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 B/Stable to Hungary-based Pannon-Work Zrt. A preliminary rating of (P)B+ has also been assigned to the planned HUF 3.48bn senior unsecured bond (2020-2030) guaranteed by Gamax Kft and to be issued under the Hungarian National Bank’s Bond Funding for Growth Scheme.

Rating rationale

Pannon-Work’s business risk profile (assessed at B) is driven by its position as the fourth largest personnel services provider in Hungary, a very fragmented market in which the four largest players account for only 28% of the segment. The company’s growth through the years has been bolstered by the need for an intermediary to fill the current labour shortage as well as the company’s ability to provide flexibility by leasing workers. Despite the company’s efforts to expand its service range, it still has concentration risk due to the sole exposure to Hungary and dependence on the country’s labour market. While the top 10 clients contribute more than 50% of revenues, they have been bound to the company for more than five years. However, the coronavirus crisis may prompt some workers to be returned to Pannon-Work due to the reduced need. Pannon-Work has a very thin EBITDA margin, at 1% to 3%, which has been volatile through the years in which low margins have been the norm among personnel services providers. The company faces the challenge of rising operating expenses due to higher wages as well as sales prices that are hard to raise due to strong competition and the fragmented market.

The financial risk profile (assessed at B) is driven by the anticipated weakening in credit metrics following the planned HUF 3.48bn bond issuance. The bond proceeds will be used to repay around HUF 1.21bn of debt, finance HUF 70m of intercompany loans to Pannon-Work subsidiaries and invest (around HUF 2.2bn) in a solar power plant project that will generate dividends from 2022.

Scope-adjusted debt (SaD)/EBITDA and funds from operations/SaD is forecast to deteriorate significantly (above 5x and below 15%, respectively) in comparison to the previous years’ levels. Free operating cash flow fluctuated during the previous year due to the continuing expansion and restructuring but is expected to reach above 5% in the next three years, up from the negative number in 2019.

The liquidity is adequate based on the fact that the bond proceeds will be used to repay the interest-bearing short-term debt. A factoring line and a working capital facility are also available in case generated cash is insufficient to finance the working capital.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view of the Pannon-Work’s stable business and ability to generate cash. Furthermore, the Outlook reflects Scope’s expectation that indebtedness will remain high over the next few years, with a SaD/EBITDA of more than 5x, as a result of the planned bond issuance. In addition, Scope anticipates stable indebtedness of the company’s main subsidiaries as well as recurring dividend income from these subsidiaries at a level similar to that of 2019. Moreover, Scope expects no distribution of dividends to the owners of Pannon-Work in the next few years.

A negative rating action could occur if Scope-adjusted free operating cash flow/SaD is below 5% on a sustained basis. e.g. through an adverse operational development leading to reduced profitability and cash flows. A downgrade could also be prompted by worsening liquidity, e.g. through significant delays in customer payments or a reduced ability to recover costs.

A positive rating action could be warranted if SaD/EBITDA goes significantly below 5x on a sustained basis.

Long-term debt ratings

Scope has assigned a (P)B+ preliminary debt rating to the senior unsecured debt guaranteed by Gamax Kft. This reflects the debt’s junior ranking to the potentially existing factoring line and account payables. Scope expects an ‘above-average recovery’ (50%-70%) for outstanding senior unsecured debt in a hypothetical default scenario based on a distressed liquidation value, resulting in one notch of uplift above 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 www.Scoperatings.com/methodologies/ ESG factors in ratings.
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 rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Azza Chammem, Senior Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 14 August 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.