Scope affirms issuer rating of SunDell Estate Nyrt. at B/Stable
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Scope Ratings GmbH (Scope) has affirmed the issuer rating of SunDell Estate Nyrt. at B/Stable. Scope has also affirmed the senior unsecured debt rating at B+.
The rating affirmation is based on the unchanged assessments of the issuer’s business risk profile (assessed at B) and financial risk profile (assessed at BB+). Sales remained strong in the first half of 2022, providing top-line visibility into 2023. This was despite a lower backlog due to reduced pre-sales for new developments after state-subsidised retail lending ended. Further, the larger project pipeline can be financed fully and at a much lower cost than the current base rate, thanks to the HUF 9bn equity issuance to MFB Invest and Hiventures (members of the Hungarian Development Bank) for a minority interest in Q2 2022 and the HUF 5.5bn senior unsecured green bond issuance in mid-2021 at a fixed coupon of 3.65%.
The ratings are constrained by a low share of recurring lease revenue, exacerbated by the very small size of the portfolio, and by inflation-induced margin pressure. Furthermore, the increasing interest rates and rapidly rising living costs in Hungary (the consumer price index increased more than 20% in September 2022 YoY) are making housing significantly less affordable. The central bank’s recent rate hikes set the base rate at 13%, which has put a halt to lending in forint, resulting in demand in H2 being restricted mostly to cash-rich buyers. SunDell could therefore accelerate the ramp-up of its lease portfolio as financing costs for its developments are currently cheap; at the current rates, rental rates are below retail mortgage instalments. Scope acknowledges that housing units developed are energy-efficient (positive ESG factor) and well above minimum legal requirements, which are more in demand in comparison to old or renovated housing and less energy-efficient projects.
Revenues doubled YoY in 2021 and Scope-adjusted EBITDA increased to HUF 2.6bn (not taking into account revaluations) despite many handovers being delayed to 2022. In H1 2022, sales were strong with around 180 units and around 190 garages and connected storage spaces due to the limited timeframe of the state-supported green housing programme (Zöld Otthon Program), which provides cheap retail mortgage loans. The residential development backlog of HUF 32bn provides comfort for cash flows in 2022-2023. The backlog will be recognised as revenue at handover only. Scope has limited visibility on sales from 2024, which poses risks for the medium term. Half of the capital increase (HUF 4.5bn) was invested to acquire a landbank in Q3 2022 to support the pipeline.
With total assets valued at HUF 49bn at 2021 (up 39% YoY) and HUF 61.8bn at H1 2022, SunDell is an emerging real estate developer in a highly fragmented market. With its large developments in Zugló, Budapest, the company grew significantly in terms of the number of residential apartments developed, followed by an expansion to several areas of Budapest with good asset quality. Scope still sees rather low operating profitability subject to medium volatility.
At the end of 2021, the Scope-adjusted loan/value ratio was 25% and Scope-adjusted debt/EBITDA was 5.6x. These metrics are forecast at ranges of respectively 30%-40% and 4x-6x going forward. Such levels are low for a developer, leaving enough headroom to either lease properties at capitalisation rates that can cover financing costs and tackle a moderate downturn of property fair value, or tap external financing sources to cover construction costs if needed.
Scope-adjusted EBITDA interest cover is good at above 4x and Scope expects it to stay above 4x due to strong cash generation forecasted for 2022-23 on development activity, albeit with low visibility for 2024. The contracted fixed-rate debt protects cash flows.
SunDell has no short-term debt. Liquidity is adequate based on the high balance sheet cash, the recent equity injection and forecasted cash flows. Should the market and hence backlog not recover by 2024, SunDell already has a cash reserve of HUF 1.25bn for the first bond instalment of HUF 1.1bn due in 2025. The plan is to increase this reserve up to HUF 3.75bn by the end of 2023 using current backlog proceeds. Afterwards, the rental portfolio will complement development activity with a higher share of revenues.
One or more key drivers of the credit rating action are considered an ESG factor.
Outlook and rating-change drivers
The Outlook for SunDell is Stable and assumes Scope-adjusted debt/EBITDA of 4x-6x, Scope-adjusted interest cover of more than 4x and the execution of sales at expected prices on the growing project pipeline.
A positive rating action would require increased visibility on sales to beyond one year (likely expressed by a backlog of above 1x) or a substantial share of recurring EBITDA while credit metrics remain in line with Scope’s rating case.
A negative rating action might be warranted were the issuer to show a Scope-adjusted interest cover deteriorating towards 1.0x, Scope-adjusted debt/EBITDA deteriorating towards 15x or weaker liquidity. This could be caused by underperformance of its development projects, e.g. as a result of increasing input prices or demand shocks beyond mid-2023 due to soaring inflation rates.
Long-term and short-term debt ratings
The issuer has issued two senior unsecured bonds totalling HUF 16.5bn, which will start amortising in 2025 and 2026, respectively. It has also refinanced all other outstanding bank debt. Scope has assumed a hypothetical default in 2024 and applied reasonable discounts on assets, resulting in an ‘above-average’ recovery expectation.
This translates into a B+ debt class rating for senior unsecured debt, one notch above the issuer rating, with the up-notching limited by the volatility of the capital structure on a hypothetical path to default (possible introduction of secured debt).
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and/or Outlook, (European Real Estate Rating Methodology, 25 January 2022; General Corporate Rating Methodology, 15 July 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the 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 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/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.
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: Barna Szabolcs Gáspár, Associate 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 October 2020. The Credit Ratings/Outlook were last updated on 22 June 2022.
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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.
Conditions of use/exclusion of liability
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