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

Rating action

Scope Ratings GmbH (Scope) has today assigned a debt instrument rating of B+ to the HUF 3.5bn senior unsecured guaranteed bond which Global Refuse Holding Zrt. (GRH) plans to issue. Scope has also downgraded GRH’s senior unsecured debt category rating to B from B+, as the senior unsecured guaranteed debt that now ranks higher to the senior unsecured debt category. The B+/Stable issuer rating remains unchanged.  

Rating rationale

GRH intends to issue a HUF 3.5bn guaranteed bond in January 2022. The bond is planned to be 100% guaranteed by Tappe Kft. (engaged in municipal waste collection and transportation) and BVÜ Kft. (landfill management), the two biggest subsidiaries of the group and the largest contributors to GRH’s revenue.

GRH’s 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 guaranteed HUF 3.5bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. Proceeds from the bond are earmarked to finance an acquisition. The planned bond will have a fixed-rate coupon of 5.1% with a 10-year tenor followed by amortisation from fifth year, with a 50% bullet payment at maturity. Scope expects GRH’s financial leverage ratio to remain in the 1-3x range and its interest cover ratio to be above 10x 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

The debt instrument rating of B+ for GRH’s senior unsecured guaranteed bond is in line with the group’s issuer rating, reflecting an ‘average’ recovery for this bond in the event of a hypothetical default. The recovery expectation for GRH’s senior unsecured debt category is considered ‘low’ and translates into a B rating, one-notch below GRH’s issuer rating, as the senior unsecured guaranteed debt that now ranks higher to the senior unsecured debt category. 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 and other financial liabilities such as trade payables rank higher than senior unsecured debt. Hence, such debt 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.

Methodology
The methodology used for these Credit Ratings, (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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Charitha Gamage, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 20 December 2021.
The Senior Unsecured Debt Credit Rating was first released by Scope Ratings on 20 December 2021.
The Senior Unsecured Guaranteed Debt was first released by Scope Ratings on 24 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.