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 Tranzit-Food Kft. The agency has also affirmed its BB senior unsecured debt rating.

The issuer participated in the rating process by providing access to internal documents and management. 

Rating rationale

The issuer rating is largely supported by Tranzit’s leading position in Europe as a goose and duck processor. Tranzit is responsible for 50% of the goose meat supply in Hungary (18% in Europe). For duck, Tranzit’s market share in its home country and Europe is 32% and 8% respectively. Scope views positively the ongoing diversification of Tranzit’s poultry meat production. The company has recently started to develop its chicken operations by acquiring a further processing plant (Marnevall Zrt.) early in 2020. This first investment was financed via a capital increase and banking loans, as opposed to the initial plan of issuing a HUF 9.2bn (EUR 30m) Hungarian National Bank (MNB) bond under the MNB Bond Funding for Growth Scheme. Scope notes that the company does not foresee the issuance of such a bond in the near future. The second main investment is in the expansion of its chicken slaughterhouse capacity from 15m pieces to 25m pieces. Although this type of meat is less profitable than duck or goose, it should allow Tranzit to continue benefiting from the larger chicken market while maintaining duck and goose as niche markets. The company’s creditworthiness is also supported by strong liquidity, a track record of low leverage and a strong operating margin. Tranzit has a good track record in terms of profitability, with an EBITDA margin ranging between 10% and 14%. However, profitability was negatively impacted in 2019 and the first half of 2020, dropping below 10%. This was the result of lower prices in the overall poultry market, driven by production overcapacity and temporarily limited export opportunities due to the Covid-19 crisis.

The rating is constrained by Tranzit’s limited size compared to other European players, as well as concentration issues regarding its footprint and customer portfolio (especially for chicken). The lower profitability (8%) of the broiler segment combined with the future increase of Tranzit’s exposure to chicken is likely to weigh on its overall EBITDA margin, further limiting the rating. Scope expects the impact of the Covid-19 crisis to be fairly limited for the company. This is because the non-discretionary nature of the goods it sells affords a general resilience to economic downturns. Scope forecasts that leverage will increase materially from 1.0x in 2020 to 1.7x by 2021. Despite good credit metrics, Tranzit’s financial risk profile is constrained by forecasted negative free operating cash flow due to massive capex which cannot be financed organically.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the expectation that Scope-adjusted debt (SaD)/EBITDA will remain below 3.0x. The Outlook also reflects Scope’s expectation that Tranzit will continue to perform positively, thanks to a resilient business model, with limited vulnerability to the Covid-19 pandemic.

A positive rating action could be warranted by an improvement in Tranzit’s business risk profile. This could be achieved via a material increase in size or better diversification.

A negative rating action may be taken if SaD/EBITDA reaches around 4.0x on a sustained basis. An increase in leverage could be triggered by a rise in net debt from larger than anticipated capex or from a slower recovery of the poultry market in Hungary weighing on the company’s profitability.

Long-term and short-term debt ratings

All senior unsecured debt has been issued by Tranzit-Food Kft. Scope’s recovery assessment is based on a hypothetical default scenario in 2022, including bank debt (2022F: HUF 9.9bn) ranked senior unsecured. 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 methodologies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020 and 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 www.Scoperatings.com/methodologies/ ESG factors in ratings.
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 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: Thomas Langlet, Senior Analyst
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 22 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
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