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Rating action

Scope Ratings GmbH (Scope) has downgraded Hungarian Sun Group Kft.’s issuer rating to B+ from BB- and placed it under review for a possible downgrade. Likewise, Scope has downgraded the rating on senior unsecured bond (ISIN: HU0000361225) guaranteed by subsidiary Prohuman Zrt. to B+ from BB- and placed it under review for a possible downgrade.

The downgrade is driven by deteriorating operating performance resulting in weaker credit metrics. The review for a possible downgrade primarily reflects pending risks related to unresolved covenant reset discussions applicable to the HUF 15.4bn bond placed under the Hungarian National Bank’s Bond Funding for Growth Scheme. Non-compliance with the rating-related financial covenant could trigger acceleration of the bond repayment, which might have default implications for Sun Group. Scope considers such a scenario unlikely, as bondholders and the issuer may reach an agreement to revise the financial covenant requirements upwards from the current 2.5x threshold.

The rating action also takes into account the correction of previous calculation errors in some financial metrics. The errors are related to the calculation of net interest, Scope-adjusted FFO* and FOCF. The errors were reviewed, and Scope concluded that the corrections had no impact on the ratings.

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). Sun Group’s competitive position is driven by subsidiary Prohuman’s moderate regional market shares in HR services across Central and Eastern Europe (CEE). The markets are fragmented but have good growth potential: i) in Hungary, Prohuman leads the market with an approximately 17% market share; ii) in Romania, Prohuman has a roughly 17% market share (as the third-largest HR services provider, with growth driven by both white-collar placements and blue-collar temporary staffing); and iii) in Serbia, high growth is anticipated following the adoption of workforce legislation modelled on Hungarian regulations. Sun Group’s potential for further bolt-on acquisitions in other CEE countries could enhance inorganic growth and diversify its service offerings.

In terms of diversification, exposure to a broad client base across multiple industries is helping to mitigate the impact of reduced staffing demand from the automotive sector. However, the company's heavy dependence on Hungary as a core market and its reliance on temporary staffing services leave it vulnerable to economic fluctuations and sector-specific downturns.

Sun Group’s profitability declined in 2023, with an EBITDA margin of 5.9%, down from 7.7% in 2022 (the first year of consolidating Prohuman). This decline was primarily driven by reduced demand from higher-margin sectors such as automotive and specialized manufacturing, which shifted the revenue base towards lower-margin sectors. Inflationary pressures and global economic uncertainties further exacerbated the situation. As temporary staffing is a margin-sensitive business, Scope believes it is likely to continue generating weaker EBITDA margins in the coming years. Flexible labour laws in Hungary and the CEE region enable companies to adjust workforce sizes quickly (credit-negative ESG factor), which has historically shielded profitability during economic downturns. However, the introduction of stricter labour regulations in the future could pose additional risks to profitability. Despite these challenges, Sun Group maintains a strong return on capital employed, consistently exceeding 20% in 2022, 2023, and the next three forecasted years. This reflects the efficiency of the company’s asset-light business model, which generates robust earnings from low capital intensity.

Financial risk profile: B+ (revised from BB). Credit metrics deteriorated in 2023, contrary to previous expectations, particularly in terms of leverage. Debt/EBITDA increased to 3.8x from 2.7x in 2022, driven by lower EBITDA and the issuance of new debt to ensure smooth operational continuity amid cash flow volatility and extended days sales outstanding (resulting from major clients pushing for delayed payment terms). In 2024, debt/EBITDA is projected to remain relatively high at above 4.0x due to a combination of declining EBITDA and the repayment of a working capital loan facility. This repayment will involve utilizing existing cash reserves and drawing additional short-term debt, which will offset any potential reduction in net debt and maintain pressure on the leverage ratio. A recovery in leverage is dependent on the expected improvement in EBITDA in 2025.

Interest cover remains strong, ranging between 4x and 7x, supported by a significant portion of debt being fixed rate.

Free operating cash flow/debt turned negative in 2023 due to increased working capital requirements. Sun Group’s asset-light business limits capital expenditure needs and working capital swings should normalise with improvements in cash flow management. Specifically, addressing delayed customer payments and leveraging factoring facilities could provide liquidity to smooth cash flow fluctuations, which are common in the staffing industry due to the timing mismatch between payroll obligations and client collections. Consequently, Scope anticipates that cash flow coverage will stabilize at 5% to 15% for the period between 2024 and 2026.

Liquidity: adequate (unchanged). Scope’s adequate liquidity assessment is based on HUF 3bn in cash at end-June 2024, HUF 2bn in unutilised, committed financing facilities, the expectation of improving free operating cash flow and the expectation that expiring bank loans will be refinanced, given the company’s strong historical track record. However, liquidity could face pressure from significant working capital fluctuations, such as delayed customer payments. This risk could be partially mitigated through the use of factoring receivables.

