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Rating action

Scope Ratings assigns a first-time issuer rating of B/Stable to Hungarian-based business services company Aranynektar Kft. The planned HUF 1bn bond (2020-2030), which is guaranteed by Fulmer Hungarian Branch and issued under the MNB Bond Funding for Growth Scheme, has been assigned a preliminary rating of (P) B+.

Rating rationale

The issuer rating of Aranynektar is determined by the credit quality of its sister company Fulmer Hungarian Branch (FHB), owned by the same ultimate shareholder Mr Ferenc Takács. This is because Scope considers Aranynektar to be fully dependent on the relationship between the two entities. A severance in their business links would lead to an immediate bankruptcy of Aranynektar. The credit quality of FHB determines Aranynektar’s issuer rating.

FHB’s business risk profile (rated B) is constrained by its small market share on a European level (close to 1.5% of the continent’s honey production). Scope assumes that its total market share is even lower due to high European imports (representing 60% of total consumption). The company’s small size also affects the magnitude of the impact which external events have on revenue (illustrated by the 15% drop in 2018, due to the bankruptcy of its Italian business partner). Diversification is weak due to the sale of a single type of product to consumers, despite a broad geographical outreach. Scope considers profitability to be relatively low for the fast-moving consumer goods industry (with the Scope-adjusted EBITDA margin averaging 9%), due to the high share of private labels FHB offers. Going forward, Scope expects profitability to recover somewhat, softening the decline in 2018.

Aranynektar’s financial risk profile (rated B) is weak due to Scope’s expectation that the 2020-2030 HUF 1bn bond issuance will erode its historically strong credit metrics. The bond will be issued by Aranynektar, which will, in turn, extend an intercompany loan to FHB with exactly the same features (coupons, repayment schedule, maturity and others). The bond will partially be used to repay FHB’s existing loans but also to finance some its operations, increasing its total gross debt by close to HUF 500m.

YE 2018 already saw an overall deterioration in FHB’s credit metrics due to a drop in revenue. Scope expects both revenue and profitability to recover somewhat by YE 2019, lessening the negative impact on credit ratios.

Nonetheless, forecasted Scope-adjusted debt (SaD)/EBITDA and funds from operations/SaD will face a slight deterioration in comparison with its 2017 level from 2020 on. Interest cover is forecasted to drop from above 12x in 2018 to below 6x at YE 2020. Finally, Scope expects free operating cash flow/SaD to deteriorate in line with leverage metrics going forward. Liquidity is expected to be under pressure at YE 2019 and negative at YE 2020, due to high capex in 2020. Despite Aranynektar being the issuer of the bond, the significant deterioration in its credits metrics is not a key factor in Scope’s rating case.

Preliminary bond rating

Scope assumes a bond issuance of HUF 1bn (over the 2020/2030 duration) under the MNB Bond Funding for Growth Scheme. Scope assigns a preliminary rating of (P) B+ to the planned guaranteed bond based on the agency’s expectations of an above-average recovery. This is one notch above the assigned issuer rating.

Outlook and rating-change drivers

The Outlook is Stable based on FHB’s financials and operations. It also incorporates Scope’s view that liquidity will be weak over the next few years.
The possibility of a positive rating action is remote, given FHB’s limited scope of operations, which means that low-probability events may potentially have a serious impact on the company. The diversification of FHB’s operations is too limited to buffer large, unexpected developments (notably operationally).
A negative rating action may be taken if FHB’s SaD/EBITDA increases above 4.5x on a sustained basis or if FHB’s liquidity deteriorates as a result of unforeseen liquidity needs, such as working capital requirements.

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 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: Adrien Guerin, Analyst
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 30 January 2020.

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
© 2020 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: Guillaume Jolivet.