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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungarian honey packaging company Aranynektár Kft.’s issuer rating of B/Stable. It has affirmed the rating on Aranynektár’s senior unsecured bond guaranteed by Fulmer GmbH’s Hungarian Branch (Fulmer) at B+ (ISIN HU0000359559).

Rating rationale

The affirmation of the ratings reflects the robust financial risk profile amid the deteriorating market environment (increase of energy price and labour cost, demand shocks) underpinned by significant margin reduction and significant volume reduction at a key customer.

The rating of Aranynektár continues to be determined by the credit quality of its sister company Fulmer. Aranynektár packages honey for Fulmer, which not only owns all the assets used by the issuer but is also its sole customer. Management has not indicated any plans to develop the activities of Aranynektár outside the scope of Fulmer. Scope therefore considers Aranynektár to be fully dependent on Fulmer as a severance of the business link.

Fulmer’s business risk profile (assessed at B, down from B+) is weak. The lower assessment factors in general economic developments that have a limited impact on the strong industry risk profile.

Revenue has grown by 42% from FY 2018 to end-FY 2023. Nevertheless, it is still very low at HUF 6.7bn (about EUR 17.5m) in FY 2023. The 6.5% YoY decrease of revenues in FY 2023 is due to the significant drop in the price of honey following the cancellation of customs from Ukraine, which resulted in lower agricultural input prices. The packaging of premium-priced honey, exported to the Middle East, has decreased, hindering both revenue and profitability. The lost volume was sold in Hungary and Western Europe but without the premium margin. The slight decrease in revenue is also due to the high base during the Covid-19 pandemic, when honey consumption was high domestically. However, in a high inflationary environment, honey is a premium product and consumer demand decreases. The order intake for Christmas 2023 and Easter 2024 is secured from retailers, which supports the rating.

Customer diversification is broad by number of customers, however LIDL has a high share of total revenue (close to 50% in FY 2023) and access to certain markets is provided by LIDL. Losing LIDL as anchor customer is a significant risk and constrains the diversification.

In FY 2023, Scope-adjusted EBITDA margin was 7.0%, a strong decrease from 16.8% in FY 2022. This profitability level is average for the Hungarian consumer products market, but also shows good management of cost inflation as in Hungary many consumer products producers have suffered losses in Q4 2022.

Scope expects profitability to increase slightly in FY 2024-25 to around 7-8% - as measured by Scope-adjusted EBITDA margin -, but to remain below 10% due to partial loss of the Middle Eastern market and inflationary pressure. The slightly growing margin expectation for FY 2024 compared to FY 2023 is underpinned by lower honey and energy prices than in FY 2023, yearly contracts with retailers for significant volumes and better automation as a result of significant capital expenditure in the past two years.

The development of branded labels remains weak, but Fulmer managed to increase its share of branded products to one-third of revenue in FY 2023 compared to a quarter in FY 2022. Direct sales to customers have started, which can potentially boost branded sales, albeit gradually. The development of sales channels and branded labels would improve Fulmer’s diversification and brand strength, both of which are weak areas in Scope’s assessment.

Fulmer’s financial risk profile (assessed at BB+) is supported by good leverage, strong interest cover and moderate capex plans, which leads Scope to expect improving free operating cash flow.

Leverage had been improving until end-FY 2022 due to strengthening EBITDA. Gross leverage measured by Scope-adjusted debt/EBITDA however increased to 2.8x in FY 2023 (net leverage of 1.3x) from 1.1x in FY 2022 (net cash position) due to a significant reduction in Scope-adjusted EBITDA of HUF 0.5bn in FY 2023 (-60% YoY) and flat gross debt of HUF 1.3bn. The current leverage level is still in line with the rating category. No new debt issuance is planned. No netting of cash is applied for this rating category.

Scope-adjusted funds from operations/debt has been very strong historically but decreased to 35% in FY 2023 from 97% in FY 2022. Scope expects Fulmer to maintain at least the current level in the next two to three years as input prices normalise, raw materials are secured and pressure from wage inflation is mitigated by automation, especially in the flagship product packaging line (honey with honeycomb).

Drawn debt consists mainly of a long-term fixed coupon bond. Scope-adjusted EBITDA/interest cover is hence not under pressure from the high HUF interest rates, which are still above 10%. Furthermore, with current deposit rates well above the bond coupon, the interest cover was exceptionally strong in FY 2022-FY 2023 due to interest received. In the forecast for FY 2024-FY 2025, Scope assumed no significant interest received, even so Scope-adjusted EBITDA/interest cover remains strong at well above 10x.

