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Rating action

Scope Ratings has today assigned a first-time issuer rating of B+/Stable to Metál Hungária Holding Zrt (MHH). A first-time rating of B+ was also assigned to the company’s senior unsecured debt.

Rating rationale

The rating for MHH is driven by the company’s leading position in Hungary as a contractor in façade cladding and roof covering, a construction subsegment that Scope judges to benefit from medium barriers to entry. Furthermore, the issuer benefits from long-standing relations with its main clients. Both should help to protect the company’s market position in the medium term. In addition, MHH’s adequate customer diversification limits the impact of a single customer’s default or inadequate payment behaviour.

The rating is mainly constrained by the company’s sole exposure to Hungarian construction, leaving cash flows vulnerable to the expected cooldown in the domestic industry. Scope also views negatively MHH’s limited track record in converting its leading market position into an elevated, stable profitability, despite the anticipated improvement for 2019. A major negative rating driver is the limited cash flow visibility from the below-par backlog, caused by the short project durations typical in the segment. This is forecasted to burden credit metrics, compounded by the anticipated increased indebtedness this year via a capex programme financed with debt.

MHH’s liquidity is adequate as sources of liquidity (HUF 159m in unrestricted cash as at YE 2019 and Scope-adjusted free operating cash flow of HUF 3,489m forecasted for 2020) will cover its uses (HUF 2,110m in short-term debt for the 12 months to YE 2020) by more than 100%.

However, liquidity has weakened in the last couple of years, mainly driven by persistently high short-term debt from revolving working capital facilities. However, Scope expects liquidity to recover in 2020, assuming that i) the HUF 8bn (EUR 24m) bond will be issued successfully in Q2 2020, with part of the proceeds used to repay short-term debt; and ii) Scope-adjusted free operating cash flow will continue to be positive. The company is also well equipped to cover intra-year working capital swings using available cash (HUF 5bn of bond proceeds dedicated to finance working capital).

Corporate Governance

The company is owned in equal shares by József Kreinbacher (CEO) and Josef Unger with no independent board in place that provides oversight functions.

The company pays on a recurring basis non-business related grants to other ventures, investments of the direct owners of MHH (HUF 0.3bn to HUF 1.0bn annually in between 2016 to 2019). To capture this credit-negative procedure of recurring pay-out of dividend-like payments to a sister company related to MHH’s business these grants remained included in Scope-adjusted EBITDA, thus impacting both the company’s business as well as financial risk profile.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that credit metrics will deteriorate following the debt-financed capex programme, although EBITDA interest cover will remain strong at above 4x, as will Scope-adjusted debt to Scope-adjusted EBITDA (SaD/SaEBITDA) at 3-4x. Furthermore, Scope assumes that dividend and dividend-like payouts to entities owned by MHH’s shareholders do not exceed HUF 2bn annually. The Outlook also incorporates the successful issuance of the HUF 8bn (EUR 24m) bond under MNB Bond Funding for Growth Scheme, leading to improved liquidity, with bond proceeds also used to replace short-term debt.

A positive rating action is seen to be remote but may be warranted if the company’s business risk profile improves significantly through e.g. a larger market outreach and higher diversification, while keeping leverage as measured by SaD/SaEBITDA below 2.5x on a sustained basis.

A negative rating action could occur if SaD/SaEBITDA increases to above 5.0x on a sustained basis or if liquidity were to worsen. An increase in leverage could be triggered by either i) an adverse operational development leading to reduced profitability and cash flows; or ii) higher dividend and dividend-like payouts in excess of HUF 2bn annually. Liquidity could worsen if, for example, i) customers delay payments significantly; or ii) the company becomes exposed to the non-recoverable cost overruns of its projects.

Long-term and short-term debt instrument ratings

MHH plans to issue a HUF 8bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 3.0% coupon and is amortising from 2023 until its tenor ends in 2030. Proceeds are earmarked for refinancing short-term working-capital facilities, purchasing machinery, building a new steelwork production facility and developing a new office building (new headquarters for MHH).

Scope’s recovery analysis assumes a potential default in 2021 and is based on MHH’s going concern status. This view is based on the company’s business as a specialist contractor (façade cladding and roof covering). Thus, the enterprise value is not linked to ‘hard’ assets but to ‘soft’ assets (access to long-term customers and technical knowledge in both engineering and manual labour). However, Scope assumes that secured debt at default (HUF 2.1bn) will be satisfied by the disposal of the dedicated collateral (Budapest property). Consequently, EBITDA of the Budapest property is excluded from the assumed EBITDA at default of HUF 755m (implied enterprise value at default of HUF 2.8bn).

Based on Scope’s recovery analysis, an ‘average recovery’ is expected for the company’s senior unsecured debt (HUF 8.0bn bond, HUF 0.2 in guarantees and HUF 0.4bn in additional bank debt), resulting in a B+ rating for this debt class (the same rating as the issuer rating).

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 these ratings and rating outlook (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 rated entity and/or its agents participated in the rating process.
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: Philipp Wass, Executive Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 30 March 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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