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Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of BB- and revised the Outlook to Stable from Negative on Hungarian real estate and loan brokerage Otthon Centrum Holding Kft. The senior unsecured debt rating has also been affirmed at BB-.

The Outlook change reflects that financial metrics remain in line with Scope rating case despite the profitability deterioration.

Key rating drivers

Business risk profile: B+. Otthon Centrum’s business risk profile is supported by the company’s position as one of two leading real estate and loan brokerages in its home market of Hungary, the other one being Duna House Holding Nyrt. Despite the sharp decline in revenue in 2023, the company has succeeded in maintaining its market position, with the help of the recent acquisition of Open House adding 30 offices to the Hungarian network. The acquisitions of two real estate brokers in Poland, closed in April and September 2023, are set to improve geographical diversification, although Otthon Centrum will continue to depend on its home market for 90% of its revenue, at least in the short term, when the issuer will focus on the integration of the acquired entities. Revenue diversification is adequate as several segments generate operating profit, the most important of which are the real estate brokerage franchise, credit intermediation services, the physical agency network, and the real estate-related consultancy.

Profitability, historically high and ranging between 15% and 25%, dropped significantly following the real estate market crisis in Hungary, which caused Scope-adjusted EBITDA margin* to fall to 14% in 2023 (from 24% in 2022). Even though a market recovery is ongoing in Hungary and the issuer’s revenue is benefiting from the trend in Q1 2024, profitability is set to further decline in the medium term. This is due to the high costs planned for integrating the newly acquired entities and the development of a new sales team in Hungary as well as the establishment of a FinTech company which will provide IT services to Otthon Centrum and the market. Scope expects profitability to range between 7% and 10% in the next three years.

Otthon Centrum's business risk profile is constrained by the small absolute size of its business, the relatively fragmented markets in which it operates and the lack of geographic diversification. Service strength is also considered a negative rating factor. While the issuer has good brand recognition in its home market, the nature of the service, which typically involves one-off transactions, precludes opportunities to build recurring revenues and exclusive customer relationships. However, Otthon Centrum is seeking to reduce revenue volatility by revising its sales strategy and focusing on cross-selling opportunities, while increasing volumes of recurring services such as insurance packages.

Financial risk profile: BB+. The issuer’s financial risk profile supports the rating. Following a strong result in 2022, the leverage, measured by the Debt/EBITDA has increased in 2023 to 1.7x (from 0.7x in 2022), driven by weakening profitability. The recent acquisitions in Poland will pressure leverage further as significant integration costs are planned in 2024. Nonetheless, Scope expects that the ratio will not exceed 3x, as no new debt issuance is planned. Free operating cash flow has been historically positive but turned negative in 2023 due to the weakening results and cash absorption from increased working capital¹. Scope expects Free operating cash flow/debt to remain around break-even at least in 2024 due to no substantial recovery in operating cash flow paired with higher capex.

Liquidity: adequate. Liquidity remains adequate, with over HUF 3bn of cash and equivalents at 31 December 2023 covering minimal short-term debt and cash outflows under Scope’s base case, which are largely discretionary (i.e. growth capex and dividends). Otthon Centrum has traditionally not experienced large swings in working capital, except for 2023, and did not see cash balances drop below HUF 300m even at their low point, which was H1 2020. The senior unsecured bond will start amortizing in 2024 (HUF 149m annually).

Scope highlights that Otthon Centrum’s senior unsecured bonds 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 2.9bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 120 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 1 notch. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Outlook and rating sensitivities

The Stable Outlook, revised from Negative reflects the assumption that, although Scope's expectation of declining EBITDA due to the integration of the new business has materialised and is expected to continue into 2024, the impact on leverage and cash flows has been less than expected. Scope now expects leverage to rise only temporarily above 2.0x, but to remain still largely within the rating case, and to return to between 1x and 2x in the long term.

The upside scenario for the rating and Outlook is seen as remote, but would require:

1. Otthon Centrum to significantly increase its size and diversification while maintaining financial metrics in line with Scope's expectations, i.e. a Debt/EBITDA below 2x for a sustained period.

The downside scenario for the rating and Outlook is:

1. Financial leverage (Debt/EBITDA) were to rise significantly above 3.0x on a sustained basis. This could be caused by margin pressure due to increased competition from banks, online retailers or other larger organisations with greater financial strength, adverse regulatory developments or challenges in integrating acquired businesses.

Debt rating

Otthon Centrum issued a HUF 2,981m senior unsecured bond (ISIN: HU0000360391) in April 2021 through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for the acquisition of Open House, Freedom N sp. Zoo and Investor N. sp. Zoo, while HUF 1,699m is still available. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in eight tranches starting from 2024, with 5% of the face value payable yearly from 2024 to 2027, 10% of the face value payable yearly from 2028 to 2030, and a 50% balloon payment at maturity.

Scope has rated senior unsecured debt at BB-, the same level as the issuer rating, reflecting limited prior-ranking liabilities in the capital structure. Scope bases its recovery assessment on a going concern enterprise valuation and expects a superior recovery for bondholders. Scope refrains from upnotching the debt rating due to Otthon Centrum’s asset-light business model and the material uncertainty regarding its asset value in a hypothetical default scenario, which may be driven by increasing competition and/or a loss of confidence in the business and resulting departure of licensees and agents.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Otthon Centrum Kft.

Issuer rating: BB-/Stable, Outlook change

Senior unsecured debt rating: BB-, affirmation

*All credit metrics refer to Scope-adjusted figures.

1. In 2023 net working capital changes includes an extraordinary, negative HUF 369m unspecified other item (2022: negative HUF 2m).

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 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 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 January 2021. The Credit Ratings/Outlook were last updated on 16 November 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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