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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian investment holding company Forrás Nyrt. (Forrás) to B/Stable from B+/Stable. Scope has also downgraded the senior unsecured debt rating to B from B+.

The downgrade reflects heightened concerns regarding the sustainability of the issuer’s cash-generating portfolio. This is driven by the cancellation of dividend distributions from key holdings (Kiss és Társa Kft., Váll-Ker Kft.) and the deferral of interest payments from the solar projects. These developments raise doubts about the issuer’s ability to generate sufficient recurring cash income to meet mandatory obligations over time.

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). The portfolio’s diversification remains supportive, but its sustainability and investment philosophy constrain Scope’s assessment.

Forrás’s business risk profile benefits from moderate portfolio diversification. The investment portfolio remains well-balanced, with limited concentration across sectors (renewables, real estate, capital goods and financial services) and by gross asset value (the top holding, Kiss és Társa Kft., accounts for 8% of gross asset value as of YE 2024). While the renewables sector’s relative share within the portfolio increases slightly, the change is not expected to result in material concentration risk. However, limited geographical diversification is a credit constraint. Forrás's core holdings mostly operate in Hungary, which exposes the company to market-specific factors such as economic shifts and regulatory changes.

The high concentration of cash inflows poses a significant risk. Top holding, Stúdió-V Kft., which is the only source of cash inflows from the core-holding portfolio, accounted for 18% of recurring cash income in 2024. The recent cancellation of dividends from Kiss és Társa Kft. and Váll-Ker Kft., along with the postponement of interest payments from solar projects, has significantly reduced the contribution of recurring cash-generating assets. As a result, the portfolio has become increasingly reliant on short-term investments, which Scope does not consider to be a sustainable source for building a resilient cash-generating base.

Scope points out that while additional investments in liquid assets – amounting to HUF 4.1bn as at YE 2024– appear to support portfolio liquidity, these short-term investments are not a structural component of the issuer’s financial policy. Instead, Scope views them as a temporary cash generation source. Given the anticipated funding needs of investment projects within the portfolio companies, these liquid assets may be reallocated, limiting their long-term contribution to the portfolio. As such, Scope does not view this development as indicative of a fundamental improvement in the issuer’s portfolio liquidity.

Financial risk profile: B (revised from B+). Forrás's financial risk profile remains constrained by the limited predictability of volatile cash inflows.

Total cost cover* decreased to 0.5x in 2024 from 1.3x in 2023, primarily due to the cancellation of HUF 500m in dividend income from Kiss és Társa Kft. and the postponement of interest payments on shareholder loans. Scope estimates that total cost cover will remain significantly below 1.0x over the next few years, constrained by volatile cash flow, the limited visibility of the interest payment from wholly owned holdings, and the lack of a formal dividend policy at recently acquired entities such as Kiss és Társa Kft. and Váll-Ker Kft. These factors materially limit the predictability of future cash inflows. While management anticipates that the collection of interest on shareholder loans will commence in the second half of 2025, Scope has not factored any such inflows into its projections. This conservative stance reflects the lack of a track record in 2024 and continued uncertainty around the enforceability and timing of these payments.

The loan/value ratio stood at 53% as of YE 2024. The metric decreased slightly from previous years (57% as of YE 2023) due to fair value gains from solar projects, which were partially offset by additional guarantees issued to holding companies. Based on a gradual use of the bond proceeds, Scope expects the loan/value ratio to remain between 50%-60% over the next two years.

Liquidity: adequate (unchanged). Due to the absence of short-term liabilities and a considerable liquidity reserve of around HUF 4.7bn as of YE 2024, there are no refinancing risks that would necessitate the sale of investments in the short to medium term, despite the negative free cash flow expected for 2025–26. The bonds start amortising with HUF 2.2m yearly from 2027. Further sources of liquidity could be provided by the sale of the short-term investments in liquid assets in the amount of HUF 9.4bn.

Forrás's senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme have a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 21.7bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 days). Such a development could adversely affect the holding company’s liquidity profile. Following today’s downgrade of the senior unsecured debt rating to B, Forrás has entered the grace period. This means the company must ensure the debt rating returns to B+ before the grace period ends on 18 June 2027, unless the rating falls below B-. If the debt rating does not return to B+ within the grace period, Forrás could face severe liquidity constraints and enter a default, unless it obtains refinancing that covers the early repayment of the outstanding bond amount, or it proactively obtains an investor waiver related to the repayment acceleration.
 
Supplementary rating drivers: credit-neutral (unchanged). Supplementary rating drivers have no impact on the issuer rating. However, concerns related to weak predictability of the business plan and loose forecasting have been factored into Scope's conservative assessment of the company’s financial risk profile, which also affects the issuer rating. (ESG factor: credit-negative).

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that the cancellation of dividend payments from core holdings will continue to weaken cash inflows, resulting in total cost cover remaining significantly below 1.0x while LTV will remain between 50% and 60% in the medium term.

The upside scenario for the ratings and Outlook is:

1. Total cost cover improving significantly above 1.0x on a sustained basis

The downside scenario for the ratings and Outlook is:

1. Total cost cover sustained below 0.5x

Debt rating

Scope has downgraded the senior unsecured debt rating to B from B+, including the HUF 21.7bn bond (ISIN: HU0000359997), the same level as the issuer rating.

Scope’s analysis is based on a hypothetical default scenario in 2026, which assumes outstanding senior unsecured debt of HUF 21.7bn with no senior secured loans. Scope has computed an 'average' recovery for senior unsecured debt holders in a liquidation scenario. Senior unsecured debt at the holding company level is structurally subordinated to debt at the subsidiary level, constraining the debt rating.

Environmental, social and governance (ESG) factors

Scope points to the lack of reliability of Forrás's strategic planning, as evidenced by the limited predictive power of business plans provided by the management, with cash and non-cash income changing considerably between business years. This factor significantly reduces visibility and may lead to a further deterioration of credit metrics.

Scope highlights the strong influence of the main shareholder Arago, which could potentially lead to disadvantages for external creditors like bondholders (and minority equity shareholders) in case of disputes/liquidation scenarios.

All rating actions and rated entities

Forrás Nyrt.

Issuer rating: B/Stable, downgrade

Senior unsecured debt 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; Investment Holding Companies Rating Methodology, 16 May 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 22 June 2020. The Credit Ratings/Outlook were last updated on 18 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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