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 the BB-/Stable issuer rating of Market Építő Zrt. (Market). The senior unsecured debt rating has been affirmed at BB-.

The rating affirmation reflects credit metrics that have remained within Scope’s rating guidelines, largely due to the resilient operating performance underpinned by a relatively robust yet concentrated order backlog. It also reflects robust financial metrics despite anticipated new-debt financed real estate developments.

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+ (unchanged). The business risk profile remains underpinned by Market’s leading position in the Hungarian construction sector. Market achieved a milestone in 2023, marking a record year with revenues climbing to HUF 326bn, outperforming Scope’s forecast by 6%. However, the company’s size is still small compared to European peers. The company’s business risk profile remains constrained by its weak geographic diversification, as Market’s activities are concentrated in its domestic market, mainly in the Budapest region, where it derives a large share of its revenues from a sizeable pool of large projects.

The construction sector in Hungary has faced heightened uncertainty in recent years due to a shrinking pool of public construction projects, which has increased competition for private sector projects and in turn has put more pressure on the margins of companies in the sector. Despite unsupportive construction market conditions in Hungary, Market still benefits from its scale and has continued to source new projects, as various projects are often too large for other players in the market. The company’s book-to-bill ratio stood at 1.15x in 2023.

The company’s backlog of projects totalled HUF 590bn as of June 2024 (HUF 629bn in June 2023), which is equivalent to 2x its three-year average revenue until 2023 and provides top line visibility for the next two years. Market’s backlog remains concentrated in terms of number of projects and across business segments with a clear bias towards building projects. Markets three largest projects account for 46% of the order backlog, the largest being the Budapart project, valued at more than HUF 190bn.

As Scope had anticipated, rising operating costs including building materials, sub-contracting costs and energy have negatively impacted profitability. Market’s profitability margin, as measured by the Scope-adjusted EBITDA margin*, dropped to 7.7% in 2023 from 8.7% in 2022. The company has limited options to mitigate the negative impact from increasing energy prices and labour costs. In order to ensure an adequate supply of raw materials, Market has started a strategic cooperation to build a mineral rockwool insulation factory through a JV with Masterplast. Similar to the ramp-up of the PreBeton concrete factory, the new production facility will enable Market to source part of its raw materials internally and give it additional control over its supply chain. The factory is scheduled to start pre-production in 2025.

Scope anticipates than EBITDA margin will stabilise at around 7% in the next few years, due to a more predictable cost environment and Market’s focus on larger projects to benefit from economies of scale will likely reduce the incidence of loss-making projects. A large backlog, and its leading position in the Hungarian market as one of the largest and most visible contractors entails some bargaining power with its suppliers. However, Scope highlights that Market’s profitability margin remains under pressure in a more challenging market environment characterised by higher competition and higher operating costs.

Financial risk profile: BBB (revised from BBB+). The company’s financial risk profile is supported by low leverage and a very strong EBITDA interest cover, although credit metrics will be under pressure from the anticipated debt issuance to finance the company’s planned real estate developments over the next couple of years.

The company’s creditworthiness is supported by very low leverage (Debt/EBITDA), which stood at 1.3x in 2023. Interest-bearing debt increased to HUF 61.5bn as at YE 2023 (up HUF 6.8bn YoY). Scope anticipates the leverage to increase to above 2x in 2025. The agency’s view is driven by Market’s intention to increase its bank debt by around HUF 40bn by the end of 2025 to support investments in the Bem Palace project (fit out phase) and two luxury residential projects as part of Market’s extended strategy, launched in 2020. The strategy focuses on real estate projects in which Market will be the main contractor, allowing it to maximise its operating capacity. Although new debt is expected to be non-recourse to Market, delays or cost overruns in the development pipeline as well as low pre-sale or pre-letting rates may force the company to provide fresh funding for these investments or result in reputational damage.

EBITDA interest cover remained strong in 2023, with a positive net interest in 2023, supported by higher interest income and stable interest expenses, as the HUF 42bn of bond debt have fixed interest rates of 2.7% and 2.95%. Scope expects higher financial expenses in the coming years amid Market’s partially debt-funded investment phase. Scope anticipates EBITDA interest cover to decrease to around 10x by the end of 2025 but to remain adequate for the rating category.

Liquidity: adequate. Scope assesses liquidity as adequate, with the HUF 1.8bn of short-term debt maturing in 2024 being fully covered by the unrestricted cash balance (Scope considers unrestricted cash balance of HUF 40.8bn). Market also has good relationships with several Hungarian banks. This is reflected in its available revolving credit lines totalling HUF 5.0bn – provided by six different Hungarian banks – as well as HUF 160bn of bank guarantees (HUF 39bn available to June 2024), which can be used for future activities.

Scope highlights that Market’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme have a covenant requiring the accelerated repayment of the outstanding nominal debt amount if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B-. If this does not happen the remaining outstanding amount must be split into equal amounts for the remaining duration and will be repaid at each coupon payment dates until maturity. Such a development could adversely affect the group’s liquidity profile. The rating headroom to entering the grace period is one notch. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition, if the rating deteriorates, then the group may not pay dividends or other pay-outs to shareholders, may not increase its debt amount.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

Outlook and rating sensitivities

The Outlook is Stable and incorporates Scope’s expectation of Debt/EBITDA to remain below 3x. Scope expects the company to retain its strong liquidity position. The Outlook is based on total capex (including organic expansion and acquisition capex) of around HUF 48bn over the period 2024-26 and an EBITDA of above HUF 20bn per annum, supported by an EBITDA margin of above 7%.

The upside scenario for the ratings and Outlook is:

1. Significant improvement in Market's business risk profile, e.g. improved segment or geographic diversification, while credit metrics remain in line with Scope's expectations. However, Scope does not expect such an improvement in the short to medium term.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA moves towards 4x if e.g. investments under the business plan and in real estate projects weigh on leverage.

Debt ratings

Scope has affirmed Market’s senior unsecured debt rating at BB-. This rating is based on a going-concern scenario as of year-end 2025, in which Scope computed an average recovery for senior unsecured debt holders.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Market Építő Zrt.

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB-, 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; Construction and Construction Materials 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 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 16 August 2019. The Credit Ratings/Outlook were last updated on 17 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.