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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 underlying market of construction in Hungary significantly weakened in 2023. The substantial deterioration of its backlog since 2022, aggravated by the cancellation of significant projects early in 2023, weakened its credit metrics.

The rating remains under review for a possible downgrade due to the slow recovery of the order backlog, which raises concerns on Vasútvill’s business viability and increases uncertainties regarding future development.

Vasútvill has obtained a HUF 1.1bn contract in Q4 2023, while management is looking for subcontracting opportunities in neighbouring countries. A separate company owned by Zsolt Homlok, majority owner of Vasútvill, is participating in several tenders at various bidding stages. If successful, new orders would benefit Vasútvill’s orderbook given this company’s role as subcontractor. An order in Bulgaria was also won by a consortium in which Vasútvill’s majority shareholder holds a 40% stake.

Despite some progress, a fast recovery of public procurements in Hungary does not seem feasible given the political risk that exacerbates uncertainty over receipt of billions of euros of EU funds, which have historically been crucial for financing projects in Hungary. Other countries appear more viable, mainly Bulgaria and Serbia, where European Union funds are supporting the development and modernisation of transport infrastructure. Activity in the first quarter of 2024 will be decisive for Vasútvill’s performance. The company also had to scale back due to the cancellation of main contracts, 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. The 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) the limited backlog, mostly comprising small short-term projects.

The issuer’s financial risk profile has weakened significantly. Vasútvill has recorded losses for the past quarters, and 2023 revenues will remain weak. Cash flow has been negative since 2022, and Scope forecasts it will remain negative in FY 2023. Vasútvill’s cash flow plan for 2023 and Q1 2024 shows a reliance on i) a handful of minor projects in execution; ii) compensation for cancelled projects totalling about HUF 620m; and iii) receivables collection from Rafinanz CZ. The situation has not significantly improved since the last review in September 2023. Scope also notes that there is the risk that the cash flow plan is not executed on time and that a recovery in 2024 might fall short of expectations due to unsuccessful tenders and uncertainty around the timing of a recovery in construction.

A dispute between Vasútvill’s ultimate owners has aggravated this situation, causing a main customer (R-Kord) to terminate major contracts. In September 2023, Vasútvill’s main shareholder communicated its intention to acquire the minority stakes, which, if successful, could improve Vasútvill’s ability to secure operations, allowing the management to make clear signs of commitment to Vasútvill.

Given the low revenues and negative cash flow, maintaining enough liquidity to withstand these turbulent times will be crucial. Available sources of liquidity consist of HUF 145m of cash as at November 2023, which will cover monthly fixed costs of HUF 80m-90m, with no significant upcoming financial obligations in Q4 2023. Vasútvill expects to gather HUF 620m for compensation for cancelled projects in the next few months and the intercompany receivable from Rafinanz CZ is always available to support liquidity (HUF 100m disbursed in November 2023; HUF 210m available). These sources would cover the bond interest payment of HUF 90m in February 2024. Upcoming short-term maturities are also manageable. Scope expects the company to maintain low short-term debt and ensure enough liquidity to cover it.

Under review for a possible downgrade

The issuer rating remains under review for a possible downgrade. Scope aims to resolve the under-review status as soon as possible and latest before end-February 2024, assessing also the business profile’s viability. Scope will continue to closely follow developments in the company’s operations, in particular: i) its order intake, with signed contracts reflecting the ability to secure future operations; ii) Vasútvill’s new ownership structure, as communicated by the management; and iii) whether receivables are paid in a timely manner and ensure liquidity at all times.

A downgrade of at least one notch might result from i) an inability to achieve a fast recovery in business conditions; and/or ii) liquidity issues. This could happen if i) Vasútvill failed to secure national or international business; and/or ii) no agreement is reached at ownership level; and/or iii) cash sourcing is delayed, putting pressure on liquidity.

A rating confirmation could occur if liquidity were sustained at or above 100% and would reflect Scope’s expectation that, despite the current market pressure, new orders will help to return the top line to at least the levels of 2022.

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

Scope highlights that Vasútvill’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have accelerated repayment clauses requiring repayment of 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, (Construction and Construction Materials Rating Methodology, 25 January 2023; General Corporate Rating Methodology, 16 October 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.

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 4 October 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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