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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on Hungarian durable consumer goods company Naturtex Gyapjú- és Tollfeldolgozó Kft. (Naturtex). Scope has also affirmed its rating for the senior unsecured debt category at B+.

Rating rationale

The affirmation is driven by the bedding manufacturer’s ability to make up for the lost sales in 2020 in 2021. However, due to additional short-term loans taken out to finance a temporary business expansion and increased input costs in 2022, Scope expects no major improvement in credit ratios in 2021 and 2022.

Naturtex’s business risk profile (assessed at B+) continues to benefit from its comfortable operating profitability, strong international profile and its product’s brand strength on its domestic market. However, due to the current post-pandemic situation and geopolitical conflict, many input costs have significantly increased, including raw materials, energy and transport costs. Together with planned increase in staff costs, these are all expected to put pressure on Naturtex’s profitability in the near term. The company successfully implemented a price increase at the beginning of 2022, but future price increases are constrained by various pricing clauses with partners and by customer behaviour trends. Scope expects Naturtex’s profitability to return to average historical levels of Scope-adjusted EBITDA of around 11% after 2023.

As a small producer in the fragmented European bedding market, Naturtex can take advantage of shifting market trends. Due to high transport costs and delivery issues many buyers face in relation to their Asian suppliers, buyers have had to search for alternative European suppliers. This plays in favour of Naturtex’s expansion strategy. With the completion of the joint venture with NTT Manufacturing Kft., Naturtex will be able to increase its output by 40% in the following years and fulfil the expected rise in demand for its products.

Following increased sales in 2021 due to the Covid-19 lockdown and delayed partner promotions, Naturtex took out a short-term non-recourse project finance loan to finance a promotion project of one of its main buyers. The net impact of the higher sales and higher debt was broadly unchanged credit metrics. Naturtex received close to HUF 0.75bn of government grants in 2021 to finance new machinery, a solar park and renovations.

The agency expects Scope-adjusted Debt to EBITDA to remain around 4.0x (at the high end of the tolerance for the rating) in 2021 and 2022 and see prospects for improvement in 2023 onwards.

Outlook and rating-change drivers

The Outlook for Naturtex is Stable and incorporates Scope’s view of the negative effects that the rapidly increasing material costs may have on operating profitability. Although the company successfully implemented a significant product price increase in 2022, the different contractual timeframes of price changes for its wholesale buyers may pressure margins in the near term. The company has built up a substantial inventory of raw materials and products to mitigate its exposure to immediate price increases; however, this has caused free operating cash flow to remain negative in Scope’s base case in 2021. Furthermore, government grants have allowed the company to expand capex plans, with negative free operating cash flow forecast in 2022.

Rating-change drivers have not changed significantly. A positive rating action could be warranted if profitability and cash flow stabilised in the coming years. This could be exemplified by positive sustained free operating cash flow, which would strengthen the balance sheet.

A negative rating action is possible if Scope-adjusted debt/EBITDA increased to over 4x and funds from operations/Scope-adjusted debt fell below 15% on a sustained basis, resulting from a more aggressive debt-financed growth strategy or tougher market conditions.

Long-term and short-term debt ratings

Scope has affirmed the senior unsecured debt rating of Naturtex at B+, including the HUF 2.8bn bond (ISIN HU0000359922). Scope expects an ‘average’ (30-50%) recovery for senior unsecured debt in a hypothetical event of a company default. The recovery analysis is based on the company’s liquidation value in a hypothetical default scenario in 2024. 

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 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, 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Tommy Träsk, Director 
The Credit Ratings/Outlook were first released by Scope Ratings on 26 May 2020. The Credit Ratings/Outlook were last updated on 20 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.