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 its BB- issuer rating on Hungary’s GVC George's Venture Capital Zrt. (GVC) and revised the Outlook to Positive from Stable. Scope has also affirmed the senior unsecured debt rating at BB-.

The revision of the Outlook to Positive from Stable is driven by the company’s strong operating performance while keeping indebtedness stable which results in a faster-than-expected improvement of credit metrics. Given that GVC's business model does not allow sales prices to be adjusted easily, the company has showcased its ability to pass on inflationary costs to customers.

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

Key rating drivers

Business risk profile: BB- (unchanged). GVC's performance in 2023 exceeded expectations, with notable growth in revenue (up 23% year-on-year) and EBITDA (up 60% year-on-year). This is partly attributable to the considerable price adjustments made in contracts from 2023 and the reduction in utility costs in the second half of the year. Furthermore, GVC plans to expand into the hospital catering market, which is expected to generate additional cash flow.

GVC’s business risk profile is supported by high EBITDA margins. The company demonstrated operating efficiency in FY 2023, maintaining EBITDA margins above 15% through price adjustments with customers, cost control, and a gradual improvement in gross margins through supply chain optimisation. However, Scope foresees EBITDA margins declining in the medium term, primarily due to anticipated low profitability margins in the healthcare catering sector, where GVC plans to increase its exposure.

Financial risk profile: BBB- (revised from BB). GVC's financial risk profile is stronger than its business risk profile. The company’s strong growth improved credit metrics in 2023, with leverage, as measured by debt/EBITDA*, decreasing towards 2.0x (from 3.5x in 2022) and funds from operations exceeding 40%, due to solid EBITDA growth in absolute terms.

Scope anticipates that leverage will remain significantly below 3.0x in the medium term thanks to solid operating performance, with momentum already evident in Q1 2024. Scope does not expect a significant increase in indebtedness, including new leases. The assessment of leverage does not include the netting of cash, as the high cash balance is expected to be partly utilised rather than serving solely as a liquidity buffer.

Scope believes intercompany loans provided to the agriculture related business line will have a limited positive impact on GVC’s financial risk profile. Although the company received HUF 52m and accrued HUF 41m in interest in 2023, Scope has left potential cash interest income out of its calculations, as the nature of payment will be heavily dependent on the operating performance of the underlying entities.

Liquidity: adequate. GVC’s liquidity remains adequate. This is mainly driven by a limited short-term debt position and sound EBITDA cash conversion. While an expected increase in maintenance and development capex in upcoming years will push free operating cash flow close to nil, the company’s significant cash buffer should be sufficient to fully cover financing and refinancing needs.

Scope highlights that GVC’s senior unsecured bond 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 7.0bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 10 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is two notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Supplementary rating drivers: Supplementary rating drivers have no impact on the issuer rating. However, governance concerns related to transparency currently restrain the rating at the current level (credit-negative ESG factor).

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

Outlook and rating sensitivities

The Positive Outlook reflects Scope's expectation that debt/EBITDA will remain below 3.0x, supported by EBITDA growth. In addition, the Outlook is based on the assumption that GVC will not engage in any increased shareholder-oriented financial policies, such as significant dividend payments or additional third-party borrowings.

The upside scenario for the ratings and Outlook would require (collectively):

1. Debt/EBITDA to remain significantly below 3.0x on a sustained basis
    
2. Successful execution of the company’s growth ambitions
    
3. Provision of improved transparency, e.g. about intercompany transactions, dividend-like payouts

The downside scenarios for the ratings and Outlook would require non-fulfilment of the upside triggers.

Debt ratings

Scope has affirmed the senior unsecured debt rating at BB-, including the HUF 7.0bn (ISIN HU0000360235) bond, in line with the issuer rating. This rating is based on a hypothetical liquidation scenario as of end-2026, in which Scope computed an ‘average’ recovery for holders of senior unsecured debt based on its assumptions of attainable liquidation values.

Environmental, social and governance (ESG) factors

Overall, ESG factors have impact on this credit rating action. Despite a slight improvement in FY 2023, concerns regarding GVC’s financial policy and transparency (the increasing volume of intercompany transactions with the owner, treated as dividend-like payments, and the inter-company guarantees provided, which emerged in 2022) have been factored into Scope's conservative assessment of the company’s financial risk profile, which also affects the issuer rating.

All rating actions and rated entities

GVC George's Venture Capital Zrt.

Issuer rating: BB-/Positive, Outlook change

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 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 Entities’ Related Third Parties, 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Zurab Zedelashvili, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 September 2020. The Credit Ratings/Outlook were last updated on 25 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
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