The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Rating GmbH (Scope) has today affirmed the issuer ratings of BB/Stable on Envien Magyaroraszág Kft and Envien International Ltd. Scope has also affirmed the BB rating on the senior unsecured HUF 5.5bn bond (ISIN: HU0000360193) issued by Envien Magyaroraszág and guaranteed by Envien International, issued under Hungary’s Bond Funding for Growth Scheme.

Rating rationale

The issuer rating of Envien Magyaroraszág is based on the credit metrics of its direct parent, Envien International, which is the holding company of Envien Group, the leading biofuel producer in Central and Eastern Europe (CEE). Within the group, Envien Magyarország is a pure trader of animal feed products that primarily uses the by-products of Envien Group’s biofuel production. The rating is based on Envien International's implicit guarantee to Envien Magyaroraszág given the shared name identity, brand responsibility, intercompany funding and Envien Magyaroraszág’s importance for the group, as well as the parent’s explicit, unconditional and irrevocable guarantee on the bond issued by Envien Magyaroraszág under the Bond Funding for Growth Scheme.

Scope continues to assess the business risk profile at B+. The main supportive elements are: i) the significant market shares in biofuels production in some CEE countries, especially Slovakia, and leading positions in biodiesel in Hungary and bioethanol in Czech Republic, with strong business ties with its main customer, MOL Group, a large oil and gas company; ii) the regulatorily driven demand of biofuels used as an additive in petroleum-based fuels; and iii) the diversification of production and agro-commodity trading activities across several countries.

The business risk profile remains constrained by: i) the limited pricing power, with profitability closely dependent on volatile upstream and downstream prices, which are in turn linked to feedstock and crude oil prices; ii) the low profitability margins (Scope-adjusted EBITDA margin at around 10% over the past years); iii) the small production capacity within the EU; iv) the concentration on a single product group (biofuels) with a modest contribution of specialty products; and v) the limited diversification in terms of geographies (over 55% of sales from Slovakia and Hungary) and customers (around 70% of sales from MOL Group, including its subsidiary Slovnaft). However, the customer concentration risk is mitigated somewhat by the material part of the exposure deriving from the activity of Rossi Biofuels, a subsidiary owned by Envien Group (majority) and MOL (minority) that is also located at MOL’s site in Hungary, creating a close and synergistic relationship that bears little risk of deterioration.

Scope continues to assess the financial risk profile at A-, reflecting the low Scope-adjusted debt (SaD) that benefits from a very strong cash position. Scope’s base case includes EBITDA reaching a record high of around EUR 125m in 2021, corresponding to an EBITDA margin of over 15%, benefitting from a positive timing between sales and purchases amid spiralling prices.

From 2022 onwards, Scope assumes a reversal of the EBITDA margin towards its historical mean of 10% as raw material prices are expected to further increase and not be compensated for by increased final product prices. The large price increase during 2021 also led to significant working capital needs not only for inventory and receivables but also for VAT receivables. This, together with high capex of around EUR 23m, led to negative free operating cash flow (FOCF) and increased SaD, driven mostly by overdraft use and partly by the EUR 15.7m bond issuance from Envien Magyaroraszág.

Leverage as measured by SaD/EBITDA was a low 0.5x in 2021 due to an exceptionally high EBITDA that offset the increased debt. For 2022/23, SaD/EBITDA is expected to increase to just under 2x. This will be driven by lower EBITDA, combined with higher debt due to working capital needs, capex of up to EUR 25m, and the expected acquisition of Poland’s Lotos Biopaliwa for an undisclosed amount (which Scope assumes to remain well below EUR 50m based on own estimates). The Lotos Biopaliwa acquisition (production of FAME for biodiesel), announced early 2022, is expected to close in late 2022 once regulatory approvals are received since this transaction is part of a larger deal involving the acquisiton of Grupa Lotos by PKN Orlen. The funds from operations/SaD leverage metric is also forecast to remain comfortably above 45%, strengthening Envien International’s leverage.

Interest cover is also very strong, reflecting not only the low interest rate regime until 2021, but also the relatively limited debt carried by Envien Group. Cash flow cover (FOCF/SaD) is expected to fluctuate over time due to price volatility, turning negative in 2021 due to extremely high working capital needs, then improving during 2022/23, but only to below 15% due to the high capex (around EUR 25m yearly) aimed at increasing the share of advanced biofuels produced. Scope expects the Russia-Ukraine war to have only an indirect effect in terms of raw materials and energy prices.

Scope views liquidity as adequate, with short-term debt primarily consisting of utilised overdraft lines, most of which are kept as cash and some as the short-term portion of finance leases. In line with general practice in the country, Envien Group has short-term revolving overdraft lines with a handful of banks, with different maturities with each bank over the course of the year to reduce liquidity risk. Most of these lines have been in place for years; the oldest has been regularly renewed in the last 10 years. Liquidity benefits from long-term debt maturing not earlier than 2029. Internal coverage alone is greater than 100% over the past years, while the internal and external coverage is comfortably trending towards 200%

Scope assesses ESG factors as neutral. While the increased use of biofuels (as per regulation) allows for lower carbon emissions and Envien regularly invests in improving sustainability, the company is not an outlier within its industry.

Outlook and rating-change drivers

The Outlook is Stable. This incorporates Scope’s assumption that the EBITDA margin will revert more towards its historical mean from 2022 after strong levels in 2021. Scope expects leverage to increase towards 2x and the volatile FOCF/SaD metric to remain below 15% in the short to medium term.

A positive rating change is possible in case of an improved business risk profile for Envien Group or a SaD/EBITDA sustained below 1x.

A negative rating could be driven by a change in parent ownership for Envien Magyarország and/or the SaD/EBITDA of Envien International deteriorating above 3.0x due to protracted pressure on production margins and/or the introduction of large capex investments to build second-generation facilities that are not included in Scope’s base case. Additionally, liquidity risk may arise in case of a further large increase in working capital needs that unused overdraft lines cannot cover or the unexpected cancellation of one or more of such lines.

Long-term ratings

Envien Magyarország Kft issued a HUF 5.5bn bond under Hungary’s Bond Funding for Growth Scheme (ISIN: HU0000360193), which was oversubscribed by 10% (company fully utilized the HUF 0.5bn overallotment provision). The bond’s tenor is 10 years, maturing in May 2031. Bond proceeds are earmarked for the repayment of an intercompany loan with the parent company, Malta-based Envien International Ltd., to be used for capex, working capital and general corporate purposes and to increase liquidity buffers at the group level. The guarantee from Envien International is unconditional and irrevocable, totalling HUF 6.1bn for the full value of the bond plus a contingency buffer to cover all costs incurred by Envien Magyarország. The security is unconditional and unsubordinated, ranking as senior unsecured debt for Envien International. The only trigger for the guarantee is the non-performance of Envien Magyarország.

Based on a liquidation scenario at the level of Envien Group, Scope assesses an ‘average’ recovery for the senior unsecured bond and has therefore affirmed the BB rating, which is in line with the 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 Outlooks, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Chemical Corporates, 23 April 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director 
The Credit Ratings/Outlooks were first released by Scope Ratings on 24 March 2021. 
The preliminary Credit Rating for the bond was first released by Scope Ratings on 24 March 2021. The final Credit Rating for the bond was first released by Scope Ratings on 6 May 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
© 2022 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.