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Rating action

Scope Ratings GmbH (Scope) has affirmed the corporate issuer rating of B+/Stable on Hungarian durable consumer goods company Naturtex Kft (Naturtex Gyapju -es Tollfeldolgozo Kft). Senior unsecured debt has also been affirmed at B+.

Rating rationale

The affirmation is driven by the company’s solid development despite the tough Covid-19 environment, which had a clear effect on its top line last year. Although sales declined 22% last year, EBITDA outperformed Scope’s expectations. As a result, the credit ratios of Scope-adjusted debt (SaD)/EBITDA and funds from operations/SaD ended FY 2020 at respectively below 3x and above 30% compared with Scope’s estimates of 3.7x and 21%.

With Scope’s updated forecast assumptions, credit metrics are very likely to improve in 2021. Among new important contracts signed in the last 12 months, Scope highlights two contacts adding millions of euros of sales in 2021: a new contract with Asian partners and a re-negotiated loyalty promotion contract in Q4 2021. Further, following the completion of NTT Manufacturing Ltd (joint venture project company) expected in Q3 2021, the company will reduce the amount of its outstanding debt guarantees, and thus also reduce the Scope adjusted debt.

Thus, with this in mind and Scope’s updated forecasts, the company is in a relatively robust financial condition. The financial risk profile will thus continue to improve on Scope’s estimates, and be better than the business risk profile of Naturtex going forward. Still, based on the planned discretionary inventory build-up this year, Scope does not expect positive free operating cash flow in the medium term, which remains a key constraint on the financial risk profile. However, Scope recognises the greater flexibility the company will obtain to tackle the seasonal nature of raw material purchases (feathers and down), which is important for stable profitability margins. Moreover, following the refinancing last year, the company is less exposed to liquidity issues and refinancing risk.

The business risk profile assessment remains unchanged and still incorporates medium cyclicality from the exposure to durable consumer goods. As one of the leading bedding brands in Hungary, Naturtex has a healthy domestic market share. Nonetheless, it is a relatively small producer in the fragmented European bedding market. Inherent cyclicality risk is reduced by its high share of revenue from exports to more than 45 countries and by its acceptable customer diversification. However, some cyclicality remains and there is clear seasonal volatility, as the demand for Naturtex’ products have a seasonal character (from September to January). Overall, the weaker business risk is still overweighted by Scope when affirming the overall issuer rating.

Outlook and rating-change drivers

Although Scope maintains the Stable Outlook, it acknowledges that the company is in a positive direction in 2021 after being negatively affected by the pandemic last year. Scope expects the company to benefit from new contracts, higher demand, and fewer Covid-19 restrictions on exports going forward. Still, the expected inventory build-up this year will cause FOCF to remain negative in Scope’s base case in 2021 and adds to the uncertainty of the magnitude of how quickly an improvement will happen. Overall, the stable outlook reflects Scope’s balanced expectation of a moderate FRP improvement, accompanied with short-term recovery uncertainty and start-up risks of the new NTT Manufacturing JV factory.

A positive rating action could be warranted if Naturtex experiences higher demand than Scope expects, translating into stable profitability and cash flow, accompanied by lower negative working capital build-up. This could be exemplified by a positive free operating cash flow on a sustained basis, which is being used for strengthening the balance sheet.

A negative rating action is possible if SaD/EBITDA reaches above 4x and funds from operations/SaD below 15% on a sustained basis, resulting from a more aggressive debt-financed growth strategy or tougher market conditions.

Long-term and short-term debt ratings

Scope expects an average recovery for senior unsecured debt, such as the outstanding HUF 2.8bn bond under the Bond Funding for Growth Scheme of the Hungarian National Bank. This recovery expectation result in no notching from the issuer rating, giving a senior unsecured debt rating of B+. Scope’s recovery expectations are based on an expected liquidation value in a hypothetical default scenario.

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

Methodology
The methodologies used for these Credit Ratings and Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Consumer Products 30 September 2020), are 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 the 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 26 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.