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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian construction materials producer-distributor Masterplast Nyrt. to B+ from BB-. Scope has also downgraded the senior unsecured debt rating to B+ from BB-. Both ratings have been placed under review for a possible downgrade.

Rating rationale

The downgrade is driven by the adverse effect on profitability and credit metrics from the further slowdown in the European construction industry amid a significant investment programme by Masterplast. Sales have declined in all but two of the company’s markets, reflecting the industry’s cyclical nature. Masterplast has recorded losses for the past four quarters, while soaring inflation and interest rates are starting to harm operating performance. The under-review status highlights significant uncertainty regarding liquidity concerns the company may face in 2024, as the company is heavily reliant on its ability to roll over its short-term bank facilities. The current rating level assumes a successful roll over of all bank facilities.

Early this year, Masterplast started addressing the market downturn since late 2022 by i) suspending dividend payments for 2022 and 2023; ii) reducing operating costs, including reducing headcount by over 300 people to 1,170 (as of September 2023) and; iii) optimising production capacity and inventory levels. This should lead to the business stabilising in 2024 and allow the issuer to weather the unfavourable market conditions, with revenue expected to remain flat in 2024. Profitability margins should also recover on the back of these cost-saving measures.

Geographical diversification remains limited. Most revenues are from Europe, with a strong focus on Central and Eastern Europe. Noticeably, sales dropped by 43% in Masterplast’s home market of Hungary in the first nine months of 2023 (Hungary accounted for 45% of sales in the first nine months of 2022), as high interest rates are discouraging new renovation and construction projects commencing. The Hungarian home renovation subsidy also ended in late 2022 and plans for a new program are yet to be announced.

Profitability as measured by the Scope-adjusted EBITDA margin decreased slightly to 10.2% as at YE 2022 from the high of 11.9% at YE 2021, supported by the high-margin healthcare segment. After four quarters of losses, this figure dropped to -1.3% for the 12 months to September 2023. Scope forecasts a further decline to -2.2% by year-end 2023 before a gradual recovery in 2024. The Scope-adjusted EBITDA margin is well below Scope’s prior forecasts, due to lower sales revenue, a lower utilisation of production capacities, and the impact of raw materials purchased at higher prices. However, the inventory of higher-priced raw materials has now been expended in the quarter under review, which will lead to improved margins in the coming periods. In any case, the slowing construction industry in Europe will prevent Masterplast from operating at full capacity for the next few quarters. Medium-term profitability will also depend on the recovery of the Hungarian construction sector, which itself depends on the release of EU funds, particularly for the renovation sector. However, when the EU funds will arrive is unknown, and its effect would still take time to filter down into the economy.

Masterplast’s financial risk profile previously benefitted from very strong debt protection, with Scope-adjusted EBITDA interest cover of well over 10x during the past few years. However, Scope expects revenue to decline by 25% to EUR 152m by YE 2023 (from EUR 202m at YE 2022) due to a weaker macro environment. This will cause Scope-adjusted EBITDA to deteriorate to an expected negative EUR 3.3m at YE 2023 from a positive EUR 20.6m at YE 2022. As such, the negative profitability will also result in negative Scope-adjusted EBITDA interest cover until YE 2023. However, Scope expects interest cover to recover to 5.3x in 2024, thanks to the cost savings measured introduced in 2023, and the expected completion of a new production facility in Italy that will allow Masterplast to serve a wider market. This should help to boost revenue once market conditions normalise.

With an increase in debt and equity of nearly EUR 40m in 2022, the company has limited short-term financing needs. During the first nine months of 2023, Masterplast’s bank loans increased further to EUR 36.1m from EUR 31.9m at YE 2022. The additional bank debt increases floating-rate risk. Scope forecasts interest expense of EUR 3.4m by YE 2023, a significant increase compared to EUR 2.5m at YE 2022. However, the rise in interest rates is somewhat offset by the overnight deposit rate in Hungary, at 13% as at November 2023. Masterplast’s leverage, as measured by its Scope-adjusted debt/EBITDA ratio, has historically been around 2.5x-3.5x, including 3.1x as at YE 2022. Similarly, this metric is expected to weaken by YE 2023 before recovering to 7.2x in 2024 and 5.3x in 2025 (both years exclude cash netting).

