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Rating action

Scope Ratings assigns a corporate issuer rating of B+ to Hungarian-based Vajda-Papir Kft. The rating Outlook is Positive. Future senior unsecured debt is rated B+.

Rating rationale

Vajda-Papir’s business risk profile is positively influenced by the stable underlying demand for its hygiene paper products, given the low cyclicality of the consumer goods industry. The company has a solid market position in Hungary, especially for private-label products, but is still a relatively small producer in Europe’s overall hygiene paper market. In 2018, Vajda-Papir started focusing on ‘away from home’ segments, which could increase its market presence further and improve customer diversification. The company has more than 60 customers, including domestic and multinational retail chain stores like Tesco, Auchan, Penny-Market, Lidl, ICA, CBA, Reál, Metro and Spar. Although Vajda-Papir has some concentration risk regarding its top-five customers (more than 55% of sales), Scope recognises its ability to be competitive and quality-oriented, which enables it to keep and secure its large customers over time (for both branded products and private label). The company has more than 600 product items, offering low-price, medium-price and premium brands.

Last year, Vajda-Papir reported an operating loss. This was driven by significantly higher raw material input prices, which are deemed volatile and represent more than 50% of the company’s cost base. Vajda-Papir’s exposure to cellulose prices is particularly high, and these are difficult to hedge, thus constituting a negative aspect for the business risk profile. With a new production facility established in 2018, the company has increased the share of internally supplied base paper to around 50%. This, coupled with lower transportation costs, will boost profitability from 2019 onwards. Thus, despite Scope’s expectation of a further increase in staff costs (a general market effect in Hungary, with pressure on salaries due to labour shortages in certain areas), the agency anticipates that profitability margins will exceed past levels on average.

Weak profitability coupled with recent high investments had a strong effect on key financial credit metrics in 2018. Scope’s assessment of Vajda-Papir’s financial risk profile still reflects its high leverage and volatile results in the past. As a result, the company’s financial risk profile is weaker than its business risk profile. On a positive note, unaudited YTD 2019 financial figures give Scope comfort that Vajda-Papir is now beyond the trough and will be able to report a more conservative capital structure within 12-18 months.

Scope deems liquidity and financial flexibility to be somewhat constrained at the moment, but with positive prospects. Although the company only had HUF 0.2bn in cash as of YE 2018 – not enough to cover the HUF 1.2bn short-term loan outstanding – it has since agreed on a new three-year HUF 2.5bn working capital facility. Scope views this positively as it indicates that Vajda-Papir could still maintain bank support at a time where financial covenants had to be waived by lenders. Scope will continue to assess short-term liquidity and financial flexibility as slightly constrained until the new planned seven-year HUF 11.7bn bond (under the MNB Bond Funding for Growth Scheme) has been issued and bank loans have been refinanced (all expected in Q1 2020).

The Positive Outlook reflects Vajda-Papir’s ongoing financial transformation: in terms of improved EBITDA from lower raw material prices, reduced operational costs from producing more base paper inhouse, and the positive liquidity effect from refinancing plans. As a result, Scope’s assessment of the company’s financial risk profile anticipates that excess cash generation from H2 2019 will lead to more conservative Scope-adjusted credit ratios going forward. The Outlook also assumes that management will maintain its financial policy of deferring further expansionary capex in the medium term until leverage and excess cash buffers have reached more conservative levels.

Rating-change drivers

A positive rating action could be warranted if SaD/EBITDA returned below 4x, refinancing plans were successful, and the new bond under the MNB scheme was issued.

A negative rating action is possible if the company failed to reach positive EBITDA in FY 2019 and/or free operating cash flow turned negative. A downgrade is also possible if the company initiates Phase II expansion plans before the cash buffer can fund approximately one-third of the project.

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 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 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: Henrik Blymke, Managing Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 28. Ocotber 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 Directors: Torsten Hinrichs and Guillaume Jolivet.