The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

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

Rating rationale

INOTAL Zrt. is an aluminium products manufacturer located near Székesfehérvár in Várpalota, Hungary.

The rating is supported by the financial risk profile of BB-, which reflects the consolidation of debt with extension of tenor. Scope expects SaD/EBITDA to be between 3x and 4x during the rating period, reflecting improved EBITDA, after having increased in 2019 to 4.8x due to lower EBITDA as trading margins weakened. Scope-adjusted funds from operations/SaD also shows improvements in 2020, reflecting the recovery of EBITDA. FOCF/SaD is volatile, reflecting rises in capex to maintain competitiveness and changes to EBITDA as price developments affecting EBITDA roll out and then recover.

INOTAL operates in the metals and mining industry (BB). The industry is generally highly cyclical, with both revenues and profitability volatile. The industry is highly capital intensive with high entry barriers for high value-added products or downstream companies, with low entry barriers for upstream companies and commodity producers. We note however that Inotal is also a secondary producer with substantial trading activity (18% by sales in 2019).

Inotal’s competitive position is rated at B-. Ingot and semi-finished aluminium products are an exchange commodity, i.e. they are standardised, interchangeable, and easy to transport and divide, can be delivered in batches, and consumers usually have no preference for a particular manufacturer. Forty percent of Inotal’s production (unalloyed aluminium rod) are commodities; sixty percent are alloyed materials with less of a commodity character. Inotal is a small player in its regional markets. Inotal has no own mining capacity and lacks integration with major industry groups (such as automobiles or aerospace, whose customers demand higher value-added in the supply chain for semi-finished aluminium products). The product portfolio also shows relatively low value-added in production. Geographic and customer diversification are robust. However, product diversification is weak, with almost all revenues linked to semi-finished aluminium products. This high vulnerability to a single product group limits overall diversity. Probability and efficiency are low.

For these reasons, the business risk profile is placed at B-.

Outlook and rating-change drivers

The Outlook is Stable and incorporates our view of stable revenues in a challenging environment. Furthermore, the Stable Outlook reflects Scope’s expectation that INOTAL’s indebtedness (SaD/EBITDA) will be around 3x-4x in the medium term.

A negative rating action could occur if market price volatility leads to weakened margins, resulting in a SaD/EBITDA ratio of 4x on a sustained basis.

A positive rating action could be warranted if profitability were to be higher than our base-case scenario, leading to SaD/EBITDA ratio of 2x on a sustained basis.

Long-term and short-term debt ratings

The rated entity plans to issue a HUF 6bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. We expect the coupon to be approximately 4% and the bond will amortise with a tenor until 2027 with amortization in 2023 (20%), 2025 (20%) and 2027 (60%).
Scope assigns a B+ debt rating to senior unsecured debt issued by INOTAL Zrt. The debt category rating reflects the ranking status of the debt, ranking below EUR 16.4 million of senior secured debt that includes recovery of investment grants and senior secured bank debt. Scope expects an ‘average’ recovery (30%-50%) for outstanding senior unsecured debt in a hypothetical default scenario based in 2022.

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 (Scope Corporates Rating Methodology, 26 February 2020) 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 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, 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 John F. Opie, Associate Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 20 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
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