Scope affirms B+ issuer rating on Bayer Construct Zrt. and changes Outlook to Stable from Negative
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Scope Ratings GmbH (Scope) has affirmed the B+ issuer rating of Bayer Construct Zrt. and changed the Outlook to Stable from Negative. Scope has also affirmed the B+ rating assigned to senior unsecured debt.
The rating affirmation and the reversion of the Outlook back to Stable reflect credit metrics that have remained well within Scope’s rating guidance, owing largely to the resilient operating performance, improved cash flow generation and stable indebtedness. The Outlook change is also driven by the strong order backlog, as well as the sale agreement concluded for all offices buildings in the Zugló City Center project. The latter considerably alleviates development risks while ensuring good visibility on future cash flow. This is particularly encouraging given the tremendous challenges faced by the Hungarian construction industry, which is expected to shrink in 2023-2024.
The business risk profile (assessed at B+) reflects the company’s solid competitive position supported by its high vertical integration, sound procurement capacities and sizeable order backlog. Consolidated revenues were HUF 84.4bn (around EUR 226m; up 13% YoY) and Scope-adjusted EBITDA was HUF 18.7bn (around EUR 50m; up 126% YoY). The record-high order backlog (HUF 279bn as of end-March 2023) will drive revenue growth in 2023-2024, particularly the Zugló City Center project. This provides good visibility on future revenues and will strengthen or at least sustain the company’s market share (estimated at 1%-2%) despite unsupportive construction market conditions in Hungary.
However, two factors continue to constrain the business risk profile assessment due to their potential effect on cash flow: the dominant exposure to Hungary (minor exposure to Romania) and the high customer concentration. The top 10 customers contributed 93% of the backlog on average during 2018-2022 (98% as at end March 2023) while 76% were from contracts with affiliates. The Zugló City Center project also accounts for 66% of outstanding works as of end-March 2023. Scope considers project-related risks to be mitigated, due to the quality of the purchaser of the office buildings (acting on behalf of the Hungarian State), thus reducing the likelihood of bad payments behaviour.
Profitability as measured by the Scope-adjusted EBITDA margin rose to 22% in 2022 (up 11.1 pp YoY), supported by a reducing unit per construction cost and price increases on certain contracts. Investments in prior years towards production capacities and modern construction technologies (e.g. prefabricated concrete elements, BIM design) have started to bear fruit by shortening construction periods and improving efficiency. This should provide a cushion against volatility in cash flow and earnings, with the Scope-adjusted EBITDA margin forecasted at above 12%.
The financial risk profile (assessed at B+) reflects the adequate debt protection and moderate indebtedness. Debt protection as measured by the Scope-adjusted EBITDA/interest cover, at 15.7x as of end-2022 (2021: 9.8x), is adequate, largely supported by the improved profitability. This provides some leeway against potential cash flow volatility that is inherent to construction activities. Nonetheless, some constraints arise from the high share of floating-rate debt (42% as of end-2022), essentially indexed to the Bubor reference rate, which has risen drastically by 10.2 pp since end-2021. Scope expects interest cover to remain above 4x, enough to serve future interest payments.
Leverage, as measured by Scope-adjusted debt/EBITDA ended its upward trend and returned to 3x as at end-December 2022 (2021: 6.9x). This level ensures access to external financing, both secured and unsecured, to offset volatility in cash flow. Scope expects leverage to remain below 5x as no major debt issues are anticipated, with Scope-adjusted debt not expected to exceed HUF 60bn. The easing leverage pressure is also supported by the slowing capital expenditures and steady customer advances.
Liquidity is adequate, with cash sources (unrestricted cash of HUF 7.4bn as of end-2022 and forecasted free operating cash flow of HUF 1.1bn) fully covering short-term debt of HUF 8.8bn due in the 12 months to end-December 2023. The liquidity assessment is further supported by the company’s consistent record of rolling over or repaying debt, the lack of major debt maturities in the short term and the availability under existing loan limits (HUF 2.9bn undrawn that are not expiring in the 12 months to end-2023). Liquidity and refinancing risks are therefore manageable.
Outlook and rating-change drivers
The Outlook is Stable and reflects Scope’s view that Bayer Construct will execute on its order backlog while keeping leverage under control with a Scope-adjusted debt/EBITDA of below 6x. The Stable Outlook also reflects the lower risks associated with the Zugló City Center project (e.g. disposal, delayed payments or customer defaults) after a purchase agreement was reached for all office buildings on behalf of the Hungarian state.
A negative rating action could be warranted if Scope-adjusted debt/EBITDA exceeded 6x on a sustained basis or liquidity worsened. This could be triggered, for example, by delays in customer payment or project execution, cost overruns, higher working capital requirements or an eroding contract backlog.
A positive rating action is remote but could be warranted if the business risk profile improved. This could be achieved if the company increased its size and improved its diversification, while keeping credit metrics at current levels.
Scope notes that Bayer Construct Zrt.’s senior unsecured bond issued under the Hungarian Central Bank’s scheme has an accelerated repayment clause. The clause requires the issuer to repay the nominal amount (HUF 30.1bn) in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 15 days after the bond rating falls below B-), which could have default implications1.
Long-term debt rating
Scope has affirmed the B+ debt rating on senior unsecured debt issued by Bayer Construct Zrt. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on the company’s liquidation value.
1Editorial note: we added a paragraph to the section ‘Outlook and rating-change drivers’ on 30 October 2023. In the original publication, this paragraph was missing.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and Outlooks, (General Corporate Rating Methodology, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 2023), 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 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 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 31 August 2021. The Credit Ratings/Outlooks were last updated on 4 August 2022.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
Conditions of use/exclusion of liability
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