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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian construction materials producer-distributor Masterplast Nyrt. to B/Negative from B+/under review for a possible downgrade. Scope has also downgraded the senior unsecured debt rating to B from B+/under review for a possible downgrade.

Rating rationale*

The downgrade is driven by Masterplast's heavy reliance on the ability to roll over its short-term bank facilities. While liquidity concerns remain, Scope views the risk of immediate repayment of these facilities as low. The Negative Outlook reflects a protracted downturn in the construction sector, particularly within Hungary, which has caused a slowdown in Masterplast's sales, and is awaiting a catalyst for revival that may not materialise until the second half of 2024. Concurrently, uncertainties around liquidity persist, despite Masterplast's operations stabilising in the fourth quarter, after four loss-making quarters. Scope will closely monitor the company's performance in upcoming quarters to determine if the profitability witnessed in the last quarter of 2023 can be sustained.

In early 2023, Masterplast initiated measures to counteract the market downturn that began in late 2022 by suspending dividend payments for 2022 and 2023, reducing operating costs - including a significant reduction in the workforce - and optimising production and inventory, aiming for stabilisation in 2024 despite expected flat revenue. The company's focus on cost-saving measures is anticipated to improve profitability margins. Despite challenges from high interest rates and the cessation of a home renovation subsidy in Hungary, Masterplast's primary market, the company has navigated through a difficult period, marked by decreased sales and underutilisation of production capacities.

Masterplast's efforts bore fruit in the fourth quarter of 2023, evidenced by an operational profit with revenues of EUR 31m and an EBITDA of approximately EUR 0.5m. Nevertheless, this quarter's profit, while a positive development, was not sufficient to completely counterbalance the losses incurred in earlier quarters. In a move to align its accounts with the current operational reality, the company's management also identified the need to recognise an additional inventory impairment of approximately EUR 3.5-3.8m as a singular item at the year's end.

The long-awaited EU funds for Hungary have finally been released, offering renewed hope for the construction sector. However, it will take time for these funds to positively impact the economy and, by extension, Masterplast's operations. This influx is central for the company's medium-term profitability, which hinges on the broader recovery of the construction sector in Hungary and across Europe.

Masterplast's financial risk profile significantly benefited from strong debt protection, with a Scope-adjusted EBITDA interest cover consistently exceeding 10x in recent years. Despite this advantage, the company faced challenges from a weaker macroeconomic environment, leading to its revenue falling to EUR 144.7m by the end of 2023, down from EUR 202m at the end of 2022.Despite this setback, there is optimism for recovery in 2024, thanks to cost-saving measures introduced in 2023 and the expected completion of a new production facility in Italy. This expansion is anticipated to enable Masterplast to serve a wider market and boost revenue as market conditions normalise. Positive developments in the Hungarian economy could further support Masterplast's recovery. The early signs of economic growth offer a hint of potential stability and improvement for the company.

Liquidity is inadequate, as sources (EUR 16.5m of cash available as at YE 2023) do not cover uses. As at YE 2023, Masterplast has EUR 26.5m in short-term debt outstanding, of which EUR 7.8m relates to bond repayments due in December 2024. These bond repayments are expected to be covered by available cash. The remaining short-term debt, totalling EUR 18.7m, consists of various bank facilities. While the issuer has successfully rolled over EUR 3.1m until February 2025, a significantly larger facility of EUR 10m was only rolled over until August 2024. Furthermore, the inability to reach an agreement with the financing banks could have default implications, underscoring the necessity of successful negotiations.

Despite Masterplast's considerable reliance on the ability to roll over its short-term bank debt—a situation underscored by available cash being insufficient to cover all its liabilities—the company's strategic responses and strong banking relationships paint a more reassuring picture. In 2023, Masterplast took decisive steps to stabilise its operations, reflecting a commitment to ensuring financial resilience. Coupled with an impressive track record of financial management over the years and established rapport with several banks, these measures have led Scope to assess the risk of immediate debt repayment demands in 2024 as low.

