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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating to BB-/Stable from B+/Stable on Global Refuse Holding Zrt. (GRH). Scope has also upgraded the HUF 3.5bn senior unsecured guaranteed bond rating to BB from B+ and has withdrawn the senior unsecured debt category rating of B, due to business reasons.

Rating rationale

The upgraded reflects GRH’s improved financial risk profile driven by stronger credit metrics in 2023-2025 and the well-integrated recent acquisition of Eltex Zrt. Scope also considers GRH’s ability to maintain its leverage in the 2-3x range as measured by Scope-adjusted debt/EBITDA, while Scope expects its interest cover ratio to be above 7x in the period 2022-2025. However, the comparatively weaker business risk profile continues to constraint the rating.

GRH’s business risk profile is supported by the increasing need for recycling, especially of industrial waste, in line with global sustainability megatrends towards a circular economy (positive ESG factor). GRH’s market position is secured by its strong position in the Békés region in Hungary despite its rather limited size. The group’s cash flows are protected by the large exposure to public cleaning, municipal waste collection and transportation, which is less volatile, and by long-term contracts with a high likelihood of being renewed, given its strong position in the service territory and possession of key infrastructure.

With GRH serving about 92% of the region’s population and operating the only major landfill site in Békés county, the group holds a strong position in its service territory. However, the diversification of contracts by source is weak. Almost all of the group’s contracts are municipal contracts and there are no existing major contracts with industrial clients, indicating some customer concentration risk.

GRH’s geographical diversification remains limited to a single region in Hungary. Moreover, GRH’s limited scale compared to its close peers remains a main rating constrain and is reflected by a negative one-notch adjustment on the standalone rating. However, the group is improving diversification in its services portfolio by combining supplementary business services, such as winter road cleaning, waste container rental and waste yard operations, with its municipal waste management segment. If GRH’s (via Tappe) application is accepted to become a regional coordinator under the new concession system being launched in July 2023, GRH’s market position and diversification could improve.

The sustainability of landfill – the group’s highest margin activity – is questionable due to its many adverse environmental effects (negative ESG factor). This activity also creates some margin concentration. Moreover, the recycling-related project was not realised due to the current adverse economic situation, while reduced revenue contributions are expected from waste trading subsidiary GRM, as the prices of recycled waste have significantly softened. Therefore, the robust margin profile that GRH has maintained in the past is expected to slightly ease in 2022 and 2023 with inflationary pressure from soaring energy and staff expenses. Moreover, the loss of additional margins from a cancelled recycling-related project will also contribute to the margin contraction. All in all, the EBITDA margin is expected to gradually recover towards 25% in 2024.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view on GRH’s comparatively stronger credit metrics in 2023-2025. The Outlook also considers GRH’s ability to maintain the leverage below 3.0x. The Outlook is further driven by GRH’s strong revenue generation capacity driven by its prominent position as a regional municipal waste management company and the well-integrated recent acquisition of Eltex Kft.

A positive rating action rating could be warranted if the group strengthened its business risk profile, which could possibly remove the negative one notch adjustment due to its limited scale.

A negative rating action could result from a deterioration in the group’s leverage (Scope-adjusted debt/EBITDA) above 3.5x for a prolonged period, as the result of weaker profitability or a further increase in debt.

Long-term debt ratings

The debt instrument rating of BB for GRH’s senior unsecured guaranteed bond is one notch above the group’s issuer rating, reflecting an ‘above-average’ recovery for this bond in the event of a hypothetical default. Scope’s recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2024. Short-term and long-term debt (excluding the bond issue) raised from financial institutions and other financial liabilities such as trade payables rank higher than senior unsecured debt. Hence, such debt would be repaid first.

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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities' Related Third Parties 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: Charitha Gamage, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 20 December 2021. The Credit Ratings/Outlook were last updated on 24 January 2022
The Senior Unsecured Debt Credit Rating was first released by Scope Ratings on 20 December 2021. The Credit Rating was last updated on 24 January 2022. 
The Senior Unsecured Guaranteed bond was first released by Scope Ratings on 24 January 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.