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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB- issuer rating of Globe Trade Centre S.A. (GTC) and its subsidiary GTC Real Estate Development Hungary Zrt. and revised the Outlook to Negative from Stable. The senior unsecured debt rating has been affirmed at BBB-. Concurrently, Scope has affirmed the BBB- rating of the green notes (XS2356039268) issued by GTC Aurora Luxembourg S.A. that GTC unconditionally and irrevocably guarantees.

The Outlook has been revised to Negative to highlight the risk of the Scope-adjusted loan/value ratio rising to around 55%, the Scope-adjusted EBITDA interest cover falling below 2.2x and the increased risk of a prolonged period of insufficient liquidity, leaving the company dependent on the successful execution of asset sales to free up the required capital or the extension and increase of secured financing.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB-. GTC's business risk profile is driven by its unchanged position as one of the most important commercial real estate players in CEE and SEE (Scope-adjusted total assets* of EUR 2.6bn at end-March 2024, up EUR 0.1bn YoY), which shows and is expected to show above-average profitability despite weakening asset quality with increasing obsolescence risk in parts of its office portfolio.

GTC's portfolio is well diversified across CEE (69% of gross asset value - income producing assets - at end-March 2024) and SEE (31%) with a focus on Poland (38%), the company's domestic market. The remainder of the portfolio is spread across five other countries: Hungary (31%), Bulgaria (10%), Romania (8%), Croatia (6%) and Serbia (7%). The top three tenants account for 11% of the total rent at the end of March 2024, while the top 10 tenants account for 26% of the total rent. Scope considers the diversification still adequate and doesn't see a risk of (i) a significant increase in concentration with three office projects currently under development (41,000 sqm; 48% pre-let; gross development value of EUR 176m), which will be added to the portfolio mainly in 2024 and 2025; nor (i) a significant risk of rent impairments given the average investment grade credit quality of the tenants.

Occupancy softened in Q1 2024, declining to 83% in March 2024 (down 1pp YoY) for the office segment and 96% (unchanged YoY) for the retail segment. Occupancy is lowest in GTC's office properties in Poland (73% as at end-March 2024) and Romania (83%). Most vacancies are caused by properties in regional Polish cities with a high market vacancy rate due to the strong "work from home" trend, or properties with small floor plates with imperfect structure and fitting. These weaknesses have been addressed through the reorganisation of GTC's office leasing departments, increased community management aimed at tenants' employees and, in some cases, more flexibility in lease terms (length, incentives, local currencies). It remains to be seen whether these measures will bear fruit or whether some of GTC's assets will require major investment or will be sold at a price that reflects these weaknesses.

The retail performance appears to have recovered after the pandemic, with sales in 2023 above pre-pandemic levels. Footfall and tenant sales in GTC's shopping centres increased by 7.1% and 10.9% respectively in 2023. In addition, GTC benefits from its exposure to CEE and SEE, where online shopping habits are growing at a slower pace compared to Western Europe and consumer purchasing power is expected to remain resilient in 2024 thanks to a strong improvement in real disposable income since H2 2023.

Nevertheless, the risk to future occupancy levels is amplified by the relatively short WAULT of 3.4 years as of end-March 2024, which exposes GTC to ongoing re-letting risk, especially given the subdued demand, as reflected by the portfolio's ERV, which is around 6% below actual market rents.

GTC's adjusted strategy is to invest in sectors with higher sustainable growth, including hospitality, residential and renewable energy. GTC is also looking to expand into the German (senior living) and UK markets, highly rated countries with some growth potential in asset classes focused on. However, these investments are subject to execution risk due to GTC's limited experience in these additional core asset classes and markets, as well as the required capital recycling to enable investments.

The Scope-adjusted EBITDA margin normalised closer to 75% (last twelve months to end-March 2024: 78%, down 4pp YoY), a level that Scope considers sustainable. However, declining occupancy combined with inflationary increases in property operating costs will continue to put pressure on profitability, partially mitigated by the company's efforts to reduce SG&A expenses.

Financial risk profile: BB+ (revised from BBB-). GTC's financial risk profile is driven by sustained high levels of capital expenditure, pressure on achievable rental levels, rising borrowing costs and further, but limited, yield widening, all of which are putting pressure on credit metrics that are seen to be on the verge of deteriorating to levels that are not commensurate with the rating.

