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

Rating action

Scope Ratings has affirmed the B+ issuer rating of Masterplast Nyrt. with the Outlook revised to Positive from Stable. The senior unsecured debt rating was affirmed at B+.

Rating rationale

Masterplast’s business risk profile (affirmed at B) remains unchanged despite relatively strong growth in the last twelve months to end-June 2020 with revenues of EUR 109m (+6% YoY) and Scope-adjusted EBITDA of EUR 8m (+16% YoY). Relatively strong growth came despite the Covid-19-induced reduction of construction output across Europe in Q1/Q2 2020, enabling Masterplast to seize some market share, benefitting from its relatively high inventories, negligibly impacted supply chains, regional production facilities and its own distribution/logistics capabilities. Scope expects support for Masterplast’s market positioning especially in comparison to regional peers from the company’s planned investments into its production capacities and product availability in 2020 and 2021 (total expansion capex of EUR 17m). The company has already executed its new investment plan by acquiring of a 50% share (controlled by Masterplast) in a production facility for special fleece and multilayer membranes in Germany (Aschersleben) for a total consideration of EUR 4m that is expected to contribute circa EUR 20m in revenues and around EUR 5m in Scope-adjusted EBITDA per year, starting from July 2020. The latter is anticipated to lead to the improved diversification of Masterplast’s cash flow including i) a reduced dependence on its domestic market (two fifth of revenues are from Hungary) with a revenue share from export markets forecasted to rise to over 25% from 14% (last twelve months revenue to end-June 2020) as well as ii) the introduction of the more resilient healthcare equipment end market (20% in forecasted Scope-adjusted EBITDA).

Profitability, as measured by the Scope-adjusted EBITDA margin, increased to 7.2% for the last twelve months to end-June 2020 following a continuous improvement from its trough in 2017 (5.7%). Scope forecasts the Scope-adjusted EBITDA margin to improve to over 8% on a sustained basis driven by higher existing and further investments into the extension of production capacities, product ranges and product availability. The strongest drivers of future profitability are i) the higher margin production of special fleece and multilayer membranes (EBITDA margins of over 20%) and ii) lower raw material prices. The latter is a consequence of Masterplast being able to negotiate lower prices with its suppliers as a result of the oil price plunge following the Covid-19 outbreak as well as the internalisation of supplier margin via the acquisition of the Aschersleben production facility.

Masterplast issued a HUF 6bn (EUR 18m) senior unsecured bond in December 2019 under the Hungarian National Bank’s Funding for Growth Scheme. Bond proceeds have been used to repay short-term debt (EUR 15m), for capital expenditure (EUR 1m) and to bolster the company’s cash position (EUR 2m). Total indebtedness as measured by Scope-adjusted debt remained broadly unchanged as a consequence of a predominately use of proceeds to restructure the company’s liability side. However, credit metrics improved beyond Scope’s expectations, driven by a lower-than-expected capital expenditure and working capital build-up in 2019. Scope forecasts the company’s credit metrics, especially Scope-adjusted debt to Scope-adjusted EBITDA, to improve further despite the anticipated rise in SaD to EUR 35m by YE 2021 to finance the company’s investment plan. This follows the agency’s view of a relatively strong increase in Scope-adjusted EBITDA to around EUR 10m in 2020 and beyond, fuelled by i) reduced raw material prices, ii) the introduction of higher margin healthcare equipment business and iii) economies of scale from increased capacities after the execution of the company’s investment plan. All of these led to an improved financial risk profile (upgraded to BB).

Liquidity is adequate, even if sources (EUR 4.5m of cash available as at YE 2019) do not cover uses (EUR 6.1m in short-term debt as at YE 2019 and negative Scope-adjusted free operating cash flow of EUR 0.2m forecasted for 2020). This follows the agency’s understanding that the build-up in working capital in H1 2020 (EUR 8m) to improve product availability during the Covid-19 crisis i) has been financed in full and ii) will be reversed to a great extent in H2 2020.

Outlook and rating-change drivers

The Outlook is Positive and reflects the view that credit metrics will improve further, with an ongoing strong Scope-adjusted EBITDA interest cover and a Scope-adjusted debt (SaD) to Scope-adjusted EBITDA ratio below 3.5x thanks to stable business performance with investments made in the last 18 months starting to pay off and a limited impact of Covid-19 on the company’s operations. The Outlook also incorporates further improving liquidity with lower working capital built-up anticipated in the future compared to 2020.

A positive rating action may be warranted if the company can reduce its leverage to a SaD to Scope-adjusted EBITDA ratio significantly below 3.5x on a sustained basis. This could be driven by the successful integration and expansion of the higher margin business of special fleece and multilayer membranes production for the healthcare industry.

A negative rating action could occur if the SaD to Scope-adjusted EBITDA ratio remained around or exceeded 3.5x on a sustained basis. This could be triggered by continuous strong built-up in working capital and/or expansion capex beyond current expectations leading to ongoing negative Scope-adjusted free operating cash flow.

Long-term and short-term debt instrument ratings

Masterplast issued a HUF 6bn senior unsecured bond in December 2019 under the Hungarian National Bank’s Funding for Growth Scheme. The recovery analysis is based on the enterprise value calculated on a going concern. A continuation of the business in a default scenario seems to be more likely than a liquidation, as Masterplast already has a distribution network in several European countries, which comprises subsidiaries in its core Eastern European countries as well as ‘external’ export partners, which are responsible for the distribution in Masterplast’s export markets. This distribution network also has a value in itself, that would get lost in the case of a liquidation of the company. Recovery for all senior unsecured debt is estimated above average. However, Scope does not grant a possible one notch uplift on the issuer rating due to risk and possibility of senior secured debt to increase in the path to default (volatility of capital structure and share of senior unsecured debt).

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/or 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: issuer, public domain, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst Philipp Wass, Executive Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 9 September 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.