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

Rating action

Scope Ratings has today affirmed its BB-/Stable corporate issuer rating to Hungary-based Baromfi-Coop Kft. The agency also affirmed the BB- senior unsecured debt rating.

Rating rationale

Following the acquisition of Saga Foods (see: Baromfi-Coop acquires Hungarian turkey processing company Saga Foods), Baromfi-Coop’s business risk profile has strengthened but continues to be commensurate with a ‘BB’ rating. The company’s long-term relationship with McDonald’s is especially positive (up to 15% of all chicken products sold by McDonald’s in Europe are supplied by the company). With an annual production capacity of up to 64m chickens per year, Baromfi-Coop accounts for around 25% of overall Hungarian chicken meat production. However, this is still rather small compared to European competitors, and continues to hold back Scope’s assessment of the company’s market share. Baromfi-Coop’s business risk profile is also constrained by weak diversification despite positive effects following the acquisition of Saga Foods, e.g. higher scale and broader scope. Diversification is limited by: i) a fairly concentrated customer portfolio; and ii) the focus on one poultry species (chicken). Baromfi-Coop’s profitability (EBITDA margin) continues to be credit supportive, with reported EBITDA margins averaging around 12% (2016 to 2019) and coming in at 14.1% in H1 2020, despite the global economy being hit by Covid-19.

The company’s financial risk profile is affirmed at ‘BB-’. Thanks to strong performance in H1 2020, Baromfi-Coop was not meaningfully affected by the Covid-19 pandemic. Demand from major retail chains remained unchanged, McDonald’s ramped up its delivery and drive-in supply channels, and frozen finished products were temporally stored at Baromfi-Coop and shipped to customers in July 2020, with the corresponding revenues recorded in H1 2020. Based on the acquisition of Saga Foods, higher inventory levels and a continued positive trend in growth and pricing power, Scope anticipates leverage, as measured by Scope-adjusted debt (SaD)/EBTIDA, of 4.0x at year-end 2020 and 3.6x at 31 December 2021.

Besides the higher contribution from Saga Foods, Scope’s assumptions for 2021 include a second capex cycle in 2020 and 2021. Scope anticipates that free operating cash will improve in 2021 and 2022 compared to levels posted in 2018 to 2020. However, Baromfi-Coop’s internal and external liquidity coverage remains weak, as the company continues to disclose considerable amounts of short-term debt every year. That said, Scope has not adjusted Baromfi-Coop’s financial risk profile, as the company has successfully entered capital markets as a source of funding and is expected to refinance maturing short-term debt in the future, based on its previous strategy.

Scope has made no adjustment for supplementary rating drivers due to Baromfi-Coop’s neutral financial policy.

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation of continuing positive performance thanks to a resilient business model, with limited vulnerability to the Covid-19 pandemic. Scope’s rating scenario anticipates SaD/EBITDA ranging from 3.5x to 4.0x over a medium-term horizon.

A positive rating action could be warranted by SaD/EBITDA of below 3.5x on a sustainable basis. This could occur if Baromfi-Coop’s capital allocation policy shifts towards debt reduction rather than a second capex programme.

A negative rating action could be required if SaD/EBITDA moves above 4.0x on a sustained basis. This could occur if the company orchestrates large M&A or if EBITDA falls short of Scope’s projections. Lastly, a rating downgrade could result from continued weak liquidity coverage beyond 2022.

Long-term and short-term debt ratings

All senior unsecured debt has been issued by Baromfi-Coop Kft. The recovery assessment is based on a hypothetical default scenario in 2022, including the assumption that bank debt (2022F: HUF 24.7bn) is ranked senior secured. Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt. This expectation translates into a rating of ‘BB-’ 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 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 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, public domain 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 rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Klaus Kobold, Associate Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 19 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.