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

Rating action

Scope Ratings has today assigned first-time issuer ratings of BB to Hungary-based holding OPUS Global Nyrt (OPUS). The Outlook is stable. The agency also assigned first-time ratings of BBB- to senior unsecured debt issued by OPUS.

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 our 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 our 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 our view through strong investments in various participations over the past two years and by way of the merger. However, 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’ 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 Meszaros es Meszaros 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 3 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, in our view, as there is sizable value in companies which are not paying a dividend at the moment. Another mitigant to OPUS’ presently high dividend concentration is the fact that the holding does not depend on the large HUF 5 billion M+M/ R.Kord dividend income from a cost coverage perspective (excluding it total cost coverage is still expected to be at about 1.4x in 2019 and 2020). This is on the one hand the consequence of OPUS’ very lean cost structure after the merger, on the other hand it is also the result of the holding not paying dividends to their shareholders currently.

The rating reflects the group’s evolving form and structure, incorporating headroom for further investments, although we believe 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. 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, in our view.

While there is no apparent cost coverage problem for OPUS, potential flexibility is provided by the portfolio being partly listed on the Budapest Stock Exchange. However, the rating benefits from no dependence on market timing aspects in the context of potentially necessary divestments to provide additional cost cover. 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.

We have performed a recovery assessment for the senior unsecured debt category. For this assessment, we 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, we 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 33bn, the bond is still likely to be fully recovered. We therefore raise the debt category two notches above the issuer rating, reflecting superior recovery prospects.

Our assessment assumes no cross-default clauses in the portfolio companies’ debt documentation.

Rating-change drivers

• Up: improved concentration risk
• Down: total cost coverage below 1x

*The link was added on 29 August 2019. It was not included in the initial publication.

Stress testing
No stress testing was performed.

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

Methodology
The methodology used for this rating and/or rating outlook: Corporate Ratings is/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 and Scope internal sources. Historical data used for this rating is limited.
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 Olaf Tölke, Managing Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 29. 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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