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      Scope downgrades the notes issued by OTP KMRP II 2031

      FRIDAY, 02/12/2022 - Scope Ratings GmbH
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      Scope downgrades the notes issued by OTP KMRP II 2031

      Scope Ratings GmbH (Scope) has today downgraded ratings of the bond issued by Special Employee Partial Ownership Plan Organization No. II of OTP Employees (OTP KMRP II) of HUF100bn to B from B+.

      Rating action

      The rating action is as follows:

      OTP KMRP II 2031 Bonds (ISIN : HU0000361118), 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.

      Transaction overview

      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 II owns currently 6,571,381 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 II to redeem the rated notes.

      Rating rationale

      The downgrade of the current OTP KMRP II 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 II 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). The single class of notes issued by OTP KMRP II are guaranteed by MFB for a proportional amount of 80% of the notes’ face value.

      Share price volatility (negative). 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). 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.

      Rating-change driver

      Positive:

      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 II before maturity, limiting the potential for upgrade.

      Negative:

      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.

      Sensitivity analysis

      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.

      Rating driver references
      1. OTP Bank AGM
      2. OTP Bank share price
      3. Issuer documentation and supporting material (Confidential)

      Stress testing
      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.

      Methodology
      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.

      Regulatory disclosures
      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.

      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
      © 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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. 

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