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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungary’s Wellis Magyarország Zrt. to B-/Negative from BB-, resolving its review for a possible downgrade. Scope has also downgraded the senior unsecured debt rating to B- from BB-.

Rating rationale

The downgrade is triggered by deteriorating operating profitability in H1 2022 following the increase in materials costs and operating expenses. Lower demand for jacuzzis and spas, which are discretionary goods, caused inventory to rise, absorbing working capital and increasing the need for external financing. Scope expects operating profitability to be negative in 2022, followed by an improvement in 2023 and 2024 as cost-cutting is implemented.

Scope placed Wellis’ ratings under review for possible downgrade in July 2022 after the company laid off 300 workers and the management forecast was altered. Scope later received additional management input about a business reorganisation, an altered business plan and the company’s plan to mitigate the risks related to the current challenging business environment. In October 2022, another 300 workers were laid off and Wellis produced the second amendment of its 2022 business forecast.

Wellis is a Hungary-based manufacturer of durable consumer products. Its business risk profile is supported by its i) strong position on its core markets (Hungary and Western Europe) and its entry onto the US market in recent years; and ii) high degree of diversification in terms of geographies, suppliers and customers. The business risk profile is rated B, still constrained by Wellis’ limited size compared to competitors. Deteriorating operating profitability is also a constraint and results from the currently challenging business environment as increasing energy costs in Europe and decreasing purchasing power have lowered the demand for jacuzzis and spas.

Wellis’ financial risk profile is rated B- and is supported by the interest coverage, which is expected to remain above 2.0x despite rising interest expenses and profitability remaining below historical average. Leverage as measured by Scope-adjusted debt/EBITDA is expected to rise to over 10.0x in 2023 and to remain high in the short-to-medium term, which constrains the financial risk profile. Liquidity is inadequate, as the available liquid assets (HUF 595m of available cash at YE 2021) and negative free operating cash flow cannot cover the HUF 3bn short-term debt maturing in 2022, making the company highly dependent on external funding. Scope’s base case assumes that the company will be able to find appropriate funding options by the end of 2022 as Wellis has already entered discussions with its banks. One bond (ISIN: HU0000360250) constitutes a major source of funding for Wellis and a further negative rating action would accelerate its repayment and likely trigger a default as the bond agreement stipulates a debt repayment acceleration at loss of B- rating, which is an additional weakness for the company’s liquidity.

Outlook and rating-change drivers

The Negative Outlook reflects the uncertainty around the ability to generate revenue and maintain operating profitability in the challenging business environment. Scope’s base case assumes that credit metrics will weaken in 2022 and 2023, factoring in the discretionary nature of Wellis’ main products, which are vulnerable to economic downturns, and thus to the ongoing drop in demand. Scope’s base case also assumes a refinancing of the existing short-term bank debt, and no legal proceedings initiated by business partners or any other third party resulting in insolvency.

A positive rating action, currently deemed remote, along with the return to a Stable Outlook, would be possible if Wellis managed to deleverage to a Scope-adjusted debt/EBITDA of below 6.0x on a sustained basis, while improving liquidity and maintaining positive free operating cash flow.

A negative rating action would be possible following a further deterioration of operating profitability or the failure to refinance existing debt, which would hinder the company’s liquidity. In the event of a downgrade, the repayment acceleration clause in the bond agreement (as described above) would kick in.

Long-term and short-term debt ratings

In February 2021, Wellis issued a HUF 9.9bn senior unsecured corporate bond under Hungary’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with 10 % of its face value amortising from 2026. The coupon is fixed at 3% and payable yearly.

Scope has rated the senior unsecured debt issued by Wellis at B-, the same level as the issuer rating. The recovery is ‘average’ for senior unsecured debt holders in a liquidation scenario. 

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; 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 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: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 January 2021. The Credit Ratings/Outlook were last updated on 21 July 2022.

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.