Outlook and rating-change drivers

The Negative Outlook reflects a protracted downturn in the construction sector, particularly within Hungary, awaiting a catalyst for revival, which may not materialise until the second half of 2024. Despite existing liquidity concerns, the risk of immediate repayment of short-term bank facilities is low. This situation coexists with stabilisation in Masterplast's operations in the fourth quarter, after four loss-making quarters. Scope will continue to monitor the company's performance in the coming months to ascertain whether the profitability seen in the last quarter of 2023 can be maintained. Masterplast is scheduled to release its Q1 results and provide revised forecasts in May, which will offer better visibility on the company’s future prospects. However, challenges related to liquidity are expected to persist until long-term financial arrangements are secured.

A downgrade of at least one notch could result from poorer operating results in Q1 2024. This situation might impact the company's ability to have its short-term bank facilities rolled over in the future, potentially causing serious liquidity problems, and affecting the company’s day-to-day operations.

A positive rating action, such as a return of the Outlook to Stable, could be warranted if the company's sales revenue were to recover, thereby enhancing operational visibility, and if there were a successful rollover of short-term debt. Additionally, a significant reduction in short-term debt, the establishment of longer-term financing facilities, or the extension of existing short-term obligations over longer durations would further support the case for a positive rating action, by alleviating liquidity pressures and stabilising the company’s financial footing.

Long-term debt ratings

Scope has downgraded Masterplast’s senior unsecured debt to B from B+/under review for a possible downgrade, in line with the issuer rating.

Masterplast has issued three senior unsecured bonds through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The first bond was issued in December 2019 with a volume of HUF 6bn (ISIN: HU0000359369), a seven-year tenor and a fixed coupon of 2.00%. Repayment is in four equal tranches from December 2023, with 25.00% of the face value payable yearly. Proceeds were used to repay a high portion of short-term debt.

The second bond, issued in December 2020, also had a volume of HUF 6bn (ISIN: HU0000360219) and a seven-year tenor but a slightly higher fixed coupon of 2.10%. Proceeds refinanced current debt and financed further capital expenditure and business acquisitions. Repayment is in four equal tranches from December 2024, with 25.00% of the face value payable yearly.

The August 2021 issuance had a volume of HUF 9bn (ISIN: HU0000360748), a 10-year tenor and a fixed coupon of 2.90%. Proceeds were used for capital expenditure and business acquisitions. Repayment will start in August 2027 in four equal instalments of HUF 1.125bn (12.5% of the face value), with a 50% balloon payment at maturity.

Scope’s recovery analysis is based on a hypothetical default scenario in 2024, based on the liquidation value of the company’s assets. Scope had previously based the recovery on the enterprise value as a going concern. However, if sales were to deteriorate at a similar rate over the next 12 months, liquidation would be more likely. Scope estimates the recovery for all senior secured debt to be ‘above average’ but, given the existing uncertainties in the construction industry, Scope has equalised the senior unsecured debt rating with the issuer rating of B.

* Editorial note: A section of text under 'Rating rationale' was deleted on 7 March 2024, as it was factually inaccurate. The deleted text inaccurately detailed a specific covenant associated with Masterplast’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. This covenant mandated an accelerated repayment of the outstanding nominal debt amount (HUF 21bn) if the bonds' debt rating remained below B+ for more than two years or dropped below B-, potentially impacting the company's liquidity profile. For clarification, the bonds issued by Masterplast are not subject to this covenant, ensuring no immediate effect on the issuer's liquidity or repayment obligations based on the described conditions.

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/or Outlook, (General Corporate Rating Methodology, 16 October 2023; Construction and Construction Materials Rating Methodology, 25 January 2024), 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                                      NO
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 these 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 September 2019. The Credit Ratings/Outlook were last updated on 16 November 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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