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

Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on Hungary’s investment holding company Lexholding Zrt. Scope has also affirmed its B+ rating on the senior unsecured debt category.

Rating rationale

The affirmation of the issuer rating is supported by sufficient total cost cover and a balanced financing structure with only moderate external financial debt. The issuer rating is still constrained by Lexholding's limited gross asset value and a complex structure with different businesses, cross-ownerships and financing structures (credit-negative ESG factor).

Lexholding's business risk profile (assessed at B) remains constrained by portfolio sustainability, portfolio liquidity and geographical diversification. The company relies heavily on cash inflow from BAV Zrt., which constituted over 71% of total cash inflows in FY 2023. Therefore, any adverse developments or changes in BAV Zrt.'s financial performance could have a significant impact on Lexholding's cash flow stability and overall portfolio sustainability. Secondly, portfolio liquidity is limited by Lexholding's investment strategy, which includes a substantial focus on unlisted assets. Investing in such assets can present challenges in terms of liquidity. Unlisted assets typically have limited trading platforms, making it more difficult to sell or exit positions quickly. This lack of liquidity may hinder Lexholding's ability to adjust its portfolio or address unexpected cash flow requirements. Finally, geographical diversification constrains the rating. The operations of Lexholding's core holdings are predominantly concentrated in the Hungarian market. This lack of geographical diversification exposes the company to risks associated with local economic conditions, regulatory changes, and other market-specific factors. Enhancing geographical diversification can help mitigate these risks and provide a more balanced risk profile.

Scope highlights the fact that delayed investments from bond proceeds earmarked for real estate have been parked in the real estate fund for two years. This could signal a soft covenant breach.

In 2023, Lexholding came to an agreement with bondholders regarding a proposed change in the use of bond proceeds within the real estate division. The company redefined an investment strategy involving a portfolio of fully operational assets that are currently generating cash flow. The revised strategy was partially executed in 2023 via a HUF 1.5bn real estate acquisition (32,765 sqm of industrial property in Érd, Pest County) using HUF 1.25bn of invested bond capital, enabling immediate cash flow generation on core-holding level.

Lexholding's financial risk profile (assessed at BB+) is stronger than its business risk profile. Scope estimates that total cost cover will remain above 1.0x over the next few years, supported by the relatively stable nature of management fees implemented at the level of core holdings. This is despite the fact that Lexholding did not fully pass on its increased costs in 2023 so as to support the subsidiaries' operations. The rise in cost-based service fees was attributed to inflation, leading to higher prices from external service providers and increased salaries. Further factors supporting cost cover are: i) broadly stable net interest on shareholder loans; ii) Resumed dividend payments from core portfolio companies (i.e. pledged loans, ground transportation dividends already paid in 2024); and iii) no significant increase in dividend payouts shielded by bond covenants.

Liquidity continues to be adequate. Due to the absence of short-term debt, along with positive free operating cash flow and a significant cash buffer of around HUF 1.4bn as of FY 2023, there are no refinancing risks that would necessitate the sale of any shareholdings.

Scope highlights that Lexholding'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 15.0bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 90 days). Such a development could adversely affect the company's liquidity profile. The rating headroom to entering the grace period is 0 notches. Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

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

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope's view that the company should maintain a total cost cover at above 1.0x in the medium term.

A positive rating action might be warranted upon an improvement in portfolio sustainability and/or portfolio liquidity.

A negative rating action may be warranted if transparency remained limited in the medium term, mainly due to a complex organisational structure, and/or if total cost cover dropped to below 1.0x on a sustained basis. This could occur if the financial position of the dividend-paying undertakings deteriorated significantly, requiring a recovery programme and/or limiting their ability to pay dividends or management fees to Lexholding.

Long-term debt rating

Scope has affirmed the senior unsecured debt rating at B+ including the HUF 15.0bn (ISIN HU0000359955) bond. This reflects Scope's expectation of a 'superior' recovery for senior unsecured debt in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior unsecured debt of HUF 15.0bn with no senior secured loans. More than half of the bond proceeds (HUF 8.4bn) have already been deployed with a focus on investments in real estate; the rest has been invested in the open-ended real estate fund.

Scope has constrained the debt category rating to the same level as the issuer rating given the risk that Lexholding could raise higher-ranking debt that would dilute the recovery for senior unsecured debtholders.

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; Investment Holding Companies Methodology, 17 May 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 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 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: Zurab Zedelashvili, Associate Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 6 July 2020. The Credit Ratings/Outlook were last updated on 9 June 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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