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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Negative issuer rating on Wingholding Zrt (Wing). Scope has also affirmed the senior unsecured debt rating of B+.

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

Key rating drivers

Business risk profile: BB. Wing’s business risk profile is driven by its solid market position as one of the leading property development and investment groups in Central Europe, supported by a well diversified portfolio across asset classes. The company’s asset base has grown significantly in recent years, with Scope-adjusted total assets* reaching HUF 2.9bn at the end of 2023, up 43% YoY. The growth has been driven by the successful execution of its development projects coupled with strategic value-adding acquisitions, although it has been balanced by selective divestments.

Wing’s commercial real estate portfolio is primarily located in the Greater Budapest area (accounting for approximately 65% of the total GLA) and consists of high quality assets. The investments in Echo (Poland) and Bauwert (Germany) have enhanced the company’s diversification profile, providing access to markets with different dynamics.

Wing is active in all real estate segments in its home market of Hungary, which helps to mitigate potential cash flow volatility. The issuer’s develop-to-hold commercial projects are largely focused on industrial/logistics properties (88% of the pipeline in Hungary) while develop-to-sell projects are mostly carried out in Poland (over 4,000 apartments and 56,800 sq m of office spaces were under construction as of Q1 2024).

Wing’s development activities do not entail additional risk as it executes on a balanced number of projects, which Scope considers to be commensurate with current market dynamics. The inherent development risks are partially mitigated by the issuer’s high pre-sale rate on residential projects (136% according to Scope’s definitions) and robust pre-lease rate on commercial projects (53%) as at end-2023, which provides good visibility over future cash flows. Concurrently, the recurring revenue from leased properties (occupancy and WAULT of the Hungarian property portfolio was 91% and 4.8 years respectively as of Q1 2024) provides a reliable source of income and acts as a buffer if properties are intended to be divested.

The EBITDA margin is expected to remain in the range of 15%-25%, supported by recurring income from standing properties, robust market sales prices for apartments, the relatively low cost of the land bank and gradually easing development costs. Scope estimates the internal rate of return to stand between 16%-22%.

Financial risk profile: B-. Wing’s financial risk profile is characterised by a high degree of indebtedness coupled with interest rate risk arising from a high proportion of floating-rate debt, leaving limited room for manoeuvre against the inherent volatility of development activities and external factors beyond the company’s control.

Leverage as measured by debt/EBITDA (excluding netting of cash) has materially increased since 2019, owing largely to the debt raised to partially finance the acquisition of majority stakes in Echo and, more recently, Bauwert AG. Leverage has since steadied at elevated levels (22.1x as of end-2023, up 10.7x YoY), with total debt reaching HUF 724bn (an increase of HUF 238bn from end December 2022). A leverage in excess of 8x is seen high for a real estate developer. Concurrently, the high indebtedness also lifted the loan/value above 60% (64% as of end 2023, up 2pp YoY), although this ratio holds less weight in Scope’s assessment given the develop-to-sell focus.

Despite the changed market conditions and the more cautious stance of lenders, Wing continues to benefit from a good access to external financing, as evidenced by the financing transactions completed in H1 2024^1,2,3. However, Wing’s high leverage could ultimately affect its ability to withstand earnings volatility, rising cost of capital, higher working capital requirements, declining property market values and unforeseen operational disruptions.

Debt levels have far exceeded Scope’s previous expectations and leverage is expected to remain between 15x 20x in the near-term. Scope sees potential for deleveraging through planned asset disposals and equity release from investments in JVs, although this could be delayed by the standstill in the transaction market or weaker cash flow generation.

Debt protection as measured by the EBITDA/interest cover stood at 1.2x as at end-2023. In an environment of sharply increased financing costs, such a level is considered insufficient as it leaves very limited headroom against cash flow volatility. This could be further exacerbated by potential project delays, time lags between projects revenues and costs incurred, or extended periods to lease commercial properties. The high share of floating-rate debt (48% as of Q1 2024) poses a risk, but remains manageable as timely repayments move in sync with the execution of projects and reference rates have started to ease. Going forward, Scope expects interest cover to remain volatile, being highly dependent on the timely execution of projects and external factors beyond the company’s control.

Liquidity: inadequate. Wing’s liquidity is considered inadequate and below par for the twelve months ending December 2024. At end-2023, the company had HUF 94bn of cash available, which is insufficient to cover HUF 213bn of short-term debt due until end-2024. However, the liquidity assessment is supported by the successful refinancing transactions that took place in H1 2024, from both the Hungarian and Polish capital markets (about HUF 48bn have been rolled over or repaid). Out of the short-term debt, HUF 68bn relates to shareholder loans, which will be reduced by up to HUF 30bn in conjunction with the sale of a project in Berlin. Scope expects the remainder to be extended or rolled over given the alignment of shareholders. Scope points to the limited transferability of cash between group companies, which have varying access to funding sources and committed credit facilities. The funding of Wing’s ongoing development projects is supported by unused credit limits.

Scope highlights that Wingholding Zrt.’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 89bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (immediate repayment). Such a development could adversely affect the company’s liquidity profile. There is currently no rating headroom to entering the grace period. Given the tightening rating headroom, the company must address its credit weaknesses to avoid entering the grace period or the more severe event of the debt rating being downgraded below B-.

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

Outlook and rating sensitivities

The Negative Outlook reflects the increased risks of EBITDA/interest cover sustaining below 1.5x and debt/EBITDA steadying above 15x. Scope expects the company to successfully and prudently execute on its development pipeline, earnings volatility could lead to pronounced swings in credit metrics. The Negative Outlook also captures the inadequate liquidity, coupled with Wing’s limited capacity to reduce its debt through cash generation, leaving it reliant on asset sales or increase of secured financing.

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

1.      EBITDA/interest cover above 1.5x on a sustained basis.
    
2. Debt/EBITDA below 15x on a sustained basis.

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

1. EBITDA/interest cover sustainably below 1.5x.
    
2. Debt/EBITDA above 15x on a sustained basis.

Debt rating

Scope has affirmed the B+ debt rating to senior unsecured debt issued by Wingholding Zrt. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on Wing’s liquidation value. With an unencumbered asset ratio above 100%, senior unsecured debt holders could also benefit from a pool of assets that have not been pledged as collateral.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Wingholding Zrt.

Issuer rating: B+/Negative, affirmation

Senior unsecured debt rating: B+, affirmation

*All credit metrics refer to Scope-adjusted figures.

1. Echo: Galeria Młociny refinancing
2. Archicom: PLN 190m bond issue
3. WING: project financing

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, 28 March 2024; 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 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 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: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlook were last updated on 27 December 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
© 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.