Scope downgrades the notes issued by OTP KMRP I 2031
The rating action is as follows:
OTP KMRP I 2031 Bonds (ISIN : HU0000361100), HUF 100bn: downgraded to B from B+
The latest information on the ratings, including rating reports and related methodologies, is available on this LINK.
The rating action considers the transaction reporting available until 22 November 2022.
The transaction finances the acquisition of a portfolio composed exclusively of (i) OTP Bank Plc ordinary shares and (ii) Hungarian 10-year government securities. The transaction facilitates the financing of an employee-backed investment scheme in OTP Bank according to a dedicated national law (the KMRP or SESOP law) using special purpose vehicles (the KMRPs) where membership is restricted to employees and management of a company.
The OTP KMRP I owns currently 6,571,460 shares of OTP Bank and HUF 5.14bn Hungarian bond HU0000404744 notional.
The bond is guaranteed by MFB, the Hungarian Development Bank Pr. Ltd. (MFB), for 80% of its outstanding notional amount. The guarantee is unconditional, irrevocable and the guarantor will pay on the first written request of the beneficiaries, being the noteholders.
The two main parties to the transaction are:
OTP Bank Plc. assigned issuer rating of BBB+, and
- MFB Hungarian Development Bank Private Limited Company assigned issuer rating of BBB+.
The different costs of the structure, including bond interest, guarantee costs and operating fees will be paid out of (i) the dividend paid by the OTP Bank Plc. shares, (ii) the interest earned on the government securities, (iii) a potential subsidy by OTP Bank Plc. as allowed under the SESOP law, (iv) sale of the government securities or (v) sale of the OTP Bank Plc. shares themselves.
At or before the maturity date, the assets of the issuer will be liquidated or acquired by the members of OTP KMRP I to redeem the rated notes.
The downgrade of the current OTP KMRP I bond rating reflects the drop in value of the OTP Bank shares and the lower-than-expected available liquidity in the vehicle.
Since closing, the OTP Bank share price has decreased by approximately 40% and exhibited a large drawdown since its peak value from around closing date. Such loss in value can potentially be recovered over the remaining nine years.
In addition, the available liquidity to the OTP KMRP I is lower than expected due to only a symbolic dividend decided by the OTP Bank annual general assembly meeting in April 2022.
Key rating drivers
Existence of a guarantee on 80% of the notes’ notional (positive)3. The single class of notes issued by OTP KMRP I are guaranteed by MFB for a proportional amount of 80% of the notes’ face value.
Share price volatility (negative)2. Most of the assets of the vehicle are OTP Bank Plc. Shares. These shares are publicly traded with a volatile value, exposing the vehicle to a large market risk.
Availability of liquidity (negative)1. The liquidity required for the issuer to pay all costs and fees would come from different sources of revenues that are not contractual commitments. However, shares could be liquidated to pay any shortfall.
An increasing value of the assets of the issuer could lead to an upgrade of the issuance rating, by creating a higher over-collateralisation between the assets and the rated liability. Such increase in assets could come either from larger available liquidity amounts due to higher-than-expected dividend payments, or the increase in OTP Bank Plc. Shares’ value. However, any excess of liquidity above a certain threshold could be distributed to the members of OTP KMRP I before maturity, limiting the potential for upgrade.
A downgrade of the rating of the guarantor would negatively impact the likelihood of indemnifying the beneficiaries of the guarantee and could therefore lead to a further downgrade of the rated notes.
A decreasing value of the assets of the issuer could lead to a further downgrade of the issuance rating.
Scope tested the resilience of the rating against deviations of the main input parameters: the share’s volatility. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.
The following shows how the quantitative results change when the OTP Bank Plc. shares volatility assumption is 50%:
- sensitivity to volatility, one notch.
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like volatility and dividend yield assumptions, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.
Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool checked by a dedicated team, incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the asset composition, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.
The methodologies used for these Credit Ratings, (Scope’s General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 14 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.
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, 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 these 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.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Olivier Toutain, Executive Director.
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director.
The final Credit Ratings were first released by Scope Ratings on 8 December 2021.
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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