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Rating action

Scope has today affirmed the BBB- issuer rating for Hungarian utility Opus Tigáz Zrt and revised the Outlook to Positive from Stable. Scope has also affirmed the rating on senior unsecured debt at BBB-.

Rating rationale

Opus Tigáz's creditworthiness is strongly supported by its regional monopoly position as the largest gas distributor in Hungary, with a network accounting for 40% of the national grid and distributing 25% of domestic gas consumption. However, the business risk profile (assessed at BBB+) is negatively affected by the regulatory framework, which does not allow for a timely recovery of incurred costs through regulated tariffs. This is displayed by the utility’s weakened profitability since 2022 which has been burdened by an increased cost base, e.g. significantly higher costs associated with gas distribution losses as well as inflated operating costs, but also a relatively low weighted-average cost of capital of 3.24%. Scope forecasts that profitability will remain under pressure, mainly due to increased costs associated with service level agreement (SLA) payments to Optesz Opus, a shared service company that provides joint services and support functions at Opus Global Nyrt (the parent company). At the same time, Scope expects that the shared service centre will contribute to cost reductions on an arm's length basis and will not become a means to replace dividend payments to Opus Global. Scope also notes the currently limited visibility into the next regulatory period (2025-2028), particularly with regard to the level of WACC, which is a key driver of future operating margins. However, Scope expects the pressure on profitability to ease in the medium term, supported by tariff increases and the recovery of costs associated to network losses. According to the regulations, in the fourth year of the regulatory period, i.e. 2024, there will be an indexation of tariffs on the RAB and OPEX items, as well as adjustments related to network losses. In addition, Scope expects costs associated to grid losses to decrease compared to previous years due to subdued energy prices, which will be another factor supporting the company's EBITDA.

Opus Tigàz's financial risk profile (assessed at BBB) is supported by the expected improvement in leverage. Leverage, as measured by Scope-adjusted debt/EBITDA, is expected to fall below 3.2x after 2024, bottoming out at around 2.3x in 2026. This will be supported by tariff indexation in line with regulatory requirements, which is expected to increase revenues. In addition, Scope expects a lower cost burden related to the price of contracted gas to cover network losses. This is coupled with lower net debt exposure (as measured by Scope-adjusted debt) as the HUF 50bn bond issued continues to be repaid, with the amortisation expected to be covered by cash. At the same time, Scope expects leverage to be negatively impacted by lower EBITDA, which is estimated at around HUF 14bn (down from HUF 15.0bn in 2023). This is due to increased costs related to subcontracted services for Optesz Opus.

The pressure on profitability will also have a negative impact on the company's free operating cash flow. This is expected to lead to negative cash flow coverage in 2024, additionally driven by temporarily high capex of HUF 9.8bn. Capex coverage as measured by FOCF/Scope-adjusted debt is expected to reach -16% in 2024. Beyond 2024, free operating cash flow is likely to improve to a range of 7-9% in 2025 and 2026 due to lower capex and expected higher EBITDA generation in 2026.

Debt protection, as measured by EBITDA interest cover, continues to support the financial risk profile. Through a 2021 bond issue, Opus Tigáz was able to secure funding at a favourable fixed interest rate of 2.8% compared to the current Hungarian base rate of 10.75% as of March 2024. The company's debt coverage should remain comfortable at well above 10.0x, supported by the absence of additional external debt raised and by significant interest income from cash deposits.

Liquidity is adequate. The debt maturity profile is manageable with gradual amortisation of bonds: 3% (HUF 1.5bn p.a.) in 2023-2026; 9% (HUF 4.5bn p.a.) in 2027-2030; and a 49% (HUF 24.5bn p.a.) bullet repayment in 2031. Scope expects the short-term maturities to be fully covered by cash and an undrawn EUR 9m back-up credit facility (approximately HUF 3.5bn).

Scope highlights that Opus Tigaz’s senior unsecured 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 50bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 90 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 4 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Parent support is considered neutral to the rating. Opus Tigáz is wholly owned by Opus Global Nyrt (rated BB/Stable by Scope), a Hungarian investment holding company that owns interests in Opus Tigáz (energy sector) as well as other companies with exposure to various sectors, including construction, food processing and tourism. Scope does not see any credit-negative factors that would constrain Opus Tigáz's issuer rating at the level of the parent company, as it has a high degree of operational and financial independence from the parent company and there is no indication that Opus Tigáz's creditworthiness would be hampered by that of Opus Global.

Finally, a weak market position relative to international peers under Scope’s coverage limits the rating. This also takes into account the vulnerabilities of the Hungarian economy (rated BBB/Stable by Scope) to inflation and high interest rates. This is reflected through a negative one-notch adjustment to the BBB standalone credit assessment pertaining to peer context.

Currently, no company-specific ESG factors have a material impact on the credit risk assessment.

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that Opus Tigáz’s financial risk profile will improve, with a Scope adjusted debt/EBITDA remaining around or below 3.0x. However, this is subject to uncertainty regarding the final parameters of the new regulatory period, in particular the level of the WACC.

An upgrade could be triggered by a sustained improvement in leverage, as signalled by Scope-adjusted debt/EBITDA at around or below 3.0x on a sustained basis, supported by a favourable development in RAB remuneration and cost recovery as well as the company’s conservative approach on its financial policy in terms of new issuance and dividend payout.

A negative rating action, such as revision of the Outlook to Stable, could be triggered if Scope’s expectations do not materialise on a sustained basis. Further ratings downside is limited.

Long-term debt rating

Scope has affirmed the senior unsecured debt rating at BBB-, the same level as the issuer rating. Opus Tigáz is the only issuer of public debt.

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 Utilities Rating Methodology, 17 March 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 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 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 these 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: Kamila Bernadeta Hoppe, Senior Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 29 March 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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