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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+ issuer rating on Hungarian aluminium processor Inotal Zrt. and revised the Outlook to Positive from Stable. Scope has also affirmed the B+ senior unsecured debt rating.

Rating rationale

The revised outlook is driven by developments in the issuer’s operating profitability, with the EBITDA margin (2022: 4.5%, 9M 2023: 7.8%) exceeding Scope’s financial forecast. Inotal has decided to review its product portfolio and suspend the production of aluminium slugs, a low-margin product mainly used by the cosmetics and food industry. The suspension of this product line has resulted in a 25% drop in revenues to September 2023 compared to the same period last year, but it has had a positive effect on overall profitability, driving the issuer’s financial risk profile in a positive direction. Additionally, higher energy prices and softer demand on the end-market side in 2022 affected margins to a lesser extent than previously anticipated.

The business risk profile (assessed at B) continues to be supported by strong geographical, customer and end-market diversification. Inotal’s main products (wire rod, aluminium strips, drawn wire and aluminium granules) are used by a number of industries, from construction and electronics to pharmaceuticals. This enables Inotal to benefit from different demand patterns across industries. In terms of geographies, Inotal focuses on Central and Eastern Europe, with Romania and Austria being its most important export markets in 2022. The customer portfolio is well diversified, with no single customer accounting for more than 10% of revenues, and the top five customers accounting for 30% of revenues in 2022. The business risk profile is also supported by improving operating profitability, with the EBITDA margin expected to stay above 5% on a sustained basis. The EBITDA margin benefits from the improved gross margin of the product portfolio and from continuing investments. Currently, there are three ongoing capex projects (a new sludge storage facility, a sludge processing machine line and a solar plant investment with 6 MW capacity) aimed at increasing capacity and efficiency. The business risk profile is constrained by the issuer’s limited absolute size in a European and global context.

The financial risk profile has been upgraded to BBB- from BB- because of stronger credit metrics. Leverage as measured by the Scope-adjusted debt/EBITDA ratio has shown persistent improvement since 2021 and is expected to stay close to 2.5x in the medium term. The leverage metric benefits from: i) decreasing Scope-adjusted debt, in line with the scheduled amortisation of financial debt; and ii) improved profitability. No additional debt intake is forecasted until 2025, in line with information from the issuer. EBITDA interest coverage remains robust, with significant interest income realised through short-term depositing of cash in 2022 and 2023. As the interest on the issuer’s financial debt is moderate (average interest rate of 3.3%) and fixed during the whole tenor of the debt, the development of the debt protection metric depends on profitability – which is forecasted to move in a positive direction. With no interest income assumed from 2024, EBITDA interest coverage is forecasted to stabilise above 10x. Cash flow is more volatile than earnings, driven primarily by fluctuations in capex. FOCF is expected to remain negative or close to zero until 2025, mainly due to strong investment activity forecasted at EUR 6.2m in 2023 and 2024, and EUR 4m in 2025.

Liquidity is adequate as sources (EUR 6.7bn of free cash as of YE 2022 and positive FOCF of EUR 0.4m) fully cover uses (short-term debt of EUR 1.9m). Scope expects liquidity to stay significantly above 100%, benefitting from strong cash generation. Bond amortisation has started in 2023, with a tranche of EUR 1.9m payable yearly.

Outlook and rating-change drivers

The Positive Outlook reflects the assumption that Inotal can maintain its robust financial risk profile, driven by concentration on the core activities, and remains affected to a minor extent by softening end-market demand. Scope’s financial base case assumes Inotal can maintain its robust financial risk profile in the medium term, with EBITDA/interest cover remaining above 10x and leverage as measured by Scope-adjusted debt/EBITDA remaining below 3x.

A positive rating action, i.e. a rating upgrade could be warranted if cash flow cover, measured by Scope-adjusted Free Operating Cash-Flow/ Scope-adjusted Debt, would turn positive, and move sustainably above 5%, while EBITDA margin remain above 5% on the medium term.

A negative rating action, including Outlook revision to Stable could occur if Inotal is not able to reach positive cash-flow cover, with profitability deteriorating below 5%. Additionally, Scope-adjusted Debt/EBITDA moving above 4x on a sustained basis would warrant further downside i.e. rating downgrade.

Scope notes that the senior unsecured bond Inotal issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires Inotal to repay the nominal amount (HUF 6bn) within 30 days of the bond rating falling below B-, which could have default implications.

Long-term and short-term debt ratings

In September 2020, Inotal issued a HUF 6bn senior unsecured bond (ISIN: HU0000359948) through the Hungarian central bank’s Bond Funding for Growth scheme. The bond proceeds have been used to refinance the existing third-party debt. The bond has a tenor of seven years and a fixed coupon of 3.2%. Bond repayment is in five tranches: 12.5% of the face value payable yearly between 2023 and 2026, and 50% at maturity in 2027.

Scope has rated the senior unsecured debt issued by Inotal at B+, the same level as the issuer rating. Recovery is ‘average’ for senior unsecured debt holders in a liquidation scenario.

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 and Outlook, (General Corporate Rating Methodology, 16 October 2023; Metals and Mining Rating Methodology, 25 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 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, the Rated Entities' Related Third Parties 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 and Outlook 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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 May 2020. The Credit Ratings/Outlook were last updated on 7 December 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.