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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian investment holding Forrás Nyrt. to B from B+ while raising the Outlook to Stable from Negative. Scope has also downgraded the senior unsecured debt rating to B from B+.

Rating rationale

The downgrade is triggered by the issuer’s further postponement of acquisitions in the manufacturing sector and the slower-than-anticipated build-up in 2021 of recurring cash income from interest and dividends. Scope forecasts total cost coverage to remain below 1.0x until 2023, when the newly acquired renewables portfolio will start to generate income.

The issuer rating on Forrás, a Budapest-based industrial and real estate investment holding, is supported by i) the company’s record of over 20 years in the sourcing, development and sale of manufacturing companies and real estate projects in different asset classes in Hungary; ii) the significant profit potential from the 20 recently acquired solar parks (acquired in 2021; 0.5MW capacity each) and from the nine 0.5MW parks under construction and expected to be operational by the end of June 2022. The issuer rating is still constrained by i) the issuer’s current lack of size and scope both in the industrial, real estate and renewables segments; ii) the slower-than-anticipated build-up in recurring financial income; and iii) the issuer’s complex group structure incorporating different businesses, consolidation forms and financing structures (ESG factor: credit negative).

With acquisitions in the metal parts manufacturing sector yet to take place, Forrás’ blended industry risk remains primarily driven by the existing real estate portfolio and the newly acquired solar energy assets.

Scope highlights the limited visibility of earnings because the issuer is yet to implement multiple acquisitions and several assets remain under construction. However, this has no effect on the business risk profile, which remains at B.

Total cost coverage is expected to remain below 1.0x until 2023, when it will improve gradually in line with the increasing dividend income from the newly acquired solar portfolio and further acquisitions in the sector. Future cash inflows largely depend on the target companies’ ability to generate profit, and Scope’s forecast accounts for this potential volatility. Scope also flags that recurring interest and dividend income from the current investment portfolio cannot fully cover interest costs on the HUF 21.7bn senior unsecured bond issued in October 2020.

In 2021, Forrás acquired shares in companies listed on the Hungarian stock exchange, with a total face value of HUF 8.6bn. However, due to highly fluctuating share prices, this portfolio’s market value is subject to rapid, significant changes.

Liquidity is adequate, benefiting from HUF 3.5bn in cash available as of YE 2021 and positive free operating cash flow of HUF 0.5bn forecasted for 2022. The company has no short-term debt as of YE 2021.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The rating Outlook is Stable and is based on the successful execution of the envisaged investments into companies from the renewable energy, property development and manufacturing sectors, financed by the HUF 21.7bn senior unsecured bond. Scope forecasts the expanded portfolio to translate into sufficient total cost coverage of more than 1.0x from 2023. However, total cost coverage will remain subject to low visibility and volatility of cash income.

A negative rating action is possible if total cost coverage deteriorated further to less than 0.5x on a sustained basis. This could be the result of smaller-than-expected cash contributions from the newly acquired companies in the industrial sector caused by adverse industry trends or further delays in capital deployment. A negative rating action could also occur if liquidity were to worsen.

Scope may consider a positive rating action in case of higher visibility regarding recurring cash income from interest and dividends while total cost coverage remains substantially above 1.0x.

Long and short-term debt ratings

Forrás issued in October 2020 a HUF 21.7bn senior unsecured corporate bond under Hungary’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with 10% of its face value to amortise from 2027. The coupon is fixed (3.2%) and payable yearly. The main part of bond proceeds have been deployed already with a focus on acquisitions in the renewables and real estate sectors (HUF 12.4bn), the rest is invested on the Hungarian Stock Exchange in a portfolio of shares (HUF 8.6bn).

Scope rates the senior unsecured debt issued by Forrás Nyrt at the same level as the issuer rating. Scope has computed an ‘average’ recovery for senior unsecured debt holders in a liquidation scenario. Senior unsecured debt at the holding company level is structurally subordinated to debt on the subsidiary level, constraining the debt rating.

Disclosure

Scope uses the following key credit metrics to gauge the financial risk profile of an investment holding company: total cost coverage, leverage (loan/value) and liquidity. Scope uses total cost coverage as the key indicator. Scope 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 only focuses on this ratio in the event of major debt repayments over the foreseeable future. Scope assesses the liquidity of an investment holding company in a similar way to its assessment of liquidity for any other non-financial corporate.

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://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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 June 2020. The Credit Ratings/Outlook were last updated on 29 June 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
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