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Rating action

Scope Ratings assigns a first-time issuer rating of BB to Hungary-based fast-moving consumer goods (FMCG) company Hell Energy Group. The rating Outlook is Stable. Senior unsecured debt, including the planned corporate bond issue under the Hungarian national bank’s Bond Funding for Growth Scheme, is rated BB.

Rating rationale

Business risk profile

Hell Energy’s business risk profile is primarily supported by the FMCG sector’s strong industry risk profile, which benefits from low cyclicality and medium entry barriers. The company is also the market leader in the energy drink segment in Hungary and eight other countries, mostly in Central and South Eastern Europe, and has good diversification, supported by a granular client and supplier base. Profitability on a sustainable EBITDA margin basis is in a range of 15% to 20%. This is in line with sector peers, particularly given the Hell Group’s above-average degree of vertical integration. 

Hell Energy’s business risk profile is constrained by limited diversification with regard to product categories as well as the company’s relatively small absolute size compared to international FMCG peers. Scope assesses the company’s business risk profile as BB+.

Financial risk profile

Hell’s financial risk profile is supported by strong interest coverage of well above 7.0x, mostly in the double-digit range, also going forward. It is further supported by positive free operating cash flows as of 2019E and going forward, with the exception of 2020E, when free operating cash flows will temporarily turn negative according to Scope’s base case forecast due to planned investments in new production facilities. Since the company still lacks absolute size in comparison with the global FMCG brands, Scope has taken potentially higher revenue and cash flow volatility into account, which constrains the financial risk profile to some extent. In addition, the group has issued financial guarantees to third parties covering financial leasing contracts. Those entities are part of the larger, family-owned Hell Group, but not part of the rated entity. We do not incorporate these in our base case forecast metrics since we deem the likelihood of any payments resulting from those contingent liabilities to be negligible at this point.

Operating leverage, as measured by Scope-adjusted debt/EBITDA, ranges between 3.5x and 4.0x, which is commensurate with a lower BB rating category. Scope therefore assesses Hell Energy’s financial risk profile as BB-.

All ratings reflect ambitious growth figures in our underlying base case, starting already in 2020. Financial metrics in our base case are therefore subject to larger potential volatility if those growth plans cannot be achieved by the issuer.

Liquidity

Liquidity has been at 1.4x as of year-end 2018 and is expected to remain at more than 1.1x going forward with the exception of 2019E, when Scope forecasts that the large cast investments planned for 2020E will burden free operating cash flows. Scope therefore judges liquidity to be adequate.

Bond issuance

Based on Scope’s base case financial forecast, the agency expects Hell Energy to issue a HUF 28.5bn senior unsecured corporate bond with a maturity of 10 years under the Hungarian national bank’s Bond Funding for Growth Scheme.

Outlook

The rating Outlook is Stable, based on expected operating leverage of 3.5x to 4.0x going forward, with a temporary peak of 4.5x to 5.0x in 2020E due to the expected investment programme, funded by the intended HUF 28.5bn corporate bond placement.

Rating-change drivers

A positive rating action may be taken if the issuer shows financial leverage of less than 3.5x on a sustained basis.

Scope may consider a negative rating action if financial leverage deteriorates to more than 4.0x on a sustainable basis.

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/or rating outlook: Corporate Rating Methodology, 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: issuer, agents of issuer, third parties, scope internal sources and public domain.
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: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 8 November 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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