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

Rating action

Scope Ratings GmbH (Scope) has affirmed the B/Stable issuer rating on Hungarian limestone producer Reneszánsz Kőfaragó Zrt. Scope has also affirmed the B+ senior unsecured debt rating.

Rating rationale

The business risk profile of Reneszánsz (assessed at B+) continues to be supported by i) the strong market position as the largest limestone dimension stone producer in Hungary; ii) the unique properties of the limestone at the Süttő quarry, which is also close to national heritage buildings in Budapest, a captive market; and iii) the mine’s very long reserve life. Reneszánsz operates Hungary’s largest limestone quarry, which is in Süttő on the Danube River about 65km from Budapest. The company, controlled by the Balogh family since 2014, has the exclusive right to mine, process and sell stone from the quarry under a 70-year concession agreement. While the mine itself (previously also owned by the shareholders of Reneszánsz) was sold to the Hungarian state in Q1 2022, the terms and conditions of the concession agreement are unchanged. In this context, Scope notes the regulatory risk related to the potential amendment of mining concession after the quarry and the limestone deposits moved into government ownership (ESG factor: credit-negative).

The business profile is constrained by i) the company’s small absolute size in both a domestic and a European context; ii) the low diversification of products and the order book; and iii) the deteriorating operating profitability due to increasing energy costs. Further, the company is unlikely to be able to fully offset the swings in energy prices, even with plans to decrease energy consumption by investing in a solar park in 2023.

The financial risk profile (assessed at B) is driven by the issuer’s high financial leverage (Scope-adjusted debt/EBITDA, including the capitalisation of future mine concession payments), expected to deteriorate to 8.0x in 2022 due to a worsening EBITDA margin. In the medium term, Scope expects leverage to stabilise to around 7.0x. Despite the lower profitability, debt protection (Scope-adjusted EBITDA/interest cover) is expected to remain strong at around 3.0x. This will be due to the favourable coupon of the bond issued in 2021 which is fixed for the whole tenor, and the absence of plans to enter into new interest-bearing debt.

Liquidity is adequate, with no short-term debt maturing other than the future amortisation of the bond and with capex to be funded with bond proceeds. Liquidity became the strong point of the financial risk profile following the HUF 5.7bn capital injection in Q1 2022. While these funds are earmarked for potential future investments, they are held in easily accessible, marketable assets, forming an additional liquidity buffer.

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

Outlook and rating-change drivers

The Stabile Outlook reflects the assumption the Reneszánsz will be able to upkeep the resilient interest coverage and positive FFO despite the lower profitability caused by energy prices placing additional pressure on margins. Scope’s base case assumes EBITDA margins at below the historical average with gradual recovery on the medium term, and considers leverage metrics less meaningful due to its sensitivity to the debt composition (strongly influenced by the leasing adjustment).

A positive rating action is possible if Free operating cash flow/ Scope-adjusted Debt would improve towards 15%, through either improving operating profitability or decreasing outstanding Scope-adjusted debt.

A negative rating action, i.e. a downgrade, might occur if Scope-adjusted EBITDA/interest cover deteriorated below 2.0x in the medium term or funds from operations/ Scope-adjusted Debt remained below 5 % beyond 2022.

Scope notes that the senior unsecured bond issued by Reneszánsz under the Hungarian Central Bank’s Bond Scheme has an accelerated repayment clause. The clause requires Reneszánsz to repay the nominal amount (HUF 2.4bn) within 30 days after the bond rating falls below a B-, which could have a default implication.

Long-term debt ratings

In April 2021, Reneszánsz issued a HUF 2.4bn senior unsecured bond (ISIN: HU0000360375) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds have been used for refinancing and capital investment, i.e. to procure new mining and stone working equipment and refurbish existing equipment. The bond’s tenor is 10 years, with a fixed coupon of 3.2% and repayment in eight tranches: 5% of the face value in 2023 and 2025; 10% yearly between 2026 and 2030; 40% at maturity in 2031.

Scope has rated the senior unsecured debt issued by Reneszánsz at B+, one notch above the issuer rating. The recovery is ‘above 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; Metals and Mining Rating Methodology, 27 October 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, 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, 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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 29 January 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.