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Rating action

Scope Ratings has assigned a BB- issuer rating on Hungary-based Baromfi-Coop. The Outlook is Stable. Senior unsecured debt is rated BB-.

Rating rationale

The credit rating mainly reflects Baromfi-Coop’s market position in the Hungarian chicken processing industry and the solid profitability (EBITDA margin). The rating is held back by its weak diversification.

Given its annual production of up to 64m chickens per year, Baromfi-Coop accounts for around 25% of overall Hungarian chicken meat production. Furthermore, Scope judges the company’s long-term relationship with McDonald’s as positive (up to 15% of all chicken products sold by McDonald’s in Europe are supplied by the company). However, the company’s production output is rather low compared to European competitors, which holds back Scope’s assessment of the company’s market share. The company’s credit rating is compromised by weak diversification. This is based on 1) a fairly concentrated customer portfolio; and 2) the focus on one poultry species (chicken). Profitability (EBITDA margin) is credit-supportive, with reported EBITDA margins averaging 11.8% (2016 to 2018). Scope therefore rates Baromfi-Coop’s business risk profile in the ‘BB‘ category.

The company’s financial risk profile (rated ‘BB-‘) is constrained by Scope’s expectation of a meaningful deterioration in credit metrics this year, following substantial capex programme, predominantly on the expansion of the farm in Kisvárda. For the current year Scope projects leverage (SaD/EBITDA) of 3.8x, versus 2.1x in 2018. That said, the rating agency expects credit metrics to strengthen moderately from 2020 onwards. This is based on higher operating results due to the first-time contribution of investments made and lower capex. Weak liquidity is a negative rating factor, given Baromfi-Coop’s substantial amount of short-term debt, negative Free operating cash flow in 2018 and 2019F, and no committed credit lines.

Rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation of a slight improvement from 2020 on. It also includes the assumption of a successful placement of a bond (volume: up to HUF 28.5bn) in 2019, of which up to HUF 19.5bn should be used to repay debt and up to HUF 9.0bn to finance the current capex programme. A positive rating action could be warranted by SaD/EBITDA of below 3.5x on a sustainable basis. A negative rating action could be required if SaD/EBITDA moves above 4.0x on a sustained basis. This could, in particular, occur if the company orchestrates large M&A or if EBITDA falls short of Scope’s projections. Lastly, a rating downgrade could result from continued weak liquidity coverage beyond 2021 (the capex programme ends in 2020).

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

Methodology
The methodology used for this rating and rating outlook (Corporate Rating Methodology) is 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 did participate in the rating process. Scope had access to accounts, management and 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: Klaus Kobold, Associate Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 19 September 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.
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