Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Communication Technologies Kft (rated B+/Under review for a possible downgrade; senior unsecured debt rating B+/Under review for a possible downgrade) on 12 April 2024.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

On 3 August 2023, Communication Technologies announced that it had signed a long-awaited HUF 27bn tender for an electronic surveillance system for the Hungarian police over a five-year-period, offering a significant potential increase in revenue and visibility over the period. However, uncertainty remains as to when this will start in 2024. As this framework agreement represents almost 90% of the issuer’s 2024 revenue plan and a similar proportion of its EBITDA, the business plan for 2024 is uncertain after delays in 2023.

As FY 2023 accounts are yet to be finalized, the gross debt/EBITDA ratio could be close to (or perhaps above) 5x for the second year in a row (the depressed performance in 2022, including some one-off expenses, already took it to 29.4x), which significantly increases the risk of a covenant breach, possibly triggering an early repayment of the HUF 2bn bond. Audited accounts are due to be published by 30 April 2024, followed by an updated business plan. In addition, Scope also notes some clarity and transparency issues related to the quality and reliability of financial information received, as well as key person risk, as noted in its rating action release on 22 January 2024 (ESG factor: credit-negative governance factor).

The B+ issuer rating remains under review for a possible downgrade. Scope will closely monitor the developments in relation to the potential breach of the covenant and the future development of the company.

The B+ long-term debt rating for senior unsecured debt issued by Communication Technologies Kft also remains under review for a possible downgrade.

Scope will resolve the under review status as soon as possible upon receipt of updated financial statements and, if such financials are covenant compliant, will evaluate them in light of the business plan to be received.
 
The methodologies applicable for the reviewed ratings, (General Corporate Rating Methodology, 16 October 2023; European Business and Consumer Services Rating Methodology, 15 January 2024) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Jacques de Greling, Director

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