Hungary's Opus assigned great rating by Scope Ratings

Excellent rating

Scope Ratings has on Thursday assigned first-time issuer ratings of BB to Hungary-based holding Opus Global Nyrt. The Outlook is stable. The agency also assigned first-time ratings of BBB- to senior unsecured debt issued by Opus, which beat the minimum required by the Hungarian central bank by four notches. Mol Group’s senior unsecured debt also has a BBB- rating at both S&P and Fitch.

Rating rationale

The ratings reflect Scope’s view

• on newly merged Opus’ strong executed growth both in its two respective former units (Opus and Konzum) as well as by the merger executed between them in 2019.
• The ratings are thus supported by the group’s strongly increased recurring income generation capacity going forward.
• As a consequence of this and Scope’s perception of a lean holding cost structure, Scope believes that Opus’ total cost coverage will likely be above 6x in 2019, a very strong level in the context of the ratings.
• The ratings also reflect Scope’s view of Opus’ conservative and long-term “buy-and-build" investment approach, focused on creating growth and value by exercising active operational control at the subsidiaries’ level.
• Portfolio diversification - a very important ratings driver in Scope’s assessment of holdings - has equally benefited in Scope’s view through strong investments in various participations over the past two years and by way of the merger.
• The rating reflects the group’s evolving form and structure, incorporating headroom for further investments, although Scope believes that the major building blocks should have been established with the merger.
• The rating also reflects the limited amount of debt on the balance sheet of the holding as most of the past expansion has been equity-funded.
• The envisaged bond issuance (HUF 28.6bn) later this year will then be the first sizable long-term debt portion for Opus.

As regards portfolio diversification, however, Scope notes that given its still large concentration on two segments (industrials - mainly construction, and food processing) diversification in the newly merged entity is presently not balanced enough.

In general, Scope believes that Opus’s exposure to four distinct and relatively un-cyclical and little correlated sectors is a support for the company’s business risk profile. In addition, most of the subsidiaries are characterized by significant growth potential, either derived from high order backlog (as the case for 51%-owned construction company Mészáros és Mészáros Kft. - M+M, and R Kord Kft.) or by substantial recent expansion capital expenditure (food processing companies Kall and Viresol).

Conversely, concentration risk is still high presently reflecting the about 80% weight (by sales) of the two dominant sectors industrials and energy. This is even more the case with regard to dividend income with M+M and R.Kord likely to contribute about 90% of dividend income in 2019. While this is likely to moderate over the following years, as especially food production companies Kall and Viresol are forecast to improve their profitability substantially, it is still too early to reflect this in the ratings, in our view, as it likely takes at least three years after the heavy investment programs for the two companies to reach their dividend payment capability. Thus, while portfolio diversification by income is not a support to the ratings at the moment, looked at it by value it is significantly better, as there is sizable value in companies which are not paying a dividend at the moment, added Scope.

Scope understands that the vast part of the expansion is over and that management will concentrate on executing on the growth potential of the portfolio in the next two to three years. While bolt-on acquisitions are still likely to happen in the meantime, any larger additional portfolio addition, while remote is still likely to also get a sizable equity funding contribution.

Opus is expected to issue bonds of up to HUF 28.6 bn by the end of this year. Leverage as expressed by the loan-to-value ratio (Scope-adjusted debt to the portfolio’s NAV) is likely to be around 30% after the prospective bond issuance.

Given the planned HUF 28.6 bn bond issuance in H2, Scope has performed a recovery assessment for the senior unsecured debt category. For this assessment, it constructed a hypothetical default scenario, derived a liquidation value and then compared it with the bond volume in order to determine its recovery rate. For Opus, Scope calculated a full recovery of the bond, mainly supported by very little secured bank debt, and the comparatively high market value of portfolio companies. Even discounting this value by 50% and adding guarantees and suretyships of about HUF 33 bn, the bond is still likely to be fully recovered. Scope therefore raised the debt category two notches above the issuer rating, reflecting superior recovery prospects.

The Stable Outlook incorporates the following factors:

• largely unchanged rating on the company’s investment portfolio in the next one or two years;
• no major dividend payment to Opus shareholders;
• focus on executing on the growth potential of the current portfolio;
• no significant M&A activity;
• cost coverage of over 1.5x.

The key drivers of a positive rating action are improved concentration risk, and improving business risk profile, but Scope does not see material changes in these either in the short or in the medium terms. The key driver of negative rating action is if total cost coverage drops to below 1.0x.

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. 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.

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.

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