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

Rating action

Scope Ratings has today affirmed the B+ issuer rating on Hungary-based B+N Referencia Zrt and raised the outlook from Stable to Positive. The senior unsecured debt rating has been affirmed at B+.

Rating rationale

The rating action reflects Scope’s view on B+N’s robust financial risk profile, in light of recurring revenue from procured contracts, and takes into account possible acquisitions planned in the next years.

In terms of business risk profile, B+N continues to solidify its position by winning new contracts. More recently, bids were won from government-related entities, ensuring revenue visibility for at least three years. The present coronavirus crisis has increased demand for the company’s services, from cleaning to textiles. In a very fragmented facility management market, B+N distinguishes itself by ensuring reliability and an ability to meet increasing demand. This confirms that the company is gradually overcoming the current labour shortage and increasing its efficiency. The company still operates on a small scale, mainly in Hungary; however, the concentration in Budapest is gradually decreasing due to its clients’ countrywide presence. Along with the cleaning segment, there is an increasing revenue proportion from segments such as facility management. B+N's clientele consists mainly of government-related entities, reducing counterparty risk and the risk of non-payment. Profitability in terms of the EBITDA margin ranges from 11% to 13% as operating costs have risen with the increasing sales.

The financial risk profile is the strongest rating driver. Credit metrics improved significantly in 2019. This is due not only to increasing cash flow generation but also to half of the proceeds being unused from the HUF 10bn bond placed in 2019 under the Hungarian National Bank’s Bond Funding for Growth Scheme. Some of the proceeds were used to pay back short-term debt and for investments, and the rest will finance the planned acquisition. Scope forecasts leverage, as measured by the Scope-adjusted debt/EBITDA ratio, to stay within the identified range of 1-3x, taking into account the planned acquisition in 2021 that may need further external financing in terms of bank loans and/or bonds.

Scope believes B+N’s liquidity is adequate, reflecting a small amount of short-term debt as well as increased cash generation.

In terms of supplementary rating drivers, Scope has notched down the rating once for financial policy concerns (ESG factor) with regard to a possible much higher dividend payout ratio in the future, as the restricting covenants in that respect on the bank loans have been removed with their repayment in 2019. Another concern in our view relates to key man risk (ESG factor) regarding the CEO, who is instrumental not only for success in tenders but also for dividend policy. Secondly, we have built-in another negative qualification for uncertainty on the execution of the company’s future acquisitions and their financing details.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is positive and reflects Scope’s expectation of a resilient EBITDA margin and limited pressure on credit metrics from projected growth, leading to a forecasted Scope-adjusted debt/EBITDA of 1-3x for the next few years.

A positive rating action could be triggered by one or a combination of those factors: improvements in the business risk profile, the development of a more creditor-friendly financial policy, removal of the uncertainty regarding execution of the acquisition and its financing; and a SaD/EBITDA below 1x on a sustained basis.

A negative rating action could be prompted by a deterioration in credit metrics stemming from a loss of major contracts exemplified by a Scope-adjusted debt/EBITDA of above 3x for a prolonged period.

Long-term debt ratings

Scope has affirmed the rating of the senior unsecured debt category at B+. The recovery assessment is based on a hypothetical default scenario in 2022, including the assumption that additional bank debt required for a potential large acquisition is ranked senior secured. Scope’s recovery analysis indicates an ‘above average recovery’ for senior unsecured debt. While this would qualify for an uplift of the senior unsecured debt rating of one notch in relation to the issuer rating, Scope decided to equalize both ratings due to the uncertainty with regard to a potential acquisition and its financing implications.

Stress testing and cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology/ies 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 rated entity participated in the rating process. 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, 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: Azza Chammem, Senior Analyst
Person responsible for approval of the rating: Olaf Toelke, Managing Director
The ratings/outlooks were first released by Scope on 4 October 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.