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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of B+/Stable to Hungary-based logistics company BHS Trans Kft. The company’s senior unsecured debt has been rated B+, in line with the issuer rating.

Rating rationale

BHS Trans Kft’s business risk profile, assessed at B+, is constrained by the company’s relatively small size, limited diversification and high customer concentration. BHS Trans Kft. is the parent company and the largest component of BHS Group, which also includes three subsidiaries active in road transport services in Romania, warehousing, and pallet manufacturing.

With 2020 revenues of HUF 12.7bn (EUR 36m) at the group level and HUF 11.2bn (EUR 32m) at the parent level, BHS Group is a relatively small player in a highly fragmented transportation industry (in Hungary and Europe). However, the group’s exposure to the extremely price-competitive spot market accounts for only 5% of its business, while the lion’s share comes from contract logistics with large corporate customers/partners. Stable long-term relationships and strong customer loyalty have prevented any significant volatility in revenues so far, mitigating the risk inherent to annual renewals of most contracts and a limited number of multi-year contracts (e.g. a three-year warehousing contract with Bosch in Debrecen and a five-year transport contract with Pro-Coop).

Key constraints in terms of diversification are limited geographical outreach (Hungary accounts for 90% of the parent’s revenues, but 79% at the group level thanks to the strong momentum of its Romanian subsidiary) and high customer concentration (Hell Group over 40%, top three around 60%). An active customer acquisition strategy (e.g. DS Smith, Wellis) and a planned investment in complex warehousing in Romania will help diversify the client base, although the process will take time (partly due to Hell Group’s continued strong growth). In terms of business lines, the vast majority of revenues come from road transportation and distribution. The company is stepping up its efforts to diversify its service portfolio and offer more services per customer. Examples include its ambition to be a first mover/price-setter and unavoidable player in the untapped warehousing market in Romania, and further expansion into refrigerated goods transport with the target of doubling its share of this business, which is in high demand across Europe.

Operating profitability is the main support for the business risk profile. EBITDA margins (above 20%) are relatively strong and at the upper end of the peer group. The company has experienced limited volatility in earnings over the past few years and has managed to keep its EBITDA margin in the 20%-25% range since 2017. The expansion of value-added services and complex warehousing will help improve underlying profitability and provide a buffer for potential fluctuations in the core transportation business. For 2021, management has released guidance indicating that EBITDA margins will be below the 21%-22% range initially targeted. The revision is due to fleet order delays in international transport, leading to a temporary revenue/cost mismatch. With an improved asset utilisation rate (vehicle fleet and recently established warehouses), strong transportation demand and higher freight rates, margin recovery should be secured in 2022 despite material cost inflation and continued increase in headcount.

Financial risk profile is assessed at B+. In the absence of audited consolidated financial statements, Scope’s base case is based on the parent company, which currently represents 80%-90% of the group’s revenues, EBITDA and financial debt. All guarantees granted to subsidiaries (HUF 1.1 bn) are accounted for in the figure for Scope-adjusted debt (SaD). Scope calculates SaD of HUF 11.4bn at year-end 2021 (following the settlement of a subsidy pre-financing loan of HUF 956m in November 2021) and SaD of HUF 15.5bn at year-end 2022, assuming a successful bond issuance in 2022. Scope forecasts that credit metrics will start to improve in 2023. Due to the heavy investment cycle that started in 2020 (a large part of which will be borne by the Romanian subsidiary), free operating cash flow is under pressure and will remain so until 2023.

Liquidity is assessed as adequate. However, we point to negative coverage of short term maturities by internal liquidity sources and thus a recurring dependence on external liquidity provision, especially in times of negative free cash generation. The improvement in free operating cash flow expected in 2023 will positively impact cash flow cover as well as liquidity.

Outlook and rating-change drivers

The Outlook is Stable based on Scope’s expectation that BHS Trans Kft. will successfully issue the planned HUF 4.8bn senior unsecured bond and that the proceeds from this bond will be used as planned. It also reflects Scope’s expectation that BHS Trans Kft. will retain its main customers and implement the warehousing expansion project from its business plan. Furthermore, the outlook reflects Scope’s expectation that no dividend payments will be made during the current heavy investment cycle.

A positive rating action could also occur if SaD/EBITDA strengthened towards 3.5x on a sustained basis. An upgrade may also be warranted it the company manages to improve its business risk profile in terms of customer concentration and business line/geographical diversification, while maintaining credit metrics at the forecasted levels.

A negative rating action could be warranted by an increase in leverage to SaD/EBITDA above 5x on a sustained basis. A rating downgrade could also be triggered by a significant decline in its largest customer’s activity or a substantial decrease in the order volume from this key customer, leading to much lower profitability than expected. A significant liquidity deterioration could likewise drive a negative rating action.

Long-term debt ratings

Scope has assigned a B+ rating to senior unsecured debt, in line with the issuer rating. This rating is based on a hypothetical default scenario in 2023, in which we computed an average recovery for senior unsecured debt holders, based on our assumptions of attainable liquidation values (including haircuts on the assets and liquidation costs of 10%). We factored in the underlying value of the assets that will be funded via the planned bond issue (warehouses in Romania), as well as the guarantees granted for the subsidiaries’ financial debt.

BHS Trans Kft. plans to issue a HUF 4.8bn senior unsecured corporate bond under the Hungarian National Bank’s Bond Funding for Growth Scheme. The bond will feature a 10-year tenor, 10% annual amortisation of the principal amount between 2027-31, and a 50% bullet repayment at maturity (2032). The bond coupon will be fixed (planned around 5.5%, subject to market conditions) and payable on an annual basis. Proceeds from the bond issue are earmarked for the building of four warehouses in Romania.

Scope assumes the business plan and investment programme will be executed as planned.

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-EU. 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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 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: Georges Dieng, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 March 2022.

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
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