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 upgraded B+N Referencia Zrt.’s (B+N) issuer rating to BB/Stable from BB- under review for a developing outcome. B+N’s senior unsecured debt has also been upgraded from BB- under review for a developing outcome to BB.

Rating rationale

Scope has upgraded B+N’s issuer rating to BB/Stable from BB- under review for a developing outcome. The rating action follows the delayed publication of B+N’s 2021 consolidated financial statements based on international financial reporting standards (IFRS) which previously caused a lack of clarity on the group’s financial performance. The upgrade reflects Scope’s opinion that the group can maintain a strong financial risk profile (assessed as A-) backed by its attained stable project backlog despite the many difficult macroeconomic factors (the inflationary environment, the increase in minimum wages and the Hungarian labour market shortage) it faces and the disappearing revenue source of B+N’s highly profitable fit-out division.

B+N published its 2021 consolidated financial statements based on IFRS in Q4 2022. The two main differences between the Hungarian and IFRS are: i) the addition of financial leases; and ii) the recategorisation and treatment of permanently transferred funds from being operating expenses to be dividend cash outflows for 2020 and 2021 in the amounts of HUF 7.8bn and HUF 2.1bn, respectively. Both these changes have affected the credit metrics as Scope-adjusted debt increases by financial leases being treated as debt (e.g. in 2020 the Scope-adjusted debt becomes HUF 13.3bn instead of HUF 11.1bn) and the significant increase of Scope-adjusted EBITDA (e.g. in 2020 the Scope-adjusted EBITDA becomes HUF 16.6bn instead of HUF 7.5bn), leading to the improved credit metrics for 2020 and 2021. Previously, Scope included the dividend-like payouts in Scope-adjusted EBITDA as they were considered to be possible recurring expenses, however B+N’s management has assured Scope that the payouts were extraordinary events and will not be repeated in the future.

In 2020-2022, B+N’s fit-out division was one of the main contributors to both group revenues and profitability with one of the largest projects being the restoration of Hungarian hospitals. B+N estimates that approximately 90% of those projects were finalised in 2022, and after their completion in 2023, B+N plans to reduce its fit-out workforce. Management states that most of the fit-out revenues have already been replaced by cleaning and facility management contracts, therefore Scope does not expect a downturn for B+N’s 2023 revenues.

No significant changes have occurred regarding B+N’s business risk profile (assessed as BB-), it remains the main rating constraint. The group is geographically well-diversified and has maintained its leading positions in both Hungary and in the neighbouring CEE countries, while its customer concentration is a weakness. With the previously mentioned difficult economic conditions B+N faces, Scope forecasts its operating profitability (measured by the Scope-adjusted EBITDA margin) to return to historical levels of around 11% as the heightened levels in 2020 and 2021 are considered temporary. Scope expects there will be additional costs from the significant labour shortages in Hungary, restraining the EBITDA margin going forward.

B+N’s financial risk profile is supported by the group’s strong interest coverage (Scope-adjusted EBITDA/interest cover) of above 15x and strong leverage credit metrics (Scope-adjusted debt/EBITDA) around 1.7x and Scope-adjusted funds from operations/debt of around 50%. The financial risk profile is constrained by the cash flow cover, measured by Scope-adjusted free operating cash flow/debt, since the group’s active M&A expansion strategy and large public contract dependence has led to volatile net working capital trends and unexpected large cash absorption, negatively impacting the credit metric and constraining liquidity. Although year-end liquidity was adequate, with sufficient internal and external funds to cover short-term debt obligations, the intra-quarter liquidity was at times inadequate. As B+N’s public contract exposure with a significant bearing on working capital remains, Scope considers the inadequate liquidity to be a persisting threat that necessitates the introduction of significantly larger committed credit lines.

In 2022 B+N acquired the Polish Inwemer System group and the Bulgarian i-Facility EOOD facility management providers.

The rating assessment includes a negative rating adjustment of one notch reflecting several concerns, including key person risk and limited transparency on B+N’s reporting, dividend policy and financial policy, exemplified by the late publications of the audited 2021 financial statements and previous dividends categorized as other expenses (ESG factor).

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

Outlook and rating-change drivers

The Outlook for B+N is Stable and incorporates Scope’s view of a relatively stable indebtedness level characterised by a Scope-adjusted debt/EBITDA ratio between 1-2x for the following years with the amortisation of the 2031 bond starting in 2024.

A positive rating action could be warranted if B+N’s financial policy became more transparent about financial reporting and the group’s dividend payment strategy. However since the one notch adjustment also reflects the key person risk associated with the management, such an action is unlikely for the time being. Additionally, a positive rating action could result from the improvement of B+N’s business risk profile, either through market share or improved diversification.

A negative rating action could occur if the Scope-adjusted debt/EBITDA ratio rose above 2.5x on a sustained basis or through the recurrence of liquidity issues. Such an increase in leverage could be triggered by an increase in debt (e.g. a debt-funded acquisition).

Long-term debt ratings

Scope has upgraded B+N’s senior unsecured debt rating to BB from BB- under review for a developing outcome, based on the issuer rating and an ‘average’ recovery expectation for this debt category. The recovery analysis is based on a hypothetical event of a company default in 2024. The senior unsecured debt category mainly includes the HUF 10bn bond placed in 2019 (10-year tenor, 2.9% coupon) and the HUF 13.2bn bond placed in 2021 (10-year tenor, 3.5% coupon), both issued under the Hungarian Central Bank’s Funding for Growth Scheme.

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 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Vivianne Kapolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 October 2019. The Credit Ratings/Outlook were last updated on 18 October 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.

Conditions of use/exclusion of liability
© 2023 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.