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Rating action

Scope Ratings GmbH (Scope) has taken no action on the B+/Stable issuer rating of Hungary-based investment holding company LP Portfolio Kft (LP). Scope has also taken no action on its BB- senior unsecured debt rating.

The issuer rating continues to be supported by LP's strong financial risk profile and its progress on portfolio sustainability and diversification. The ratings are still held back by the holding company's small portfolio size.

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

Key rating drivers

LP’s unchanged business risk (B+) and financial risk (BB) profiles are in line with Scope’s base assumptions as outlined in the rating action from August 2023. Operating performance for FY 2023 slightly exceeded Scope’s projections, primarily due to a greater rise in recurring cash income than forecasted. Notably, interest income saw a more positive trend than anticipated, thanks to increased interest rates on intercompany loans and greater returns from deposits. Meanwhile, dividend income met Scope’s expectations. The evolution of LP’s financial debt and net asset values was consistent with the predictions Scope made last year.

The activities of LP’s core holdings are mainly concentrated in the Hungarian market, exposing the company to risks related to local economic conditions. However, portfolio diversification has improved following the completion of the Komlo Park steel manufacturing project and higher occupancy rates in the Budapest office park (EDU Campus), gradually increasing its share of the investment portfolio. Asset value diversification is therefore more balanced than in previous years.

The investment holding remains heavily dependent on Solar FM’s dividend cash inflow, which constituted over 65% of total cash inflows in FY 2023. While the generation of recurring income from the operation renewable energy is deemed credit-positive in the context of product innovation (ESG factor), the concentration of the income to this entity is weighing on portfolio sustainability. The rating also continues to be constrained by portfolio liquidity, as most portfolio companies are non-listed SMEs with small-scale operations.

LP’s loan/value* ratio remains comfortable at 34% as of FY 2023 (39% as of FY 2022). The ratio has decreased slightly compared to the previous year due to the rising value of the holdings while indebtedness has remained broadly stable. Scope expects the debt trajectory to continue to decline in the medium term, thanks to the good performance of the core portfolio, the declining nature of guarantees and the repayment of bonds from 2025 onwards.

Scope expects total cost coverage to remain above 2.0x for the next few years, supported by: i) relatively stable management and service fees; ii) increasing interest received on shareholder loans; and iii) fixed interest payments on the outstanding bond. However, still significant exposure on dividends received from Solar FM raises concerns about the core holding company's ability to pay dividends on a sustainable basis based on its operating performance.

Liquidity: adequate. 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 535m as of YE 2023, there are no refinancing risks that would necessitate the sale of any shareholdings.

Scope highlights that LP’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 5.4bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 15 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is two notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Supplementary rating drivers: The ratings are affected by a negative notch for the holding company’s small size in a peer context. Governance is deemed critical in the context of key person risk (ESG factor) and reflected in the conservative assessment of the company’s standalone credit assessment.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that both LP’s business risk and financial risk profiles will not change significantly in the next one to two years. The rating further reflects Scope’s forecast of total cost cover of at least 1x on a sustained basis. It also incorporates the expectation that further growth of LP’s investment portfolio will not be funded via additional bank debt.

The upside scenarios for the ratings and Outlook would require: (individually)

• Improved business risk, particularly with regard to concentration risks related to dividend income
   
• Significant growth of its investment portfolio size

The downside scenario for the ratings and Outlook would require:

• Total cost cover dropping to 0.8x on a sustained basis

Debt ratings

Scope’s recovery analysis was based on significant asset haircuts of 50% on LP’s HUF 14bn in gross asset value. Scope continued to evaluate these conservatively, partly using book values (equity), as none of the subsidiaries are quoted. The recovery rate was very high despite the increased debt and the use of only half of the assets (valued on a net basis, i.e. deducting their bank debt) as recoverable. Nevertheless, Scope has maintained its former approach to limit the uplift to one notch.

Environmental, social and governance (ESG) factors

Overall, ESG factors were neutral for the rating. This reflects a positive product innovation assessment (E) for LP’s large exposure to renewable energy as well as negative assessments with regard to key person risk under management and supervision (G) which results in a conservative assessment of credit metrics and the financial risk profile.

All rating actions and rated entities

LP Portfolio Kft.

Issuer rating: B+/Stable, no action

Senior unsecured debt rating: BB-, no action

*All credit metrics refer to Scope-adjusted figures.

The methodologies applicable for the reviewed ratings and/or rating Outlook (Investment Holding Companies Rating Methodology, 17 May 2024; General Corporate Rating Methodology, 16 October 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Zurab Zedelashvili, Director

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