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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Global Refuse Holding Zrt. (GRH) at BB- and changed the Outlook to Positive from Stable. Scope has also affirmed the HUF 3.5bn senior unsecured guaranteed bond (ISIN: HU0000361316) rating at BB.

Rating rationale

The Outlook change to Positive is driven by Scope’s expectations about GRH securing the long-term municipal regional coordinator status in the new Hungarian waste management system, resulting in increased transparency concerning future revenue generation capabilities. Additionally, the issuer has indicated providing audited, consolidated financial statement from H1 2024, resulting in enhanced insight into the group’s financial performance. Scope forecasts that the improved revenue generation will result in the financial risk profile stabilizing at a solid level, with Scope-adjusted debt/EBITDA around 1.5x, and Scope-adjusted EBITDA interest cover ratio sustainably above 9.0x.

GRH’s business risk profile (unchanged at B+) is supported by its secure local market position protected by the changes in the Hungarian waste management system. From July 2023 waste management has been transformed into a concession-based system, where MOL Plc’s subsidiary MOHU MOL Hulladékgazdálkodási Zrt. (‚MOHU’), as a sole concessionaire, is responsible for operating the municipal waste management on a national level till 2035. Following a public tender, MOHU granted the regional waste management operation in Békés county to Tappe Kft., direct subsidiary of GRH. Tappe also provides regional coordination services to MOHU in Békés, Hajdú-Bihar and Szabolcs-Szatmár-Bereg county as a concessional subcontractor, significantly increasing the scope and outreach of GRH. The group’s cash flows are protected by the exclusive subcontractor agreement with MOHU, currently a medium-term contract with a high likelihood of being renewed, given its strong position in the service territory and possession of key infrastructure. Taking into consideration the quasi-monopolistic position of Tappe in the field of municipal waste management, revenue stability and predictability is deemed supportive to the business risk profile. Due to the regulatory environment, no company is allowed to provide such service other than the subcontractor of MOHU. This results in low customer churn rate, with high share of recurring revenues, multi-year contracts and no possibility to switch service providers for households in the region. Service integration is high, deemed as an essential service for households (in a similar manner to public utilities), and provided by Tappe and its subcontractors on an exclusive basis. Additionally, there is increasing need for recycling, especially of industrial waste, in line with global sustainability megatrends towards a circular economy (positive ESG factor). Scope highlights that the sustainability of landfill – the group’s highest margin activity – is questionable due to its many adverse environmental effects (negative ESG factor).

The business risk profile is also supported by the operating profitability, stabilising on a lower level following the integration of Éltex to the scope of consolidation. GRH’s overall Scope-adjusted EBITDA margin in 2021 came in around 35% and is composed of waste collection and transport (SaEBITDA margin of 25%) and landfill management (SaEBITDA margin of 44%) and waste trading (50%). Within the new scope, SaEBITDA margin in 2022 was close to 15%. A further deterioration is expected towards 11% based on the preliminary 2023 management accounts, influenced negatively by the historically lower Éltex profitability margin (between 5% - 10%).

The business risk profile is constrained by the limited diversification. In terms of service diversification the group is highly focused on waste management, although within this subsegment, the GRH deals with a wide range of activities (collection, transportation and sorting of municipal and industrial waste, operation of waste disposal sites, additional services related to municipal waste management such as customer service and complaint management). Geographical diversification is limited, with 100% of the revenues generated in Hungary.

The financial risk profile (assessed at BBB+, raised from BBB-) remains supported by robust interest coverage, with Scope-adjusted EBITDA/interest ratio expected to stay above 9.0x sustainably. The interest coverage benefits from the favourable, fixed interest rate of the bonds. Average interest rate in 2023 is expected to be around 4.3%, which is expected to increase close to 6% with the additional debt intake (new loans of Tappe and BVU with an interest rate of 6.5%) in 2024. Leverage, measured by Scope-adjusted debt/EBITDA, is expected to remain between 1.0x and 2.0x in the medium term, positively affected by the amortisation of the Éltex bonds, but negatively affected by the additional debt intake forecasted for 2024 on the subsidiary level. Beyond 2024 a gradual deleveraging is forecasted, in line with the debt amortisation, SaEBITDA remaining relatively stagnant. Cash flow cover, measured by free operating cash flow/Scope-adjusted debt is projected to be volatile till YE 2024 (the end of the current capex-heavy period), heavily impacted by the capital expenditures.

