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Rating action

Scope Ratings GmbH (Scope) has affirmed Aranynektár Kft’s issuer rating of B and changed the Outlook to Stable from Positive. Aranynektár’s senior unsecured bond has been affirmed at B+.

Rating rationale

The Outlook change to Stable from Positive reflects the risks posed by the large capex programme initiated for Aranynektár and its sister companies in Hungary, Ukraine and Russia, including honey processor Fulmer Hungarian Branch (FHB), whose credit quality determines Aranynektár’s rating. The capex programme will take place in several phases. The rise in honey prices has necessitated investment in a Russian sister company to enable raw material to be sourced locally. Further increases in other input prices such as for energy and packaging as well as increased management risk support the Outlook change, despite currently sound financial leverage metrics. New external risk factors include geo-political risk and soaring energy prices that can create volatility in profitability and is sometimes out of management’s normal control.

The rating of Aranynektár continues to be determined by the credit quality of sister company FHB. Aranynektár provides an integrated business service to FHB, which not only owns all the assets used by the issuer but is also its sole customer. Management has not indicated any willingness to develop the activities of Aranynektár outside the scope of FHB. Scope therefore considers Aranynektár to be fully dependent on FHB as a severance of the business link would lead immediately to the issuer’s bankruptcy.

FHB’s honey processing business has benefitted greatly from the Covid-19 pandemic. Its sales and profitability increased significantly due to the shift in consumer preferences towards healthy produce. That said, in Europe, FHB remains constrained by its size and low market share, within a geographical region under pressure from a large number of imports. Raw honey imports are diversified with supply points established by the issuer’s owners in Ukraine and Russia outside of the rated entity, which come, however, with some geopolitical risk and exposure to volatile currencies.

The group’s development of its branded labels (stagnating at close to one-fourth of sales) was hindered by the cancellation of trade fairs last year due to the pandemic and agreements to accept branding done by the retailers or sales partners. The development of branded labels would improve FHB’s diversification and brand strength, two weak areas in Scope’s assessment.

FHB’s profitability (Scope-adjusted EBITDA) improved from 12.9% in 2019 to above 20% in May 2021, in line with management’s expectations. However, Scope expects that this growth in profitability cannot be sustained as input prices are rising (raw materials – honey, energy, packaging, logistics). Margins can be planned well and defended as the company reprices its products around October, just ahead of the main sales season for the produce and when the quality and quantity of the crops for the year can be reliably ascertained. However, Scope notes the relatively small size and pricing power of FHB.

FHB’s financial risk profile has benefitted considerably from the growth in its Scope-adjusted EBITDA, which has translated into an overall improvement in metrics. FHB has also increased its cash position to a new high and received a state subsidy to launch a new capex programme. Scope expects FHB’s cash position to decrease significantly in the coming years. Despite a lack of information on the upcoming subsidy, Scope believes 2021 and 2022 metrics will benefit from a comfortable cash position as investments are phased in and launched in a conservative fashion. Scope-adjusted debt (SaD)/EBITDA is expected to stay below 1.5x in the coming two years without a netting of cash. Scope also expects cash flow cover to come under pressure given the expansion plans in 2022. FHB has announced its intention to invest in production and storage facilities in the coming years in four phases. Scope anticipates that this will considerably increase capex, leading to a negative free operating cash flow/SaD ratio going forward.

Liquidity is adequate. The bond issuance has allowed FHB to repay the majority of its short-term debt, limiting any repayment walls in the coming years. The improvement in metrics last year could warrant a higher issuer rating. However, Scope has maintained a conservative stance, overweighting the free operating cash flow/SaD ratio in its financial risk profile assessment given the expectation of a high investment phase. In the overall rating, Scope has overweighted the business risk profile sub-rating. This is because of FHB’s and Aranynektár’s small size, which makes it more vulnerable to external factors.

Scope also applies a negative notch for governance and structure, due to the complexity of the bond issuance and intercompany loan structure. A lack of transparency regarding forecasts, the very small management and very manual accounting and planning processes are detrimental to the rating (ESG factor: credit-negative governance factor).

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable, based on the higher profitability and the large investment programme started with low leverage. Scope believes FHB can deploy its considerable capex programme while maintaining an acceptable financial risk profile, helped by the state subsidy. The Outlook excludes potential external events – beyond Scope’s assessment of the credit quality of FHB – which could have a negative impact on the issuer.

A positive rating action may be taken if FHB kept its EBITDA margin high, which would also keep SaD/EBITDA low, while simultaneously improving transparency, management size and the scale of its activities.

A negative rating action may be taken if SaD/EBITDA reached above 3x on a sustained basis, e.g. due to a greater-than-expected drop in profitability and larger-than-anticipated net capex on the investment programme.

Long-term and short-term debt ratings

Scope has affirmed the rating of B+ on the senior unsecured bond (HU0000359559). Scope calculated an ‘above-average’ recovery following a hypothetical default in 2023 and therefore maintains one notch of uplift on the assigned issuer rating.

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: 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                                        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: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 30 January 2020. The Credit Rating/Outlook was last updated on 10 February 2021.
The bond's final Credit Rating was first released by Scope Ratings on 25 March 2020. The Credit Rating was last updated on 10 February 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.