Rating action

The rating actions is as follows:

MOL PLC KMRP Organisation 2021-2 Bond, up to HUF 80bn: assign new (P)B+

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

Preliminary ratings rely on information available to Scope Ratings GmbH (Scope) up to 13 January 2022. Scope will assign final ratings when all documentation will be signed and upon receipt of the final version of all transaction documents and legal opinions. Final ratings may deviate from preliminary ratings.

Transaction overview

The transaction is set up to finance the acquisition of a portfolio composed exclusively of (i) MOL Plc. ordinary shares, for an aggregate amount of up to HUF 80bn, and (ii) Hungarian government securities, for an aggregate amount of up to HUF 8bn. The transaction is intended to facilitate the financing of an employee-backed investment scheme in MOL according to a dedicated national law (the KMRP or SESOP law) using dedicated vehicles (the KMRPs) where membership is restricted to employees and management of a company: it is expected there will be around 300 participants in aggregate to the two KMRPs set-up by the employees of MOL Plc., including probably 10 members of the Board of Directors. The share in each of the KMRPs held by the 10 members of the Board of Directors of MOL Plc. is expected to be approximately 93%.

The bond is guaranteed by MFB, the Hungarian Development Bank Pr. Ltd. (MFB), for 80% of its outstanding notional amount. The guarantee is unconditional, irrevocable and the guarantor will pay on the first written request of the beneficiaries, being the bondholders. Erste Bank Hungary is the account bank and OTP Bank Plc. provides paying agent services.

The different costs of the structure, including interests on the bonds, cost of the guarantee and different fees will be paid out of (i) the interest earned on the government securities, (ii) the dividend paid by the MOL Plc. shares, (iii) a subsidy by MOL Plc. as allowed under the SESOP law, (iv) sale of the government securities or (v) sale of the MOL Plc. shares themselves. The General Assembly of MOL Plc’s shareholders of the 22 December 2021has already agreed to pay a subsidy of 2.5% of the held MOL shares p.a. to the issuer annually for the entire lifetime of the KMRPs under the precondition that a dividend will be paid on the MOL shares in the respective year.

At or before the maturity date, the assets of the issuer will be liquidated or acquired by the members of MOL PLC KMRP Organisation 2021-2 in order to redeem the rated bonds.

The rated bonds have a ten-year maturity with annual coupon payment using a fixed rate.

Rating rationale

The rating reflects the legal and financial structure of the transaction, including the guarantee; the credit quality of the issuer of the ordinary shares and of the guarantor; and the historical evolution of the sponsor share prices.

The assigned ratings depend in large part on the bonds’ guarantee to the benefit of the bondholders, guarantee which is irrevocable, unconditional and at first demand of the beneficiaries. The assigned rating would not be achievable without the MFB guarantee. In addition to the guarantee, we have given credit to potential proceeds coming from the MOL Plc. shares either through the dividend and subsidy payment on a regular basis or through the liquidation of thereof at maturity.

The ratings also address exposures to the key transaction counterparties, being the sponsor MOL Plc., Erste Bank Hungary the account bank, the paying agent OTP Bank Plc. and the guarantor MFB. To assess the issuer’s exposure to counterparty risks Scope considered public information and counterparty ratings from Scope.

Key rating drivers

Existence of a guarantee on 80% of the bonds’ notional (positive). The single class of bonds issued by MOL PLC KMRP Organisation 2021-2 are guaranteed by MFB for a proportional amount of 80% of the face value of the bonds.¹

Credit Rating of MOL Plc. (positive). The credit quality of MOL Plc. is also a reflection of the fundamental drivers of its share price over a long-term horizon.

Absolute bond preference (positive). Until maturity, there will be no funds paid out to the KMRP participants as long as the bond is outstanding, which protects the bond and aligns the bond interests with those of the participants and also MOL Plc.¹

Share price volatility (negative). Most of the assets of the vehicle are MOL Plc. shares publicly traded with a volatile value, exposing the vehicle to a large market risk.

Availability of liquidity (negative). The liquidity required for the issuer to pay all costs and fees would come from different source of revenues that are not contractual commitments. However, in case of shortfall, shares could be liquidated in order to pay any required elements.¹

Upside rating-change driver

An increasing value of the asset of the issuer could lead to an upgrade of the issuance rating, by creating a higher overcollateralisation between the assets and the rated liability. Such increase in assets could come either from the availability of larger liquidity amounts due to a higher-than-expected dividend payments, or the increase in the value of MOL Plc. shares.

Downside rating-change drivers

A downgrade of the rating of the guarantor would negatively impact the likelihood of a failure to indemnify the beneficiaries of the guarantee and could therefore lead to a downgrade.

A decreasing value of the assets of the issuer could lead to a downgrade of the issuance rating.

Quantitative analysis and assumptions

Scope has performed a cash flow analysis considering the asset characteristics and the main structural features. Our quantitative analysis reflects the transaction’s strong reliance on both the guarantee, the dividend payments, and the final value of the shares. We derived the bonds’ loss rate distribution from a Monte Carlo simulation of the entire structure, incorporating both revenues and costs of the issuer.

One key parameter assumption is the volatility to be assumed for our diffusion of the value of shares, where share’s returns do follow a normal distribution, in a similar fashion as in the Black & Scholes model. We looked at historical volatilities either on MOL Plc. itself or on peer companies (either the largest European Oil & Gas companies, or even more comparable CEE peers) over different horizons: one day, one year, or ten years (duration of the transaction). Several levels of volatilities were tested but the assumption corresponding to the assigned rating is 35%, a level which is in line with short-term historical volatilities. The dividend yield assumed for the duration of the transaction has been defined as a discounted yield corresponding to 50% of the expected dividend yield as derived from equity analysts’ consensus, which should address the exposure of the transaction to a potential non-payment of dividends in some years.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the share’s volatility. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the MOL Plc. shares volatility assumption is 45%:

• sensitivity to volatility, two notches.

Rating driver references
1. Transaction documents (confidential) 

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted volatility and dividend yield assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool checked by a dedicated team, taking into account the transaction’s main structural features. The outcome of the analysis is an expected loss and an expected weighted average life for the bonds.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 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.

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 Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 this Credit Rating 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.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Sebastian Dietzsch, Director.
Person responsible for approval of the Credit Rating: David Bergman, Managing Director.
The preliminary Credit Rating was first released by Scope Ratings on 14 January 2022.

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.