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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer credit rating on Hungarian tyre wholesaler MARSO Kft. along with its BB long-term senior unsecured debt rating.

Rating rationale

The affirmation reflects MARSO’s resilient business model and stable performance amid both the Covid pandemic and the general decline in the imported tyre market. With investment in its new logistics centre in Dunaharaszti set to conclude in 2021, MARSO will have expended bond proceeds and will thus utilise long-term debt to refinance its short-term debt and finance its increased working capital needs. This will result in a deterioration of the company’s financial risk profile, though to a level commensurate with the rating. The Stable Outlook reflects Scope’s expectation of a Scope-adjusted debt (SaD)/EBITDA ratio of between 3-4x for the coming years, assuming no further debt is utilised.

The issuer rating continues to reflect MARSO’s high market share. The comparatively strong financial risk profile also supports the rating. The rating is, however, hindered by MARSO’s small size, weak diversification and weak cash flow cover.

MARSO’s credit profile remains broadly unchanged. The company has so far withstood the depressed conditions in automotive-related industries thanks to its dominance of the relevant wholesale tyre markets. Even so, the pandemic, combined with general market changes including the digitalisation of retail and customers’ increased price sensitivity, has prompted MARSO to redefine its pricing strategy, though Scope expects no significant short-term impact. MARSO plans to cater to its extensive network of wholesalers by protecting their margins in comparison to retail customers. Scope expects MARSO’s operating profit to improve after the logistics centre is complete, through cost savings generated by lower rents and the company’s ability to deliver products with its own fleet instead of through external companies. The new logistics centre will also allow MARSO to better service Budapest and the surrounding area and execute same-day shipping.

Scope expects credit metrics to remain commensurate with the current issuer rating. SaD/EBITDA is expected to remain within 3-4x, funds from operations/SaD at above 20%, and EBITDA interest cover at above 7x. Liquidity is adequate. The temporary burden on the free operating cash flow/SaD ratio, due to negative free operating cash flow during the current investment period and inventory stocking, is not a negative rating driver.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that MARSO will have expended its bond proceeds by the end of 2021 due to the end of the investment programme and will thus utilise long-term loans. The increased SaD/EBITDA as a result is still likely to remain commensurate with the rating, at an expected range of 3-4x for the coming years.

A positive rating action could be triggered if MARSO’s premiumisation strategy strengthened the Scope-adjusted EBITDA margin and SaD/EBITDA reached below 3x on a sustained basis, for example, through an efficient management of working capital.

A negative rating action could be triggered if SaD/EBITDA reached above 4x on a sustained basis, as a potential consequence of the new strategy not lifting the EBITDA margins or a further significant working capital expansion.

Long-term and short-term debt ratings

Scope has affirmed the BB rating for senior unsecured debt. Recovery expectations for senior unsecured debt are ‘excellent’, even after senior secured debt (primarily consisting of the redrawn loan amount of HUF 1.7bn) has fully been covered. Scope applied a one-notch positive adjustment to the senior unsecured debt rating while maintaining its conservative treatment of MARSO’s current liabilities. This results in the BB rating. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario in 2023.

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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 October 2019.

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.