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 affirmed its BB- issuer rating on Hungarian construction company Vasútvill Kft. and revised the Outlook to Negative from Stable. Scope has also affirmed its BB- rating for the senior unsecured debt category.

Rating rationale

The Outlook change reflects the significant reduction in orders added to Vasútvill's backlog amid the uncertainty regarding future supply of EU-funded public infrastructure projects, which the company’s business relies on. A smaller backlog could weaken cash flows and the financial credit profile and could ultimately affect the issuer rating. The Hungarian government’s intention to freeze or postpone HUF 1,150bn of public investment in 2022 and 2023 adds to this uncertainty.

While the Covid-19 pandemic has had no impact on Vasútvill's current construction business (revenues up by 15% in 2021 YoY), it has caused delays in public procurement tenders, compounded by the suspension of political decisions in an electoral year. After years of fiscal stimulus linked to EU funds and local governmental policies, tenders have become scarcer in Vasútvill’s niche market while competition has increased, leading to lower volumes and thinner margins (backlog of HUF 8.2bn in May 2022 compared to HUF 22bn in the previous year).

A recovery in future spending in infrastructure projects, also in line with the goal to reduce carbon emissions until 2030, would lead to an increase in stimulus-related orders, but when this will happen is uncertain. Given the usual delay between a new order being secured and its execution, Scope expects the top line and cash flow to remain weak in 2022 before the backlog gradually recovers. This is based on the company’s robust market positioning, accounting for around 65% of staff and machinery in Hungary’s overhead line construction segment. Vasútvill is negotiating two key projects in Hungary (both totalling about HUF 14bn) and plans to participate in at least eight upcoming projects, as confirmed by management.

Profitability, as measured by the Scope-adjusted EBITDA margin, also weakened to 7% in 2021 from 16% in 2020. To dampen the effect of rising raw materials prices, Vasútvill acquired 49% of MABA Hungaria Kft, a manufacturer of concrete construction products, especially sleepers for railway tracks. However, this is unlikely to offset the full impact on projects of the rising construction materials prices and supply chain disruptions, leading to weaker profitability and reducing the buffer against cost overruns before a project becomes loss-making. Further financial investments – Vasútvill acquired a 49% participation in real estate developments – are expected to generate dividend income once projects are completed and sold, but this will only happen in the medium term. Scope therefore foresees profitability to remain below 10% in the next few years.

Vasútvill’s business risk profile (assessed at B+) continues to benefit from its dominance of its domestic niche market and track record of over 70 years. The rating remains constrained by Vasútvill’s small scale in both a European and Hungarian context, which weakens its ability to mitigate economic cycles. Weak diversification is a further constraint, namely: i) a lack of geographical diversification; ii) the reliance on one end-market; and iii) the concentrated customer portfolio and backlog mostly dependent on government decisions. Also credit-negative are the weaker backlog and profitability assessment given the medium-term trend of deteriorating margins.

The company’s financial risk profile (assessed at BB) reflects robust debt protection, as indicated by a Scope-adjusted interest cover ratio of 9.6x and a Scope-adjusted debt/Scope-adjusted EBITDA ratio of 0.4x at December 2021. Credit metrics benefit from a conservative debt strategy, as evidenced by a very low debt balance (mostly comprising the HUF 3bn bond issued in 2021 and about HUF 700m of financing leases) against the significant balance of unrestricted cash and cash equivalents (HUF 3.5bn as at December 2021). Scope foresees Scope-adjusted debt/Scope-adjusted EBITDA to increase from 2022 due to weaker-than-expected cash flow. This will also have a negative impact on debt protection, which, however, should remain above 3x and return to previous levels once public procurements recover.

Liquidity is adequate and benefits from the conservative, back-loaded debt maturity profile, with no significant amounts due in the coming years. Short-term financial obligations include HUF 40m of investment loans and HUF 454m of financing leases in 2022. Given the long maturity of the HUF 3bn bond, upcoming short-term maturities will be manageable. Scope expects the company to maintain its low short-term debt levels and ensure these are covered by available liquidity.

Outlook and rating-change drivers

The Negative Outlook reflects the risk of the backlog remaining low (backlog to revenues of less than 1x) and profitability remaining weak (Scope-adjusted EBITDA margin of less than 10%). Scope’s base case still foresees credit metrics to weaken from 2022, which factors in the lower visibility on business fundamentals, including a weaker economic environment and inflationary pressures, but also the expectation of a gradual recovery in top-line metrics once public procurements recover.

A positive rating action, with a return to a Stable Outlook, is possible if the company’s order backlog recovered quickly, improving operational visibility. The possibility of a rating upgrade is remote at the moment.

A negative rating action, i.e. a downgrade, might result from an inability to achieve a fast recovery in business conditions and/or liquidity concerns. This could be triggered by a deterioration in market conditions while no projects are added to the backlog and/or dividend payouts increase.

Long-term and short-term debt ratings

The rated entity issued a HUF 3bn senior unsecured corporate bond (ISIN HU0000360151) in 2021. The bond terms include amortisation of 20% yearly from 2026 until maturity, a fixed annual coupon and a 10-year tenor.

Scope’s recovery analysis is based on a hypothetical default scenario in 2022, factoring in Vasútvill’s liquidation value, and assumed outstanding senior unsecured debt of HUF 3bn. Scope expects an ‘above-average’ recovery for Vasútvill’s senior unsecured debt. However, due to the increased market uncertainty, Scope has affirmed the debt class rating of BB- in line with the issuer rating and has not applied up-notching.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Construction and Construction Materials Rating Methodology, 25 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation    YES
With access to internal documents                                        YES
With access to management                                                  YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 July 2020. The Credit Ratings/Outlook were last updated on 12 July 2021.

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.