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

Rating action

Scope Ratings has today affirmed its BB/Stable issuer rating on OPUS Global Nyrt. The company’s HUF 28.6bn bond issued in 2019 under the Hungarian Central bank’s Funding for Growth Scheme continues to be rated at BBB-.

Rating rationale

The ratings continue to reflect Scope’s view on newly merged OPUS’ strong growth, via the combination of (former) Opus and Konzum, as well as the positive operating potential of the industrial and food processing segments. The ratings are thus supported by the group’s greatly increased recurring income generation capacity going forward. This, together with a lean holding company cost structure, means that OPUS’ total cost coverage should continue to be far above the levels commensurate with the ratings. The ratings also reflect Scope’s view of OPUS’ conservative and long-term ‘buy-and-build’ investment approach, focused on creating growth and value by exercising active operational control at the subsidiaries’ level. Scope does not believe that management’s present M&A transactions in the energy division (divestment of 55% stake in Status Power Invest Kft. [Matrai lignite plant] and potential replacement by Titasz) and the asset management division (4IG, Hotel Alpenblick, Apeninn, among others) are a departure from its investment philosophy.

Scope believes that the holding company continues to be relatively resilient to macroeconomic downturns, such as the present crisis triggered by coronavirus. With the exception of Hunguest, the effects on the holding company appear limited, as the other three core areas are non-cyclical and governed by long-term trends.

In terms of portfolio diversification, OPUS is still largely concentrated on two segments (industrials – mainly construction, and food processing), which is a drag on the ratings. We thus continue to believe that diversification in the newly merged entity is not sufficiently balanced at present. In general, OPUS’ exposure to four distinct, relatively non-cyclical and little-correlated sectors supports its business risk profile. In addition, most of the subsidiaries have significant growth potential, either from a high order backlog (as is the case for 51%-owned construction company Meszaros es Meszaros Kft (M+M) and R-Kord Kft.) or from substantial recent expansion and modernisation (food processing companies KALL and Viresol). We understand both segments benefitted from high growth rates in revenues and operating profitability in 2019 and the first half of 2020. However, concentration risk is still high, reflecting the weight of about 80% (by sales) of the two dominant sectors: industrials and energy.

The coronavirus crisis and related necessary refurbishment programme have delayed potential dividend payments at Hunguest by at least two years, in our view. Thus, portfolio diversification by income does not support the ratings at present. However, the situation by value is significantly better, as there is sizeable value in companies which are not paying a dividend at the moment.

The rating reflects the group’s evolving form and structure, incorporating headroom for further investments, although we believe that the major building blocks were established after the merger. The rating also reflects the limited amount of debt on the holding company’s balance sheet, consisting mostly of the 2019 bond (HUF 28.6bn). Both the bond issuance and the sale of Matrai have led to strong cash inflow to date. Excess liquidity was temporarily ‘parked’ in a HUF 10bn securities investment at the end of 2019. Year-end 2020 liquidity looks set to become even larger due to higher expected dividends (M+M, R-Kord) and the divestments of Matrai and others. Scope expects very comfortable cost coverage in 2019, based on recurring income, to come down in 2020, albeit to levels which are still more than in line with the ratings. The agency estimates that recurring holding income will cover costs by about 3x in the current year. This is based on some cost inflation – most notably accounted for by the coupon payments for the new bond – and likely higher taxes and M&A advisory fees. On the other hand, Scope also projects higher recurring income as Mészáros Építőipari Holding Plc, a direct subsidiary of OPUS has already paid a dividend of HUF 6bn to OPUS (HUF 5.1bn last year) and another HUF 2bn are potentially pending. The cost side continues to be supported by the fact that management is currently not paying dividends to OPUS shareholders.

While there continues to be no apparent cost coverage problem for OPUS, potential flexibility is provided by the portfolio being partly listed on the Budapest Stock Exchange. The rating benefits from the fact that OPUS will not be dependent on market timing factors should divestments become necessary to provide additional cost cover. Leverage as expressed by the loan-to-value ratio (Scope-adjusted debt to the portfolio’s net asset value) is likely to be around 35%, adjusting for the low Hunguest valuation which is presently depressed by the coronavirus crisis.

Scope’s assessment assumes no cross-default clauses in the portfolio companies’ debt documentation.

Outlook and rating-change drivers

The Stable Outlook incorporates a broadly unchanged investment portfolio over the next one to two years, no material dividend payments to OPUS shareholders, a focus on developing the existing portfolio and no major M&A activity (other than the replacement for Matrai), as well as a cost coverage of above 1.0x.

A positive rating action could be warranted by an improvement in the holding company’s business risk profile related to concentration risks. However, Scope does not foresee any material changes in this regard in the short to medium term. Rating downside could be triggered by total cost coverage dropping below 1.0x on a sustained basis.

Debt rating

Scope performed a recovery assessment for the senior unsecured debt category. For this assessment, Scope constructed a hypothetical default scenario, derived a liquidation value and then compared it with the bond volume in order to determine its recovery rate. The agency calculated a full recovery for the bond, mainly supported by very little secured bank debt ranking ahead, and the comparatively high market value of portfolio companies. Even discounting this value by 50% and adding guarantees and suretyships of about HUF 43bn, the bond is still likely to be fully recovered. Scope therefore assigns the bond (senior unsecured debt category) a rating two notches above the issuer rating, reflecting superior recovery prospects.

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 these ratings and rating outlooks (Corporate Rating Methodology dated 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: issuer, agents of the issuer, public domain 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 Toelke, Managing Director
Person responsible for approval of the rating: Werner Staeblein, Executive Director
The ratings/outlooks were first released by Scope on 29 August 2019.

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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