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Rating action

Scope Ratings GmbH (Scope) has affirmed its B+ issuer rating on AutoWallis Nyrt. and has revised the Outlook to Stable from Positive. Scope has also affirmed its B+ rating on senior unsecured debt.

Rating rationale

The change in Outlook to Stable from Positive reflects the shift in financial policy as indicated by plans to issue a second bond and use the proceeds to finance transactions. Within the last rating monitoring in November 2020, Scope noted positively the strategy to finance growth plans through share exchanges and capital increases, which require no cash. The Scope-adjusted debt (SaD)/EBITDA ratio was therefore expected to advance towards 3.5x by 2022. However, the planned bond creates uncertainty regarding the financing of future transactions. AutoWallis is in a strong expansion phase, aiming to increase revenues to more than HUF 400m in 2025 (Scope expects around HUF 300bn in 2023). While SaD/EBITDA is expected to recover from the 2020 peak driven mostly by the full-year effects of transactions, Scope expects the recovery to be weaker than its projections in November 2020, reflecting the higher-than-anticipated debt.

The group’s SaD increased to HUF 19.2bn at end-2020 from HUF 11.2bn at end-2019. Financial debt mostly comprises loans to finance vehicle stock (around HUF 9.2bn vs HUF 7bn at year-end 2019), operating leases (HUF 9.7bn vs HUF 5.7bn at year-end 2019) and a HUF 3bn 10-year bond issued under the Hungarian Central Bank’s Bond Funding for Growth Scheme (MNB Scheme). The increase in SaD is explained by recent transactions that increased inventory loans and leases. AutoWallis’ strong expansion will lead to higher financial debt. The negative impact of the planned bond on leverage should be mitigated through a planned issue in 2021 of HUF 4bn-6bn in equity in a secondary public offering – Scope assumes HUF 4bn in proceeds. All in all, SaD is expected to increase to around HUF 30bn at year-end 2021 and HUF 31bn at year-end 2022.

The financial risk profile remains assessed at B+ and continues to reflect Scope’s expectation of an improvement in credit metrics, though at a slower pace, in 2021 and 2022. As expected, credit metrics were weak in 2020, with SaD/EBITDA increasing to 9.1x (2019: 3.6x), reflecting lower EBITDA and higher debt. That said, SaD/EBITDA in 2020 was somewhat distorted by transactions made but not fully reflected in EBITDA. Scope’s base case foresees a SaD/EBITDA of around 4.8x at year-end 2021 and 3.7x at year-end 2022. Interest cover decreased as expected to 5.1x (2019: 10.7x), and Scope expects it to recover to around 11x in 2021 on the back of higher EBITDA. Credit metrics will depend on the financing of future transactions, on which there is no visibility beyond 2022. Scope, however, expects AutoWallis to finance future transactions through a mix of debt and equity.

Operating cash flow improved to HUF 7.6bn (HUF 1.7bn in 2019 and -HUF 35m in 2018) reflecting in part the lower net working capital. Free operating cash flow improved to HUF 8.4bn (2019: HUF 2.0bn). AutoWallis is in a strong expansion phase that will grow inventory significantly. In addition, capex is expected to increase in 2021 to HUF 5.0bn due to the construction of a new dealership. Scope expects free operating cash flow to be negative in 2021 by around HUF 8.5bn and to turn positive to around HUF 2.0bn in 2022.

Low profitability remains the key constraint on the business risk profile (lowered to B+ from BB-). In 2020, revenues increased by 17.5% YoY to HUF 88.4bn, driven by transactions conducted in 2020 (i.e. Wallis Kerepesi and Iniciál Autóház) and the launch of the Jaguar Land Rover retail business. Despite higher revenues, the EBITDA margin in 2020 decreased to 2.4% from 4.2% in 2019 (2018: 4.2%). This was due to lower average sales prices (ASP), the suspension of car rental services at airports (AutoWallis’ most profitable business), and increased costs from business launches. The low margin is also mainly attributable to automotive sales’ very low or even negative margins. The services business, on the other hand, is profitable and was responsible for 40%-50% of group EBITDA despite its very low revenue share.

Scope expects the transactions made in 2020 to give a substantial boost to revenues in 2021, anticipated to reach around HUF 252bn. In Q1 2021, revenues increased by 142% YoY to HUF 48.7bn. For 2022, Scope assumes revenue to increase by 12% to HUF 282bn. EBITDA margin is forecast at between 2%-3% in 2021 and 2022.

