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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungary-based Pannon-Work Zrt. (Pannon-Work) to B from B+ and revised the Outlook to Negative from Stable. Scope has also downgraded the senior unsecured guaranteed bond (ISIN: HU0000360052) rating to B from B+.

The downgrade reflects a rapid deterioration in credit metrics, primarily driven by operational disruptions in the company’s HR services segment. This was triggered by a significant reduction in temporary staffing demand from key client Samsung. Additionally, other anticipated projects requiring temporary staffing have been delayed, raising concerns about the company’s ability to restore sales momentum in the short to medium term.

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

Key rating drivers

Business risk profile: B+ (unchanged). Pannon-Work’s business risk profile continues to be supported by the service strength but remains constrained by weak profitability in its core operations and limited market share.

The company remains fifth largest personnel service provider in Hungary. The Hungarian market is very fragmented, with the top four players holding around a third of the market.

Growth in recent years has been driven by the labour shortage in Hungary and companies’ need for an intermediary to offer flexibility by leasing out personnel when required. The labour shortage and further workforce needs created by large-scale investments in the automotive, automotive supplier and consumer goods sectors may continue, enabling the workforce leasing market to grow. However, sluggish economic growth is tempering the level of temporary staffing needed, specifically for the battery producers and original equipment manufacturers (OEMs) industry, which has negatively affected Pannon-Work’s top-line development.

Despite the company’s efforts to expand its range of services, there is concentration risk due to: i) its sole exposure to Hungary; ii) dependence on the Hungarian labour market; iii) reliance on an imported Asian workforce; and iv) the high revenue share provided by key customers. Low geographical and client diversification mean that cash flow from Pannon-Work’s main activity is volatile.

Scope-adjusted EBITDA* includes one-off adjustments related to a HUF 132m impairment of receivables and a HUF 422m debt write-down associated with a software acquisition. Despite these adjustments, operating profitability has deteriorated sharply, with the EBITDA margin falling to 1.1% in 2024 from 3.6% in 2023. This decline was primarily driven by reduced manpower leasing to the Samsung factory and a rise in the municipality tax, which increased the issuer’s cost of goods sold by approximately 2% of total income. While the outlook for the automotive vendor market in 2025–2026 is promising, project delays raise concerns about Pannon-Work’s ability to restore profitability margins in the near term. Scope expects profitability to remain at around 1% going forward. Following the decline in EBITDA, the ROCE also fell to 5% in 2024 (20% in 2023).

Service strength is moderate and is driven by a medium level of integration in key customers’ operations with multiple HR services, mostly not on an exclusive basis.

Financial risk profile: B- (revised from BB-). Pannon-Work’s financial risk profile is constrained by elevated leverage. Debt protection metrics provide some support to the rating.

Following the significant drop in EBITDA in 2024, leverage, as measured by debt/EBITDA, increased sharply to 19.1x from 4.7x in 2023. Debt increased by around HUF 500m, largely attributable to the full drawdown of an overdraft facility. Scope expects a modest recovery in EBITDA going forward. Meanwhile, debt levels are projected to remain stable. Both of these factors will result in elevated leverage, with a debt/EBITDA ratio above 10.0x anticipated in the medium term.

EBITDA interest cover remains the strongest component of Pannon-Work’s financial risk profile. However, the decline in EBITDA, weakened the metric significantly to 3.5x in 2024, from 10.6x YoY. This ratio was supported by the low fixed annual coupon of 3.0% on the HUF 3.5bn bond, which kept interest expenses flat, and by interest income earned on high-yielding time deposits. Scope expects EBITDA interest cover to decline further towards 2.0x as deposit rates continue to fall, although this would still provide a moderate level of debt protection.

Scope expects cash flow cover to benefit from reduced exposure to Samsung, the company’s key client, as payment collection terms with this client have historically been longer. This trend was already evident by the end of 2024, when accounts receivable decreased by approximately HUF 1.0bn. A similar amount can reasonably be assumed as cash inflow in 2025, however, Scope has treated this inflow as a one-off event, likely used for general corporate purposes, and does not consider it to have a recurring impact on the company’s free operating cash flow. Despite limited capital expenditures anticipated for 2025–2026, cash flow cover is expected to remain at or near zero over the next two years.

