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Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer rating of 4iG Nyrt to BB-/Stable from B+ under review for a possible upgrade. Concurrently, Scope has upgraded the senior unsecured debt rating to BB- from B+ under review for a possible upgrade.

Rating rationale

Scope has upgraded 4iG’s issuer rating to BB-/Stable from B+ under review for a possible upgrade. The rating action reflects an improved competitive positioning with a significant mobile market share in Hungary following the acquisition of Vodafone Hungary¹ and slightly improved credit metrics, while the mostly debt-funded acquisitions still present significant execution and integration risks.

Scope expects the pending acquisition of Vodafone Hungary to close in the coming weeks.

The business risk profile (assessed at BBB-) is supported by the strong improvement in market share following the acquisition of Vodafone Hungary, with a number two position (with about 3.2 million subscribers) in the Hungarian mobile market and with a number one position (with about 1.5 million subscribers) in the Hungarian fixed broadband market. Diversification will remain broadly unchanged as the increased geographical concentration on Hungary brought by Vodafone Hungary acquisition will be largely offset by the associated customer diversification with 3 million new mobile customers. Operating profitability, as measured by the company’s Scope-adjusted EBITDA margin is expected to reach between 30-35% thanks to Vodafone Hungary’s higher profitability, the end of Hungary’s temporary special telecommunication tax, and the progressive materialisation of synergies.

The company’s financial risk profile (assessed at B+) is helped by a slightly improving leverage as measured by Scope-adjusted debt/EBITDA forecasted at around 4.5x in 2024, benefitting from equity financing from state-owned holding Corvinus in Vodafone Hungary acquisition, significant growth of Scope-adjusted EBITDA thanks due to low competitive pressure in the Hungarian mobile market and break-even FOCF despite a substantial increase in capex to nearly HUF 100bn. The larger size of the issuer post-acquisition is expected to result in a more diversified and therefore stable cash flow, supporting interest coverage at over 3x and to some extent offsetting the expected increase in the weighted average cost of debt - with the financing of Vodafone Hungary acquisition bearing interest that Scope estimated at around 9%.

Vodafone Hungary acquisition (Scope estimated at up to HUF 715bn) will bring a Scope estimated additional debt of about HUF 340bn at subsidiary level, while state-owned holding Corvinus will finance the remainder with equity. Scope still does not consider cash and cash equivalent in assessing the company’s indebtedness as the netting of cash is generally applicable to ratings in the BB category or higher, and if the cash is permanent and accessible. Given the transactions’ size and complexity, and pledges in favour of new debt holders, Scope believes that the cash is not permanent and can be used for working capital, capex and other needs. There is no significant amount of debt maturing in the next three years as debt maturities are spread over an extended time (including the new debt). Scope deems liquidity to be adequate in the short term. Nevertheless, it could become an issue, e.g. in the event of sharp working capital swings, high capex or if approaching debt maturities failed to be refinanced. For 2023, Scope expects short-term financial debt to be more than 2x covered by a combination of available cash and cash equivalents as well as positive expected free operating cash flow.

As regards supplementary rating drivers, Scope assesses 4iG’s financial policy as a negative rating driver. This is due to its very large, mainly debt-funded acquisitions and originally limited exposure to telecoms, leading to increased execution and integration risks. Scope notes the strong involvement of the state with 4iG via the provision of equity. As a result, Scope has adjusted 4iG’s standalone credit quality of BB downwards by one notch.

Outlook and rating-change drivers

The Outlook is Stable and reflects: 1) the acquisition of Vodafone Hungary for a Scope estimated amount of up to HUF 715bn in January 2023; 2) new loans at subsidiary level of Scope estimated HUF 340bn and 3) expected Scope-adjusted debt/EBITDA of below 5x by 2024.

A positive rating action could result from an improved financial policy exemplified by stabilisation of the group structure with no new material M&A activity, the successful integration of the acquired companies indicated by improved operational performance or Scope-adjusted debt/EBITDA reaching significantly below 4x.

A negative rating action could be triggered by the issuer's inability to further deleverage with Scope-adjusted debt/EBITDA remaining above 5x on a sustained basis.

Long-term debt rating

Scope’s base case forecasts the successful acquisition of Vodafone Hungary by 4iG’s subsidiary, with the following Scope estimates: about HUF 340bn of new loans, with no maturity for the next ten years and bearing an interest rate of around 9%. Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt. Scope sees some pressure on expected recovery rates due to i) pledges in favour of creditors, which could lead to restrictions on the transfer of funds within the group, and ii) future debt issuance will mainly take place at 4iG subsidiary level, resulting in structural subordination of senior unsecured debt at 4iG level. This expectation translates into a BB- rating for this debt category, the same level as the issuer rating. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2024. 

Rating driver references
1. Company announcement as at 22. August 2022

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 Outlooks, (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 Rated Entity and/or its Related Third Parties did not participate in the Credit Rating process.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jacques de Greling, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 October 2019. The Credit Ratings/Outlooks were last updated on 9 November 2022.

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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

Conditions of use/exclusion of liability
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