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 assigned a B+/Stable issuer rating on Hungarian real estate company Sun Group Kft. Senior unsecured long-term debt has also been rated B+.

Rating rationale

The issuer rating assumes that Sun Group will acquire a majority stake (80.22%) in Prohumán 2004 Kft. from current owner GI Group Poland S.A. by the end of Q1 2022. The sale and purchase agreement was signed on 16 December 2021; the closing process poses limited execution risk. Sun Group is a real estate company which owns offices and warehouses, mainly in one location, with assets under management of around HUF 5bn. Prohumán is Hungary’s leading provider of HR services. Profolio Kft is the minority owner of Prohumán.

The issuer rating mainly reflects Scope’s expectation that the post-transaction group will hold a leading position in Hungarian HR services, bolstered by a strong regional presence.

Sun Group plans to issue a HUF 14.0bn senior unsecured bond under the Bond Funding for Growth Scheme of the Hungarian National Bank (MNB) and a 10% oversubscription to finance the purchase price of Prohumán and to provide an intercompany loan to Prohumán. The oversubscription entails some risk in comparison with raising the initial bond issuance amount.

The bond is expected to have a 10-year tenor, annual coupon of up to 5.5% yearly, and amortisation from year five in equal annual instalments, leaving a 50% balloon at maturity.

The issuer rating of the significantly larger Sun Group is mainly driven by the historically low leverage on its real estate portfolio and its acquisition of Prohumán, which has high profitability, low maintenance capex requirements and well-established operations in Hungary and neighbouring countries. The rating is constrained by Sun Group’s intention to fully finance the Prohumán acquisition with debt, the limited scale of Sun Group’s operations, Prohumán’s high dependence on a single service (temporary staffing), and Sun Group’s rather low geographical and revenue diversification, which was given a higher weight in Scope’s business risk profile assessment.

Sun Group’s business risk profile (assessed at B+) will benefit from the acquisition of leading HR services firm Prohumán. Prohumán has more than 700 clients in the fragmented Hungarian market, in which it holds a share of over 16%. Prohumán also operates in the neighbouring countries of Romania and Slovenia. While blue-collar temporary staffing services generate most of the revenues in Hungary, office worker staffing and outsourcing services predominate in Romania. Once Prohumán is consolidated, Hungarian and Romanian HR services will make up more than 80% of Sun Group’s consolidated revenues and EBITDA, while the share for the real estate segment will fall below 10%.

Sun Group’s financial risk profile (assessed at BB+) is supported by its healthy operating profitability at 2-4% above the EBITDA margins of the other top five competitors, which translates into a good ability to generate cash flow. Both Sun Group and Prohumán have kept leverage low, with a Scope-adjusted loan/value ratio of around 35% on Sun Group’s real estate assets and a net cash position for Prohumán’s HR services, which use only working capital loans and factoring. Indebtedness will, however, increase after the acquisition since it is fully debt-funded, to reach a Scope-adjusted debt/EBITDA ratio of around 3.5x.

Scope deems Sun Group’s liquidity to be adequate, mainly driven by moderate leverage after the acquisition, historically good cash flow generation for both Prohumán and Sun Group, with good outlooks, and the repayment profile of the envisaged bond, allowing amortisation from year five and a 50% balloon payment at maturity.

The planned bond issuance will be guaranteed by Prohumán and issued under the MNB Bond Funding for Growth Scheme. The debt is structured as a holding financing on Sun Group level, with the cash flow for repayment produced at subsidiary level.

Scope does not expect significant changes to the capital structure or further large debt-financed acquisitions over the next few years, with organic growth set to be the main focus. The strategic owners have been managing the company since its inception. After the Prohumán acquisition, the management team will indirectly become the majority owner, with each owner managing one key business line. Scope’s therefore sees some key person risk.

Based on supplementary rating drivers, Scope has taken one notch off the issuer rating for Sun Group’s shareholder-friendly financial policy and rather loose financial planning under the modified M&A structure. The issuer rating including supplementary rating drivers is rated B+. Sun Group plans to vote for a dividend of around HUF 1.5bn for the minority shareholder in 2021, of which HUF 525m has already been paid out and the remainder will be paid by 2023. Furthermore, the bond is structured on Sun Group Kft at holding level, while the debt will mainly be serviced using the operative cash flow from Prohumán. As this will come in the form of dividend payments from Prohumán to Sun Group, there will be an automatic dividend for the minority shareholder without a link to performance.

Outlook and rating-change drivers

The Outlook is Stable and assumes: i) the successful placement of the HUF 14.0bn bond with 10% oversubscription by the end of Q1 2022; ii) the successful closing of the Prohumán acquisition by the end of Q1 2022; and iii) a Scope-adjusted debt/EBITDA ratio of around 3.5x for the post-transaction entity as Sun Group plans to consolidate Prohumán.

A negative rating action could be triggered by the cancellation of the Prohumán deal or further delays in its execution. It could also follow a deterioration in credit metrics, e.g. if Scope-adjusted debt/EBITDA increased and stayed above 4x, or liquidity weakened due to very strong working capital swings or higher shareholder remuneration. Credit metrics could deteriorate as the consequence of another large debt-funded acquisition or a major dividend payout in the coming two to three years.

A positive rating action is remote but could be warranted if diversification in the HR business improved by services or geographies, including achieving a leading/top three market share in further countries of operation, while Scope-adjusted debt/EBITDA does not exceed 3x.

Long-term and short-term debt ratings

Scope simulated a hypothetical default scenario in YE 2022, in which the company had issued the new senior unsecured bond with proceeds used for the Prohumán acquisition. The resulting recovery expectation translates into the same rating as the issuer rating, leading to a B+ senior unsecured long-term debt rating.

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, (Corporate Rating Methodology, 6 July 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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: 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 the 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 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, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 December 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services 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.