Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website. 

Scope completed the monitoring review for ITK Holding Zrt. (BB-/Stable issuer rating; BB- rating on senior unsecured debt) on 13th April 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The BB- rating on ITK continues to incorporate a three-notch uplift reflecting the strong support from majority shareholder MOL Group, which adds financial stability, risk management and professional backing to the company.

The business risk profile (assessed at B+) is underpinned by a stable public transportation business. The company has six long-term contracts (five of which being 10 years or more from inception) for the provision of bus services in Hungary, with a high certainty of cost recovery over the term of the contracts. Two important contracts were added since our last review and the relatively modern (aged 6.6 years on average) fleet now stands at 409 vehicles. The smaller business services operations also have a long track record of stable margins and performed particularly well in 2021. This is balanced by higher risk in the newly established vehicle manufacturing business, which started production in 2019. The company produced only 149 vehicles in 2021, against a forecasted 380, although we expect earnings to be broadly in line with our expectations. We expect a significant ramp-up in production over the coming three years to over 400 vehicles per annum. ITK itself needs 400-500 additional buses for its own fleet by YE 2024, equal to around one-third of the expected production.

Profitability is strong and stable in business and transportation services, whereas vehicle manufacturing is only operating at breakeven due to sub-optimal production volumes. We expect profitability to improve gradually over the next three years, and for the group as a whole to generate a positive net profit from 2021 onwards. Supplier and customer concentration is high, but most are well-established industry players with good credit standing.

ITK’s financial risk profile (assessed at B-) reflects very high leverage, measured by Scope-adjusted debt (SaD)/Scope-adjusted EBITDA estimated at 8.5x at the end of 2021. With sizeable investments in the bus fleet to continue in 2022-2024 (around HUF 29bn), leverage is expected to rise in 2022 to around 11x and reduce gradually thereafter towards 8x as we see the full year contribution of the expanded fleet. A potential investment in a new HUF 20bn production plant at Debrecen could also add to the financial leverage (final investment decision expected by end of May 2022).

The company issued a HUF 20bn bond under the Hungarian National Bank’s Bond Funding for Growth Scheme in June 2021, which was used primarily for refinancing. The 10-year tenor and pricing at 2.9% for the bond has added stability to the capital structure of the company. ITK had HUF 3.1bn of liquid assets and HUF 1.4bn of short-term debt at the end of 2021. We expect the growth in the fleet to be financed primarily by new secured bank loans, and to a lesser extent by subordinated loans and equity from MOL Group. We understand that shareholders do not expect to extract dividends from the company in the short to medium term.

This publication does not constitute a credit rating action. Scope assigned initial ratings on ITK Holding Zrt. on 14 April 2021. For the official credit rating action release click here.

The methodology applicable for the reviewed ratings and/or rating Outlook (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Automotive and Commercial Vehicle Manufacturers, 12 February 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Tommy Träsk, Director

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