Scope assigns B+/Stable first-time issuer rating to Hungarian company Global Refuse Holding
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Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of B+/Stable to Global Refuse Holding Zrt. (GRH). Scope has also assigned a first-time rating of B+ to senior unsecured debt issued by GRH.
The issuer rating is supported by its financial risk profile that is stronger than its business risk profile driven by GRH’s comparatively stronger credit metrics over the next three years with a strong ability to generate free cash flows. Our view also considers GRH’s significant ability to deleverage after the proposed acquisition. Despite good debt protection and solid leverage, the group’s financial risk profile is constrained by its relatively low cash flow cover. Scope’s rating case incorporates the group’s plans to issue a HUF 3.5bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. Scope assumes that the planned bond will have a fixed-rate coupon with a 10-year tenor followed by amortisation from fifth year, with a 50% bullet payment at maturity. Proceeds from the bond are earmarked to finance an acquisition. Scope expects GRH’s financial leverage ratio to remain in the 1-3x range and its interest cover ratio to be above 12x in the next three-year period.
GRH’s business risk profile is supported by the additional cash-flow generation capacity created by near-term organic growth opportunities. This is further driven by the increasing need for recycling, especially of industrial waste, in line with global sustainability megatrends with regard to a circular economy (positive ESG factor). GRH’s market position is secured by its strong position in the Békés region in Hungary despite its rather limited size. The group’s cash flows are protected by the large exposure to municipal waste collection and transportation, which is less volatile, and long-term contracts with a high likelihood of being renewed, given its strong position in the service territory.
GRH’s geographical diversification remains limited to a single region in Hungary. However, the group is improving diversification in its services portfolio by combining supplementary business services, such as winter road cleaning, waste container rental and waste yard operations, with its municipal waste management segment. The newest addition to the group, GRM, which is active in waste material trading, together with the planned project related to recycling are expected to bring substantial growth potential to the group.
With GRH serving about 92% of the region’s population and operating the only major landfill site in Békés county, the group holds a strong position in its service territory. However, diversification of contracts by source is weak. Almost all of the group’s contracts are municipal contracts and there are no existing major contracts with industrial clients, signalling some customer concentration risk.
The sustainability of landfill – the group’s highest margin activity – is questionable due to its many adverse environmental effects. This activity also creates some margin concentration. The newest addition to the group, GRM, which is active in waste material trading, together with the planned project related to recycling are expected to bring substantial growth potential to the group. However, these additional businesses will only lead to an EBITDA margin of about 32% due to high pressure from significantly increasing material and staff expenses.
One or more key drivers of the credit rating action are considered an ESG factor.
Outlook and rating-change drivers
The Stable Outlook reflects Scope’s view on GRH’s comparatively stronger credit metrics over the next three years with a strong ability to generate free cash flows. The Stable outlook also considers GRH’s considerable ability to deleverage after the proposed acquisition, with a leverage expectation of not above 4.0x. The outlook is further driven by GRH’s strong revenue generation capacity driven by its strong position as a regional municipal waste management company.
A positive rating action rating could be warranted if the group strengthened its size significantly through the proposed organic and inorganic growth opportunities.
A negative rating action could result from a deterioration in the group’s leverage (Scope-adjusted debt/EBITDA) above 4.0x for a prolonged period, as the result of a contracted profitability or a further increased debt profile.
Long-term debt ratings
Scope expects an ‘average’ recovery for senior unsecured debt, for instance the HUF 3.5bn bond issued under the Hungarian National Bank’s programme. This recovery expectation translates into a B+ rating for the senior unsecured debt category, at the same level as the issuer rating. Scope’s recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2023. Short-term and long-term debt (excluding the bond issue) raised from financial institutions, other financial liabilities such as tax and interest payables, as well as trade payables rank higher than senior unsecured debt. Hence, such debts would be repaid first.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
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, the Rated Entities’ Related 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.
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: Charitha Gamage, 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 20 December 2021.
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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