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Rating action

Scope Ratings GmbH (Scope) has today downgraded Tranzit Food Kft.’s issuer rating to BB-/Stable from BB. Tranzit Food Kft.’s senior unsecured debt rating has also been downgraded to BB- from BB.

Rating rationale

The downgrade reflects a one notch negative supplementary rating adjustment from recurring lack of transparency and clarity (negative ESG factor), driven by an limited visibility, due to lack of forecast guidance and limited reporting disclosure. Scope also misses certain discloser of key information in a timely manner, which has increased the uncertainties for material changes to our rating case.

The standalone rating remains unchanged, driven by continued Tranzit’s business risk profile (BB) which benefits from its leading position in Europe as a goose and duck processor. Tranzit is responsible for 50% of the supply of goose meat in Hungary and (18% in Europe). For duck, Tranzit’s market share in its home country is 32% and in Europe 8%. Scope views positively the ongoing diversification of Tranzit’s production of poultry meat. Although chicken sales have levelled off over the past two years, the company’s large upcoming investments will allow it to continue reducing its sales seasonality. This should allow the company to continue benefiting from the larger chicken market while maintaining duck and goose as niche markets. The launch of new fresh poultry products, including marinated and roast duck, supported by strong demand is also expected to lower seasonality. Moderate product and geographical diversification is impaired by an increasingly concentrated customer base and sales channels.

Tranzit has a moderate track record in terms of profitability, with an EBITDA margin ranging between 9% and 14% since 2015. Profitability was negatively impacted in 2020, with margins dropping below 10% as the result of lower prices in the poultry market because of production over-capacity and temporarily limited export opportunities due to the Covid-19 crisis. The company recovered its operating margin in 2021 as the supply of duck and goose decreased, leading to higher prices. Scope assesses the volatility of the EBITDA margin as medium to high, led by a rapidly-changing price environment also influenced by avian flu and exposure to foreign-exchange risk.

Tranzit’s 2022 operating margin is expected to be in line with 2021, supported by large storage and production facilities for feed which provide a partial hedge against costs, and by the limited impacts of price caps implemented by the Hungarian government on chicken breast to offset inflation. The strong demand for fresh duck and monthly price adjustments negotiated with retailers are also supporting Tranzit’s profitability. However, the operating margin is expected to be negatively impacted by cost inflation on items such as additives, tools, packaging, transport, staff and maintenance. Tranzit recorded one case of avian flu in the first quarter of 2022, impacting the month of February with the EBITDA margin falling to 4%.

The company’s financial risk profile (BB) is supported by low leverage and very strong EBITDA interest cover, although the latter has been pressured by the issuance a HUF 9.2bn (EUR 30m) Hungarian National Bank (MNB) bond under the MNB Bond Funding for Growth Scheme in 2021. The bond was used for refinancing and to support the expansion of Tranzit’s chicken slaughterhouse capacity from 15m to 25m pieces. The company’s creditworthiness is also supported by very low leverage, but credit metrics remain highly volatile driven by EBITDA generation and very negative working capital consumption. Nevertheless, the leverage is also assessed without netting of cash due to high cash balance viewed to be partly used in the future instead of a liquidity buffer. Scope expects working capital to pressure free operating cash flow (FOCF) in 2022 in addition to high capex levels, which cannot be financed organically. As such, negative FOCF is forecast to push leverage to around 1.0x.

Scope assesses liquidity as better than adequate, with the HUF 1.6bn of short-term debt maturing in 2022 fully covered by HUF 11.7bn in unrestricted cash.

Scope has applied to Tranzit one notch negative supplementary rating adjustment from recurring lack of transparency and clarity (negative ESG factor) in light of its governance risk including inadequate reporting methods and failure to disclose key information in a timely manner.

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

Outlook and rating-change drivers

The Outlook is Stable and incorporates the expectation that Scope-adjusted debt (SaD)/EBITDA will remain below 3.0x. The Outlook also reflects our expectation that Tranzit will continue to perform positively, with its EBITDA margin remaining above 12%.

A positive rating action could be warranted by an improvement in Tranzit’s business risk profile. This could be achieved via a material increase in size or better diversification. A positive rating action could also be warranted by an improvement in governance linked to adequate financial disclosure and better transparency.

A negative rating action may be taken if SaD/EBITDA reaches around 4.0x on a sustained basis. An increase in leverage could be triggered by a rise in net debt from larger than anticipated capex or from a slower recovery of the poultry market in Hungary, weighing on the company’s profitability.

Long-term and short-term debt ratings

Scope has downgraded the debt rating to the senior unsecured debt issued by Tranzit Food Kft. to BB-, in line with the issuer rating. This rating is based on a hypothetical liquidation scenario as of year-end 2023, in which Scope computed an ‘average’ recovery for holders of senior unsecured debt based on Scope’s assumptions of attainable liquidation values. 

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; Consumer Products Rating Methodology, 30 September 2021), 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 Rated Entity or Related Third Party Participation      YES
With Access to Internal Documents                                    NO
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: Thomas Langlet, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 October 2019. The Credit Ratings/Outlook were last updated on 6 November 2020.

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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