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Rating action

Scope Ratings GmbH (Scope) has changed 4iG Nyrt (4iG)’s issuer rating to BB- under review for a possible downgrade from BB- under review for a developing outcome. Concurrently, Scope has changed the senior unsecured debt rating to BB- under review for a possible downgrade from BB- under review for a developing outcome.

Rating rationale

Scope has changed the under review status of 4iG's issuer rating to possible downgrade from developing outcome. The rating action reflects heightened execution and integration risk given large and more numerous potential acquisitions as well as 4iG’s still-limited exposure to telecom services. Since Scope’s rating action on 25 June 2021, 4iG has announced the following transactions:

On 9 July 2021, 4iG signed a preliminary non-binding agreement to acquire 100% of the shares in Telenor d.o.o. (Telenor Montenegro) for an undisclosed amount. The transaction could be completed in Q4 2021 subject to due diligence, the conclusion of the share sale and purchase agreement, and the necessary competition authority approvals. Telenor Montenegro is the market leader in Montenegrin mobile telecom services. The company has 150 privately owned base stations and serves around 338,000 subscribers. Its 2020 revenue stood at HUF 15bn.¹

On 25 August 2021, 4iG signed a preliminary agreement with the Hungarian government to acquire a majority stake in Antenna Hungária Zrt. via a transfer of telecommunication companies to be acquired by 4iG. The transaction could be completed in Q4 2021 subject to due diligence, asset valuation and the conclusion of a final agreement. Antenna Hungária’s main activities include national terrestrial television and radio broadcasting, and wireless business telecommunication. The company employs over 500 people. In 2020, its consolidated revenue was HUF 41bn and its EBITDA adjusted for one-off items was HUF 9bn. According to 4iG, the purpose of the transaction is to establish a strategic telecommunication infrastructure and services company with a combination of public and private capital. In addition to providing competitive services to the market, such a company would give sufficient emphasis to national interests within the industry, says 4iG.²

On 13 September 2021, 4iG signed a binding agreement to acquire 100% of the shares in Invitech ICT Services Kft. (Invitech) for an undisclosed amount. The transaction could be completed in Q4 2021 subject to necessary competition authority approvals. Invitech is one of the leading providers of telecommunication and infrastructure solutions in Hungary. Its portfolio includes broadband business internet, data centre, IT security and cloud solutions, as well as voice and IT services. The company employs around 600 people and serves more than 5,000 corporate, institutional and wholesale customers. In 2020, its consolidated revenue was HUF 25bn and its EBITDA adjusted for one-off items was HUF 9bn.³

On 20 September 2021, 4iG signed a preliminary non-binding agreement to acquire 70% of the shares in TeleGroup Limited and TeleGroup Banja Luka (TeleGroup) for an undisclosed amount. The transaction could be completed in Q4 2021 subject to due diligence, the conclusion of the share sale and purchase agreement, and the necessary competition authority approvals. TeleGroup provides IT solutions and infrastructure design services to clients in different industries in Europe and the Middle East. The company employs more than 250 people, and its 2020 revenue was HUF 23bn.⁴

Once these transactions have been completed successfully, Scope believes 4iG’s business risk profile will benefit from the acquired companies’ scale and reach in terms of industries, customers, geographies and higher EBITDA margins. At the same time, the transactions are likely to have a negative impact on 4iG’s financial risk profile, and this negative impact may outweigh the positive impact on its business risk profile. Such an outcome will depend mainly on: i) purchase prices; ii) funding sources for these investments; iii) the financing structure of the target companies; and iv) funding requirements after the transactions are completed.

The combination of a probable positive impact on 4iG’s business risk profile and a probable negative impact on its financial risk profile cannot be assessed reliably at present.

Under review for a possible downgrade

The issuer credit rating is under review for a possible downgrade. Scope will closely follow developments related to 4iG’s M&A activities. 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. Scope 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 status of the BB- rating for senior unsecured debt to possible downgrade from developing outcome. This debt category includes a HUF 15.45bn bond (ISIN: HU0000360276) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme.

Credit rating driver references
1. Announcement of the non-binding agreement to acquire 100% of the shares in Telenor Montenegro 
2. Announcement of the preliminary agreement to acquire a majority stake in Antenna Hungária 
3. Announcement of the binding agreement to acquire 100% of the shares in Invitech 
4. Announcement of the non-binding agreement to acquire 70% of the shares in TeleGroup

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, 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 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.
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: 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 25 June 2021.

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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