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Rating action

Scope Ratings has assigned a first-time issuer credit rating of BB with a Stable Outlook to Hungary-based Tranzit-Food Kft. The agency has also assigned a first-time rating of BB to the company’s senior unsecured debt.

Rating rationale

The issuer rating is largely supported by Tranzit’s leading position in Europe as a goose and duck processor. Tranzit is responsible for 50% of the goose meat supply in Hungary (the fourth largest producer in the world) and 18% in Europe. For duck, Tranzit’s market share in its home country and Europe is 32% and 8% respectively. Scope views positively the on-going diversification of Tranzit’s poultry meat production. The company has recently started to develop its chicken operations and intends to further increase its output thanks to a planned EUR 50m capex programme. This programme is expected to be partly financed by the issuance of a HUF 9.2bn (EUR 30m) Hungarian National Bank (MNB) bond with seven years maturity, under the MNB Bond Funding for Growth Scheme. This should allow Tranzit to continue benefiting from the growth anticipated for the European chicken sector. The company’s creditworthiness is also supported by strong liquidity, a track record of low leverage and a strong operating margin.

The rating is constrained by Tranzit’s limited overall size compared to other European players, as well as concentration issues regarding its footprint and customer portfolio (especially for chicken). The lower profitability (5%-7%) of the broiler segment combined with the future increase of Tranzit’s exposure to chicken is likely to weigh on its overall EBITDA margin, further limiting the rating. Scope forecasts that leverage will increase materially from 0.1x in 2018 to 1.9x by 2020. Despite overall good credit metrics, Tranzit’s financial risk profile is constrained by forecasted negative free operating cash flow due to massive capex which cannot be self-financed.

Outlook

The Outlook is Stable and incorporates Scope’s expectation of stable credit metrics, with net debt/EBITDA below 3.0x and an EBITDA interest coverage of above 7x. The Outlook also includes the expectation that liquidity (currently viewed as adequate) will not deteriorate. Scope’s Outlook is based on annual capex spending (including organic expansion and acquisition capex) of around EUR 50m (HUF 16.5bn) for the 2019-2021 period and an EBITDA margin ranging between 11%-13%.

A positive rating action is likely if Scope-adjusted debt/EBITDA remains below 2.0x on sustained basis. A negative rating action could be required if leverage surges above 4.0x on a sustained basis for the next few years.

Rating for unsecured debt

Scope expects an ‘average recovery’ for current and future senior unsecured debt. Such recovery expectations translate into a BB rating for the senior unsecured category (equal to the issuer rating). Scope’s expectations are based on a distressed enterprise value under the assumption of a going concern of around HUF 12.1bn at the end of 2020, including a 10% reduction for administrative claims in a liquidation scenario. Existing debt positions are senior unsecured and are expected to rank pari passu to the planned seven-years HUF 9.2bn bond (EUR 30m), under the MNB Bond Funding for Growth Scheme.
 

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

Methodology
The methodology used for this rating(s) and/or rating outlook(s), 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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 and/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, the rated entities’ agents, 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 Thomas Langlet, Senior Analyst
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 22 October 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
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