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Rating action

Scope Ratings GmbH (Scope) has today assigned an issuer rating of B+/Stable to Trans-Sped Kft. The agency also assigned a first-time rating of B+ to senior unsecured debt issued by Trans-Sped Kft.

Rating rationale

Trans-Sped Kft. is a Hungarian, family-owned SME active in the logistics sector. Founded in 1990 by Mr. Zsolt Fülöp as an international transport company, the company has expanded its scope to multiple different branches of the logistics sector, such as warehousing, freight forwarding, on-site logistics and more recently, e-commerce. Headquartered in Debrecen, Hungary, Trans-Sped currently has 16 regional warehouses offering more than 200,000 m2 of warehousing space, a vehicle fleet of 230 trucks and more than 800 employees.

The issuer’s business risk profile, assessed at B, is supported by Trans-Sped’s stable operating profit margins. The issuer has generated Scope-adjusted EBITDA margins between 7-9% in recent years, which Scope expects to gradually improve towards 10%, mainly as a result of the heavy investment cycle expected to end in 2024. Trans-Sped is investing not just in increasing warehousing and fleet capacity, but in digitalisation and improving operational efficiency. In 2022, the issuer also entered the e-commerce market, providing warehouse logistics and distribution services for web shops. The business risk profile is constrained by the issuer’s limited size and relatively weak market position in a highly competitive market, dominated by multinationals. Based on 2021 revenue, Trans-Sped is amongst the top 20 out of more than 40,000 Hungarian logistics companies, yet its market share is still estimated to be below 1% in the highly fragmented sector. The business risk profile is further constrained by its limited geographical scope (focusing on Hungary and the Central and Eastern European area) making the issuer vulnerable to macroeconomic shifts in these economies. This is mitigated by the well-diversified customer portfolio, with exposure to various industries, such as automotive, chemical, pharmaceutical and fast-moving consumer goods.

The rating is supported by the financial risk profile (assessed at B+) which is supported by the debt protection, measured by Scope-adjusted EBITDA interest cover, consistently above 4.5x and expected to improve towards 7.5x by 2025. Scope’s rating case assumes net interest payments will peak in 2023, in line with the increase in Scope-adjusted debt. Going forward, positive developments are assumed, with the expected increase in Scope-adjusted EBITDA and the debt amortisation profile.

Scope expects financial leverage, measured by Scope-adjusted debt/EBITDA, to remain around 5x until 2024, with a gradual improvement afterwards. This gradual deleveraging is the result of two assumptions: i) the new investments (most notably the increased warehousing capacity) start to generate profit when the construction phase is finished, boosting Scope-adjusted EBITDA; ii) the intensive capex phase is assumed to gradually slow, with no significant new financial debt drawn beyond 2023.

Trans-Sped has generated negative free operating cash flow in recent years, due to intensive investment in property, plant and equipment, which has typically been financed by external debt. Going forward, similar negative FOCF is expected for 2023, gradual improving from 2024 and onwards in line with capex spending.

Liquidity is adequate as sources fully cover uses – the company’s short-term debt at YE 2021 is HUF 462m. Sources comprise HUF 358m of free cash and HUF 1.8bn open committed credit line available as at YE 2022. Negative FOCF of HUF 1.8bn forecasted for 2022 is financed from dedicated long-term investment credits. Scope notes the rolling exposure related to the drawn credit facilities of Trans-Sped (approximately HUF 2.1bn as of December 2022), which have no definite maturity, but reviewed yearly by the financing banks, with the option to stop the annual extension. Scope sees this scenario currently remote.

Scope currently sees no company-specific ESG factors which are deemed to have a substantial impact on the overall assessment of credit risk.

Outlook and rating-change drivers

The Outlook is Stable, based on Scope’s assumption that the Scope-adjusted EBITDA margin of Trans-Sped will gradually improve in the coming years, thanks to increased capacity and efficiency-improving investments. Scope expects the capex-heavy period that started in 2020 to end in 2024, with no new significant financial debt drawn after 2023 and a gradual deleveraging in line with the debt amortisation. Scope expects financial leverage – measured by Scope-adjusted debt/EBITDA – of 4.0x to 5.0x going forward.

A positive rating action is remote at this point but may be warranted in case Trans-Sped manages to improve its business risk profile. A positive rating action can also be considered in case Scope-adjusted Debt/EBITDA improves significantly below 4.0x either through repayment of financial debt or higher profitability, while generating positive free operating cash flow.

A negative rating action might occur in case the issuer fails to improve profitability, leading to sustained financial leverage above 5.0x in the medium term.

Scope notes that Trans-Sped’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Trans-Sped to repay the nominal amount (HUF 5bn) within 30 days after the bond rating falls below B-, which could have default implications.

Long-term debt rating

In March 2020, Trans-Sped issued a HUF 5bn senior unsecured bond (ISIN: HU0000359500) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 2.8bn), for acquisitions (HUF 0.6bn) and capex (HUF 1.6bn). The bond has a tenor of 10 years and a fixed coupon of 2.5%. Bond repayment is in four tranches starting from 2026, with 7.5% of the face value payable yearly, and 70% balloon payment at maturity. In addition to the rating deterioration covenant (2-year grace period below B+, immediate acceleration below B-), bond covenants include a cap on the dividend payment (maximum 25% of profit before tax) and a change of control covenant for the Fülöp family.

Scope has rated Trans-Sped’s senior unsecured debt at B+, the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at YE 2024. Scope has used the liquidation scenario in the analysis due to the asset-rich nature of the company, including fixed assets with high resale value (warehouses, vehicle fleet). Recovery is ’average’ for senior unsecured debt holders in this scenario.

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 Outlooks, (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: 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 27 February 2023.

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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