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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary’s GVC George's Venture Capital Zrt.’s (GVC) issuer rating of BB-/Stable. Scope has also affirmed the senior unsecured debt rating at BB-.

Rating rationale

The affirmation is based on the strong operating performance of the company throughout FY 2022, which has carried over into 2023. Despite the notable increase in ccommodity prices (a significant portion of GVC's costs) and given that GVC's business model does not easily allow for adjusting sale prices, the company has showcased its ability to pass on inflationary costs to customers. GVC has successfully renegotiated price increases with key customers, particularly in the public catering segment. Nevertheless, Scope foresees a substantial rise in off-balance sheet debt primarily associated with surety guarantees provided to minority-owned affiliates and private individuals. Scope also anticipates significant cash outflows in the form of shareholder loans. Despite the company's operating performance being much better than expected which might indicate positive rating action, concerns regarding financial policy and transparency (increasing volume of intercompany transactions with the owner, treated as dividend-like payments, and the inter-company guarantees provided, which emerged in 2022) have been factored into Scope's conservative assessment of the financial risk profile effecting also on issuer rating.

GVC's performance in 2022 surpassed expectations, with significant growth in revenue (up 46% YoY) and EBITDA (up 25%). This is partly due to conservative planning in 2022, which was a response to weak operating performance in Q1 2022. Sound operating performance is partially supported by the significant price adjustments observed in contracts from 2022. Additionally, GVC plans to expand into the hospital catering market, which is expected to generate an additional revenue of HUF 0.8bn in 2023. The home delivery service was suspended in January 2023, as market exhibits low demand.

GVC unsuccessfully tried to develop allergen-free food in the acquired food factory (Food Universum), which was mentioned in Scope’s last rating action as a potential integration risk of acquired companies. As a result, in December 2022, management terminated the product development and started exploring alternative uses for the food factory. The execution and integration risks still remain.

GVC’s business risk profile benefits from high EBITDA margins. Margins proved sustainable in FY 2022 when the company demonstrated operating efficiency and managed to keep EBITDA margins above 10% thanks to its ability to make price adjustments with most of their customers, control salary costs via lay-offs and a gradual improvement of gross margins with optimization of supply chain.

GVC's financial risk profile is stronger than its business risk profile due to the cash-generating nature of its business. However, the company's deleveraging efforts are constrained by significant off-balance sheet liabilities that emerged in FY 2022, resulting in a leverage ratio of approximately 3.7x. The delayed integration of acquired entities Food Universum and PVK Horog Kft. also limits EBITDA. Scope anticipates that leverage, as measured by Scope-adjusted debt/EBITDA, will remain below 3.5x in the medium term. The assessment of leverage does not include the netting of cash, as the high cash balance is expected to be partly utilised rather than serve solely as a liquidity buffer.

Scope believes intercompany loans provided to agri-business arm would have a limited positive impact on GVC’s financial risk profile. Although management communicated 3% interest on intercompany loans without the arm’s length principal, interest could be cumulative and have no cash effect in the short-to-medium term. As a result, Scope has left potential cash interest income out of its calculations.

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s expectation that Scope-adjusted debt/EBITDA will remain below 4.0x and continue to gradually decrease.

A positive rating action could follow an improvement in the business risk profile, driven by increasing operating profitability or revenue stream diversification with less exposure to public tenders. A positive rating action could also be warranted if leverage fell below 3.0x. To achieve any rating upgrade, GVC would need to resolve financial policy and/or transparency related concerns.

A negative rating action could result from leverage consistently reaching above 4.0x. Weak financial performance could be triggered by an adverse change in regulations and/or macroeconomic conditions, further increasing input costs and putting operating profitability under pressure.

Long-term debt rating

Scope has affirmed the debt rating of senior unsecured debt issued by GVC George's Venture Capital Zrt’s. at BB-, in line with the issuer rating. This rating is based on a hypothetical liquidation scenario as of end-2024, in which Scope computed an ‘average’ recovery for holders of senior unsecured debt based on its assumptions of attainable liquidation values.

Scope notes that GVC’s senior unsecured bond issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires the company to repay the nominal amount in case of a rating deterioration of the bond rating below B+ (two-year cure period for a B/B- rating; repayment within 10 business days after the bond rating falls below B-, which could have default implications). From today’s perspective, there is good headroom to a potential covenant breach considering the current BB- rating for senior unsecured debt (which is also applicable to the bond) as well as the underlying BB-/Stable issue rating¹.

¹Editorial note: we added a paragraph to the section ‘Long-term debt rating’ on 18 October 2023. In the original publication, this paragraph was missing.

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: Zurab Zedelashvili, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 September 2020. The Credit Ratings/Outlook were last updated on 28 July 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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