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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB/Stable issuer rating of Progress Étteremhálózat Kft (Progress), the development licensee partner of McDonald’s in Hungary. The senior unsecured debt category rating has been affirmed at BB+.

The rating affirmation reflects Progress’s unchanged moderate business risk profile and financial risk profile. The rating affirmation also takes into account the correction of previous calculation errors in some financial metrics. The errors relate to the calculation of Scope-adjusted interest*, funds from operations and free operating cash flow. The errors were reviewed, and Scope concluded that the corrections had no impact on the ratings.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB (unchanged). The affirmation of Progress’ business risk profile follows the company’s demonstrated resilient performance despite inflationary pressures in Hungary that drove labour and agricultural products costs higher in the past year. Progress has presented a double-digit revenue growth (17%) in 2024, while sustaining a solid EBITDA margin (15.7%) as the issuer benefited from the increase in traffic and volumes, as well as successful business expansion in strategic areas of the country.

Progress, along with its conventional licensee partners, is a major restaurant chain operator in Hungary through its operation of the McDonald’s brand. Hungary currently has 115 McDonald's restaurants (including franchise partners), where 60% of the stores are operated and owned by Progress generating HUF 105bn revenues in 2024 (approx. EUR 260m).

McDonald’s Corporation and its strong brand facilitate the company’s strong market position in Hungary among informal eating out (IEO) competitors and provide additional support through well-defined global marketing tools (locally adapted), strong internal controls and supply-side capacity. The primary risk for Progress’ business lies in a deterioration in its relationship with McDonald’s Corporation. This risk is mitigated by the company’s consistent fulfilment of its obligations towards global requirements under the development licensee agreement, including the timely execution of investments, which reinforces trust and alignment with McDonald’s Corporation.

The company’s diversification assessment remains constrained by the limitation of the development licensee agreement to Hungary and the concentration on a single business line, although Scope notes the country-wide strong presence and multiple sales channels. Product diversification remains limited mainly to fast food and beverages. On the other hand, Scope expects Progress’ EBITDA margin to remain at a similar level to that in 2024 (between 15%-16%) in the medium term as the company gains market shares, has an adequate pricing strategy in place and manage costs effectively.

Financial risk profile: BB+ (unchanged). Progress’ financial risk profile has been improving over the past years with a continuous improvement in leverage levels and cash flow generation. The company was able to successfully conclude its heavy investment phase and scale up operations in 2024, which resulted in an improved nominal EBITDA ahead of expectations while debt levels remain flat.

Leverage, measured as debt/EBITDA, has decreased to 2.6x in 2024 (vs 3.0x in 2023). The decline was driven by the HUF 3.2bn EBITDA growth YoY and relatively flat gross debt. Leverage is expected to remain below 3.0x and in an improving trend in the medium term driven by sequential improvement in nominal EBITDA. As of year-end 2024, the company’s balance sheet debt includes a HUF 33bn senior unsecured debt maturing in 2030 and approx. HUF 3bn in bank guarantees. Scope expects no major changes in Progress’ debt profile, besides the bond amortisation from 2026, further supporting the gradual improvement in leverage levels YoY.

EBITDA interest cover is strong at above 15x at year-end 2024 and Progress’ benefits from a fixed rate debt coupon for its HUF 33bn bond of 3.0% yearly, what supports debt protection. Consequently, Scope expects this metric to remain strong, above 10x, in the next three years. Funds from operations/debt were at 37% in 2024 (up 6pp YoY) while free operating cash flow/debt compressed to 5% in 2024 (13% in 2023) as the company concluded its heavy capex phase. Progress’ free operating cash flow generation is expected to remain adequate, allowing cash to be accumulated for debt service and dividends payments as the heavy capex related to the renovation of restaurants is concluded. The company has initiated dividends payments as of year-end 2024 and Scope forecasts sufficient free cash flow generation in the medium-term allowing dividends payments without compromising the company’s financial risk profile.

Liquidity: Adequate (unchanged). Liquidity is adequate and benefits from the company’s conservative debt maturity profile, with no short-term debt either historically or planned in the coming years. The bond will start amortising in 2026 with HUF 4.1bn annually which does not pose a liquidity risk given the comfortable cash position and positive free operating cash flow generation.

Scope highlights that Progress’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 33bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (immediate accelerated repayment). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is three notches. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition to the rating deterioration covenant, bond covenants include list of soft covenants among others (i) change of control unless approved by McDonald’s Corporation, (ii) net/Debt EBITDA up to 3.5x applicable only if breach is due to raising new debt, and (iii) dividend restriction up to 50% pay-out ratio.

Supplementary rating drivers: Credit-neutral (unchanged). Financial policy supports the rating given the company target of a net debt/EBITDA of below 3.5x (in line with bond covenant). Parent support is neutral as support is not expected from the holding company or the ultimate owner. No dividends were paid during the investment phase, and company guidance on dividends still allows for deleveraging.

Outlook and rating sensitivities

The Stable Outlook reflects Progress' increased network size and stable market share, after having successfully completed the investment phase. The Outlook also assumes that the issuer will be able to maintain debt/EBITDA below 3.0x, as well as generating sufficient cash to limit the need for additional financing in the medium term.

The upside scenarios for the ratings and Outlook are (collectively):

1. Increase in market share.
    
2. Free operating cash flow/debt above 10% on a sustained basis.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA above 4.0x.

Debt rating

The senior unsecured debt rating of Progress Étteremhálózat Kft. has been affirmed at BB+, one notch above the issuer rating.

The assessment is supported by the low likelihood of introduction of new financings, the HUF 87bn in total assets (of which HUF 45bn are fixed), as well as that the size of additional financing is restricted by bond leverage covenants. Based on Scope assumptions at default year, the company had a buffer of approx. HUF 25bn of additional debt before breaching its bond covenant. Such incremental debt would still result in a recovery expectation of above 50% but that would not be sufficient for a two-notch uplift.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Progress Étteremhálózat Kft.

Issuer rating: BB/Stable, affirmation.

Senior unsecured debt rating: BB+, affirmation.

*All credit metrics refer to Scope-adjusted figures.

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, 14 February 2025), 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
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 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 these 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: Lucas Nathan Pozza Pessoa, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 July 2020. The Credit Ratings/Outlook were last updated on 30 May 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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