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 Vasútvill Kft. and a first-time rating of BB- to its senior unsecured debt.

Rating rationale

The company’s business risk profile benefits from its position as the leader in its domestic niche market, railway overhead line construction. With a presence of over 70 years in the market, Vasútvill is well established in the segment, having participated in practically all major railway electrification projects in Hungary (more than 2,500km of Hungary’s 3,100km electrified railway network). The company’s profitability (as measured by its Scope-adjusted EBITDA) has remained over 20% in the last three years and is higher than that of other construction peers. This would further support Vasútvill’s position if other players entered the market. The company also benefits from a business model that covers the whole business chain in the railway construction segment, as well as its longstanding relationships with its main clients.

The rating is mainly constrained by Vasútvill’s small scale in both a European and Hungarian context, which weakens its ability to mitigate economic cycles. Weak diversification is a further constraint, namely: i) a lack of geographical diversification; ii) a high reliance on one end-market; and iii) a concentrated customer portfolio and backlog, in a segment where demand is mostly dependent on governmental demand and strategy. The rating is also limited by an anticipated increase in leverage driven by the company’s planned expansion, and a potential rise in working capital requirements.

Liquidity is adequate and benefits from the company’s conservative, back-loaded debt maturity profile, with no significant amount due in the coming years. Scope anticipates that the company’s low short-term debt levels will be maintained going forward and that they will be sufficiently covered by available financing sources. The company has financial leases implying a yearly amortisation of approx. HUF 40m and will repay HUF 200m corresponding to the leaseback transaction for the three Plasser machines before the end of 2020. Vasútvill has bank guarantees available for HUF 16.4bn (HUF 6.0bn undrawn as of March 2020), which can be used for future activities. Given the long maturity of the prospective MNB bond, Scope believes upcoming short-term maturities are likely to be manageable for the foreseeable future.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view that the impact of Covid-19 on Vasútvill’s activities will be limited. The Outlook also incorporates the successful placement in 2021 of a HUF 8bn bond under the MNB Bond Funding for Growth Scheme. Of the total proceeds, HUF 5bn are earmarked for expansion plans, while the remaining HUF 3bn will be used to finance working capital. This will increase leverage, but Scope anticipates that Scope-adjusted debt/Scope-adjusted EBITDA will not rise above 3.5x and that Scope-adjusted funds from operations/Scope-adjusted debt will fall to below 25% by YE 2022.

A positive rating action is unlikely but could be warranted if the company achieves substantial growth, affording better diversification of geographies and customers, with Scope-adjusted debt/EBITDA advancing towards 3.0x on a sustained basis, as a potential consequence of new orders and a supportive dividend policy.

A negative rating action could occur if Vasútvill’s leverage exceeds 4x on a sustained basis or its market position weakens, leading to lower revenues and profitability margins than projected in Scope’s base case scenario. The latter could occur if no additional projects are won or the company maintains an aggressive dividend policy.

Long-term and short-term debt ratings

Vasútvill plans to issue a HUF 8bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 3% coupon with a tenor until 2031. Proceeds from the bond are earmarked for the financing of expansion plans via acquisitions of smaller players (HUF 5bn) and net working capital (HUF 3bn).

Scope’s recovery analysis is based on a hypothetical default scenario in 2022, factoring in Vasútvill’s liquidation value, considering its planned investment, and assumed outstanding senior unsecured debt of HUF 8bn. Scope expects an ‘average’ recovery for Vasútvill’s senior unsecured debt, and therefore assigns a debt class rating of BB- in line with 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 this ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Construction Corporates, 17 January 2020) are 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 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, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Rigel Patricia Scheller, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 7 July 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.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.