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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary-based Hell Energy Magyarország Kft’s issuer rating at B+/Stable. Senior unsecured debt is also affirmed at B+.

Rating rationale

The B+ rating is supported by a strong market position in Central and Eastern Europe (CEE), high margins despite the pandemic and Ukraine war, and significant growth potential. The rating is constrained by limited product diversification and high leverage.'

Hell Energy’s business risk profile (rated BB+) is supported by the consumer products sector’s strong industry risk profile, which benefits from low cyclicality, medium barriers to entry and an A rating.

The company is the market leader in the energy drink segment in Hungary and eight other countries that are mostly in central and southeastern Europe. It also has good diversification within the non-alcoholic beverages segment, supported by a granular client and supplier base. Its recently introduced Energy Coffee product quickly became the market leader in five countries. Hell Energy has a market presence in over 50 countries, although most of its sales are in the CEE markets (its largest markets are Hungary and Romania), which gives it room for organic growth once production capacity expands.

Profitability on a sustainable EBITDA-margin basis is in the range of 15%-20%. This is in line with sector peers, particularly given Hell Energy’s above-average degree of vertical integration and its relatively new and efficient production facility.

A strong increase in input costs (sugar, aluminium, energy, transportation) and production ramp-up related inefficiencies has put pressure on margins. Scope expects the company to use its pricing power to keep its EBITDA margin around 15%, 3 pp below historical trends but in line with projections for the ramp-up phase.

Hell Energy’s business risk profile is constrained by limited diversification with regard to product categories (non-alcoholic beverages only) and high exposure to markets in central, eastern and southeastern Europe. The company’s relatively small absolute size compared to international consumer products peers is an additional constraint.

The financial risk profile (rated B) is strongly affected by an investment programme that started in 2021 of around HUF 80bn plus a cost overrun of up to 10%. Of that amount, HUF 67bn is financed by a senior unsecured bond issued in 2021 (with a fixed coupon of 3%, a 10-year maturity, linear amortisation of 10% from 2026, a 50% balloon at maturity and a corporate guarantee from Quality Pack Zrt., which is 100% owned by Hell Energy). The remainder is financed by a state subsidy of HUF 13.5bn to be received in 2023 and the company’s own cash flows. The company received HUF 6.7bn subsidy for its previous investment in 2022. The bond proceeds are earmarked for capital expenditure to greatly increase production capacity in beverage manufacturing and filling as well as aluminium can manufacturing.

The state subsidy is not contracted at this stage, and a shortfall arising from a lower subsidy amount will be covered by equity or a subordinated intercompany loan provided by the owners. No other equity contribution is planned. Cost overruns and timing delays are mitigated using the same technology suppliers as before, and a new filling line has been quickly installed in place of the existing PET line to boost output needed to achieve high revenue-growth targets. Subsidy negotiations will extend beyond mid-2022 and put pressure on cash flows if the subsidy is not received by mid-2023.

The new investment programme follows a deleveraging from the previous programme that started in 2015 for the can manufacturing facility and additional filling lines, resulting in Scope-adjusted debt (SaD)/EBITDA of above 7x in 2017. The company successfully deleveraged to SaD/EBITDA of 2.8x by YE 2020. Without netting cash earmarked for capex, SaD/EBITDA stands at 6.1x as of YE 2021.

The rating is supported by interest coverage of well above 5.0x, which is the strongest financial metric for Hell, and no large debt repayments in upcoming years.

Free operating cash flow/SaD will stay negative for the next two years according to Scope’s base case forecast. Since the company still lacks absolute size compared to global consumer product brands, Scope has taken potentially higher revenue and cash flow volatility into account, which constrains the financial risk profile to some extent. Those entities are part of the larger, family-owned Hell Group but not part of the rated entity. Scope does not incorporate these in its base case forecast metrics since it deems the likelihood of any payments resulting from such contingent liabilities to be negligible at this point.

Operating leverage, as measured by SaD/EBITDA, ranges between 6.1x and 4.5x, which is commensurate with a rating at the lower end of the B category.

All ratings reflect ambitious growth figures in Scope’s underlying base case. Financial metrics in the agency’s base case are therefore subject to larger potential volatility if the company cannot achieve its growth plans.

Liquidity has been adequate with expected coverage around 1x with temporary deviations caused predominantly by negative free operating cash flow as investment plan progresses. The assessment is supported by limited short-term debt usage so far. The company had HUF 57bn of cash as at YE 2021, most of which is intended to finance investments. In 2023 additional liquidity is needed as working capital grows due to inflation and strong expansion of the business and due to and possible cost overruns financed from the company’s own sources. This is somewhat mitigated by possible supplier financing.

Outlook and rating-change drivers

The rating Outlook is Stable based on expected SaD/EBITDA staying around 6x until YE 2022, with deleveraging below 4.5x from 2024 at the earliest due to the ongoing large-scale investment programme.

A positive rating action could be warranted if the company showed financial leverage, measured by SaD/EBITDA, of less than 4.0x on a sustained basis.

Scope would consider a negative rating action if financial leverage deteriorated to above 6.0x on a sustained basis, if free operating cash flow/SaD stayed negative beyond 2023, or if the liquidity ratio fell below 1.0x as a result of increased working capital or a shortfall in subsidies.

Long-term and short-term debt ratings

Senior unsecured debt is rated in line with the issuer rating based on Scope’s expectation of an average recovery.

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 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: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 8 November 2019. The Credit Ratings/Outlook were last updated on 20 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
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