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      MONDAY, 13/05/2024 - Scope Ratings GmbH
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      Scope assigns SD to Deutsche Konsum REIT

      The assignment of a default status follows the execution of a debt restructuring that Scope regards as a distressed debt exchange.

      The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

      Rating action

      Scope Ratings GmbH (Scope) has today assigned an SD issuer rating to German commercial real estate company Deutsche Konsum REIT-AG (‘DKR’). Scope has also assigned an SD rating to DKR’s senior unsecured debt and has assigned a D rating to the senior unsecured bond (ISIN: DE000A2TR5A0) following a debt restructuring. Furthermore, Scope has downgraded the senior secured debt instrument rating DE000A2G8WQ9 to CCC from B-. These rating actions resolve the under-review status on all ratings.

      Subsequently, Scope has reinstated a C rating on DKR’s senior unsecured debt and the senior unsecured debt instrument DE000A2TR5A0.

      Rating rationale

      The renewed extension of the maturity date of the senior unsecured bond (ISIN: DE000A2TR5A0) beyond the grace period of the original terms meets Scope's definition of a default as it results in a loss of value relative to the original terms of the debt and has the effect of avoiding a likely default. As a result, Scope has assigned an SD rating to DKR, assigned a D rating to the relevant bond and assigned an SD rating to the senior unsecured debt. The SD ratings mirror that the issuer has defaulted on one specific debt instrument but not all its debt instruments.

      On 2 May 2024, DKR announced that it was in continued negotiations to refinance the upcoming EUR 70m senior unsecured bond (ISIN: DE000A2TR5A0) and the EUR 35.9m senior secured bond (ISIN: DE000A2G8WQ9), but that it was unlikely that these negotiations would be concluded within the agreed extension period for the senior unsecured facilities (originally due on 5 April 2024, extended to 3 May 2024). As a result, the company and the bondholders have agreed to extend both maturities until 30 June 2024.

      This extension falls outside the grace period under the original terms of the senior unsecured bond and therefore results in less favourable terms for the bondholders through a loss of value and, in Scope’s view, has the effect of avoiding a likely default as the company does not have the liquidity available to repay the EUR 70m. As such, it constitutes a distressed debt restructuring that meets Scope’s definition of default (link to the rating definition).

      In view of the ongoing negotiations on the refinancing of the two bonds whose maturities were extended on 2 May 2024, Scope considers the restructuring of the senior unsecured debt rating to be completed for the time being and has reinstated DKR’s senior unsecured debt rating and the respective bond (ISIN: DE000A2TR5A0) at C. Scope considers DKR to be in an ongoing state of financial restructuring and maintains the SD issuer rating until the refinancing of the two bonds is completed and the company has provided a more sustainable solution for its debt maturities, at the earliest.

      Scope upholds the negative governance assessment (ESG factor: credit-negative) which continues to result in a negative one-notch adjustment of DKR’s standalone rating. This is due to the perceived conflict of interest situation that has arisen as a result of the shareholder loan that DKR has made available to Obotritia. One of DKR's main shareholders, Rolf Elgeti, who was the company's CEO until mid-2023 and then Chairman of the Board, is also a general partner in Obotritia. Scope welcomes Rolf Elgeti's resignation as Chairman of the Supervisory Board, but does not consider the conflict of interest resolved as he remains on the Supervisory Board.

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

      Long-term debt ratings

      DKR issued a EUR 40m bond in May 2018 (EUR 35.9m outstanding) with a six-year term (2018-24) and a coupon of 1.80% (ISIN: DE000A2G8WQ9). This bond benefits from a first-ranking mortgage on 13 properties valued at EUR 96m as September 2022 (the most recent valuations are not yet available). The structure’s over-collateralisation is adequate, with an issue-specific loan/value ratio estimated of 41%. This positively influences recovery rates in a default scenario. According to Scope’s methodology and based on discounts on assets (as described below), an ‘excellent’ recovery is expected in a default scenario, thus allowing for a three-notch uplift on the SD issuer rating which results in a CCC debt rating. Scope highlights that the extended maturity of the senior secured bond (to 30 June 2024 from 30 May 2024) is within the grace period of the original bond terms, but warns that any further extension of the maturity of such an instrument could be viewed as a default on the debt.

      Scope’s recovery analysis for senior unsecured debt also signals an ‘excellent’ recovery. This is based on a hypothetical default scenario in FY 2023/24 with a liquidation value of EUR 677m, including a haircut applied to assets, reflecting a BB category stress according to Scope’s methodology, and liquidation costs of 10% for insolvency proceedings. This compares to a forecasted EUR 371m of secured financing, EUR 37m in unsecured convertible bonds, EUR 140m in senior unsecured bonds and EUR 68m in Schuldschein loans. DKR’s Scope-adjusted unencumbered asset ratio amounted to 1.9x at end-December 2022. However, due to the observed default on a senior unsecured bond (DE000A2TR5A0), whose renewed extended maturity falls within the next two months, the senior unsecured debt class was downgraded to SD and the corresponding bond to D. The rating of the senior unsecured debt and the corresponding bond was subsequently reinstated at C.

      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, 28 March 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.

      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 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: Thomas Faeh, Executive Director
      Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 31 May 2018. The Credit Ratings were last updated on 5 April 2024.

      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
      © 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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