Scope affirms Daniella’s B+/Stable issuer rating
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Scope Ratings GmbH (Scope) has today affirmed Daniella Kereskedelmi Kft. (Daniella)’s issuer rating of B+/Stable. Scope has also affirmed Daniella’s senior unsecured debt rating of BB-.
The affirmation is driven by Daniella’s extraordinary performance in 2022, which generated a liquidity buffer sufficient to withstand the slowdown in the construction market. A decrease in profitability is expected this year, negatively impacting the group’s credit metrics. However, this decline is seen as temporary. This is because Daniella’s strategy to establish an engineering consultancy and shift its focus towards servicing industrial customers is expected to generate long-term recurring revenue and gradually improve profitability after 2023, allowing it to return to historical levels.
Daniella’s business risk profile (assessed at BB-) continues to benefit from the group’s operating profitability despite the decline forecasted for 2023. Daniella’s revenue and EBITDA grew significantly in 2022 (by 30% and 69% respectively) as favourable market conditions and governmental subsidies supported the construction market. Profitability was further enhanced because of the group’s decision to stock up on cheap inventory by the beginning of 2022 (in anticipation of supply pressures), resulting in a Scope-adjusted EBITDA margin of 8% by YE 2022. A reversal effect is apparent for margins in 2023, however. High inflation rates and the tightening of state subsidy programmes this year have caused a decline in demand (4% revenue decline in H1 2023 compared to H1 2022), which has led the group to shift its strategy and focus more on industrial customers. The unfavourable market conditions are expected to put pressure on Daniella’s profitability in upcoming years, lowering profitability to a Scope adjusted-EBITDA margin of 5% in 2023E. An expected slow recovery will lead this metric to normalise around 6% by 2025E. The business risk profile is further supported by Daniella’s robust market shares. However the group’s absolute size and niche focus remain its main drawbacks.
Daniella started reporting consolidated financial statements in 2021 along with its subsidiaries HAD Real Estate and DL’1. Given that a carve-out of HAD Real Estate was planned for 2022, Scope decided to wait for the transaction to close before incorporating DL’1 into Daniella’s credit rating. As DL’1 has grown significantly since its acquisition in 2019 and materially contributes to the group’s performance, Scope decided to assess Daniella at the consolidated group level from 2022 on.
The group’s financial risk profile (assessed at BB-) continues to benefit from a low absolute level of debt, mostly consisting of a bond and operating leases. Additionally, the group uses open credit lines to finance its working capital expenses. It refinanced these in the amount of HUF 1.3bn in 2023 under the Baross Gabor loan programme, which provides favourable fixed interest rates to SMEs. Further debt issuance is unlikely at the moment due to the high interest rate environment and the group’s outstanding 2022 performance. The latter gives it reasonable cash positions to weather macroeconomic headwinds in 2023. (Daniella’s bond covenants limit its issuance of new debt, however this does not pertain to DL’1.) Credit metrics are forecasted to deteriorate in 2023, in line with the expected decline in profitability. Leverage as defined by the Scope-adjusted debt/EBITDA ratio and the Scope-adjusted funds from operations/debt ratio is expected to decrease to 3.5x and 24% respectively in 2023E (compared to 2x and 46% in 2022). A gradual recovery towards 3x and 30% is expected to follow. Cash generation is expected to remain robust despite the high expected cash outflow (due to working capital build-up and capex) and the slowdown in the construction market. Liquidity is considered adequate based on Daniella’s cash reserves in combination with its expected cash flow (assuming the utilisation of its HUF 1bn credit line) and given that the bond does not start to amortise until 2026.
Daniella previously transferred ownership of the warehouse financed by the Funding for Growth Scheme bond to HAD Real Estate, which was spun out in Q4 2022. The spinoff has had no impact on Daniella’s credit rating since the entity was not incorporated and the transaction had no effect on cash flow. However, it implies that bond proceeds would become unavailable to investors in a bankruptcy-like event. This is seen as credit-negative (ESG factor: credit-negative governance factor), leading Scope to a lower the issuer rating by one notch.
One or more key drivers of the credit rating action is considered an ESG factor.
Outlook and rating-change drivers
The Outlook is Stable and reflects Scope’s view that although macroeconomic headwinds are putting pressure on Daniella’s profitability, causing credit metrics to deteriorate, the negative impact is temporary, with the Scope-adjusted debt/EBITDA ratio set to recover to around 3x. The Stable Outlook also assumes no M&A.
A positive rating action is remote at present but would be considered if Daniella significantly increased in size while maintaining its credit metrics at levels in line with the Outlook. This would result from an expansion into Romania or a ramp-up of industrial customers.
A negative rating action could be taken if the financial risk profile deteriorated, shown by the Scope-adjusted debt/EBITDA ratio moving towards 4x, or if the financial policy became aggressive, exemplified by sizeable M&A or a change in the dividend policy.
Long-term debt ratings
Scope has affirmed Daniella’s senior unsecured debt at BB-, one notch above the issuer rating. In addition to the HUF 3.5bn bond (ISIN HU0000359872), the recovery assessment assumes the utilisation of credit lines in the amount of HUF 1.3bn. A ‘superior recovery’ (71%-90%) is expected for outstanding senior unsecured debt in a hypothetical default scenario in 2025 based on the liquidation value method. This level of recovery would normally allow a two-notch uplift, but Scope has taken a conservative view and limited the uplift to one notch due to Daniella’s expansion plans, which are likely to require additional debt issuance.
In July 2020, Daniella issued a HUF 3.5bn senior unsecured bond (ISIN: HU0000359872) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond proceeds were used for warehouse capex and debt refinancing. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in five tranches starting from 2026, with 20% of the face value payable yearly. Scope notes that Daniella’s senior unsecured bond issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires Daniella to repay the nominal amount (HUF 3.5bn) in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 10 business days after the bond rating falls below B-, which could have default implications). Other bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control, dividend payment and additional indebtedness covenants.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting.
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 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.
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: Vivianne Kapolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 May 2020. The Credit Ratings/Outlook were last updated on 9 September 2022.
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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