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

Rating action

Scope Ratings affirms the BB-/Stable issuer rating on Duna Aszfalt Zrt. (in October 2020 Duna Aszfalt has changed its company form, from a Kft. to Zrt.). Scope also affirms the BB rating for the senior unsecured debt category.

Rating rationale

Duna Aszfalt reported consolidated numbers in 2019 after acquiring 100% of Magyar Vakond Kft. Consolidated revenues were HUF 271bn (around EUR 800m) and consolidated EBITDA was HUF 55bn (EUR 165m; margin at 20.3%). Although these levels are substantially more than Duna Aszfalt’s stand-alone figures, which we used for our initial rating assessment, the group is still a small, niche construction company focused on motorways in Hungary. The B rated business risk profile remains constrained by geographical diversification and the very concentrated business model. Further factors limiting the business risk profile include the high dependency on state tenders (Hungarian state-owned companies accounted for around 65% of total revenues in 2019), the short average project length (three years), and the low backlog-to-sales ratio (1.6x at year-end 2019). Profitability remains the main supportive factor for the business risk profile.

Duna Aszfalt’s BB+ rated financial risk profile remains unchanged. In view of the higher EBITDA and stable debt level, credit metrics based on consolidated numbers are slightly better than those previously calculated for the individual entity. At year-end 2019, we calculate a Scope-adjusted debt (SaD)/EBITDA ratio of 1.8x. For year-end 2020, despite an expected drop in EBITDA, we anticipate SaD/EBITDA to improve to 1.0-1.5x, reflecting a lower expected SaD, in particular driven by the planned conversion of around HUF 29bn in long-term financial assets into cash in 2020. Nevertheless, we remain cautious about the sustainability of the current credit metrics. Firstly, they are heavily influenced by the lucrative contracts received in 2016 and to be executed over the next two years. Secondly, Duna Aszfalt’s reasoning for the planned reduction in long-term financial assets is to prepare for large projects and future acquisitions. Thus, the cash position expected at year-end 2020 (our expectation is around HUF 65bn) is unsustainable, in our view.

Scope deems regulatory and reputational risks to be a negative ESG factor. We believe that Duna Aszfalt’s market position in recent years was gained by winning state tenders thanks to the company’s well-established credentials on projects with state owned companies. State tenders accounted for around 65% of total revenues in 2019, which creates a high dependency.

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that the company will successfully execute its currently profitable order backlog. It also reflects our expectation that Duna Aszfalt will use its significant expected liquidity buffer for large projects and acquisitions. This is likely to result in the low expected leverage at year-end 2020 reverting to our rating case, with a SaD/EBITDA in the 2-3x range.

A positive rating action is possible if Duna Aszfalt improves its business risk profile, e.g. through better diversification of its order backlog, increased cash flow predictability and a lower dependency on state orders, while maintaining the financial risk profile at least in line with our rating case.

A negative rating action could result if SaD/EBITDA reached above 3.5x on a sustained basis, due, for example, to new contracts being less profitable.

Long-term and short-term debt ratings

Scope affirms the current BB rating for the senior unsecured debt class, one notch above the issuer rating. An ‘above average’ recovery is expected for senior unsecured debt. Scope’s recovery analysis is based on a liquidation value in a hypothetical default in 2021 of HUF 75bn. This value is based on a haircut of around 60% on the assets and reflect liquidation costs for the assets of 10%. In line with the company’s plans, Scope assumes the business plan can be executed without the need for additional bank debt or other senior-ranked financing, with the HUF 30bn unsecured corporate notes issued under the Hungarian National Bank’s Bond Funding for Growth Scheme being the only financial instrument to consider. According to Duna Aszfalt, roughly HUF 2bn of its consolidated real estate assets are encumbered. Moreover, the recovery rate calculation assumes i) payables having a higher seniority than the bond; and ii) the same seniority for advances received in comparison to the bond. This view is based on the legal opinion provided by local legal counsel.

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

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 ratings and/or rating outlook (European Construction Methodology, 17 January 2020; Corporate Rating Methodology, 26 February 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, 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: Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 6 September 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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