Scope affirms Textura Zrt.’s B- issuer rating and revises Outlook to Negative
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Scope Ratings GmbH (Scope) has affirmed its issuer rating on Textura Zrt. at B- and revised the Outlook to Negative from Stable. Scope has also affirmed the rating on the senior unsecured bond (ISIN HU0000361449) guaranteed by state-owned Hungarian Development Bank (MFB) at B.
The Outlook change is driven by the limited visibility on the future impact on sales and EBITDA of Textura’s new product lines launched in 2022: swimming pools and coffee bio-capsules. Scope is concerned about the management’s ability to sell the early-phase products due to their very limited contract backlog. The Outlook change also encompasses the below plan performance of the well-established regional textile retail-wholesale division which is under operational restructuring and the unsolved covenant breach related to rating deterioration, which if left untreated, could result in a default situation by February 2025.
The business risk profile (assessed at B+) is driven by the textile retail-wholesale business’s regional outreach and ca. 10% Scope-adjusted EBITDA margin since 2021 which is average for a specialised retailer in Hungary. The size of the company strongly constrains the rating as it is small even compared to the local peer group.
H1 2023 revenue declined YoY due to low demand in general in the CEE as inflation was at its peak. H1 2023 sales were HUF 2.0bn (EUR 5.3m) vs HUF 5.5bn (EUR 15m) in the full-year 2022. Since then, the Romanian market has picked up and sales are typically higher in the second half of the year. Thus, Scope expects the textile division to deliver stable volumes and revenue, increasing only with inflation. The plastics division is subject to risks from the market introduction of new products, with low visibility, so Scope expects a slow sales ramp-up and hence low revenues in 2024. 1,500 pools were sold during January-October 2023 which should provide more than HUF 1bn in revenues and partly cover sunk costs for the plastics division. There were no significant coffee capsule sales in 2023, reinforcing Scope’s view of a very slow and challenging introduction to the market for the biodegradable capsules.
Lower demand in H1 2023 also impacted profitability with the Scope-adjusted EBITDA margin at 8.1% in H1 2023. Margins are expected to recover in H2 2023 supported by operational restructuring (15-20% of staff were let go in the textile business) and the recovery of the Romanian market where demand has increased.
The financial risk profile (assessed B-) is driven by the high leverage of the company, with Scope-adjusted debt/EBITDA of 13.6x at YE 2022 which Scope expects to stay above 9x beyond 2025 if no material contracts are secured in the plastics division.
The sales ramp-up on the new production lines (pools and capsules) did not happen as expected in 2022, nor in H1 2023 and Scope has limited visibility on H2 2023 as Textura’s efforts to sign contracts haven’t been overly successful to date. Associated investments of HUF 3.5bn made in 2020-2021 have therefore not born fruit so far. This is an extremely poor performance and may signal that new products are not being well received by the market and poses significant impairment risk on the new investments. Furthermore, in Scope’s view, even the delivery of 250 pools under the first contract signed in H1 2023 faces significant execution risk as early phase production and related logistics were not running smoothly.
It is positive that the company plans to execute phase II of its investment programme, consisting of upscaling activities in the plastics division at an estimated cost of HUF 2.5bn net of subsidies, only after the sales ramp-up of phase I, meaning earliest in H2 2024. While phasing of the investment is good to manage risks, it also makes Textura vulnerable to cost overruns as the second phase is not contracted, and financing was secured for a preliminary budget prepared before the bond issuance in 2022. Management expects to simply finance the cost overrun from subsidies, on which Scope has no visibility.
Scope-adjusted free operating cash flow/debt is expected to remain negative in 2023-24 because of planned phase II investments leading to significant cash absorption, thus limiting the room to manoeuvre for further working capital needs of the plastics division. Phase II could also be delayed subject to the sales ramp-up of Phase I. A delay in time would result in still low free operating cash flow, adding up to HUF 1bn for the period 2023-24. In Scope’s view additional external funding is needed to cover future liquidity requirements while maintaining the flexibility to manage risks associated with the production ramp-up in the plastics division, which will lead to increasing debt.
Externally financed significant investments in the plastics division have not led to substantially improved Scope-adjusted EBITDA. This resulted in the Scope-adjusted debt/EBITDA ratio soaring to 13.6x at YE 2022 (up from 7.0x at YE 2021). In Scope’s view, the textile retail-wholesale division alone cannot support the group level debt of both the textile and the plastics divisions. Scope expects Scope-adjusted debt/EBITDA at around 13x in 2023, which is still poor and does not represent a significant improvement. An improvement depends on contracts being secured for pools and/or capsules that support a strong EBITDA contribution from the plastics division. Based on the small existing pool sales contracts and the cash flows of the textile division, Scope expects a slight deleveraging to 9.8x by YE 2025.