In FY 2023, Scope-adjusted free operating cash flow/debt was negative at -66%, down from -38% in FY 2022. The negative value in FY 2023 is due to lower profitability, HUF 0.7bn of working capital increase (raw honey stocked) coupled with the previously budgeted investment programme. Scope expects this metric to improve but remain volatile.

Liquidity is adequate. The liquidity ratio was above 200% at end-FY 2021 and FY 2023 despite negative free operating cash flow because the sources were secured via the bond issuance in 2020 and hence a high cash balance was maintained, which decreased to HUF 0.7bn at end-FY 2023 as working capital expanded and investments were made.

There is no significant short-term debt. As the bond only matures in 2030, there is no upcoming large refinancing risk. Furthermore, the liquidity ratio calculation excludes the EUR 1.3m unused revolving credit facility because it is short term and uncommitted. The high cash level was due to the HUF 1bn bond issuance, which has been spent in the last few years. Cash is higher in May, at the end of the agricultural year, than the average during the year. This means that there is strong seasonality in the liquidity coverage, causing volatile liquidity metrics. Therefore, no notching was considered despite a good coverage ratio.

Due to volatility of credit metrics which could happen for business reasons (low customer diversification - loss of anchor customer, small size), the BB+ financial risk profile only provides little support to the overall standalone credit assessment which stands at B+.

Scope has applied a negative one notch adjustment to the standalone credit assessment for governance and structure under supplementary rating drivers due to i) the complexity of the bond issuance, the intercompany loan and the transfer pricing structure; and ii) the small management team entailing some key person risk in finance functions and highly manual accounting and planning processes (ESG: credit-negative governance factors).

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

Outlook and rating-change drivers

The Outlook is Stable based on increasing but still good leverage after completing the HUF 2bn capex programme started in 2020, some loss of export volumes and an inflation shock on the EBITDA margin. The Outlook incorporates the assumption that Fulmer’s Hungarian branch at least maintain its current financial metrics as input prices normalise and demand is predictable for the next 12 months.

A positive rating action is remote but could be granted if Fulmer Hungarian Branch recovered its EBITDA margin to a level of at least 10% but below historical performance, increased Scope-adjusted free operating cash flow / debt above 10% and reduces dependence on certain customers while also grows significantly in revenues and improves governance (reporting to capital markets, management size and completes generation change).

A negative rating action could be taken if Scope-adjusted debt/EBITDA were sustained well above 4x, e.g. due to a greater-than-expected drop in profitability, significant volume loss or larger-than-anticipated net capex.

Scope notes that Aranynektár’s senior unsecured guaranteed bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Aranynektár to repay the nominal amount (HUF 1.0bn) in case of a rating deterioration of the senior unsecured guaranteed bond (two-year cure period for a B/B- rating, repayment in 15 days after the bond rating falls below B-, which could have default implications). There is limited rating headroom as the senior unsecured guaranteed bond is rated B+, one notch above the issuer rating. This means worsening recovery expectation for example due to increase in secured debt may result in a downgrade of the bond which would trigger the rating deterioration covenant.

Long-term debt rating

Scope has affirmed the rating of B+ on the senior unsecured bond issued by Aranynektár which is guaranteed by Fulmer. Scope calculated an ‘above-average’ recovery following a hypothetical default in FY 2025 and therefore maintains one notch of uplift on the assigned issuer rating.

In April 2020, Aranynektár issued a HUF 1.0bn senior unsecured bond (ISIN: HU0000359559) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to expand working capital and capex. The bond has a tenor of 10 years and a fixed coupon of 3.5%. Bond repayment is bullet with the full notional payable in 2030 at maturity. In addition to the rating deterioration covenant, bond covenants include a list of soft covenants, among others cross default and change of control.

The rating was prepared following Scope’s Consumer Products Rating Methodology, 4 November 2022. The application of the Consumer Products Rating Methodology, 3 November 2023, does not have an impact on the rating.

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 this Credit Rating and Outlook, (General Corporate Rating Methodology, 16 October 2023; Consumer Products Rating Methodology, 3 November 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 Rating if the Credit Rating was to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Rating was 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 Rating: 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 Rating 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 Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.
 
Regulatory disclosures
This Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Rating: Sebastian Zank, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 30 January 2020. The Credit Rating/Outlook was last updated on 9 November 2022.
The bond's final Credit Rating was first released by Scope Ratings on 25 March 2020. The Credit Rating was last updated on 9 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
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