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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary-based Hell Energy Magyarország Kft’s issuer rating at B+/Stable. The senior unsecured debt rating is also affirmed at B+.

 Rating rationale

The rating affirmation reflects resilient preliminary operating results in 2022 that balanced increased working capital financing needs. Leverage remains high due to the ongoing debt-funded investment plan that the company is executing to boost output.

The issuer rating is supported by a strong market position in Central and Eastern Europe (CEE), high margins despite strong expansionary and inflationary pressures, and significant regional growth potential. The rating is constrained by limited product diversification, high leverage, and uncertainty surrounding the size of investment subsidies.

Hell Energy’s business risk profile (assessed at BB+) is supported by the consumer products sector’s strong industry risk profile and its leading regional market position.

The company is the market leader in the energy drink segment in Hungary and eight other countries that are mostly in CEE. It also has good diversification within the non-alcoholic beverages segment, supported by a granular client and supplier base. Although it has a market presence in over 50 countries, most of its sales are in CEE markets (its core markets are Hungary and Romania), which gives it room for organic growth once production capacity expands.

Revenues grew by more than 40% YoY in 2022 (reaching EUR 370m) due to both pricing and volume expansion, while nominal EBITDA growth was in the single digits (reaching EUR 50m). Profitability was under pressure due to input cost inflation, price and currency volatility, and the company’s strong expansionary ambitions. The Scope-adjusted EBITDA margin decreased as a result but remained above 10%. This puts HELL Energy at the high end of Hungarian consumer products entities and in the middle at the European level. The company’s above-average degree of vertical integration and its efficient, relatively new production facility shields profitability from Hungary's strong wage inflation. The facility also provides a competitive advantage over competitors with less modern, less automated production facilities. Hell Energy’s business risk profile is constrained by limited diversification with regard to product categories (non-alcoholic beverages only) and high concentration in two CEE countries. The company’s relatively small absolute size compared to international consumer products peers is an additional constraint.

The financial risk profile (assessed at B) is strongly affected by the ongoing investment programme that started in 2021. The HUF 80bn (plus a cost overrun of up to 10%) programme caused leverage, as measured by the Scope-adjusted debt/EBITDA ratio, to increase to 6.1x at YE 2021 and to remain elevated in 2022 (5.7x). Scope expects leverage to stay high at between 5-6x Scope-adjusted debt/EBITDA in the medium term. Leverage projections reflect new debt issuances including up to EUR 50m in new working capital facilities, intra-year letter of credit facilities and up to EUR 7m in corporate guarantees and suretyships.

Hell Energy plans to co-finance capital expenditure with HUF 13.5bn in state subsidies. However, this state subsidy is not contracted at this stage, and a shortfall arising from a lower subsidy amount will be covered by equity or a subordinated intercompany loan from the owners. The size of the subsidy is subject to approval from the European Commission. Nevertheless, the company continued its investment programme based on a local offer from the Hungarian Investment Promotion Agency. The delay in receiving the subsidy due to the lengthy approval process poses cash flow risk, as does a potential reduction in the subsidy amount. The company responded to this risk by phasing some of the capex payments over the second half of 2023.

The rating is supported by Scope-adjusted EBITDA interest coverage of above 4.0x, which is the strongest financial metric for Hell Energy. The agency expects interest coverage to stay at good levels because the two bonds which make up 80% of the issuer’s debt have a fixed coupon.

Scope’s base case forecast shows Scope-adjusted free operating cash flow/debt will stay negative for 2023 and possibly in 2024 due to delaying capex.

Liquidity is adequate, with cash sources (HUF 8.0bn cash balance and HUF 8.5bn unused committed long-term working capital facilities as at end-2022) covering uses (minimal short-term debt and negative HUF 14.2bn in free operating cash flow forecasted for 2023) by about 1x in 2023 and above 4x afterwards. 

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation of elevated leverage to remain in place in 2023 with Scope-adjusted debt/EBITDA staying around 6x and deleveraging below 4.5x from 2025 at the earliest due to the ongoing large-scale investment programme. The Outlook further assumes the HUF 13.5bn in subsidies to be contracted by the end of Q3 2023.

A positive rating action could be warranted if the company showed financial leverage (Scope-adjusted debt/EBITDA) of less than 4.0x on a sustained basis. This could be triggered by ramp up of production, improved operating profitability, less intensive capex on medium-term or successful capital increase.

Scope would consider a negative rating action if financial leverage (Scope-adjusted debt/EBITDA) deteriorated to above 6.0x on a sustained basis, if Scope-adjusted free operating cash flow/debt stayed negative beyond 2024, or if the liquidity ratio fell below 1.0x as a result of increased working capital or a shortfall in subsidies.

Scope notes that Hell Energy’s senior unsecured bonds have accelerated repayment clauses. The clauses require Hell Energy to repay the nominal amounts in case of rating deterioration (two-year cure period for a B/B- rating, immediate repayment if the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include a number of soft covenants, such as change of control and dividend restrictions.

Long-term and short-term debt ratings

Senior unsecured debt is rated in line with the issuer rating based on Scope’s expectation of an ‘average’ recovery.

Hell Energy issued two senior unsecured bonds with 10-year tenors under the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond issued in 2020 (ISIN: HU0000359377) at HUF 28.5bn with a fixed coupon of 2.7% yearly and the bond issued in 2021 (ISIN: HU0000360722, guaranteed by subsidiary Quality Pack Zrt) at HUF 67bn with a fixed coupon of 3.0% yearly were used mainly for capex. Bond repayments start in tranches from 2026 onwards with a high balloon at maturity.

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; Consumer Products Rating Methodology, 4 November 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 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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 8 November 2019.The Credit Ratings/Outlook were last updated on 7 July 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
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