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

Rating action

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

The affirmation reflects the expectation that the sale of BXI Kft. (BXI) to the current BXI management and the continuation of the business under a franchise agreement will have only limited impact on credit metrics, as the loss of revenues will be offset by improved operating costs and the ability to focus more resources on profitability enhancing segments over the long term.   

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

Key rating drivers

In July 2024, the issuer indicated its intention to sell its own office business operated in Budapest to the current management. Otthon Centrum will sell the business and enter into a franchise agreement with the new owner, thus applying its core business model also in Budapest. Otthon’s decision is motivated by the understanding that achieving higher profitability for BXI will require significant management effort and restructuring. Franchising the business appears to be the most effective solution to reallocate resources and focus on more profitable opportunities, such as cross-selling and up-selling.

Business risk profile: B+ (unchanged). Scope expects Otthon Centrum's market position to remain unchanged. While the overall size of the company will be negatively impacted as the issuer will lose part of the revenue (estimated at around 13% in 2025), the issuer is expected to maintain its leading position as the ten-year franchise agreement will ensure business continuity.

Diversification is also expected to remain unchanged, as the transaction involves a change in business model from proprietary to franchise, but with no change in product offering.

Profitability, as measured by the Scope-adjusted EBITDA margin*, is expected to improve in the long term as Otthon Centurm will outsource a low margin business and benefit from less margin dilution following the spin off of BXI. In addition, Otthon Centrum sees the outsourcing as an opportunity to focus more management resources (currently focused on BXI) on increasing financial intermediation volumes and cross-selling opportunities, which would ensure a higher proportion of recurring revenues over time.

Profitability, which was historically high and ranged between 15% and 25%, declined significantly following the property market crisis in Hungary, leading to a decline in the EBITDA margin to 14% in 2023 (from 24% in 2022). While Otthon’s revenue went up by 46.6% YoY in H1 2024, the EBITDA margin declined further to 12.7%, a trend that is expected to continue in H2 2024. Margin pressure is due to the high costs for the integration of the newly acquired business units in Poland and the development of a new sales team in Hungary, as well as the establishment of a FinTech company that will provide IT services to Otthon Centrum and the market. Scope expects profitability to be between 9% and 12% over the next three years.

Financial risk profile: BB+ (unchanged). The issuer's financial risk profile supports the rating.

After a strong performance in 2022, leverage as measured by debt/EBITDA has increased to 1.7x in 2023 (from 0.7x in 2022), driven by weakening profitability. The recent acquisitions in Poland will put further pressure on leverage, as significant integration costs are planned in 2024. Nevertheless, the current positive EBITDA trend of HUF 481m at H1 2024 (up 26% YoY) is already above Scope's previous base case and suggests that leverage is likely to remain below 2x.

The sale of BXI is expected to have a neutral impact on leverage, driven by stable EBITDA, no new debt planned and a slight decrease in lease obligations (approx. HUF 30m paid annually for the BXI office). Interest cover is also expected to remain unchanged, with a net interest position or interest cover above 10x. Scope expects free operating cash flow to be unaffected by the sale of BXI, benefiting instead from a slight reduction in maintenance capex (driven by the sale of BXI) and a return to EBITDA growth. An additional benefit could come from the increasing contribution from brokerage services, which Otthon plans to focus on in the future, but as the outcome is uncertain, Scope’s scenario does not include the potential contribution.

Liquidity: adequate. Liquidity remains adequate, with over HUF 3bn of cash and equivalents at 31 December 2023 and free operating cash flow (HUF 271m as at H1 2024) largely covering minimal short-term debt under Scope’s base case. 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 2 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

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

Outlook and rating sensitivities

The Outlook is Stable, reflecting Scope's expectation that the transition of BXI from an owned business to a franchise will not have a material impact on credit metrics. This reflects Scope's understanding that BXI's EBITDA contribution is marginal and that outsourcing the business will allow effort and resources to be allocated to more profitable businesses, while maintaining a strong presence in the Budapest area. As a result, Scope expects the leverage ratio (debt/EBITDA) to remain between 1x and 2x.

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

• 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:

• 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, affirmation

Senior unsecured debt rating: BB-, 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 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 17 June 2024.

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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