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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Globe Trade Centre S.A. (GTC) and its subsidiary GTC Real Estate Development Hungary Zrt. to BB+ from BBB- and kept the Outlook Negative. The senior unsecured debt rating has been downgraded to BB+ from BBB-. Concurrently, Scope has downgraded the rating of the green notes (XS2356039268) issued by GTC Aurora Luxembourg S.A., which GTC unconditionally and irrevocably guarantees, to BB+ from BBB-.

The downgrade of the issuer rating is a result of the slower than expected execution of the issuer's capital recycling and deleveraging programme, which increases the risk of weaker credit metrics that do not support an investment grade rating. The Negative Outlook has been maintained to reflect the increased risk of liquidity becoming inadequate, leaving the company either reliant on the successful execution of asset sales to free up the requisite capital or the extension and increase of secured financing. Significant progress on the divestment programme over the next six to nine months could alleviate Scope’s concerns.

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

Key rating drivers

Business risk profile: BBB- (unchanged). GTC's business risk profile is driven by its unchanged position as one of the most important commercial real estate players in CEE and SEE (Scope-adjusted total assets* of EUR 2.6bn at end-June 2024, up EUR 0.2bn YoY). In addition, Scope expects it to continue to achieve above-average profitability (EBITDA margin of 77% for the twelve months to end-June 2024). This is despite softening occupancy rate at 86% as of end-June 2024, down 1pp YoY.

Financial risk profile: BB (revised from BB+). The execution of the issuer's capital recycling and deleveraging programme has been slower than expected. This increases the risk of weaker credit metrics that do not support an investment grade rating, i.e. the loan/value ratio rising above 50% and EBITDA interest cover falling below 2.2x.

As of mid-November 2024, GTC has made no significant progress on its divestment programme, which includes asset sales of nearly EUR 400m in net proceeds to end-March 2026 (EUR 38m signed to date). The expected deleveraging enabled by the associated exit proceeds is thus delayed, increasing the risk of the loan/value ratio rising above 50% and approaching 55% in the coming years (end-June 2024: 47%). The expected rise in leverage will be driven by: i) pressure on asset values, with further but limited yield expansion (Scope’s view) not offset by rental growth as portfolio rents will slowly return to lower market rents (ERVs), driven by around 15% of leases coming up for renewal each year and limited visibility of incremental rental income from developments under construction, coupled with relatively weak pre-letting; and ii) an increase in debt of between EUR 175m and EUR 200m over the next three years based on expected developments and disposals, as free operating cash flow remains negative.

Negative free operating cash flow is driven by an anticipated increase in capital expenditure (including uncommitted) between 2024 and 2026, which also reflects GTC's recent investments. These investments include: i) GTC's first property (under construction) in Germany – ELIBRE: Berlin, senior living for rent – with a purchase price of EUR 32m (first instalment of EUR 12m paid, remaining development costs EUR 20m); and ii) 15% of the shares in NAP Nyrt. (a renewable energy producer with an installed capacity of 43 MW) for EUR 5m, both reflecting GTC's adjusted strategy to invest in sectors with higher sustainable growth potential.

Furthermore, in such a scenario, GTC's dividend policy, with dividend payments (although discretionary) expected to continue at the lower of EUR 30m per year or 50% of fund from operations, is not expected to be covered by free operating cash flow.

EBITDA interest cover stood at 3.4x in the last 12 months ending June 2024. Scope does not expect GTC to be significantly impacted by the changing interest rate environment in the short term as 100% of the company’s debt is fixed or hedged. However, new debt will bear notably higher interest rates. Thus, Scope expects the weighted average cost of debt to increase to close to 3% by YE 2024 and around 4% by YE 2026. As a result, EBITDA interest cover will decline to between 2.0x and 2.5x in 2026, when EUR 770m of debt (including the EUR 500m bond) will need to be refinanced at significantly higher borrowing costs. Rising financing costs are only partially offset by expected rental growth, given the challenging economic environment as well as the limited demand for some of GTC’s office portfolio and existing interest rate hedges.

