The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Pick Szeged Zrt. to BB/Stable from BB-/Stable. Scope has also upgraded senior unsecured debt to BB from BB-.

Rating rationale

The upgrade of the rating to BB/Stable from BB-/Stable mirrors the rating action on Pick Szeged’s parent, Bonafarm Zrt., based on the parent’s ownership and consolidation of Pick Szeged and its unconditional and irrevocable guarantee for group debt.

The rating action is driven by Bonafarm group’s exceptional operating performance in 2022 followed by good H1 2023 results, with Scope-adjusted EBITDA up by 80.7% in 2022 compared to 2021 and a related decrease in Scope-adjusted debt/EBITDA to 0.9x from 2.4x. While the performance in 2022 was an outlier due to the volatile input prices (which the company managed well), Scope projects leverage to stay below 2x in the medium-term (excluding potential M&A), underpinning Scope's view of a better financial risk profile and hence the rating upgrade.

The ratings are driven by i) two of the group’s brands, Pick and Sole-Mizo, being among Hungary’s most valued, as market leaders in processed pork and milk; ii) the group’s high vertical integration and counter-cyclical business units; iii) solid profitability (Scope-adjusted EBITDA margin of 11.3% in 2022, up from 7.8% in 2021); and iv) continuously strong parent support. The rating is held back by the group’s M&A strategy and its slow deployment of capex for a new processed meat plant of subsidiary Pick Szeged. Bond financing was secured in 2019 for the originally budgeted capex. The plant’s construction is not yet fully contracted, making cost overruns likely given the soaring construction costs in Hungary. This may cause Scope-adjusted debt/EBITDA to increase by up to 0.5x, at most, depending on the cost overruns (payable in early 2026) and how these are funded.

Pick Szeged’s business risk profile reflects a strong presence both in Hungary through its 150-year-old brand and in key export markets such as Germany for its famous winter salami. However, volatile input prices, inflationary pressure, wage increases and limited diversification temper the rating. Pick Szeged is tackling inflation with strong pricing efforts, workforce optimisation and operational efficiencies. Nevertheless, Pick Szeged is still seeing volume loss due to the shrinking market as well as slower revenue growth due to consumer preferences shifting from branded products to private labels and cheaper products.

Pick Szeged’s rating is based on the unconditional and irrevocable guarantee of the parent Bonafarm Zrt. and its full consolidation within the group, therefore the financial risk profile assessment is equalised with that of Bonafarm Zrt.

Pick Szeged can access a cash pool provided by its parent for investments. At the same time, Bonafarm Group and its strategic partners such as MCS Slaughterhouse have been able to use some of Pick Szeged's strong cash flow and low-cost fixed-rate debt since 2022, which can result in higher leverage at group level as cash use is extended to strategic partners. Therefore, Pick Szeged is a contributor to the cash pool, which can lower its liquidity moderately though not significantly.

Bonafarm is Hungary’s largest vertically integrated consumer products and agricultural company, which contributes to the circular economy. Group entities have started developing and implementing ESG principles, which is visible in the group’s environmental footprint. Scope views Bonafarm’s and Pick Szeged’s ESG strategy as credit neutral.

Outlook and rating-change drivers

The Outlook for Pick Szeged is Stable, mirroring that of the parent due to consolidation, ownership and its guarantee. The Stable Outlook reflects Scope’s expectation that Bonafarm Group can tackle inflation and maintain margins as well as execute capex plans while keeping Scope-adjusted debt/EBITDA below 3.5x.

An upgrade or downgrade of the parent could result in the same rating action for Pick Szeged.

A positive rating action is possible if Scope-adjusted free operating cash flow/debt can be sustained above 5% following the execution of the capex plan and production ramp-up while keeping Scope-adjusted debt/EBITDA below 3.0x at Bonafarm Group level.

A negative rating action could be warranted by i) Scope-adjusted funds from operations/debt decreasing towards 15%; and/or ii) Scope-adjusted debt/EBITDA increasing towards 4x at Bonafarm Group level. The latter could be caused by more debt taken on due to i) higher construction costs; ii) a slow production ramp-up; iii) a significant change in market input prices; iv) weaker pricing power in main segments due to further delays in modernisation that weaken market share; and/or v) M&A.

Long-term debt ratings

Scope has upgraded the rating on senior unsecured debt issued by Pick Szeged to BB from BB-, which is in line with the issuer rating.

Pick Szeged Zrt. issued a HUF 27.0bn senior unsecured bond unconditionally and irrevocably guaranteed by the parent company, Bonafarm Zrt. (ISIN: HU0000359336, issued in December 2019), through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The only bond issuance within Bonafarm Group was done at the Pick Szeged level, while Bonafarm Group has other senior unsecured debt ranking pari passu in the form of payables.

The senior unsecured bonds issued by Pick Szeged rank below the HUF 23bn senior secured bank debt of Bonafarm Group. Bonafarm Group has a strong asset base, but due to the old meat processed products plant and assets under construction to replace it, Scope has applied a high discount. As a result, Scope expects therefore an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2025.

The bond proceeds are earmarked for the new meat processed products plant, which is in preparatory phase, and for general group financing purposes. The bond proceeds have been set aside as cash and in Hungarian sovereign bonds until construction starts. The bond has a tenor of 10 years and a fixed coupon of 2.0%. Bonds have bullet repayment. Scope notes that Pick Szeged’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has accelerated repayment clauses. The clauses require Pick Szeged to repay the nominal amount (HUF 27.0bn) in case of rating deterioration (two-year cure period for a B/B- rating, immediate repayment after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, soft covenants include those addressing cross default (with the senior secured club facilities agreement having a net debt/EBITDA covenant of 4.0x, mitigated by the large headroom to actual levels) and a change of control (initially limited to dr. Sándor Csányi as final beneficial owner; in 2023 bondholders agreed to a change of control to a Csányi family trust).

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 Outlooks, (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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlooks were last updated on 23 August 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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.