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

Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary-based Pannon-Work Zrt’s issuer rating at B+/Stable. The senior unsecured guaranteed bond rating (ISIN: HU0000360052) has been affirmed at B+.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: B+. Pannon-Work’s business risk profile is driven by its position as the fifth largest personnel service provider in Hungary. The Hungarian market is very fragmented, with the top four players holding around a third of the market. Industry risk (revised to BB from BBB-) is blended between business services (asset-light with a mainly unspecialised workforce) and renewables (non-regulated power generation). Pannon-Work’s solar power generation capacity has increased through acquisitions to 6MW (+20% YoY) and accounted for one-fifth of reported EBITDA in 2023.

Growth in recent years has been driven by the labour shortage in Hungary and companies’ need for an intermediary to offer flexibility by leasing out personnel when required. The labour shortage and further workforce needs created by large-scale investments in the automotive, automotive suppliers and consumer goods sectors may continue, enabling the workforce leasing market to grow. This may provide additional opportunities for Pannon-Work to expand its client base. At the same time, supply chain disruptions and sluggish economic growth tempers the level of temporary staffing needed. Workforce agencies and the leased workforce are the easiest to let go. Cash flow arising from Pannon-Work’s blue collar workforce leasing is therefore volatile and vulnerable.

Despite the company’s efforts to expand its range of services, there is concentration risk due to: i) its sole exposure to Hungary; ii) dependence on the Hungarian labour market; iii) dependence on an imported Asian workforce; and iv) the high revenue share provided by key customers. Low geographical and client diversification has led to volatile cash flow from Pannon-Work’s main activity. Although the top five clients contribute more than two-thirds of revenue, most of them are bound to Pannon-Work for more than five years.

Operating profitability, as measured by the Scope-adjusted* EBITDA margin, was low at 3.6% in 2023 (down from 4.6% in 2022). The decrease in 2023 was due to: i) falling energy prices for solar power generation; and ii) the contraction of margins in temporary staffing due to the easing labour shortage in 2023-24 ahead of the ramp up of under construction electric vehicle and battery manufacturing plants. As the new automotive production plants start operation in 2025-27 and solar power generation tariffs are indexed by inflation, Scope expects operating profitability to increase to above 4% in 2025-26.

Service strength is moderate and is driven by a medium level of integration in key customers’ operations with multiple HR services, mostly not on an exclusive basis.

Financial risk profile: BB-. Pannon-Work’s financial risk profile is driven by: i) high indebtedness following the issuance of a HUF 3.5bn senior unsecured guaranteed bond and additional HUF 750m of senior secured long-term loans for capex and acquisitions; ii) weak but still reasonable credit metrics as a result, with flat Debt/EBITDA of 4.6-4.7x in 2022-23 and Funds from operations/debt fluctuating around 15%.

Scope expects Pannon-Work to deleverage going forward. However, earnings volatility given the company’s small size, as well as the need for additional debt to refinance amortising bonds, will keep leverage elevated at around 4x Debt/EBITDA, in Scope’s view.

EBITDA interest cover was strong in 2023 at 10.6x (down from 12.5x YoY). This was driven by the HUF 3.5bn bond’s low fixed coupon of yearly 3.0%, resulting in flat interest expense. Furthermore, Pannon-Work earned interest on high yielding time deposits. Scope forecasts that EBITDA interest cover will decrease towards 5x as deposit rates are falling, which will still provide good debt protection.

Liquidity: adequate. Scope deems Pannon-Work’s liquidity adequate despite liquidity coverage of below 1x in 2023 and a similar level expected for 2024-25. The strong usage of short-term working capital facilities for salary payments puts pressure on metrics, which is largely mitigated by the low refinancing risk of receivables from global automotive players. The bonds start amortising with HUF 700m yearly from 2026. Scope did not take the undrawn HUF 1.0bn in working capital financing into account when calculating liquidity due to its short remaining tenor. Further sources of liquidity could be provided by the sale of standardised 0.5MW solar power generation assets.

The issuer is subject to financial covenants that involve bond repayment if net debt/equity exceeds 2.5x or if net debt/balance sheet size exceeds 60%, based on year-end consolidated financial statements. There has been no covenant breach and there is no immediate risk of a covenant breach since the bond issuance.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating. However, Scope notes weak predictability of the business plan, loose forecasting and some intransparencies regarding investments and financials (ESG factor: credit-negative).

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the company can retain its major clients and keep its moderate cash flow generation. The Stable Outlook reflects Scope's expectation that leverage will remain high, at around 4x Debt/EBITDA over the next 12-18 months as a result of the debt issued to fund the completed investment programme and ongoing working capital funding requirements.

The upside scenario for the ratings and Outlook is seen as remote, but would require:

1. Pannon-Work to significantly increase its size and diversification while reducing leverage (Debt/EBITDA) significantly below 4x on a sustained basis. The latter could be achieved by improving profitability, a higher EBITDA contribution from HR services or reduced shareholder remuneration.

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

1. Perceived liquidity deterioration, i.e. if bond amortisation starting in 2026 is not addressed well in advance.
    
2. Debt/EBITDA exceeding 6.0x on a sustained basis.
    
3. Free operating cash flow/debt of below 5% on a sustained basis.

Debt rating

Scope assesses Pannon-Work’s senior unsecured bond (ISIN: HU0000360052) guaranteed by Gamax Kft. at B+, in line with the issuer rating. The average recovery expectation primarily reflects the bond's ranking below senior secured borrowings (for investments, acquisitions and working capital) and the unchanged debt in absolute terms. Furthermore, Scope sees the guarantee of Gamax Kft. as credit-neutral.

Environmental, social and governance (ESG) factors

The regulatory environment around temporary staffing is fairly negative socially, as staff can be laid off easily and leased workers have usually less rights compared to employees. While this may seem to benefit Pannon-Work in the short term, Scope believes it imposes some regulatory risk for the future, and is therefore maintaining a credit-neutral view for now.

Pannon-Work has new two-year, fixed-term contracts to bring Asian employees to Hungary. The employees are accommodated in local hostels and must return to their home country once their contracts end. This provides new business but is also socially negative and entails regulatory risk related to immigration. If current regulation in Hungary is not seen to be in line with EU regulation/law or human rights in general, it could undermine the company’s business model.

Pannon-Work has built up 6MW of renewable power generation with strong cash flow generation, which supports the rating.

All rating actions and rated entities

Pannon-Work Zrt.

Issuer rating: B+/Stable, affirmation

Senior unsecured guaratanteed bond (ISIN: HU0000360052): 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; 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 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: 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 14 August 2020. The Credit Ratings/Outlook were last updated on 3 July 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 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.