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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating of 4iG Nyrt. (4iG) to B+/Stable from BB- under review for a possible downgrade. Concurrently, Scope has downgraded the senior unsecured debt rating to B+ from BB- under review for a possible downgrade.

Rating rationale

Scope has downgraded 4iG's issuer rating to B+/Stable from BB- under review for a possible downgrade. The rating action reflects a weakened financial risk profile and heightened execution and integration risk from large, mainly debt-funded acquisitions, which outweigh the positive impact on 4iG's business risk profile from the significant growth being pursued.

4iG is pursuing strong, M&A driven growth, which will transform it into a diversified telecom, IT and space & defence group. The main acquisition targets include:

• 100% in Invitech ICT Services Kft. (transaction closed in September 2021)
   
• 51% in Space-Communication Ltd. (Spacecom)
   
• 100% in DIGI Távközlési Szolgáltató Kft. and its subsidiaries, Invitel Zrt., i-TV Zrt. and DIGI Infrastruktúra Kft. (DIGI Hungary)
   
• 100% in Telenor d.o.o. (Telenor Montenegro)
   
• Further telecom assets in the Western Balkans
   
• a majority stake in Antenna Hungária Zrt. via a transfer of telecommunication companies to be acquired by 4iG

Scope expects the pending acquisitions to close in Q4 2021-Q1 2022.

Once these transactions have been successfully completed, 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.

Total 2021 pro-forma revenue of the enlarged group is expected to reach around HUF 380bn and pro-forma EBITDA should exceed HUF 100bn, which is far above 4iG’s 2020 revenue of HUF 57bn and EBITDA of HUF 5bn. In terms of industries, telecom services including satellite communication are expected to account for a dominant share in total revenue and EBITDA. The remainder is mainly IT, IT infrastructure and media/event services.

The market positioning of the new group will be mainly driven by its solid presence in fixed broadband in Hungary (market share of over 20%) and IT infrastructure/services, the unique position of Antenna Hungaria in the media/broadcasting landscape, a good presence in selected telecom markets in the Western Balkans, and Spacecom’s expertise in the satellite communication market. The share of recurring revenues is expected to exceed 60% compared to less than 20% in 2020. 4iG’s market positioning is held back by a very weak position in the Hungarian mobile market as well as by strong competition in its main markets including IT and satellite communication.

The new group will be more diversified. In addition to exposure to the different industries mentioned above, overall diversification will also benefit from a somewhat broader geographical presence, i.e. in Hungary, Western Balkans and other regions (mainly CEE, the Middle East and Sub-Saharan Africa) via Spacecom. 4iG’s overall share of Hungarian operations is expected to decline to around 75%-80% of revenues from over 95%. The customer structure is expected to become more granular, including a significant share of retail clients, and less dependent on public sector customers. These benefits will be partly offset by higher foreign exchange risk.

4iG’s business risk profile further benefits from an estimated group EBITDA margin of around 25%-30%, which is a solid level for a telecom focused, capital-intensive business model. Scope notes that EBITDA margins vary substantially depending on the business segment, from less than 10% in IT services to more than 70% in satellite communication.

From a financial perspective, Scope expects a significant deterioration in credit metrics with leverage, as measured by Scope-adjusted debt (SaD)/EBITDA, of above 4x in the next couple of years. While credit metrics are somewhat supported by a solid interest cover ratio of around 4x, they are burdened by weak free operating cash flow cover at around breakeven.

The negative development in credit metrics will be driven by mainly debt-funded acquisitions (around 80% of a total consideration of about HUF 460bn, with the rest as an equity increase). Debt required for the acquisitions largely consists of the prospective HUF 350bn MNB bond, bank loans in the amount of HUF 14bn and available funds from the MNB bond issued in March 2021. 4iG plans to repay the HUF 100bn MFB bond issued in September 2021 for the financing of the Invitech transaction with proceeds from the prospective MNB bond.

The company plans to execute equity increase transactions totalling over HUF 100bn in Q4 2021-Q1 2022 with Hungarian and international investors. The proceeds are earmarked for funding the M&A deals and as a capex and foreign exchange reserve.¹

In addition, total SaD will increase due to the consolidation of debt (bonds, loans, leases) of target companies, primarily Spacecom, DIGI and Antenna Hungaria. Scope also notes that, going forward, the SaD calculation will not consider cash and cash equivalents as netting of cash is generally only applicable to ratings in the BB category or higher, and only if the cash is permanent and accessible. Given the size and complexity of the transactions, Scope believes that cash is not permanent and can be used for working capital, foreign exchange, capex and other needs. The increase in SaD will only be partly offset by expected EBITDA growth.

While debt maturities are spread over an extended time horizon, there is a significant amount of debt maturing in the next couple of years. This is mainly attributable to short-term loans at different group companies and bonds at Spacecom. Scope expects 4iG to partly refinance this debt via new debt instruments.

Scope deems liquidity to be adequate in the short term. Nevertheless, it could become an issue, e.g. in the event of sharp working capital swings, large capex or if approaching debt maturities are not refinanced. For 2022, Scope expects short-term financial debt to be more than 1x covered by a combination of available cash and cash equivalents, following envisaged debt and equity issuance as well as positive expected free operating cash flows.

As regards supplementary rating drivers, Scope assesses 4iG’s financial policy as a negative rating driver. This is due to its very large, mainly debt-funded acquisitions and still-limited exposure to telecom services, leading to heightened execution and integration risk. As a result, Scope has adjusted 4iG’s standalone credit quality of BB- downwards by one notch.

Outlook and rating-change drivers

The Outlook is Stable and reflects: i) the successful placement of a HUF 350bn bond in Q4 2021; ii) successful equity increase transactions totalling more than HUF 100bn in Q4 2021-Q1 2022; iii) the execution of the announced M&A strategy; and iv) SaD/EBITDA of below 5x in the next few years.

A positive rating action could result from a stabilisation of the group structure with no new material M&A activity and/or the successful integration of the acquired companies, indicated by improved operational performance and stronger credit metrics, with SaD/EBITDA of around 4x on a sustained basis.

A negative rating action could be triggered by a deterioration in credit metrics as indicated by SaD/EBITDA of significantly above 5x on a sustained basis, e.g. due to an inability to generate sufficient new business or if execution risk around targeted acquisitions materialises. A negative rating action could also result from liquidity issues, e.g. caused by very sharp working capital swings.

Long-term and short-term debt ratings

Scope’s base case financial forecast assumes the successful placement in Q4 2021 of a HUF 350bn senior unsecured bond with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, with 10% annual amortisation commencing in 2026 and a 50% bullet maturity in 2031. The proceeds are earmarked for the acquisition of companies and the refinancing of the existing MFB bond of HUF 100bn.

Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt such as the prospective bond and the existing HUF 15.45bn bond (ISIN: HU0000360276) issued in March 2021. This expectation translates into a B+ rating for this debt category, the same level as the issuer rating. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2023.

Rating driver references
1. Announcement of the preliminary agreement between KZF Vagyonkezelő Kft, 4iG PLC and Rheinmetall AG 

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 24 September 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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

Conditions of use/exclusion of liability
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