Scope-adjusted EBITDA is expected to recover in 2024 but will be much lower than originally forecasted due to a drop-off in demand for construction. Consequently, Scope-adjusted free operating cash flow is only expected to turn positive from early 2025 once the years of heavy capex come to an end. At this point, the company could begin to benefit from a huge increase in demand: the EU energy-efficiency targets set for 2030 will likely see a host of renovation subsidy programmes launched throughout Europe, as already seen in Italy and Serbia. However, when such programmes may be launched in other member states is unclear.

Liquidity is adequate for the rest of 2023, as sources (EUR 22.6m of cash available as at end-September 2023) covers any uses (EUR 3.8m bond repayment due in December 2023). However, in 2024, Masterplast has short-term bank debt of EUR 22.3m due, in addition to a further EUR 7.5m in bond repayments due in December 2024. While the bond repayments will likely be repaid from cash on the balance sheet, Masterplast is reliant on its ability to roll over its short-term bank debt every year. Scope highlights the significant risks associated with having such high levels of short-term debt, as a further deterioration in the macro environment could impede the company’s ability to refinance its debt or make debt available only at higher interest rates, putting a further strain on finances.

Furthermore, the negative EBITDA expected in 2023 will be in breach of several financial covenants associated with the outstanding bank debt, which could trigger an immediate repayment of these facilities and could have default implications for the issuer. However, given the measures Masterplast has implemented in 2023 to stabilise its business, its excellent track record over the past number of years and its strong relationship with its banks, Scope views the risk of immediate repayment of any debt facilities in 2024 as low.

Outlook and rating-change drivers

Scope intends to resolve the under-review status within three months once Masterplast has addressed liquidity concerns. Scope will closely follow developments in the company’s financial operations, in particular its ability to roll over a large amount of short-term debt.

A downgrade of at least one notch might result from the company failing to roll over at least some of its short-term debt, which could cause serious liquidity problems and affect the company’s day to day operations.

A rating confirmation could occur if liquidity can be sustained at or above 100%. This would require successfully rolling over short-term bank debt, thus ensuring adequate liquidity.

An upgrade is remote at present and would require the company’s sales revenue to recover quickly, thereby improving operational visibility.

Long-term debt ratings

Scope has downgraded Masterplast’s senior unsecured debt to B+ from BB-, in line with the issuer rating.

Masterplast has issued three senior unsecured bonds through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The first bond was issued in December 2019 with a volume of HUF 6bn (ISIN: HU0000359369), a seven-year tenor and a fixed coupon of 2.00%. Repayment is in four equal tranches from December 2023, with 25.00% of the face value payable yearly. Proceeds were used to repay a high portion of short-term debt.

The second bond, issued in December 2020, also had a volume of HUF 6bn (ISIN: HU0000360219) and a seven-year tenor but a slightly higher fixed coupon of 2.10%. Proceeds refinanced current debt and financed further capital expenditure and business acquisitions. Repayment is in four equal tranches from December 2024, with 25.00% of the face value payable yearly.

The August 2021 issuance had a volume of HUF 9bn (ISIN: HU0000360748), a 10-year tenor and a fixed coupon of 2.90%. Proceeds were used for capital expenditure and business acquisitions. Repayment will start in August 2027 in four equal instalments of HUF 1.125bn (12.5% of the face value), with a 50% balloon payment at maturity.

Scope’s recovery analysis is based on a hypothetical default scenario in 2024, based on the liquidation value of the company’s assets. Scope had previously based the recovery on the enterprise value as a going concern. However, if sales were to deteriorate at a similar rate over the next 12 months, liquidation would be more likely. Scope estimates the recovery for all senior secured debt to be ‘above average’ but, given the existing uncertainties in the construction industry, Scope has equalised the senior unsecured debt rating with the issuer rating of B+.

Scope notes that Masterplast’s senior unsecured bonds issued under the Hungarian bond scheme have an accelerated repayment clause requiring repayment of the nominal amount of all three bonds (total HUF 21bn) in case of rating deterioration (two-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications).
 
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, (General Corporate Rating Methodology, 16 October 2023; Construction and Construction Materials Rating Methodology, 25 January 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                                        NO
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 the principal grounds on which the Credit Ratings and are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings were first released by Scope Ratings on 9 September 2019. The Credit Ratings were last updated on 13 June 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
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