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

Rating action

Scope Ratings has affirmed the B+ issuer rating on AutoWallis Nyrt and revised the Outlook to Positive from Stable. Scope has also affirmed the B+ rating for the senior unsecured debt category.

Rating rationale

AutoWallis announced six major transactions during 2020. Particularly worth mentioning is the acquisition of the importer rights for the Opel brand in Hungary, Croatia, Slovenia, and Bosnia and Herzegovina, which will add sales of around 12,500 cars in Hungary and around 11,700 cars in the three other countries. This is substantially more than AutoWallis’ sales in 2019 (3,210 new cars in Hungary and 1,996 cars in the relevant non-Hungarian markets) and will thus improve the Hungarian market share markedly to more than 13% from currently 2%. The company’s market share outside of Hungary, however, should remain low at around 1.5%. The improved market position supports the company’s unchanged BB- rated business risk profile. Scope maintains its generally credit supportive view on the company’s diversification. The low profitability still constrains the company’s business risk profile. The EBITDA margin remained unchanged in 2019 at 4.2% (2018: 4.2%). For 2020, Scope expects an EBITDA margin, adjusted for one-off items, of 2.2%, driven by the sharp revenue decline in AutoWallis’ high-margin automotive services. For 2021, EBITDA margin is forecast to remain between 2-3%, as the share of the high-margin services business is set to decrease further following the recent transactions.

AutoWallis' B+ rated financial risk profile remains unchanged. The group’s Scope-adjusted debt (SaD) amounted to HUF 11.2bn at year-end 2019. Scope calculates a slightly higher SaD/EBITDA ratio of 3.6x at year-end 2019 (2018: 3.2x) and an improved interest cover of around 11x (2018: 8.5x). AutoWallis is in a phase of strong expansion, for which Scope expects financial debt to more than double until the year-end 2021 due to the increasing inventory loans. We note positively that AutoWallis’ financing strategy for acquisitions is to execute these via share exchanges and capital increases, without using cash, as seen in the recent acquisitions of Wallis Kerepesi Kft and Iniciál Autóház. Behind this backdrop, Scope notes that on 30 November AutoWallis will ask shareholders to authorise the board to increase share capital to up to HUF 6bn, with the aim to improve future flexibility. Scope estimates SaD to increase to HUF 17bn at year-end 2020 and HUF 27n at year-end 2021. Scope expects the lower EBITDA and higher SaD to lead to a sharp increase in the SaD/EBITDA ratio to around 8.5x at year-end 2020. This ratio, however, will be distorted to some extent as the recent transactions will not yet be fully reflected in the EBITDA. Scope expects the SaD/EBITDA to recover into the 4.0-4.5x range in 2021, driven in particular by higher EBITDA reflecting the full-year effects of the transactions.

Operating cash flow turned positive at HUF 1.7bn (2018: -HUF 35m), reflecting the higher EBITDA and relatively unchanged net working capital. The lower expected EBITDA will weigh on cash flow in 2020. Inventories are also expected to grow significantly during AutoWallis’ expansion phase. As a result, Scope expects operating cash flow and free operating cash flow to be deeply negative in 2020 and 2021.

Scope views AutoWallis’ liquidity and financial flexibility to be adequate. AutoWallis had a cash balance of HUF 1.9bn at end-December 2019. Moreover, AutoWallis issued in April a HUF 3bn bond under the Hungarian Central Bank’s Bond Funding for Growth Scheme. Scope’s view on liquidity is supported by the substantial inventories of around HUF 14bn at year-end 2019. Here, AutoWallis’ short-term debt consists largely of inventory loans. AutoWallis’ strategy is to reduce automobile stock risks by directly financing each vehicle, documented individually at the financing agent (bank or leasing partner). This ensures an outstanding loan is fully covered by the particular vehicle’s value. According to AutoWallis, this will also apply for automobile stock from the announced transactions. Scope calculates a short-term asset coverage of loans at year-end 2019 of 171% (2018: 139%), meaning stock can cover loans, even if vehicles are sold at around 40% of book value. Based on a 20% discount for inventories, Scope calculates short-term debt coverage at more than 100%. Positively, Scope highlights that financing institutions continued to provide credit lines during the automotive market downturn in 2008-09.

Outlook and rating-change drivers

The Positive Outlook reflects the improved market position following the recent transactions, as well as Scope’s expectation that the company will execute its growth plans through share exchanges and/or capital increases, leading to the SaD/EBITDA ratio advancing towards 3.5x by 2022. The positive rating outlook also reflects no dividend payouts over the next several years.

Scope may upgrade the rating if AutoWallis increases its profitability, for instance, through a higher percentage of services revenues, and/or if Scope’s expectation of the SaD/EBITDA ratio of around 3.5x on a sustained basis is met.

A negative rating action could be triggered by a failure to improve SaD/EBITDA to around 3.5x on a sustained basis, e.g. due to lower-than-expected profitability and/or higher-than-expected debt after transactions are completed. A negative rating action could be also triggered by the loss of major dealership or importer contracts.

Long-term and short-term debt ratings

Scope has affirmed the current B+ rating on senior unsecured debt, in line with the issuer rating. This is based on the ‘average’ recovery rate (30-50%) calculated for this debt class.

The recovery analysis used a liquidation value in a hypothetical default scenario in 2021 of HUF 51bn. This value is based on a haircut of around 20% on the assets and reflect asset liquidation costs of 10%. The majority of inventory assets are pledged as security for the underlying loans. The recovery analysis assumes that, in a hypothetical default, short-term loans and lease liabilities would be senior to the bond, while long-term liabilities and advances received would have the same seniority as the bond. In addition, Scope has assumed a higher seniority for the balance of trade payables covered by banks. The reasoning for this view is Scope’s belief that payables would have a first-ranking pledge (assignment) by auto manufacturers in a hypothetical default. Scope has assumed 100% recovery for importer trade receivables (around 80% of total trade receivables) as they are covered by third-party bank guarantees. Also, the issuer will be the holding company, which has no other assets apart from its investments.

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 ratings and/or rating outlook (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, 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: Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 18 September 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.