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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Hungarian agricultural and construction machinery distributor AXIÁL Javító, Kereskedelmi és Szolgáltató Kft to BB/Stable from BB- under review for possible upgrade. Senior unsecured debt issued by AXIÁL has been upgraded to BB+ from BB under review for possible upgrade.

Rating rationale

The rating action resolves the placement under review for a potential upgrade of AXIÁL’s ratings that followed the release on 17 March 2021 of the new rating methodology on retail and wholesale corporates. The new methodology defines rating criteria specific to business risk profiles in the sector, including an industry risk rating that distinguishes between cyclical and non-cyclical product categories as well as a competitive positioning evaluation that reflects market shares, diversification, and profitability.

The application of the new rating methodology resulted in a stronger business risk profile assessment for AXIÁL, supported by the continued strength of its operations despite the 2020 economic cooldown. This resulted in the rating upgrade.

AXIÁL’s business risk profile has benefited from a better profitability assessment thanks to the high Scope-adjusted EBITDA margin for a retail player, which has also steadily improved to 10.5% in 2020 from 5.7% in 2017. This has been despite a low Scope-adjusted EBITDA return on assets, which means the issuer is not as effective at using its increasing tangible assets (one-third of the total balance sheet) and inventories (50% of total balance sheet) to generate EBITDA. The better profitability assessment has also outweighed negative adjustments related to diversification and industry. Low geographical diversification is the main constraint for the business risk profile: its home market represents more than 90% of total net sales, insufficient to offset any negative macro developments in Hungary.

AXIÁL’s financial risk profile remains stronger than its business risk profile. Scope expects the financial leverage ratio (Scope-adjusted debt (SaD)/Scope-adjusted EBITDA) to remain at around 2x in the medium term and the interest cover ratio at above 20x. The overall financial risk profile remains constrained by free operating cash flow generation, which Scope expects to be negative in 2021.

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s view that key credit metrics over the next two years will remain strong, with a SaD/Scope-adjusted EBITDA ratio of around 2x, while the issuer remains a top-three agricultural machinery dealer in Hungary. Scope’s rating case also projects stable profitability, with a Scope-adjusted EBITDA margin of around 9%.

A positive rating action is seen to be remote but could be warranted if AXIÁL’s business risk profile improved, for example, through significant growth in size and greater geographical diversification, while SaD/Scope-adjusted EBITDA reached below 2x on a sustained basis. The latter could be triggered by a constant improvement in working capital management and/or a lower dividend payout.

The ratings could come under downward pressure if AXIÁL’s leverage (SaD/Scope-adjusted EBITDA) moves towards 4x on a consistent basis, for example, due to higher capital expenditures and/or a higher dividend payout.

Long-term and short-term debt ratings

The senior unsecured debt category has been upgraded to BB+ from BB following the one-notch uplift in the issuer rating. Scope still expects an ‘above average’ recovery for senior unsecured debt, including for the HUF 15bn bond issued in September 2020 under the Bond Funding for Growth Scheme of the Hungarian National Bank. This considers potential macro changes and that some aspects of the sub-ratings are well within low non-investment grade, meaning any macro changes could cause a rapid deterioration in credit metrics. This recovery expectation translates into a BB+ rating for senior unsecured debt. Scope highlights that senior unsecured debt has a subordinate ranking to debt raised from financial institutions for working capital financing as well as to payables.

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/or Outlook, (Rating Methodology: Retail and Wholesale Corporates, 17 March 2021; Corporate Rating Methodology, 26 February 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 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
These 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 June 2020. The Credit Ratings/Outlook were last updated on 25 March 2021.

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.