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Rating action

Scope Ratings GmbH (Scope) has maintained its B- issuer rating on Hungarian construction company Vasútvill Kft under review for a possible downgrade. Scope has also maintained the senior unsecured debt rated B- under review for a possible downgrade.

Rating rationale

Vasútvill’s business environment significantly weakened in 2023. As outlined in the last review, the company’s situation has worsened since early 2023 due to the cancellation of its participation in significant projects, resulting in a substantial deterioration of its backlog and a very limited visibility on its financial risk profile.

Vasútvill’s pipeline of projects is affected by the shrinking pool of public construction projects in Hungary, a result of general budget restrictions and uncertainty surrounding EU funds. A dispute between Vasútvill’s ultimate owners is aggravating this situation, potentially causing a main customer to terminate major contracts and severely limiting the issuer’s ability to secure public infrastructure projects in Hungary in the future.

The company is participating in various tenders in several bidding stages (worth around HUF 10bn), some of which are expected to be signed by end-2023. In addition, Vasútvill’s management is looking for opportunities in neighbouring countries, where the company would act a subcontractor. Scope does not see a fast recovery in Hungary as feasible, given the still low visibility on the timing of a recovery in public procurement. But activities in other Central and Eastern European countries, where European Union funds will further support the development and modernisation of the transport infrastructure, might be more viable. Scope notes that the cancellation of Vasútvill’s main contracts has also forced the company to scale back, which could cause problems once operations normalise.

Vasútvill’s business risk profile remains constrained by its small scale in both the European and Hungarian context, which weakens its ability to mitigate economic cycles and changing market conditions. Limited size is a negative rating driver as it implies greater sensitivity to unforeseen shocks, greater cash flow volatility and limited economies of scale. Weak diversification is a further constraint given i) a lack of geographical diversification; ii) the reliance on one end-market; and iii) limited backlog comprising small short-term projects.

The issuer’s financial risk profile has weakened significantly in the last twelve months, driven by a declining cash flow, which turned negative in 2022 and is expected to remain negative in FY 2023. Vasútvill has provided Scope with a cash flow plan for 2023, which shows the company’s reliance on a handful of minor projects in execution; compensation for cancelled projects totalling about HUF 1.4bn (around HUF 700m already disbursed); and the disposal of raw materials and machineries to generate operational cash flow that could cover operational expenses. The situation has not significantly improved since the last review in June 2023 and Scope notes the risk that the plan might not be executed on time and that the expected recovery in 2024 may not meet current expectations due to unsuccessful tenders and uncertainty around the timing of a full construction market recovery.

Given negative cash flow and a deterioration in credit metrics, preserving enough liquidity to get through these turbulent times will be crucial. Available sources of liquidity consist of HUF 256m as at end September 2023. This will cover monthly fixed cost of HUF 80m-90m, with no significant upcoming financial obligations in Q4 2023 and a bond interest payment of HUF 90m due in February 2024. Vasútvill expects to gather additional HUF 720m in Q4 2023 corresponding to pending compensation for cancelled projects. On top of that, Scope understands that the intercompany receivable from Rafinanz CZ (HUF 395m) is available anytime to support the company’s liquidity. Given the long maturity of the bond, upcoming short-term maturities will be manageable. Scope expects the company to maintain low short-term debt and ensure that such debt is covered by available liquidity.

Outlook and rating-change drivers

The issuer credit rating remains under review for a possible downgrade. Scope expects to resolve the under review status within the next two months, assessing especially the business profile’s viability. Scope will closely follow developments in the company’s operations, in particular: i) its order intake, with successfully signed contracts in the next two months, reflecting the company’s ability to secure future operations; ii) changes in the company’s ownership structure, with documented progress in the negotiations; and iii) whether receivables are paid in a timely manner and ensure the company’s liquidity at all times.

A downgrade of at least one notch might result from an inability to achieve a fast recovery in business conditions and/or from liquidity issues. A downgrade could occur if i) Vasútvill failed to secure national or international business and/or; ii) there were delays in cash sourcing, putting pressure on liquidity.

A rating confirmation could occur if liquidity were sustained at or above 100% at all times and would reflect Scope’s expectation that the issuer, despite the current market pressure, will restore a minimum level of order book guaranteeing top-line figures in line with those of 2022.

An upgrade is remote and would require the company’s order backlog to recover quickly, thereby improving operational visibility.

Scope notes that Vasútvill’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have several accelerated repayment clauses. The clauses require the issuer to repay the nominal amount (HUF 3bn) if the rating deteriorates (two-year cure period for a B- rating, repayment within 90 days below B-).

Long-term debt ratings

The rated entity issued a HUF 3bn senior unsecured corporate bond (ISIN HU0000360151) in 2021. The bond terms include a yearly amortisation of 20% 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. Even though asset values are high (machinery valued at HUF 3.9bn as at March 2023), liquidation would occur at distressed prices in a default. Scope has maintained the unsecured debt class rating at B- in line with the issuer rating.
 
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, (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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings were first released by Scope Ratings on 7 July 2020. The Credit Ratings were last updated on 6 July 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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