The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the BB/Stable issuer rating of Progress Étteremhálózat Kft, the development licensee partner of McDonald’s in Hungary. The senior unsecured debt category rating has been affirmed at BB+.

Rating rationale

The affirmation of the issuer rating reflects the strong organic top-line growth (up 23.7% YoY) and reported EBITDA growth (up 23.1% YoY) and solid credit metrics with leverage measured by Scope-adjusted debt/EBITDA of around 3.0x in 2023-25 from 3.2x in 2022. Positive developments were enabled by 24 store openings since 2019 (network size up by 25%), the modernisation of all existing restaurants and the strong marketing activity while keeping a double-digit EBITDA margin.

The rating is constrained by low diversification and the pressure on medium-term profitability from volatile input costs, rising cost of labour and the moderate decrease in purchasing power.

The affirmation of the senior unsecured debt rating reflects the significant expansion of the fixed asset base, which resulted in an unchanged above-average recovery assessment.

The business risk profile (assessed at BB) remains unchanged compared to last year’s assessment. Progress had a resilient performance in 2023 despite inflation measured by food consumer price index of 25% in two consecutive years in Hungary, with revenue at double the pre-pandemic level and good operating profitability.

Progress along with its conventional licence partners is one of the largest restaurant chain operators in Hungary through its operation of the McDonald’s brand. Hungary has over 110 McDonald's restaurants with system-wide sales (including franchise partners) of HUF 140bn in 2022 (EUR 358m). 60% of the stores are operated and owned by Progress and the rest by local conventional licensee partners.

McDonald’s Corporation and its strong brand facilitate the company’s moderate market position in Hungary and provide additional support through well-defined global marketing tools, strong internal controls and supply-side capacity. The primary risk for Progress’ business lies in a deterioration in its relationship with McDonald’s. Progress is mitigating this risk through the timely execution of investments as undertaken in the development licence agreement.

The diversification assessment remains low due to the limitation of the development licensee agreement to Hungary and the concentration on a single business line. Product diversification is above that of McDonald’s licensees in other countries but remains limited mainly to fast food.

Operating profitability is good with a Scope-adjusted EBITDA of HUF 13.1bn in 2023 (up 23.5% YoY) and a stable Scope-adjusted EBITDA margin of 14.3%. The Scope-adjusted EBITDA in 2023 includes HUF 3.4bn of adjustments for real estate leases.

The operating environment will remain challenging in 2024. Affordability, digitalisation and economies of scale will therefore be key to remaining competitive. While certain input costs may decrease or at least stabilise compared to 2023 levels, labour costs continue to rise at a double-digit rate. Scope expects the company to remain resilient to inflationary pressure as proven in 2022-23 and therefore expects stable Scope-adjusted EBITDA margin of 13.5%-14.5% for 2024-26.

The financial risk profile (revised to BB+ from BB) improved compared to last year due to improved leverage metrics. The company was able to navigate the heavy investment phase and operational expenditure inflation and scale up operations which resulted in improved nominal EBITDA exceeding expectations while reported financial debt remained flat and operating lease obligations increased slightly.

Leverage measured by Scope-adjusted debt/EBITDA stood at 3.0x at YE 2023 (decreased from 3.2x YoY). Scope expects Scope-adjusted debt/EBITDA to stay around 3.0x until YE 2025, driven by EBITDA growth due to inflation and additional restaurant openings which is partially offset by increasing operating lease obligations.

The company’s debt on balance sheet as at YE 2023 includes a HUF 33.0bn senior unsecured bond and HUF 2.5bn in bank guarantees. Scope expects no major changes in the next three years. Furthermore, Scope has excluded from cash netting the contracted capex and cashier money totalling HUF 2.4bn in 2023.

Scope-adjusted EBITDA interest cover is very strong, at above 20x at YE 2023. The purely fixed rate debt having a coupon of 3.0% yearly supports debt protection. Scope expects the metric to stay very strong, above 15x, in the next three years as there is no new financing need and Scope projects nominal EBITDA to increase.

Scope-adjusted funds from operations/debt is good at 33% at YE 2023 (up from 28% in 2022) and points towards healthy cash flow generation. With inflation stabilising, but with some wage pressures and input price volatilities Scope expects cash flow generation to stabilise above 30%.

Progress’ investment plan from the bond is broadly completed, with new store openings slowing down and modernisations completed. Medium-term growth will therefore be less dynamic allowing Scope-adjusted free operating cash flow/debt to remain positive in the next years. This will also result in no pressure to raise new debt in the current high interest rate environment, allowing cash to be accumulated for debt service and dividend payments.

Liquidity is adequate and benefits from the conservative debt maturity profile, with no short-term debt held historically or planned in the coming years. The bond will start amortising in 2026 with HUF 4.1bn yearly which does not seem to pose a liquidity risk given the comfortable cash position and positive free operating cash flow following the investment phase.

Scope highlights that Progress’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 33bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (immediate accelerated repayment). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is three notches. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition to the rating deterioration covenant, bond covenants include list of soft covenants among others (i) change of control unless approved by McDonald’s Corporation, (ii) net/Debt EBITDA up to 3.5x applicable only if breach is due to raising new debt, and (iii) dividend restriction up to 50% pay-out ratio.

No notching was applied for supplementary rating drivers. Financial policy supports the rating given the company target of a net debt/EBITDA of below 3.5x. Parent support is neutral as support is not expected from the holding company or the ultimate owner. No dividends were paid during the investment phase, and company guidance on dividends still allows for deleveraging. The bond prospectus limits dividends to 50% of the previous year’s profit after tax, which is protective for debtholders.

Outlook and rating-change drivers

The Outlook is Stable, based on Scope's expectation that Scope-adjusted debt/EBITDA will remain well below 3.5x, with no further debt issuance as expansion slows and input prices stabilise, resulting in improved cash flow allowing for gradual deleveraging and dividend payments.

A positive rating action could be warranted if the company strengthened Scope-adjusted free operating cash flow/debt to at least 10% on a sustained basis while growing in size as evidenced by an increased market share.

A downgrade could be warranted if Scope-adjusted debt/EBITDA increased above 4x. This could be a result of a deterioration in the franchise relationship (developmental licensee) with McDonald’s and/or inflationary pressure leading to low cash flow.

Long-term debt rating

Scope’s recovery assessment shows above-average recovery starting from 2023 due to the tripling of fixed assets to HUF 39.3bn at YE 2023 from HUF 13.8bn at YE 2020 as a result of the capex programme. The company has no senior secured debt and has no need to raise any.

Therefore, Scope has affirmed the senior unsecured debt rating one notch above the issuer rating at 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; Retail and Wholesale Rating Methodology, 26 April 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 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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 July 2020. The Credit Ratings/Outlook were last updated on 7 June 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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.