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Rating action

Scope Ratings GmbH (Scope) has today upgraded its issuer rating on Hungarian agribusiness company Hunland Trade Kft. to BB-/Stable from B+/Positive. Scope has also upgraded the rating on the HUF 24.2bn guaranteed senior unsecured corporate bond to BB- from B+.

Rating rationale

The rating action reflects the concretisation of the improvement in debt protection thanks to the use of a series of cross-currency interest rate swaps that were progressively implemented throughout 2022. Those swaps enable Hunland Trade to pay interest in euro instead of forint as it swapped the notional amount in forint to euro. However, as the base interest rate difference between the euro and forint was significant, the swaps resulted in negative interest rates in euro (-0.8% on average), meaning that Hunland Trade is actually receiving interests instead of paying them. As a result, in 2022, Hunland Trade recorded negative net interest paid. Scope expects this situation to be sustained as long as those swaps are in place. This huge improvement in debt protection and the expected improvement in Scope-adjusted debt/EBITDA to below 6.5x in the coming years have led to a stronger financial risk profile (raised to BB from B+).

Hunland Trade’s business risk profile (assessed at B+) is supported by its vertical business integration into Hunland Group but also by its leading position in the Hungarian livestock export market. The company continues to benefit from a large customer base, though with some concentration risk. However, Hunland Trade’s business risk profile remains constrained by its high level of receivables. This is due to the nature of its business and the low diversification of its activities. Scope expects underlying profitability to remain low but stable, at around 2.0%. Besides, with the cross-currency interest rate swaps, the company will be exposed to exchange-rate risk at the end of the swap when the principal will be exchanged back.

Hunland Trade’s liquidity is adequate thanks to the bond issuance, which enabled the company to refinance the bulk of its short-term financial debt. Hunland Trade repays EUR 452,000 in debt in 2023. This compares to EUR 19.4m of available cash and equivalents as of 31 December 2022. In 2024, Scope expects the company to cover its short-term financial debt of EUR 904,000 (mainly composed of financial leases) by the expected available cash and equivalents of EUR 11.2m at YE 2023 and free operating cash flow of EUR 3.7m expected for 2024. As for short-term debt expected to be repaid in 2025 (EUR 773,000), it would be largely covered by the expected cash and equivalents of EUR 14.7m at YE 2024 and the projected free operating cash flow of EUR 1.8m for 2025.

Scope highlights that Hunland Trade’s guaranteed senior unsecured bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 24.2bn) if the rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 days). Such a development could adversely affect the company’s liquidity profile. Following the upgrade of the rating, the rating headroom to entering the grace period is 1 notch. Hence, Scope currently sees no significant risk of the rating-related covenant being triggered.

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s view that key credit metrics over the next three years will improve overall, with Scope-adjusted debt/EBITDA at 5.0x-6.0x and with very strong debt protection reflecting the higher interest received over interest paid. It also incorporates Hunland Trade’s position as the leading Hungarian livestock exporter and Scope’s expectation that Hunland Trade’s EBITDA margin will remain stable at around 2%.

A positive rating action is deemed remote but could be warranted by an improved business risk profile, e.g. through improved operating margin such as a Scope-adjusted EBITDA margin of over 3.5%. Likewise, rating upside could be seen through a significant improvement of the company’s leverage, e.g. through a Scope-adjusted debt/EBITDA close to 4.0x on a sustained basis.

The rating could come under pressure if Scope-adjusted debt/EBITDA rose above 6.0x, for example as a result of significantly lower contributions to earnings from cattle and pig sales.

Long-term debt rating

Scope expects an ‘above-average’ recovery for the HUF 24.2bn guaranteed senior unsecured bond, which is based on an anticipated liquidation value in a hypothetical default scenario. The guaranteed senior unsecured bond ranks below short-term and long-term debt raised from financial institutions (excluding the bond) and payables that are secured by asset pledges. Consequently, in a hypothetical default, creditors of the guaranteed senior unsecured bond are likely to be repaid from the liquidation proceeds remaining after repayments to senior secured debt creditors; the guarantors’ current assets; and property, plant and equipment; reduced by long- and short-term financial debt as well as payables. Scope’s recovery expectation takes into consideration uncertainties regarding the value of claims at the guarantors’ (Hunland Trans Kft, Bovinia Kft, Hunland Production Kft, Hunland Dairy Kft, HLT Production, Hunland Service, HLT Telep, Hunland Feed and Hunland Group Holding) level at the point of a hypothetical default of the bond issuer. The value of claims at default is strongly driven by short-term assets such as inventory, receivables and financial assets whose value is deemed as uncertain at default. It also considers uncertainties about the debt positions of the guarantors at the point of a hypothetical default of the bond issuer and the seniority of the claim. This is why Scope has refrained from granting any notch uplift. These recovery expectations translate into a rating of BB-, reflecting the issuer rating upgrade.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 February 2021. The Credit Rating/Outlook were last updated on 23 December 2022.
The bond Credit Rating was first released by Scope Ratings on 13 July 2021. The Credit Rating was last updated on 23 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
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