The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Rating action

Scope Ratings affirms and publishes the BB+ issuer rating of Pannonia Bio Zrt, an ethanol and animal feed producer based in Hungary. The rating Outlook is Stable. Scope also affirms the BBB instrument rating for senior secured debt and the BB+ instrument rating for senior unsecured debt.

Rating rationale

The issuer rating mainly reflects the company’s plant, whose large scale, high efficiency and favourable location lead to competitive operating costs and solid profitability overall. Challenges include a strong exposure to very volatile commodities, very weak asset and product diversification, and no current exposure to low-cyclicality speciality products. From a financial perspective, Scope expects an increase in the company’s leverage from the historic low in 2018, driven by large dividend payments as well as significant investment levels, mainly in higher-value products and renewable electricity generation. It is Scope’s understanding that, in terms of capital allocation, capital expenditure ranks ahead of dividend payments. This is reflected in Scope’s base case for the ratings, which assumes leverage to stay in a corridor of around 2.0x-2.5x for 2019 to 2021.

Positive rating drivers:

Ethanol plant among the largest and most efficient in Europe, as measured by production capacity and EBITDA margins, respectively

• Large plant size enables significant economies of scale and market relevance

1. Solid profitability with historical and projected EBITDA margins of between 15% and 25%
    
2. Proximity to low-price corn-producing areas and good logistical infrastructure

• Operating costs among the lowest in the industry
   
• Strong financial risk profile relative to business risk profile, even after large dividend payments in 2019
   
• Sound liquidity position

Negative rating drivers:

• Very high asset concentration, with a single plant being the core asset, though partly offset by investments in renewable electricity generation
   
• Weak product diversification, with commodities as output and ethanol representing four-fifths of revenues
   
• Strong exposure to very volatile commodities (corn and ethanol), though partly offset by correlation in DDGS/corn prices
   
• No exposure to speciality products with low cyclicality, though the company is investing in the development of such products

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation of the company’s resilient operating performance and limited pressure on credit metrics from projected investment and dividend payments. The agency therefore forecasts a leverage level – measured by Scope-adjusted debt (SaD)/EBITDA – of about 2.0x-2.5x for the next few years.

A negative rating action could be triggered by a deterioration in credit metrics, e.g. if SaD/EBITDA increased towards 3x for a prolonged period.

A positive rating action appears unlikely under the current business setup but could be triggered by significant improvements in the company’s diversification and/or outreach. While Scope foresees improved diversification due to the enlarged investment programme, the agency also points out the execution risks before the programme will affect diversification meaningfully in the medium term.

Senior unsecured debt (BB+)

Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt such as the prospective bond (HUF 15bn, 2019/2029). These expectations translate into a BB+ for this debt category. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario, of around EUR 170m in 2021, and the application of 10% on that value for administrative claims.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating and rating outlook (Corporate Rating Methodology, Rating Methodology for Chemical Corporates) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity or its agents participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings 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.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Marlen Shokhitbayev, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 18 July 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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.

Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs and Guillaume Jolivet.