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

Rating action

Scope Ratings affirms the BB+/Stable issuer rating on Pannonia Bio Zrt. as well as the BBB senior secured debt rating. Scope upgraded the senior unsecured debt rating from BB+ to BBB-.

Rating rationale

The issuer rating mainly reflects the company’s highly efficient plant, whose large scale and favourable location lead to competitive operating costs and solid profitability overall. Challenges include a strong exposure to very volatile commodities, very weak asset and product diversification, and no current exposure to low-cyclicality speciality products.

The company plans to issue senior unsecured bonds with tenors of 10, 11 and 12 years under the Hungarian National Bank’s Bond Funding for Growth Scheme in a total amount of up to HUF 44bn (around EUR 126m). The bond proceeds will be used to: i) fund the capex programme of EUR 114m in 2020-22 next to existing cash flows; ii) repay EUR 100.6m of term bank loans in 2021; iii) repay the working capital facility in 2021 (if utilised); and iv) maximise the repayment of term loans in 2022, subject to available cash after capex.

Scope believes that the issuance of the new bonds will have only a limited impact on the company’s credit metrics, because the bond proceeds will be mainly used to refinance existing bank term loans. Scope’s updated rating case continues to expect a temporary increase in leverage, as measured by Scope-adjusted debt/EBITDA, to above 2.5x in the next few years. This will be mainly driven by large dividend payments as well as significant investment levels, mainly in higher-value products. It is Scope’s understanding that, in terms of capital allocation, capital expenditure ranks ahead of dividend payments.

Pannonia Bio’s liquidity is adequate. For 2020-21, Scope expects coverage of short-term financial debt at more than 1x, including an undrawn working capital facility of EUR 25m and available cash and cash equivalents of EUR 45m as of 31 May 2020.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation of the company’s resilient operating performance and limited pressure on credit metrics from projected investment and dividend payments. The agency therefore forecasts the leverage level – measured by Scope-adjusted debt/EBITDA – to not exceed 2.5x for a prolonged period.

A negative rating action could be triggered by a deterioration in credit metrics, e.g. if Scope-adjusted debt/EBITDA increased towards 3x for a prolonged period.

A positive rating action appears unlikely under the current business setup but could be triggered by significant improvements in the company’s diversification and/or outreach. While Scope foresees improved diversification in the medium term due to the enlarged investment programme, the agency also points out the execution risks involved before meaningful effects are seen.

Long-term and short-term debt ratings

Senior secured debt

Scope’s recovery analysis indicates an ‘excellent recovery’ for senior secured debt. These expectations translate into a BBB for this debt category. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2022.

Senior unsecured debt

Scope’s recovery analysis indicates an ‘above-average recovery’ for senior unsecured debt, including the existing HUF 15bn bond (ISIN: HU0000359112) and prospective bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. These expectations translate into a BBB- for this debt category.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020;Rating Methodology for Chemical Corporates 23 April 2020) are 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 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: Marlen Shokhitbayev, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 18 July 2019. The ratings/outlooks were last updated on 24 June 2020.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. Scope provided the following ancillary services to the rated entity and/or its agents within two years preceding this credit rating action: Rating Assessment Service.

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.