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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating of Hungarian food producer Tranzit Food Kft. (Tranzit) and revised the Outlook to Positive from Stable. Scope has also upgraded the senior unsecured debt rating to BB from BB-.

Rating rationale

The revised Outlook to Positive reflects Tranzit’s solid results in 2022. Revenues and EBITDA increased by respectively 56% and 70% to reach HUF 72bn and HUF 9.9bn. This was fuelled by the poultry price jumping more than 50% and was despite the mixed picture regarding volumes (chicken sales up by 6% but duck and goose down by 8%). In addition, the EBITDA margin rose by 13.8%, 100 bp above the 2021 level, even with the ramp-up in production of chicken products for the Hungarian market, which have lower margins than duck and goose.

The affirmed issuer rating continues to be driven by Tranzit’s business risk profile (assessed BB), which benefits from the leading position in Europe as a goose and duck meat producer. In Hungary, Tranzit supplies 27% of goose and duck meat and produces 8% of the chicken meat. Tranzit’s poultry meat production continues to be well diversified. However, despite the strong increase in sales in 2022, Tranzit remains a small player in both the European market and for chicken meat, the most sold type of poultry. Although chicken sales have levelled off over the past two years, the company’s large upcoming investments will allow it to continue reducing sales seasonality and thereby benefit from the larger chicken market while maintaining duck and goose as niche markets. Chicken accounts for 40% of total revenues decreasing goose’ sales seasonality. Supported by strong demand, launches of additional fresh poultry products such as marinated and roast duck are also expected to lower seasonality. Moderate diversification by product and geography is impaired by an increasing concentration in terms of customers and sales channels. Hungary represents 51% of total sales making Tranzit fairly concentrated into its domestic market.

Profitability remains moderate. EBITDA margins have ranged between 9% and 14% since 2015. In 2022, the margin improved at 13.8% (vs 12.8% in 2021), the result of poultry prices rising after an avian flu outbreak across Europe caused production shortages. Scope expects the operating margin to be stable in 2023 as duck, goose and chicken supply is yet to recover in H1, supporting the high prices environment of the poultry market. The ability to stockpile feed through large storage and production facilities as well as investments in automating the slaughterhouses provides a partial hedge against cost inflation. The ability to pass on cost inflation to customers is also helped by strong demand for fresh duck and chicken and the price adjustments negotiated monthly with retailers. The volatility of the EBITDA margin is medium, led by a rapidly changing price environment influenced in part by the avian flu and foreign-exchange risk. Tranzit Ker, the main supplier of Tranzit, recorded one case of avian flu in the first quarter of 2023 but Scope anticipates this will have a limited impact on Tranzit’s EBITDA margin.

The company’s financial risk profile (revised from BB to BB+) is supported by very low leverage and very strong EBITDA interest cover. Gross debt is mainly composed of a HUF 9.2bn (EUR 30m) bond issued under Hungary’s Bond Funding for Growth Scheme. Proceeds were used for refinancing and towards expanding chicken slaughterhouse capacity from 15m to 25m pieces. Leverage, while very low, is highly volatile because the EBITDA is sensitive to price, with the effect pronounced in Q3 2022 when seasonal working capital consumption was negative. Scope has therefore revised the leverage assessment by considering part of Tranzit’s cash as restricted for funding seasonal working capital. In 2023, Scope expects working capital to continue to put pressure on free operating cash flow, in addition to high capex that cannot be financed organically.

Scope assesses liquidity as better than adequate, with HUF 1.6bn of short-term debt maturing in 2022 fully covered by HUF 11.7bn in unrestricted cash.

Scope has applied one negative notch for supplementary rating drivers for the consistent lack of transparency and clarity (negative ESG factor) in terms of governance. This includes inadequate reporting methods and the failure to disclose key information in a timely manner.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that credit metrics will remain strong in the difficult market environment characterised by volatility and avian flu outbreaks; positive performance will continue with the EBITDA margin remaining above 13%; and no acquisitions will be undertaken in the next 12-18 months.
 
An upgrade could be warranted by credit metrics remaining at their presently strong levels or an improvement in governance linked to adequate financial disclosure and better transparency.

A reversion of the Outlook to Stable could be triggered by a deterioration of credit metrics. A rating downgrade, although a remote scenario, is possible if a large debt-funded acquisition caused leverage to reach about 4.0x.

Long-term debt rating

Scope has upgraded the rating on senior unsecured debt issued by Tranzit Food Kft. to BB from BB-, one notch above the issuer rating. The upgrade was due to the ‘improved recovery, assessed as ‘above average’, computed for holders of senior unsecured debt, based on Scope’s assumptions of attainable liquidation values and a hypothetical liquidation scenario at year-end 2024.

In June 2021, Tranzit Food Kft. issued a HUF 9.2bn senior unsecured bond (ISIN: HU0000360599) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. All proceeds were used for capex. The bond has a tenor of seven years and a fixed coupon of 2.0%. Bond repayment is in four tranches starting from 2025 with 10% of the face value, followed by 20% yearly for the period 2026-2027 and a 50% balloon payment at maturity. Scope notes that Tranzit Food Kft.’s senior unsecured bond issued under the Hungarian scheme has an accelerated repayment clause. The clause requires the company to repay the nominal amount (HUF 9.2bn) in case of rating deterioration (two-year cure period for a B rating; repayment within 30 days after the bond rating falls below CCC, which could have default implications). In addition to the rating deterioration covenant, bond covenants include 6 other covenants.

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, (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 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: Thomas Langlet, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 October 2019. The Credit Ratings/Outlook were last updated on 17 June 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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