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

Rating action

Scope Ratings has changed its corporate issuer rating for Hungarian-based Unix Auto Kft. to BB-/Negative from BB-/Stable. The BB- senior unsecured debt rating has been affirmed.

Rating rationale

The Outlook change is primarily driven by the negative demand effects that have emerged in Q2 2020 following the Covid-19 outbreak and the related restrictions in Unix Auto’s key markets. Although the lower activity and reduced opening hours evident early on in the pandemic have now eased, Scope still expects some subdued growth effects throughout the year. Q1 2020 started off well for Unix Auto, with a sales increase of around 5%. However, Scope still expects the FY 2020 numbers to come in marketable below its previous estimates, negatively affecting credit ratios. Unix Auto has been able to reduce many of its costs in response to declining activity, which leads Scope to assume that the company will be able to maintain its EBITDA margin relatively well. These variable cost reductions include salary and fuel costs, in addition to a renegotiation of some of Unix Auto’s rental costs for its shops. 

Already in the YE 2019 figures, Scope saw some negative rating pressure on Unix Auto’s leverage ratios, with Scope-adjusted debt (SaD)/EBITDA of 4.2x (if including a shareholder loan), exceeding Scope’s 4x rating threshold slightly. Based on Scope’s updated forecast, the rating agency does not see this ratio returning to below 4x in the medium term, which puts some pressure on the company’s financial risk profile. With regards to Scope’s other negative rating trigger threshold, funds from operations/SaD came in at 23% last year, still above the agency’s 15% target. However, with tougher market conditions expected throughout the year, it will be more difficult for Unix Auto to maintain this ratio as well, if it cannot return to higher demand and profitability.

In terms of liquidity, Unix Auto benefits from the long-dated maturity profile of its 2026 MNB bond issued last year. It also uses short-term credit lines to pay its suppliers in advance to get discounts. At YE 2019 short-term loans amounted to HUF 7.4bn, which means that the company still has a relatively high portion of short-term debt (i.e. approx. 35%), which Scope expects will increase this year. According to Scope’s estimates, the available credit line will largely be fully drawn on in the next one to two years, as free operating cash flow is expected to remain negative.

Outlook and rating-change drivers

The Negative Outlook reflects Scope’s expectations that Unix Auto will be hurt by the lower activity and GDP in its key markets of Hungary and Romania, as a consequence of the Covid-19 restrictions. Although Scope’s base case assumes that business activity in these countries will recover slowly in Q3 and Q4, FY 2020 results are expected to further constrain Unix Auto’s financial risk profile. Should however, the company show evidence of more resilience than we anticipate, a stable outlook could resume.

A positive rating action (i.e. the return to a Stable Outlook) is possible if the company improves sales and profit margins and returns to leverage below 4x on a sustained basis. The possibility of a rating upgrade is remote at the moment, but could occur in the longer run if Unix Auto also achieves free operating cash flow/SaD of above 5%, as a result of lower expansionary investments and improved market conditions.

A negative rating action is possible if Unix Auto’s financial risk profile deteriorates, exemplified by SaD/EBITDA staying above 4x on a sustained basis and funds from operations/SaD moving below 15%.

Long-term and short-term debt ratings

Unix Auto’s senior unsecured debt is rated in line with the issuer rating, based on Scope’s expectation of an average recovery.

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 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: 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 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: Henrik Blymke, Managing Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 27 August 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
© 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.