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

Rating action

Scope Ratings GmbH (Scope) has today affirmed its B/Stable issuer rating on Szinorg Universal Vagyonkezelő Zrt. (Szinorg), Scope has also affirmed its B+ rating for the senior unsecured debt category.

Rating rationale

Szinorg's construction activities have not been interrupted by the impact of Covid 19 on the economy. However, the crisis has led to delays in public procurements and private tenders, while some contracted work has been rescheduled, which resulted in revenue declines. In 2020, revenues and Scope-adjusted EBITDA declined by 16% and 55% respectively compared to 2019, based on 2020 preliminary figures. As the company has kept its fixed cost structure stable, profitability was also below the previous year’s Scope-adjusted EBITDA margins (down to 4.2% in FY 2020 from 6.6% in FY 2019).

Nonetheless, Scope believes the company's plan to establish a real estate portfolio – to generate recurring income and/or sales proceeds – as well as its improved backlog will help protect revenues and cash flow generation in the next few years. The company’s backlog as of February 2021 amounts to HUF 31bn (HUF 21bn for 2020), which partly benefits from the government’s long-term investment plan for the Debrecen region.

In H1 2020 Szinorg issued a senior unsecured bond for a total of HUF 5bn, to partially finance its own planned developments for approx. HUF 24bn in the next few years. Remaining financing is being provided by the Hungarian state (subsidies have already been obtained for HUF 3.7bn) and Scope estimates that the company could add further bank loans of up to HUF 4bn for refinancing purposes in the period to 2023. The projects will be started depending on demand, as the company aims to keep the flexibility to prioritise projects and use available resources more efficiently.

Szinorg’s business risk, affirmed at B, continues to benefit from its market position and regional presence, as this translates into market visibility and affords moderate access to third-party financing. The rating is also supported by the company’s customer diversification, with good outreach in terms of public and private customers (government and public-sector customers accounted for around 50% of total revenues in 2020).

The rating remains constrained by the company’s small scale in both a European and Hungarian context, which lessens its ability to mitigate economic cycles. Weak diversification is a further constraint, namely: i) a lack of geographical diversification (predominantly active in eastern Hungary); ii) a high reliance on one segment (building activities); and iii) a concentrated backlog of projects (with the top three/top 10 projects representing about 63%/93% of the total).

Szinorg’s B+ rated financial risk profile remains unchanged and is supplemented by a supportive liquidity position, including cash (HUF 10.4bn FY 2020), available overdrafts of HUF 2.8bn and marketable securities of HUF 4.5bn as of December 2020. Szinorg’s unrestricted and available liquidity exceeds its limited financial debt, resulting in a negative Scope-adjusted debt and, ultimately, in adequate credit ratios. Nevertheless, the company’s financial risk profile is constrained by a forecasted increase in leverage driven by its expansion, with relatively high capital expenditure dedicated to building up a real estate portfolio.

Outlook and rating-change drivers

The Outlook for Szinorg remains Stable and incorporates Scope’s view that the company’s revenues will stabilise at a level of at least around HUF 15bn, based on its current backlog and diversified portfolio of real estate developments. Scope assumes Szinorg will be able to partially balance the decline in construction revenues by building up a real estate portfolio that can generate recurring income and/or sales proceeds. This should help keep its top line close to current levels in the medium term.

A positive rating action is remote but may be warranted if Szinorg keeps its backlog at above 2x on a sustained basis, benefiting from a higher granularity of customers and more complex projects, which would extend respective execution periods and help keep SaD/EBITDA below 3.5x on a sustained basis.

A negative rating action could occur if real estate developments suffer from significant delays or cost overruns but also if liquidity worsens. The latter could happen if, for example: i) customers delay payments significantly; or ii) the company becomes exposed to non-recoverable cost overruns on its projects.

Long-term and short-term debt ratings

The rated entity issued a HUF 5bn senior unsecured corporate bond (ISIN HU0000359633) in H1 2020. Scope’s recovery analysis is based on a hypothetical default scenario in 2022, which assumes outstanding senior unsecured debt of HUF 1.7bn in addition to HUF 5bn in bank loans. Scope expects an ‘above average recovery’ for the company’s unsecured debt and therefore affirms the B+ rating for this debt category (one notch above the issuer rating).

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

Methodology
The methodologies used for this credit rating(s) and/or rating outlook(s) (European Construction Corporates Methodology, 15 January 2021; Corporate Ratings 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 Ratings’ 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 credit 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 Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the credit rating action, the rated entity was given the opportunity to review the credit rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the credit 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. The credit rating and/or outlook is UK endorsed.
Lead analyst: Rigel Patricia Scheller, Director
Person responsible for approval of the credit rating: Philipp Wass, Executive Director
The credit ratings/outlook were first released by Scope Ratings on 25 February 2020.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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