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

Rating action

Scope Ratings GmbH (Scope) has affirmed its B+/Stable issuer rating on West Hungaria Bau Kft. (WHB), together with its B+ senior unsecured debt rating. Simultaneously, Scope has withdrawn the issuer ratings/Outlook and the senior unsecured debt rating and has ceased analytical coverage for business reasons.

Rating rationale

The affirmation reflects WHB’s above-average profitability, but also its small overall scale in a European context, the geographic limitation of its activities to Hungary, and its dependency on government contracts. Scope sees the latter as a potential risk for the company’s backlog in light of upcoming elections.

WHB’s business risk profile (affirmed at B) is supported by its historically above-average profitability and domestic market position, which has translated into market visibility and moderate access to third-party capital and guarantees. The company’s business risk profile is somewhat constrained by its small overall scale in European construction, which lessens its ability to mitigate economic cycles, as well as by weak geographical diversification (mainly in Hungary), segment concentration, and dependency on government contracts. The concentrated backlog is somewhat mitigated by the investment grade counterparties. The book-to-bill ratio is volatile.

WHB’s four private owners are also its top management. There is no independent board to provide an oversight function. While Scope understands the family-owned nature of the company, an improvement in corporate governance would be positive given its growth in scale. Regulatory and reputational risks are negative ESG factors. Scope believes that WHB’s market position in recent years has been gained through state tenders, which were secured thanks to its established credentials regarding projects with state-owned companies. WHB is now highly dependent on state tenders, which accounted for around 85%+ of total revenues in 2021.

The company’s financial risk profile (affirmed at BB-) benefits from historically low debt levels and a cash cushion estimated at above HUF 19bn (including a significant restricted cash portion) at Q3 2021. WHB has abandoned its initial plan of issuing HUF 10bn of bond debt. However, Scope foresees that the pursuit of the company’s strategy will still need significant capex, leading to negative free operating cash flow. WHB intends to increase dividend payouts to HUF 5bn going forward (if covenant restrictions allow and business permits), which would burden discretionary cash flow further. In addition, the concentrated and government-dependent contracted backlog creates uncertainty around future cash flows. Scope has reflected this uncertainty via a decreasing top line in 2023 and a cautious stance on the company’s funding profile and credit metrics.

Liquidity is adequate, with unrestricted cash exceeding short-term debt even if free operating cash flow moves still further into negative territory. 

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 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 and the Rated Entity.
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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Tommy Träsk, Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 January 2020. The Credit Ratings/Outlooks were last updated on 1 February 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
© 2022 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.