Liquidity: adequate (unchanged). Scope considers Pannon-Work’s liquidity to be adequate, despite liquidity coverage remaining below 100% in recent years and a similar level projected for 2025–2026. The company’s strong reliance on short-term working capital facilities – primarily for salary payments – continues to weigh on liquidity metrics. However, this is largely mitigated by the low refinancing risk associated with receivables from global automotive clients.

The HUF 3.5bn bond begins amortising in 2026, with annual repayments of HUF 700m. Management expects accumulated cash inflows from solar projects over 2024–2026 to cover the principal repayments of the amortising debt. However, Scope raises concerns regarding Pannon-Work’s ability to meet repayment requirements by the end of 2027 if market conditions remain unchanged and the company continues to struggle to return to historical EBITDA generation levels.

Additional liquidity could be sourced from the potential sale of standardised 0.5MW solar power generation assets.

Pannon-Work is subject to financial covenants requiring bond repayment if net debt/equity exceeds 2.5x or if net debt/balance sheet size surpasses 60%, based on year-end consolidated financial statements. To date, there have been no covenant breaches, but Scope highlights tight headroom to covenants for 2025.

Supplementary rating drivers: credit-neutral (unchanged). Supplementary rating drivers have no impact on the issuer rating. However, Scope notes weak predictability of the business plan, loose forecasting and some intransparencies regarding investments and financials (ESG factor: credit-negative).

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

Outlook and rating sensitivities

The Negative Outlook reflects Scope's concerns about the pace of market recovery and the lack of new contracts to offset the decline in revenue and profitability caused by falling sales from the company's largest client. This is compounded by the increased municipal tax burden. A delayed recovery increases the risk of weak cash generation continuing, which could restrict the company’s ability to meet the amortisation schedule of the MNB bond from 2026 onwards using internal resources alone. Furthermore, the Outlook assumes that leverage (debt/EBITDA) will remain materially elevated in the range of 10x–15x, while EBITDA interest coverage is expected to stay above 2.0x.

The upside scenarios for the ratings and Outlook are seen as remote, but would require (collectively):

1. Improving profitability by achieving the historical margin profile in the core business (HR services).
    
2. EBITDA interest cover maintained at above 2x.

The downside scenarios for the ratings and Outlook are (individually):

1. Failure to improve profitability by achieving the historical margin profile in the core business (HR services).
    
2. EBITDA interest cover not maintained at above 2x.
    
3. Perceived liquidity deterioration, i.e. if bond amortisation starting in 2026 is not addressed well in advance.

Debt rating

Scope assesses Pannon-Work’s senior unsecured bond (ISIN: HU0000360052) guaranteed by Gamax Kft. at B, in line with the issuer rating. The average recovery expectation primarily reflects the bond's ranking below senior secured borrowings (for investments, acquisitions and working capital) and the unchanged debt in absolute terms. Furthermore, Scope sees the guarantee of Gamax Kft. as credit-neutral.

Environmental, social and governance (ESG) factors

The concerns regarding Pannon-Work’s transparency have been factored into Scope's assessment of the company’s financial risk profile, which also affects the issuer rating.

The regulatory environment around temporary staffing is fairly negative socially, as staff can be laid off easily and leased workers usually have less rights than employees. While this may seem to benefit Pannon-Work in the short term, Scope believes it poses some regulatory risk for the future, and is therefore maintaining a credit-neutral view for now.

Pannon-Work has built up 6MW of renewable power generation with strong cash flow generation, which supports the rating.

All rating actions and rated entities

Pannon-Work Zrt.

Issuer rating: B/Negative, downgrade and Outlook change

Senior unsecured guaranteed debt instrument (ISIN: HU0000360052) rating: B, downgrade

*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 methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 14 February 2025; European Business and Consumer Services Rating Methodology, 15 January 2025), 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 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, 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 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: Zurab Zedelashvili, Senior Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 14 August 2020. The Credit Ratings/Outlook were last updated on 20 June 2024.

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, 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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