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

Rating action

Scope Ratings has changed the Outlook on the BB- issuer rating of Market Epito Zrt from Stable to Negative. At the same time, the BB- issuer rating has been affirmed, and senior unsecured debt has been downgraded from BB to BB-.

Rating rationale

The Outlook change reflects the risk of further pressure on leverage and free operating cash flow generation from the company’s more ambitious investment plan. Following the issuance of its first HUF 20bn bond under the Bond Funding for Growth Scheme of the Hungarian National Bank (MNB) in 2019, Market has decided to expand its growth strategy by increasing investments to HUF 53bn for the next three years. In 2020 and 2021, the company’s financial risk profile is expected to come under pressure in terms of Scope’s negative rating drivers. Scope anticipates that key credit metrics will deteriorate in the next 12 to 18 months. The company’s financial risk profile has been adjusted to reflect the fact that it no longer has a net cash position, which is the main reason for the current pressure on the issuer rating.

The updated investment plan, which is largely debt financed via a mix of bank loans and a second seven-year HUF 20bn bond under the MNB scheme, is expected to maintain the company’s currently good operating performance. This growth strategy focusses on investing in various real estate projects where the company will operate as the main contractor in order to fully maximise its operating capacity. Market’s results in 2019 were strong, including double-digit EBITDA growth while consistently winning large-scale projects, even during the Covid-19 lockdown.

Operating cash flows are expected to decrease gradually in 2020 and 2021 on the back of lower EBITDA and a more neutral impact from working capital. Based on Market’s increasing need to finance its investment plan externally, Scope anticipates that leverage as measured by Scope-adjusted debt (SaD)/Scope-adjusted EBITDA will increase to above 2x on a sustained basis over the next few years.

The issuer rating is still supported by Market’s leading position in the Hungarian construction sector, strong liquidity and a stable operating margin. On the other hand, the rating remains constrained by Market’s limited overall size, low profitability, non-existent geographical diversification, and concentration issues regarding its backlog and business operations, making the company highly sensitive to business cycles.

Finally, in the short term, Scope expects Covid-19 to have a negative impact on the company backlog as fewer tenders are available on the market, which could lead to a material drop in revenues in the medium term. The HUF 40bn European Union economic recovery package to stimulate investment in infrastructure and sport facilities could help offset this downturn.

Outlook and rating-change drivers

The Negative Outlook on Market’s rating reflects the anticipated weakening of credit metrics in the short to medium term as a result of debt-funded investments in real estate assets. Scope’s base case indicates that key credit metrics, including leverage as measured by SaD/Scope-adjusted EBITDA reaching above 2.0x, could deteriorate in 2020 and 2021 if no other cash inflow measures are taken.

A positive rating action, including a change of Outlook, could occur if the company manages to increase its cash inflow in order to reduce the debt-funded part of its upcoming investments, leading to SaD/Scope-adjusted EBITDA remaining below 2.0x on a sustained basis.

A negative rating action could be required if investments in various real estate projects weigh on leverage, resulting in SaD/Scope-adjusted EBITDA moving towards 4.0x.

Long-term and short-term debt ratings

Scope has revised its expectation for senior unsecured debt from an ‘above-average recovery’ to an ‘average recovery’. The downgrade for senior unsecured debt was driven by the introduction of first-ranked secured debt to finance the issuer’s real estate development activities. Scope believes this will limit recovery expectations for senior unsecured debtholders. The agency has therefore downgraded the BB rating for the senior unsecured debt category to 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 rating and rating outlook (Corporate Rating Methodology, published on 26 February 2020; Rating Methodology for European Construction Corporates, published on 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, 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: Thomas Langlet, Senior Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 16 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
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