AutoWallis' Opel dealerships will be affected by the decision of partner Stellantis to terminate all current dealership contracts in the EU (for retail), primarily due to regulatory changes. AutoWallis' five-year import contracts (for distribution) concluded in 2020 are not affected. The company considers this termination to be only technical and expects to renegotiate a new contract with Stellantis. According to AutoWallis, the worst case would entail higher opex/capex following the renegotiation. AutoWallis expects effects to be evident only from 2023. AutoWallis also expects to renegotiate new dealership contracts with other car manufacturers.

Moreover, troubled automaker SsangYong Motor is reorganising and is yet to reach an agreement with its new investors. However, AutoWallis is still distributing this brand as it believes SsangYong's manufacturing operations are likely to be rescued in some form. In 2020, SsangYong cars accounted for around 14% of AutoWallis’ revenues.

AutoWallis’ liquidity and financial flexibility are adequate. At the end of 2020, AutoWallis had HUF 5.1bn in cash and substantial inventory of around HUF 22bn. Short-term debt consists largely of inventory loans. AutoWallis’ strategy is to reduce automobile stock risks by directly financing each vehicle, documented individually at the financing agent (bank or leasing partner). Direct financing ensures the vehicle’s value can cover the outstanding loan in full. According to AutoWallis, this is also true for the automobile stock from the announced transactions. Scope calculates a short-term asset coverage of loans at year-end 2020 of 180% (2019: 171%, 2018: 139%), meaning stock can cover loans even if vehicles are sold at 40% of book value. Based on a discount of 20% for inventories, short-term debt coverage is more than 100%. Positively, financing institutions continued to provide credit lines during the automotive market downturn in 2008-09. AutoWallis shareholder Generali Alapkezelő has recently increased its holding, providing AutoWallis with cash income of around HUF 745m. In addition, Scope assumes HUF 4bn of cash inflow from the secondary public offering in 2021. Liquidity will also be supported by the issue of the new HUF 6bn corporate bond under MNB Scheme.

All credit instruments have a financial covenant based on the equity to total assets ratio, calculated based on the subsidiaries’ standalone financial statements prepared according to Hungarian accounting standards (i.e. not consolidated IFRS financial statements; no cross default). Covenants are monitored quarterly and subsidiaries can breach covenants twice in any year. AutoWallis negotiated an exemption from the covenant until the end of Q1 2021 due to the Covid crisis. AutoWallis resolved the covenant issue by injecting capital in Wallis Motor Duna. Furthermore, AutoWallis says it has complied with all covenants as at Q1 2021.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations of a recovery of SaD/EBITDA to around 4.0x by 2022, no dividend payouts over the next few years, a renegotiation of the Stellantis dealership contract, and a reorganisation of SsangYong Motor.

Scope may upgrade its rating if profitability increases, for instance, through a higher revenue share from services, or SaD/EBITDA is sustained at 3.5x.

A negative rating action could be the result of SaD/EBITDA remaining higher than 5.0x on a sustained basis, for example, due to lower-than-expected profitability and/or higher-than-expected level of debt after the completion of transactions. A negative rating action could be also triggered by the loss of important dealership/importer contracts.

Long-term and short-term debt ratings

Scope has affirmed the B+ senior unsecured debt rating to reflect the ‘average’ recovery expected after the issuance of the HUF 6bn senior unsecured bond, agreed preliminarily to be issued under the MNB Scheme. This would be AutoWallis’ second issuance under the Scheme. The planned bond will have a 10-year tenor, 3% coupon, and 10% annual amortisation from year 6. Part of the proceeds are intended for refinancing outstanding debt and financing selected projects in the pipeline (including real estate). Scope’s recovery analysis used a liquidation value in a hypothetical default scenario in 2022 of HUF 63bn. This value is based on a haircut of around 20% on the assets and reflect asset liquidation costs of 10%. Most of the inventory is pledged as security for the underlying loans. The recovery analysis assumes that, in a hypothetical default, short-term and long-term loans as well as lease liabilities would be senior to the two bond traches. In addition, Scope assumed a higher seniority for trade payables covered by banks, based on its view that payables would have a first-ranking pledge (assignment) by auto manufacturers in a hypothetical default. Scope also assumes full recovery for importer trade receivables (around 80% of total trade receivables) as they are covered by third-party bank guarantees.

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, 6 July 2021; Rating Methodology: Retail and Wholesale Corporates, 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 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: Gennadij Kremer, 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 18 September 2019. The Credit Ratings/Outlook were last updated on 25 November 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.