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

Rating action

Scope Ratings has today downgraded the issuer rating of Hungarian real estate group Wingholding Zrt. to B+/Stable from BB/Stable. Senior unsecured debt was also downgraded to BB- from BBB-.

Rating rationale

The downgrade is mainly driven by the substantial increase in indebtedness compared to Scope’s previous assessment. The increase is due to the partly debt-financed acquisition of publicly listed Polish real estate developer Echo Investment SA in H2 2019 and the anticipated further expansion of the investment property portfolio in H1 2020E. The latter would be financed by proceeds from the planned HUF 60bn senior unsecured bond to be issued under the Bond Funding for Growth Scheme of the Hungarian National Bank.

The assessment of the business risk profile remains at BB. Scope’s view of the issuer’s market position and asset quality has also not changed. The improved geographical diversification and increasing granularity of clients are credit-positive; however, the positive effects are offset by the lower profitability that accompanies a higher development volume, as this typically weighs on EBITDA margins due to the associated increase in revenue.

The financial risk profile’s rating has been lowered to B+ from BB+ as a result of substantially increased leverage. Scope’s new base case includes a higher loan-to-value (LTV) ratio, at above 60% for the next two business years. The ratio was below 50% until year-end 2018 (based on property market values) and 63% as of year-end 2019. Regarding free operating cash flows, Scope expect positive levels in 2020E, due to significant asset disposals, before becoming negative in 2021E and 2022E due to the ongoing expansion plans. Scope-adjusted EBITDA interest cover is also expected to reduce towards 2.0x in the current business year. The calculations assume the successful placement of the aforementioned HUF 60bn senior unsecured bond in H1 2020E. Scope’s forecasts incorporate discounts on future profits due to uncertainties regarding development projects and the potential impacts of Covid-19.

Liquidity is deemed adequate in the light of the increasing recurring revenue from the investment portfolio, a sufficient buffer of unencumbered assets and a significant portion of expansion capex that has a discretionary nature.

Outlook and rating-change drivers

The Stable Outlook is based on Scope’s revised forecast, which assumes the continued expansion of the issuer’s investment property and development portfolios. This should result in negative free operating cash flows and increased debt, which, however, should be balanced by even higher recurring cash flows from rents and improved diversification.

A negative rating action may be warranted if LTV reached around 80% on a sustained basis and/or the business risk profile weakened. An increase in LTV could be triggered by market value declines owing to lower rental income or weaker sentiment in Hungary’s real estate market.

A positive rating action is possible if the issuer managed to return the LTV ratio to below 60% on a sustained basis while keeping sufficient levels of interest coverage from recurring EBITDA.

Long-term and short-term debt ratings

Scope’s base case assumes the successful placement of a HUF 60bn senior unsecured corporate bond, with a seven-year bullet maturity and an interest rate of c. 4%, issued under the Bond Funding for Growth Scheme.

Based on Scope’s revised financial forecast, which considers 2019 preliminary results and the anticipated further portfolio expansion financed by debt, we have calculated a lower, but still above-average, recovery rate for senior unsecured debt holders in a hypothetical liquidation scenario in 2022E. Senior unsecured creditors benefit from an above-average unencumbered asset ratio of more than 2.5x going forward. Scope therefore rates senior unsecured debt at BB-, one notch above the issuer rating.

Stress testing & Cash flow analysis
No stress testing was performed.Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating and/or rating outlook(s) (Corporate Rating Methodology 26 February 2020 ; European Real Estate Methodology 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on www.Scoperatings.com/methodologies/ ESG factors in ratings.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rating process was conducted:
With 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 rating: issuer, agents of issuer, public domain, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings 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. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0
Lead analyst Denis Kuhn, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 27 August 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.