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 placed Baromfi-Coop Kft.’s issuer rating of BB- and senior unsecured debt rating of BB- under review for a possible downgrade.

Rating rationale

On 11 September 2021, the Bárány family (the owner of Baromfi-Coop and its fully consolidated subsidiary Sága Foods) announced a large-scale HUF 20bn investment plan to increase the production capacity of Sága Foods and its strategic partners, Steam Cook and Várda Meat (which make processed poultry products)¹. The additional investment comes alongside the existing large-scale investment programme announced in June 2021, which was financed with a HUF 23bn senior unsecured green bond issuance.

Management has confirmed that the new investment financing is under structuring and will potentially consist of: i) a relatively high expected (not contracted) subsidy; and ii) company cash flow, resulting in potentially higher leverage than planned. The company will try to avoid raising additional senior secured bank debt, however Scope considers further financing may be needed for the investment and its increased working capital need.

The new plant is expected to start producing cash flow at the end of 2023. Therefore, Scope expects Baromfi-Coop’s Scope-adjusted debt/EBITDA to increase to above 4x on a sustained basis, at least until 2024. This compares unfavourably with Scope’s previous rating case, which foresaw leverage not exceeding 4x.

Furthermore, the timing of the owner’s plan to contribute in kind two companies (Steam Cook Kft. and Várda Meat Kft) became unsecure, which may cause lower EBITDA than projected. Scope notes that its rating case included the contribution in kind of the two companies, which mainly operate in the area of frozen convenience food.

Issuer rating put under review

The issuer credit rating is under review for a possible downgrade. Scope will closely follow developments related to the investment strategy and capital structure of the company and aims to resolve the review as soon as possible, within three months at the latest.

Scope expects to obtain greater transparency via the provision, by management, of information on operations, the new capital structure and new investment plans (an updated business plan).

A downgrade of up to, but not limited to, one notch could result if (i) as a result of our review Scope-adjusted Debt/EBITDA will exceed 4x on a sustained basis (ii) the information is not provided which Scope needs to gain visibility on the company’s operations (current and future), cash flow generation and capital structure.

Long-term and short-term debt ratings

The senior unsecured debt rating was based on the BB- issuer rating and an ‘average’ recovery expectation for this debt category. Driven by the rating action on the issuer rating, Scope has also placed the BB- rating for senior unsecured debt under review for a possible downgrade.

Rating driver references
1. 11 September 2021 press announcement by Mr. László Bárány

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 Outlooks, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Consumer Products, 30 September 2020), 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                                     NO
With access to management                                              YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 September 2019. The Credit Ratings/Outlooks were last updated on 2 July 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.