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

Rating action

Scope Ratings assigns a first-time corporate issuer rating of BB-/Stable on Hungary-based Wellis Magyarország Zrt. Senior unsecured debt is rated at BB-.

Rating rationale

Wellis’ business risk profile is rated BB, consisting of a BB industry risk profile for durable consumer goods and a competitive position that is mainly supported by good diversification in terms of geographies, customers and suppliers. More than 75% of revenues are already generated internationally, outside Wellis’ home market of Hungary, including a fast-growing share of revenues from exports to the USA. Both the single largest supplier and largest individual customer accounted for less than 7% of total revenue/costs in 2020, demonstrating a high degree of diversification.

The major constraints on Wellis’ business risk profile include its limited absolute size (annual revenues of below EUR 50m), also compared to peers, and its single-digit historical operating profitability, which is below the sector average. We expect operating profitability to improve to a Scope-adjusted EBITDA margin of around 12% in our financial base case, incorporating substantial stresses to the company’s business plan.

Wellis is heavily dependent on its core product, spas, which represents 80% of revenues. The company has only moderate brand strength, due to its multi-brand and multi-channel sales strategy as well as its limited size. On the other hand, these strategies serve Wellis well enough to address the different segments of the market efficiently.

Wellis’ financial risk profile is rated BB-, mostly supported by robust interest coverage of more than 7.0x on a sustained basis and moderate financial leverage, which we expect to range between 2.0x and 3.5x Scope-adjusted debt (SaD)/Scope-adjusted EBITDA for the next two business years.

We highlight the execution risks arising from the planned bond placement as well as from the substantial increase in production capacity and envisaged further dynamic growth in the United States. These uncertainties could translate into elevated cash flow volatility, which we have incorporated into our assessment of financial risk for the time being.

Based on our assumption of a full placement of the new HUF 9bn senior unsecured bond in Q1 2020, Wellis will not have significant short-term financial debt going forward as most secured bank debts will be refinanced with the bond proceeds. In addition to its unrestricted cash position and expected positive operating cash flow from 2022 on, the company has an approx. HUF 1bn committed bank line at its disposal. We therefore deem the issuer’s liquidity adequate, assuming the planned bond transaction is successful.

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that Wellis will be able to successfully place the new HUF 9bn MNB bond while being able to increase sales and ramp up production at the new production facility in line with our financial base case. This should lead to financial leverage returning to less than 3.0x Scope-adjusted EBITDA after 2021.

A positive rating action may be warranted if SaD/EBITDA decreases towards 2.5x while showing positive free operating cash flows on a sustained basis.

A negative rating action may be warranted by financial leverage of more than 4.0x on a sustained basis. This could be triggered by weaker-than-expected sales growth and/or operational delays in the planned ramp-up of production capacity.

Long-term and short-term debt ratings

The issuer plans to issue a HUF 9bn senior unsecured bond under the MNB Bond Funding for Growth Scheme with a 10-year tenor and 10% annual amortization in 2026-2030 and a remaining 50% bullet repayment in 2031. We assumed a 3.0% coupon in our financial forecast. The bond proceeds are earmarked for the refinancing of current financial secured bank debt in the total amount of HUF 3.1bn, capex of HUF 4.4bn for the new production facility in Ózd as well as a HUF 1.5bn financing of working capital expansion.

Based on our recovery analysis, which assumes the successful placement of the new HUF 9bn bond and a hypothetical default scenario in 2022, we expect ‘average recovery’ for future senior unsecured debt holders. This translates into a BB- instrument rating for senior unsecured debt.

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; Rating Methodology: Consumer Product, 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 Ratings’ 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 entities’ 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. The credit rating and/or outlook is UK endorsed.
Lead analyst: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The credit ratings/outlooks were first released by Scope Ratings on 22 January 2021. 

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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