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

Rating action

Scope Ratings GmbH (Scope) has affirmed the BB- issuer rating of Cordia International SE (Cordia) and maintained the Negative Outlook. Scope has also affirmed the BB- senior unsecured debt rating.

The Negative Outlook has been maintained as market fundamentals for newly-built apartments remain challenging, with interest rates and inflation still high. Although there are encouraging signs in the Hungarian property market, current business conditions could exert negative pressure on the company’s credit metrics.

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

Key rating drivers

Business risk profile: BB- (unchanged). The business risk profile continues to reflect Cordia’s solid positioning in the residential development property market in Central Europe, supported by a sizeable and balanced project pipeline with a potential of 10,775 units as of end-June 2024. However, two factors continue to constrain the assessment as they present a cluster risk for cash flow: the company’s small size, with Scope-adjusted total assets* of HUF 299bn (EUR 729m) as of end-June 2024; and moderate concentration in its core markets of Hungary and Poland, which account for around 91% of projects under construction as of H1 2024. However, the company is well positioned to reinforce its leadership position in its home market of Budapest, with the acceleration of new project launches in the second half of 2024 and early 2025.

The pre-sale rates of Cordia’s completed and ongoing projects contribute significantly to mitigating development risks and securing future revenues. As of Q3 2024, pre-sales reached 88% for completed projects and 31% for projects under construction , whilst noting that over 700 units were launched in the first half of 2024.

Profitability as measured by the EBITDA margin is forecasted to remain above 15%, supported by the low cost of land for ongoing projects, sustained market sale prices and normalised development costs. The weighted average internal rate of return remains robust and is expected to reach approximately 22% for ongoing projects.

Financial risk profile: BB- (unchanged). The financial risk profile reflects Cordia’s moderate credit metrics despite the increased indebtedness. The main constraint is the exposure to interest rate risk and the potential for cash flow and earnings volatility.

Debt protection as measured by the EBITDA interest cover stood at 4.5x in H1 2024 (2023: 4.3x). This remains adequate as it provides a buffer against the cash flow volatility inherent to developers. Nonetheless, floating rate debts (36% of total debt as of end-June 2024) present constraints on Cordia’s debt protection. However, they remain manageable due to the synchronisation of drawdowns and timely repayments along with the execution of projects. Furthermore, Scope dos not expect upside pressure on floating rate debt in line with Hungary’s monetary policy easing.

Rising financing costs will only be partially offset by the expected growth in profitability and interest income, given the still challenging operating environment for developers and the expected gradual normalisation of returns on cash deposits and investments against inflation.

Scope anticipates that Cordia’s EBITDA interest cover will remain volatile and highly dependent on the timely execution of its development pipeline. As a result, there is a heightened possibility that interest cover will decline towards 2.5x as interest payments on recently issued debt commence.

Scope points to the remaining risk that new contracted sales are likely to remain sparse in some markets (particularly those with a wide supply and slow sales pace), as high interest rates and rising prices affect affordability and demand for newly built apartments. In contrast to the 2022-2023 period, these concerns are much less pronounced in Hungary, while prospects in Poland are less encouraging.

Leverage, as measured by debt/EBITDA, rose to 5.4x at the end of June 2024 (end-2023: 5.1x), reflecting the financing transactions carried out in the first half of the year. Cordia’s indebtedness subsequently increased, with reported gross debt reaching HUF 170.5bn at end-June 2024 (up HUF 44.6bn from end-December 2023). Gross debt will continue to be driven by project loans (HUF 43.5bn of unused facilities as of H1 2024) and by the amortisation schedule of the bonds maturing in 2026. It is therefore anticipated that gross debt will remain at a level of between HUF 170bn and 190bn in 2024-25, including lease liabilities.

Scope considers that Cordia’s current leverage provides sufficient headroom to mitigate potential earnings volatility, while maintaining access to external financing, on both a secured (unencumbered asset ratio above 110% as of H1 2024) and unsecured basis, to fund working capital needs, build inventories, or pre-finance new projects.

Liquidity: adequate (unchanged). Cordia’s liquidity is adequate, with cash sources (unrestricted cash and cash equivalents of HUF 77.8bn as of end-June 2024) fully covering short-term debt of HUF 23.6bn due in the 12 months to end-June 2025. Scope anticipates that the company will be able to meet its debt obligations in the next 12-18 months. The majority of these maturities relate to bond amortisation and project loans (repaid along with project’s lifecycle). Scope’s view is supported by the company’s prudent liquidity management, which aims to maintain a minimum cash position of around EUR 50m at all times and sets at minimum a 1.5-year cash reserve for bond redemptions. Furthermore, Scope acknowledges Cordia’s financial assets (HUF 39.6bn as of end-June 2024), a portion of which are earmarked for bond repayments. Consequently, 10% of these investments are considered as cash equivalents.

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

Outlook and rating sensitivities

The Negative Outlook continues to reflect challenging market fundamentals for developers, with varying conditions that are either unfavourable, uncertain or encouraging, depending on the specific in which Cordia operates. While Scope anticipates that the company will successfully execute its development pipeline, potential earnings volatility, coupled with exposure to interest rate risk, could exert some pressure on Cordia’s credit metrics, which could negatively impact the rating.

The upside scenario for the rating and Outlook are (collectively):

1. EBITDA interest cover sustaining above 2x.
    
2. Increased visibility of a sustained recovery in Cordia’s main markets.

The downside scenarios for the ratings are (individually):

1. EBITDA interest cover dropping below 2x on a sustained basis.
    
2. Worsening of liquidity (deemed remote for the time being).

Debt rating

Scope has affirmed the BB- senior unsecured debt rating. The agency expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2025 based on the company’s liquidation value. Given an unencumbered asset ratio of above 110%, senior unsecured debt holders could also benefit from a pool of assets not pledged as collateral.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Cordia International SE

Issuer rating: BB-/Negative, 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, (European Real Estate Rating Methodology, 28 March 2024; General Corporate Rating Methodology, 16 October 2023), 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: Fayçal Abdellouche, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 12 September 2019. The Credit Ratings/Outlook were last updated on 8 December 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, Scope Innovation Lab 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.