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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungarian beverage producer Hell Energy Magyarország Kft’s issuer rating at B+ and changed the Outlook to Positive from Stable. Senior unsecured debt has also been affirmed at B+.

Rating rationale

The revision of the Outlook to Positive is supported by the start of deleveraging as production ramps up, the strong market position in Central and Eastern Europe (CEE) with further significant growth potential, especially in south-eastern Europe, and the high margins despite strong expansionary and inflationary pressures.

The rating is constrained by the limited product diversification, still high leverage, and the shortfall in state subsidies which the parent will not cover as Hell Energy’s liquidity situation does not require it.

Hell Energy’s business risk profile (assessed BB+) is supported by the strong risk profile of its underlying industry of consumer products (rated A), which benefits from low cyclicality and medium barriers to entry, and by the company’s moderate competitive position underpinned by its regional market leadership and high share of branded products.

The company is the market leader for energy drinks in Hungary as well as in nine other countries, mostly in CEE. It also has good diversification within the non-alcoholic beverages segment, supported by a granular client and supplier base. Despite operating in over 50 countries, most of Hell Energy’s sales are in CEE (core markets are Hungary and Romania), which gives it room for organic growth as production capacity expands.

Revenues in 2023 are similar to 2022 levels. H1 2023 showed 3.8% YoY growth, explained by the somewhat lower volumes as inflation peaked but also strong pricing effects to raise profitability. Profitability was under pressure due to input cost inflation, price and currency volatility, and the company’s strong expansionary ambitions. This pressure comes after the outstanding 40% growth YoY in 2022, which pushed up the top line to HUF 158.6bn (ca. EUR 0.4bn). Regarding margins, H1 2023 saw a return to the historical 18% EBITDA margin, which is a significant improvement from 13.3% in H1 2022. This was a result of the improved EBITDA in H1 2023 of HUF 14.0bn from HUF 9.9bn in H1 2022. Such an improvement led to the deleveraging, much expected after the heavy investment phase.

The high operating profitability of Scope-adjusted EBITDA margin of 15%-20% puts Hell Energy at the high end of Hungarian consumer products entities and above average at the European level. The company’s above-average vertical integration and efficient, relatively new production facility have shielded its profitability from the strong wage inflation in Hungary. The facility also provides an advantage over competitors with less modern, less automated production facilities.

Hell Energy’s business risk profile is constrained by limited diversification with regard to product categories (non-alcoholic beverages only) and high concentration in two CEE countries. The company’s relatively small absolute size compared to international consumer products peers is another constraint. The single production site also hinders international growth; a second production site may be needed in the near term.

The financial risk profile (assessed B) is being adversely affected by the ongoing investment programme, exacerbated by the shortfall in state subsidies. Leverage started to improve in 2022 but remains high, with Scope-adjusted debt/EBITDA decreasing to 5.4x from 6.1x in 2021. Scope-adjusted debt/EBITDA is expected to stay in the range of 4x-5x in the medium term thanks to the recovery of operating profitability and the successful production ramp-up.

Hell Energy is yet to receive the HUF 13.5bn state subsidy for capex. The size of this subsidy is also under doubt: no contract has been signed and no EU approval has been secured to date. Owners saw no need to cover this shortfall with equity or a subordinated intercompany loan, as they had previously signalled, because deleveraging had already started without the fresh equity and liquidity has not been endangered. The dividend pay-out stayed well below 20% of profit after tax, while the missing subsidy equates to around half of yearly EBITDA. Therefore, parent support remains credit-neutral as such a move does not endanger planned deleveraging and does not show excessive distribution to owners.

The rating is supported by the Scope-adjusted EBITDA interest coverage of 5.7x in YE 2022. Scope expects it to remain well above 5x in the next two to three years as most of the debt is fixed rate, including the two bonds, EUR 20m out of the EUR 50m working capital facility and the old capex financings. This is the strongest financial metric for Hell Energy. There is no large upcoming debt repayment or refinancing risk.

Scope’s base case forecast shows that Scope-adjusted free operating cash flow/debt will stay negative in 2023. The negative free operating cash flow is due to the company’s massive capex programme and working capital build up. Although the company has depended on external financing to finance its new production facilities and growing working-capital needs, free operating cash flow should improve from 2024 onwards, thereby enabling deleveraging and the overall financial risk profile to improve.

Liquidity has been adequate, with the external liquidity ratio expected to be under pressure in 2023 due to increased working capital, higher capex and the subsidy shortfall, which was managed by contracting EUR 50m in new debt in H1 2023. Scope expects the liquidity ratio to reach above 200% from 2024 once free operating cash flow moves towards zero and turns positive in 2025 as a result of decreasing capex and lower working capital swings than in previous years.

No notching was applied for supplementary rating drivers.

Outlook and rating-change drivers

The Outlook is revised to Positive from Stable. This is based on the expectation of continued deleveraging reflected by Scope-adjusted debt/EBITDA moving below 5.0x and free operating cash flow approaching positive values.

An upgrade could be warranted if the company reached and could maintain Scope-adjusted debt/EBITDA at below 5.0x and free operating cash flow approached positive values.

A return to a Stable Outlook would be warranted in case of an inability to continue deleveraging to below a Scope-adjusted debt/EBITDA of 5.0x or improve free operating cash flow towards positive values.

Further ratings downside is considered remote at this stage.

Long-term and short-term debt ratings

Senior unsecured debt is rated in line with the issuer rating based on Scope’s expectation of an ‘average’ recovery taking into consideration a hypothetical default scenario at YE 2024 and applying reasonable discounts to existing assets and assets under construction. Hell Energy issued two senior unsecured bonds with 10-year tenors under the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond issued in 2020 (ISIN: HU0000359377) at HUF 28.5bn with a fixed coupon of 2.7% yearly and the bond issued in 2021 (ISIN: HU0000360722, guaranteed by subsidiary Quality Pack Zrt.) at HUF 67bn with a fixed coupon of 3.0% yearly were used mainly for capex. Bond repayments start in tranches from 2026 with a high balloon payment.

Scope notes that Hell Energy’s senior unsecured bonds have accelerated repayment clauses requiring repayment of the nominal amounts in case of rating deterioration (two-year cure period for a B/B- rating, immediate repayment if the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include a list of soft covenants, such as change of control and dividend restrictions.

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; Consumer Products Rating Methodology, 3 November 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 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: Barna Szabolcs Gáspár, 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 8 November 2019. The Credit Ratings/Outlook were last updated on 18 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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