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 Lexholding Zrt (Issuer rating: B+/Stable; senior unsecured debt rating: B+), on 2 June 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

Lexholding’s business risk and financial risk profiles are in line with Scope’s base assumptions as outlined in the initial rating action in July 2021. There have been four notable events in the last 12 months: i) Stelius Zrt’s change of name to Lexholding Zrt as of 1 December 2021; ii) the resignation of deputy CEO Béla Slánicz and the appointment of Sándor Móczár as CFO as the consequence of the current reorganisation of the company; iii) the spending of 40% of the bond proceeds, mainly on real estate and IT-related project developments as planned while the remaining bond proceeds remain invested in short-term deposits without any lock-up periods available for immediate deployment if required; and iv) ongoing structural reshaping as Procash Zrt merged with Lexholding Zrt and MB Elit Luxury Kft merged with Főtaxi Kft while a complex issuer structure remains. Incorporating a variety of different businesses, cross-ownerships, intra-company transactions and financing structures have resulted in a lack of transparency.

The dependence of Lexholding’s portfolio on BAV Zrt-related dividends will also remain significant (above 70%) for the next few years. This limits Lexholding’s ability to offset the impact one of its undertakings failing to pay dividends and hence poses the risk of volatile fixed-cost coverage. Scope views positively the transition from dividends to management fees as an income source. Management and service fee income is less volatile than dividend income as payment by the undertakings is mandatory and depends on top-line rather than bottom-line performance. Management and service fees accounted for around 61% of total cash income in 2021 and are expected to further increase in the medium term as Lexholding intends to provide more corporate functions to its undertakings.

Despite lower-than-expected cost coverage mainly driven by dividend cuts due to Covid-19, Lexholding managed to cover its operating expenses through cash income thanks to the recurring nature of management and service fees. Scope estimates that total cost coverage will remain above 1.0x over the next few years, supported by: i) the relatively stable nature of management fees implemented on the level of investees from 2020; ii) broadly stable net interest on shareholder loans; iii) the likely scaling-back of dividend payments to normal levels from core portfolio companies (i.e. ground transport, real estate); and iv) no significant increase in dividend payouts protected by inancial covenants on bonds.

Disclosure
Scope Ratings uses the following key credit metrics to gauge the financial risk profile of an investment holding company: total cost coverage; leverage (LTV); and liquidity. Scope Ratings uses total cost coverage as the key indicator. The rating agency defines the total cost coverage ratio as cash inflows versus non-discretionary cash outflows at the holding company level. The ratio signals the extent to which an investment holding company can cover all its discretionary payments. An investment holding company’s leverage – measured as the LTV ratio – only serves as a supplementary credit ratio, indicating its headroom for additional external funding, should this be required to cover upcoming debt maturities. However, as the LTV of an investment holding company tends to be volatile due to constant changes in the portfolio’s market value, Scope Ratings only focusses on this ratio in the event of major debt repayments over the foreseeable future. Scope Ratings assesses the liquidity of an investment holding company in a similar way to its assessment of liquidity for any other non-financial corporate.

The methodology applicable for the reviewed ratings and/or rating Outlook (Corporate Rating Methodology, 6 July 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 Zurab Zedelashvili, Associate Director

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