The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today confirmed its B/Stable issuer rating on Daniella Kereskedelmi Kft. The senior unsecured debt rating has been confirmed at B+.

Rating rationale

Daniella surpassed last year’s forecasts as the sector proved more resilient than initially foreseen by the Scope at the start of the pandemic. This led to an overall growth of both the sector (+6%) and the rated entity (+7.5% revenue growth). However, profitability decreased slightly over the course of last year, with the Scope-adjusted EBITDA margin reaching 5.6% at YE 2020 versus 6.3% a year before. This was due to additional costs linked to the pandemic and the start of operations for Daniella’s new logistic platform and warehouse. The group successfully finished the construction of a new warehouse in Nagytarcsa and moved in in December 2020, doubling its available storage capacity (previously flagged by management as a bottleneck in the group’s development). Scope maintains its view that the group’s market positioning is strong locally but remains limited due to its small size and niche market on an international level. Development possibilities are likely, either taking the form of new logistics warehouses in Romania and/or M&A within Hungary. Diversification supports Scope’s business risk profile assessment. The group sells goods which Scope deems non-cyclical and also has relatively high online sales for a company of its size, mitigating the mono-country focus on Hungary (96% of total sales for 2020). The implementation of Scope’s sectorial methodology benefits the group’s profitability assessment and justifies a better assessment of the company’s business risk profile (assessed at BB-), supported by a strong Scope-adjusted EBITDA return on assets and a satisfactory Scope-adjusted EBITDA margin. The latter is expected to remain stable in the coming years, anchored at levels close to 6%.

Concerning Daniella’s financial risk profile (assessed at B+), credit metrics have been more resilient than expected due to higher profitability than initially anticipated. In detail, leverage – defined as Scope-adjusted debt (SaD)/EBITDA and funds from operations/SaD – remained close to 4.0x (2020: 4.2x) and 20% (21%) respectively. Scope expects metrics to weaken slightly in 2021 due to the overall expected increase of the lease adjustment. Following the start of operations at the new warehouse, Daniella’s lease payments have increased slightly, impacting total debt. Scope expects the deterioration to be a one-off, keeping SaD/EBITDA above 4x for FY 2021 before it returns towards 4.0x in the following years. Scope expects interest cover to remain stable due to the anticipated absence of new debt. However, the agency expects free operating cash flow/SaD to remain under pressure in 2021, due to new investments in warehouse automation. Liquidity is adequate considering the absence of short-term debt following its repayments with the bond issuance.

The company created a new subsidiary, Weerts Logistic Park V Kft – to be renamed HAD Real Estate in the short term, in order to separate real estate activities more clearly from wholesale operations following the warehouse construction, which was partially financed by the bond issuance of last year. However, Daniella does not have recourse to the newly created entity. This means that assets financed with bond proceeds would become unavailable to bond investors should a bankruptcy-like event occur (ESG factor: credit-negative governance factor), that leads to a down notching of the issuer rating of -1. 

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation that there will be no debt issuance linked to potential acquisitions in the coming years. Scope expects SaD/EBITDA to remain at the lower end of the 4.0x - 5.0x range in the coming years. The Outlook also incorporates Scope’s expectation that the Romanian subsidiary (new logistics warehouse) will be operational by in between 2022-2023.

A positive rating action may be triggered if SaD/EBITDA improved to levels below 4.0x on a sustained basis. This could result from a better development of EBITDA linked to a more efficient usage of assets while demand continues to rebound.

A negative rating action may be triggered if SaD/EBITDA moves toward 6.0x on a sustained basis. This could be the consequence of a worsening in national demand or regulatory changes

Long-term and short-term debt ratings

Daniella issued a HUF 3.5bn senior unsecured corporate bond last year under the MNB Bond Funding for Growth Scheme. Proceeds were earmarked for: i) the refinancing of short-term debt (HUF 1.5bn); ii) warehouse construction (HUF 0.8bn); and iii) warehouse automation (HUF 1.2bn, still to be spent). The bond’s tenor is ten years, and it will amortise from year six to year ten in equal instalments. The coupon has been fixed at 3% and is payable on an annual basis. Scope estimates an above-average recovery with a liquidation value of close to HUF 5.6bn under a theoretical bankruptcy scenario in 2022. Consequently, Scope has confirmed the B+ rating for senior unsecured debt. 

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: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 May 2020. The Credit Ratings/Outlook were last updated on 26 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.