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 B/Stable to Hungarian limestone producer Reneszánsz Kőfaragó Zrt. Senior unsecured debt has been rated B+.

Rating rationale

The business risk profile (assessed at B+) is supported by i) the group’s position as the largest limestone dimension stone producer in Hungary; ii) the unique properties of the limestone at the Süttő quarry, which is also close to national heritage buildings in Budapest that serve as a captive market; iii) the mine’s low cost and very long reserve; and iv) opportunities to grow the business by investing in plant and equipment, which would increase both production and efficiency. The company operates Hungary’s largest limestone quarry, which is in Süttő, situated on the Danube about 65km from Budapest. The company, controlled by the Balogh family since 2014, has the right to mine, process and sell stone from the quarry under a 70-year exclusive concession agreement.

The issuer’s business risk profile is constrained by the small absolute size of its business, concentration on a single site, high customer concentration, and significant historical earnings volatility. The company is seeking to raise HUF 2.4bn through a bond issuance under the Hungarian National Bank’s Bond Funding for Growth Scheme; half of the proceeds will be used for refinancing and the other half for capital expenditure. The investment in new plant and equipment has the potential to increase production, efficiency and profitability, the latter of which is currently below the industry average, with the return on capital in the low single-digits.

The financial risk profile (assessed at B) is driven by the issuer’s high financial leverage (Scope-adjusted debt/EBITDA ratio), including the capitalisation of future mine concession payments, expected to remain above 5x for the coming 2-3 years. The company is in a capital investment-intensive period expected to last until the end of 2021, resulting in negative free operating cash flow (FOCF). With minimal capital expenditure and no dividend payments expected beyond 2021, as well as likely higher earnings as a result of the plant modernisation, Scope sees potential for positive FOCF from 2022 onwards. Liquidity is considered adequate, with no short-term debt other than related-party liabilities and capex to be funded with bond proceeds.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view of the company’s solid order backlog at the end of 2020, with firm orders in excess of one year of production, and the potential for improved FOCF from 2022 onwards on the back of the plant and equipment upgrade planned for 2021.

A positive rating action would require an improvement in FOCF generation, measured by FOCF/Scope-adjusted debt, to above 5% (2019: -10%), and leverage of around 4x (2019: 5.9x).

A negative rating action could be warranted if FOCF generation remains negative beyond 2021. This could be caused by a failure to improve efficiency and/or weaker-than-expected demand for the company’s products.

Long-term debt ratings

Scope has assigned a debt class rating of B+ to the issuer’s senior unsecured debt, one notch higher than the issuer rating of B. This reflects limited prior-ranking liabilities in the capital structure, relatively modern plant and equipment given actual and planned capex of nearly HUF 3bn in 2018-2021, the relatively large stock of finished goods (HUF 1.6bn) and the negative pledge provisions to be incorporated in the planned bond indenture. Scope estimates a recovery of 51-70% for senior unsecured debt holders in a default scenario.

Scope’s base case financial forecast assumes the successful placement of a HUF 2.4bn senior unsecured bond with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, with amortisation of 10% per annum commencing in 2026 and a 50% bullet maturity in 2031. Bond proceeds are earmarked for refinancing and capital expenditures.

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): 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 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 was 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: Tommy Träsk, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The credit ratings/outlooks were first released by Scope Ratings on 29 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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