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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating on Hungarian holding company AutoWallis Nyrt. and revised the Outlook to Positive from Stable. Concurrently, Scope has affirmed the B+ rating on senior unsecured debt.

Rating rationale

The change in Outlook reflects the likelihood that EBITDA will increase in coming years, which combined with stable debt, will lead to improved leverage at below 3x, despite the issuer’s expansion policy. The Outlook also reflects Scope’s expectation that the issuer will be able to improve geographical and brand diversification while maintaining leverage under control.

The business risk profile remains constrained by AutoWallis’ relatively small size on the European market and its still weak product diversification, as most revenue is generated by vehicles sale. Furthermore, diversification is constrained by the issuer’s dependency on a handful of manufacturers: in 2022, 44% of new car sales were generated by Opel and 78% of sales were generated by three brands: Opel, SsangYong and BMW. While Scope does not see an imminent risk of the manufacturers cancelling the distribution and dealership agreements, especially BMW, with whom AutoWallis benefits from a long-term relationship, depending on just a few providers enhances the risk of cash flow volatility.

The issuer has taken significant steps towards reducing dependency on its home market, with the share of domestic revenue reducing to 45% in Q1 2023 (52% at YE 2021). AutoWallis achieved exceptional profitability in 2022, with 5.5% Scope-adjusted EBITDA margin, compared to 4.1% in 2021, on account of increased average vehicle prices. While the inflationary pressure and decreased consumer confidence could drive down revenue in 2023, leading margins to return to around 4% in 2023, the recent acquisitions of a fleet management company and a used car sales operator, as well as other ongoing negotiations both in Hungary and abroad could support profitability in the long term by expanding revenue streams and generating economies of scale. The recent transactions have not changed Scope’s view of AutoWallis’ weak market positioning and diversification but 2022 results have confirmed the company growth without impacting the financial metrics.

The financial risk profile, upgraded to BB- from B+, benefits from a stable Scope-adjusted debt/EBITDA at 3.5x in 2022 (compared to 3.4x in 2021), confirming the issuer’s effort to decrease leverage over the last two years (11.2x Scope-adjusted debt/EBITDA in 2020). The agency expects the metric to remain at around 3.5x or lower as the issuer can rely partially on own funds to finance future acquisitions, and inventory financing should drop back down following a peak in 2022, when logistics issues in the whole industry significantly slowed down inventory disposal. The financial risk profile is pressured by decreasing debt protection, measured by Scope-adjusted EBITDA interest cover, which has been pushed down by the recent interest rate spike and financed by mostly floating-interest debt. Scope expects the interest cover to decrease to around 4x in 2023. In the following years, increasing EBITDA and relatively stable debt should lead the ratio to settle at around 5x.

AutoWallis’s liquidity is adequate. Liquidity is supported by the large amount of cash available at end-2022 (HUF 17bn) and expected cash inflow from operations of about HUF 20bn in 2023 driven by stock decrease. Furthermore, the issuer’s adequate liquidity is also reflected in the nature of the short-term debt, which is mostly used for inventory financing and reverse factoring, and expected to be repaid once inventory is sold.

Outlook and rating-change drivers

The positive Outlook reflects the assumption that AutoWallis will continue its expansion policy while maintaining stable or lower leverage, as seen in the last two years. The expectation is based on the issuer’s ability to finance future growth with current available funds and keep indebtedness stable. While the unfavourable interest rate scenario will put pressure on debt protection, Scope anticipates that in the medium-to-long term, the issuer will offset the burden by increasing EBITDA. The positive Outlook also recognises the issuer’s effort to improve geographical and brand diversification, which could improve its business risk profile without affecting credit metrics.

A rating upgrade could be warranted if AutoWallis’ Scope-adjusted debt/EBITDA settled at below 3.0x. This could be achieved if the issuer reached its expansion target without recurring to excessive external debt and Scope-adjusted EBITDA were in line with Scope’s forecast. A positive rating action could also occur if AutoWallis improved its profitability to above 5%, for instance through higher revenue from services.

A negative rating action, including a reversed Outlook to Stable, could occur if Scope-adjusted debt/EBITDA were sustained at above 3.0x, driven by lower-than-expected profitability and the need for new external financing. A negative rating action could also be triggered by the loss of an important dealership or importer contract.

Scope notes that AutoWallis’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have an accelerated repayment clause. The clause requires the issuer to repay the nominal amount (HUF 3bn and HUF 6.7bn) within 10 days after the bond rating falls below B- (2-year cure period for a B/B- rating), which could have default implications.

Long-term debt rating

AutoWallis has two bonds issued under the Hungarian Central Bank’s Bond Funding for Growth Scheme. In April 2020, the Company issued a HUF 3bn senior unsecured bond (ISIN: HU0000359476). The bond proceeds were used for fleet financing (HUF 2.3bn), while HUF 0.7bn remains available. The bond has a tenor of 10 years and a fixed coupon of 3.0%. Bond repayment is in one tranche at maturity date April 2030. In July 2021 AutoWallis issued a HUF 6.7bn senior unsecured green bond (ISIN: HU0000360664). The bond proceeds were used for property purchase (HUF 0.9bn) and for CAPEX (HUF 1.7bn), while HUF 4bn remain available. The bond has a tenor of 10 years and a fixed coupon of 3.0%. Bond repayment is in five tranches starting 2026 (10% of face value payable each year from 2026 to 2030 and 50% balloon payable in 2031).

Scope has affirmed the B+ rating for the senior unsecured debt class to reflect its average recovery rate. The calculation is based on the liquidation value in a hypothetical default scenario at end-2024. This value assumes a haircut of around 25% on the assets and reflects asset liquidation costs of 10%.

The recovery analysis assumes that, in a hypothetical default, all financial debt except bonds and advance payments would be secured either with stocks (stock-financing loans, reverse factoring) or with real estate assets.

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; Retail and Wholesale Rating Methodology, 27 April 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: Claudia Aquino, 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 18 September 2019. The Credit Ratings/Outlook were last updated on 14 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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