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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+/Stable issuer rating on MetMax Europe Zrt. Scope has also affirmed the B+ rating on the senior unsecured debt category.

Rating rationale

MetMax’s business risk profile, with an unchanged rating of B, is still constrained by the company’s size, low diversification and high customer concentration. Profitability continues to be the major support. The EBITDA margin has ranged between 24% and 32% during the past five years. In 2020, the EBITDA margin was 32.5%, down from 35.5% in 2019 due to a lower gross profit margin. In H1 2021, the EBITDA margin decreased to 26.6% from 27.5% in H1 2020, largely reflecting higher personnel expenses. Due to a rebound in the labour market, MetMax implemented an average 10% salary increase, and variable payments normalised. The Scope-adjusted EBITDA margin is expected at around 28% in 2021-22. MetMax’s long-term goal is to maintain the EBITDA margin near 30%.

The rating continues to be supported by the company’s lowered financial risk profile, rated BB. The company’s reported debt of HUF 5.0bn at year-end 2020 comprises corporate notes of HUF 5bn issued in December 2020. The Scope-adjusted debt (SaD) calculation adjusts for HUF 118m of leases. Scope generally applies cash netting when calculating credit metrics for ratings in the BB category or higher, and only if the cash is permanent and accessible. Based on these adjustments, SaD amounted to HUF 5.1bn at year-end 2020 (HUF 317m at year-end 2019).

MetMax has access to a HUF 500m credit line from the Hungarian central bank’s Hajrá programme as a three-year facility. In 2021, HUF 111m of this credit line was used to repay existing financial leases. The rest is available for temporary financing needs. Scope expects a relatively unchanged SaD at around HUF 5.1bn at year-end 2021 and 2022.

MetMax started an investment programme in Q3 2020 to expand its production facilities. The planned investment size is HUF 5.0bn (of which HUF 2.2bn is for real estate and HUF 2.8bn is for new machinery). This programme is being implemented at the level of MetMax Vagyonkezelő as agreed with the Hungarian Investment Promotion Agency. MetMax Vagyonkezelő is a wholly owned subsidiary of CNC Tőkebefektető (100% owner of MetMax). The programme will run for five years with the first stage (real estate) to be completed in Q4 2021. Both equity and debt financing will be organised at the group level (MetMax, MetMax Vagyonkezelő and CNC Tőkebefektető) and provided to the respective group member as intra-group financing. When the programme is complete, MetMax will lease the production assets from its sister company.

The increase in the SaD/EBITDA leverage ratio to 3.6x in 2020 was driven by an increase in SaD due to the bond issuance. Scope expects SaD/EBITDA to increase to 4.3x at year-end 2021, reflecting lower expected Scope-adjusted EBITDA, and to 4.1x at year-end 2022. Scope estimates cash flow cover, expressed as free operating cash flow (FOCF)/SaD, to reach around 15% in 2021 (26% in 2020).

In 2020, MetMax transferred around HUF 5.7bn to parent and sister companies in the form of intercompany loans (HUF 6.3bn at end-June 2021). MetMax Vagyonkezelő will repay the intercompany loans using real estate and asset lease income received from MetMax, while CNC Tőkebefeketető will repay primarily through dividends received from MetMax.

Internal cash flow generation, with positive FOCF since 2013, is a supportive factor for MetMax’s financial risk profile. In 2020, operating cash flow of HUF 1.7bn was at a record high mainly due to higher EBITDA and lower net working capital. The decline in net working capital was largely due to the use of vendor/supplier financing schemes starting in 2021, in which accounts receivable amounts are sold to a financing institute as non-recourse debt. MetMax is currently in schemes with BNP Paribas Dublin (for Atlas Copco Group) and Raiffeisen Bank Hungary (for Knorr Bremse Budapest). Supported by higher operating cash flow, FOCF increased to HUF 1.1bn in 2020 against HUF 548m in 2019. In H1 2021, operating cash flow was HUF 355m against HUF 513m in H1 2020. FOCF decreased to HUF 314m against HUF 417m in H1 2020. Scope expects FOCF of around HUF 900 in 2021 and HUF 800m in 2022.

Scope liquidity and financial flexibility as ‘adequate’ as sources cover uses by more than 100% in 2021. Financial maturities will also remain low with almost no financial debt other than the long-dated bond (10 years).

Outlook and rating-change drivers

The Stable Outlook incorporates the expectation of mid-to-high single-digit revenue growth in 2022 and of the EBITDA margin remaining at around 28%, translating to a FOCF/SaD of around 15% in 2022.

At this stage, Scope deems a rating upgrade to be remote unless MetMax can improve its business risk profile in terms of customer concentration and product/end-market diversification, while keeping its credit metrics at the forecasted levels.

A negative rating action could result from FOCF/SaD moving towards 5% on a sustained basis, caused by EBITDA margin pressure from rising personnel costs or investment that goes beyond the current plan.

Long-term and short-term debt ratings

In December 2020, MetMax issued a HUF 5.0bn senior unsecured bond with a 10-year maturity (amortising at 10% each year during 2025-29, then at 50% in 2030) and a coupon of around 3% p.a. It was issued under the Hungarian central bank’s Bond Funding for Growth Scheme. Bond proceeds were transferred to sister company MetMax Vagyonkezelő (around HUF 2bn) for investments to expand production capacity and to parent company CNC Tőkebefektető (around HUF 3bn) to repay management buyout debt and acquisition debt. Interest payable on the bond will be offset by interest receivable from the parent and sister company.

In line with the issuer rating, Scope has affirmed the B+ rating on senior unsecured debt based on the ‘average’ recovery prospects for bondholders in a simulated default scenario.

Scope’s recovery analysis uses a liquidation value of HUF 3.9bn in a hypothetical default in 2023. This figure is based on an asset haircut and reflects liquidation costs of 10% for the assets. The haircut also assumes that the intra-group receivable from the parent used to refinance acquisition debt would become non-recoverable in the event of a payment default. Our recovery scenario assumes availability of sister company’s PPE in a simulated default scenario.

To determine claimholders, Scope has ranked repayment obligations for subsidies at the simulated point of default senior to the claims on the prospective bond. The three-year, HUF 500m credit line from the Hungarian central bank’s Hajrá programme, raised in 2021, is secured by a pledge on selected machinery. In the simulated point of default, Scope assumes that this credit line will be fully utilised. Scope also assumes the business plan and investment programme will be executed as planned, with no additional bank debt or other senior financings ahead of the planned bond.

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 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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 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.