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Rating action

Scope Ratings GmbH (Scope) has today upgraded Hungary-based Progress Étteremhálózat Kft’s issuer rating from BB-/Stable to BB/Stable. Senior unsecured debt is rated BB.

The rating action reflects Scope’s reversal of the negative one notch for ‘governance and structure’ that had reflected concerns regarding the repeated use of intercompany loans (the issuer’s parent, Leones QSR, has meanwhile repaid fully its acquisition related bank loan).

Rating rationale

The rating reflects Progress’ strong market position in Hungary, high margins and significant growth potential. The rating is constrained by low diversification and increasing leverage as refurbishment is progressing in existing restaurants and new restaurants will be opening in coming years.

The competitive position of Progress is constrained by its small size on a global level and its concentration on one geographical area and activity.

Progress’ activities are facilitated by the McDonald’s brand, which supports the company’s strong market position in the informal eating-out market¹ in Hungary and its above-average profitability, which in turn is supported by well-defined global marketing facilities and supplier-side capacity.

This strong market position will be further bolstered by the planned double-digit increase in the number of restaurants by YE 2025. Progress’ strategy of focusing on drive-through restaurants is also positive, as it is the most profitable format in the informal eating-out² segment and the most resilient one during the pandemic. The operating environment is currently favourable, and the company is planning to expand quickly to exploit its comparative advantage. The primary risk would entail a deterioration in its relationship with McDonald’s.

The financial risk profile is rated BB after the increase in leverage caused by the company’s bond issuance of HUF 33bn under the Bond Funding for Growth Scheme of the Hungarian National Bank), including accepting an oversubscription of 10%. Cash flow generation and cash flow coverage are constrained by ongoing investments. Interest coverage, expressed as the ratio of the Scope-adjusted EBITDA/interest expense ratio, is robust. This ratio is expected to be above 25x after the bond issuance since Progress achieved a coupon of 3%, lower than assumed.

Liquidity is adequate and benefits from the company’s conservative debt maturity profile, with neither a history of short-term debt nor any planned in coming years. Scope anticipates the low short-term debt levels to be maintained going forward and to be sufficiently covered by available financing sources.

Previous concerns regarding governance and structure resulting in the issuer rating being lowered by one notch are now waived as the issuer’s parent, Leones QSR, has fully repaid its acquisition-related bank loan. Scope does not expect the issuer to provide further intercompany loans to its parent.

Outlook and rating-change drivers

The Outlook is Stable based on Scope’s expectation of expansion being executed as planned, which should result in increased revenue as new restaurants open. Scope also assumes that the company will not pay dividends to the parent company before 2024.

A positive rating action is a remote scenario but would be warranted if the company strengthened free operating cash flow to Scope-adjusted debt to at least 10% on a sustained basis.

A downgrade would be warranted in the event of an increase in Scope-adjusted debt/Scope-adjusted EBITDA to above 4x, as a result of i) a deterioration in the franchise relationship (development license) with McDonald’s; ii) a significant delay in or failure to successfully execute expansion plans; and/or iii) a renewed closure of restaurants due to another wave of Covid-19.

Long-term and short-term debt ratings

The issuer’s senior unsecured debt is rated in line with the issuer rating, based on Scope’s expectation of an average recovery.

1. The sentence was corrected on 19 July 2021. The text in the original publication was: “dominance in the quick-service restaurant industry”.
2. The sentence was corrected on 19 July 2021. The text in the original publication was: “quick-service restaurant".

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, 6 July 2021), 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, the Rated Entities’ Related Third Parties, third parties 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: Barna Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 July 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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.