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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time BB/Stable issuer rating to Hörmann Industries GmbH. The senior unsecured debt category has been assigned a first-time BB rating. 

Rating rationale

The BB issuer rating is based on the B+ business risk profile and BBB- financial risk profile assessments for Hörmann, a German industrial conglomerate active in the automotive, communications, logistics and engineering sectors.

Hörmann’s B+ business risk profile reflects a moderate market position, supported in particular by the good position in a profitable niche communications market of subsidiary Funkwerk AG, which provides train radio modules on analogue and digital networks. The business risk profile is limited by the risk that Funkwerk loses its market position in the long term with the upcoming transition to a new standard for railway communications (FRMCS) and by Hörmann's weak position in the automotive segment, which accounted for 57% of group revenues in 2021.

The diversified product offering supports the business risk profile. However, diversification is held back by some concentration in terms of customers and end-markets. Hörmann also has a weak international presence, with around 67% of 2021 revenues generated in Germany.

Low operating profitability in a peer context is a constraint on the business risk profile, reflected by Scope-adjusted EBITDA margins of between 7-10% in 2017-21. This is due to weak profitability in automotive (EBIT margins of less than 1% in 2017-21), dampened somewhat by the strong profitability in communications.

Scope expects group revenue having reached around EUR 680m in 2022, up from EUR 590m in 2021. Even so, Scope-adjusted EBITDA is expected to reduce in 2022 to around EUR 50m from EUR 55m in 2021, due to an expected decrease in Scope-adjusted EBITDA margin to around 7% (around 9.5% in 2021), which reflects strong growth in the material-intensive Automotive division, price increases for raw materials such as steel, purchased parts and electronic components, and the increased energy costs for production. Group revenues are forecasted to increase further to around EUR 740m in 2023 due to higher volumes, recently negotiated price increases in automotive and the finalisation of major logistics-related projects. For 2023, Scope anticipates only a marginal improvement in Scope-adjusted EBITDA as higher revenues should be counteracted by lower profitability in communications due to the expiry of Germany’s Railway Economic Stimulus Programme in 2022.

The BBB- financial risk profile is supported by the leverage ratio as measured by the Scope-adjusted debt/EBITDA ratio at around 1.5x in 2019-21 but restrained by a volatile and weak cash flow cover.

Reported financial debt totalled EUR 61m at end-September 2022, comprising EUR 50.0m of bonds and EUR 11m of bank loans. Hörmann also has access to a EUR 40.0m syndicated loan due at the end of 2026. All debt is managed centrally by Hörmann, which provides loans and other types of financing to its affiliate companies. There are no cross-guarantees. The syndicated loan also has a covenant, which is met as of 2022.

Scope-adjusted debt is expected to increase to around EUR 91m by end-2022 from EUR 72m at end-2021. This is because Scope-adjusted free operating cash flow will turn negative (estimated -EUR 18m) due to increased inventory and higher capex costs for a major construction project, weighing on the group’s cash. For 2023, Scope-adjusted debt is expected to remain relatively stable, after Scope-adjusted free operating cash flow turns positive (estimated EUR 18m) due to a significant reduction in net working capital, allowing planned investments and M&A transactions to be covered by cash.

The increase in Scope-adjusted debt combined with a lower Scope-adjusted EBITDA would result in Scope-adjusted debt/EBITDA leverage rising to around 2.0x in 2022. The ratio will remain at around this level into 2024 after the expiry of Germany’s railway stimulus programme in 2022 weighs on the Scope-adjusted EBITDA margin.

Interest cover in 2021 was strong at around 10x. Scope expects the current bond to be refinanced with a new bond, with the coupon to increase from the current 4.5%. This will cause interest cover to reach around 8x.

Cash flow cover will be volatile in line with fluctuations in Scope-adjusted free operating cash flow, turning negative in 2022 before improving to around 20% in 2023.

Hörmann’s capital allocation policy is credit-neutral.

Liquidity is ‘adequate’, supported by the available liquidity sources and the absence of large maturities until June 2024 when EUR 50m is due for repayment. The liquidity assessment assumes the refinancing of the bond due in June 2024, most probably through a new bond.

It is worth noting that Funkwerk AG generated most, at times all, of the group's cash flow over the last four years, which is a credit weakness.

Scope sees no company-specific ESG factors that have a substantial impact on credit risk.

Outlook and rating-change drivers

The Stable Outlook reflects Scope's expectation that revenues will increase in 2023; Scope-adjusted free operating cash flow will turn positive in 2023 after being negative in 2022; Scope-adjusted debt/EBITDA will remain at around 2.0x in 2022-24; and the EUR 50m bond due in 2024 will be fully refinanced.

A positive rating action is possible if Hörmann’s financial risk profile improved, e.g. driven by a Scope-adjusted debt/EBITDA ratio moving to around 1.5x, bolstered by higher profitability in automotive or a return to significantly positive and steady free operating cash flow. Alternatively, a positive rating action could be warranted by an improved business risk profile, e.g. through an improved profitability on the group level.

Scope may consider a negative rating action if Scope-adjusted debt/EBITDA were sustained at around 2.5x, which could result from lower profitability, the aggressive use of liquidity for M&A or a worsening of Funkwerk’s strong market position.

Long-term debt rating

Scope has assigned a BB rating for senior unsecured debt, based on an ‘average’ recovery prospect in a simulated event of default. Scope’s recovery analysis uses a distressed going-concern enterprise value in a simulated event of default in 2024 of around EUR 50m.

Hörmann’s debt instruments totalled EUR 98.1m at end-September 2022, comprising a bond, an entrepreneur loan with German development bank KfW, and a syndicated loan, of which EUR 61.1m of debt was drawn. All debt instruments are unsecured and pari passu.

Scope assumes that Hörmann will reduce its KfW loan to EUR 1.9m by year-end 2024 and that the current bond will be refinanced through another bond issued in the same amount. Scope also assumes that at the simulated point of default the full amount under the EUR 40.0m syndicated loan will be drawn. Hörmann may also take on the maximum EUR 6.5m in additional debt on the basis of the KfW loan’s documentation. Scope assumes that at the simulated point of default Hörmann or one of its subsidiaries will make use of this option and raise EUR 6.5m of senior unsecured debt. Beyond this, Scope assumes that the business plan will be executed as planned with no additional bank debt or other financing ranking ahead of the bond.

Hörmann and its parent company both make use of guaranteed, though unsecured, credits. However, Hörmann is a co-obligor or co-borrower for financings of its parent Hörmann Holding GmbH & Co. KG regarding guaranteed credits and leasing obligations. The guaranteed credit lines have a total volume of EUR 107m, of which around EUR 32m were utilised at year-end 2022.

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 Outlook, (European Automotive Suppliers Rating Methodology, 6 February 2023; General Corporate Rating Methodology, 15 July 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 Rated Entity and its Related Third Parties participated in the Credit Rating process.
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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 March 2023.

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
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