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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB- issuer rating on 4iG Nyrt. and revised the Outlook to Stable from Positive. Scope has also affirmed 4iG’s BB- senior unsecured debt rating.

The revision of the Outlook reflects Scope’s view that the financing requirements linked to the execution of the planned Spacecom debt settlement and acquisitions will exert strain on 4iG financial risk profile leading to a slower than previously expected deleveraging of the company.

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

Key rating drivers

Business risk profile: BBB- (unchanged). 4iG’s business risk profile continues to be the main supporting factor of its standalone credit assessment. The assessment benefits mainly from the low volatility of the telecommunications services industry and 4iG position as the second largest telecom operator in Hungary with a strong market share in the mobile market and broadband market after the acquisition of Vodafone Hungary. Diversification remains the main constraining factor due to the group’s significant exposure to Hungarian telecommunications sector. 4iG’s displays an improved profitability profile following its pivot from a pure IT business to a Telco-focused model, although weaker than other peers.

4iG achieved a significant milestone in 2023, with Scope-adjusted EBITDA* rising to HUF 184.2bn, more than doubling the 2022 figure of HUF 76.3bn and reflecting a 30.8% EBITDA margin, up from 26.7% in the prior year. This robust performance was primarily driven by inorganic growth, including an 11-month contribution from Vodafone Hungary following its acquisition in January 2023, alongside strong B2C mobile performance in the Western Balkans. Looking ahead, Scope projects EBITDA to reach approx. HUF 200bn in 2024 and further increase to around HUF 250bn by 2026. These results are expected to be supported by the full-year impact of the acquisitions performed, inflation-driven price adjustments leading to higher ARPU, and positive customer base dynamics. However, the EBITDA margin is anticipated to temporarily decline below 30% in 2024, primarily due to the impact of the supplementary telecom tax and higher costs associated with the group’s ongoing reorganization. From 2025, Scope expects margin improvement to be further supported by the discontinuation of the aforementioned sector tax, which will be fully phased out from January 2025. In Scope’s opinion this development should support profitability returning to approximately 30-31% in 2025-2026.

Financial risk profile: B+ (unchanged). The group’s financial risk profile remains the weakest link in the standalone credit assessment. The assessment reflects the impact of the significant debt accumulated during the last years through telecommunication acquisitions. In the projected period, Scope believes that financing requirements linked to the execution of the planned Spacecom debt settlement and acquisitions will result in a slower-than-anticipated deleveraging of the company.

Debt (which excludes netting of cash and cash equivalents) increased to HUF 915.6bn at YE 2023 (HUF 485.2bn at YE 2022) following the consolidation of Vodafone Hungary. Nevertheless, leverage, as measured by debt/EBITDA improved to 5.0x (6.4x at YE 2022) supported by EBITDA that has more than double for the same reason. In 2024 Scope expects the execution of the announced debt settlement plan for Spacecom and the announced acquisitions to result in an increase of debt to approx. HUF 1,000bn, with leverage projected to remain in line with 2023. The Spacecom transaction holds a strategic value for the group, which aims at maintaining the current 20% stake in the company and, subject to the necessary approvals, to convert the bridge loan into an asset deal, acquiring the AMOS 17 satellite and leasing it back to Spacecom, thereby supporting and diversifying cash generation and profitability.

In 2025-2026, Scope projects leverage to gradually decline supported by decreasing debt and robust margins, but to remain above 4x in 2025 and to fall below that level only starting 2026. However, this does not take into account other potential debt funded M&A transactions, which could eventually have an impact on the group's deleveraging.

In terms of cash flow cover, free operating cash flow/debt averaged around 1% over the last three years. Scope expects such ratio to remain weak, reaching only breakeven, in 2024-2026 due to increased capex spending (gross capex on average around HUF 118bn per year).

