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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating of Hungarian construction materials producer-distributor Masterplast Nyrt. and changed the Outlook to Negative from Stable. Scope has also affirmed the BB- senior unsecured debt rating. 

Rating rationale

The Negative Outlook reflects significant credit deterioration projected for 2023 and continued uncertainty. Masterplast benefited from favourable industry trends in H1 2022, but the industry deteriorated significantly in the final quarter of 2022, as inflation and interest rates soared around the world.

Masterplast faces a challenging year as the construction sector has begun to slow down throughout Europe. Building material wholesalers have started reducing their stockpiles, which means building material manufacturers face even lower demand. This slowdown has put Masterplast’s margins under pressure.

Masterplast has built up several strategic partnerships over the past few years. They have enabled it to generate significant growth, with revenue rising from EUR 123m in 2020, to EUR 191m in 2021 and EUR 202m in 2022. However, the company is expecting to operate at lower profitability in 2023, having already revised forecasts it issued in 2022, before an expected recovery in revenue and profitability margins in 2024.

Masterplast’s geographical diversification is rather poor since the company generates most of its revenues in one region, Europe (with a strong focus on Central and Eastern Europe). In 2022 the company generated 44% of its revenue in Hungary (2021: 46%). Hungary has been experiencing weaker growth over the past 18 months, and it counts among the most exposed countries to the fallout from the war in Ukraine. In view of its high reliance on Russian fossil fuel imports, amplified by an economic structure dominated by energy-intensive businesses with complex value chains, the Hungarian economy entered a technical recession in H2 2022. Scope expects economic momentum to remain subdued over the coming months as elevated price pressures weigh on real incomes, while tighter funding conditions and high uncertainty impact investment decisions.

Profitability as measured by the company’s Scope-adjusted EBITDA margin decreased to 10.2% (YE 2022) from a high of 11.9% (YE 2021) which was supported by the higher margin healthcare segment. In the 12 months to end-March 2023, this figure weakened even further to 7.1%, and by year-end 2023 Scope forecasts it will decline to 4.6% before gradually recovering in 2024. The strongest driver of medium-term profitability is dependent on the recovery of the Hungarian construction sector, and it depends on the release of funds from the EU to kickstart the sector, particularly the renovation sector. Consequently, the company’s sales of insulation materials benefits from i) regulatory tailwinds with most EU member states subsidising investments into properties to reduce energy consumption and CO2 emissions¹ and ii) the development of recyclable insulation systems (ESG factor: credit positive).

The slowdown in the construction industry throughout Europe has meant Masterplast is no longer able to achieve full operational efficiency at its production plants, and it is not expected to operate at full capacity for the remainder of 2023. Masterplast has begun to take corrective measures to manage the downturn, including: i) pausing dividend payments for 2022 and 2023; ii) reducing its workforce by 200 people; and iii) reducing production output at a number of its plants.

Masterplast’s financial risk profile previously benefited from very strong debt protection, with Scope-adjusted EBITDA historically well over 10x during the past few years. However, revenue is expected to decline by 13% to EUR 175m by YE 2023 (from EUR 202m at YE 2022) due to a material deterioration in the macro environment and the expiry of subsidies. As a result of this drop in revenue, Masterplast’s Scope-adjusted EBITDA is expected to fall to EUR 8.0m (YE 2023) from EUR 20.6m (YE 2022). In October 2022 the company raised an additional EUR 22.3m through a secondary public offering in order to finance its growth plans. With an increase in debt and equity of nearly EUR 40m in 2022, the company has limited financing needs in the short term.

Masterplast’s bank loans increased substantially to EUR 31.9m (YE 2022) from EUR 10.2m (YE 2021). The additional bank debt increases Masterplast’s floating rate risk. The effects of the increase in floating rate bank debt could already be seen in Q1 2023, with a total interest expense of EUR 0.75m, up from EUR 0.48m in Q1 2022 (54% increase YoY). However, the rise in interest rates is somewhat offset by the overnight deposit rate in Hungary, currently at 17% (as at end-May 2023), so the net interest Masterplast pays should be lower. As a result, its Scope-adjusted EBITDA interest cover dropped to 8.3x in LTM Q1 2023, and it is expected to drop to 3.8x by YE 2023. A recovery to above 7x is expected in 2024 when market conditions are expected to improve. New production facilities that are currently under development will come online and start contributing to Scope-adjusted EBITDA in 2024 too.

Masterplast plans to spend around EUR 14.7m on capex in 2023, followed by an additional EUR 10.8m in 2024 and a further EUR 8m in 2025. Of the EUR 14.7m earmarked for 2023, EUR 6.3m has been spent to date, including EUR 2.4m to finish the XPS production facility in Subotica. The remaining capex for 2023 will primarily be spent to complete the two EPS production facilities (Kál, Hungary and Reggio Emilia, Italy) and invest in Masterplast’s new modular house segment in partnership with the KÉSZ Group. Substantial expansion of production capacity is anticipated to come to a halt in 2023 after a capex-heavy expansion phase over the past two to three years. The XPS production facility in Subotica is now operational, and the two additional EPS production facilities are expected to be operational in the second half of 2023. Any further growth is subject to developments in the cost of capital (including debt and equity).

