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 the BB+/Stable issuer rating on Pannonia Bio Zrt. as well as the BBB senior secured debt rating. Scope has downgraded the senior unsecured debt rating to BB+ from BBB-.

Rating rationale

The issuer rating mainly reflects the company’s highly efficient plant (ESG factor: credit-positive environmental risk factor), whose large scale and favourable location lead to competitive operating costs and solid overall profitability. Challenges include a strong exposure to very volatile commodities, very weak asset and product diversification, and no current exposure to low-cyclicality speciality products.

Despite very volatile ethanol prices during 2020 (record low in March followed by record high in August), crush margins have been at historical highs on average, helping to generate a record EBITDA of EUR 118m. Pannonia Bio’s management has stated that the plant continued to maximise output even during Covid-19 lockdowns.

The commodity price environment remains challenging. Prices for main input and output commodities have increased materially since the start of 2021, with crush margins somewhat below the multi-year average. Nevertheless, the company benefits from recent investments to optimise production processes and develop higher-value products, resulting in a conservative EBITDA forecast of around EUR 70m in 2021, well above that achieved in 2017, a year of more favourable commodity prices. These projects include a new evaporator with reduced energy consumption, a biogas plant and a related fertiliser facility. Pannonia Bio is continuing with its large investment programme: almost EUR 90m is dedicated to the plant in this year alone. In addition to plant upgrades, the company has invested in a biogas plant in Slovenia and is planning to acquire another one there. Some of the projects were delayed due to Covid-19 impacts, and increased commodity prices may lead to moderate cost overruns for ongoing projects.

From a financial perspective, Scope notes a large dividend payment in November 2020, followed by the signing of the ‘Amended and Restated Facility Agreement’ in December 2020 to expand existing term loans, which included a new EUR 60m facility. The company recently stated that it has no plans to issue new bonds.

Scope expects a temporary increase in leverage, as measured by Scope-adjusted debt/EBITDA, to above 3x in 2021 before recovering to below 2.5x in the next few years. This will be mainly driven by conservative commodity price assumptions as well as significant investment. The investments will be largely funded from available cash and the solid operating cash flow. In addition, the company has several funding options including an unutilised EUR 35m working capital facility.

Due to the large investment programme, the repayment of shareholder loans and distribution of dividends are not expected by Scope in the short term but are likely in the medium term if surplus cash is available. According to Scope’s projections, Pannonia Bio may repay all shareholder loans and start paying dividends in 2023. This leads to the removal of equity credit for shareholder loans from the Scope-adjusted debt calculation.

Pannonia Bio’s liquidity remains adequate. For 2021-22, Scope expects coverage of short-term financial debt at more than 1x, including from the undrawn working capital facility of EUR 35m and available cash and cash equivalents of EUR 32m as of 31 May 2021.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation of resilient operating performance as well as only a temporary increase in leverage due to large investment spending, with Scope-adjusted debt/EBITDA reaching above 2.5x. The Outlook also anticipates that the company will ensure leverage is kept under control and funding remains flexible. Scope’s rating case does not assume any dividend payments nor repayments of shareholder loans before 2023.

A negative rating action could be triggered by a deterioration in credit metrics, e.g. if Scope-adjusted debt/EBITDA increased above 2.5x for a prolonged period.

A positive rating action appears unlikely under the current business setup but could be triggered by significant improvements in diversification and outreach.

Long-term and short-term debt ratings

Senior secured debt

Scope’s recovery analysis indicates an ‘excellent’ recovery for senior secured debt. These expectations translate into a BBB for this debt category. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2023.

Senior unsecured debt

With the refinancing of bank term loans and in the absence of bond issuance plans, Scope’s recovery analysis indicates an ‘average’ recovery for senior unsecured debt, including the HUF 15bn bond (ISIN: HU0000359112) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2023. These expectations translate into a BB+ for this debt category. While the company’s capex programme will be financed predominantly by higher senior secured debt (bank loans) this reduces recovery prospects for senior unsecured debt which ranks behind in a default case, explaining the downgrade on this debt category.

One or more key drivers for the credit rating action are considered ESG factors.

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, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Chemical Corporates, 23 April 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 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: Marlen Shokhitbayev, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 July 2019. The Credit Ratings/Outlook were last updated on 9 July 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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

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.