In 2023, EBITDA interest cover improved slightly to 3.5x (2022: 3.0x), despite higher interest expenses, due to strong profitability performance. Looking forward, Scope expects debt protection to temporarily fall below 3.5x in 2024, before gradually recovering to above 4.0x by 2026, despite higher interest paid in light of projected increasing debt levels. The agency assumes that this anticipated improvement will be driven by growing EBITDA and higher interest income.

Liquidity: adequate (unchanged). 4iG’s liquidity profile is deemed adequate, supported by projected liquidity ratios comfortably exceeding 200% for 2024-2025, despite pressures from negative free operating cash flow. Scheduled debt repayments of HUF 12.7bn in 2024 and HUF 14.7bn in 2025 are expected to be covered by available cash and cash equivalents, amounting to HUF 50.8bn as of June 2024. However, liquidity ratios are projected to weaken below 100% in 2026, primarily due to the maturity of the first HUF 38bn instalment of bonds issued under the Hungarian National Bank's Bond Funding for Growth Scheme. Scope expects that these debt maturities will be potentially refinanced, supporting the overall liquidity profile.

The senior unsecured bonds issued by 4iG 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 bond stays below B+ for more than two years (grace period) or drops at CCC (or below). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period remains two notches in this scenario. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition to the rating deterioration covenant, bond covenants include a financial covenant of maximum 5.0x net debt/EBITDA to be first measured on YE 2024 results where breaches in three consecutive years would cause an event of default (meaning the earliest is a risk when checked in 2027 spring based on 2024-26 results). Based on Scope’s projections, net debt/EBITDA ratio is expected to remain below 5x in the three years considered.

Supplementary rating drivers: -1 notch (unchanged). Scope views 4iG’s financial policy as a negative rating driver, resulting in a one-notch negative adjustment to the standalone credit assessment. Scope’s view is driven by the rather ambitious debt-funded acquisitions which have been carried out during the last four years and originally limited exposure to telecoms services, leading to heightened execution and integration risks. Moreover, the maintenance of such assessment on the company’s financial policy reflects Scope’s cautious stance regarding 4iG’s investment phase over the next years. As such, the issuer rating will continue to incorporate the one-notch negative adjustment until the agency gains more confidence about the company’s investments and growth plans in the medium term.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view of a slow deleveraging over the next three years, as the additional debt incurred to finance the recently announced transactions such as Spacecom’s debt restructuring plan and small acquisitions, will not be entirely offset by the projected increase in margins. Therefore, leverage, as measured by debt/EBITDA, is expected to gradually decline over the forecast period but remain above 4x for the next two years. Furthermore, the Stable Outlook is contingent on 4iG completing the Spacecom transaction in accordance with the agreed terms and only once all the necessary approvals have been obtained. The Outlook also reflects Scope’s expectations that 4iG will take the necessary steps to address upcoming refinancing needs well in advance.

The upside scenarios for the ratings and Outlook are (collectively):

1. Improved view on financial policy driven by stabilisation of the group's structure and business model including no material M&A activity or other discretionary spendings.
    
2. Improved financial risk profile as signalled by a debt/EBITDA significantly below 4.0x on a sustained basis.

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

1. Debt/EBITDA at or above 5.0x.
    
2. Significantly negative cash flow cover.

Debt rating

Scope has affirmed the BB- rating for senior unsecured debt which primarily relates to the two bonds issued by 4iG in March 2021 and December 2021, respectively, for HUF 15bn (ISIN:HU0000360276) and HUF 370bn (ISIN: HU0000361019) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The assessment incorporates the agency’s view on pressure exerted on recovery rates by i) pledges in favour of creditors, which could lead to restrictions on the transfer of funds within the group, and ii) future debt issuance will mainly be taking place at HDT and Antenna Hungaria level, resulting in structural subordination of senior unsecured debt at 4iG level. This results in an average recovery value for this debt category based on a hypothetical default scenario at year-end 2026.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

4iG Nyrt.

Issuer rating: BB-/Stable, affirmation with revision of the Outlook

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 methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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: Herta Loka, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 October 2019. The Credit Ratings/Outlook were last updated on 22 December 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, Scope Innovation Lab 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.