Scope-adjusted funds from operations/debt was low at 6% in 2022 and Scope expects it to remain in the range of 4-6% in the next two years, with a possible upside if new production lines for the plastic business are filled with orders, something which is not in Scope’s base case.
Scope-adjusted EBITDA/interest cover benefitted of the company’s net cash position and interest received on deposits until YE 2021. With executed investments lifting the company’s gross debt to HUF 7.5bn in 2022, Scope-adjusted EBITDA interest cover came in at 6.8x in 2022. Scope expects interest cover to deteriorate to below 3x from 2023, caused by a decreasing cash balance from the start of phase II and working capital needs from phase I as well as the decreasing base rate in Hungary reducing Textura’s interest received. The still moderate metric is supported by purely fixed rate debt and hence Textura is not running any interest rate risk for the time being.
Liquidity is adequate and is supported by sources secured from bond issuance for the planned investments and the renewal of the working capital facility of HUF 2.5bn until July 2026. With the investments, however, cash will decrease to low levels and there is no undrawn committed credit line for further working capital needs of the plastics division. Therefore, Scope notes further financing will be needed to support the expansion of the plastics division and to cover potential cost overruns of the capex. Furthermore, if the covenant breach for rating deterioration of the bonds is not solved, acceleration of the bond repayments would also pose a liquidity risk in Q1 2025, or sooner in case of a downgrade. The needed deleveraging to cure the rating deterioration covenant is challenging as no significant sales contracts and related EBITDA have been secured in the plastic business as of November 2023. The covenant has not been waived, and the bond has not been refinanced so far.
Management projections were very optimistic based on the expected outcome of negotiations on capsule and pool sales contracts, however these have not materialised in the past 12-18 months. Furthermore, no new forecast or profit warning was issued after H1 2023 results came in without significant sales from the plastics division (ESG: credit-negative factor).
Textura shows group consolidation in its accounts, albeit disclosures are made late and incomplete, while forecasts are updated only yearly even when there are major changes in the business, such as the current slow sales ramp-up of the plastics division. Management is very small and there is key person risk (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 has been changed to Negative as the issuer has been unable to secure significant sales contracts for the plastics production lines since 2022 and the textile business is unable to support the debt of the entire company. In addition, the Negative Outlook reflects the continued breach of the rating deterioration covenant, which, if not remedied, would lead to debt acceleration by February 2025.
A downgrade would be considered if leverage as measured by Scope-adjusted debt/EBITDA is not likely to improve to below 6x by YE 2025. A downgrade could also be considered if liquidity weakens because of further capital expenditure without additional visibility on sales from the plastic divisions. A downgrade would also occur if the rating deterioration covenant is not cured by 2025.
A return to a Stable Outlook would be justified if Scope-adjusted debt/EBITDA ratio is likely to improve to below 6.0x by 2025, so that a bond rating upgrade by February 2025 is within reach and the rating deterioration covenant could be cured. This could be the case if the plastics division achieves significant EBITDA growth.
An upgrade is unlikely at this stage but could be justified if Scope-adjusted debt/EBITDA improves to below 6x by YE 2024, which is likely to be made possible by a successful ramp-up of the plastics divisions in H1 2024.
Scope notes that Textura’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has two accelerated repayment clauses. The clauses require the issuer to repay the nominal amount (HUF 5.0bn) in case of rating deterioration (2-year cure period for B/B-rating, immediate repayment below B-) or change of control at the issuer level. The same applies to the bank guarantee provided by MFB Hungarian Development Bank securing 80% of the bond notional.
Long-term debt ratings
The HUF 5.0bn senior unsecured bond (ISIN HU0000361449) is guaranteed by Hungarian Development Bank and issued under its Bond Funding for Growth Scheme. Its rating was affirmed at B, one notch above the issuer rating. It reflects Scope’s view of an average recovery; however, it is supported by the guarantee by Hungarian Development Bank (BBB/Stable).
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and Outlook, (Retail and Wholesale Rating Methodology, 27 April 2023; General Corporate Rating Methodology, 16 October 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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/Outlook were not amended before being issued.
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: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 3 February 2022.
The bond preliminary Credit Rating was first assigned by Scope Ratings on 3 February 2022. The final Credit Rating was first assigned by Scope Ratings on 21 February 2022.
The Credit Ratings/Outlook were last updated on 6 February 2023.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
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