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

Rating action

Scope Ratings GmbH (Scope) has affirmed the BB+/Stable issuer rating on Pannonia Bio Zrt. as well as the BBB senior secured debt rating and the BB+ senior unsecured debt rating.

Rating rationale

Pannonia Bio’s business risk profile (assessed at BB-) continues to reflect its highly efficient plant (credit-positive environmental risk ESG factor), whose large scale and favourable location lead to competitive operating costs and solid overall profitability. Challenges include a strong exposure to very volatile commodities, very weak asset and product diversification, and no current exposure to low-cyclicality speciality products.

Reopening economies and new/higher blending mandates for biofuels led to greater bioethanol demand in Europe in 2021, supporting prices and margins. Crush margins remained above multi-year averages for the third year in a row despite increased corn and energy prices. In addition, the company benefitted from recent investments in efficiency, including reduced gas consumption. As a result, Pannonia Bio generated a record adjusted EBITDA of EUR 136m.

The commodity price environment remains volatile. The increase in prices for main input and output commodities has been further amplified by the war in Ukraine, while the tight European bioethanol market continues to support crush margins. According to management, the company has faced no material issues due to the conflict in Ukraine yet. However, Hungary sources most of its gas from Russia and the escalation of the conflict in Ukraine has increased the risk of supply disruptions from damage to infrastructure or Russian retaliation to sanctions. Scope believes Pannonia Bio will be able to manage short-term interruptions of gas flows from Russia. However, the potential implications of prolonged interruptions will likely be material, although they cannot be assessed reliably at present. The company is evaluating a replacement of some burners so that the most critical boilers can run on alternative fuels, e.g. ethanol.

Scope expects crush margins to gradually stabilise below multi-year averages. Nevertheless, the company benefits from ongoing investments to optimise production processes and develop higher-value products, resulting in a conservative EBITDA forecast of around EUR 130m in 2022. Pannonia Bio is continuing its large plant investment programme of around EUR 100m per year. These projects include a barley plant (to process barley in addition to corn), a new corn milling system (to increase the fibre extraction rate), the expansion of biomethane and fertiliser production capacity, a plant to produce dietary fibre and another plant to produce alternative proteins. In addition to plant upgrades, the company plans to invest in a number of smaller projects, including the construction of four biogas power plants in Serbia, via its 75% owned subsidiary Pannonia Green d.o.o. and the acquisition of 49% in an operating 24 MW merchant wind farm in Hungary. Scope notes that the ambitious growth plan is accompanied by the risk of delays and cost overruns due mainly to global supply chain issues and general price inflation.

The company’s financial risk profile (assessed at BBB) reflects its strong interest cover, solid leverage and relatively weak cash flow cover. Scope expects an increase in leverage, as measured by Scope-adjusted debt/EBITDA, to around 2.0x-2.5x in the next few years. This will be mainly driven by conservative commodity price assumptions, a significant dividend payment in 2022 as well as the large investment programme. The investments will be mainly funded from available cash, solid operating cash flow as well as prospective senior secured term loans with existing bank lenders and the European Investment Bank totalling up to EUR 150m, to be drawn in 2022-23. In addition, the company has several funding options including a EUR 45m working capital facility.

Supported by strong cash generation in the recent past, Pannonia Bio repaid all of its shareholder loans by the end of March 2022 and plans to distribute a large dividend this year. The company plans to maximise dividend payments going forward subject to operating performance, covenants set by the bank loan agreement (such as maximum leverage and surplus cash) and approval by bank lenders.

Pannonia Bio’s liquidity remains adequate. For the next 12 months, Scope expects coverage of short-term financial debt and negative free operating cash flow at more than 1x, including from the undrawn working capital facility of EUR 45m and available cash and cash equivalents of EUR 57m as of 31 March 2022.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation of resilient operating performance and an increase in leverage due to heavy investment spending, with Scope-adjusted debt/EBITDA at around 2.0x-2.5x. The Outlook also anticipates that Pannonia Bio will ensure leverage is kept under control and funding remains flexible. Scope’s rating case does not assume any prolonged interruptions of gas supplies.

A negative rating action could be triggered by a deterioration in credit metrics, e.g. if Scope-adjusted debt/EBITDA increased above 2.5x for a prolonged period.

A positive rating action is unlikely under the current business setup but could be triggered by significant improvements in diversification and outreach.

Long-term debt ratings

Senior secured debt
Scope’s recovery analysis indicates an ‘excellent’ recovery for senior secured debt. These expectations translate into a BBB rating for this debt category. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2024.

Senior unsecured debt
Scope’s recovery analysis indicates an ‘average’ recovery for senior unsecured debt, including the HUF 15bn bond (ISIN: HU0000359112) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2024. These expectations translate into a BB+ rating for this debt category.

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; Chemical Corporates Rating Methodology, 22 April 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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: Marlen Shokhitbayev, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 July 2019. The Credit Ratings/Outlook were last updated on 2 July 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. Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

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.