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Rating action

Scope Rating GmbH (Scope) has today affirmed the BB/Stable issuer ratings on Hungary-based Envien Magyarország Kft. and Envien International Ltd. Scope has also affirmed the BB rating on the senior unsecured HUF 5.5bn bond (ISIN: HU0000360193) issued by Envien Magyarország and guaranteed by Envien International, issued under Hungary’s Bond Funding for Growth Scheme.

Rating rationale

The issuer rating of Envien Magyarország is based on the credit metrics of its direct parent, Envien International, which is the holding company of Envien Group, the leading biofuel producer in Central and Eastern Europe. Within the group, Envien Magyarország is a pure trader of animal feed products that primarily uses the by-products of Envien Group’s biofuel production. The rating is based on Envien International's implicit guarantee to Envien Magyarország given the shared name identity, brand responsibility, intercompany funding and Envien Magyarország’s importance for the group, as well as the parent’s explicit, unconditional and irrevocable guarantee on the bond issued by Envien Magyarország under the Bond Funding for Growth Scheme.

The issuer rating of Envien International reflects good but deteriorating financial credit metrics offset by a moderate business risk profile. The business risk profile is limited by low and volatile margins dependent on commodity market fluctuations, limited company size on an international scale despite strong market shares in small core markets and improving diversification.

In October 2022, Envien finalised the acquisition of Lotos Biopaliwa in Poland from PKN Orlen for an estimated transaction value between EUR 30-45m through its joint venture in Rossi Biofuel (75% owned, remainder 25% held by MOL). PKN Orlen sold its 100% stake in Biopaliwa as part of the remedial measures approved by the European Commission in connection with the merger of PKN and Lotos Group. Biopaliwa (now Envien Biopaliwa Poland) – a producer of fatty acid methyl esters based on rapeseed oil used for biodiesel – has enabled Envien to enter the Polish market via one of the leading local producers.

The business risk profile has gone up to BB- from B+. The main supportive elements are: i) significant market shares in biofuel production in several mature and fairly protected Central and Eastern European markets, especially Slovakia, where Envien covers the entire demand, but also in Hungary, Czech Republic and, lately, Poland; ii) strong business ties with the main customer, MOL Group, a large oil and gas company; iii) the regulation-driven demand of biofuels used as an additive in petroleum-based fuels; and iv) the diversification of production and agricultural commodity trading activities across several countries.

The business risk profile remains constrained by: i) a limited pricing power, with profitability closely dependent on volatile upstream and downstream prices, which are in turn linked to feedstock and crude oil prices; ii) low profitability margins (Scope-adjusted EBITDA margin at around 11% over the past ten years); iii) the limited production capacity within the EU; iv) a concentration of over 80% on a single product group (biofuels) with a moderate contribution of by-product sales and trading activity of related products (not internally produced). In addition, the limited but improving diversification in terms of customers and geographies, with a dependency on volumes sold to MOL – including its Slovakian subsidiary Slovnaft – is expected to decline to around 50% (this only considers the sales of biofuels produced internally) from 70% a year ago, with volumes contracted by MOL and second largest customer PKN Orlen to cover around 60% of group sales in 2023, while sales to Slovakia and Hungary constitute close to half of group total. Nevertheless, the single name concentration risk on MOL is mitigated by the material part of the exposure deriving from the activity of Rossi Biofuels, a joint venture between Envien International and MOL that is also located at MOL’s site in Hungary, creating a close and synergistic relationship that bears little risk of deterioration.

Prices for biofuels have been on the rise over the last few years, leading to record EBITDA levels of EUR 129m in 2021 and EUR 93m in 2022 (preliminary unaudited results), compared to below EUR 60m up to 2020. Envien International achieved a very strong performance in 2021 with an EBITDA margin at around 16% thanks to continuously increasing prices and favourable timing between the purchase and sale of raw materials. In 2022, biofuel prices remained high but had a volatile development and the EBITDA margin declined markedly to around 8%. Besides high feedstock prices, the other key driver for the weaker profitability was the extreme increase in energy costs (reaching around 5% of sales). Envien decreased production, keeping output below full capacity due to higher production costs, hence limiting profitability. In addition, some of the production of dried distillers grains with solubles, which uses natural gas as feedstock, was switched to lower value added production of wet protein in order to save costs.

For 2023, Scope expects EBITDA to decline towards EUR 60m with profitability pressured by volatile prices and persisting high energy and raw material costs. Scope expects a high single-digit increase in salaries as a consequence of general inflation. Scope’s base scenario sees the EBITDA margin further declining to below 7%in the short-term, which is a conservative assumption considering some energy price normalisation in recent months and the company track record over the past ten years. Our base case scenario assumes EBITDA will remain between EUR 60m and EUR 65m in the medium term amid gradually improving margins and declining biofuel prices.

The financial risk profile has deteriorated to BBB from A-, reflecting an increase in debt mainly from higher working capital needs in the last two years. Scope-adjusted debt increased by around EUR 100m in 2022, leading to a deterioration in Scope-adjusted debt/EBITDA to 1.8x compared to only 0.4x a year earlier. Scope had foreseen this deterioration in leverage in last year’s review based on rapid cost inflation. The key drivers of the Scope-adjusted debt increase were the persisting high working capital needs and the large dividend distribution of EUR 97m in 2022 (corresponding to almost 100% of FY 2021 net profits); investment loans taken by subsidiary Polnservice for around EUR 20m; and the above-mentioned acquisition of Biopaliwa. In 2023, Scope assumes leverage will further increase to around 3.0x amid broadly stable debt but declining EBITDA to around EUR 60m. Similarly, Scope-adjusted funds from operations/debt declined in 2022 but remained strong at above 40%. Scope expects this metric to further deteriorate to around 30% in 2023. On March 15th, 2023, Envien signed the agreement for a 50/50 joint venture investment in India with Zuari Industries Limited for the construction and operation of a fully grain-based distillery with capacity of 150 kilo liters per day. This recent deal does not have a material impact on financial metrics, as the expected investment from Envien’s side will remain below EUR 10m and accounted at equity.

