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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+ issuer rating on Hungarian metalworking company MetMax Europe Zrt. and changed the Outlook to Negative from Stable. Scope has also affirmed the B+ rating for the senior unsecured debt category.

Rating rationale

The Negative Outlook reflects the deteriorated credit metrics in 2021 and Scope's expectation that credit metrics will not recover significantly in the near future. It also reflects increased uncertainty regarding revenues in 2023 and continued inflationary pressure on costs likely to lead to an EBITDA margin of around 20% and weaker leverage. It also reflects the worsened Scope-adjusted free operating cash flow (FOCF)/debt expected after the merger with Vagyonkezelő Kft. which will take effect on 31 December 2022.

The affirmed B+ issuer rating is based on the assessments of the business risk profile, unchanged at B, and the financial risk profile, downgraded to BB- from BB.

The downgraded financial risk profile reflects weaker credit metrics in 2021 due to lower EBITDA and the expectation that they will not recover significantly in the short term. In 2021, leverage as measured by Scope-adjusted debt/EBITDA increased to 6.7x from 3.6x in 2020 while cash flow cover decreased to 14% from 26%. The leverage ratio will remain high at 5.0x-6.0x until 2023. This is because EBITDA, while set to improve, is unlikely to return to MetMax’s targeted 30% in the medium term due to inflationary pressures and rising personnel costs. Furthermore, Scope expects cash flow cover of around 5% until 2023 following the merger.

Scope-adjusted debt, at HUF 5.5bn at year-end 2021 (HUF 5.1bn at year-end 2020), largely comprises corporate notes of HUF 5bn issued in December 2020. The merger of MetMax Vagyonkezelő Kft. with MetMax, effective 31 December 2022, will not add debt as the former financed investments with intercompany loans and state subsidies. Scope expects MetMax to finance the remaining HUF 1.1bn from cash flow and additional subsidies. As of 30 September 2022, MetMax Vagyonkezelő received HUF 1.19bn in subsidies out of an expected HUF 1.75bn. A further HUF 150m has been approved and will be paid in January 2023. MetMax expects to receive HUF 285m in 2023 and HUF 230m in 2024. Scope expects no additional debt in 2023, keeping Scope-adjusted debt unchanged into 2023.

Internal cash flow, with positive FOCF since 2013, continues to support the financial risk profile. In 2021, operating cash flow decreased to HUF 903m from HUF 1.7bn in 2020, mainly due to lower EBITDA. This caused FOCF to decrease to HUF 805m from HUF 1.3bn in 2020. In H1 2022, operating cash flow was HUF 332m against HUF 368m in H1 2021 while FOCF decreased to HUF 144m from HUF 327m due to higher capex. Despite higher investment expected after the merger, Scope expects FOCF to remain positive, at around HUF 340m in 2022 and HUF 375m in 2023. Here, capex is forecast at around HUF 430m in 2022 and HUF 650m in 2023.

The unchanged B rated business risk profile continues to be constrained by the company’s size, low diversification and high customer concentration. Profitability as measured by the Scope-adjusted EBITDA margin is still the major  support for the business risk profile, even with the decrease in 2021 to 20.2% from 32.5% in 2020. The lower margin was mainly due to higher materials and staff costs as well as lower revenues (down 6% YoY to HUF 4.0bn). Thus, EBITDA ended 2021 with HUF 816m, well below the previous year’s HUF 1.4bn.

Revenue in H1 2022 increased to HUF 2.4bn, up 11% on the previous year’s level, driven by price increases applied to major customers and positive currency effects. Scope expects revenues to improve further to around HUF 4.8bn for full-year 2022 (+19% YoY) due to further positive currency effects.

Despite higher revenues, EBITDA in H1 2022 of around HUF 559m was slightly below the HUF 583m from a year before. This was due to a 24% year-on-year increase in staff costs reflecting labour market conditions and inflation in Hungary. However, the gross profit margin improved in H1 2022 to 48.8% from 46.9% a year before, driven by price increases applied to key customers to offset rising raw materials and energy costs. The EBITDA margin decreased to 23.0% in H1 2022 against 26.6% from a year before. For full-year 2022, the EBITDA margin is forecast at around 23% and EBITDA at HUF 1.1bn.

For 2023, revenue visibility is limited due to the short lead times (30-60 days) on the backlog. Revenues are forecast to remain at around HUF 4.9bn. The gross profit margin is also expected to increase due to rental expenses saved with the move to the new production facility (4-5% of 2020-21 revenues). Scope expects an EBITDA margin of around 20% and EBITDA of HUF 950m, again adversely affected by inflation and rising staff costs.

Liquidity and financial flexibility are adequate. Scope’s assessment is supported in particular by the absence of major financial debt except for the bond with a 10-year maturity (amortising 10% every year during 2025-29 and 50% in 2030).

Key person risk is high (ESG factor). MetMax CEO András Csoma, responsible for daily operations and execution of investment programme, is also the majority owner with around 54%.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook change to Negative reflects weaker credit metrics in 2021 and Scope's expectation that they will not recover significantly in the near future. It also reflects our expectation of weaker Scope-adjusted FOCF/debt of around 5% until 2023 based on the expected FOCF following the merger. It also reflects increased uncertainty regarding revenues in 2023 and the expectation of an EBITDA margin of around 20% in 2022-23, well below MetMax’s 30% target, which will ultimately lead to a weaker Scope-adjusted debt/EBITDA.

In order to return to a Stable Outlook, MetMax’s Scope-adjusted FOCF/debt would need to be back at 5-10%. Scope may consider additional upside on the rating if Scope-adjusted FOCF/debt improved above 10% on a sustained basis e.g. due to the ability to drive revenue growth and/or EBITDA margins.

A negative rating action may be triggered by Scope-adjusted FOCF/debt falling below 5% on a sustained basis, due to lower revenues and/or EBITDA margins from rising staff costs or investment that goes beyond the current plan. In this context, we note that MetMax’s senior unsecured bond issued under the Hungarian Central Bank’s Bond Scheme has an accelerated repayment clause. The clause requires MetMax to repay the nominal amount (HUF 5bn) within 10 business days after the bond rating falls below a B-, which could have a default implication.

Long-term debt rating

In December 2020, MetMax issued a senior unsecured HUF 5.0bn bond with a 10-year maturity (amortising 10% every year during 2025-29, and 50% in 2030) and coupon of around 3% p.a. under the Hungarian Central Bank’s Bond Scheme. Bond proceeds were transferred to sister company MetMax Vagyonkezelő Kft. (approx. HUF 2bn) for investments to expand production capacity and around HUF 3bn to 100% parent CNC Tőkebefektető Kft. for the repayment of debt related to a management buyout and the acquisition.

In line with the affirmed issuer rating, Scope has affirmed the B+ rating for senior unsecured debt based on an ‘average’ recovery prospect in a simulated event of default.

Scope’s recovery analysis uses the liquidation value in a hypothetical default in 2024 of HUF 3.9bn. This value is based on a haircut on the assets and reflects liquidation costs of 10%. The haircut also assumes the receivable from the parent used to refinance the acquisition debt would become non-recoverable in the event of payment default.

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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With 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: the Rated Entity, public domain, 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 these 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: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Toelke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 October 2020. The Credit Ratings/Outlook were last updated on on 7 December 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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