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

Rating action

Scope Ratings affirms its B+ corporate issuer rating on Hungarian-based Vajda Papír Kft. (Vajda Papír) and changes the Outlook to Stable from Positive. Future senior unsecured debt has been affirmed at B+.

Rating rationale

The Outlook change is primarily driven by Scope’s anticipation that Vajda Papír will not deleverage as fast as previously anticipated, as the company wants to start its Phase II investment plan sooner. Although no final investment decision has been taken, there are indications it will take place next year, instead of 2022 as Scope had anticipated last year. The company’s rationale is to achieve full supply of raw materials for the group, which would necessitate an earlier start to Phase II investment. The base paper production machine in Phase II will be used to produce raw materials for kitchen paper rolls, paper tissues and paper napkins, which again should be positive for future profitability margins. The investment will be financed mainly with debt, meaning leverage, as measured by Scope-adjusted debt/EBITDA, is unlikely to stay below 4x in the medium term, a condition set last year by Scope for any potential issuer rating upgrade. Other conditions last year included positive liquidity effects following refinancing, as well as the issuance of the new bond under the Hungarian Central Bank (MNB) scheme, now expected in Q4 2020, instead of Q1 2020 as initially planned.

Still, the affirmation of the B+ issuer rating indicates the improvement in credit metrics, which Scope anticipated last year. The increase in H1 2020 sales revenue compared to the 2019 level even exceeded expectations, enabled by the expansion in production unit capacity and the initial buying frenzy prompted by Covid-19 during the reporting period. Scope estimates a strong increase in EBITDA this year (helped by higher export sales), with positive free operating cash flow and the leverage ratio moving towards 4x at YE 2020. In addition to the higher sales volume, the company has also been positively affected by the lower raw material input prices.

The updated financial base case projection does not incorporate the potential Phase II investment, as Scope is awaiting the company’s final decision. This means that after refinancing, liquidity and financial flexibility will improve and should increase financial headroom within the current rating to take on more investments. Although all financing terms are yet to be finalised, Scope already assumes that approximately one-third of the investments will consist of government grants.

Outlook and rating-change drivers

The Stable Outlook reflects Vajda Papír’s successful financial transformation – in terms of improved EBITDA from lower raw material prices and higher export sales, reduced operating costs from producing more base paper inhouse, and the positive liquidity effect following refinancing and the issuance of the new MNB bond. It also reflects the increased financial headroom for the Phase II investment project next year, which could temporarily weaken certain credit metrics.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA goes below 4x on a sustained basis. This is unlikely in the short term as the company wants to initiate the Phase II investment soon.

A negative rating action is possible if the company initiates Phase II expansion plans with too much debt in the context of a more negative market where credit metrics are weak, exemplified, for instance, by a funds from operations/SaD of below 10%.

Long-term and short-term debt ratings

Scope expects an ‘average recovery’ for future senior unsecured debt such as the planned 10-year HUF 11.7bn MNB bond to be issued in 2020. Such recovery expectations translate into the same rating as the issuer rating. The recovery expectations are based on an expected liquidation value in a hypothetical default scenario after the proposed refinancing in 2020, which is expected to release all pledges taken on the company’s assets, except for receivables under the new overdraft facility. Until the completion of refinancing, senior unsecured debt has a lower recovery rate and would be rated below the issuer rating. Moreover, the recovery analysis points out that the company can partially pledge assets again, which is possible once Phase II of the base paper project has been initiated.

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 ratings and rating outlook (Corporate Rating methodology 26 Februar 2020, Consumer Products Rating Methodology 30 September 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, Agents of Issuer, 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: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 28 October 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.