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Rating action

Scope Ratings GmbH (Scope) has today upgraded Hungary-based Agrár Kft’s issuer rating to B+/Stable from B/Stable. The HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) has been assigned a new instrument rating of BB-. The senior unsecured debt category rating has been withdrawn due to business reasons.

Rating rationale

The upgrade of the issuer rating is driven by the improving credit metrics and the reversal of the negative one notch on the financial risk profile for previous concerns about liquidity, reflecting uncertainties regarding the availability and frequency of operational subsidies from the European Union’s Common Agricultural Policy.

The main constraint of the rating continues to be the business risk profile (improved to B). The company’s limited size in both the European and domestic contexts renders it more vulnerable to macroeconomic shocks and makes it harder to handle changes in market conditions. Additionally, the company’s small size limits its ability to mitigate price volatility as Agrár has little influence on market prices. The overdependence on a single product category is also credit-negative. The rating is positively driven by operational profitability.

Scope-adjusted EBITDA margin has deteriorated compared to FYE 2020 (Scope-adjusted EBITDA margin: 18.7% in FYE 2021) but remains solidly above the agribusiness peer average. Profitability has benefited from raw material procurement from around 1,000 hectares of own farmland. However, profitability is highly dependent on the European Union’s Common Agricultural Policy subsidies. Any changes in the subsidy system can also significantly influence Agrár’s cash flow and profitability.

The new capital investments will significantly increase the energy efficiency of the expanded pig farm by utilising renewable energy sources, reducing exposure to the change in energy costs (credit positive ESG factor).

Agrár’s financial risk profile (improved to BB+) is supported by its history of adequate credit ratios, thanks to its past moderate financial leverage. Scope assumes moderate revenue growth in 2022, until the pig farm’s expansion is completed, which should result in a significant revenue increase from 2023 onwards. Scope also expects EBITDA margin at close to historical average, with the framework of agricultural subsidies unchanged in the coming years.

Leverage as measured by Scope-adjusted debt/EBITDA remained around 3.5x after the issuance of the HUF 3.26bn senior unsecured guaranteed bond, with a gradual improvement expected in the medium term, benefiting from new capital investments. Interest cover is expected to remain strong, with EBITDA/interest cover rising above 10x in the upcoming years. Cash flow cover, measured by free operating cash flow/Scope-adjusted debt is projected to be negative till 2023, as a result of capital expenditure. Negative cash flow should not have a significant adverse impact on liquidity as the new HUF 5bn investment is covered by the proceeds of the bond issuance and investment subsidy.

Liquidity is adequate, benefitting from the HUF 1,69bn unrestricted cash available as of FYE 2021, fully covering the negative free operating cash flow of HUF 0.9bn and short-term debt repayment of HUF 0.5bn forecasted for 2022.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects the successful execution of the company’s capex phase along with a robust financial risk profile that is signaled by a sustained leverage (SaD/EBITDA) of around 3.0x on average. This reflects Scope’s expectation that the company will be able to pass on increased procurement cost through increased selling prices and continued reception of operating agricultural operational subsidies that will keep the company’s EBITDA margin at a level higher than 20%.

A positive rating action is deemed as being remote for the time being due to the company’s constrained outreach and scale. A positive rating action would require a significantly improved business risk profile and operational scale.

A negative rating action could be required if the company’s leverage (SaD/EBITDA) moved towards 4.0x amid its expansion phase or if the company’s faced significant pressure regarding keeping its EBITDA margin at 20% or higher in case it failed to pass on higher input prices to customers or to collect operational subsidies.

Long-term debt rating

In August 2021, Agrár issued a HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with a fixed coupon rate of 2.9% and repayment in six tranches of 10% in 2026, 2027, 2028, 2029 and 2030 and of 50% in 2031. The bond has been issued with a guarantee from related company Agro-Build Kft.

The recovery analysis indicates an ‘above average’ recovery for the senior unsecured guaranteed bond and for all other senior unsecured debt positions at the level of Agrár Kft even after all senior secured debt would have been fully recovered. The recovery is benefiting from the high level of fixed assets (mainly consisting of PPE), translating into a debt instrument rating of the senior unsecured guaranteed bond one notch above the issuer rating (BB-). The guarantee of Agro-Build Kft has no significant effect on the expected recovery of the debt instrument.

The senior unsecured debt category rating has been withdrawn due to business reasons.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), is 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 August 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.