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

Rating action

Scope Ratings assigns a BB-/Stable first-time issuer rating to Hungarian agricultural and construction machinery distributor AXIÁL Javító, Kereskedelmi és Szolgáltató Kft. Senior unsecured debt issued by AXIÁL is rated BB.

The analysis is based on publicly available and private information. The issuer has participated in the process.

Rating rationale

AXIÁL’s business risk profile is supported by the importance of agriculture for the Hungarian population and economy. The company is one of the top three agricultural machinery dealers in Hungary with the leading position in spare parts and a market share of 20%-25% in the Hungarian agricultural machinery sector. It benefits from a good position in a niche market, which ensures stable revenues. Furthermore, AXIÁL is the exclusive distributor of several globally well-known brands, such as Claas, Manitou Fendt, Horsch and Hyundai, which emphasises its status as an expert in the sector.

Despite adequate product diversification (50% of total net sales come from agricultural machinery and 30% from spare parts), AXIÁL’s business risk profile is constrained by its low geographical diversification. The highest non-domestic exposure represents a mere 7% of total net sales, too small to offset any negative macro developments in its home market of Hungary. AXIÁL also has to deal with an ageing and decreasing labour force in the agricultural sector. This negative factor could be overcome by focusing more on construction, where sales have been minor compared to agriculture.

AXIÁL’s financial risk profile is stronger than its business risk profile. Scope's rating case incorporates the company’s plans to issue a HUF 15bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. Scope assumes that the planned bond will have a 2.0% coupon and a bullet maturity with a tenor until 2030. Proceeds from the bond are earmarked for refinancing. The agency expects AXIÁL’s financial leverage ratio to remain stable in the medium term, with Scope-adjusted debt (SaD) to Scope-adjusted EBITDA between 2x and 2.5x, and its Scope-adjusted EBITDA interest cover ratio to be above 20x. Scope also expects some improvement in underlying profitability despite free cash flow fluctuating from positive to negative numbers.

Outlook & rating-change drivers

The Stable Outlook for AXIÁL incorporates Scope's view that key credit metrics over the next two years will remain at levels comparable to those in 2019, i.e. SaD/Scope-adjusted EBITDA of between 2x-2.5x and debt protection as measured by Scope-adjusted EBITDA interest cover of above 20x, with the issuer to remain among the top three agricultural machinery dealers in Hungary. Furthermore, Scope assumes a successful issuance of a HUF 15bn bond under the MNB Bond Funding for Growth Scheme, with proceeds used to refinance the bulk of short-term financial debt. The rating case also projects stable profitability, with Scope-adjusted EBITDA margin at around 10%.

A positive rating action is seen to be remote but could be warranted if AXIÁL’s business risk profile improved through, e.g. greater geographical diversification while SaD/Scope-adjusted EBITDA decreased below 2x on a sustained basis. This could be triggered by either a constant improvement in working capital management and/or a lower dividend payout.

The ratings could come under downward pressure if AXIÁL’s SaD/Scope-adjusted EBITDA deteriorated above 4x on a consistent basis, e.g. as a result of higher capital expenditures, a higher dividend payout and/or a use of bond proceeds for purposes other than the aforementioned refinancing.

Long-term debt ratings

Scope expects an above-average recovery for senior unsecured debt, such as the planned HUF 15bn MNB bond. This recovery expectation translates into a BB rating for the senior unsecured debt category. Scope's recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2022. The agency highlights that debt raised from financial institutions for working capital financing as well as payables rank higher than senior unsecured debt; hence, such debts would be repaid first.

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 these ratings and rating outlook (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 https://www.scoperatings.com/#!methodology/list.
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 entity’s agents 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Anne Grammatico, Associate Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 9 June 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.