Rating action

Scope Ratings GmbH (Scope) has performed the following rating action:

OTP KMRP II 2031 Bonds (ISIN : HU0000361118), HUF 100bn: affirmation at B

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

The rating action considers the transaction reporting available until 30 October 2024.

Transaction overview

The transaction finances the acquisition of a portfolio composed exclusively of (i) OTP Bank Plc ordinary shares and (ii) Hungarian 10-year government securities. The transaction facilitates the financing of an employee-backed investment scheme in OTP Bank according to a dedicated national law (the KMRP or SESOP law) using special purpose vehicles (the KMRPs) where membership is restricted to employees and management of a company.

The OTP KMRP II owns currently 6.7m shares of OTP Bank and HUF 5.14bn Hungarian bond HU0000404744 notional.

The rated bond is guaranteed by MFB, the Hungarian Development Bank Pr. Ltd. (MFB), for 80% of its outstanding notional amount. The guarantee is unconditional, irrevocable and the guarantor will pay on the first written request by the noteholders.

The two main parties to the transaction are:

• OTP Bank Plc. with an assigned issuer rating of BBB+, and
   
• MFB Hungarian Development Bank Private Limited Company with an assigned issuer rating of BBB.

The different costs of the structure, including bond interest, guarantee costs and operating fees will be paid out of (i) the dividend paid by the OTP Bank Plc. shares, (ii) the interest earned on the government securities, (iii) a potential subsidy by OTP Bank Plc. as allowed under the SESOP law, (iv) sale of the government securities or (v) sale of the OTP Bank Plc. shares themselves.

At or before the maturity date, the assets of the issuer will be liquidated or acquired by the members of OTP KMRP II to redeem the rated notes.

Rating rationale

The rating is currently constrained by the volatility risk of OTP Bank shares and the transaction’s leakage option, which prevent the build-up of significant liquidity and loss buffers, resulting on material default risk. Nevertheless, the issuer’s position from an expected loss perspective has slightly improved year-on-year, reflecting that, since its drop during 2022, the OTP Bank share price has recovered its value and now stands at HUF 18,700 per share, similar to the value from around the closing date. The issue also benefits from a guarantee form MFB for a proportional amount of 80% of the notes’ face value.

Moreover, the bank’s commitment to support the OTP KMRP II with an additional HUF 2.5bn annual subsidy payment, conditional on the regular dividend being paid, is beneficial for the liquidity position of the issuer. It reduces the risk of the adverse scenario where assets have to be sold before maturity to pay the annual issuer costs. Still, the risk of a shortfall at maturity is not reduced substantially due to the leakage option.

Key rating drivers

MFB guarantee on 80% of the notes’ notional (positive)¹. The single class of notes issued by OTP KMRP II are guaranteed by MFB for a proportional amount of 80% of the notes’ face value.

Share price volatility (negative)². Most of the assets of the vehicle are OTP Bank Plc. Shares. These shares are publicly traded with a volatile value, exposing the vehicle to a large market risk.

Availability of liquidity (negative)³. The liquidity required for the issuer to pay all coupon, costs and fees would come from different sources of revenues that are not contractual commitments. Further, a leakage option prevents the build-up of substantial buffers. However, OTP Bank has shown a strong commitment to the vehicles since closing and also shares could be liquidated to pay any shortfall.

Rating-change drivers

Positive:

An increasing value of the assets of the issuer could lead to an upgrade of the issuance rating, by creating a higher over-collateralisation between the assets and the rated liability, for example through an increase in OTP Bank Plc. shares’ value.

Negative:

A downgrade of the rating of the guarantor would negatively impact the likelihood of indemnifying the beneficiaries of the guarantee and could therefore lead to a further downgrade of the rated notes.

A decreasing value of the assets of the issuer could lead to a downgrade of the issuance rating.

Quantitative analysis and assumptions

Scope has performed a cash flow analysis considering the asset characteristics and the main structural features. Our quantitative analysis reflects the transaction’s strong reliance on both the guarantee, the dividend payments, and the final value of the shares. We derived the note’s loss rate distribution from a Monte Carlo simulation of the entire structure, incorporating both revenues and costs of the issuer.

One key parameter assumption is the volatility to be assumed for our diffusion of the value of shares, where share’s returns do follow a normal distribution, in a similar fashion as in the Black & Scholes model. We looked at historical volatilities either on OTP Bank Plc. itself or on peer companies (either the largest European banks or smaller CEE banks) over different horizons: one day, one year, or ten years (duration of the transaction). Several levels of volatilities were tested but the assumption corresponding to the assigned rating is 45%, a level which is (i) in line with short-term historical volatilities and (ii) above the long-term historical volatility. The dividend yield assumed for the duration of the transaction has been defined as a discounted yield corresponding to 50% of the expected dividend yield as derived from equity analysts’ consensus.

 Sensitivity analysis 

Scope tested the resilience of the rating against deviations of the main input parameters: the share’s volatility. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the OTP Bank Plc. shares volatility assumption is 67.5%:

• sensitivity to volatility, zero notches.

Rating driver references
1. Issuer documentation and supporting material (Confidential)
2. OTP Bank share price
3. OTP Bank AGM

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like volatility and dividend yield assumptions, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool checked by a dedicated team, incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the asset composition, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 6 March 2024; Counterparty Risk Methodology, 10 July 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.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 the Credit Rating 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.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Sebastian Dietzsch, Senior Director
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The final Credit Rating was first released by Scope Ratings on 8 December 2021. The Credit Rating was last updated on 2 December 2022.

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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