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

Rating action

Scope Ratings assigns a B+/Stable first-time issuer rating to Hungarian waste management service company, Éltex Kft. Senior unsecured debt issued by Éltex is rated B+.

Rating rationale

Éltex’s business risk profile is supported by the increasing need for recycling, especially of industrial waste. The company is one of the top three leaders in waste management in Hungary. It benefits from medium- and long-term contracts with globally well-known groups. The contracts have a high likelihood of being renewed, which ensures stable revenues. Éltex has also committed not to use landfill (credit-positive ESG factor).

Despite a good EBITDA interest cover ratio, Éltex’s business risk profile is constrained by its relatively high expected leverage and low Scope-adjusted EBITDA margin. In addition, 75% of Éltex’s business is generated in its home market and all its activities are related to recycling, which leads to low diversification. Éltex also has to deal with some turbulence on the competitive waste market.

Éltex’s financial risk profile is slightly stronger than its business risk profile. The agency’s rating case incorporates the company’s plans to issue a HUF 2.25bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. Scope Ratings assumes that the planned bond will have a 3.5% coupon with an 8-year tenor and a 3-year grace period following by a yearly linear amortisation. Proceeds from the bond are earmarked for financing four major investment projects and refinancing some of 2020 financial debt. The agency expects Éltex’s financial leverage ratio to increase to almost 4x in the medium term and its interest cover ratio to be above 7x. Scope Ratings also expects some deterioration in underlying profitability despite free cash flow fluctuating between negative and positive numbers.

Outlook and rating-change drivers

The Stable Outlook for Éltex incorporates Scope Rating’s view that key credit metrics over the next two years will deteriorate, i.e. expected Scope-adjusted debt (SaD)/EBITDA of 3.7x-3.8x compared to 1x-2x in the past. It also incorporates Éltex’s position as one of the top three leaders in waste management in Hungary and the agency’s perception that the company will keep its EBITDA margin around 5-6%. Currently conducted debt-financed growth investments are not expected to impose major execution risk. Furthermore, Scope Ratings assumes the successful issuance of a HUF 2.25bn bond under the MNB Bond Funding for Growth Scheme, with the proceeds used to finance four major investment projects and refinance a part of 2020 financial debt.

A positive rating action is deemed remote in light of the company’s expected size and outreach in the foreseeable future but could be warranted if the company’s business risks were to be reduced while keeping the financial risk profile stable. This could be achieved by significant growth of the company’s overall outreach and diversification.

The rating could come under pressure if Éltex’s leverage deteriorated to significantly above 4x on a consistent basis, e.g. as a result of higher capital expenditures, a higher dividend payout and/or the use of bond proceeds for purposes other than the aforementioned refinancing.

Long-term debt ratings

The agency expects an average recovery for senior unsecured debt, such as the planned HUF 2.25bn MNB bond. This recovery expectation translates into a B+ rating for the senior unsecured debt category. Scope Ratings’ recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2022. Short-term and long-term debt (excluding the bond issue) raised from financial institutions as well as payables rank higher than senior unsecured debt. Hence, such debts would be repaid first.

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 rating outlooks (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: public domain, the rated entity, the rated entity’s agents 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: Anne Grammatico, Associate Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 20 October 2020.

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.