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 affirmed its B+ issuer rating on Éltex Kft., a Hungarian waste management services company, and revised the Outlook to Positive from Stable. Scope has also affirmed its B+ rating on the senior unsecured debt issued by Éltex.

Rating rationale

The current rating action reflects the significant increase in revenues during the last quarters of 2021 which is likely to lead to improved credit metrics compared to 2020 levels as well as the redistribution of capex initially planned for 2020 over 2020-22. This leads to better expected operating results and lower expected leverage. As a result, the Scope-adjusted debt/EBITDA ratio is expected to range between 1.5x-2.5x in the medium term. Note that Scope no longer nets cash against debt because it deems the current cash on hand, mainly coming from the bond proceeds, as temporary. Indeed, bond’s cash proceeds are intended for financing capex while the expected remaining cash is seen as volatile in the medium term.

Éltex’s financial risk profile remains slightly stronger than its business risk profile. Scope expects Éltex’s SaD/EBITDA to range between 1.5x-2.5x, its interest cover ratio to remain above 10x in the coming years, and free operating cash to turn positive from 2022 thanks to new contracts and higher demand for recycled raw material.

Éltex’s business risk profile is still supported by the increasing need for recycling, especially of industrial waste. The company is top three in waste management in Hungary. It benefits from medium- and long-term contracts with globally well-known groups. The contracts have a high likelihood of being renewed, which ensures stable revenues. Éltex has also committed to not use landfill (credit-positive ESG factor). Its business risk profile is constrained by low diversification: 75% of business is generated in its home market and all activities relate to recycling.

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

Outlook and rating-change drivers

The Positive Outlook for Éltex incorporates Scope’s view that key credit metrics over the next three years will improve, with SaD/EBITDA expected at between 1.5x-2.5x. It also incorporates Éltex’s position as a top-three waste management company in Hungary and Scope’s perception that the EBITDA margin will improve to between 8.5%-9.5%. Currently conducted debt-financed growth investments are not expected to pose major execution risk. While interim 2021 financials suggest a significant improvement in year-end credit metrics, Scope points out their significant volatility both in the past and with regards to the near-term projections, raising doubts regarding their sustainability and execution.

An upgrade could occur if the company kept Scope-adjusted debt/EBITDA below 3.0x on a sustained basis, e.g. as a consequence of significantly stronger operating results than expected and/or lower capex than expected.

A negative rating action, such as a revision to a Stable Outlook, could be triggered by a deterioration in credit metrics if Éltex is unable to get Scope-adjusted debt/EBITDA below 3.0x on a sustained basis. This could be caused by higher capex and/or material debt-financed M&A activities.

Long-term debt ratings

Scope expects an ‘average’ recovery for senior unsecured debt, such as the HUF 2.45bn bond issued under the Hungarian National Bank’s programme. This recovery expectation translates into a B+ rating for the senior unsecured debt category, in line with the issuer rating. Scope’s recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2023. Short-term and long-term debt (excluding the bond issue) raised from financial institutions, undrawn committed medium- and long-term facilities as well as payables rank higher than senior unsecured debt. Hence, such debts would be repaid first.

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 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, 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 October 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.