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Rating action

Scope Ratings GmbH (Scope) has changed its issuer rating for Forras Nyrt to B+/Negative from B+/Stable and affirmed the rating on senior unsecured debt of B+.

Rating rationale

The change in Outlook from Stable to Negative is mainly caused by the delays in the execution of the envisaged acquisition program versus the issuer’s initial planning that served as the basis for the initial rating. Those delays imply that the limited visibility of future cash income of the rated entity will persist beyond 2021. If the planned acquisition will either be further delayed versus the revised time plan of the issuer or the acquired entities will fall short of the envisaged cash contribution volumes, Scope sees an increased risk that the total cost coverage ratio will move below 1.0x and towards 0.8x, which constitutes a downward rating trigger.

The B+/Negative issuer rating on Forras Nyrt, (“Forras”), a Budapest-based industrial and real estate investment holding, is currently supported by the company’s (l) still sufficient, but weaker-than-expected total cost coverage, (ll) balanced financing structure that bears only moderate external financial debt compared to its current asset base and net cash position. The issuer rating is still constrained by (l) the issuer’s current lack of size and scope both in the industrials and real estate segments, (ll) execution risks in connection with the postponed but still planned increase of exposure to more cyclical manufacturing businesses as well as (III) a complex issuer structure incorporating a variety of different businesses, consolidation forms and financing structures. Since the planned acquisitions in the metal parts manufacturing sector did not take place so far, Scope still deems the blended industry risk to be primarily driven by the existing real estate portfolio across several asset classes like hospitality, retail and logistics. Scope therefore still deems the business risk profile of Forras to be unchanged at B

Earnings have again shown high volatility in 2020, since a substantial share of recurring rental income is generated in asset classes that had a severe negative impact from the Covid-19 pandemic such as hospitality and retail. Despite the ongoing recovery of those sectors, Scope again flags the risk of an extended volatility of earnings as the company’s earnings will be increasingly cyclical going forward as a result of the expansion in comparison to the rather stable real estate-centered recurring revenues in the past. A potential mitigant of this increased earnings cyclicality might be the investment program into green energy that the issuer has started within 2020 and already acquired c. HUF 300m of solar energy plants and expects to ramp up investments to c. HUF 2bn over the next 12 months. The issuer has also expanded its investment focus to companies from the metal parts / CNC sector situated in Western Europe, predominantly in the German-speaking DACH-region. The postponement of the major acquisitions in the metal parts / CNC sector have led to substantially smaller cash outflows for acquisitions in 2020 as expected in Scope’s base case, leading to a higher-than-expected cash position of c. HUF 25bn as of year-end 2020. While this implies a net cash position for the time being, Scope anticipates circa HUF 10bn and HUF 5bn in cash outflows for acquisitions in 2021 and 2022, respectively. Scope now expects a split of the HUF 20bn in total bond proceeds of around 50% investment into the metal parts / CNC sector, 25% into green energy projects and 25% to other sectors, e.g. investments in the existing real estate portfolio and potential developments.

Although there is still sufficient total cost coverage of >1.0x on a sustained basis on holding level, this ratio is highly dependent on the successful and timely execution of the targeted investments. Despite the high uncertainty on future recurring cash income from new holdings, Scope hints at the fact that the issuer has shown a certain degree of acquisition discipline so far and has viable acquisition options at hand to deploy its currently large cash position of HUF >20bn at the required cash flow yields.

The small volume of external financial debt on the diversified real estate portfolio as measured by a look-through LTV of c. 15% as of year-end 2020 should leave sufficient possibilities for secured (mortgage-) lending that mitigates liquidity concerns for Scope at this point. On the other hand, Scope flags the risks of additional financial debts on subsidiary level, ranking structurally senior to senior unsecured creditors of the holding entity. Mostly as a result of the persisting uncertainties regarding execution of the investment program and thus future cash earnings, Scope deems the financial risk profile still as B+.

Outlook and rating-change drivers

The rating Outlook was changed to Negative due to delays in the portfolio ramp-up that entail risks of ongoing negative carry and total cost coverage dropping below 1x. Even so, Scope expects the successful but delayed execution of envisaged investments into companies from the metal parts/CNC and green energy sectors, financed by the HUF 20bn senior unsecured bond. If executed as planned within the next 18 months, the expanded portfolio should translate into a total cost coverage of more than 1.0x. In addition, the Outlook incorporates substantial cash inflows in 2021 from the redemption of more than HUF 3bn of shareholder loans between the rated entity and a parent holding company.

A negative rating action is possible if the issuer shows a further deterioration of total cost coverage to less than 0.8x on a sustained basis. This could be the result of smaller-than-expected cash contributions from the newly acquired companies in the industrials sector caused by adverse industry trends or further delays in capital deployment.

Scope may consider a positive rating action (i.e. a return to a Stable Outlook) in case of a higher visibility regards total cost coverage to remain sustainably above 1x going forward. This could follow a successful deployment of bond proceeds in line with the company’s acquisition strategy.

Long and short-term debt ratings

Forras has issued a HUF 20bn senior unsecured corporate bond under the MNB ‘Bond Funding for Growth Scheme’ within 2020. The lion’s share of proceeds from the bond are earmarked for the acquisition of majority and/ minority stakes in manufacturing businesses in Hungary and Western Europe within the metal parts / CNC sector as well as investments into green energy.

Scope rates all current and future senior unsecured debt at the same level as the issuer rating. Scope anticipates average recovery for senior unsecured debt holders in a liquidation scenario. Furthermore, the rating of senior unsecured debt is limited by the fact that all current and future secured and unsecured debt on subsidiary level ranks structurally senior to senior unsecured debt of the holding. 

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/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 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 Ratings: 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/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.

Regulatory disclosures
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: Denis Kuhn, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 June 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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