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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating on Hungarian tyre wholesaler MARSO Kft. (Marso) and revised the Outlook to Negative from Stable. Marso’s long-term senior unsecured debt rating of BB has also been affirmed.

Rating rationale

The change in Outlook to Negative from Stable reflects Scope’s expectation of a Scope-adjusted debt/EBITDA ratio of around 4x in 2023. This expectation follows from the macroeconomic headwinds and intense competition that Marso faces, which are expected to significantly deteriorate its 2023 profitability (reported EBITDA margin of 2.7% in H1 2023). Although this drop is seen as temporary, the unfavourable market conditions are likely to put pressure on profitability in future and could hinder the timely recovery of credit metrics. Furthermore, the high seasonality of Marso’s working capital requirements, which peak biannually (typically in Q1 and Q3), may lead to higher indebtedness in case the company is not able to reduce it by the end of the year, leading Scope-adjusted debt/EBITDA to potentially rise above 5x.

Marso’s business risk profile (assessed at B+) remains the main constraint on the issuer rating. The business risk profile is characterised by the company’s leading market position, widespread supplier network and profitability but hindered by Marso’s small size, strong competitors and weak diversification (both geographically and product-wise).

The business risk profile benefits from the company’s relatively strong profitability. However, Scope expects Marso’s Scope-adjusted EBITDA margin to decrease in the coming years despite its premiumisation strategy. 2022 was an exceptional year for the company as its Scope-adjusted EBITDA margin increased to 7.1%. During 2022 many manufacturers and market players built up large inventories as they anticipated headwinds caused by the Russia-Ukraine war. However, as these issues subsided, market players had to reduce their excess inventory. In H1 2023 the market was filled with cheap supply, putting pressure on Marso’s profitability. This resulted in a Scope-adjusted EBITDA margin of 4.3% in mid-2023. As the surplus dwindles, pressure on margins is also expected to weaken. However, due to the company’s premiumisation strategy, Scope forecasts Marso’s Scope-adjusted EBITDA margins will normalise at around 5.5%, in line with historical, pre-pandemic profitability levels.

The comparatively strong financial risk profile (assessed at BB) is the main support for the issuer rating. It continues to benefit from relatively high interest coverage despite the high interest rate environment because the majority of company debt has fixed interest rates. (In addition to the NKP bond, Marso has refinanced a part of its debt portfolio with the Baross Gabor loan programme, which provides Hungarian SMEs favourable fixed interest rates.) The refinanced, fixed rate loans are scheduled to mature in 2025 and 2026, which will sustain relatively strong interest coverage between 4x-7x.

Credit metrics will deteriorate with the drop in profitability in 2023. However, the expected recovery in Scope-adjusted EBITDA, backed by Marso’s premiumisation strategy, is forecasted to gradually improve credit metrics. Scope expects Marso’s credit profile to remain broadly stable. In addition to the HUF 3.6bn NKP bond and roughly HUF 2bn in Baross Gabor loans, the company is expected to utilise short-term working capital loans seasonally during the year when needed (typically in Q1 and Q3). Scope forecasts credit metrics will deteriorate, with the Scope-adjusted debt/EBITDA ratio set to rise to 4x in 2023, after which it is forecasted to recover towards 3x (assuming working capital levels follow historical seasonality). The Scope-adjusted funds from operations/debt ratio and cash flow cover are expected to normalise at over 20% and around 10% respectively. Liquidity is considered adequate, with minimal short-term debt amortisation scheduled for 2023 and 2024. However, fluctuations in working capital requirements are expected.

Outlook and rating-change drivers

The Negative Outlook incorporates Scope’s view that while Marso’s long-term loan profile will remain stable in the coming years and that credit metrics will deteriorate in 2023. This is exemplified by the company’s Scope-adjusted debt/EBITDA ratio declining to 4x. A timely recovery in 2024 could be hindered as strong competition puts pressure on margins.

A return to a Stable Outlook could be triggered if Marso successfully executed its premiumisation strategy and the Scope-adjusted debt/EBITDA ratio returned to above 4x in a timely manner. Although a positive rating action or upgrade is remote, it could be triggered if Marso’s Scope-adjusted EBITDA margin strengthened significantly and its Scope-adjusted debt/EBITDA ratio increases to above 3x on a sustained basis. One way this could happen is through efficient management of working capital.

A downgrade could be triggered if the Scope-adjusted debt/EBITDA ratio declines towards 4.5x.

Long-term debt rating

Scope has affirmed the BB rating of Marso’s senior unsecured debt. Recovery expectations for senior unsecured debt are superior, even after senior secured debt (primarily consisting of the drawn loan amount of HUF 2bn) has been fully covered. Scope has applied a one-notch positive adjustment to the senior unsecured debt rating while maintaining its conservative treatment of Marso’s current liabilities, primarily due to the high volatility of the company’s working capital. This results in the BB rating, one notch above the issuer rating. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario in 2025.

In December 2019, Marso issued a HUF 3.6bn senior unsecured bond (ISIN: HU0000359393) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond is guaranteed by MARSO Holding Kft., which belongs to the same corporate group as Marso. The bond proceeds were used for warehouse capex. The bond has a tenor of 10 years and a fixed coupon of 2.3%. Bond repayment is in three tranches starting from 2027, with 33.3% of the face value payable yearly. Scope notes that Marso’s senior unsecured bond issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires Marso to repay the nominal amount (HUF 3.6bn) in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 10 working days after the bond rating falls below B-, which could have default implications). Bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and dividend payment 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; 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 October 2019. The Credit Ratings/Outlook were last updated on 21 September 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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