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Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer rating of B+/Stable on Alfa Equity Holding Kft. (‘AEH’). Scope has also affirmed the company’s senior unsecured debt category rating of B+.

Rating rationale

The affirmation reflects a stable operating performance underpinned by improved occupancy (94% at June 2022), conversion of around EUR 24m of shareholder loans into equity in 2021, and successful handover of the 2913 Uptown residential development and the Alfa Hub Business 11 expansion in 2022. Scope expects a transfer of around EUR 25m of land plots from related parties into the group in 2022 to serve as base for a full future development pipeline – mainly residential development in Budapest – with a gross development value of over EUR 300m over five years.

AEH’s business risk profile (assessed at B+) reflects the company’s relatively small size and market share, with total assets of EUR 149m at end-December 2021 (preliminary), a relatively short weighted-average unexpired lease term of 3.3 years in June 2022, and a significant development pipeline of over EUR 300m of gross development value over the coming five years (of which EUR 32m committed and funded). Some is for let but most is for sale. Development risk is partially mitigated through a pre-sale (20-40%) and pre-let (50-60%) strategy and fixed price turn-key construction contracts. Operating margins for the rental assets improved in 2021 to more than 50% on higher occupancy but remain below average for the peer group. AEH managed the Covid-19 crisis relatively well, with lower occupancy mainly in the office segment and some government-imposed concessions in favour of tenants in the retail segment. The company’s diverse portfolio by asset type, focused mainly on commercial real estate (retail, logistics and office), and a development pipeline with an emphasis on residential property, as well as good tenant diversity provide support for the rating. The company’s assets are in Budapest (Hungary) and Bratislava (Slovakia), classified as B-locations, but providing an element of geographic diversity. Finally, occupancy stood at 94% at June 2022, reflecting good asset quality, particularly in the logistics segment.

The financial risk profile (assessed at BB) reflects moderate leverage, as measured by the Scope-adjusted loan/value (LTV) ratio of 44% at YE 2021 (preliminary). The LTV ratio improved in 2021 due to conversion of part of outstanding shareholder loans to equity as well as some uplift to asset values on favourable planning outcomes. Scope does not expect the company to pay excessive dividends given funding needed for its full development pipeline and commitment to maintaining the LTV below 60%. Scope expects an increase in revenue and EBITDA in 2022 with 7,871 sq m of additional net leasable area at Alfa Hub Business 11 and the handover of 2913 Uptown, to some extent offset by higher energy costs, some of which cannot contractually be passed on to tenants. Revenue and EBITDA are set for another boost in 2023 when phase 1 of the Haller residential development (gross asset value EUR 32m) in Budapest is scheduled for handover. Forex risk is managed by matching the currency of debt and revenue, while the cost of debt is set to rise as around 60% is floating (mostly denominated in euro). Rising interest costs, together with a significant increase in developments in progress, will put pressure on debt protection in 2023 and 2024. The extent of pressure will be a function of the pace of execution of the large development pipeline, movements in interest rates and trends in real estate rents and sale prices. Scope-adjusted EBITDA interest cover should remain above 2x (2021 preliminary: 2.3x) over the long term.

The overall rating is lowered by one notch based on peer comparison and reflects AEH’s small size compared to rated peers.

Scope considers AEH’s liquidity adequate. The company had EUR 4.4m in cash and EUR 4.5m of short-term debt at December 2021 and has since secured a HUF 7.59bn (EUR 15.4m) credit facility due in December 2023 to fund phase 1 of the Haller residential development. The company is in the process of refinancing (pooling) all its asset-based financing with one syndicated bank loan secured on its income-producing assets. The weighted average remaining term of the bank loan is three to four years. Scope understands covenant headroom is adequate under all loans at present.

Outlook and rating-change drivers

The Outlook is Stable reflecting a high pre-let ratio of 75% at the Alfa Hub Business 11 expansion and strong demand for AEH’s residential real estate developments with current price expectations above budget. Scope expects the EBITDA margin for rental operations to remain above 50% in 2022 and 2023 based on good occupancy. The rating and Outlook assume that the contracted asset swaps (land against receivables) with related parties are confirmed by the banks and the relevant authorities.

A positive rating action would require AEH to achieve a larger size and Scope-adjusted EBITDA interest cover sustainably above 3x. This larger size could be accomplished through successful execution of its development pipeline.

A negative rating action would be possible if the LTV increased sustainably above 60% or interest cover fell below 2x, both on a sustained basis, or liquidity worsened materially. Leverage could increase if the value of portfolio properties dropped due to wider yields, weaker rental cash flow, or excessive growth through speculative development. Liquidity could worsen if, for example, the company suffered project delays or cost overruns, tenant payment delays, or subsidiary profits were trapped because of covenant breaches at the bank borrowing entity level.

Long-term and short-term debt ratings

All AEH’s income-producing assets are encumbered in favour of its secured lender. Nevertheless, Scope expects an ‘average’ recovery for senior unsecured debt in a hypothetical default scenario and therefore rates it in line with the issuer 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/or Outlook, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2022), 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 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 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings 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: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 October 2021.

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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