The BBB rating for EUR 30m secured corporate bond (6.75% 2012/2019) issued by Immobilien-Projektgesellschaft Salamander-Areal Kornwestheim mbH (IPSAK) is supported by the company’s high market share in residential developments in Ludwigsburg, Kornwestheim and Kassel, as well as by its sound recurring income, which partially mitigates the volatility of its development business. The company also shows strong financial metrics with a comparatively low loan/value ratio among peers, strong fixed-charge coverage and solid liquidity.

Negative rating factors include: IPSAK’s small size, strong reliance on top customers, concentrated development pipeline focused only on a few regional markets, and key person risk.

The bond rating strongly benefits from overcollateralisation of 1.6x.

Key rating drivers

Market leader for residential developments in Kassel and Kornwestheim/Ludwigsburg. IPSAK’s market share in property development in Kornwestheim/Ludwigsburg and Kassel is expected to reach 30% in 2016. This dominant market position ensures the company’s projects have high visibility in their respective markets, which supports its business-to-consumer business model.

A small property company. With a total consolidated asset value of EUR 153m and funds from operations (FFO) of EUR 9m in 2015, IPSAK is a small company in the highly fragmented German real estate market. This small size and market position can lead to a higher sensitivity to unforeseen events, more volatility in cash flows as well as greater key person risk.

Moderate loan/value of 53% in 2015. IPSAK’s loan/value ratio increased to 53% in 2015 from 48% in 2014, due to a consolidated discretionary cash flow of negative EUR 11m. This cash flow was financed by available credit facilities (EUR 2m), available cash (EUR 4m) and divestments (EUR 5m). Scope does not expect the negative impact on the company’s financial risk profile to last, as it expects IPSAK’s loan/value ratio will decrease to below 50% in the next 18 months, primarily driven by the successful disposal of the Heidenheim portfolio.

Volatile cash flows due to concentrated development pipeline. The volatility of IPSAK’s cash flows is amplified by the concentrated development pipeline of three projects. This very modest diversification in its pipeline might negatively affect future cash flows if projects are delayed or suffer cost overruns, and Scope therefore considers diversification to be a risk factor.

Sound recurring cash flows partially mitigates volatility of development business. IPSAK shows sound recurring cash flows of EUR 8m from IPSAK’s letting, power and heat generation activities, which Scope expects to remain stable in the next few years. This foundation fully covers operational and senior financing expenses and partially offsets the volatility of the development business.

Strong reliance on top customers. IPSAK is overly reliant on its top customers. 83% of rental income was attributed to its top 10 tenants as of September 2016, while the top three made up around 57%. This lack of tenant diversification is partly offset by the excellent credit quality of some of these tenants, reducing the risk of their default.

Debt protection is above average. Scope expects that the company will maintain FFO fixed-charge cover at 2015 levels (4.1x), which provides a sufficient buffer to meet fixed charges. This increase was boosted by the growth in FFO, fuelled by the successive disposal of IPSAK’s development pipeline.

Limited geographic diversification with a focus on a few regional markets. IPSAK’s portfolio is situated in the cities of Kassel (6% of total assets), Ludwigsburg (1%) and Kornwestheim (93%). All are classified by Scope as ‘B’ or ‘C’ locations, and currently benefit from the booming German real estate market, with strong demand spilling over from tenants and investors in ‘A’ locations.

Key person risk. Scope considers there is key person risk as the CEO and founder currently makes the main strategic decisions for the company. 

Liquidity and debt repayments

IPSAK’s current liquidity profile is very solid. Expected operating cash flow for FY 2016, cash and equivalents, marketable securities and undrawn bank facilities total EUR 20m at YE 2015, which will cover the EUR 5.1m of debt due this year.

IPSAK’s debt of about EUR 82m as of December 2015 consists of bank debt at the holding level (EUR 28m) and subsidiary level (EUR 24m) as well as a corporate bond (EUR 30m). Exit proceeds from the disposal of the Heidenheim portfolio – signed in July 2016 and closed at the end of September 2016 – will be used to early repay EUR 19m of corresponding debt by YE 2016. Apart from this early repayment, there are no material loan redemptions until 2017, when EUR 5.6m is payable. Scope believes IPSAK can easily redeem this debt using operating cash flow. The company will also be able to use an estimated collateral value of EUR 10m from its unencumbered subsidiary, IPSAK Energie GmbH.

Bond

The BBB corporate bond rating reflects IPSAK’s credit quality as an issuer, as well as the seniority and asset pledges of IPSAK’s debt positions. The bond benefits from a very valuable collateral package. This consists of a Buchgrundschuld (land charge without certificate) on the Salamander Areal property valued at EUR 93m, which is subordinate to the first-ranked debt of currently EUR 28m (maximum EUR 30m), and a fixed cash deposit of EUR 2m. Scope views the estimated overcollateralisation of 1.6x as a strong factor for the bond rating.

Outlook

IPSAK’s Stable Outlook for its EUR 30m corporate bond is driven by the company’s stable recurring income stream from its letting, power and heat generation activities. The latter enlarges the visibility of future cash flows and makes financial metrics more robust.

A positive rating action may be considered if IPSAK i) lowers its loan/value ratio to a sustainable level of around 30% or below, ii) reduces the share of its top ten tenants to less than 20% of rental income and iii) maintains FFO above EUR 7m.

A negative rating action may be taken if the company’s loan/value ratio remains above 50%, and if the EBITDA margin does not return to above 30% from the current 27%.
 

Regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund, Dr Sven Janssen.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history
Date; Rating action; Rating
16.09.2016; Affirmation; BBB Stable
17.09.2015; Affirmation; BBB Stable
18.09.2014; Downgrade; BBB Stable
17.09.2014; Review for possible downgrade; A-
29.11.2013; Downgrade; A- Stable
03.12.2012; Initial Rating; A

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the issuer of the investment.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Website of the rated entity, Detailed information provided on request, Valuation reports, other opinions, Data provided by external data providers, Current performance record, External market reports, Unaudited annual financial statements, Press reports/other public information.
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

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