From 2023, a significant increase in interest expenses to around EUR 8m will be driven by the rising costs of overdraft lines (increasing base rate based on Euribor), which Scope assumes will bear a 3.5% interest rate over the forecasted period. Some gradual decline in interest expenses is assumed from 2024 as the amount of overdraft is expected to decline (the interest rate on overdraft is currently higher than the average for other borrowings, most of which have fixed rate), resulting in an EBITDA cash interest cover of around 8x over the medium term, still a strong metric but significantly lower than in previous years.

Scope adjusted free operating cash flow/debt weakened in 2022 to 12% from around 50% in 2021, mainly driven by higher debt despite free operating cash flow maintained at around EUR 20m despite high working capital needs but lower capex at EUR 17m (the major capex project was the construction of the degumming unit in Polnoservis). For 2023/24, Scope expects the cash flow cover to remain constrained at around 15%, since the expected decrease in EBITDA will only partly be compensated by normalising (i.e. lower) net working capital outflows, while capex is expected at around EUR 20m per year over the forecasted period. Scope’s assumptions also include a yearly dividend distribution of EUR 30m to EUR 40m and the absence of sizable M&A transactions.

Liquidity is adequate, with short-term debt of EUR 164m primarily consisting of utilised overdraft lines of EUR 114m (covering around 50% of gross debt in 2022), half of which was kept as cash as of December 2022. In line with general practice in the country, Envien Group has uncommitted short-term revolving overdraft lines with a handful of banks, with different maturities with each bank over the course of the year to reduce liquidity risk. Most of these lines have been in place for years (even decades) and primarily serve to finance inventory needs. Internal liquidity coverage should be greater than 100% over the next years even when applying conservative recoverability assumptions on inventories, despite the fact that in the case of Envien inventories include highly liquid raw and finished materials with a generally high expected recoverability ratio. Scope expects short-term bank loans maturing in 2023 to be rolled over into 2024 and overdraft exposure to closely match the development of working capital, which should therefore gradually decrease.

Supplementary rating drivers are still credit neutral. In terms of financial policy, management has a record of being prudent since leverage has been kept within 2.5x over the past ten years, with a potential deviation expected in the short term due to extremely high production costs. After several years of low dividends, Eigen paid out high dividends in the past two years (the aggregate payout ratio in 2021/22 was above previous years’ net profits) driven by unusually high EBITDA. However, Scope expects Envien’s management to reduce shareholder remuneration in 2023/24 in order to keep leverage below 3x.

Outlook and rating-change drivers

The Outlook is Stable and assumes no change in regulation, taxation and law. The outlook incorporates Scope’s assumption that the EBITDA will continue to decline in 2023 to around EUR 60m with margins pressured by volatile prices and persisting high energy and raw material costs. Scope expects leverage to deteriorate towards 3x in 2023, depleting the formerly built-in rating headroom, but remaining in the range 2-3x over the medium term.

A positive rating change is possible in case of Scope-adjusted debt/EBITDA sustained below 1.5x.

A negative rating action could be driven by SaD/EBITDA of Envien International deteriorating above 3.0x due to protracted pressure on production margins and/or the introduction of large capex investments to build second-generation facilities that are not included in Scope’s base case. Additionally, liquidity risk may arise in case of a further large increase in working capital needs that unused overdraft lines cannot cover or the unexpected cancellation of one or more of such lines. Although a remote possibility - a change in parent ownership for Envien Magyarország (i.e. Envien International being replaced by a financially weaker entity) could also lead to a negative rating action.

Long-term ratings

Envien Magyarország Kft. issued a HUF 5.5bn bond under Hungary’s Bond Funding for Growth Scheme (ISIN: HU0000360193). The bond’s tenor is 10 years, maturing in May 2031. Bond proceeds are earmarked for the repayment of an intercompany loan with the parent company, Malta-based Envien International Ltd., to be used for capex, working capital and general corporate purposes and to increase liquidity buffers at the group level. The guarantee from Envien International is unconditional and irrevocable, totalling HUF 6.1bn for the full value of the bond plus a contingency buffer to cover all costs incurred by Envien Magyarország. The security is unconditional and unsubordinated, ranking as senior unsecured debt for Envien International. The only trigger for the guarantee is the non-performance of Envien Magyarország. Scope notes that Envien Magyarország’s bond – as per the Hungarian Central Bank’s bond scheme - has an accelerated repayment clause in case of credit rating deterioration below B+ (2-year cure period to return to B+, but immediate repayment if rating falls below B-), which is currently deemed a remote occurrence for Envien’s case.

Based on a liquidation scenario at the level of Envien Group, Scope assesses the recovery for the senior unsecured bond as average and has therefore affirmed the BB rating, in line with the issuer rating.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Chemical Rating Methodology, 22 April 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 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: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 24 March 2021. The Credit Ratings/Outlooks were last released by Scope Ratings on 18 March 2022.
The final Credit Rating for the bond (ISIN: HU0000360193) was first released on 6 May 2021. The final Credit Rating assigned to the bond was last updated on 18 March 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.