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      Scope raises Outlook to Positive from Stable on 4iG’s BB- issuer rating
      FRIDAY, 22/12/2023 - Scope Ratings GmbH
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      Scope raises Outlook to Positive from Stable on 4iG’s BB- issuer rating

      The Outlook change is driven by 4iG’s expected deleveraging and progress in integration of acquisitions.

      The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

      Rating action

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

      Rating rationale

      The rating action incorporate 4iG’s expected deleveraging and the low volatility of the telecommunications industry, the good competitive position in Hungary and Albania, and the improving credit metrics after the significant and mostly debt-funded acquisitions.

      The business risk profile (assessed at BBB-) is supported by the low volatility of the telecommunications services industry, the strong market share in the Hungarian mobile market after the acquisition of Vodafone Hungary (about 3m subscribers) and the number one position in the Hungarian broadband market (about 1.5m subscribers). Diversification remains weaker with a dominant exposure to Hungarian telecommunications. Operating profitability as measured by the Scope-adjusted EBITDA margin is expected to be above 30% in the coming years, helped by increasing synergies and the announced end of the utility tax in 2024 and the special telecommunications tax in 2025.

      The financial risk profile (assessed at B+) is constrained by the significant debt accumulated during the last years through telecommunication acquisitions, even with the help from the state either directly or through state holding Corvinus Zrt (owning 30% of Vodafone Hungary). Leverage measured by Scope-adjusted debt/EBITDA is anticipated to improve to around 4.2x in 2024 (from 5.3x the year before). Interest coverage is expected to be over 3x in the coming years (after 2.7x the year before), while free operating cash flow is expected to remain limited due to significant capex (just below HUF 100bn), partly due to the integration process of the telecommunication businesses.

      Scope’s assessment of the company’s indebtedness continues to exclude cash and cash equivalents. Netting is generally applied to BB category ratings or higher and if cash is permanent and accessible. Given the size of the Vodafone acquisition, the complexity of the structure and the pledges in favour of the new debt holders, Scope believes that the cash is not permanent and can be used for working capital, capex and other needs. No significant amount of debt matures until 2025 as debt maturities are well spread (including the recent debt for Vodafone’s acquisition). Scope deems liquidity to be adequate in the short term. For 2024, Scope expects short-term financial debt to be more than 2x covered by a combination of available cash and cash equivalents as well as positive free operating cash flow.

      As regard supplementary rating drivers, Scope still assesses 4iG’s financial policy as a negative rating driver (ESG factor: credit-negative governance factor). This reflects the company’s aggressive debt-funded M&A policy and limited visibility as to future M&A activity. As a result, Scope has adjusted 4iG’s standalone credit quality of BB downward by one notch.

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

      Outlook and rating-change drivers

      The Positive Outlook on 4iG’s rating reflects the expected deleveraging in line with the company’s stated financial policy and progress in the integration of acquisitions, with no significant M&A.

      An upgrade may be warranted if profitability improved beyond Scope’s base case and a better communication of capital allocation priorities could potentially remove the financial policy notching applied, and with Scope-adjusted debt/EBITDA maintained below 4x.

      A return to Stable Outlook may be warranted if 4iG is deemed unable to deleverage, with Scope-adjusted debt/EBITDA remaining above 4x. Further ratings downside is possible if the Scope-adjusted debt/EBITDA remained high at around 5x, but the probability of such a negative action is seen as remote in the short to medium term.

      Long-term and short-term debt ratings

      In March 2021 and December 2021, 4iG Nyrt. issued a HUF 15bn senior unsecured bond (ISIN: HU0000360276) and HUF 370bn senior unsecured bond (ISIN: HU0000361019) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for acquisitions in telecoms (Invitech’s Hungarian operations, DIGI’s Hungarian operations, Telenor Montenegro, and ALBtelecom and One Telecommunication, both in Albania). The bonds have a tenor of 10 years and a fixed coupon of respectively 2.9% and 6.0%. Bond repayment is in four tranches starting from 2026, with 10% of the face value payable yearly, and a 50% balloon payment at maturity. Scope notes that 4iG’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has several accelerated repayment clauses. The clauses require 4iG to repay the nominal amount (HUF 385bn) in case of rating deterioration (twoyear cure period for a CCC rating; repayment within respectively 10 and 60 days after the bond rating falls below CCC, which could have default implications). 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). There is also a list of soft covenants listed in the bond prospectuses.

      Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt, which is based on an expected enterprise value as a going concern in a hypothetical default scenario in 2025. Scope sees some pressure on expected recovery rates due to i) pledges in favour of creditors that could restrict fund transfers within the group; and ii) debt issuances at subsidiary level resulting in the structural subordination of senior unsecured debt at 4iG level. This translates into a BB- rating for this category, the same level as the issuer 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, (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 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 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: Jacques de Greling, Director
      Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 30 October 2019. The Credit Ratings/Outlook were last updated on 6 January 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.

      Conditions of use/exclusion of liability
      © 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.

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