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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB- issuer rating of Market Építő Zrt. with the Outlook revised to Stable from Negative. The senior unsecured debt rating was affirmed at BB-.

Rating rationale

The Outlook change reflects the lower-than-anticipated pressures on leverage and free operating cash flow in the context of the ambitious investment plan started in 2020. Market expanded its growth strategy to invest in real estate projects and in its concrete plant PreBeton (HUF 83bn in capex in the next three years). For 2021 and 2022, Scope expects a similar financial risk profile as in previous years as cash can cover outstanding gross debt in full. As part of last year’s rating action, Scope anticipated key credit metrics to deteriorate in the subsequent 12-18 months due to large investments mainly funded by debt, which includes bank loans and Market’s second bond under the Hungarian National Bank (MNB) scheme (seven-year tenor; HUF 22bn), issued in November 2020. Scope’s revised forecast now sees leverage as measured by Scope-adjusted debt to Scope-adjusted EBITDA around 2.0x in 2021 and 2022, driven by a stronger EBITDA. This is the main reason for the improved rating Outlook.

Market’s 2020 results were better than anticipated, with EBITDA growing by 124% to HUF 22.2bn from HUF 9.9bn. Although revenues dropped by 5.2%, the EBITDA margin reached 11.9%, higher than the average in 2015-19 of 4.7%. The lower cost base was partly due to a better sourcing of raw materials, renegotiated prices with suppliers and the reduced number of intermediaries in the supply chain. The ramp-up of the PreBeton concrete plant has also enabled Market to source part of its raw materials internally. Overall, 40% of Market’s cost base, including raw materials and services, is dealt with by Market’s own subsidiary making the company less sensitive to the strong price inflation in Hungary when working with sub-contractors.

Scope expects the updated investment plan, largely financed with debt, to allow the company to maintain its good operating performance. The strategy focuses on real estate projects in which Market will be the main contractor, allowing it to maximise its operating capacity.

Operating cash flows are expected to remain strong on the back of stable revenues and a good EBITDA margin ranging between 8% and 9%. These elements will help to partially finance the investment plan organically and thereby preserve Market’s financial risk profile. The strong contribution of working capital observed in 2020 of HUF 20bn should not continue in 2021.

The issuer rating is still supported by Market’s leading position in the Hungarian construction sector and strong liquidity. On the other hand, the rating remains constrained by Market’s limited overall size, non-existent geographical diversification, and the concentrated backlog and business operations that result in a high sensitivity to business cycles.

Finally, Scope expects new orders to again increase in 2021 following the reduction in the company’s backlog in 2020 owing to Covid-19 affecting the number of available tenders. In addition, the impacts of the recent downturn could be dampened by The European Union’s HUF 40bn Economic Recovery package, aimed in part to stimulate investment in infrastructure as well as various forms of financial support for the residential market offered by the Hungarian government, announced earlier in 2021.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation of Scope-adjusted debt to Scope-adjusted EBITDA around 2.0x. Scope expects the company to retain its strong liquidity position. The rating Outlook is based on total capex (including organic expansion and acquisition capex) of around HUF 83bn for period between 2021-23 and a stable Scope-adjusted EBITDA of around HUF 21bn.

A positive rating action is likely if Market’s business risk profile improved materially through, for example, improved segment or geographic diversification while credit metrics remain in line with Scope’s expectations. However, Scope does not foresee such improvement in the short to medium term.

A negative rating action could be required if investments under the new business plan and in real estate projects weighed on leverage, resulting in a Scope-adjusted debt to Scope-adjusted EBITDA moving towards 4.0x.

Long-term debt rating

Scope expects an ‘average recovery’ for current and future senior unsecured debt. This translates into a BB- rating for the senior unsecured category (in line with the issuer rating). The recovery expectations are based on a distressed enterprise value under the assumption of a going concern of around HUF 37.5bn in 2023, including a 10% reduction for administrative claims in a liquidation. 

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Construction Corporates, 15 January 2021), are 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, 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/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: Thomas Langlet, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 16 August 2019. The Credit Ratings/Outlook were last updated on 1 September 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.