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Rating action

Scope has assigned a first-time issuer credit rating of BB- with a Stable Outlook to Hungary-based TV2 Media Csosport Zrt. Senior unsecured debt has been rated at B+.

Rating rationale

TV2’s issuer rating is largely supported by the group’s leading position in Hungary as a television broadcaster. TV2 has managed to become the country’s primary audio-visual company. This is thanks to a material expansion of its channel offer, combined with a surge in its audience ratings, overtaking main competitor RTL, driving increased advertising revenues. In 2018, TV2’s market share in the spot advertising segment stood at 37%, generating HUF 20.0bn in a concentrated market. We view positively the ongoing cost control policy. This has allowed the company to attain strong operating profitability above 30%, which it is expected to maintain in the coming years. We expect the group to use the issuance of a HUF 30bn Hungarian National Bank (MNB) bond with ten years maturity, under the MNB Bond Funding for Growth Scheme, to refinance its total debt in order to lower financial costs. The issuance should also allow TV2 to finance its strategy of producing and broadcasting more local productions and series to strengthen its leading position in Hungary. The company’s creditworthiness is further supported by adequate liquidity, low leverage and good cash flow generation.

The ratings are constrained by the limited overall size of the market in which TV2 operates. The group also has concentration issues regarding its footprint and customer portfolio (especially in its distribution segment). We view negatively TV2’s volatile profitability, which is sensitive to recurring negotiations with content producers, and reduced visibility on future advertising revenues. TV2’s digital offer and its monetisation remain limited, although the group expects to develop its online platform in the foreseeable future. Finally, the rating is lowered by TV2’s financial policy considered as aggressive since the company is expected to double its gross debt while refinancing a shareholder loan by an unsecured senior bond.

Outlook and rating-change drivers

The Outlook is Stable and incorporates our expectation of stable credit metrics, with net debt/EBITDA below 2.0x and an EBITDA interest coverage of above 7x. The Outlook also includes the expectation that liquidity (currently viewed as adequate) will not deteriorate. Our Outlook is based on annual capex spending (including organic expansion and acquisition capex) of around HUF 43bn for the 2019-2021 period and an EBITDA margin ranging between 29%-34%.
A positive rating action is likely if free operating cash flow (FOCF)/Scope-adjusted debt (SaD) increases above 5% on sustained basis. A negative rating action could be required if SaD/EBITDA rises above 2x on a sustained basis for the next few years.

Rating for unsecured debt

We expect a ‘below average recovery’ for current and future senior unsecured debt. Such recovery expectations translate into a B+ rating for the senior unsecured category (one notch lower than the issuer rating). Our expectations are based on a distressed enterprise value under the assumption of a going concern of around HUF 10.7bn at the end of 2021, including a 10% reduction for administrative claims in a liquidation scenario. Existing debt positions are senior unsecured and are all expected to be refinanced by the planned MNB bond (expected issuance of HUF 30bn).

Stress testing & Cash flow analysis
No stress testing was performed. 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) 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: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope on 29 November 2019.

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

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