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

Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+ issuer rating on Hunland Trade Kft., a Hungarian agribusiness company, and revised the Outlook from Stable to Positive. Scope has also affirmed its B+ rating on the HUF 24.2bn guaranteed senior unsecured corporate bond (HU0000360680).

Rating rationale

The rating action reflects the expected improvement in debt protection as a positive rating-change driver. This will occur thanks to the use of a series of cross-currency interest rate swaps which were progressively implemented in the course of 2022. Those swaps will likely enable Hunland Trade to pay interest in euros instead of forint as it swapped the notional amount in forint to euro. However, as the base interest rate difference between euro and forint was significant, the swaps resulted in having negative interest rates in euro (-0.8% on average) meaning that Hunland Trade is actually receiving interests instead of paying them. As a result, forecasted interest payments are expected be much lower than over the last two years. 

Hunland Trade’s financial risk profile remains constrained by the high Scope-adjusted debt/EBITDA ratio which is expected to remain above 6.5x for the coming years. Scope expects underlying profitability to remain low, but stable, at around 2.0%.

Hunland Trade’s business risk profile is still supported by its vertical business integration within the Hunland Group but also by its leading position in the Hungarian livestock export market. The company continues to benefit from a large customer base, though with some concentration risk. However, Hunland Trade’s business risk profile remains constrained by its high level of receivables. This is due to the nature of its business and the low diversification of its activities. Besides, with the cross-currency interest rate swaps, it will be exposed to exchange-rate risk at the end of the swaps when the principal will be exchanged back.

Hunland Trade’s liquidity is adequate thanks to the bond issue, which enabled the company to refinance the bulk of its short-term financial debt. Scope expects Hunland Trade to repay EUR 520,000 in financial debt and financial leases in 2023. This compares to EUR 13m of expected available cash and equivalents as of 31 December 2022. Scope expects positive FOCF in 2023 due to a positive working capital variation. Overall, the repayment of short-term financial debt is expected to be fully covered in the coming years.

Outlook and rating-change drivers

The Positive Outlook for Hunland Trade incorporates the expected improvement in debt protection thanks to the cross-currency interest rate swaps progressively implemented in 2022. It also incorporates the high indebtedness with a Scope-adjusted debt/EBITDA ratio above 6.5x.

An upgrade could occur if the company kept Scope-adjusted EBITDA/interest cover significantly above 7.0x on a sustained basis, e.g. if the net cash interest is reduced substantially as a result of the swaps.

A negative rating action, such as a revision to a Stable Outlook, could be triggered by a deterioration in credit metrics if Hunland Trade exhibits a Scope-adjusted EBITDA/interest below or at 7.0x on a sustained basis. This could be caused by significantly lower contributions to earnings from cattle and pig sales.

Long-term debt rating

Scope expects an ‘above-average’ recovery for the HUF 24.2bn guaranteed senior unsecured bond, which is based on an anticipated liquidation value in a hypothetical default scenario. The guaranteed senior unsecured bond ranks below short-term and long-term debt raised from financial institutions (excluding the bond) and payables which are secured by asset pledges. Consequently, in the event of a hypothetical default, creditors of the guaranteed senior unsecured bond are likely to be repaid from the liquidation proceeds remaining after repayments to senior secured debt creditors. Scope’s recovery expectation takes into consideration uncertainties regarding the value of claims at the guarantors’ level (Hunland Trans Kft, Bovinia Kft, Hunland Production Kft, Hunland Dairy Kft, HLT Production, Hunland Service, HLT Telep, Hunland Feed and Hunland Group Holding) but also uncertainties about the debt positions of the guarantors at the point of a hypothetical default of the rated entity and the seniority of the claims. This is why Scope has refrained from granting any notch uplift. These recovery expectations translate into a rating of B+.

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 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 February 2021. The Credit Rating/Outlook were last updated on 2 February 2022.
The bond Credit Rating was first released by Scope Ratings on 13 July 2021. The Credit Rating was last updated on 2 February 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.