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

Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating on Hungarian real estate developer SunDell Estate Nyrt. to B- from B and has maintained the Stable Outlook. Scope affirmed the senior unsecured debt rating at B+.

The downgrade of the issuer rating is based on the increased dependence of SunDell's controlling shareholder (GOPD Nyrt.) on dividend payments from the issuer, which are required to service debt at the holding level, which in turn puts pressure on the issuer's credit quality.

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

Key rating drivers

Business risk profile: B (unchanged). Scope’s assessment of SunDell’s business risk profile is primarily driven by its small size, despite being the fifth largest developer on the Budapest residential market. This leads to limited diversification, with a focus on only a handful of new, energy-efficient housing projects in Budapest, and thus more volatile profitability.

With a total asset value of EUR 150m as at end-2023, SunDell remains an emerging real estate developer in a highly fragmented market. However, Scope believes that its strong track record of over 1,000 apartments sold since 2019, with a total value of above EUR 130m, provides decent market visibility.

SunDell has a concentrated development pipeline. There are currently eight projects running in its portfolio, with advanced construction comprising around 1,200 units (partially sold) and two projects with over 600 units in building permit status. The geographical distribution of the company’s revenues remains rather weak, given its focus on the Budapest residential market. Therefore, diversification is a rating constraint in all segments: geographical, real estate (concentration on the homebuilder subsegment) and tenant quality.

In the past years, (i) the price segments offered, including affordable housing as well as the mid and premium price segments, and (ii) the micro-locations within Budapest, have been reasonably diversified, promoting decent project diversification. However, from 2025 onwards SunDell’s project pipeline will be highly concentrated on its largest development to date, the Duna Riverbank. This greatly constrains the diversification assessment as it increases cluster risk.

As at end-2023, the lease portfolio accounted for 30% of total assets, representing EUR 35-40m in gross asset value. This is expected to double in the medium term with the addition of 100 apartments to the existing 21 apartments and a hotel. Nevertheless, the lease portfolio remains concentrated and very small and does not offer real diversification in terms of revenues (approx. 10% of revenues).

SunDell’s residential developments are exclusively in Budapest (‘B location’). Historical presales have been high for mass-market residential condos, as required by banks for project financing. As at 15 September 2024, presale rates have recovered somewhat from the lows at end-2023. The improved moderate presale rates were driven by a recovery in demand, thanks to retail mortgage rates decreasing towards 5% by YE 2024, subsidies for families, both of which improving affordability, and good asset quality (ESG factor: credit positive). As a result, Scope expects sales of HUF 8.0bn in 2024 (down from HUF 20.3bn in 2023 due to a market downturn and new flagship project) followed by an improvement in 2025.

SunDell’s Scope-adjusted EBITDA margin* has been in the 10% to 25% range in recent years (10.2% in 2023, down from 12.7% in 2022). Scope therefore sees operating profitability as volatile. The agency expects this to remain the case due to the project-based nature of SunDell’s revenue, related fluctuations in profitability and the continuously changing market environment.

Demand is still catching up. While retail mortgage interest rates have not decreased enough to support fast sales and hence an increasing internal rate of return, construction and labour costs are falling, so Scope sees no real pressure on this side. As such, the agency expects moderate internal rates of return for the company’s development pipeline to remain in line with those for delivered projects.

Financial risk profile: BB- (unchanged). Scope’s assessment of SunDell’s financial risk profile is primarily driven by moderate debt protection and moderate leverage. Liquidity is adequate, supported by an equity investment in 2022 and two bond issuances, which have a high balloon repayment (40%-50% of notional to be repaid only in 2030-31).

At the end of 2023, SunDell’s loan/value ratio stood at 29% (up 2pp YoY) while debt/EBITDA was at 7.9x (down 0.5x). Going forward, Scope forecasts that the loan/value ratio will stay at around 25%-30% and that debt/EBITDA will remain very volatile but below 15x.

The loan/value of around 30% is rather conservative for a developer. It leaves SunDell enough headroom to either: i) lease properties at sufficient cap rates to cover financing costs; ii) tackle a moderate downturn in the properties’ fair values; or iii) tap external financing sources to cover construction costs if needed.

The projected increase in debt/EBITDA to 14x at YE 2024 reflects Scope’s expectations of significantly lower revenues from the sale of residential units of HUF 8bn in 2024 (down from HUF 20.3bn in 2023) as well as EBITDA of HUF 1.2bn in 2024 (down from HUF 2.1bn in 2023). This will be due to SunDell adapting its handovers to the shifting market conditions and reducing its offerings. Demand throughout 2024 is also lower than in 2023 due to persistently high mortgage rates. Scope forecasts that debt/EBITDA will decrease to well below 10x in 2025. This is based on: i) improved demand on the back of falling interest rates; ii) moderate operating profitability as most large developments are handed over; and iii) decreasing gross debt as the bonds start amortising (HUF 3.3bn in 2025 and HUF 550m in 2026). Scope assumes no new debt issuance.

EBITDA interest cover has been moderate with 5.0x at YE 2023 (up 1.1x YoY). Scope expects it to stay above 2x due to the moderate cash flow generation driven by the handovers in Sundell’s flagship projects in Zugló and District XIII of Budapest in 2025.

