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 BB-/Stable to Progress Étteremhálózat Kft (Progress). The senior unsecured debt category has been rated BB-, based on a planned HUF 30bn bond issuance.

Rating rationale

The issuer rating of BB- is supported by Progress’ strong market position in Hungary, high margins and significant growth potential. The rating is constrained by the low diversification and increasing leverage.

The competitive position of Progress is constrained by its small size on a global level and concentration on one geographical area and activity.

Progress’ activities are facilitated by the McDonald’s brand, which supports the company’s dominance in the quick-service restaurant industry in Hungary and its above-average profitability, which in turn is supported by well-defined global marketing facilities and supplier side capacity.

This strong market position will be further bolstered by the planned double-digit increase in the number of restaurants until end-2025. Progress’ strategy of focusing on drive-through restaurants is also positive, as this is the most profitable format in the quick-service restaurant segment. The operating environment is currently favourable, and the company is planning to expand strongly to exploit its comparative advantages. The primary risk would entail a deterioration in its relationship with McDonald’s.

The financial risk profile is rated BB and will not be affected by the anticipated increase in leverage caused by the company’s planned issuance under the Bond Funding for Growth Scheme of the Hungarian National Bank (MNB). Cash flow generation and cash flow coverage are constrained by ongoing investments. Interest coverage, expressed as the ratio of Scope-adjusted EBITDA to interest expense, is robust; this ratio was extremely high between 2016 and 2019 and is expected at 15.7-19.4x after the bond issuance. The negative ratio of Scope-adjusted EBITDA to interest expense during 2019- 2020 is due to the interest income received from the interest-bearing intercompany loan.

Liquidity is adequate and benefits from the company’s conservative debt maturity profile, with no short-term debt historically nor planned in the coming years. Scope anticipates the low short-term debt levels to be maintained going forward and to be sufficiently covered by available financing sources.

The rating has been lowered by one notch due to the significant amount of the intercompany loan granted by Progress to its parent company, Leones QSR, which raises concerns over the company’s governance and structure.

Outlook and rating-change drivers

The Outlook is Stable based on Scope’s expectation of expansion plans being executed as planned, which should result in revenues increasing as new restaurants are opened. Scope also assumes that the company will not pay dividends to the parent company before 2024. The Stable Outlook incorporates the successful placement in 2020 of the HUF 30bn MNB bond. HUF 12.8bn of the bond’s proceeds are earmarked for expansion plans, while the remaining HUF 17.2bn will refinance a parent company loan via an intercompany loan.

A positive rating action is a remote scenario but would be warranted if the company strengthened its revenue growth significantly while sustaining Scope-adjusted debt/EBITDA below 2x.

A downgrade would be warranted in the event of an increase in Scope-adjusted debt/Scope-adjusted EBITDA to above 4x, as a result of i) a deterioration in the franchise relationship (development license) with McDonald’s; ii) a significant delay in or failure to successfully execute expansion plans; and/or iii) a renewed closure of restaurants due to another wave of the Covid-19 pandemic.

Long-term and short-term debt ratings

The rated entity plans to issue a HUF 30bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 3.8% coupon with a tenor until 2030. HUF 12.8bn of the bond’s proceeds are earmarked for expansion plans, while the remaining HUF 17.2bn will refinance a parent company loan via an intercompany loan.

Scope’s recovery analysis is based on a hypothetical default scenario in 2022, Progress’ liquidation value and planned investments. The analysis also assumes outstanding senior unsecured debt of HUF 30bn. An ‘average’ recovery is expected for Progress’ senior unsecured debt. Scope 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 methodology used for this rating and rating outlook (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 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: Olaf Tölke, Managing Director
Person responsible for approval of the rating: Henrik Blymke, 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.