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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian construction company Vasútvill Kft. to B+/Negative from BB-/Negative. At the same time Scope has downgraded the senior unsecured debt rating to B+ from BB- .

Rating rationale

The rating downgrade to B+ from BB- of Vasútvill’s issuer rating is mainly driven by the deterioration of its financial risk profile following the significant decline in new orders received amid limited visibility reflecting the company’s strong dependence on single customers and public (EU funded) infrastructure projects, that weakened cash flows, financial credit profile and, ultimately, deteriorate issuer rating.

Vasútvill's construction activities slowed down in 2022. Revenues, based on preliminary figures, amounted to HUF 5.9bn (28% below Scope’s rating case), and EBITDA stood at a low HUF 0.2bn (55% below Scope’s rating case). At this stage, Scope expects revenues to remain weak in 2023, due to the recent cancellation of its participation in three significant projects in its pipeline, as well as the short and concentrated backlog that offers only limited visibility on revenues.

Vasútvill’s business risk profile (assessed at B) remains constrained due to its small scale in both a European and Hungarian context, which weakens its ability to mitigate economic cycles. Limited size is a negative rating driver because it implies greater sensitivity to unforeseen shocks, greater cash flow volatility and limited economies of scale. Weak diversification is a further constraint, namely: i) a lack of geographical diversification; ii) the reliance on one end-market; and iii) the concentrated customer portfolio and backlog mostly dependent on government decisions. Also credit-negative are the weaker backlog and profitability assessment given the medium-term trend of deteriorating margins.

Profitability, as measured by the Scope-adjusted EBITDA margin, remained weak and below 5%, based on preliminary figures. In the view of Vasútvill’s shrinking revenues and cost structure, with a strong fixed cost base (mainly salaries), operating leverage will again hurt operating profit (EBITDA) in 2023 and likewise decrease the projected cash flow generation.

The pipeline of contracted projects stood significantly below levels compared to prior years (HUF 22bn in 2021 and HUF 32bn in 2020). In addition, on 3 March¹ the company announced that the contractor R-KORD Kft. has terminated its business contracts related to the projects ‘Püspökladány – Biharkeresztes’ and ‘Vác substation’ with effect from 29 March 2023 and more recently, on 14 March², the announcement that Opus Titász Zrt. has cancelled Vasútvill’s business contract for ‘Nyíregyháza Ipari Park 2.’. The cancellation of the contracts raises significant capacity concerns about Vasútvill's railway overhead line installation business. The company intends to allocate freed capacity to other market players’ projects in the next months and, if not successful, to scale back operations. Vasútvill is negotiating other projects in Hungary (totalling about HUF 6.5bn in potential orders) and plans to look for opportunities in other neighbour countries, as confirmed by management. However, Scope does not see a fast recovery as feasible, given the still low visibility on the timing of a recovery in public procurement and the normal delay between the award of a new order and its execution.

The shrinking revenues in 2022 and expected weak performance in 2023 impact the financial risk profile (assessed at B+), as Scope-adjusted debt/EBITDA is expected to deteriorate to above 10x at YE 2022 and remain high in 2023. Interest cover was strong in FY 2022, as money on deposit benefitted from the sharp rise in Hungarian interest rates. Interest cover is, however, expected to suffer from a sharp deterioration driven by shrinking operating EBITDA generation.

Credit ratios in the current environment provide less support than in previous years and Scope’s financial risk profile assessment is clearly focused on the group’s liquidity situation. Current liquidity is still deemed to be adequate and benefits from a conservative debt strategy, as evidenced by a very low debt balance (mostly comprising the HUF 3bn bond issued in 2021 and about HUF 110m of short-term financing leases) against the positive balance of unrestricted cash and cash equivalents (HUF 1.2bn as at December 2022). Short-term securities available in prior years (HUF 1.1bn) were used for the financing of operating expenses, as the total revenue was about HUF 2bn less than forecasted. Vasútvill used its excess capacity on the ongoing projects, and it also performed the revision of the finished projects to fix/prevent any defects during the warranty period. Some cash inflow is expected following the cancelled projects as well as sale of real estate properties (about HUF 2bn). Given the long maturity of the HUF 3bn bond, upcoming short-term maturities will be manageable. Scope expects the company to maintain its low short-term debt levels and ensure that these are covered by available liquidity.

Outlook and rating-change drivers

The Negative Outlook reflects the uncertainty and risk of a sharp worsening in the credit metrics, caused by the potential deterioration in future revenues, given a limited order book for 2023 amid multiple headwinds, including higher input prices and an unfavourable macroeconomic outlook. It also reflects Vasútvill's limited room for manoeuvre in its cost structure, which could lead to a prolonged period of weak profitability with a Scope-adjusted EBITDA margin below 5%. Scope will closely follow developments in the company’s operations and, in particular, its assumptions with regard to a gradual resumption of the order intake in the next quarters.

A downgrade might result from an inability to achieve a fast recovery in business conditions and/or liquidity concerns. This could be triggered by a deterioration in market conditions while no projects are added to the backlog.

A positive rating action, i.e. a revision of the Outlook back to Stable is remote at the moment, but may be warranted if Vasútvill is able to provide a sustained visibility of sales beyond 12 months, i.e. a steady backlog of above 1x enabled by successful tenders, improving operational visibility and supporting profitability with the Scope-adjusted EBITDA margin remaining at above 5% going forward.

Scope notes that Vasútvill’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have several accelerated repayment clauses with potential default implications. The clauses require the issuer to repay the nominal amount (HUF 3bn) in case of rating deterioration (loss of ‘B+’ issuer rating triggers two-years cure period for recovering that rating, otherwise repayment might get triggered; immediate repayment of principal is triggered if rating is below B-).

Long-term and short-term debt ratings

The rated entity issued a HUF 3bn senior unsecured corporate bond (ISIN HU0000360151) in 2021. The bond terms include amortisation of 20% yearly from 2026 until maturity, a fixed annual coupon and a 10-year tenor.

Scope’s recovery analysis is based on a hypothetical default scenario in 2024, factoring in Vasútvill’s liquidation value, and assumed outstanding senior unsecured debt of HUF 3bn. Scope expects an ‘average’ recovery for Vasútvill’s senior unsecured debt. Scope has also downgraded the unsecured debt class rating to B+ (in line with the issuer rating) from BB-.

Rating driver references
1. 3 March 2023 Vasútvill’s announcement on the Budapest Stock Exchange 
2. 14 March 2023 Vasútvill’s announcement on the Budapest Stock Exchange

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 2023), are 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 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 7 July 2020. The Credit Ratings/Outlooks were last updated on 14 June 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
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