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Rating action

Scope Ratings GmbH (Scope) has affirmed the corporate issuer rating of BB-/Negative and senior unsecured debt rating of BB- on Hungary’s Unix Auto Kft.

Rating rationale

The rating action follows the publication of Scope’s new rating methodology for retail and wholesale corporates on 17 March 2021. The new methodology defines more specific rating criteria for the business risk profile. These include 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. Unix Autó’s industry risk profile is rated BB under this methodology.

Scope’s review resulted in an affirmation of the ratings. This is primarily driven by the increased profitability in Unix Autó’s key markets of Hungary and Romania in 2020 despite the falling demand prompted by the Covid-19 crisis (pandemic-related restrictions caused volumes to fall by around 10% because business performance correlates with kilometres driven). However, most of the additional profit realised in 2020 compared to 2019 will be paid as a dividend and hence credit metrics did not improve. Further, a ransomware attack in Q2 2021 forced the company to close all physical points of sale for three business days and resulted in urgent IT expenditure.

The lower activity and reduced opening hours early in the pandemic have now eased, but Scope still expects some subdued growth throughout 2021. January-May sales volumes were similar between 2021 and 2020, but 9% lower than in 2019, mainly attributable to lower demand. However, for 2021, Scope expects at least the 2020 level, which will not affect credit ratios negatively.

Unix Autó cut costs during 2019-20 to stem the decline in profitability already evident before the pandemic. Scope therefore assumes that the EBITDA margin can be maintained. Variable-cost reductions related to salaries, fuel, and rents renegotiated on shops.

Already in YE 2019, Scope saw negative rating pressure on leverage, with the Scope-adjusted debt (SaD)/EBITDA ratio of 4.2x slightly exceeding Scope’s 4x rating threshold. In 2020, SaD/EBITDA normalised to 3.1x due to higher profitability and favourable foreign exchange rates. However, as the additional profit will be paid as a dividend, leverage will return above 4x by end of the year. Based on Scope’s updated forecast, this ratio is unlikely to return to significantly below 4x in the medium term, which puts some pressure on the financial risk profile. Regarding Scope’s other negative rating trigger: the funds from operations/SaD ratio came in at 28% in 2020, still above the 15% rating threshold. However, with market conditions expected to weaken in 2021, maintaining this ratio will be difficult unless demand and profitability increase. Scope expects profitability to stay at least at the current levels, based on cost reductions in the past two years and the expansion of the A-Z Meisterteile (own brand) portfolio.

In terms of liquidity, Unix Autó benefits from the long maturity (in 2026) of the bond issued under the Hungarian National Bank’s programme. Short-term credit lines are also used to pay suppliers in advance to get discounts. Account payables reduced from HUF 7.8bn at YE 2019 to HUF 3.8bn at YE 2020, mainly from debt. At YE 2020, short-term loans amounted to HUF 10bn (increase from HUF 7.4bn), which means the proportion of short-term debt remains high at around 45%, which is in line with Scope’s expectation from last year. Scope estimates that the available credit line will be largely drawn on in the next one to two years due to low free operating cash flow and dividend payments.

Outlook and rating-change drivers

The Negative Outlook reflects Scope’s expectation that Unix Autó will be adversely affected by the lower activity and GDP in its two key markets due to Covid-19 restrictions, specifically through the reduction in kilometres driven. Although Scope’s base case assumes a slow recovery in these markets, the company’s financial results and the one-off shareholder remuneration in FY 2021 will still have a negative effect on the financial risk profile.

A positive rating action (i.e. a return to a Stable Outlook) is possible if the company is more resilient than Scope’s expectations and leverage stays below 4x. A rating upgrade is unlikely at the moment but could occur in the longer run if Unix Autó improves sales, profit margins, liquidity, and leverage with a SaD/EBITDA sustained well below 3.5x.

A negative rating action is possible if the financial risk profile deteriorates, exemplified by SaD/EBITDA staying above 4x on a sustained basis and funds from operations/SaD moving below 15%.

Long-term and short-term debt ratings

Unix Autó’s senior unsecured debt is rated in line with the issuer rating, based on Scope’s expectation of an ‘average recovery.

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; Retail and Wholesales Corporates Methodology, 17 March 2021), 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 Rating: 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 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: Barna Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlook were last updated on 22 June 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.