A successful execution of the divestment programme could ease the pressure on GTC's interest cover, as it would allow a reduction in the debt burden, thereby cutting the amount of debt that needs to be refinanced at higher rates. However, the slower than expected execution of the disposal programme increases the likelihood of a scenario in which interest cover is no longer commensurate with an investment grade rating.

Liquidity: adequate (unchanged). Liquidity is considered adequate but still close to being stretched. Short-term debt maturities are fully covered by cash sources. However, a longer-term view shows the company's reliance on external financing, with debt maturities in the 24 months to end-June 2026 (EUR 866m, including a EUR 500m bond) and negative free operating cash flow forecast for the same period, which is not expected to be fully covered by cash sources, including available cash and cash in construction escrow accounts of EUR 120m (as at end-June 2024). In particular, more than EUR 700m of debt are due in H1 2026, including a EUR 500m bond, which will need to either be repaid, refinanced or extended. It could have a significant impact on GTC's liquidity profile if the company fails to address the related funding needs – through asset sales and/or new (bank) debt – well in advance, in line with its deleveraging plan. Scope will continue to closely monitor the implementation of this plan to assess whether the liquidity risk is well managed or whether further rating pressure will arise.

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

Outlook and rating sensitivities

Scope has maintained the Negative Outlook to reflect the increased risk of liquidity becoming inadequate, leaving the company dependent on either the successful execution of asset sales to free up the required capital or the extension and increase of secured financing. Significant progress on the divestment programme over the next six to nine months could alleviate Scope’s concerns.

The upside scenario for the ratings and Outlooks is:

1.     Progress on the deleveraging plan, supported by the successful execution of divestments that will enable debt repayments and address significant debt maturities in 2026, resulting in continued adequate liquidity as perceived by Scope.

The downside scenario for the ratings and Outlooks is:

1. A further delay in the deleveraging plan, which could lead to a deterioration in liquidity by setting back the company's efforts to successfully manage significant debt maturities in 2026.

Debt ratings

GTC has EUR 653m in capital market debt outstanding as at end-June 2024. All issuances are irrevocably and unconditionally guaranteed by Globe Trade Centre S.A.

Scope’s recovery analysis suggests a ‘superior’ recovery under BB-category stress. The recovery is based on a hypothetical default scenario in FY 2026 with a distressed enterprise value of EUR 1,446m. This value is based on the liquidation value of the business and includes a discount of approximately 40% for GTC's investment properties, in line with BB category stress, and 10% for insolvency costs. This compares to forecasted secured debt of EUR 847m and unsecured financing of EUR 653m. However, recovery expectations decline significantly under BBB-category stress, which would imply higher haircuts (around 50%), resulting in an 'average' recovery that does not justify a rating above the BB-category for this debt class. As a consequence, Scope downgraded the debt class rating to BB+ in line with that of the issuer.

The issuer’s unencumbered asset ratio stands at above 200% as at end-June 2024, providing sufficient collateral to bondholders. This justifies the senior unsecured debt rating of BB+.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Globe Trade Centre S.A.

Issuer rating: BB+/Negative, downgrade

Senior unsecured debt rating: BB+, downgrade

GTC Real Estate Development Hungary Zrt.

Issuer rating: BB+/Negative, downgrade

Senior unsecured debt rating: BB+, downgrade

GTC Aurora Luxembourg S.A.

Senior unsecured (guaranteed) debt instrument rating (ISIN: XS2356039268): BB+, downgrade

*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 Outlooks, (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 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 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Managing Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlooks assigned to Globe Trade Centre S.A. and GTC Real Estate Development Hungary Zrt. were first released by Scope Ratings on 12 November 2020. The Credit Ratings/Outlooks were last updated on 10 June 2024.
The Credit Rating assigned to the senior unsecured (guaranteed) debt instrument issued by GTC Aurora Luxembourg S.A. was first released by Scope Ratings on 24 January 2022. The Credit Rating was last updated on 10 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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