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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer credit rating on Hungarian tyre wholesaler MARSO Kft. (MARSO) along with its BB long-term senior unsecured debt rating.

Rating rationale

The affirmation reflects MARSO’s resilient business model after the completion of the warehouse near Budapest (17,000 sq m next to the M0 motorway) and full utilisation of the NKP bond proceeds as it faces several threats in its core market. The Russian-Ukrainian war has caused raw material shortages and supply chain disruptions in the entire global tyre industry in addition to energy price increases. Thus some tyre manufacturers have adjusted their strategy, including closing some production facilities. Nokian, one of MARSO’s top suppliers, has closed its Russian factory and exited the country. Furthermore, the high inflationary environment also puts pressure on customer behaviour and working capital management. Despite the market conditions that are forecasted to negatively impact MARSO’s credit metrics, both its business and financial risk profiles remain commensurate with the rating. The Stable Outlook reflects expectation of a Scope-adjusted debt/EBITDA ratio of between 3-4x for the coming years, assuming no further debt is utilised.

The warehouse, which cost HUF 5.5bn, was completed by the end of 2021, entered service in early 2022, and was partially financed by the HUF 3.6bn NKP bond and a HUF 0.7bn government subsidy. After relocating MARSO’s inventory from scattered, smaller rental storage sites to the new warehouse, a significant number of rental agreements were terminated, resulting in a stronger gross margin, improving profitability. The spike is forecasted to be short-lived as labour market conditions and rising input prices are expected to weaken MARSO’s Scope-adjusted EBITDA margin to around 5% for the medium term, after the elevated level of 6.5% forecasted for 2022. Furthermore, the new warehouse will allow MARSO to better serve Budapest and the surrounding area and execute same-day shipping.

The operating profitability remains the supporting factor of MARSO’s business risk profile (assessed as B+) next to the company’s high market share. The comparatively strong financial risk profile (assessed at BB) also supports the issuer rating. The rating is, however, hindered by MARSO’s small size, weak diversification and weak cash flow cover.

MARSO’s credit profile is forecasted to remain broadly unchanged (including the ca. HUF 1.2bn warranty MARSO has provided for MARSO Holding Kft.’s loans): the company is expected to utilise short-term working capital loans seasonally during the year when needed, typically twice, repaying as soon as cash generation allows, thus not impacting the year-end profile. The company has so far withstood the depressed conditions in the automotive-related industries thanks to its strong market position in the wholesale tyre markets allowing it to partially pass on price increases. Even so, the current market conditions (e.g. the high interest rate environment) are forecasted to deteriorate MARSO’s credit metrics, primarily its interest cover and secondly its profitability metrics. Scope forecasts credit metrics to remain commensurate with the current issuer rating: Scope-adjusted debt/EBITDA is expected to remain within 3-4x, Scope-adjusted funds from operations/debt at above 20%, and EBITDA interest cover between 4-6x. Liquidity is considered adequate, however negative fluctuations of working capital are expected.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that with the elimination of the execution risk related to the large-scale investment programme of the warehouse, MARSO’s long-term loan profile will remain stable in the next three years and as a result the company’s Scope-adjusted debt/EBITDA will remain commensurate with the rating at an expected range of between 3-4x for the next years.

The rating-change drivers remain the same as last year: a positive rating action could be triggered if MARSO’s premiumisation strategy strengthened the Scope-adjusted EBITDA margin and Scope-adjusted debt/EBITDA fell below 3x on a sustained basis, for example, through an efficient management of working capital.

A negative rating action could be triggered if Scope-adjusted debt/EBITDA reached above 4x on a sustained basis, as a potential consequence of the new strategy not lifting the EBITDA margins or from a further significant working capital expansion.

Long-term and short-term debt ratings

Scope has affirmed the BB rating for MARSO’s senior unsecured debt. Recovery expectations for senior unsecured debt are superior, even after senior secured debt (primarily consisting of the redrawn loan amount of HUF 1.7bn) has fully been covered. Scope applied a one-notch positive adjustment to the senior unsecured debt rating while maintaining its conservative treatment of MARSO’s current liabilities, primarily due to the forecasted negative fluctuations of the working capital. This results in the BB rating, one notch above the issuer rating. Recovery expectations are based on an expected liquidation value 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 Outlook, (General Corporate Rating Methodology, 15 July 2022; Retail and Wholesale Rating Methodology, 27 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, Outlook 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 October 2019. The Credit Ratings/Outlook were last updated on 21 October 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
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