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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Communication Technologies Kft. (CT) and revised the Outlook to Negative from Stable. Scope has also affirmed the B+ rating on senior unsecured debt.

The affirmation of the issuer rating reflects broadly unchanged business and financial risk profiles, as well as expected positive developments in terms of geographical diversification and revenue additions from non-core segments. However, the ratings are constrained by delays in the execution of a large framework agreement with the Hungarian Police Authority, which has lowered cash flow predictability and prompted a revision of the Outlook to Negative.

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). CT's good profitability supports its business risk profile, with an average Scope-adjusted EBITDA margin* of around 35% and an average return on capital employed of around 20% for the period from 2022 to 2025, with medium volatility. Although the execution of a large framework agreement with the Hungarian Police Authority has been delayed by two years, CT plans to diversify its revenue streams and expand other agreements with state authorities. This will likely lead to stability in profitability metrics over the short term.

The assessment is limited by the company's small size in a niche market, resulting in a small market share in the IT security sector. Although CT is the sole provider of electronic offender monitoring solutions to the Hungarian Police Authority, which bolsters its competitive positioning in the niche market, its level of diversification is currently very low. CT is exposed to a single country and industry, coupled with high customer concentration. These factors negatively impact its moderate service strength, which is characterised by low churn rates and a high proportion of recurring revenues.

Financial risk profile: BB+ (unchanged). Despite the delay in executing the contract with the Hungarian Police Authority, Scope considers the issuer’s financial standing to be healthy due to recurring revenues from current contracts and good profitability. Leverage (debt/EBITDA) remained below the 5.0x covenant threshold at 4.3x in 2024 and is projected to gradually decrease. This is because CT does not currently foresee any major capital expenditures in the near future, while EBITDA is expected to remain stable due to recurring revenues from ongoing contracts.

Scope projects EBITDA interest cover to improve over the next few years, as CT has opted to invest excess cash stemming from bond proceeds into interest-bearing government securities. Consequently, the agency estimates that the company will generate net interest income in 2025 and 2026. Moreover, Scope expects free operating cash flow/debt to also remain adequate going forward in the absence of major capital expenditures.

Liquidity: adequate (unchanged). Scope considers liquidity to be adequate. The rating agency does not foresee any refinancing issues in 2025 and 2026, considering CT’s low refinancing needs (HUF 100m) and sufficiently high cash buffer (HUF 844m) as well as positive projected free operating cash flow.

Scope highlights the fact that the senior unsecured bond issued by CT under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant that requires the accelerated repayment of the outstanding nominal debt amount (HUF 2.0bn) if the bond's debt rating remains below B+ for more than two years (grace period) or drops below B-. In the latter case, repayment must be made within thirty days. This could negatively impact the company’s liquidity profile. The rating headroom to entering the grace period is zero notches. Furthermore, Scope expects full compliance with the aforementioned leverage-related covenant over the next two years.

Supplementary rating drivers: credit-neutral (unchanged). Scope considers supplementary rating drivers to be credit-neutral. Despite CT’s relatively small scale and concentration risks, Scope has not lowered the issuer rating for peer context because the standalone credit assessment is currently considered suitable. Scope has identified some concerns regarding governance, including suboptimal plan execution and key person risk, which could materialise into credit risks over time (ESG factor: credit-negative). Nonetheless, the risks involved are adequately addressed in the company's standalone credit assessment, thereby eliminating the need for further rating adjustments.

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

Outlook and rating sensitivities

The Negative Outlook reflects CT’s suboptimal execution of its plans and its failure to use bond proceeds for their intended purpose. These issues could lead to a deterioration of the company’s financial standing in the long run, either individually or collectively.

The upside scenario for the ratings and Outlook is:

• The contract with the Hungarian Police Authority beginning in H2 2025 at the latest, and the company's financial and operational targets largely being met

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

• A delayed start to the contract with Hungarian Police Authority beyond 2025, and/or a continued failure to achieve financial and operational targets
   
• Renewed concerns about covenant compliance with debt/EBITDA moving close to 4.5x

Debt rating

The rating on senior unsecured debt has been affirmed at B+, consistent with the issuer rating. Scope projects an "average" recovery for senior unsecured debt, i.e. the senior unsecured corporate bond, in a hypothetical default scenario in 2026, aligning the debt rating with the issuer rating as a result.

Environmental, social and governance (ESG) factors

Scope sees two key areas of concern that require close monitoring: CT’s execution of its strategic plans and ensuring that bond proceeds are used properly. These issues pose long-term risks to the company’s financial health, particularly given the increase in debt repayments starting in 2027. The company also faces key person risk, as its operations depend heavily on its founder and majority owner, Mr Peter Neuman.

All rating actions and rated entities

Communication Technologies Kft.

Issuer rating: B+/Negative, Outlook change

Senior unsecured debt rating: B+, 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 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 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, 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: Dániel Szebényi, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 January 2022. The Credit Ratings/Outlook were last updated on 2 August 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
© 2025 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab 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. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.