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

Rating action

Scope Ratings affirms its B+/Stable corporate issuer rating on Hungarian-based Vajda Papír Kft. Senior unsecured debt has also been affirmed at B+.

Rating rationale

The affirmation is primarily driven by Vajda Papir’s confirmation that its Phase II investment plan has started and that it intends to issue a new HUF 9bn MNB bond in Q1 2021, as part of the financing of a HUF 16bn expansion plan. The remaining financing come from the Hungarian state (subsidies have already been obtained) and a planned HUF 4bn equity investment injection into Vajda Real Estate Kft. The latter is seen positively by Scope, as it reduces the need for debt financing and is in line with the agency’s longer-term expectation of diminished financial risk ambition by the company.

The rationale for the capacity increase investment is the fact that Vajda Papir’s PM1 paper machine is already running close to full capacity, and consumer consumption of hygiene products are at a higher level in all major markets, especially in the household paper towel category. The new base paper production machine in Phase II will be used to produce all of Vajda Papir’s products (e.g. paper towels, paper tissues, table napkins and all hygienic paper products including hygienic face masks). Following the investment, Vajda Papir will be able to provide a full supply of raw material (the inhouse base paper rate is currently around 50%) for Vajda-Papír Group. The investment should not only increase the company’s export sales, but is also expected to enhance its EBITDA margin due to less dependence on external suppliers’ volume and pricing.

Compared to Scope’s previous base case projections from October 2020 (which did not include the Phase II investment), the agency’s new estimates see a temporary weakening of credit metrics in the construction year 2021. Based on management’s capex guidance, Scope now expects that leverage could reach 6-7x this year, before declining back to the 3-4x range in 2022 (i.e. the same level as in FY 2020). This temporary weakening of selected credit metrics does not alter Scope’s overall financial risk profile assessment of Vajda Papir.

Although Vajda Papir will report negative free operating cash flow this year, its liquidity position has improved since Scope’s last update in October 2020. This is based on the refinancing in November 2020, and the additional capital already obtained or secured to start the next Phase II investment. Post a successful issuance of a new MNB bond, Scope expect the company to have sufficient liquid sources to also support the need for higher working capital build up.

Scope has been informed of the proposed bond terms for the planned 10-year, HUF 9bn, 3.5% fixed bond under the MNB Bond Funding for Growth Scheme. These include an amortising repayment schedule (10% repayment annually in the fifth to ninth years, and a 50% balloon repayment in the last year). The bond will be structured as senior unsecured debt and pari pasu with the previous HUF 11.2bn bond currently outstanding. Other terms of the proposed new bond include Vajda Real Estate Kft.as guarantor, which is similar to the previous bond issuance.

Outlook and rating-change drivers

The Stable Outlook reflects Vajda Papír’s successful financial transformation – in terms of improved EBITDA thanks to lower raw material prices and higher export sales, and the recent positive liquidity effects stemming from the refinancing. This has increased financial headroom to initiate the Phase II investment project, and thus the Stable outlook also assume a temporarily weakening of certain credit metrics in 2021, and a successful bond issuance and equity injection this year.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA falls below 4x on a sustained basis.

A negative rating action is possible if the Phase II expansion plans experience capex overrun, financing problem or if a negative market environment develops. This could cause weaker than expected credit metrics, e.g. funds from operations/SaD of below 10%.

Long-term and short-term debt ratings

Scope expects an ‘average recovery’ for current and future senior unsecured debt such as the planned 10-year, HUF 9bn MNB bond to be issued in Q1 2021. This recovery expectation translates into the same rating as the issuer rating. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario after the proposed Phase II investment programme has been completed.

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 Products - 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 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 Henrik Blymke, Managing Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 28 October 2019. The ratings/outlooks were last updated on 13 October 2020.

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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