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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB issuer rating of B+N Referencia Zrt. (B+N), changing the Outlook to Negative from Stable. Scope has also affirmed the BB senior unsecured debt rating of B+N.

Rating rationale

The Negative outlook change is prompted by the deterioration of the group’s financial risk profile paired with the continued inadequate liquidity assessment. In 2023E Scope-adjusted EBITDA margin is forecasted to drop to 8% (compared to 11% in 2022) causing Scope-adjusted debt/EBITDA to rise to around 2.6x (above the negative rating trigger of 2.5x) before returning to below 2x by 2024 as profitability is expected to gradually recover. Operating profitability suffers from the persisting high inflationary environment’s impact on their fixed price contracts. Such contracts are typically long-term (between 3-5 years) and the continued increase of costs put pressure on the margins. The drop in profitability was further caused by the previously expected loss in business in the fit-out division. The reduced cash generation of B+N paired with its historically high cash flow swings put pressure on the group’s cash flow coverage and negatively impacts its liquidity.

B+N’s business risk profile (assessed as BB-) remains the main constraint of the issuer rating. B+N as a facility management service provider operating in the business services industry. The business risk profile continues to benefit from the group’s good operating profitability and market position. The weak diversification of B+N hinders the business risk profile assessment as even though the group’s active M&A strategy has resulted in the continuous decrease of the domestic market’s contribution, approximately 75% of the group’s revenues still originated in Hungary in 2022. Furthermore, although the group has a broad service portfolio all of them belong to the broader facility management services. Finally, the customer concentration and public contract dependence remains high which further enhances the key person risk (ESG factor).

The high inflationary environment which was already present in 2022 considerably impacted B+N’s operating profitability in 2023. The margin of those long-term fixed price contracts which have been agreed upon in previous years continuously deteriorated, leading to an expected stressed Scope-adjusted EBITDA margin of 8% in 2023. This trend was further intensified by the decrease in the fit-out division (of which many mandates were previously agreed-upon fixed price contracts) and a significant client lengthening its contract with unfavourable pricing conditions by one year. Going forward Scope expects that the unfavourable market conditions will continue to impact B+N’s operating profitability, however a gradual improvement from 2023’s Scope-adjusted EBITDA of 8% is expected, to 9% and 9.5% in 2024 and 2025, respectively.

B+N’s financial risk profile (assessed as BBB+) is expected to deteriorate in 2023E in line with its Scope-adjusted EBITDA margin. As operating profitability is expected to start recovering in 2024E, the credit metrics are forecasted improve as exemplified by Scope-adjusted debt/EBITDA increasing to below 2x from around 2.6x in 2023E. The financial risk profile continues to be supported by the group’s strong interest coverage (measured by Scope-adjusted EBITDA/interest cover) which is forecasted to be above 10x by 2024E (in 2023E the credit metric drops to around 9x) as majority of the debt portfolio has favourable, subsidised fixed interest rates.

The main constraints of the financial risk profile are the relatively weak cash flow cover (measured by Scope-adjusted free operating cash flow/debt) together with the inadequate liquidity of B+N. The stressed cash generation of B+N paired with the historically volatile working capital changes negatively impact its cash flow coverage. In 2023E the cash flow cover is forecasted to improve significantly from its 2022 level of -15% and will trend between 7% and 27%. The large swings in working capital also effect B+N’s liquidity. Although year-end liquidity is seen as adequate, with sufficient internal and external funds to cover short-term debt obligations, the intra-year liquidity was at times inadequate (cash and cash equivalent levels in 2022 year-end were HUF 22.4bn versus HUF 5.6bn in H1 2023). In 2023 B+N also utilized parental support to temporarily boost its cash levels (ESG factor). Scope notes that the bonds under the Bond Funding for Growth Scheme start amortising in 2024 and 2026 with HUF 1.65bn and HUF 2.5bn, respectively.

In 2023 B+N acquired two smaller targets (Tespranet Services and Tespranet Landscaping s.r.o.) in the Czech Republic and Sagad s.r.l. in Italy, partly financed by debt (~HUF 1.7bn).

The rating assessment includes a negative rating adjustment of one notch reflecting several concerns, including key person risk and limited transparency on B+N’s reporting, dividend policy and financial policy, exemplified by previous dividends categorized as other expenses (ESG factor).

On 15 January 2024 a new sector rating methodology for European business and consumer services was published, however it does not have an impact on B+N’s business risk profile and issuer rating.

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

Outlook and rating-change drivers

The Outlook for B+N is Negative and incorporates Scope’s view of leverage measured by Scope-adjusted debt/EBITDA ratio deteriorating to above 2.5x in 2023, a deteriorated cash flow cover and its continued liquidity concerns given the group’s many government-related customers.

A downgrade could occur if the Scope-adjusted debt/EBITDA ratio fails to recover to below 2.5x. This may be caused by an increase in debt (e.g. working capital financing).

A positive rating action could be warranted as follows: i) a return to a Stable Outlook would require the recovery of leverage to below 2.5x on a sustained basis; or ii) further ratings upside would require adequate liquidity or the removal of the negative notch assigned for the key person risk and lack of transparency, however this is currently deemed as remote.

Long-term debt rating

Scope has affirmed B+N’s BB senior unsecured debt rating based on the issuer rating and an ‘above average’ recovery expectation for this debt category. Although the ‘above average’ recovery allows for a one-notch uplift compared to the issuer rating, no uplift is made due to the negatively assessed financial policy of B+N and the risk related to the integration of its newly acquired subsidiaries.

The HUF 10bn senior unsecured bond (ISIN: HU0000359419) was issued in December 2019 and the HUF 13.2bn senior unsecured bond (ISIN: HU0000360623) in June 2021, both through the Hungarian central bank’s Bond Funding for Growth Scheme.

Bond proceeds were used for refinancing loans, financing acquisitions and investment capex. Both bonds have tenors of 10 years and fixed coupon rates of 2.9% and 3.5%, respectively. The bond repayment schedule for HU0000359419: in four equal instalments with 25% of the face value payable yearly starting in the seventh year. The bond repayment schedule for HU0000360623: in eight equal instalments with 12.5% of the face value payable yearly starting in the third year. The bonds start amortisation in 2026 and 2024, respectively.

Scope notes that both senior unsecured bonds have an accelerated repayment clause if the debt rating fell below B+. The clause requires repayment of the nominal amount (HUF 10bn and HUF 13.2bn) in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 5 business days after the bond rating falls below B-, which could have default implications). Bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control, dividend payment and asset covenants.

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 Outlook, (General Corporate Rating Methodology, 16 October 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 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 Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 October 2019. The Credit Ratings/Outlook were last updated on 20 January 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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