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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of German commercial real estate company Deutsche Konsum REIT-AG (DKR) to C from CC. Scope has also downgraded DKR’s senior secured bond (ISIN: DE000A2G8WQ9) to B- from B and the senior unsecured debt rating to C from CC. All ratings were kept under review for a developing outcome.

Rating rationale

The downgrade follows Scope's view that the extension of the maturity date of DKR's EUR 70m senior unsecured bond by one month poses an increased liquidity risk, as the company was unable to refinance its debt before the original maturity date of 5 April 2024. The extension of maturity does not meet Scope's definition of default as the new maturity date falls within the payment grace period of the original terms of the bond.

On 27 March 2024, DKR announced that it was in advanced discussions with bondholders to refinance the upcoming EUR 70m senior unsecured bond (ISIN: DE000A2TR5A0) and the EUR 35.9m senior secured bond (ISIN: DE000A2G8WQ9), but that these discussions were unlikely to be concluded before the maturity of the senior unsecured facility on 5 April 2024. As a result, the company and the bondholders have agreed to extend the maturity date by one month to 3 May 2024. This extension falls within the grace period under the original terms of the senior unsecured facilities and therefore does not have the effect of avoiding a likely default nor does it result in less favourable terms for the bondholders or constitutes a distressed debt restructuring. As such, it does not meet the Scope definitions of default.

Scope views the delay in reaching a refinancing agreement with bondholders as serious and highlights the deepening liquidity concerns that have yet to be addressed. Scope understands that the company is in advanced negotiations with bondholders, but the lack of tangible progress on these maturities by the original maturity date of 5 April 2024 has led to a further deterioration in DKR’s perceived liquidity, with the agency deducting five notches in its liquidity assessment today, compared to four notches at the end of January 2024, as a selective default on the upcoming maturities cannot be ruled out. Mitigating these concerns are the recently signed asset sales of 14 retail properties (announced on 28 March 2024), and the associated cash proceeds that are expected to be used to repay senior unsecured bondholders once the disposals are settled.

The lowered rating also reflects Scope’s view on a shortened proximity to a potential default under the agency’s rating definitions.

Scope upholds the negative governance assessment (ESG factor: credit-negative) which continues to result in a negative one-notch adjustment of DKR’s standalone rating. This is due to the perceived conflict of interest situation that has arisen as a result of the shareholder loan that DKR has made available to Obotritia. One of DKR's main shareholders, Rolf Elgeti, who was the company's CEO until mid-2023 and then Chairman of the Board, is also a general partner in Obotritia. Scope views positively Rolf Elgeti's resignation as Chairman of the Supervisory Board, but does not consider the conflict of interest resolved as he remains on the Supervisory Board.

One or more key drivers of the credit rating action are considered ESG factors. 

Long-term debt ratings

DKR issued a EUR 40m bond in May 2018 (EUR 35.9m outstanding) with a six-year term (2018-24) and a coupon of 1.80% (ISIN: DE000A2G8WQ9). This bond benefits from a first-ranking mortgage on 13 properties valued at EUR 96m as at September 2022 (the most recent valuations are not yet available). The structure’s over-collateralisation is adequate, with an issue-specific loan/value ratio estimated of 41%. This positively influences recovery rates in a default scenario. According to Scope’s methodology and based on discounts on assets (as described below), a ‘excellent’ recovery is expected in a default scenario, thus allowing for a three-notch uplift to B- on the issuer rating of C.

Scope’s recovery analysis for senior unsecured debt signals an ‘excellent’ recovery. This is based on a hypothetical default scenario in FY 2023/24 with a liquidation value of EUR 677m, including a haircut applied to assets, and liquidation costs of 10% for insolvency proceedings. This compares to a forecast EUR 371m of secured financing, EUR 37m in unsecured convertible bonds, EUR 140m in senior unsecured bonds and EUR 68m in Schuldschein loans. DKR’s Scope-adjusted unencumbered asset ratio amounted to 1.9x at end-December 2022. However, given the maturity of a senior unsecured debt instrument within the next month, the senior unsecured debt rating is unchanged equalised with the issuer rating at C. 

Under review for a developing outcome

Scope will closely monitor DKR’s developments regarding the refinancing of its upcoming unsecured bond (new maturity date on 3 May 2024) and secured bond (31 May 2024). Scope expects this refinancing to take place in April 2024 via two new bonds refinanced by existing bondholders. Scope will also closely monitor any potential further upcoming asset sales or capital raises by the company and will closely monitor developments in relation to the repayment of the shareholder loan. Scope intends to resolve the under-review status in May 2024, once there is sufficient clarity on the refinancing of DKR’s upcoming maturities.

A prerequisite for an upgrade is the orderly refinancing of its upcoming maturities which will address Scope’s liquidity concerns. As such Scope foresees the proceeds of signed asset sales being used for debt repayment, capital raises, an early repayment of the shareholder loan to Obotritia and/or a potential secured financing of its currently unencumbered asset portfolio as preconditions. In addition, any plan should not include a restructuring of liabilities that would result in losses to DKR's creditors.

A downgrade could be triggered by a deterioration in DKR’s liquidity or insufficient progress in the ongoing refinancing of upcoming maturities by 3 May 2024, which could otherwise result in a standstill. A selective default of the issuer cannot be ruled out. 

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, (General Corporate Rating Methodology, 16 October 2023; European Real Estate Rating Methodology, 28 March 2024), 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 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 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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 31 May 2018. The Credit Ratings/Outlooks were last updated on 29 January 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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