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Rating action

Scope Ratings Gmbh (Scope) has placed the B+ issuer rating and B+ senior unsecured debt rating of Hungary’s B+N Referencia Zrt under review for possible upgrade.

Rating rationale

On 31 March 2021, B+N announced the acquisition of interests in Central and Eastern Europe (CEE), namely by acquiring the main subsidiaries of Danish facility management company ISS Group in the Czech Republic, Slovakia, Romania, and Hungary. Ownership was transferred immediately once the agreement was signed, except for ISS Hungary, which is pending antitrust approval and expected to be closed approximately one month after signing.

The four subsidiaries provide facility services in the region, mainly cleaning, have total annual sales of EUR 70m, generate an EBITDA of around EUR 3.8m and employ almost 4,000 people. This transaction will result in B+N having over 10,000 staff in its employ and marks the beginning of the Hungarian company’s internationalisation.

B+N’s business risk profile will benefit from the established market positions of the ISS subsidiaries. The acquisitions will ensure an immediate foothold in the CEE region and improve B+N’s competitiveness in western Europe, beyond its current market leadership in Hungary. This transaction not only creates growth opportunities but also reduces the concentration on Hungary, supporting geographical diversification and reducing dependence on Hungarian state procurement contracts.

The potential positive impact on the financial risk profile would mainly stem from higher cash flow generation providing direct synergies. It is important to note that B+N’s credit metrics improved significantly in 2020 due to increasing service demand and a large public procurement contract won.

The company plans to issue another bond under the Bond Funding for Growth Scheme of the Hungarian National Bank. It will have a volume of HUF 12bn and will finance not only the current transaction but also envisaged bolt-on acquisitions.

B+N’s liquidity remains adequate, reflecting nearly no short-term debt and increased cash generation.

Rating-change drivers

The issuer credit rating is under review for a possible upgrade. Scope will follow closely the completion of the acquisition of the ISS subsidiaries and developments in the other bolt-on acquisitions.

An upgrade by potentially more than one notch could result from a strengthening in B+N’s business 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 transaction and its impact on B+N. The review is expected to be resolved within the next few months.

Despite the expected positive development, the review status could also be resolved with an confirmation of the B+/Positive issuer rating. This could be due to concerns about a shift to a significantly more aggressive financial policy shown via dividend payout or the materialisation of execution risk around the targeted acquisition.

Long-term debt rating

The initial B+ senior unsecured debt rating, mainly for the HUF 10bn bond placed in 2019 (10-year tenor, 2.9% coupon), was based on the B+ issuer rating and an ‘above average’ recovery expectation for this debt category. Driven by the rating action on the issuer, Scope has also placed the senior unsecured debt rating under review for a possible upgrade.

Scope’s financial forecast assumes the successful placement in H1 2021 of the HUF 12bn senior unsecured bond with a fixed annual coupon under the Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, with 12.5% annual amortisation commencing in 2023. The proceeds are earmarked for M&As.

Rating driver references
1. 31 March 2021 announced acquisition

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 these Credit Ratings and Outlook, (Corporate rating methodology, 26 February 2020), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the 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(s): 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 the 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 Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Azza Chammem, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 October 2019. The Credit Ratings/Outlook were last updated on 12 October 2020.

Potential conflicts
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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