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 first-time issuer rating of B+/Stable to Illés Holding Zrt. Scope has also assigned a first-time rating of B+ to the group’s senior unsecured debt.

Rating rationale

Illés Holding’s business risk profile, assessed B+, is driven by the group’s niche market position and slightly different business model within the highly fragmented transportation industry. Although the group is a small market player, it specialises in the transportation of specialty cargo (e.g. oil and gas, construction material, bulk agricultural products). This requires dedicated equipment for both the transportation and storage of goods, leading to a more stable customer portfolio with long-term, multi-year contracts. Although operating profitability is considered relatively strong, Scope notes that it is volatile because: i) it is determined by the total utilisation rate of the group’s vehicle park; and ii) most of the group’s customers operate in industries with medium to high cyclicality. Illés Holding manages peak periods with subcontractors, while closely monitoring the utilisation of its trucks. Investments in new vehicles are made in line with their estimated utilisation based on customer acquisition and the business development of the group’s road and rail divisions.

Illés Holding has a moderately diversified service portfolio. Scope expects the newly acquired solar power plant to strengthen the group’s operating profitability while simultaneously decreasing its volatility. The solar park will start operations in Q1 2022, with the capacity of 20MW¹ under the Hungarian KAT feed-in tariff programme of the Hungarian Energy and Public Utility Regulatory Authority, resulting in stable cash flow generation. Scope believes that the new energy division will strengthen the group’s financial risk profile.

Regarding the group’s financial risk profile, assessed B+, the highly leveraged solar power plant investment project has weakened 2021 credit metrics. Scope’s financial base case includes the fully consolidated financials and dividend payment to minority shareholders for Illés Holding’s rail division in 2021 and looking forward – due to its majority share of 51% in the subsidiary. Scope forecasts that credit metrics will decline further next year, assuming the successful issuance of the planned HUF 6bn NKP bond in Q1 2022. Scope forecasts that Scope-adjusted debt/EBITDA will increase to above 4.0x in 2022, but expects this to be temporary. Furthermore, interest cover is relatively strong. Illés Holding’s investment plans will lead to significant negative free operating cash flows for the next years.

Scope sees liquidity as adequate. However, the agency forecasts that it will be negative in the next two years, mainly due to negative cash cover. The group has significant outstanding short-term obligations to pay because the amortisation of most of its debts and other financial obligations (i.e. leases) is linear.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Illés Holding’s will successfully issue the planned HUF 6bn senior unsecured bond in 2022, that its new solar power plant will start operation in 2022 and that the group’s rail division financials will remain fully consolidated. The Outlook also factors in Scope’s expectation that the group will maintain a prudent financial policy consistent with the credit metrics required for the rating category.

A positive rating action may be warranted if Scope-adjusted debt/EBITDA strengthens to below 3.5x on a sustained basis, for instance, if the group successfully expands its main business line. An upgrade may also be warranted by an improvement of the group’s business risk profile.

A negative rating action might be warranted by financial leverage not improving towards the breakeven level in the mid-term, after the completion of the investment program.

Long-term and short-term debt ratings

Scope has assigned a B+ debt rating to Illés Holding’s senior unsecured debt. The instrument rating is based on a hypothetical liquidation scenario in 2023, in which Scope computed an ‘superior’ recovery for senior unsecured debt holders. This is based on Scope’s assumptions of attainable liquidation values. No notching was applied to the issuer rating.

Illés Holding plans to issue a HUF 6bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The bond is expected to have a 10-year tenor with amortisation beginning in the fifth year and a 50% bullet repayment at maturity. West-Bridge Kft and Transolut Magyarorszag Kft, two of the issuer’s subsidiaries, will act as guarantors. The bond coupon will be fixed and payable on an annual basis. Proceeds are earmarked for the acquisition of vehicles.

¹editorial note: The wording of the inital press release has been updated.

Stress testing & cash flow analysis 
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this Credit Rating and 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 Rating if the Credit Rating 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.
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 Rating: public domain, 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 Rating 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 Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
These Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed
Lead analyst: Vivianne Anna Kapolnai, Senior Analyst
Person responsible for approval of the Credit Rating: Olaf Tölke, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 22 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.