Scope changes 4iG's rating under review direction to developing outcome from possible upgrade
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Scope Ratings GmbH (Scope) has changed 4iG Nyrt’s issuer rating to BB- under review for a developing outcome from BB- under review for a possible upgrade. Concurrently Scope has changed the senior unsecured debt rating to BB- under review for a developing outcome from BB- under review for a possible upgrade.
On 1 June 2021, 4iG acquired 75% of the shares in Hungaro DigiTel Kft. (HDT). The remaining 25% are held by Antenna Hungária Zrt. HDT provides VSAT and satellite broadcasting services via its satellite communication system. HDT generated revenue of HUF 5bn and EBITDA of HUF 3bn in 2020. Following this transaction, 4iG’s business risk profile will benefit from HDT’s long-term contract structure, some diversification into the new industry (telecommunication services) and higher EBITDA margins, which are largely offset by HDT’s relatively small size, dominant exposure to public sector customers and decreasing profitability. The transaction has a positive effect on 4iG’s financial risk profile, mainly thanks to the deal structure, with a major part of the acquisition financed via the issuance of new 4iG shares. While the overall impact of the HDT transaction is positive, Scope does not anticipate any immediate rating upgrade due to the limitations mentioned above, some risk linked to the renewal of HDT’s major contracts as well as uncertainty related to ongoing M&A activity.
Despite the closing of the HDT transaction, Scope continues to have limited visibility. This is mainly due to two transactions which were announced following the placement of 4iG's issuer rating under review on 4 March 2021. The potential acquisitions are part of the telecommunications market expansion plans announced jointly by 4iG and Antenna Hungária.
On 29 March 2021, 4iG signed a preliminary non-binding agreement to acquire 100% of the shares in DIGI Távközlési Szolgáltató Kft. and its subsidiaries, Invitel Zrt. and I TV Zrt. (DIGI Group) for an undisclosed amount. The transaction may be completed in H2 2021 subject to due diligence, the conclusion of the share sale and purchase agreement and the necessary competition authority approvals. DIGI Group is one of the leading telecommunications service providers in Hungary, with a broad service portfolio covering cable TV, fixed internet and data, mobile telecommunication services, fixed-line telephony and direct-to-home services. DIGI Group employs over 3000 people, serves more than 1.1 million subscribers and has over 2.5 million revenue generating units. In 2020, its consolidated revenue was HUF 70bn and its EBITDA reached HUF 19bn.1
On 14 June 2021, 4iG and its subsidiaries Hungaro DigiTel Kft. and CarpathiaSat Zrt. entered into a non-binding agreement (letter of intent) with Space-Communication Ltd. (Spacecom) to acquire via a private placement around 51% of the shares in Spacecom for an amount of NIS 215m (around HUF 20bn). The transaction may be completed in H2 2021 subject to the completion of negotiations, due diligence, the conclusion of the definitive agreement and the necessary approvals from the general shareholder meeting of Spacecom and third parties including the Israeli Ministry of Communication. Spacecom is an Israel-based fixed-satellite operator and satellite service provider. Spacecom operates the AMOS fleet of four geosynchronous satellites at various orbital positions and has a global offering of broadcast and broadband satellite services. Spacecom is listed on the Tel Aviv Stock Exchange. In 2020 its revenue was HUF 26bn and its EBITDA reached HUF 15bn.2
Scope believes that upon the successful completion of these transaction, 4iG’s business risk profile would benefit from the companies’ scale and outreach in terms of industries, customers, geographies and higher EBITDA margins. Scope also notes heightened execution and integration risk due to the transactions’ size and 4iG’s still limited exposure to telecom services.
The transactions are likely to have a negative impact on 4iG’s financial risk profile. This will be mainly driven by: i) the purchase price; ii) the funding sources for these investments (the potential payment for Spacecom alone exceeds the total amount for all M&As anticipated in Scope’s previous rating case); iii) DIGI Group and Spacecom’s financing structure; and iv) funding requirements following the completion of the transactions. Scope highlights Spacecom’s reported net debt/EBITDA of around 6x at YE 2020.
The combination of the likely positive impact on 4iG’s business risk profile and the likely negative impact on its financial risk profile cannot be assessed reliably at present. Consequently, Scope has changed the under review direction of 4iG's issuer rating to developing outcome from possible upgrade.
Outlook and rating-change drivers
The issuer credit rating is under review for a developing outcome. Scope will closely follow developments related to 4iG’s M&A activities. An upgrade by a maximum of one notch could result from a significant strengthening of 4iG’s business risk profile while maintaining solid credit metrics. A downgrade by one or more notches could result from a significant weakening of 4iG’s credit metrics (as indicated by Scope-adjusted debt/EBITDA of above 4x on a sustained basis) or liquidity issues. The rating could be confirmed if the transactions do not go through or if their positive and negative implications balance each other. Scope will resolve the review status once there is more clarity and visibility on the abovementioned transactions and their impact on 4iG. The rating agency expects to resolve the review status by YE 2021.
Long-term and short-term debt ratings
The initial senior unsecured debt rating was based on 4iG’s BB- issuer rating and an ‘average recovery’ expectation for this debt category. Driven by the rating action on the issuer rating, Scope has also changed the under review direction of the BB- rating for senior unsecured debt to developing outcome from possible upgrade. This debt category includes the HUF 15.45bn bond (ISIN: HU0000360276) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodology used for these Credit Ratings and/or 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
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Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Marlen Shokhitbayev, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 8 February 2021. The Credit Ratings/Outlook were last updated on 4 March 2021.
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