The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Rating action

Scope Ratings has 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.

Rating rationale

The issuer rating is largely supported by 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. 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.

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.

Outlook

The Outlook is Stable and incorporates Scope’s expectation of 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.

Rating for unsecured debt

Scope expects an ‘above-average recovery’ for current and future senior unsecured debt. Such recovery expectations translate into a BB rating for the senior unsecured category (incorporating a one-notch uplift to the issuer rating). These expectations are based on a distressed enterprise value under a going-concern assumption of around HUF 18.4bn (EUR 59m) in 2021, including a 10% reduction for administrative claims in a liquidation. Existing debt positions are senior unsecured and rank pari passu to the planned MNB bond (issuance expected of HUF 20bn).

Stress testing
No stress testing was performed.

Cash flow analysis
Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, European Construction Corporates) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please 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’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information 
The rating was not requested by the rated entity or its agents. The rated entity and/or its agents participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings 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. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Thomas Langlet, Senior Analyst
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 16 August 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. 

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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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