The deleveraging required to protect the rating is dependent on the successful execution of the company's deleveraging plan, which includes asset sales with net proceeds of approximately EUR 400m over the next 24 months (EUR 12m signed to date). Exit proceeds will be used in priority to (i) deleverage and (ii) execute the company's development/acquisition pipeline. Without successful implementation of the deleveraging plan, Scope expects the loan/value ratio to rise above 50% and approach 55% in the coming years (end-March 2024: 48%). This view is driven by (i) additional pressure on Scope-adjusted total assets, with further but limited yield expansion not offset by rental growth, as portfolio rents will slowly return to lower ERV's, driven by around 15% of leases coming up for renewal each year, and limited visibility on incremental rental income from developments under construction, coupled with relatively weak pre-letting (48% as at end-March 2024); and (ii) an increase in Scope-adjusted debt of around EUR 150-175m over the next three years, as discretionary cash flow remains negative.

EBITDA interest cover was 3.5x over the last 12 months to March 2024. Scope does not expect GTC to be materially affected by the changing interest rate environment in the short term as the company has 100% of its debt fixed or hedged. However, new debt will carry significantly higher interest rates. As a result, Scope expects the weighted average cost of debt to increase to almost 3% by YE 2024 and around 4% by YE 2026. As a result, Scope-adjusted EBITDA interest coverage will decline to between 2.0 and 2.5x in 2026, when EUR 770m of debt (including the EUR 500m bond) will need to be refinanced at significantly higher borrowing costs. Rising financing costs are only partially offset by existing interest rate hedges and expected rental growth due to the challenging economic environment as well as limited demand for part of GTC's office portfolio.

Liquidity: adequate. Liquidity is considered adequate but close to being stretched. While short-term debt maturities are fully covered by cash sources, a longer-term view shows the company's reliance on external financing, with debt maturities in the 24 months to end-March 2026 (EUR 212m) and a negative FOCF forecast for the same period of EUR 61m, which is not expected to be fully covered by cash sources, including available cash and cash in construction escrow accounts of EUR 166m (as at end-March 2024). Liquidity is further constrained by around EUR 680m of debt repayments due in Q2 2026, including a EUR 500m bond. These 2026 debt maturities could have a significant impact on GTC's liquidity profile if the company does not manage to address the related funding requirements - through asset sales and/or new (bank) debt - well in advance, in line with its deleveraging plan. Scope will closely monitor the implementation of this plan to assess whether the liquidity risk is well managed or whether further rating pressure will arise.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

Outlook and rating sensitivities

The Outlook has been revised to Negative due to the risk of the Scope-adjusted loan/value ratio rising to around 55% as a result of continued pressure on capitalisation rates and ERVs, as well as the increased risk of inadequate liquidity, coupled with GTC's limited ability to reduce its debt burden over the next 18 months through cash generation from its standing portfolio, leaving it reliant on (i) the successful execution of asset sales to free up the required capital or (ii) the extension and increase of secured financing.

The Outlook is based on the assumption of annual like-for-like rental growth of 3-5% between 2024 and 2026, capital expenditure of EUR 237m and dividend payments of EUR 90m, both over the same period. Proceeds from the asset sales programme are only included to the extent that they have been executed.

The upside scenarios for the ratings and Outlooks are (collectively):

1. Successful and swift execution of the deleveraging plan, resulting in continued adequate liquidity as perceived by Scope.
    
2. Scope-adjusted loan/value ratio not increasing to around 55%.
    
3. Scope-adjusted EBITDA interest cover of above 2.2x.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Further, perceived liquidity deterioration, i.e. if significant debt maturities in 2026 are not addressed well in advance.
    
2. Scope-adjusted loan/value ratio of around 55% if continued pressure on portfolio value does not abate and GTC is unable to reduce indebtedness.
    
3. Scope-adjusted EBITDA interest coverage of less than 2.2x if GTC is unable to significantly reduce indebtedness or achieve strong Scope-adjusted EBITDA growth.

Debt ratings

GTC has EUR 653m in capital market debt outstanding as at end-March 2024. All issuances are irrevocably and unconditionally guaranteed by Globe Trade Centre S.A. The issuer's unencumbered asset ratio stands at around 200% as at end-March 2024. This provides sufficient collateral to bondholders, justifying the senior unsecured debt rating of BBB-.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Globe Trade Centre S.A.

Issuer rating: BBB-/Negative, Outlook change

Senior unsecured debt rating: BBB-, affirmation

GTC Real Estate Development Hungary Zrt.

Issuer rating: BBB-/Negative, Outlook change

Senior unsecured debt rating: BBB-, affirmation

GTC Aurora Luxembourg S.A.

Senior unsecured debt rating: BBB-, affirmation

*All credit metrics refer to Scope-adjusted figures.

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 Outlooks, (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.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Managing Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 November 2020. The Credit Ratings/Outlooks were last updated on 11 September 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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