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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Hungarian construction products wholesaler Stavmat Építőanyag Kereskedelmi Zrt. (Stavmat) and revised the Outlook to Negative from Stable. Stavmat’s senior unsecured debt rating has also been affirmed at BB-.

Rating rationale

The change in Outlook to Negative from Stable reflects the larger-than-expected deterioration in both revenue and profitability caused by the general slowdown of the Hungarian construction market coupled with the postponement in the start of the company’s paving stone production and sales, and the delays in state subsidies to the construction and private sectors. These are forecasted to negatively impact Stavmat’s profitability and credit metrics for YE 2023.

Stavmat’s declining revenue in 2023 is characterised by both a decrease in volume and in price as demand drops in the wake of its underlying industry’s slowdown. Stavmat’s revenue is expected to decline by 25% (YoY) in 2023. The significant decrease in many products’ price and the high inventory levels comprised of overpriced products have caused Stavmat’s cost of goods sold ratio to significantly increase as the strong price competition on the supply side is met with diminished demand. Previously, Scope’s forecast assumed that the loss of revenue expected for 2023 would be compensated by the sale of Stavmat’s in-house produced paving stones and demand for the company’s products would be supported by new government subsidies for the private sector in H2 2023. The start of production of paving stone was delayed and its sales only started in Q4 2023. Stavmat’s Scope-adjusted EBITDA margin is thus forecasted to deteriorate to 4.6% by YE 2023 compared to 9.2% in 2022. Although new government subsidies were announced in H2 2023, their positive impact will only materialise in 2024, partially driving profitability’s recovery going forward. From 2024 onwards, the operating profitability is expected to benefit from management’s cost-saving initiatives, such as the optimisation of the workforce and working capital management (eventually lowering inventory levels) and the decrease and renegotiation of fixed costs (e.g. operative leasing).

The company’s business risk profile (assessed at B+) continues to be constrained by its limited size and low diversification. Despite it being one of the leading wholesalers of construction materials for professional customers in Hungary, Stavmat faces high competition, limiting its price-setting ability. Furthermore, the company’s high dependency on its underlying market of construction impacts its operating profitability as witnessed by the deteriorated interim financials (exemplified by H1 2023 YTD reported EBITDA margin of 3.0%).

In Q2 2023, Stavmat communicated a new business plan to acquire three sites during 2023-2025. The acquisitions were planned to be primarily financed through a HUF 3.2bn subsidised loan, however these plans were altered as the acquisition of one of the real estates fell through. Stavmat decided to finance the remaining acquisitions primarily through equity and only utilised HUF 840m of the subsidised loan from the Baross Gabor Reindustrialization Programme. As a result, Scope expects the company’s cost structure to slightly change as the operating lease for the real estate Stavmat intended to replace with the unsuccessful acquisition will still remain in the income statement.

The deteriorated operating profitability has a substantially negative impact on Stavmat’s financial risk profile (assessed at BB, revised from BB+) as the company’s Scope-adjusted debt/EBITDA is expected to peak around 4.5x and the Scope-adjusted funds from operations/debt will be at an all-time low of around 20% in 2023. The worsened profitability also causes the interest cover and the cash flow cover to deteriorate to around 7x and a negative 30%, respectively. Nevertheless, the interest cover is supported by fixed, subsidised interest rate loans in a high interest rate environment. The cash flow cover is forecasted to remain negative for 2023 due to the acquisition of the store sites. Although no new investment capex has been communicated for 2024 and 2025, Scope expects the company to continue its expansion strategy as soon as the construction market recovers, which would put pressure again on the cash flow cover.

Stavmat’s liquidity is seen as adequate. This is supported by its debt maturity profile: no principal payments are scheduled for 2023, from 2024 onwards the new HUF 840m loan starts to linearly amortise (with HUF 168m annually), while the MNB bond only starts its amortisation in 2026. As recovery is expected to start in 2024, the cash reserves and the expected improved cash flow is expected to cover the scheduled repayments.

Regarding supplementary rating drivers, Stavmat has a negative notch for its aggressive financial policy due to the distribution of HUF 1.8bn in committed reserves to shareholders in 2020 and for the high execution risk related to the company’s high investment capex phase. Positively, the company has suspended dividends since 2020 and has taken a financially more prudent decision to finance its site acquisitions primarily through equity. Nevertheless, Scope would need a longer track record before considering the removal of the negative one-notch adjustment.

Environmental, social and governance (ESG) considerations have no significant effect on the group’s credit quality.

Outlook and rating-change drivers

Stavmat’s Outlook has been revised to Negative and incorporates the negative effects of the Hungarian construction market slowdown, causing reduced profitability from 2023 and onwards. Scope expects leverage (Scope-adjusted debt/EBITDA) to peak at around 4.5x before recovering towards 3.0x.

A downgrade could be triggered if Scope-adjusted debt/EBITDA stays at or above 3.5x longer than currently forecasted. This can result from a failure to improve operating profitability or due to the further decline of the underlying construction industry in Hungary.

A positive rating action as expressed by a return to a Stable Outlook is possible if Scope-adjusted debt/EBITDA improves below 3.5x in a timely manner.

An upgrade is currently considered remote but could be warranted if Stavmat can show i) for an extended period a Scope-adjusted debt/EBITDA of below 2.5x and a less aggressive financial policy, allowing the removal of the negative notch for financial policy and; ii) an improved business risk profile by expanding to neighbouring countries, though is less likely in the near future.

Scope notes that Stavmat’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires 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-) at the issuer level.

Long-term debt rating

Scope has affirmed Stavmat’s senior unsecured debt at BB-, one notch above the issuer rating. The recovery assessment includes the secured loan of HUF 840m (six-year term, linear amortisation, 6% fixed rate) in addition to the HUF 5bn bond (ISIN HU0000360714). A ‘superior recovery’ (71%-90%) is expected for the outstanding senior unsecured debt in a hypothetical default scenario in 2025 based on a liquidation value method. This level of recovery would normally allow a two-notch uplift, but Scope has taken a conservative view due to the difficult macroeconomic conditions the company currently operates in and limited the uplift to one notch.

In July 2021, Stavmat issued the aforementioned HUF 5bn senior unsecured green bond through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for the paving plant capex and for working capital financing. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in six tranches starting from 2026, with 10% of the face value payable yearly, and a 50% balloon payment at maturity. Scope notes that Stavmat’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Stavmat to repay the nominal amount (HUF 5bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and additional indebtedness covenants.

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, (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.
 
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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 May 2021. The Credit Ratings/Outlook were last updated on 13 April 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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