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

Rating action

Scope Ratings GmbH (Scope) has affirmed its B+/Stable corporate issuer rating on Hungarian aluminium processor Inotal Zrt along with the B+ senior unsecured debt rating.

Rating rationale

The affirmation of the issuer rating is driven by a strong performance in 2020 and the first quarter of 2021, with most of its end markets (except for cosmetics) holding up well during the pandemic. The introduction of preliminary and final import duties by the European Union on rolled and extruded aluminium products from China in 2020 and 2021, along with rising freight rates, has had a significant positive impact on market conditions in the European aluminium industry. A staff reduction in 2020 also had a significant positive impact on operating margins for the company.

Inotal’s business risk profile (assessed at B) is constrained by its relatively small size by global standards, its concentration on commodity products, and relatively low margins. Inotal ranks as the third largest aluminium processor in Hungary after Arconic and Norsk Hydro. The rating is supported by good geographical, customer and end market diversification, direct customer relationships, access to scrap through associate Martin Metals and its slag recycling operation, and effective management of metals price risk through customer/supplier contracts and hedging. The company performed relatively well in 2020, with most of its end markets (except for cosmetics) holding up well during the pandemic. The introduction of preliminary and final import duties by the European Union on rolled and extruded aluminium products from China in 2020 and 2021, along with rising freight rates, has had a significant positive impact on market conditions in the European aluminium industry, which Scope expects to last for the next two years.

The company’s financial risk profile (assessed at BB-) reflects moderate leverage, with Scope-adjusted debt (SaD)/EBITDA of just below 3x expected in 2021-2022, and a long-term debt maturity profile comprising a HUF 6bn bond maturing in 2027 with a first instalment (12.5%) due in 2023. Free operating cash flow/SaD has been volatile in the past however, driven primarily by fluctuations in working capital. Capex has been stable at or just above the level of depreciation, and is expected to remain at this level in 2021-22, whilst dividends are prohibited under the terms of the bond. This should result in positive discretionary cash flow generation, before considering working capital flows.

Scope considers liquidity to be adequate, with no debt maturities in 2021 and 2022.

Outlook and Rating-change drivers

The Outlook is Stable and reflects stable demand from Inotal’s key end markets in Europe, the building, electrical and food industries. The EU anti-dumping duties on Chinese imports are also likely to stabilise market conditions for the next few years. In our base case scenario, Scope expect Inotal’s leverage (SaD/EBITDA) to remain just below 3x over the next two years.

A negative rating action could occur if leverage exceeded 4x on a sustained basis. This could result from weaker market conditions, significantly higher capex or debt-financed acquisitions.

A positive rating action could be warranted if Scope believes the improved profitability can be maintained over the long term (also post EU anti-dumping duties), leading to leverage sustainably below 2.5x.

Long-term and short-term debt ratings

Scope rates the HUF 6bn senior unsecured bond at the same level as the issuer, based on our assessment of an ‘average’ (30%-50%) recovery for senior unsecured lenders in a hypothetical default scenario. This assessment assumes limited prior ranking debt and other liabilities, including about 20% of trade payables to micro- and small-sized companies (priority creditor under Hungarian law) and EUR 3m of receivable factoring.

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 these Credit Ratings and/or Outlook (Corporate Rating Methodology, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit 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 Ratings: public domain, the rated entity, the rated entities’ related third parties 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 the 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 Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
The Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 May 2020.

Potential conflicts
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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.