Liquidity is adequate, as sources (HUF 2.0bn unrestricted cash forecasted at FYE 2023 and positive free operating cash flow of HUF 113m forecasted for 2024) fully cover the uses (short-term debt of HUF 347m forecasted for 2024). Scope expects liquidity to stay significantly above 100%, benefitting from strong cash generation and positive free operating cash flow.

Scope highlights that GRH’s senior unsecured guaranteed bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 3.5bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (immediate repayment). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 2 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered. The senior unsecured guaranteed bond issued by GRH has no financial covenants.

GRH’s limited size and outreach compared to other entities rated in the BB rating category hinder its issuer rating, which is reflected by a negative one-notch adjustment on the standalone credit assessment. Scope notes that following the acquisition of Éltex and inclusion of the company in the scope of consolidation GRH has not been able to provide audited consolidated financial statements, resulting in increased uncertainties regarding transparency of financial disclosures (negative ESG factor) leading to a low emphasis of the improved financial risk profile within the credit assessment.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that GRH’s financial risk profile can be sustained at a good level, as signalled by a leverage (Scope-adjusted debt/EBITDA) standing consistently below 2.0x and the generation of consistently positive free operating cash flow despite significant CAPEX, particularly in 2024. This goes along an improved revenue generation capacity driven by the company’s prominent position as a regional municipal waste management coordinator in the Hungarian waste management system as a subcontractor. At the same time, the Positive Outlook reflects the likelihood that transparency will be improved on the company’s long-term municipal waste contracts and on its consolidated group accounts.

A rating upgrade could be warranted if GRH collectively i) strengthened its business risk profile, most probably through securing of long-term subcontractor agreement with MOHU, thereby improving the service strength and providing increased visibility on medium-term cash flow generation, ii) provided improved transparency through audited consolidated group accounts and iii) kept its leverage - Scope-adjusted debt/EBITDA - below 2.0x on a sustained basis.

A negative rating action such as a revision of the Outlook to Stable could result if Scope’s expectations about improvements on contracts and/or audited consolidated group accounts or expectations regarding the group’s sustained leverage are unlikely to materialise. Moreover, a negative rating action, such as a Negative Outlook or a downgrade, might be warranted in case Scope-adjusted debt/EBITDA was expected to move to above 2.0x on a sustained basis.

Long-term debt rating

In January 2022, GRH issued a HUF 3.5bn senior unsecured guaranteed bond (ISIN: HU0000361316) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with a fixed coupon rate of 5.1% and repayment in six tranches of 10% in 2027, 2028, 2029, 2030, 2031 and a 50% tranche in 2032. The bond has been issued with a guarantee from the related companies Tappe Kft. and BVÜ Kft.

The recovery analysis indicates an ‘above average’ recovery for the senior unsecured guaranteed bond and for all other senior unsecured debt positions, even after all senior secured debt would have been fully recovered. The recovery is benefiting from the high level of fixed assets (mainly consisting of PPE), translating into a debt instrument rating of the senior unsecured guaranteed bond one notch above the issuer rating (BB).

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 and/or Outlook, (General Corporate Rating Methodology, 16 October 2023; European Business and Consumer Services Rating Methodology 15 January 2024), 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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 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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 20 December 2021. The Credit Rating/Outlook was last updated on 24 January 2023.
The Senior Unsecured Guaranteed bond was first released by Scope Ratings on 24 January 2022. The Credit Rating was last updated on 24 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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