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

Rating action

Scope Ratings has today assigned a first-time issuer rating of BB-/Stable to EPKAR Zrt and a first-time rating of BB to its senior unsecured debt.

Rating rationale

The BB- issuer rating is supported by EPKAR’s relatively strong credit metrics despite its planned debt-funded acquisition of a prime real estate portfolio. Additionally, its historically above-average profitability, adequate liquidity and long backlog relative to peers benefit the rating. Its domestic market position translates into market visibility and gives moderate access to third-party capital and guarantees.

The rating is mainly constrained by the company’s small overall scale in a European construction context, which lessens its ability to mitigate economic cycles. It is further constrained by its weak diversification, namely a lack of geographical diversification (predominantly active in Hungary), segment concentration and its dependency on government contracts. Scope judges its backlog as concentrated (though somewhat mitigated by its investment grade counterparties) and its book-to-bill ratio as volatile.

Outlook and rating-change drivers

The Outlook for EPKAR is Stable and incorporates Scope’s view of a slowdown in the Hungarian construction industry, which will adversely affect the company’s revenue and profitability potential after the current backlog is worked off at year-end 2021. Scope assumes the company will partially balance the decline in construction cash flows with recurring rental income from the planned buy-to-hold portfolio, which will consist of performing Class A/B properties in Budapest.

The Outlook also incorporates the successful placement in H1 2020 of the HUF 10bn bond under the MNB Bond Funding for Growth Scheme. Proceeds are earmarked for capital expenditure to build up the aforementioned real estate portfolio.

A positive rating action is seen to be remote, but may be warranted if the company can significantly improve its business risk profile – evidenced by a higher market share and a larger and more diversified order backlog – while keeping Scope-adjusted debt to Scope-adjusted EBITDA around 2x on a sustained basis.

A negative rating action could occur if Scope-adjusted debt to Scope-adjusted EBITDA increases above 3.5x on a sustained basis. An increase in leverage could be triggered by either i) an adverse operational development leading to reduced profitability and cash flows; or ii) additional debt-funded real estate acquisitions.

Long-term and short-term debt instrument ratings

The rated entity plans to issue a HUF 10bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 3% coupon and is non-amortising with a tenor until 2030. Bond proceeds are earmarked for financing the capital expenditures to acquire a performing Class A/B commercial real estate portfolio in Budapest that generates recurring rental income. The portfolio shall remain unencumbered.

Scope’s recovery analysis is based on a hypothetical default scenario occurring at year-end 2021, assuming outstanding senior unsecured debt of HUF 11.8bn (bond loan and payables) in addition to senior secured bank debt of HUF 1.5bn (loan facility, cash advances guarantee). Scope expects an ‘above average recovery’ for the company’s unsecured debt, resulting in a BB rating for this debt class (one notch above the issuer rating).

Stress testing & cas 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, 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 Faeh, Executive Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 28 February 2020.

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
© 2020 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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