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Rating action

Scope Ratings has assigned a B+/Stable first-time issuer rating to Hungarian agribusiness company Hunland Trade Kft. The company’s planned HUF 22bn guaranteed senior unsecured corporate bond has been assigned a (P) B+ debt instrument rating.

Rating rationale

Hunland Trade’s business risk profile is supported by its leading position in the Hungarian livestock export market. It benefits from a large customer base, through with some concentration risk. However, the business risk profile is constrained by Hunland Trade’s decreasing Scope-adjusted EBITDA margin and a high level of receivables due to the nature of its business.

Scope’s financial risk profile assessment incorporates the planned issuance of a HUF 22bn guaranteed senior unsecured bond under the Bond Funding for Growth Scheme of the Hungarian National Bank (MNB). The bond will have a 2.88% coupon and a 10-year tenor consisting of a five-year grace period followed by amortisation of 10% in years 5-9 and 50% in year 10. The bond will be guaranteed by Hunland Trade’s sole subsidiary and three of its sister companies. Bond proceeds are earmarked for refinancing EUR 40m in short-term debt, investing EUR 3m in new production machines, and providing EUR 20m in intercompany loans to the guarantors. The bond’s terms allow the issuer a unilateral deviation of 10% (or up to EUR 47.3m) from intended uses for its benefit (guarantors’ stake down to EUR 15.7m accordingly). Even so, the guarantors will remain entitled to EUR 20m in proceeds. Thus, the guarantors' loans will be repaid even if the issuer uses more of the proceeds, in which case part of the investments realised from the bonds will decrease or will be realised from own funds.

Scope expects leverage, as measured by the Scope-adjusted debt (SaD)/EBITDA ratio, to increase to 8.5x in the medium term and the interest cover ratio to reach above 5.5x. The agency also expects underlying profitability to deteriorate slightly, mainly due to lower expected net sales in 2020 and higher materials costs over the coming years. Even though cattle prices dropped in 2020, Hunland Trade sold at a lower price to satisfy its partners. The falling prices have also allowed the company to buy young cattle livestock much cheaper, which could later be beneficial unless selling prices fall further. Scope also expects free operating cash flow to fluctuate between negative and positive numbers.

Outlook and rating-change drivers

The Stable Outlook for Hunland Trade incorporates Scope’s view that key credit metrics over the next two years will deteriorate, with a SaD/EBITDA of 6.0x-8.5x compared to 3.5x-4.5x in the past. It also incorporates Hunland Trade’s position as the leading Hungarian livestock exporter and Scope’s expectation that the EBITDA margin will shrink to below 2.5%.Furthermore, Scope assumes the successful issuance of the HUF 22bn MNB bond, with proceeds used as currently planned (see section below). The agency’s outlook incorporates an unchanged structure between Hunland Trade and its sister companies, all majority-owned by the Janssen family.

A positive rating action is deemed remote in light of the increasing indebtedness but could be warranted if the Scope-adjusted EBITDA/interest cover reached above 7x on a sustained basis and if the company’s business risk profile improved, for example with a sustained Scope-adjusted EBITDA margin of more than 3.5%.

The rating could come under pressure if debt protection persisted below 4x, for example, as a result of significantly lower contributions to earnings by cattle and pig sales and/or bond proceeds being used for purposes other than those currently planned.

Long-term debt ratings

The rated entity intends to issue a HUF 22bn (equivalent to EUR 63m) guaranteed senior unsecured bond in 2021 under the MNB Bond Funding for Growth Scheme. It will have a 10-year maturity with a five-year grace period followed by amortisation of 10% for years 5-9 and 50% in year 10. The bond will be guaranteed by Hunland Trade’s sole subsidiary (Hunland Trans Kft) and three sister companies (Bovinia Kft, Hunland Production Kft, and Hunland Dairy Kft).

The proceeds are primarily planned for refinancing short-term financial debt of EUR 40m, investing EUR 3m in new production machines, and providing intercompany loans to the guarantors for EUR 20m to refinance their debt (EUR 10.9m) and finance their capex (EUR 9.1m).

Proceeds from the intercompany loans will be dispatched as follows:

• Hunland Dairy: EUR 2.5m for capex to build a slurry storage and renovate its barn;
   
• Hunland Trans: EUR 4.5m for capex to acquire new assets/vehicles;
   
• Hunland Production: EUR 1m for capex to expand the feed factory and EUR 8.2m to refinance loans; and
   
• Bovinia: EUR 1.1m for capex to construct two new stables and EUR 2.7m to refinance loans.

Scope has an ‘average’ recovery expectation for the guaranteed senior unsecured debt, which is based on an anticipated liquidation value in a hypothetical default scenario.The guaranteed senior unsecured debt ranks below short-term and long-term debt (excluding the bond issue) raised from financial institutions and payables which are secured by asset pledges. Consequently, in a hypothetical default, creditors of the guaranteed senior unsecured bond are likely repaid from the liquidation proceeds remaining after repayments to senior secured debt creditors, the guarantors’ current assets, and property, plant and equipment reduced by long- and short-term financial debt, and payables. The recovery expectation takes into consideration the uncertainties regarding the value of claims at the guarantors’ level at the point of a hypothetical default of the bond issuer but also the uncertainties about the debt positions of the guarantors at the point of a hypothetical default of the bond issuer and the seniority of the claim. These recovery expectations translate into a preliminary debt instrument rating of (P) B+ prior to the placement of the bond.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this credit 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 were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The credit 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 Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the credit rating action, the rated entity was given the opportunity to review the credit rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the credit 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: Anne Grammatico Associate Director
Person responsible for approval of the credit rating: Sebastian Zank, Executive Director
The credit ratings/outlooks were first released by Scope Ratings on 25 February 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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