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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of B-/Stable to VIAVIN Epitoipari Zrt. A first-time rating of B- has been assigned to the company’s senior unsecured debt.

Rating rationale

VIAVIN’s business risk profile (assessed at B-) benefits from its robust operating profitability, with a Scope-adjusted EBITDA margin of around 10% from its core activities as a subcontractor in the construction industry. The company’s market position is a credit weakness due to its limited overall size, reflected in around HUF 4.0-4.4bn (EUR 11m-12m) in total annual revenue in recent years. Moreover, the intense competition in the CEE construction market implies little to no pricing power for companies, especially as second-line contractors. Diversification is very limited with full exposure to one niche of the construction industry (road and railway) exclusively within Hungary. Client and project diversification is also weak as one first-line contractor for major projects poses cluster risk with more than 60% of external revenue in 2020. However, such cluster risk is partially mitigated by the different services offered in VIAVIN’s portfolio as well as good creditworthiness of major clients.

The company’s financial risk profile (assessed at B+) is mainly supported by its debt protection, with Scope-adjusted interest cover between 7x-10x. This is a sufficient level to service interest payments and even provide some headroom to cover for potential cash flow volatility driven by high client concentration. Financial leverage has been very moderate in the past but is expected to grow due to the envisaged debt-financed capex programme. Scope anticipates that Scope-adjusted debt (SaD) will grow by around HUF 2bn subject to the planned senior unsecured bond issuance within Q4 2021. Leverage has increased in recent years, from SaD/Scope-adjusted EBITDA below 1.0x to 3.5x as of year-end 2020. This is a consequence of greater debt-financed capex in 2019 and especially 2020. The capex has been used to renew and expand VIAVIN’s fleet of trucks and construction machinery in anticipation of increasing project volumes as well as to improve operating margins via efficiency gains. Leverage based on SaD/Scope-adjusted EBITDA is expected to stay between 3.4x and 4.0x in 2021 and 2022 before improving back to levels below 3.0x after 2022, subject to a positive operating result development in line with Scope’s financial base case.

Liquidity is deemed adequate since the planned investments in smart construction machinery are both discretionary and granular. Scope further assumes that VIAVIN will have sufficient liquidity throughout the forecast period of the agency’s financial base case, given a successful placement of the planned HUF 2bn in senior unsecured debt within Q4 2021.

The current company structure leads to very high key person risk regarding founder, CEO and 75%-owner Mr. Schmidt. Order flow (which is typically t+1 year for subcontractors) is largely generated by Mr. Schmidt thanks to his personal track record and industry network. Scope believes that the concentration of power and responsibilities on Mr. Schmidt as majority owner, founder, technical expert in civil engineering, CEO and relevant sales person poses substantial additional credit risk. The agency has therefore applied a downward adjustment of one notch for governance and structure.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that leverage on a consolidated basis will remain at SaD/EBITDA of below 4x from 2022 onwards. However, credit metrics will stay volatile due to a concentrated backlog. The Stable Outlook also reflects a successful HUF 2bn bond issuance and the completion of the planned PPE renewal programme.

Scope sees a positive rating action as remote but may be warranted if VIAVIN substantially improves visibility on revenues, i.e. improves the order backlog picture, while keeping SaD/Scope-adjusted EBITDA below 4x on a sustained basis.

A negative rating action could occur if liquidity were to worsen or SaD/EBITDA were to increase to more than 5x on a sustained basis. Liquidity may be negatively affected by a sudden drop in order intake and thus prepayments or if VIAVIN becomes exposed to non-recoverable cost overruns or fails to successfully refinance the envisaged capex programme.

Long-term debt rating

VIAVIN plans to issue a HUF 2bn senior unsecured corporate bond. Proceeds from the bond are earmarked for the acquisition of new construction machinery. The bond’s tenor is nine years, and it will amortise from year three to year eight in equal instalments of 10% annually with a 40% balloon at maturity. The coupon will be fixed and payable on an annual basis.

Scope’s recovery analysis assumes a potential default at year-end 2023 and is based on VIAVIN’s liquidation value, as the agency assumes that the sum of the company’s parts would have higher value than a going concern valuation. Based on the recovery analysis, Scope expects an ‘average recovery’ for the company’s senior unsecured debt, also in light of a possible increase in senior secured debt prior to a potential default. This results in a B- rating for the senior unsecured debt class in line with the issuer rating.

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 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: 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 16 November 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.