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

Rating action

Scope Ratings assigns a first-time issuer rating of B+/Stable to Hungarian investment holding company Forras Nyrt. Senior unsecured debt is rated B+.

Rating rationale

The first-time issuer rating for Forras, a Budapest-based industrial and real estate investment holding company, is supported by its: i) sufficient total cost coverage; and ii) balanced financing structure with only moderate external financial debt compared to its current total asset base.

The issuer rating is constrained by: i) the company’s current lack of size and scope both in the industrials and real estate segments; ii) increasing exposure to the more cyclical manufacturing businesses; iii) a complex issuer structure incorporating a variety of different businesses, consolidation forms and financing structures; and iv) execution risks around the portfolio expansion and level of recurring dividend income from new undertakings.

Given our classification of the rated entity as an investment holding, all financial metrics are calculated on a separate account basis, not on consolidated figures.

Outlook and rating-change drivers

The rating Outlook is Stable and is based on the successful execution of the HUF 20bn senior unsecured bond placement and the successful acquisition of the targeted companies in the manufacturing industry, with corresponding sufficient positive cash contributions to Forras.

This is expected to translate into sufficient total cost coverage of around 1.0x going forward, according to our financial forecast. In addition, our Stable Outlook scenario assumes the continuation of the current dividend payout practice, with the largest part of the dividend payout (HUF 170m of HUF 200m) retained by Forras, increasing shareholder loan exposure.

A negative rating action is possible if Forras’ total cost coverage deteriorates to less than 0.8x on a sustained basis. This could be the result of lower-than-expected cash contributions from the newly acquired companies in the industrials sector caused by adverse industry trends and/or more generous dividend payouts to shareholders.

We would only consider a positive rating action if Forras managed to significantly improve its earnings visibility after a successful execution of its ambitious expansion plans while maintaining a total cost coverage of 1.3x on a sustained basis.

Long-term and short-term debt ratings

Forras plans to issue a HUF 20bn senior unsecured corporate bond under the MNB ‘Bond Funding for Growth Scheme’ in the third quarter of 2020. The bond will have a 10-year tenor. In our base case financial forecast, we expect a 3.5% interest cost on the instrument.

The lion’s share of proceeds from the bond are earmarked for the acquisition of majority and minority stakes in manufacturing businesses within the metal parts manufacturing sector in Hungary. In addition, management intends to refinance external bank debt of around HUF 2.5bn with the bond proceeds.

We expect an average recovery in a hypothetical default scenario, flagging: i) the structural subordination of Forras’ senior unsecured debt to any current or future secured or unsecured lending on subsidiary level; as well as ii) substantial uncertainty around the future value and liquidity of the company’s industrial/manufacturing portfolio at the time of our hypothetical default scenario.

We therefore rate all current and future senior unsecured debt – including the planned HUF 20bn bond mentioned above – at the same level 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 methodology used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 rating was not requested by the rated entity or its agents. The rating process was conducted:
With Rated Entity or Related Third Party Participation           YES
With Access to Internal Documents                                        YES
With Access to Management                                                   YES
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.
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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 22 June 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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