The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer rating of Forrás Nyrt to B+/Stable from B/Stable. Concurrently, Scope has upgraded the senior unsecured debt rating to B+ from B.

Rating rationale

The upgrade of the issuer rating follows a series of acquisitions in the manufacturing sector in 2022-23, along with a build-up of the solar portfolio. The latter comprises 29 solar parks with 40 MW production capacity, with the construction phase fully completed in June 2023. Scope forecasts total cost coverage at around 2.0x, benefitting from higher recurring cash income from interest and dividends.

The business risk profile (assessed at B+; revised from B) is supported by the portfolio’s sustainability, reflecting relatively low concentration on a single subsidiary in terms of cash interest and dividend income. A high number of income-generating core holdings, along with a high proportion of income-generating assets in the portfolio (close to 90%), makes cash flow more resilient to sector shocks while making portfolio performance less dependent on individual companies. The top core holding with the highest income concentration is Aquila New Energy, which generated 25% of recurring cash income in 2022. The business risk profile is also supported by the improved diversification of holdings across sectors and industries as a result of the acquisition of Kiss és Társa Kft. (capital goods sector) and Váll-Ker Kft. (manufacturer of durable consumer products) on top of the existing commercial real estate and renewables portfolio. Top core holding concentration is low as the three top holdings (Aquila New Energy, Kreditor and Studio V) account for 38% of gross asset value as of YE 2022.

The business risk profile is constrained by low geographical diversification, with a primary focus on the Hungarian market. The liquidity of holdings is another constraining factor. As of YE 2022, Forrás holds the vast majority (around 90%) of its gross asset value in private/unlisted companies and real estate assets. Scope deems this credit-negative in terms of liquidity. A situation requiring urgent liquidation is rather remote. However, if a liquidation did become necessary, it would be caused by a severe downturn in the financial performance of the newly acquired industrial assets. In a hypothetical situation like this, Scope deems demand for such (likely loss-making) small industrial assets to be weak. Scope flags the complex corporate structure as a potential risk factor as it incorporates different businesses, consolidation forms and financing structures (ESG factor: credit-negative).

The financial risk profile (assessed at B+; revised from B) benefits from total cost coverage that is expected to rapidly improve after 2022 due to: i) dividend inflows from the newly acquired manufacturing companies; ii) all the PV plants in the solar portfolio becoming operational and paying interest after the intercompany loans; and iii) yields from the financial asset portfolio. Cash interest payable is assumed to be flat going forward as Forrás has not shown any intention of contracting additional interest-bearing debt at this point. The positive impact from the increase in recurring cash income is expected to move total cost coverage above 2.0x.

The Scope-adjusted loan/value (LTV) ratio remains the weak point in the financial risk profile. The corporate guarantee behind the loans taken out by Aquila New Energy and Miklósfai increased Scope-adjusted debt (HUF 9.2bn in forecasted for 2023) on top of the HUF 21.7bn central bank bond, moving the LTV ratio to near 60%. High leverage is mitigated by the fact that most assets in the LTV calculation are kept at book value and are thus significantly undervalued. No valuation is available for the real estate portfolio and the 23 MW PV plant.

The combination of no material financial debt maturities prior to 2030 at the holding company level and high levels of unrestricted cash on a sustained basis in Scope’s base case scenario results in adequate liquidity within the rated entity. Scope nevertheless flags the substantial maturity wall, with close to 100% of external financial debt due in 2030.

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

Outlook and rating-change drivers

The Outlook is Stable and encompasses the assumption that Forrás’ credit metrics will develop in line with Scope’s base case forecast, resulting in total cost coverage of around 2.0x and an LTV ratio of below 60% in 2023. Scope’s forecast does not include any acquisitions or divestments beyond 2023 due to limited visibility on the company’s medium-term investment portfolio management strategy.

A positive rating action is remote at this stage but could be justified in case of better visibility of the medium-term strategy/investment philosophy and a rigorously established financial policy at the core investment level, while the LTV would decrease to below 50%.

A negative rating action could occur if total cost coverage deteriorated to below 1.0x on a sustained basis. This could be the result of smaller-than-expected cash contributions from the newly acquired companies in the manufacturing sector, caused by adverse industry trends or further delays in capital deployment. A negative rating action could also occur if the LTV ratio rose above 70%, caused either by asset divestments or an increase in Scope-adjusted debt.

Scope notes that the senior unsecured bond Forrás issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires Forrás to repay the nominal amount (HUF 21.7bn) within 30 days if the bond rating falls below B-, which could have default implications.

Long-term debt rating

Forrás issued a HUF 21.7bn senior unsecured corporate bond under Hungary’s Bond Funding for Growth Scheme in October 2020. The bond’s tenor is 10 years, with 10% of its face value to amortise from 2027. The coupon is fixed (3.2%) and payable yearly. The bond proceeds have been deployed for acquisitions in the renewables, real estate and manufacturing sectors.

Scope rates the senior unsecured debt issued by Forrás Nyrt at the same level as the issuer rating. Scope has computed an ‘average’ recovery for senior unsecured debt holders in a liquidation scenario. Senior unsecured debt at the holding company level is structurally subordinated to debt at the subsidiary level, constraining the debt rating.

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 and Investment Holding Companies Rating Methodology, 19 May 2023), 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, 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 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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 22 June 2020. The Credit Ratings/Outlooks were last updated on 27 June 2022.

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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