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

Rating action

Scope Ratings GmbH (Scope) today has assigned a first-time issuer rating of B+ with Stable Outlook to Hungary-based business services company Communication Technologies Kft. The senior unsecured debt category is rated B+.

Rating rationale

The business risk profile is assessed at B+ is restricted by the company’s very small size prior to its intended acquisitions.

Its competitive position benefits from good profitability but is constrained due to a relatively small market share in IT security markets (electronic offender monitoring, digital forensics and cybersecurity) and a concentration on one activity in one country.

Communication Technologies’ activity is sustained by exclusive contracts to distribute selected security systems in Hungary and well-established customer relations with state agencies, which sometimes involve long-term contracts or maintenance and licence upgrade features. Beyond underlying growth in IT security systems, the company plans to use the issuance of the bond to expand by acquiring companies in related business businesses and investing in creating a joint venture for equipment maintenance.

The financial risk profile assessment of A- reflects Scope’s expectation that the company will maintain a SaD/EBITDA ratio of around 1.0x (even with no netting of cash) while it moves from a net cash position to low leverage as the bond issuance is executed. Strong profitability and low capital expenditures should enable it to keep FOCF/SaD significantly above 35%.

Scope places much greater emphasis on the business risk profile due to the company’s very small size, execution risks in its growth strategy and acquisitions, the key person risk inherent in a small company (ESG-related driver), risks on the future consolidated balance sheet, and still less committed financial policy.

Liquidity is adequate. The company has historically maintained significant cash levels with relatively low amounts of short-term debt. After the bond is issued, the company will clear all short-term debt while expectedly maintaining a significant amount of cash.

Outlook and rating-change drivers

The Outlook is Stable based on Scope’s expectation that the company will implement its plans to grow the business organically and through M&A.

A positive rating action could occur if the company managed to successfully implement its financing plans along with its growth strategy and M&A plans.

A negative rating action could take place if the company was unable to fund its expansion or lost its exclusive status with key suppliers, leading to lower profitability than expected and SaD/EBITDA of above 5x.

Long-term and short-term debt ratings

Scope rates the planned senior unsecured debt at B+, in line with the issuer rating. Scope calculated an ‘average’ recovery following a hypothetical default in 2023 and therefore has incorporated no notches of uplift in the assigned issuer rating. Communication Technologies plans to issue a HUF 2bn senior unsecured bond under the Bond Funding for Growth Scheme of the Hungarian National Bank (MNB) to finance acquisitions (HUF 1.8bn) and the creation of a maintenance JV (HUF 0.2bn), with an expected tenor of 10 years, with a fixed annual coupon of up to 5% p.a. and 5% amortisation starting in 2025 and in 2026, 10% amortisation in 2027 and 2028, 15% amortisation in 2029, 2030 and 2031, leaving a 25% balloon at maturity.

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, 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.

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: Jacques de Greling, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 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.