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

Rating action

Scope affirms the issuer rating of Cordia International Zrt. of BB/Stable as well as the BB rating assigned to the senior unsecured debt.

Rating rationale

The affirmation reflects Cordia’s ongoing business expansion (including an assumed HUF 33bn corporate bond issue; see debt instruments ratings section for details) and its impact on the company’s business and financial risk. The affirmation also reflects greater uncertainty in the overall market environment. Cordia’s expansion includes the acquisition of projects in Hungary and Poland, the acquisition of a 93% majority stake in Poland-based real estate developer Polnord as well as a stake of around 20% in Argo Properties N.V., a company exposed to the German residential real estate market. These transactions have led to weaker credit metrics, weighing on the company’s financial risk profile, which we now rate at BB, one notch lower than before.

The impact of the recent business expansion on Cordia’s business risk profile is mixed. Geographical diversification has improved, with a higher volume of development projects in Poland as well as newly added activities in Germany and an improving market position via the substantial increase in company size.
However, we expect the impact on profitability to be negative, at least in the short to medium term, since the acquired Polnord business had historically lower operating margins than Cordia’s development business in its home market of Hungary. We rate the company’s business risk profile at BB-, the same level as before.
In addition, we have lowered our profitability forecasts for Cordia and the sector as a whole due to the negative impact of the Covid-19 pandemic on economic growth globally.

Outlook and rating-change drivers

The Outlook for Cordia is Stable and incorporates the following assumptions: i) the company successfully executing its growth plans; ii) a loan/value ratio (LTV) of below 50% based on Scope-adjusted-debt/Scope-adjusted total assets iii) interest cover to sustainably stay above 2.2x after assumed temporary Covid-19 related weakness.

A positive rating action is seen as remote and would require a significant improvement in Cordia’s business risk profile, through a much higher share of recurring cash flows independent of continued asset sales. This could, for instance, be achieved through significant recurring rental income.

A negative rating action may be warranted if Cordia’s EBITDA interest coverage drops to below 2.2x on a sustained basis beyond 2021E. This could be triggered by a significant slump in sales volumes caused by a serious deterioration in real estate conditions in Cordia’s core markets.

Long and short-term debt instrument ratings

Cordia is considering issuing a new 10-year senior unsecured bond (HUF 33bn) with the amortisation of six repayments of 10% each plus a final ‘bullet’ repayment of the remaining 40% of principal. Repayments will be made on a semi-annual basis starting in 2027 with a coupon of 3%. We have incorporated a successful placement of this HUF 33bn corporate bond in our base case financial forecast.

We rate senior unsecured debt at the same level as the issuer rating based on: i) our recovery analysis, with a hypothetical default scenario at year-end 2022, which shows a high sensitivity to attainable prices in a distressed sales scenario; ii) the structural subordination of Cordia’s senior unsecured creditors; and iii) current and future secured debt at property SPV level, which consists of fully drawn construction loans at the hypothetical point of default. This translates into a BB rating for senior unsecured debt.

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 ratings and rating outlooks: Corporate Rating Methodology 26 February 2020; European Real Estate Corporates 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 https://www.scoperatings.com/#!methodology/list.

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: public domain, the rated entity 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 12 September 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.