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

Rating action

Scope Ratings has today assigned an issuer rating of BB/Stable to Hungary-based GVC George's Venture Capital Zrt. A rating of BB is assigned to the senior unsecured debt category.

Rating rationale

GVC’s business risk profile (rated BB-) benefits from the company’s leading position in the fragmented Hungarian outsourced catering market, with more than 15% of state school catering market shares and around 10% of corporate catering market shares by sales. A positive track record of securing public tenders for catering, together with the long-term nature of contracts, provide stable recurring revenues and a competitive advantage over new market entrants as 70% of the company’s sales are made through tenders. However, the diversification of revenues streams is limited by this significant exposure to government contracts. In 2020, GVC’s top line is expected to take a hit from the Covid-19 pandemic, which led to the closure of educational institutions and production factories in the spring. The economic downturn may intensify, and recovery may be subdued next year, but current assumptions incorporate a rebound in sales in the short term. Profitability margins worsened after the Sodexo acquisition because EBITDA margins from corporates are lower than from public tender contracts. Nevertheless, we believe that GVC will be able to keep EBITDA margins above 10%.

GVC’s financial risk profile (rated BBB-) is supported by its healthy operating profitability, which translates into a good underlying cash generation capability. Relatively low financial debt on the balance sheet and prudent operating performance have kept GVC’s credit metrics in favourable territory in the past. We therefore believe they are highly likely to remain comfortable in the context of the ratings, in the short-to-medium term. GVC’s liquidity profile has been adequate in recent years, mainly driven by a limited short-term debt position and sound EBITDA cash conversion, with low capital expenditure resulting in stable and positive free operating cash flow (FOCF).

We do not expect significant changes in the company’s future capital investment programme and/or debt-financed acquisitions. We believe that GVC will only pursue inorganic growth opportunities to a limited extent over the next few years, focusing on organic growth.

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that the Covid-19 pandemic will not have a negative long-term effect on the company’s operations and that SaD/EBITDA will remain below 3.0x on a sustained basis after the successful bond issuance.

A positive rating action could be indicated by an improved business risk profile, driven by increasing size or operating profitability via organic growth, revenue stream diversification with less exposure to public tenders, and increased regional or industry coverage. However, a positive rating action is unlikely in the near future, given the expansion plan for the next three years, which will only bear fruit after 2021.

A negative rating action could result from a deterioration in credit metrics, as indicated by FOCF of below 10% and SaD/EBITDA of above 3.5x on a sustained basis. Weak financial performance could be triggered by an adverse change in regulations, putting operating profitability under pressure, debt-financed acquisitions or higher than expected dividend payments.

Long-term debt ratings

GVC plans to issue a HUF 7.0bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has the following characteristics: 3% coupon and 10 years’ maturity amortising in the last four years. Proceeds from the bond are allocated to capital expenditures related to dietary kitchen plants and the refinancing of the existing investment loan in the amount of HUF 529m.

Our recovery expectation for senior unsecured debt translates into a rating equal to GVC’s 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 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: the rated entity, third parties, 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 rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Zurab Zedelashvili, Analyst
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 22 September 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
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