in the coming years and range between 3x and 6x, pressured by additional debt financing required to realise the company’s development pipeline. The impact of the drastic change in borrowing costs is partially mitigated by the strong growth in EBITDA, which is expected to reach HUF 4.9bn in 2024 and HUF 5.1bn in 2025, and the absence of material interest rate risk on existing debt (97% at fixed rates or hedged).

Leverage as measured by the Scope-adjusted loan/value ratio materially increased in 2021 following the HUF 4.5bn bond issued for refinancing, execution of Infogroup’s development pipeline, and plot purchases. Leverage decreased for the second consecutive year in 2023 to 35% (down 5pp YoY) but is expected to increase again and remain at around 45%, driven by higher debt, with Scope-adjusted debt expected to increase to HUF 46bn by YE2025 from HUF 28bn as of YE2023, to fund further execution of the issuer’s development pipeline. Likewise, the Scope-adjusted debt/EBITDA ratio has been fluctuating for years. After bottoming out in 2023 at around 4x driven by the exceptional growth in EBITDA, the ratio is expected to remain between 8x and 9x for the next two years, with new assets generating enough EBITDA to partially offset the increase in debt used to finance their development. Despite the anticipated increase in indebtedness, Scope believes that Infogroup has still sufficient headroom to tap external financing, supported by the high pool of unencumbered assets (HUF 13bn as of YE 2023). Moreover, Scope expects the loan/value ratio to remain below 50% in line with the company’ financial policy. Scope also expects no significant acquisitions.

The liquidity is adequate as unrestricted cash fully covers short term debt obligations and no significant debt portion is maturing before 2026. Infogroup relies on established relationship with six large banks and constantly aims at keeping a minimum level of 15%-20% cash to debt ratio.

Scope notes that Infogroup’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Infogroup to repay the nominal amount (HUF 4.5bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 5 days after the bond rating falls below B-, which could have default implications). The rating headroom to enter the grace period is 2 notches; Scope therefore sees no significant risk of the rating covenant being triggered. In addition to the rating deterioration covenant, financial bond covenants include a cap on the dividend payment (maximum 50% of profit after tax and if loan/value ratio does not exceed 50%) and loan to value ratio not exceeding 60%.

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s view that Infogroup will continue to grow at a moderate pace and that the expected pressure on interest coverage and leverage, due to the execution of the project pipeline, will be partially mitigated by the strong operating performance, which relies on secured and recurring revenue. This will allow Infogroup to maintain Scope-adjusted loan/value below 55% and Scope-adjusted interest cover above 2x. The Outlook also incorporates Scope’s view that the issuer will maintain high occupancy and pre-letting levels going forward.

A positive rating action is seen remote at present but could be warranted if the company were to grow significantly in size leading to an improved tenant diversification, while maintaining credit metrics at current levels.

A negative rating action could occur if the Scope-adjusted loan/value ratio rises above 55% or Scope-adjusted EBITDA interest cover falls below 2x. An increase in the loan/value could be caused by a decrease in the company's asset value or an increase in debt due to higher-than-expected costs associated with pipeline execution. A decrease in debt protection could be caused by a decline in occupancy leading to a weakening of EBITDA.

Long-term debt rating

In May 2021, Infogroup issued a HUF 4.5bn senior unsecured bond (ISIN: HU0000360433) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 0.8bn) and for acquisitions (HUF 3.7bn). The bond has a tenor of 10 years and a fixed coupon of 3.0%. Bond repayment is in six tranches starting from 2026, with 5% of the face value payable yearly, and 50% balloon payment at maturity.

Scope has affirmed the BB- rating of Infogroup’s senior unsecured debt. The assessment is based on a hypothetical default scenario in 2025 and on the issuer’s liquidation value. The rating is supported by the company’s large pool of unencumbered assets.

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, (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/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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 27 March 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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