Scope expects a rebound in handovers of affordable housing projects from 2025 onwards. In addition, the bonds will start to amortise, reducing gross debt. Scope therefore forecasts EBITDA interest cover staying above 4x in 2025. Visibility thereafter is still limited, but even with Scope’s current reservations this metric should stay well above 2x.

Liquidity: adequate. Liquidity is adequate and is based on i) available cash sources of HUF 0.3bn at 30 June 2024, ii) cash inflow from handovers of HUF 3.0bn in Q4 2024 and the start of handover for two residential developments with a cash inflow of up to HUF 17.2bn¹ in 2025 as well iii) HUF 1.0bn cash inflow related to signed asset sales resulting in a free operating cash flow forecasted to exceed HUF 4.0bn in 2025. In total, these will cover the HUF 3.3bn bond repayment due in November 2025. In 2026, there is only a HUF 550m bond repayment due. However, the development of liquidity is subject to risks related to the timing of handovers in connection with the timely delivery of development projects.

In addition, the issuer is required to pay dividends – planned at HUF 3.0bn annually – ¬to its majority owner GOPD (B-/Negative) to enable debt service at GOPD’s level regardless of SunDell’s profits.

Scope highlights the fact that Sundell’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme both have a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 5.5bn and HUF 11.0bn respectively) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 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.

Supplementary rating drivers: -1 notch. While SunDell remains rated on a standalone basis, Scope acknowledges the rating differential between SunDell's standalone credit assessment of B and the B-/Negative issuer rating of its controlling shareholder GOPD Nyrt. Scope considers SunDell Estate Nyrt. to be a strategic subsidiary of GOPD Nyrt., which holds 63.13% of SunDell’s shares directly and through subsidiaries as of 30 June 2024. In this respect, Scope notes the significant interdependencies between these companies, as the parent company has very limited cash generation other than that of SunDell and sells incubated land plots to SunDell for residential development. As such, GOPD is dependent on the cash generation at SunDell level and subsequent cash upstream, which in turn could lead to a weaker credit profile of SunDell. As a result, Scope has made a one-notch negative adjustment to SunDell’s standalone credit assessment under parent support.

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

Outlook and rating sensitivities

The Stable Outlook reflects good navigation through the high interest rate and construction price environment, with the potential for high volatility in credit metrics beyond 2024, taking into account the slowdown in sales given the significant change in affordability in the issuer's core market of Budapest. However, the successful delivery of the company's backlog in 2024 and 2025 will help keep debt/EBITDA below 15x and EBITDA interest cover well above 2x.

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

1. Increased visibility on sales beyond one year, especially for luxury apartments, or a significant portion of recurring EBITDA while credit metrics remain in line with Scope's rating case (a scenario that is currently considered remote)
    
2. Improved credit quality of the parent

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

1. EBITDA/interest cover moving towards 1x
    
2. Debt/EBITDA moving towards 15x
    
3. Weakening liquidity, either due to a delay in handovers or a further deterioration in the parent's (GOPD’s) credit quality

Debt rating

In November 2020, SunDell issued a HUF 11.0bn senior unsecured bond (ISIN: HU0000360078) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond has a tenor of 10 years and a fixed coupon of 3.25%. The bond will be repaid in three tranches: 30% in 2025, 30% in 2027 and 40% balloon payment at maturity in 2030.

In July 2021, SunDell issued a HUF 5.5bn senior unsecured bond (ISIN: HU0000360649) under the same bond scheme. The bond has a tenor of 10 years and a fixed coupon of 3.65%. The bond will be repaid in five tranches starting from 2026, with 10% of the face value payable yearly and a 50% balloon payment at maturity in 2031.

The bond proceeds were used to develop residential housing projects and acquiring a landbank. In addition to the rating deterioration covenant, the bond covenants include a list of other soft covenants.

SunDell has issued two senior unsecured bonds totalling HUF 16.5bn. It has minimal outstanding senior secured bank debt. Scope assumed a hypothetical default at YE 2025 and applied reasonable discounts to assets. SunDell’s assets are almost fully unencumbered (unencumbered asset ratio of above 200%). Total liquidation value is HUF 12.3bn while the senior unsecured debt position is equally HUF 12.3bn at YE 2025 resulting in a ‘superior’ recovery expectation.

This translates into a B+ debt class rating for senior unsecured debt, two notches above the issuer rating.

Environmental, social and governance (ESG) factors

The housing units developed by SunDell are energy-efficient (ESG factor: credit-positive) and well above minimum legal requirements. There is more demand for this type of housing than for old or renovated housing and less energy-efficient projects. SunDell was one of the first in the market to develop environmentally conscious and sustainable residential buildings with low energy and water needs and a high share of green areas. Since SunDell constructs its buildings, its properties are guaranteed to have an energy performance certificate of at least ‘BB’ under Hungarian law, considered a nearly zero-energy building (nZEB).

All rating actions and rated entities

SunDell Estate Nyrt.

Issuer rating: B-/Stable, downgrade

Senior unsecured debt rating: B+, affirmation

*All credit metrics refer to Scope-adjusted figures.

1. In line with presale as at 15 September 2024

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 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 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, the Rated Entities' Related Third Parties, 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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 October 2020. The Credit Ratings/Outlook were last updated on 17 October 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.