Rating assigned to leading Hungarian construction company, major bond issuance may follow

Hungary’s central bank buying corporate bonds

At the end of March, the MNB announced the launch of a new corporate bond programme from 1 July 2019. Within the scope of the Bond Funding for Growth Scheme (BGS), for a facility amount of HUF 300 billion the central bank will purchase bonds with good ratings issued by non-financial corporations as well as securities backed by corporate loans.

Key parameters of the programme:

• Total amount: HUF 300 bn;
• Domestic non-financial corporations may be the issuers of the bonds to be purchased;
• Denomination of the bonds to be purchased: HUF;
• Original maturity of the bonds: 3-10 years
• The bonds to be purchased must have at least a B+ rating;
• The MNB may purchase no more than 70% of a bond series;
• Maximum exposure of the MNB per corporate group is HUF 20 bn;
• The minimum volume per issuance is HUF 1 bn;
• The MNB will sterilise the excess liquidity arising from the purchases by the preferential deposit facility.

The minimum rating of B+ used by Scope Ratings is also B+ at both Fitch Ratings and Standard & Poor’s, while its equivalent at Moody’s is B1.

We have previously learned from Equilor that a typical bond issuance process takes three to four months at the central bank. The starting date is when the potential issuer indicates its intention to the MNB. The most time consuming part of the whole procedure is the rating process which could last six to eight weeks, but all companies in the programme must undergo this procedure, there is no exception.

The issuers may choose between five credit rating agencies. The costs of the rating processes by two of them, Scope Ratings and Euler Hermes, get to be covered by the MNB. The rating agencies put the spotlight on the business operation, financial risks and various other criteria of the potential issuers. A credit rating costs nearly HUF 15 million, and there is also an annual ‘maintenance fee’ of HUF 6-7 million which is also financed by the central bank.

Market gets a good rating

Last week, Scope Ratings assigned a first-time issuer credit rating to Hungary-based Market Építő Zrt. of BB- with a Stable Outlook. The agency has also assigned a first-time rating of BB to the company’s senior unsecured debt.

Scope Ratings said following factors supported the rating assigned to Market:

• Market’s leading position in the Hungarian construction sector.
• The group’s positioning towards large-scale projects has led to substantial growth over the past five years.
• The company’s creditworthiness is also supported by its strong liquidity, net cash position and stable operating margin.

Scope also noted that development capex, financed by the bond-purchase programme of the Hungarian central bank (MNB), should improve Market’s diversification and integration and thereby strengthen its business model, through investments in a new concrete plant and various real estate opportunities.

This should allow Market to continue benefiting from strong growth anticipated for Hungary’s construction sector for the next 12-18 months.

The planned issuance of a EUR 63m (HUF 20bn) senior unsecured bond under the MNB Bond Funding for Growth Scheme is not expected to weigh significantly on the already strong financial risk profile.

Scope believes that the rating is constrained by:

• Market’s limited overall size, non-existent geographical diversification, and concentration issues regarding the backlog and business operations.
• These three factors make Market highly sensitive to business cycles.
• The low profitability represents another rating constraint.
• Scope does not expect this to improve materially over the next three years, with a structural shortage of raw materials and workers leading to cost pressures.
• The reduction of EU funding by 2020 and an Hungarian economic slowdown might weigh on Market’s cash flows, through a deterioration of working capital owing to reduced advance payments and shorter supplier payment terms.

The Outlook on the BB- rating is Stable, for the following factors:

• Scope expects stable credit metrics, with a net cash position and an EBITDA interest coverage of above 7x.
• The agency also expects the company to retain its strong liquidity position.
• The Outlook is based on annual capex spending (including organic expansion and acquisition capex) of around EUR 35m for the 2019-20 period and a stable Scope-adjusted EBITDA of around EUR 20m-25m.
• Furthermore, Scope expects no negative impact on credit metrics from the group’s plans to pay dividends from 2018 onwards, at up to 75% of net income.

A positive rating action is likely if Market’s business risk profile improved materially, for example, in terms of diversification by segment or geography. However, Scope does not foresee any material changes in this regard in the short to medium term.

A negative rating action could be required if leverage reached 2x on a sustainable basis for the next few years.

Alteo also gets great rating

Earlier this month, Scope assigned a first-time issuer credit rating to Hungary-based Alteo Energiaszolgáltató Nyrt of BB+/Stable/S-3. Concurrently, it assigned a BBB- rating for senior unsecured debt. This is four notches better than the minimum requirement set by the MNB. Interestingly enough, Mol Group’s senior unsecured debt also has a BBB- rating at both S&P and Fitch.

Rating rationale

The issuer rating is largely supported by:

• Alteo’s increasing cash flow exposure to regulated renewable power generation, its quasi-monopolistic position in heat generation and supply, and comfortable level of interest coverage.
• Moreover, the company’s creditworthiness is stabilised by its integrated energy utility model supplemented by energy services.
• Margins should remain stable overall - despite cash flows in unregulated power generation remaining vulnerable to merchant risks inherent to the Hungarian market - helped by high-margin regulated renewables and the company’s new strategy to mitigate energy supply risks.

The rating is constrained by:

• Alteo’s limited overall corporate outreach and regional risk mitigation, and by asset concentration risks in power generation.
• The financial risk profile represents another rating constraint, but Scope expects gradual improvements over the next three years through the company’s focus on organic growth and curtailment of opportunistic external growth.
• This should boost free and discretionary cash flows to a level which allows deleveraging.
• The liquidity situation is also expected to ease, following the early refinancing envisaged for the senior unsecured bond and senior secured project finance debt, through a newly issued long-term senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme with a nominal of up to HUF 9.3 bn.

Alteo plans the bond issuance for September or October. Erste Bank Hungary Zrt. will be supporting the issuance as organizer and dealer. In accordance with the expectations of MNB, the bonds will be admitted to the bond market operated by the Budapest Stock Exchange within 180 days of issue. The details of the bond issue are expected to be decided by Alteo’s Board of Directors by early September 2019.

The Head of Corporate Ratings at Scope Ratings will speak at Portfolio’s conference

Olaf Tölke, Head of Corporate Ratings at Scope Ratings, will be one of the speakers at Portfolio’s Business and Finance Summit 2019 - CFO of the year conference on 12 September in Budapest. He will talk about the rating process, the aspects they evaluate, and what they have experienced during their operation globally and in Hungary. MNB Director Viktória Nagy is also scheduled to address the MNB’s corporate bond programme at the event.

• Tags:
• MNB,
• market,
• equity,
• scope ratings,
• Market Építő Zrt.,
• alteo