Masterplast’s leverage, as measured by its Scope-adjusted debt/EBITDA ratio, has historically been around 2.5x-3.5x, such as 3.1x as at YE 2022 and 2.5x as at YE 2021. However, the past two quarters have proven very difficult for the entire construction sector. In Q1 2023 Masterplast’s Scope-adjusted EBITDA posted a loss of EUR 2.0m and an after-tax loss of EUR 5.8m. Scope-adjusted EBITDA is expected to deteriorate to EUR 8m by YE 2023.

Scope sees rather limited risk from price surges in raw materials, labour and energy, as seen in 2022. Masterplast had to purchase raw materials at higher prices after the war in Ukraine started, and the effects of those purchases will continue to be felt until the start of H2 2023. While Masterplast has been able to pass on most of the increase in costs, gross margins have declined, and Scope does not expect to see a recovery in margins until 2024, when the growth strategy that Masterplast has embarked on over the past few years is expected to bear fruit, with increased production output and increased production efficiency.

Liquidity is adequate as sources (EUR 13.0m of cash available as at end-March 2023) cover uses (EUR 3.9m bond repayment due in December 2023). Masterplast has short-term debt of EUR 17.5m and needs to reply on their ability to get this debt rolled over in the future. FOCF is expected to turn positive by YE 2023 given that the company is coming to the end of its capex-heavy phase and will be reducing its inventory levels due to lower market demand.

One or more key drivers of the credit rating action is considered an ESG factor. 

Outlook and rating-change drivers

The Negative Outlook reflects the significant deterioration of key credit metrics expected for 2023 and related uncertainty as to the scope of recovery thereafter. The recovery in Scope-adjusted EBITDA will depend on the construction sector returning to normal supply and demand conditions. Unfavourable macro trends, rising energy prices, increasing inflation and the deterioration of the interest rate environment will all hinder Masterplast in 2023. A return to profitability in 2024 is also dependent on domestic and foreign home-renovation and energy-efficiency programmes being resurrected, most of which are on hold for 2023.

A downgrade could occur if Masterplast’s Scope-adjusted debt/EBITDA ratio remains above 4x on a sustained basis. This could be triggered by a prolonged reduction in Scope-adjusted EBITDA and a further increase in Masterplast’s bank facilities, which increased substantially in 2022.

A positive rating action as expressed by a return to a Stable Outlook could be warranted if Masterplast’s Scope-adjusted debt/EBITDA ratio returns to below 4.0x on a sustained basis and business conditions stabilise. This could occur if Masterplast’s Scope-adjusted EBITDA improved to the levels seen at YE 2022 and YE 2021. Further positive rating action deemed remote at present.

Long-term debt rating

In December 2019, Masterplast issued a HUF 6bn senior unsecured bond (ISIN: HU0000359369) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The proceeds of the bond was used to repay Masterplast’s high portion of short-term debt. The bond has a tenor of 7 years and a fixed coupon of 2.00%. The bond repayments are in four equal tranches starting from December 2023, with 25.00% of the face value payable yearly.

In December 2020, Masterplast issued a second HUF 6bn senior unsecured bond (ISIN: HU0000360219), also through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The proceeds were used to refinance current debt and further capital expenditure, as well as business acquisitions. The bond has a tenor of 7 years and a fixed coupon of 2.10%. The bond repayments are in four equal tranches starting from December 2024, with 25.00% of the face value payable yearly.

In August 2021, Masterplast issued a HUF 9bn senior unsecured bond (ISIN: HU0000360748), again through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The proceeds were used for further capital expenditure and business acquisitions. The bond has a tenor of 10 years and a fixed coupon of 2.90%. The bond repayments start in August 2027, with 4 equal instalments of HUF 1.125bn (12.5% of the face value) each year until 2030, with a 50% balloon payment at maturity in August 2031.

Scope’s recovery analysis is based on the enterprise value calculated as a going concern. A continuation of the business in a default scenario seems to be more likely than liquidation given that Masterplast already has a distribution network in several European countries. This network comprises subsidiaries in its core Eastern European countries as well as ‘external’ export partners that are responsible for distribution in Masterplast’s export markets. This distribution network has its own inherent value, which would be lost if the company was liquidated. Scope estimates the recovery for all senior secured debt to be ‘average’, justifying a debt class rating equal to that of the issuer (BB-).

Scope notes that Masterplast’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Masterplast to repay the nominal amount of all three bonds (total HUF 21bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications).

1. The real estate industry is the largest energy-consuming sector in Europe, accounting for around 40% of total energy consumption and one-third of carbon dioxide emissions

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; Construction and Construction Materials Rating Methodology, 25 January 2023), 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: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 September 2019. The Credit Ratings/Outlook were last updated on 15 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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