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Rating action

Scope Ratings GmbH (Scope) has affirmed the B/Stable issuer rating on Crown Holding Kft. (Crown). Senior unsecured debt rating of B+ has also been affirmed.

Rating rationale

The affirmation of the B issuer rating is driven by Crown's adequate credit metrics. Crown’s leverage as measured by the Scope-adjusted loan/value (LTV) ratio was 24% as at YE 2019 -based on pro-forma consolidated figures- and 25% based on 2020 preliminary pro-forma consolidated figures. While Scope foresees a significant increase in the company’s leverage due to the investment phase planned for the next years, Scope-adjusted LTV is expected to remain below 50%. Crown’s current expansion strategy is to fully finance potential acquisitions -negotiations are ongoing- with debt including a EUR 60m bond in 2021 and bank debt of around EUR 10m.

From the operational side, Crown’s key performance indicators on its property portfolio remain strong. The average occupancy rate was 90% as of February 2021 and total revenues were EUR 12.2m in 2020 (-18% YoY), based on 2020 preliminary pro-forma consolidated figures. Profitability, as measured by the Scope-adjusted EBITDA margin, stood at above 60% in 2020. The Covid-19 crisis did not have a material impact on rent collections from the office properties but did affect the retail and hospitality exposures. Like most retail property landlords, Crown has prioritised tenant retention and granted EUR 1.6m in rent relief in 2020 (around 13% of total rent). While the occupancy rate for the retail assets have remained high (Lotus Center 98% and Allegria Park 90%), the renting-out of the newly refurbished OSC property has been slower than expected (currently 46%). EUR 0.6m of rents (7% of total rental cash flow) are overdue as of February 2021 but management expects to recover them in the next six months.

The Covid-19 crisis has affected the hospitality segment (Novotel in Szeged) due to travel restrictions as part of governments’ containment strategies. The hotel’s occupancy rate was below 40% (64% in 2019), which translated into a 37% drop in the hotel’s revenues for 2020. Scope expects occupancy to gradually recover and stabilise at around 60% from 2022.

The rating continues to be constrained by the company’s small size and market shares, with total assets of around EUR 180m as of December 2020. The resulting lack of economies of scale leads to greater sensitivity to unforeseen shocks and volatile cash flow, as experienced during the current crisis. In terms of diversification, Crown plans to acquire properties and develop a hotel in Budapest, as well as extend and upgrade existing properties on its portfolio. Investment will total around EUR 80m. Despite this, Scope expects Crown to remain small and largely exposed to the retail segment, which itself exposed to major changes in consumer habits exacerbated by the pandemic, such as the shift to e-commerce. This is somewhat mitigated by the portfolio weighted average unexpired lease term (WAULT) of 5.5 years. Weak geographical and tenant diversification (the top 10 tenants account for 50% of rental income as of February 2021) further constrain the rating.

Crown’s management has extensive industry knowledge, both in for real estate and its sectors specific (e.g. hospitality). However, the owner and CEO Sandor Mudura poses key person risk. In our opinion, the company heavily depends on Mr. Mudura’s ability and market competence in both the Romanian and Hungarian real estate markets, factors that will shape the company’s future development (ESG factor).

Crown’s liquidity is adequate, as unrestricted cash (EUR 6.9m) covers short-term debt (around EUR 4.3m) due until YE 2020. Even if free operating cash flow turns negative due to investments in the next few years, capex is mostly discretionary and will be financed by bond issuance and credit lines.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and incorporates: i) the successful execution of the Radisson project in Budapest and its commencement of operations in 2022; and ii) the successful placement of a EUR 60m bond in H1 2021 to finance the acquisition of revenue-generating properties in Q2 2021 via a joint-venture structure. Scope’s rating case embeds an increase in Scope-adjusted LTV to around 50%.

The Outlook also incorporates Scope’s view that Crown subsidiaries outside the scope of the bond issuance will maintain debt at current levels. Furthermore, Scope expects the issuer to receive all of its subsidiaries’ profits in cash, ensuring it can pay its obligations on time such as debt service and operating expenditure. In addition, Scope assumes cash proceeds from the bond will be transferred to SPVs via equity and shareholder loans, which will enable property acquisitions without recourse to additional bank debt or other senior-ranked financing. The same would apply if the issuer were to directly acquire and hold the properties. Finally, Crown does not prepare consolidated accounts; this is not a regulatory necessity due to its small size. However, according to Crown’s management, from FY 2020 it will produce consolidated financial statements that include all of its holdings.

A positive rating action is seen to be remote but would require a significant improvement in Crown’s business risk profile. This could be achieved by the company growing in size and strengthening its market position, increased geographical and tenant diversification of the portfolio, and more cash flow visibility through longer weighted average unexpired lease terms while sustaining a Scope-adjusted LTV below 50%.

A negative rating action would be possible if Scope-adjusted LTV increased above 60% or if liquidity worsened. Leverage could increase if the value of portfolio properties dropped due to widening of yields or weakening rental cash flow from uncertainty around the permanence of the pandemic driven change of consumer habits. Liquidity could worsen if, for example, i) subsidiary profits are not transferred to the parent, leading to delayed payments on the issuer’s obligations; or ii) tenants delay payments significantly.

Long-term and short-term debt ratings

Crown plans to issue the HUF equivalent to a EUR 60m (HUF 21.8bn) senior unsecured corporate bond. The bond’s tenor is 10 years with 10% of its face value subject to amortisation starting in the fourth year after its issuance until the ninth year and 40% in the 10th year. The coupon will be fixed and payable annually. Proceeds are earmarked for the acquisition of revenue-generating properties.

Scope’s recovery analysis is based on a hypothetical default scenario in FY 2022 with a company liquidation value of EUR 183m. This value is based on a haircut of 21% to reflect liquidation costs and reasonable discounts to the company’s asset base as well as 10% for insolvency proceedings. This compares to secured financing of a forecasted EUR 52m, and senior unsecured debt of EUR 60m.

The agency expects an ‘above average’ recovery for Crown’s senior unsecured debt (EUR 60m), allowing a one-notch uplift on the company’s issuer rating. Scope therefore affirms a debt class rating of B+.

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 Outlook, (European Real Estate Corporates Methodology, 15 January 2021; Corporate Rating Methodology, 26 February 2020), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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, the Rated Entities’ Related Third Parties 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 the 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 March 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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