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Rating action

Scope Ratings GmbH (Scope) has today assigned a B/Stable corporate issuer rating to Hungarian Agrar Kft. Scope has also assigned an senior unsecured debt rating of B+.

Rating rationale

Agrar’s issuer rating is hampered by its business risk profile of B- and supported by a stronger financial risk profile of BB. The company’s profitability figures (EBITDA margin) are volatile but solid, which is the main support for its competitive position. However, Scope’s EBITDA margin calculation excludes subsidies received as part of the EU’s Common Agricultural Policy. Prices for pigs and piglets are highly transparent, standardised and allow companies to exert only limited pricing power. At the same time, Agrar’s profitability generation benefits from its raw material procurement via around 1,000 hectares of farmland and its long track record in pig farming, among others. On the flipside, profitability is compromised by the company’s small size, resulting in a weak market share in the Hungarian pig breeding and fattening industry, together with weak diversification.

Agrar’s financial risk profile is supported by its history of very healthy credit ratios, thanks to operating with moderate financial leverage. The company’s financial risk profile is hampered by an anticipated deterioration in credit metrics and free operating cash flow generation from 2021 onwards, together with significant execution risk regarding the planned large capex programme and dependency on EU Common Agricultural Policy subsidies. Agrar’s financial risk profile is also compromised by inadequate liquidity as Agrar heavily depends on external funding.  

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations about a temporary deterioration of AGRAR’s financial risk profile along the envisioned capex plan and dependence on external funding. A reversion of the credit metrics is expected by year-end 2023 after the completion of the capex programme.

A positive rating action can be considered in case of: i) a successful execution of expansion strategy, or ii) dispelled concerns about liquidity constraints, i.e. lower dependence on external funding, subsidies payments from the Common Agricultural Policy of the European Union.

A negative rating action could be the result of SaD/EBITDA moving towards 4.0x, which might be the result of higher costs for the capacity expansion than originally planned.

Long-term debt rating

Scope expects Agrar to successfully issue the planned HUF 3.0bn senior unsecured bond within the MNB Funding for Growth Scheme in 2021 for investment financing. The amortisation schedule of the 10-year, fixed interest instrument (coupon: 2.9%) assumes repayment in six tranches of 10% in 2026, 2027, 2028, 2029, 2030 and 50% in 2031. Agro-Build Kft. will act as guarantor. Any new credit facility/ loan above 10% of equity can be taken by the issuer if there is a prior contact and analysis to the rating agency and the expected rating after new credit facility/ loan will not deteriorate under B+ rating class.³

The recovery analysis for Agrar indicates an ‘above average’ recovery for senior unsecured debt, translating into a debt category rating of B+. The calculation included the following key assumptions: i) anticipated liquidation value established via a hypothetical default scenario at year-end 2023; ii) short- and long-term bank debt, investment credits and payables ranking higher than senior unsecured debt in the waterfall; and iii) Scope’s understanding that the Claessens family via Agro-Build Kft. act as guarantor.

3. The paragraph regarding the senior unsecured bond was added on 16 August 2021. It was not included in the original publication.

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, 6 July 2021), 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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
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: Klaus Kobold, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 August 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.