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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating on Éltex Kft., a Hungarian waste management company, at BB-/Stable. Scope has also affirmed its BB- rating on the senior unsecured debt issued by Éltex.

Rating rationale

The affirmation is driven by better-than-expected operating results in 2022, a revenue increase and profitability significantly exceeding Scope’s financial forecast. The business model has shown resilience and remained unaffected by challenging macroeconomic conditions on the Hungarian market (volatility of currency exchange rates and energy prices, rapid wage inflation). The major investments of 2022 – financed mostly from the HUF 2.45bn bond issued in the framework of the Hungarian National Bank’s Bond for Growth Scheme – had a positive effect on profitability, enabling Éltex to focus on waste treatment processes (manufacturing of secondary products from industrial waste with added value) on top of its core waste management activites (transportation, sorting and packaging of industrial waste).

The business risk profile (assessed at B+) is supported by strong operating profitability. Éltex’s Scope-adjusted EBITDA margin has been steadily increasing in recent years from a historical range of 6%-8%, reaching 11.6% in 2022. Scope expects the Scope-adjusted EBITDA margin to stay in the range of 10%-11% until 2025, benefitting from the intensive capex programme focusing on technological development (e.g. special smeltery for electronic waste). The business risk profile remains constrained by the company’s limited size in a global and European context, and limited diversification in terms of activity and geographies: Hungary accounts for more than 70% of its business and all of Éltex’s activities relate to recycling. Scope notes that the newly established subsidiary of Éltex (Peregium Green Kft.) is aiming to extend the scope of the business towards renewables by manufacturing energy storage modules for solar plants. Éltex has also committed not to use landfill (credit-positive ESG factor) but remains slightly exposed to the risk of hazardous waste treatment as a subcontractor (credit-negative ESG factor).

The financial risk profile (upgraded to BBB) is supported by strong credit metrics. Leverage, measured by Scope-adjusted debt/EBITDA, has been between 1x and 2.5x historically, showing a continuous improvement towards 1.0x and reaching 0.9x in 2022. A slight deterioration of Scope-adjusted debt/EBITDA is forecasted, due to increasing debt (new HUF 2bn investment loan contracted in 2023), pushing Scope-adjusted debt/EBITDA to around 1.4x in 2023. Scope’s financial base does not account for the netting of cash in the Scope-adjusted debt calculation. In the medium term, considering Éltex’s moderate debt and robust EBITDA, Scope expects Scope-adjusted debt/EBITDA to stay below 1.5x. Debt protection, measured by the EBITDA interest cover, benefits from the favourable interest rate of the existing debt (a Central bank of Hungary bond with a coupon of 3.5% and the new, EUR denominated investment credit with an interest rate of 3%), with a yearly interest expense of around HUF 170m in the upcoming years. The financial risk profile is constrained by the cash flow cover. Free operating cash flow has been and will likely remain volatile, fluctuating between positive and negative values. This variation is mainly influenced by capex. For 2023, HUF 3.5bn of capex is forecasted (6m2023: HUF 3.2bn). Beyond 2023, Scope forecasts yearly capex of HUF 2bn is, close to historical averages, and above management’s forecast.

Liquidity is adequate, as sources (HUF 1.5bn as of YE 2022) fully cover uses ( short term debt of HUF 674m and free operating cash flow of -534m). Scope expects liquidity to stay significantly above 100%, benefitting from strong cash generation and positive free operating cash flow. Bond amortisation should start in 2024, with a tranche of HUF 490m payable yearly.

One or more key drivers of the credit rating action are considered an ESG factor. 

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s expectations that i) key credit metrics over the next three years will develop in line with Scope’s financial forecast, translating into a Scope-adjusted EBITDA margin of between 10% and 11% and Scope-adjusted debt/EBITDA at 1x-2x with debt protection remaining above 7x; and ii) Éltex will remain top three in waste management in Hungary.

A positive rating action would be possible if the issuer improved its business risk profile, while credit metrics remained on the current level. This could occur if Éltex improved its markets share, increased its absolute size and achieved greater diversification in terms of both activities and geographies.

The rating could come under pressure if leverage were sustained around 3x, e.g. as a result of higher capital expenditure, material debt-financed M&A activities and/or lower-than-expected operating results.

Long-term debt rating

Scope expects an ‘above-average’ recovery for senior unsecured debt, such as the HUF 2.45bn bond issued under the Hungarian National Bank’s programme. Despite the above-average recovery, Scope refrains from granting an uplift as the assessment is very sensitive to applied advance rates, especially the one related to tangible assets. Additionally, the issuers ability to raise additional external debt, ranking above the senior unsecured debt, might affect the recovery rate significantly. Thus, this recovery expectation translates into a BB- rating for the senior unsecured debt category, in line with the issuer rating.

Scope’s recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2025. Short-term and long-term debt (excluding the bond issue) raised from financial institutions, undrawn committed medium- and long-term facilities as well as payables rank higher than senior unsecured debt in terms of repayment.

Scope notes that Éltex’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Éltex to repay the nominal amount (HUF 2.45bn) within 30 days after the bond rating falls below B-, which could have default implications. Taking into consideration the BB- rating of the bond rating, Scope considers this scenario currently remote.

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/or Outlook, (General Corporate Rating Methodology, 16 October 2023), 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 October 2020. The Credit Ratings/Outlook were last updated on 8 November 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, 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.