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Rating action

Scope has today assigned a first-time BBB-/Stable issuer rating to Hungarian utility Opus Tigáz Zrt. Scope has also assigned a BBB- rating to senior unsecured debt.

Rating rationale

Opus Tigáz’s creditworthiness benefits strongly from its regional monopolistic position as the largest natural gas distributor in Hungary, with a network representing 42% of the national grid and covering the distribution of 32% of domestic gas consumption. The business risk profile (assessed at BBB+) is negatively impacted by the regulatory framework, which does not provide a timely recovery of incurred costs via regulated tariffs. Lower profitability since 2022 follows from an increased cost base due to significantly higher costs associated with gas distribution losses, as well as from inflation and a relatively low weighted-average cost of capital of 3.24%. Additionally, according to the regulatory framework, Opus Tigáz’s does not envisage cost recovery related to grid losses until the next regulatory period.  

Scope expects that after 2023, the pressure on profitability will ease on the back of a slight improvement in the cost base. This is driven by the expected drop in price of purchased gas to cover grid losses and operational initiatives aimed at sustained efficiency gains, including the launch of a shared service centre.

Opus Tigáz’s financial risk profile (assessed at BBB) is constrained by increased leverage. Scope expects leverage, as measured by Scope-adjusted debt/EBITDA, to deteriorate to 3.4x-4.0x in the projected years compared to 2.7x-3.0x in 2020-2022. Scope projects a peak in Scope-adjusted debt/EBITDA for 2023 at 4.0x due to grid losses and the significant growth of remaining operating expenses, especially contracted services. The main driver of increasing leverage is the strong inflation in Hungary (25.2% in February 2023), resulting in EBITDA that will likely be lower in 2023, at HUF 11.8bn, compared to HUF 13.8bn-17.4bn between 2020-2022. Leverage is then likely to improve to below 4.0x after 2023, albeit remaining higher than historical levels. The EBITDA improvement following the drop in prices of purchased gas to cover network losses will likely support leverage from 2024 onwards. Pressure on leverage will also ease as the HUF 50bn issued bond continues to amortise whereby amortisation is expected to be covered by cash.

The pressure on profitability will also put forecasted free operating cash flow under pressure, likely resulting in negative cash flow cover in 2023, additionally driven by temporarily high capex of HUF 9.8bn. Beyond 2023, free operating cash flow is expected to recover slightly thanks to an EBITDA improvement and a less extensive capex plan in 2024 and 2025.

Debt protection – as measured by EBITDA interest cover – supports the financial risk profile. Through a bond issuance of HUF 50bn in 2021, Opus Tigáz was able to source financing at a favourable fixed interest rate of 2.8% compared to the current base rate in Hungary of 13% as of February 2023. In the absence of additional external debt and supported by significant interest income from cash deposits, the company’s debt protection should remain comfortable at well above 7.0x.

Liquidity is adequate. The debt maturity profile is manageable with gradual bond amortisation: 3% (HUF 1.5 bn annually) over 2023-2026; 9% (HUF 4.5 bn annually) over 2027-2030; and a 49% (HUF 24.5 bn) bullet repayment in 2031. Scope expects full coverage of short-term debt maturities with cash and a EUR 9m undrawn back-up credit facility (around HUF 3.5bn).

Parent support is deemed as neutral for the rating. Opus Tigáz is fully owned by Opus Global Nyrt (rated BB/Stable by Scope), a Hungarian investment holding company, that apart from shareholdings in Opus Tigáz (energy sector) owns other companies exposed to various sectors including construction, food processing and tourism. Scope does not consider any credit-negative factors that would constrain OPUS Tigáz’s issuer rating at the level of the parent given the large operational and financial independence from the parent and no sign that OPUS Tigáz’s creditworthiness would be hampered by that of OPUS Global.

Finally, a weak market position compared to international peers under Scope’s coverage limits the rating. This is especially driven by Opus Tigáz’s exposure to the vulnerabilities of the Hungarian economy as reflected in Scope’s downgrade of Hungary’s sovereign rating to BBB/Stable from BBB+/Negative. This is reflected through a negative one-notch adjustment to the BBB standalone credit assessment pertaining to peer context.

At the moment, no company-specific ESG factors have a substantial impact on the credit risk assessment.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Opus Tigáz will maintain leverage within 3.4x-4.0x between 2023 and 2025.

A higher rating could be warranted if the financial risk profile improved, as signalled by leverage moving to around 3.0x, following Scope’s expectation of deleveraging by improving EBITDA and free operating cash flow over the next two to three years. A positive rating action could also be triggered by an improvement of Scope’s sovereign rating on Hungary.

A negative rating action could result from permanently weaker credit metrics, such as leverage sustained significantly above 4.5x, or a significant worsening of Hungary’s sovereign credit strength.

Long-term debt rating

Scope has assigned a senior unsecured debt rating at BBB-, the same level as the issuer rating. Opus Tigáz is the sole issuer of public debt. Opus Tigáz issued a HUF 50bn bond (HU0000360292) in 2021. The bond’s tenor is 10 years, maturing in March 2031, and carries a fixed coupon of 2.8%. The bond includes a pari passu, cross-default, negative pledge clause.

Under the bond’s terms, if the debt category rating of the issuer fell below B+, the issuer would not be entitled to pay dividends and draw down additional debt. The company would be obliged to repurchase the bond at its pre-maturity repurchase price if the debt’s rating did not improve within two consecutive years of the downgrade. Furthermore, if the debt category rating fell to CCC or below, the issuer would be obliged to repurchase the bond at its pre-maturity redemption price. Given the currently vast headroom to the covenant, there are currently no concerns about any near-term covenant breach.

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 Outlook, (European Utilities Rating Methodology, 17 March 2023; General Corporate Rating Methodology, 15 July 2022), 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 Rated Entity and 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 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: Kamila Hoppe, Senior Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 29 March 2023.  
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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