Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Epkar Zrt. on 3 November 2020. This monitoring note does not constitute a rating action nor indicates the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The credit rating of Hungarian construction company Epkar is supported by the company’s strong credit metrics despite its planned debt-funded acquisition of a prime real estate portfolio. The Covid-19 crisis resulted in some project delay in 2020, but the company was able to maintain construction activity and experienced no supply bottlenecks. Tender procedures were postponed, resulting in a delay in the company’s pipeline; Epkar nevertheless kept its backlog stable at around 1.8 years. Unaudited Q3 results underline the issuer’s resilience to the pandemic. Even though Scope-forecasted credit metrics were revised to slightly weaker levels than previous forecasts (partially due to delays in bond issuance and real estate investment), they remain in line with the rating base case. Additionally, Epkar’s historically above-average profitability, adequate liquidity and long backlog relative to peers benefit the rating. Its domestic market position translates into market visibility and gives moderate access to third-party capital and guarantees.

The rating is mainly constrained by the company’s small overall scale in a European construction context, which lessens its ability to mitigate economic cycles. Further constraints include weak geographic diversification (predominantly active in Hungary), segment concentration, and the dependency on government contracts – the latter is somewhat mitigated by the recently won large private contract for the refurbishment of three hotels. Scope also judges the issuer’s backlog as concentrated (though somewhat mitigated by the investment grade counterparties) and the book-to-bill ratio as volatile.

Epkar plans to issue a HUF 10bn senior unsecured corporate bond in Q4 2020 under the Bond Funding for Growth Scheme of the Hungarian National Bank. The bond is planned to have a 3% fixed annual coupon and a 10-year tenor and will amortise by 10% in the seventh year, 20% in each of the eighth and ninth years, and 50% at maturity in 2030. Bond proceeds are earmarked for financing capital expenditures to acquire a performing Class A/B commercial real estate portfolio in Budapest that generates recurring rental income with an intended net yield of 6%, as expected in Scope’s initial rating base case. The portfolio shall remain unencumbered.

Scope still expects an ‘above average recovery’ for the company’s unsecured debt, the amended bond terms with an amortising structure does not alter Scope’s view of a BB rating for this debt class (one notch above the issuer rating).

The rating-change triggers as set in Scope’s initial rating case remain the same:

A positive rating action is seen to be remote, but may be warranted if the company can significantly improve its business risk profile – evidenced by a higher market share and a larger and more diversified order backlog – while keeping Scope-adjusted debt to Scope-adjusted EBITDA at around 2x on a sustained basis.

A negative rating action could occur if Scope-adjusted debt to Scope-adjusted EBITDA increases above 3.5x on a sustained basis. An increase in leverage could be triggered by either i) an adverse operational development leading to reduced profitability and cash flows; or ii) additional debt-funded real estate acquisitions.

The methodologies applicable for the reviewed ratings and rating Outlooks (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.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Thomas Faeh, Executive Director

© 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.