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

Rating action

Scope Ratings has today assigned a first-time issuer rating of BB/Stable to Abroncs Kereskedőház Kft (AKH). The agency has also assigned a first-time rating of BB to senior unsecured debt issued by AKH.

Rating rationale

AKH’s issuer rating is supported by its leading position in the tyre retail business. The group has a share of over 30% in this market in Hungary. This is due to its strong presence in both the wholesale and retail segments, supported by an extended brand portfolio and a broad footprint in Hungary. The partial integration of the group’s business into car service stores and the exclusive partnership with BP lubricants (market share of around 7%) has reduced AKH’s exposure to the seasonality inherent in the tyre business. It has also diversified the group’s offer, which was previously based on only one type of product. AKH has a good relationship with its suppliers. It has a balanced mix of exclusive and semi-exclusive products (accounting for 74% of sales) and other brands, including worldwide tyre makers (e.g. Continental, Michelin, and Bridgestone). Despite the strong market in Hungary, AKH’s business risk profile is limited by its small financial size, fierce industry competition, limited opportunities for the domestic growth of its business and low potential for expansion.

The group’s business risk profile is also constrained by weak overall diversification in terms of geography and type of product sold. On the other hand, we view positively its diversified pool of customers (car leasing companies and retailers) and diversified sales channels, with an increasing share of online sales. Low profitability, ranging between 2% and 4%, also puts pressure on the rating. This is driven by seasonality and the large share of wholesale in the revenue mix. The EBITDA margin in 2019 was very weak due to inventory management issues. In response, management’s strategy from 2020 onwards has been to maximise profitability in order to recover the 2017 level of around 4% within the next two years.

AKH’s financial risk profile clearly supports the rating case, thanks to good credit metrics including high interest cover and investment grade leverage. Liquidity is adequate, with no material short-term debt following the refinancing of the group’s bank loans via the Hungarian central bank bond. AKH also has strong free cash flow generation driven by low capex (below 2% of sales). This is, however, highly volatile and sensitive to changes in working capital.

The base case for the ratings incorporates our assumption that proceeds from the upcoming bond will only be used for debt refinancing and not for shareholder remuneration. AKH intends to place a HUF 3.5 bn bond under the Hungarian central bank’s Bond Funding for Growth Scheme. The new bond will have an anticipated coupon of 2.5% per annum, a maturity of seven years with amortisation and 50% repayment upon maturity. The amortization schedule is the following: 5,714% per year of the face value for the period 2021-2023, 10% for 2024, 10,714% for 2025 and 12,143% for 2026. The new bond is earmarked solely for the refinancing of all of AKH’s debt, with the exception of the overdraft facility, for a total amount of HUF 3.3bn.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the expectation of Scope-adjusted debt/EBITDA remaining below 3.0x in addition to the assumption that no dividend payment will be made in the coming years. The Outlook also reflects Scope’s expectation of continuing positive performance with a limited impact from the Covid-19 pandemic.

A positive rating action could be warranted by an improvement in AKH’s business risk profile. Such an improvement could be achieved via better diversification or a material increase in operating margins.

A negative rating action may be taken if Scope-adjusted debt/EBITDA increases towards 3.5x on a sustained basis or in the event of significant shareholder remuneration, contrary to Scope’s expectations. An increase in leverage could be triggered by a rise in net debt from larger than anticipated capex and working capital consumption.

Long-term and short-term debt ratings

Senior unsecured debt is issued by Abroncs Kereskedőház Kft. Scope’s recovery assessment is based on a hypothetical default scenario in 2022. The agency’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): Rating Methodology: Corporate Rating, 26 February 2020, 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, third parties 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 20 November 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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