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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating on Hungarian investment holding company Forrás Nyrt. The senior unsecured debt rating has also been affirmed at B+.

Key rating drivers

Business risk profile: B+. The business risk profile of Forrás Nyrt. benefits from the improving portfolio diversification. Following multiple acquisitions in the previous years, a well-balanced investment portfolio has been created, with limited concentration across sectors (investments in manufacturing, real estate and renewables) and gross asset value (the top core holding accounting for only 9% of gross asset value). Furthermore, Forrás has indicated that the current high level of cash (YE 2023: HUF 12.5bn) is earmarked for acquisitions, and the company is seeking potential targets mainly in the manufacturing/automotive segment. The sustainability of the investment portfolio remains moderate, with the number of cash income-generating core holdings and the concentration of the cash income subject to high volatility across years.

The business risk profile is constrained by the limited geographical diversification (with the primary focus remaining on the Hungarian market) and the investment philosophy, which is still perceived as rather opportunistic. This is evidenced by the fact that the acquisition and divestment targets are subject to rapid change, impeding the visibility on medium-term cash flows at the investment holding level, resulting in a more conservative assessment of the business risk profile.

Financial risk profile: B+. The financial risk profile benefits from the higher recurring cash income generation, which has a positive effect on total cost coverage (TCC). Recurring cash income has increased to HUF 2.1bn (2022: HUF 0.9bn), primarily as a result of higher interest income on financial assets. Cash interest expenses remained flat (HUF 776m) benefiting from the fixed coupon of the bond and the low level of other financial liabilities on the holding level. In 2024 Forrás is expected to realise material cash dividend related to a one-off asset sale (HUF 1.3bn). This income is not considered part of the recurring cash income, thus excluded from the TCC calculation. Beyond 2024 TCC is forecasted to improve above 2.0x as a result of the cash income from the manufacturing portfolio (Kiss és Társa Kft. and Váll-Ker are forecasted to pay HUF 500m cash dividend annually), increasing the recurring cash income to around HUF 2.1bn as per Scope's financial forecast.

Scope-adjusted loan/value (LTV)* remains the weaker element of the financial risk profile, with the corporate guarantee behind the loans of Aquila New Energy and For-Five Kft. added to the Scope-adjusted debt (HUF 10bn as of YE 2023) on top of the HUF 21.7bn MNB Bond. Scope notes the fact that the majority of assets in the LTV calculation are kept at book value (valuation is available only for certain elements of the real estate portfolio and no valuation for the 23 MW PV plant), thus significantly undervalued. As Scope-adjusted debt is expected to remain stagnant (no short-term debt maturities, first amortization of the bond is in 2027) LTV is expected to develop in line with the gradually increasing total assets.

Liquidity: adequate. The combination of no material financial debt maturities prior to 2027 (first year of bond amortization) at the holding company level and high levels of unrestricted cash on a sustained basis in Scope's base case scenario results in adequate liquidity within the rated entity.

Scope highlights that Forrás'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 21.7bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 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.

Supplementary rating drivers: credit neutral. Scope points to the lack of reliability of Forrás's strategic planning, as evidenced by the limited predictive power of business plans provided by the management, with cash and non-cash income changing considerably between business years This factor significantly reduces visibility and may lead to a quick deterioration of credit metrics.

Outlook and rating sensitivities

The Outlook is Stable and encompasses the assumption that Forrás' credit metrics will develop in line with Scope's base case forecast, resulting in total cost coverage consistently above 1.0x and an LTV ratio sustained below 60%. Scope's forecast does not include any acquisitions or divestments beyond 2024 due to limited visibility on the company's medium-term investment portfolio management strategy.

The upside scenario for the ratings and Outlook is:

1. Providing better visibility of the medium-term strategy/investment philosophy and a rigorously established financial policy at the core investment level, while LTV decreasing below 50%

The downside scenarios for the ratings and Outlooks are (individually):

1. Total cost coverage deteriorating below 1.0x on a sustained basis
    
2. LTV ratio rising above 70% on a sustained basis

Debt rating

Forrás issued a HUF 21.7bn senior unsecured corporate bond under Hungary's Bond Funding for Growth Scheme in October 2020. The bond's tenor is 10 years, with 10% of its face value to amortise from 2027. The coupon is fixed (3.2%) and payable yearly. The bond proceeds have been deployed for acquisitions in the renewables, real estate and manufacturing sectors.

Scope rates the senior unsecured debt issued by Forrás Nyrt at the same level as the issuer rating. Scope has computed an 'average' recovery for senior unsecured debt holders in a liquidation scenario. Senior unsecured debt at the holding company level is structurally subordinated to debt at the subsidiary level, constraining the debt rating.

Environmental, social and governance (ESG) factors

Scope highlights strong influence of the main shareholder Arago, which could potentially lead to disadvantages for external creditors like bondholders (and minority equity shareholders) in case of disputes/liquidation scenarios. Additionally, Scope flags the complex corporate structure as a potential risk factor as it incorporates different businesses, consolidation forms and financing structures (ESG factor: credit-negative).

All rating actions and rated entities

Forrás Nyrt.

Issuer rating: B+/Stable, affirmation

Senior unsecured debt rating: B+, affirmation

*All credit metrics refer to Scope-adjusted figures.

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; Investment Holding Companies Rating Methodology, 17 May 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, 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 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: 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 22 June 2020. The Credit Ratings/Outlook were last updated on 22 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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 independently assess 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.