Scope notes that Sun Group’s senior unsecured bond guaranteed by subsidiary Prohuman Zrt, issued under the Hungarian National Bank’s Bond Funding for Growth Scheme, has covenants requiring the accelerated repayment of the outstanding nominal debt amount (HUF 15.4bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within five business days) or if the net debt/EBITDA (as defined in the bond prospectus) ratio (max. 2.5x for 2024) is breached. Such a development could adversely affect the company’s liquidity profile.

The issuer breached its financial covenants in 2023, exceeding the maximum net debt/EBITDA threshold of 3.0x. However, this breach was waived for the reported year. Scope projects that the issuer will again exceed the covenant thresholds (now reduced to a maximum net debt/EBITDA of 2.5x) when the 2024 annual results are communicated. This potential breach has no impact on liquidity as creditors are likely to revise the financial covenant requirements upwards from the current 2.5x. Scope’s assessment is based on ongoing discussions between management and bondholders, as well as preliminary drafts on covenant adjustments communicated. Nevertheless, if an agreement is not reached, Scope may downgrade the issuer’s rating by several notches.

Supplementary rating drivers: credit-neutral. While the rating has not been adjusted for financial policy, peer group considerations, parent support, or governance and structure, Scope has identified governance and structure weaknesses in the rated entity, in particular poor transparency and inadequate financial planning. Inadequate financial planning is especially detrimental to creditors as it constrains visibility into the future development of credit metrics (credit-negative ESG factor). Scope has reflected these risks in its financial risk profile and standalone creditworthiness assessments, negating the need for down-notching for supplementary rating drivers.

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

Under review for a possible downgrade

Sun Group’s ratings have been placed under review for a possible downgrade due to unresolved covenant reset discussions. Scope intends to resolve the under-review status as soon as possible.

The rating could be affirmed if Sun Group is able to reach a pragmatic covenant reset agreement with the bondholders that allows for sustainable compliance with the new covenant threshold.

A downgrade by at least one notch is possible if the issuer is unable to reset the net debt/EBITDA covenant or obtain a waiver of the potential 2024 covenant breach, resulting in debt acceleration.

The upside scenarios for the ratings and Outlooks are remote.

Debt rating

In January 2022, Sun Group issued a HUF 15.4bn senior unsecured bond guaranteed by subsidiary Prohuman Zrt. The bond proceeds were used for the acquisition of Prohuman Zrt. The bond has a tenor of 10 years and a fixed coupon of 5.5% yearly. Bond repayment is in five tranches starting from 2027, with 10% of the face value payable yearly and a 50% balloon payment at maturity.

Scope expects an ‘average’ recovery for the senior unsecured (guaranteed) bond (ISIN: HU0000361225), which translates into a B+ rating in line with that of the issuer.

The average recovery is based on the asset-light nature of HR services and the issued bond’s ranking behind the senior secured creditors of Sun Group and the working capital and factoring creditors of Prohuman. The recovery level is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario of around HUF 23.9bn in 2026 and a 10% haircut on that value for administrative claims.

Following the rating action on the issuer rating, Scope has also placed the B+ senior unsecured debt rating under review for a possible downgrade.

Environmental, social and governance (ESG) factors

Material social ESG factors for corporates offering asset-light business services primarily include labour management risks related to labour conditions (human rights, safety, employment is typically short term and the workforce is easily let go, physically stressful working conditions, accommodation for immigrant workforce).

Specific governance and structure weaknesses for Sun Group include poor transparency and inadequate financial planning. Inadequate financial planning not only reduces transparency but also impairs the ability to project future credit metrics accurately, creating uncertainty for creditors. This lack of visibility can heighten perceived risk, particularly during periods of financial stress, and erode confidence in the issuer's ability to manage obligations effectively. Governance shortcomings, such as deficient planning and oversight, may result in missed financial targets and undermine long-term stability, contributing to downward pressure on credit ratings.

All rating actions and rated entities

Sun Group Kft.

Issuer rating: B+ under review for a possible downgrade, downgrade and under review placement

Senior unsecured (guaranteed) debt instrument rating (ISIN: HU0000361225): B+ under review for a possible downgrade, downgrade and under review placement

*All credit metrics refer to Scope-adjusted figures except for the net debt/EBITDA financial covenant.

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, (General Corporate Rating Methodology, 16 October 2023; European Business and Consumer Services Rating Methodology, 15 January 2025), 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.

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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Azza Chammem, 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 21 December 2021. The Credit Ratings/Outlook were last updated on 30 January 2024.

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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