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Rating action

Scope Ratings has today assigned a first-time issuer rating of B/Stable to Daniella Kft. The agency also assigned first-time ratings of B+ to senior unsecured debt issued by Daniella Kft.

Rating rationale

The rating is supported by Daniella’s relative resilience to the coronavirus pandemic. The ability to offer high online sales is a positive rating driver. However, the small absolute size of the group (HUF 18bn based on preliminary 2019 figures) constrains any potential rating uplift. The development of Daniella’s warehouse should increase its top line but Scope expects profitability to remain under pressure. Daniella’s financial risk profile is relatively weak but the absence of material short-term debt repayments in the coming years supports liquidity.

Daniella’s business risk profile (rated B) is constrained by the group’s small size (HUF 15.5bn at YE 2018 – HUF 18.5bn at YE 2019 based on preliminary numbers). This leads to negligible market shares on a European level, despite a certain dominance in Hungary. Daniella operates in a competitive environment in terms of market shares and limited pricing power on sold goods. However, the group’s dominant position is supported by a shop network, spread across the country, which is larger than competitor networks. Scope expects the impact of Covid-19 on sales to be relatively limited for Daniella, in contrast to most other retailers. This is because: i) the majority of construction workers are allowed to continue working; and ii) the group has successfully developed a click & collect format due to its relatively high number of online sales. Scope nonetheless forecasts a 10% drop in revenue in 2020 but expects a recovery in 2021 and 2022. Scope expects the bond issuance to contribute to the development of Daniella’s top line as the group plans to invest close to 60% of the proceeds in a new, modern warehouse, which will allow it to ramp up its product range.

Diversification is relatively low because Daniella is active in a single category of consumer goods and generates most of its revenues in Hungary. However, the group benefits from a high percentage of online sales, following the development of its online platform “One company”. Scope considers both supplier and customer diversification to be moderate. Profitability is relatively low due to a historical tendency among Hungarian wholesalers to put high market shares before profitability, leading to product price dumping. While Scope expects Daniella’s warehouse to increase the amount of goods sold, the agency does not expect a significant marginal effect on profitability due to the interchangeability of its products and the absence of new and more lucrative products. The adverse movement of the Hungarian forint poses potential profitability risk, which could affect Daniella in the long term (despite its hedging strategy), as a large part of the group’s operating expenses are incurred in foreign currencies.

Daniella’s financial risk profile is rated B+ and is supported by high interest cover. In addition to the financing of the new warehouse, Scope expects the bond issuance to repay all current banking loans, leaving only financial leases to be repaid in addition to the bond. While debt streamlining is positive, the bond issuance will double the current amount of Scope-adjusted debt (SaD), leading to an overall deterioration in credit metrics. Scope expects the ratios to reach their lowest points in 2020, when they will also feel the impact of Covid-19. In terms of leverage, the group benefited from relatively low SaD/EBITDA and relatively high funds from operations/SaD in 2018 and 2019 (preliminary numbers), which reached around 2x and 45% respectively. 2020 should see a deterioration to 6x and around 10% for each ratio before they recover to 4x and around 20% in 2021, according to Scope forecasts. Interest cover has been at double-digit levels for the last three years and should decrease to levels close to 4x before reaching 7x in 2021, supported by a low average interest rate. Finally, free operating cash flow (FOCF)/SaD has fluctuated considerably in the last few years, due to major expansion programmes. While low FOCF/SaD is usual for companies active in the retail sector, Daniella has had relatively high FOCF/SaD, coming close to 30% in years without high capex. In 2020, Scope expects FOCF/SaD to reach its lowest level, at -47% before turning positive again in 2021 and 2022. Liquidity is considered sound due to an absence of material short-term debt in the coming years (with only financial leases remaining) as the majority of the loans are going to be repaid with the bond issuance. The liquidity is expected to be nonetheless under pressure (-2.7x at YE2020 versus 0.9x at YE2019) due to high investments for the new warehouse, leading to a negative FOCF. The externally provided liquidity is supported by the unsecured overdraft bank facility in the amount of HUF 300m in addition, serving as liquidity buffer.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation of SaD/SaEBITDA stabilising at 3.5x to 4.0x going forward. Scope expects the Covid-19 pandemic to have a significant impact on Daniella’s performance. However, YE 2020 metrics will be exceptional and not representative of the group’s normal development. Finally, Scope expects a bond issuance of HUF 3.5bn, aimed solely at financing the new warehouse and repaying current loans as stated in the letter of intent or prospectus.

The possibility of a positive rating action is currently seen as remote. It could, however, be warranted by an improved business risk profile, with Daniella becoming an incumbent on the Hungarian market.

A negative rating action could be warranted if SaD/SaEBITDA were to rise above 4.0x on a sustained basis and/or if liquidity were to weaken (e.g. due to a strong revenue decline and high payables). This could occur if Covid-19 impacts the group’s top line for longer than expected or if there is a material decrease in profitability. A use of the proceeds which diverges from the one incorporated in Scope’s Outlook could also trigger a negative rating action.

Long-term and short-term debt ratings

The rated entity plans to issue a HUF 3.5bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 2-3% coupon and is amortising after 7 years with a tenor until 2030. Proceeds from the bond are earmarked for refinancing their current loans (HUF 1.5bn) and to acquire and develop a new warehouse (HUF 2bn).

Scope assigns a B+ debt rating to senior unsecured debt issued by Daniella Kft. Scope expects an ‘above average recovery (51-70%) for outstanding senior unsecured debt in a hypothetical default scenario in 2021 based on a liquidation value of HUF 2’021m calculated as a liquidation value.

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, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on www.Scoperatings.com/methodologies/ ESG factors in ratings.
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 rating process was conducted:
With Rated Entity or Related Third Party Participation    YES
With Access to Internal Documents                                 YES
With Access to Management                                            YES
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, 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 not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Adrien Guerin, Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 11 May 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.

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