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

Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer rating of BBB+/Stable on Magyar Telekom Nyrt, along with the BBB+ senior unsecured debt rating.

Rating rationale

The business risk profile (BBB+) benefits mainly from the low cyclicality in the telecom industry and the company’s leading position in mobile and broadband markets in Hungary, which strongly supports its competitive position. Magyar Telekom has a share of different segments of its domestic market that are above those of most other European telecoms operators. The company’s share of the mobile market shrank marginally in 2021, while the company increased slightly again its share of the broadband market. As the Hungarian telecommunications market is mature, Scope does not expect a significant change in market share. The purchase by Hungarian IT-telecommunication group 4iG of broadband provider DIGI, followed by recently announced project of the acquisition of Vodafone Hungary, is unlikely to materially affect Magyar Telekom’s competitive positioning in the short to medium term. The group also benefits from a strong position in North Macedonia, though that provides only limited diversification for the group as it represents just 11% of the group’s revenues. The company’s profitability is stable, recording a 30.9% EBITDA margin after leases in 2021, somewhat below that of main European peers, partly due to telecom and utility taxes in Hungary. Nevertheless, the group faces narrower profit margins in 2022 and 2023, to contract by about 3pp, after the Hungarian government introduced a temporary supplementary telecommunications tax (equivalent to an extra cost of about HUF 25bn a year). Profitability should recover to previous levels as long as the tax does not become permanent. The company has also recently introduced clauses in its General Terms and Conditions allowing inflation adjusted price changes based on the official consumer price index, thereby offering some protection against potential inflation effects.

Magyar Telekom’s financial risk profile (A-) is underpinned by the Scope-adjusted debt (SaD)/EBITDA ratio having peaked at around 2x when the group acquired spectrum in 2020 (5G) and 2021 (2G and 4G renewal). SaD/EBITDA stood at 2.0x end-December 2021, a stable level, and should decline progressively through this year, albeit slowed by the imposition of the new tax. The company issued its first senior unsecured bond (HUF 70bn) in 2020, as part of the Hungarian central bank’s bond programme, which represented 15% of SaD at the end of 2021. The group also benefits from good debt protection, with EBITDA/interest cover of more than 10x, even after the spectrum acquisitions of 2021. SaD/EBITDA will return to below 2.0x in the coming three years. The company’s policy is for shareholder returns (dividends and share buybacks) to run at between 60% to 80% of adjusted net profit. Magyar Telekom’s liquidity is adequate, not least as it is 61%-owned by Deutsche Telekom AG.

Magyar Telekom’s integration within the Deutsche Telekom group (cash pooling, financing) is such that, while Deutsche Telekom is more indebted, Scope deems it a remote risk that the parent company’s activities would adversely affect Magyar Telekom’s ability to meet its own contractual financial debt obligations as a going concern on time and in full.

Outlook and rating-change drivers

The Stable Outlook incorporates assumptions of leverage with SaD/EBITDA of below 2.0x, following spectrum auctions in Hungary in 2020 and 2021, and temporary telecommunication tax in 2022 and 2023.

A positive rating action is possible if deleveraging happened faster than expected, with SaD/EBITDA falling below 1.5x on a sustained basis.

A negative rating action is possible in case of significant change in competitive positioning following the acquisition of Vodafone Hungary by 4iG, or in case of the payment of higher shareholder returns and higher capex that lead to a significant increase in leverage towards 3.0x on a sustained basis.

Long-term and short-term debt ratings

Senior unsecured debt has been affirmed at BBB+, the level of the issuer rating.

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, (General Corporate Rating Methodology, 15 July 2022), 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 Rated Entity or Related Third Party participation YES
With access to internal documents                               NO
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: Jacques de Greling, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 October 2020. The Credit Ratings/Outlook were last updated on 22 October 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.