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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of ITK Holding Zrt.’s (hereafter ‘ITK’) at BB-/Stable and resolved the under-review for a possible upgrade status. The senior unsecured debt rating has been downgraded to B+ from BB-.

Rating rationale

The rating action follows a change in ITK’s shareholder structure. In the fourth quarter of 2023, the Hungarian oil and gas incumbent MOL Group (rated BBB-/Positive by Scope) provided an equity injection of HUF 6bn to ITK, thereby gaining a full controlling interest. As a consequence, ITK has become a fully consolidated subsidiary of the group. This has entailed closer integration in terms of governance, as evidenced by the appointment of a new board of directors and a change of auditors. Furthermore, there has been closer integration on the operational level, as evidenced by the large-scale due diligence process conducted, which has resulted in a new business strategy focusing on improving efficiency and cutting costs, in contrast to the previous growth-oriented strategy. ITK’s issuer rating benefits from the the higher credit rating of MOL Group, with significantly larger business outreach and financial strength. However, the preliminary YE2023 accounts reflect a highly stressed financial risk profile, with leverage, measured by Scope-adjusted debt/EBITDA of 13.4x and negative free operating cash flow generation, acting as a major constraint to the issuer rating.

ITK’s business risk profile (assessed at B+) is supported by the company’s moderate operating profitability, underpinned by a stable public transportation services business with a high level of recurring revenues. In addition, ITK has entered into agreements with Mercedes Benz to become its general distributor for trucks, buses and spare parts for these vehicles in Hungary from mid-2023. Although the profit margin in vehicle wholesale is generally lower than in transport services, the strong brand name and market position, together with potential synergies with the MOL Group (fuel trucks in logistics or waste collection vehicles), make the general distribution business the one with the highest growth opportunities. The manufacturing business line has again made high losses in 2023 and has been significantly downsized due to unfavourable demand conditions, including the write-off of all non-performing tangible and intangible assets (unsuccessful R&D, obsolete stock etc.). At the consolidated ITK level, profitability temporarily dipped in 2022 (caused by volatile movements in fuel prices, energy costs and wage inflation) but returned close to historical averages in 2023 (Scope-adjusted EBITDA margin between 7-10%), and is expected to remain stable going forward, benefitting from the downsizing of the loss-making manufacturing business and the EBITDA generated by the transportation services.

The business risk profile is constrained by the absolute size (HUF 39.2bn in revenues based on 2023 preliminary results), both in domestic and European context, making the issuer vulnerable to adverse shifts in the macroeconomic environment. For 2024 Scope forecasts a revenue increase of approximately 48%, driven by the full-year revenues from the general distribution businesses, which were acquired during 2023. The business risk profile is also constrained by the limited diversification, with service offering highly focused on transportation, and the highly concentrated nature of the customer and supplier portfolio.

The financial risk profile (revised to CCC from B-) reflects leverage, measured by Scope-adjusted debt/EBITDA sustained at high levels, remaining around 10x in 2024. Scope forecasts gradual deleveraging, in line with the debt amortization schedule, with profitability forecasted to remain relatively flat going forward.

While the interest cover benefits from the favourable interest rate of the HUF 20bn MNB bond (2.9%), interest expense almost tripled between 2022 and 2023, resulting in an interest cover only slightly above 1.0x in 2023. The majority of the debt is fixed to the BUBOR rate, subject to high volatility in the past two years. In the medium term, Scope forecasts the interest cover trending towards 2.0x, positively affected by the lower interest costs, decreasing in line with the debt amortization.

High growth capex has resulted in significant negative Scope-adjusted free operating cash flow in recent years and in 2023. Going forward capex is expected to decrease significantly. Scope forecasts capex of HUF 1.5bn in 2024, down from HUF 4.9bn in 2023 due to the end of the current investment cycle, and the business strategy focusing on rationalization. Together with the positive cash contribution from working capital (mainly driven by the reduction of inventories) Scope-adjusted free operating cash flow will reach break-even, allowing for a gradual deleveraging going forward.

Liquidity is assessed as adequate, as cash sources (HUF 0.5bn available cash and HUF 15.5bn of unused, committed bank facilities – both as at YE2023 as well as HUF 1.9bn in Scope-adjusted free operating cash flow forecasted for 2024) cover cash uses (scheduled debt amortization of HUF 2.9bn in 2024) by more than 200%.

Scope highlights that ITK’s senior unsecured bonds 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 20bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 5 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is zero notches. Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

The issuer rating on ITK continues to incorporate a three-notch uplift to the standalone rating, reflecting strong support from shareholder MOL Group, which adds financial stability, risk management and professional backing to the issuer. Scope considers ITK to be of significant strategic importance to MOL, forming part of its Mobility strategy, with key areas including car sharing, bike sharing, fleet management and public transportation.

Scope notes the lack of transparency and clarity (ESG factor: credit negative) in terms of governance. This includes inadequate reporting methods and the failure to disclose key information in a timely manner.

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

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation that the profitability of ITK can be sustained at a level comparable to historical averages (Scope-adjusted EBITDA margin between 7-10%), benefitting from the long-term contracts and high level of recurring revenues from the transportation service segment. While Scope anticipates that leverage will remain elevated in the medium term (Scope-adjusted debt/EBITDA around 10.0x), the rating agency forecasts a gradual improvement of credit metrics, with interest cover consistently around 2.0x and positive free operating cash flow thanks to substantially reduced capital expenditure and improved working capital management. Scope expects that the financial support of MOL Group will remain available if needed, and no further changes in the shareholder structure. The Outlook also reflects the fact that the lack of transparency is temporary due to the transitional period the company is going through (change of management and cessation of vehicle production).

A positive rating action could be driven by stronger-than-anticipated growth in sales and/or margins, resulting in leverage (Scope-adjusted debt/EBITDA) of sustainably below 6x. A positive rating action could also be triggered by further integration into MOL, including hard debt guarantees and name equality among others.

A negative rating action could occur if Scope-adjusted EBITDA interest cover would deteriorate to below 1.0x. This could result from a failure to increase sales or from continued cost pressures in transport services that cannot be passed on to customers. A deterioration in liquidity or Scope's perception of weakened parent support, i.e. MOL Group reducing its stake in ITK or not extending financial support when needed, could also trigger a downgrade. A negative rating action is also possible if the transparency issues are not resolved in the short term.

Long-term debt rating

In 2021, ITK issued a HUF 20bn senior unsecured bond (ISIN: HU0000360631) with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. The bond refinanced most existing debt and has a 10-year tenor, with amortisation of 10% per annum in 2027 and 2028, 20% per annum in 2029 and 2030 and a 40% bullet maturity in 2031.

Scope has downgraded the rating on senior unsecured debt issued by ITK to B+ from BB-, one notch below the issuer rating. Scope expects a ‘low’ recovery for outstanding senior unsecured debt in a hypothetical default scenario occurring in 2025 based on the liquidation value approach. The debt category rating reflects the ranking of the senior unsecured debt below approximately HUF 29.3bn of secured loans and credit lines, as working capital lines are expected to be fully drawn in a distressed financial situation.

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, 25 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 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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 14 April 2021. The Credit Ratings/Outlook were last updated on 28 November 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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