Scope places Alfa Equity Holding Kft‘s B+ issuer rating under review for possible downgrade
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Scope Ratings GmbH (Scope) has placed the B+ issuer rating of Alfa Equity Holding Kft (‘AEH’) and its B+ senior unsecured debt rating under review for possible downgrade.
Scope has placed AEH's ratings on review for a possible downgrade for the following reasons: i) the delayed publication of the 2022 consolidated financial statements and the ongoing unavailability of audited individual financial statements for 2022 due to a change of auditor; ii) the weak transparency with slow information flows; and 3) the limited visibility regarding the financing of the HALLER 1 development1 now that the committed facilities are no longer available. This has led to a lack of clarity on the group's financial performance for 2022 and going forward. Scope has placed the issuer rating and senior unsecured debt rating under review until the audited consolidated financial statements are published and the transparency issues are resolved.
AEH’s business risk profile (assessed at B+) reflects the company’s relatively small size and market share, with total assets of EUR 174m as of December 2022 (preliminary) and a relatively short weighted average unexpired lease term of 3.1 years as of July 2023. AEH has a significant development pipeline with a gross development value of circa EUR 300m over the next five years. The company's occupancy remains at 91% (down 2pp YoY), which is still adequate for the assigned rating. In addition, Scope recognises the more granular tenant base as the top 10 tenants now account for 19% of rental income (down 5 pp YoY), reducing the issuer's reliance on individual rental income streams.
At the end of 2022, AEH made the decision to 'de-vest' by selling some of their development land, which was part of their 'HALLER' development plans, referred to as 'HALLER 2' and 'HALLER 3'. The decision was driven by a change in the market environment, as an increase in interest rates and the devaluation of the local currency made it difficult to secure long-term financing. Furthermore, AEH already has a substantial residential pipeline waiting to be developed, and the sale of the HALLER land allowed the company to explore new investment opportunities.
The company's assets are located in Budapest (Hungary) and Bratislava (Slovakia), classified as “B” locations, providing geographic diversity. By the end of 2023, the company expects to finalise two acquisitions, which will mark its entry into the Romanian market. The first acquisition will add a new logistics facility to the portfolio, while the second will introduce the company to the solar energy market. If the company successfully completes both projects, it will introduce a new asset category to its investments and strengthen its portfolio.
The financial risk profile (assessed at BB-, revised from BB) reflects moderate leverage, measured by the Scope-adjusted loan-to-value (LTV) ratio of 32% as of YE 2022 (preliminary) and an inadequate liquidity.
Scope forecasts Scope-adjusted loan/value will remain below 40%, as pressure from rising capitalisation rates (AEH’s portfolio yield was 8.4% at the end of December 2022) will be largely offset by improved rental cash flows from leases linked to the consumer price index.
In early 2023, AEH successfully concluded development activities at Alfa Hub Business 11, resulting in the addition of an extra 7,871 square meters of net leasable space. This completion is expected to drive an increase in rental revenue for 2023. Furthermore, if AEH successfully concludes both projects in Romania, rental revenue is projected to experience further growth in 2024.
In 2023, the 2913 Uptown development was successfully finalised. AEH anticipates completing the HALLER 1 development in 2024, with a projected gross development value of EUR 43m.
The company has ambitious development plans for the next three to five years, with a gross development volume of over EUR 300m, primarily focused on residential development in Budapest. However, given the current inflationary environment in Hungary and the difficulty in securing affordable bank facilities, it is unlikely that all the planned developments will proceed as forecasted. Consequently, Scope does expect some delays in the development plan, in line with previous forecasts that did not materialise. While a delay will likely support credit metrics in the short term as capital expenditures are deferred to future periods, the issuer's planned implementation of the development pipeline is expected to put pressure on debt protection in 2023 and 2024. Nevertheless, Scope forecasts the Scope-adjusted EBITDA/interest cover to remain above 2x (2022 preliminary: 5.0x) on average. Scope notes that interest cover may deteriorate as loan agreements are not fully hedged.
Liquidity is inadequate. While the cash sources (EUR 3.8m in cash at year-end 2022 and the Scope-adjusted free operating cash flow of EUR 0.6m projected for 2023) cover cash uses (EUR 2.7m in short-term debt at year-end 2022), cash uses in 2024 are not covered as Scope-adjusted free operating cash flow will be burdened by expenses for the HALLER 1 development. The project no longer has committed financing because the issuer has not fulfilled the conditions precedent before the facility expired. The bank also did not extend the facility because the rising interest rates are negatively affecting project metrics and its drawdown could result in an immediate covenant breach. However, the liquidity concerns are partially mitigated by the relatively low LTV ratio, which opens options for secured refinancing of unencumbered assets or additional drawdown of debt for encumbered assets. Scope's forecasts include uncommitted property developments. However, Scope assumes that these developments will not be pursued until financing is secured.
The standalone issuer rating without supplementary rating drivers was downgraded to B+ from BB-. Following this downgrade, the agency considers there is no more need of applying one notch penalisation on supplementary rating driver peer context, hence it removed such notching.
While no explicit adjustment for supplementary rating drivers has been made, Scope notes that the flow of information between management and the rating agency was often very slow. Scope also took note of the delayed publication of the 2022 consolidated financial statements, whose publication is a prerequisite for maintaining the credit rating, and the ongoing unavailability of audited individual financial statements for 20222 due to a change of auditor to PKF from KPMG. This has led to a lack of clarity on the group's financial performance for 2022 and going forward. Although this has not led to any rating impact so far, it may warrant a downgrade going forward (negative ESG factor for corporate governance).
One or more key drivers of the credit rating action are considered an ESG factor.
Under review for possible downgrade
The issuer rating is under review for a possible downgrade, pending the completion and publication of the 2022 consolidated financial statements, the fulfilment of additional information requirements and better visibility of the financing of the HALLER 1 project. Scope will resolve the under-review status as soon as possible.
An upgrade is seen remote but could be warranted if Scope were to perceive a significant improvement in transparency by the issuer paired with an adequate liquidity and an unqualified auditor’s opinion on the 2022 financial statements. It further requires AEH to achieve a larger size and Scope-adjusted EBITDA interest cover above 3x on a sustained basis.
The ratings could be confirmed if the issuer resolves transparency and liquidity concerns.
Factors that individually or collectively could lead to a downgrade of up but not limited to one notch are: no material improvement in the issuer’s transparency (negative ESG factor), including a better flow of information to the rating agency; a qualified opinion on the 2022 financial statements; a further deterioration in liquidity.
Long-term debt rating
All AEH’s income-producing assets are encumbered in favour of its secured lender.
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+. The agency notes that no senior unsecured debt issuance has taken place up to date, despite the company’s original plans to issue a HUF 10bn senior unsecured bond in 2021.
The rating has been placed under review for a possible downgrade.
1. The issuer is currently developing the HALLER 1 residential housing project in Budapest, which is expected to be fully completed in 2024, and has achieved pre-sale rates of 60%.
2. The last available audited financial statements are those for the year 2021, signed by KPMG in its capacity as former auditor at a very late date of 10 May 2023.
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, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2023), 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
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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: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings were first released by Scope Ratings on 21 October 2021. The Credit Ratings were last updated on 26 September 2022.
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