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Rating action

Scope Ratings has placed the BB- issuer rating and BB- senior unsecured debt rating of Hungary-based 4iG Nyrt. under review for a possible upgrade.

Rating rationale

On 23 February 2021, 4iG signed a preliminary agreement to acquire 75% of the shares in Hungaro DigiTel Kft. (HDT). According to the agreement, Antenna Hungária Zrt. will sell 25% of HDT shares to 4iG for cash, and the other 50% of HDT shares will be contributed to 4iG by Portuguese Telecommunication Investments Kft. in exchange for new 4iG shares. The transaction may be completed following an evaluation of the shares, the conclusion of the final share sale and purchase agreement and the finalisation of the Hungarian Competition Authority’s competition supervision procedure.¹

HDT is Hungary's leading telecommunications service provider, offering VSAT and satellite broadcasting services via its satellite communication system. HDT generated revenue of more than HUF 5.2bn and EBITDA of around HUF 3.1bn in 2020. Its customers include major private-sector companies (banks, television companies) and public customers.

Scope believes that upon successful completion of the transaction, 4iG’s business risk profile would benefit from HDT’s long-term contract structure, meaningful diversification into the new industry (telecommunication services) and higher EBITDA margins.

The potential positive impact on 4iG’s financial risk profile is mainly driven by the deal structure, with a major part of the acquisition being financed via the issuance of new 4iG shares. This is expected to result in leverage which is materially lower than anticipated in Scope’s previous rating case.

Outlook and rating-change drivers

The issuer credit rating is under review for a possible upgrade. Scope will closely follow developments related to the HDT transaction and other M&A activities by 4iG. An upgrade by a maximum of one notch could result from a strengthening of 4iG’s busines risk profile and a significant improvement in credit metrics compared to the previous rating case. Scope will resolve the review status once there is more clarity and visibility on the HDT transaction and its impact on 4iG. The rating agency expects to resolve the review status within the next few months.

Despite the expected positive developments, a negative rating action cannot be fully ruled out. It could be triggered by a deterioration in credit metrics as indicated by Scope-adjusted debt/EBITDA of above 4x on a sustained basis, e.g. due to an inability to generate sufficient new business or if execution risk around targeted acquisitions materialises. A negative rating action could also result from liquidity issues, e.g. caused by very sharp swings in working capital.

Long-term and short-term debt ratings

The initial senior unsecured debt rating was based on the BB- issuer rating and an ‘average recovery’ expectation for this debt category. Driven by the rating action on the issuer rating, Scope also places the BB- rating for senior unsecured debt under review for a possible upgrade.

Scope’s financial forecast assumes the successful placement in H1 2021 of a HUF 15bn senior unsecured bond with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope now expects the bond to have a 10-year tenor, with 10% annual amortisation commencing in 2026 and a 50% bullet maturity in 2031. The proceeds are earmarked for the acquisition of companies.

Rating driver references
1. Preliminary agreement to acquire 75% of the shares of Hungaro DigiTel Kft. 

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

Methodology
The methodology used for this credit 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 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 rated entity and/or its agents participated in the rating process.
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: Marlen Shokhitbayev, Director
Person responsible for approval of the credit rating: Werner Stäblein, Executive Director
The credit ratings/outlooks were first released by Scope Ratings on 8 February 2021.

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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