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Rating action

Scope Ratings has assigned a B+/Stable issuer rating to Hungary-based facility management company B+N Referencia Zrt. Senior unsecured debt has been rated B+.

Rating rationale

The issuer rating mainly reflects B+N’s small scale, which makes the company vulnerable to a deterioration in macroeconomic conditions or a loss of major contracts. The company grew strongly during 2016-18, with revenues up by 98% and EBITDA by 82%. This was driven by successful tenders for major contracts and by smaller acquisitions. However, such a pace could not have been maintained if Hungarian economic growth was slower.

B+N’s diversification is weakened by its domestic operations and primary reliance on public-sector procurement contracts. That said, concentration risks stemming from major contracts within B+N’s overall cash flow pattern are significant. Despite the company’s ability to adjust costs to maintain stable margins, the risk of a sharp decline in total cash flows remains.

The rating is positively driven by the strong credit metrics, and Scope believes this will be maintained, even after the planned issuance of a HUF 10bn bond under the MNB Bond Funding for Growth Scheme. Most of the bond proceeds are intended for opportunistic bolt-on acquisitions and the refinancing of short-term debt.

The rating also incorporates Scope’s negative stance on the company’s financial policy. B+N has a dynamic growth strategy as regards potential M&A. Moreover, there is key person risk regarding the CEO, who is instrumental not only for contract renewals and success in tenders but also for dividend policy.

Positive rating drivers:

• Procurement contracts won (2-3 years in duration), allowing a good standing in the facility management market
   
• Strong growth through the years and acquired expertise
   
• Stable profitability and flexibility upon a downturn or when major contracts end
   
• Comparatively strong financial risk profile

Negative rating drivers:

• Facility management market’s high fragmentation and low entry barriers
   
• Small company scale
   
• Weak diversification and concentration on domestic market and government-related institutions
   
• Aggressive financial policy
   
• Key person risk

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation of a resilient EBITDA margin and limited pressure on credit metrics from projected growth, leading to a forecasted leverage (SaD/EBITDA) of between 1-3x for the next few years.

A positive rating action appears to be remote but could be triggered by improvements in the company’s diversification and outreach, or the development of a more creditor-friendly financial policy.

A negative rating action could be prompted by a deterioration in credit metrics stemming from a loss of major contracts or an increase in dividend payouts, exemplified by a SaD/EBITDA of above 3x for a prolonged period.

Senior unsecured debt: B+

Scope estimates an ‘average recovery’ for the senior unsecured debt, including the prospective bond (HUF 10bn, 2019/2029). These expectations translate into a B+ rating for this debt category. The recovery rate is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating and rating outlook (Corporate Rating Methodology) is 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
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 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 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: Azza Chammem, Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 4 October 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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