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Rating action

Scope Ratings assigns a B+/Stable first-time issuer rating to MetMax Europe Zrt. Senior unsecured debt has been rated equivalent to the issuer rating at B+.

Rating rationale

MetMax plans to issue a HUF 5.0bn bond with a 10-year maturity (amortising 10% every year during 2025-2029, and 50% in 2030) and a coupon of around 3% p.a. under the Hungarian Central Bank’s Bond Funding for Growth Scheme. Proceeds from the bond issuance are planned for investments to expand production capacity (real estate, building, and new machines) and refinance existing debt at the parent company.

MetMax’s business risk profile, rated B, is constrained by the company’s size, low diversification and high customer concentration. MetMax is a small niche player in Europe’s capital goods market, with revenues of HUF 3.9bn in 2019. It is a strategic supplier to large international companies based in Europe, with production focused on small-to-medium series of high-precision and complex parts. The company produces more than 4,000 parts such as combustion nozzles, electric motor components, parts for railway braking systems, pumps, industrial clamping and gripping machines. Regarding diversification, the limited product range, small share of aftermarket business, and low end-market diversification are credit-negative. The key constraint is the significant customer concentration, with the top five customers representing more than 80% of revenues.

MetMax is also involved in outsourcing the projects of its customers where, in the longer term, its customers outsource key machining expertise and transfer know-how to suppliers such as MetMax. Scope views this positively as it speaks for MetMax’s technological expertise and strengthens the supplier relationship. Profitability is the major support for the business risk profile. EBITDA margin has ranged between 24% and 32% in the past five years. For 2020, MetMax expects revenues in a range of HUF 4.3bn-4.5bn (+13% YoY), based on expected order fulfilments until year end and business booked in the first half of 2020. Scope forecasts EBITDA of HUF 1.25bn in 2020, which would translate into an EBITDA margin of 28% (27% in H1 2020). MetMax has recently added new customers, which should boost revenue growth going forward. To accommodate higher business volumes, production capacity will be increased as part of the current investment programme, which foresees a 50% expansion in existing floor space.

The rating is supported by the BBB financial risk profile. The HUF 5.0bn investment programme for expanding production capacity will allocate HUF 2.2bn for real estate and buildings and HUF 2.8bn for new machinery. The new production site will allow the internalisation of HUF 200m of current rental payments and should lead to operational savings of HUF 50m. Investment will start in 2020 and will last for the next five years, and the completion of the real estate investment is expected in late 2021. Investments carried out via sister company MetMax Vagyonkezelö Kft. will lead to negative free operating cash flows in 2021, mainly because spending on real estate is mostly scheduled for that period. Beyond 2021, however, underlying cash flow should support positive free operating cash flows despite the heavy investment. The investment programme is expected to be supported by a state subsidy.

Scope-adjusted debt (SaD) was slightly negative at year-end 2019. Gross financial debt at 31 December 2019 consisted of an intra-group loan due to MetMax’s parent and a small drawing under a lease facility. All financial debt was covered using unrestricted cash. The proceeds from the planned bond are partly for refinancing acquisition debt of EUR 8.0m (around HUF 3.0bn) at the parent level. This debt is committed for another eight years but will be replaced with parts of the prospective bond issue. Afterwards, MetMax’s capital structure will consist solely of the HUF 5.0bn bond. In view of the very low indebtedness prior to the investment programme and the acquisition debt taken out at the parent level, credit ratios should remain solid in 2020 and beyond.

Leverage as measured by SaD/EBITDA is expected at below 2.0x in 2020 and only mildly above 2.0x in 2021 due to the large cash payouts planned for real estate and buildings. Deleveraging to below 2.0x should begin in 2022, supported by good cash generation.

Scope views MetMax’s liquidity and financial flexibility as adequate as sources cover uses by more than 2x in 2020. Going forward, with no financial debt other than the long-dated prospective bond, financial maturities will amount to nil.

Outlook and rating-change drivers

The Stable Outlook incorporates the successful placement of the HUF 5.0bn bond under the Hungarian National Bank’s Bond Funding for Growth Scheme and the arrangement of state subsidies for the duration of the investment programme. It also includes the expectation of mid-to-high single-digit revenue growth in 2021 while margins remain at current levels, translating into a SaD/EBITDA of around 2.0x in 2021.

At this stage, Scope deems an upgrade of the rating to be remote unless MetMax can improve its business risk profile in terms of customer concentration and product/end-market diversification, while maintaining credit metrics at the forecasted levels.

A negative rating action could result from SaD/EBITDA increasing above 3.0x on a sustained basis, caused by EBITDA margin pressure from rising staff costs or investment that goes beyond the current plan.

Long-term and short-term debt ratings

MetMax Europe Zrt. plans to issue a senior unsecured HUF 5.0bn bond with a 10-year maturity (amortising 10% every year during 2025-2029, and 50% in 2030) and coupon of around 3% p.a. under the Hungarian Central Bank’s Bond for Growth Scheme. Proceeds from the bond issuance are planned for investments to expand production capacity (real estate, building, and new machines) at its sister company. The investments at the sister company are planned to be funded through funds provided by MetMax Europe Zrt. The remaining amount of the bond proceeds are planned to be used to refinance debt at the parent company (HUF 3.0bn). Therefore, total bond proceeds will be lended to either the parent company or the sister company.

Scope’s recovery analysis uses the liquidation value in a hypothetical default in 2022 of HUF 3.8bn. This value is based on a haircut of around 50% on the assets and reflects liquidation costs for the assets of 10%. The haircut also assumes that the intra-group receivable from the parent used to refinance the acquisition debt would become non-recoverable in the event of payment default. This suggests ‘average’ recovery prospects for bondholders in a simulated event of default.

To determine claimholders, Scope has ranked the repayment obligation for subsidies at the simulated point of default senior to the claims on the prospective bond. Scope assumes the business plan and investment program will be executed as planned with no additional bank debt or other senior ranking financings ahead of the planned bond. Scope also assumes the existing undrawn bank facilities will be cancelled while mortgages and pledges over assets currently in place will be released.

In view of the expected recovery rate, Scope assigns a B+ rating to the senior unsecured debt class, the same as the issuer rating.

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

Methodology
The methodology/ies used for this rating(s) and/or rating outlook(s): Corporate Rating Methodology, published on 26 February 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: issuer, agents of the issuer, 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/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Werner Stäblein, Executive Director 
Person responsible for approval of the rating: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope on 26 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.
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