The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today upgraded B+N Referencia Zrt.’s issuer rating to BB- from B+ under review for a possible upgrade and changed the Outlook to Positive. The senior unsecured debt rating has also been upgraded to BB- from B+ under reivew for a possible upgrade, in line with the issuer rating.

Rating rationale

The rating action reflects the removal of the negative one-notch adjustment previously made for execution risk related to B+N’s M&A activity (supplementary rating driver). The rating action also incorporates the company’s improved business risk profile supported by robust credit metrics. The Positive Outlook reflects Scope’s view of the strong likelihood that B+N’s financial risk profile will improve based on its continued growth.

B+N’s issuer rating benefits from two main factors: i) a robust financial risk profile supported by a dynamic growth rate and a large share of recurring revenues from procured contracts; and ii) the acquisition of the ISS Group’s subsidiaries. These acquisitions have afforded B+N leading market positions in several regional countries while simultaneously lessening its geographical concentration and dependence on Hungarian state procurement contracts. Furthermore, the second bond issued under the Hungarian Central Bank’s Bond Funding for Growth Scheme to finance the group’s M&A activity is not expected to significantly impact credit metrics as it is partially offset by B+N’s substantial growth. Scope thus forecasts that leverage, as expressed by Scope-adjusted debt (SaD)/EBITDA, will deteriorate to around 2.0x for the medium term. The issuer rating is constrained by B+N’s improved but still comparatively weak business risk profile, key person risk and limited transparency on its financial policy as regards dividend payments (ESG factor).

The improved business risk profile is mainly due to the ISS Group acquisitions, which have prompted an upgrade from B+ to BB-. In addition to being market leader in Hungary, B+N has gained market leading positions in several countries in CEE. Furthermore, it has reduced its concentration on Hungary, supporting its geographical diversification and reducing its dependence on Hungarian state procurement contracts. The acquisitions have also broadened the company’s service portfolio by adding catering and security services. This will allow B+N to participate in tenders for clients that prefer to contract fully integrated facility management providers. The pandemic has also strengthened B+N’s market position, significantly increasing demand for its services, which further supported the company’s growth.

In the fragmented facility management market, B+N distinguishes itself by ensuring reliability and the ability to meet increasing demand. This confirms that the company is gradually overcoming the prevailing labour shortage and enhancing its efficiency. Along with the cleaning segment, there is a rising proportion of revenue from segments such as facility management and fit-out, although the latter is not expected to play such a dominant role as in 2020 and 2021. Many of B+N’s clients are government-related entities, which reduces counterparty risk and the risk of non-payment. Profitability in terms of the EBITDA margin ranges from 10% to 13% as operating costs have risen with increasing sales.

B+N’s financial risk profile (assessed BBB+, upgraded from BBB) continues to be the strongest rating driver. Credit metrics improved slightly for 2020 backed by: i) strong performance thanks to increased demand for B+N’s services during the pandemic, public procurement contracts won and robust cash flow generation; and ii) the unused portion of the issued bond proceeds in 2019. Scope expects credit metrics to remain stable after the increase in Scope-adjusted debt (SaD) in 2021 and the utilisation of the bond proceeds, assuming that B+N will use short-term debt again. The impact of the second bond is offset by B+N’s higher performance and cash flow generation. Scope expects leverage, as measured by SaD/EBITDA, to deteriorate to around 2.0x.

B+N has stated its intention to suspend its M&A activity in the short term. Scope has no reason to believe that management will deviate from this position. Therefore, for technical reasons, Scope has removed the negative one-notch adjustment for execution risk as this is now reflected in adjusted credit metrics through the non-netting of cash for SaD. However, the rating assessment still includes a negative rating adjustment of one notch for key person risk and limited transparency on B+N’s financial policy regarding its dividend payments (ESG factor). Scope has assumed a 50% payout ratio for the future and no other form of shareholder remuneration.

B+N’s liquidity remains adequate, reflecting the minimal amount of long-term debt repayments scheduled for the forecasted years, coupled with solid cash flow generation.

One or more key drivers of the credit rating action are considered ESG factors

Outlook and rating-change drivers

The Outlook for B+N Referencia Zrt. is Positive and incorporates Scope’s view of the strong likelihood that continued growth together with the successful integration of subsidiaries will improve the company’s financial risk profile.

An upgrade could be warranted if SaD/Scope-adjusted EBITDA consistently trends below 2.0x. The rating could also benefit from an improvement in B+N’s financial policy, which is, however, unlikely as this negative rating driver also reflects key person risk.

The Outlook could move to Stable if SaD/Scope-adjusted EBITDA consistently remains above 2.0x. A downgrade could be prompted by a deterioration in credit metrics, with SaD/EBITDA of above 3.5x, e.g. stemming from a loss of major contracts.

Long-term debt rating

Scope has upgraded the rating for the senior unsecured debt category to BB- from B+ in line with the issuer rating. Scope expects an ‘average’ recovery (30%-50%) for B+N’s outstanding senior unsecured debt in a hypothetical default scenario based on its going-concern enterprise value.

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 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 October 2019. The Credit Ratings/Outlook were last updated on 20 April 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
© 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.