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

Rating action

Scope has affirmed the BB- rating on Pick Szeged along with the BB- senior unsecured debt rating. The Outlook has been changed to Stable from Positive.

Rating rationale

The affirmed BB- rating and changed Outlook mirrors the rating action on Pick Szeged’s parent, Bonafarm Zrt., based on the parent’s unconditional and irrevocable guarantee for group debt. The Outlook change is mainly driven by the flexible financial policy and the M&A policy of Bonafarm Group despite improving credit metrics. The improvement in credit metrics is due to low agricultural input prices (as of 2021) based on production sold with a superior margin in 2022 and the slow deployment of capex in the new brownfield meat processing plant at Pick Szeged resulting in lower-than-planned leverage and higher free operating cash flow. Most of the investment budget is still not fixed although construction costs have been soaring since the bond issuance in 2019. Scope expects metrics to deteriorate moderately once capex is deployed.

The rated entity’s business risk profile reflects a strong presence both in the Hungarian market through its 150-year-old brand and in key export markets such as Germany for its famous winter salami. However, volatile input prices, inflationary pressure, wage increases and limited diversification temper the rating. Pick Szeged is tackling inflation with a strong pricing response and by discontinuing some low-margin processed products.

Pick Szeged has a strategic partnership with MCS Slaughterhouse, which is also owned by Bonafarm Zrt.’s ultimate owner, Dr Sándor Csányi. Scope notes that one-third of Pick Szeged’s output and only certain parts of its pork meat are purchased from MCS Slaughterhouse at market price. MCS Slaughterhouse closed the year with a profit after initial loss-making years since production started in 2016, while Pick Szeged’s margins have been improving. A combined margin of the slaughtering and meat processing business would be around 10%, which is strong for the Hungarian food production sector.

Pick Szeged can access a cash pool provided by its parent for investments and thus does not carry its own investment burden. At the same time, the strong cash flow generation of Pick Szeged and its low-cost fixed-rate debt can be used up to a limited amount by Bonafarm Group and its strategic partners such as MCS Slaughterhouse from 2022, which can result in higher group leverage extended for the cash use of strategic partners. Therefore, Pick Szeged is a contributor to the cash pool, which may lower its liquidity moderately though not significantly.

As a result, its financial risk profile mirrors that of the parent. A HUF 27bn bond under the Hungarian National Bank’s Bond Funding for Growth Scheme (HU0000359336) was the first time Pick Szeged issued debt. Overall, Pick Szeged’s rating remains in line with the parent’s, affirmed at BB-.

Outlook and rating-change drivers

The Outlook for Pick Szeged has been changed to Stable from Positive, mirroring that of the parent due to its ownership and guarantee.

An upgrade or downgrade of the parent could result in the same rating action for Pick Szeged.

Long-term debt ratings

Pick Szeged Zrt. issued HUF 27bn in senior unsecured debt in 2019. While the company has a strong asset position, Scope has not provided an uplift for any potential recovery.

Scope has therefore affirmed the BB- rating on senior unsecured debt issued by Pick Szeged and guaranteed by Bonafarm, which is in line with the issuer rating. The debt category rating reflects the ranking of debt issued by Pick Szeged, which is below the HUF 32bn senior secured bank debt of Bonafarm Group. Scope expects an ‘average’ recovery for outstanding senior unsecured debt 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 Outlooks, (Corporate Rating Methodology, 15 July 2022; Rating Methodology: Consumer Products, 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlooks were last updated on 17 September 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.