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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of B+ on Hungarian transport and logistics company Trans-Sped Kft. and revised the Outlook to Negative from Stable. Scope has affirmed the B+ senior unsecured debt rating.

Rating rationale

The Negative Outlook is driven by the weaker profitability as reported in the H1 2023 management accounts (Scope-adjusted EBITDA margin at 6.4%) and Scope’s expectation that profitability will stay close to the lower end of the historical range of 7%-9% into the medium term. The transport and freight forwarding business lines were the drivers of the weaker performance, affected by lower freight volumes as a result of the slowing Hungarian economy and rising operating costs due to inflation. Trans-Sped’s current capital expenditure cycle is not helping as it might slow the ramp-up in revenue and profitability stemming from investments to expand warehousing capacity and truck fleets. The weaker Scope-adjusted EBITDA margin is affecting all credit metrics negatively, most notably leverage as measured by Scope-adjusted debt/EBITDA, now persisting above 5.0x.

The B business risk profile continues to be driven by the volatile but adequate operating profitability. The Scope-adjusted EBITDA forecast is more conservative to account for the more challenging market conditions, but Scope acknowledges that the issuer intends to shift its strategy towards protecting and improving profitability. Trans-Sped is seeking to control operating expenses and to improve efficiencies through measures such as reducing unused warehouse capacity and tightening controls over working capital to reduce external financing. Further constraints of the business risk profile are the issuer’s limited size and weak position in a highly competitive market dominated by multinational companies as well as its limited geographical diversification (Hungary and Central and Eastern Europe).

The financial risk profile continues to be rated at B+ despite the deteriorating credit metrics, which Scope deems only temporary. The assessment is driven primarily by the Scope-adjusted EBITDA interest cover, which Scope expects to remain above 6x beyond 2023. Scope expects financial leverage, measured by Scope-adjusted debt/EBITDA, to remain above 5x until 2024 followed by a gradual improvement towards 4x. This gradual deleveraging assumes that i) the new investments, most notably the increased warehousing capacity, will generate profit once the construction is finished; and ii) the intensive capex phase will gradually slow, with no significant new financial debt drawn beyond 2023. Free operating cash flow has been negative in recent years due to intensive investment in property, plant and equipment, typically financed by external debt. Cash flow cover, measured by free operating cash flow/EBITDA, is expected to turn positive in 2024 once the investment cycle ends.

Liquidity is adequate, able to cover the sole need to cover the HUF 2.3bn of short-term debt at YE 2022. The rolling exposure to drawn credit facilities (HUF 2.1bn as of December 2022) has no definite maturity but is reviewed yearly by the financing banks and comes with the option to cease the annual extension. Scope expects the facilities to continue to be extended, based on the long term, well-estblished relationship between the issuer and its financing banks. Sources of liquidity comprise HUF 310m of free cash and HUF 1.6bn of open, committed credit lines forecasted for YE 2023. Negative free operating cash flow of HUF 1.2bn forecasted for 2023 is covered by dedicated long-term investment credits.

Scope notes that Trans-Sped’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Trans-Sped to repay the nominal amount (HUF 5bn) within 30 days after the bond rating falls below B-, and includes a two year grace period if the bond rating falls below B+. The headroom to entering the grace period has narrowed following the Outlook change from Stable to Negative.

Outlook and rating-change drivers

The Negative Outlook reflects Scope’s expectation about deteriorating credit metrics in 2023, but chances for recovery in 2024 and 2025. A recovery is highly dependent on: i) the effectiveness of the company’s programme to cut costs and improve efficiency; and ii) macroeconomic developments and demand in the transport and logistics sector. The Negative Outlook signals the likelihood that credit metrics could remain stressed, e.g. with a leverage of more than 5.0x for a prolonged period.

A downgrade could be triggered if the Scope-adjusted debt/EBITDA ratio stayed above 5.0x longer than currently expected. This can be the result of a further deterioration of the Scope-adjusted EBITDA margin to below 6% caused by unfavourable market developments, a failure to improve operating profitability by reducing costs and improving efficiency or adverse working capital developments and pressure on free operating cash flow.

A positive rating action as expressed by a return to a Stable Outlook could be warranted if Scope’s expectations about a prolonged period with a leverage of above 5.0x were not to materialise and the company deleveraged again on a sustained basis as a result of the Scope-adjusted EBITDA margin returning close to historical average and/or better-than-expected cash flow coverage. Further ratings upside, i.e. a higher rating, is deemed remote.

Long-term debt rating

In March 2020, Trans-Sped issued a HUF 5bn senior unsecured bond (ISIN: HU0000359500) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 2.8bn) and financing acquisitions (HUF 0.6bn) and capex (HUF 1.6bn). The bond has a tenor of 10 years and a fixed coupon of 2.5%. Bond repayment is in four tranches starting from 2026, with 7.5% of the face value payable yearly and a 70% balloon payment at maturity.

Scope has rated Trans-Sped’s senior unsecured debt at B+, the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at YE 2024. Scope has used the liquidation scenario in the analysis due to the asset-rich nature of the company, including fixed assets with high resale values (warehouses, vehicle fleet). Recovery is ‘average’ for senior unsecured debt holders in this scenario.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 15 July 2022), is 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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 February 2023.

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, 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.