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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating of Nitrogenmuvek Zrt to B, from BB-, and has placed the rating under review for a possible downgrade. Likewise, Scope has downgraded the rating on senior unsecured debt to B, from BB-, and placed it under review for a possible downgrade.

Rating rationale

The multi-notch downgrade reflects a confluence of adverse events in 2023. Key among these was the unfavourable movement in CAN prices, compounded by the implementation of a novel, retroactive CO2 taxation regime from January 1, 2023. The tax, presently contested, might not see resolution for an extended period. These developments have culminated in a less than favourable financial outcome for FY 2023. Further exacerbating the issuer's challenges is the refinancing of a bond maturing in May 2025, introducing pronounced liquidity risks. The under review status principally stems from the unclear prospects concerning the successful refinancing of the EUR 200m bond due in May 2025. It is understood that the issuer is exploring various strategies to ensure a seamless refinancing process. Nonetheless, Scope will maintain vigilant oversight of developments in the ensuing months. The under-review status also encapsulates the uncertainties surrounding production volumes in 2024 and the corresponding price points. Consequently, near-term operational performance will be pivotal, either bolstering or undermining the feasibility of securing a viable refinancing solution for the bond.

The main factor in Scope's assessment has been the clear deterioration of the Financial Risk Profile (FRP) in terms of leverage, precipitated by the unsupportive CAN market prices that have not been sufficient to support the company's operational burdens. This challenge is further aggravated by the retroactive imposition of a CO2 levy effective on January 1st 2023 and amounting to HUF 9.7bn in 2023. The latter factor is currently under appeal in various European courts, but the timing and outcome of a resolution are still unclear. The company is taking active measures on various fronts and if this tax would be abolished things would be much brighter and there would be a potential upside in operating cash flows.

The company underwent a four-month cessation of its operations from early November 2023 to February 2024, although such suspensions, typically lasting a month, are not unusual annually for technical and maintenance purposes. This halt resulted in negative Scope-adjusted EBITDA of HUF 7bn for 2023. Moreover, Scope flags that the company faces mounting pressure to refinance the EUR 200m bond maturing in May 2025, amid anticipated higher refinancing costs next year due to the company's deteriorating credit and the general increase in interest rates. These factors have led to a negative adjustment in the FRP and a revision of liquidity, now considered inadequate for fulfilling the company's commitments in the ensuing 18 months.

The FRP has been assessed at B-, down from BB+ in May 2023, as the leverage ratios, Scope-adjusted debt to EBITDA and FFO to Scope-adjusted debt, plummeted to a negative value at YE 2023 due to a combination of unfavourable CAN prices, a mandatory halt in production triggered by the new CO2 tax, and inefficient cost absorption. Despite facing no significant debt maturities until May 2025, allowing for current debt servicing from existing cash reserves, leverage is expected to remain high but show signs of improvement in 2024 and beyond, supported by the resumption of plant operations in February 2024. Projected leverage ratios are expected to improve to 6x by 2024 and further to approximately 5x by 2025, assuming successful bond refinancing.

Interest coverage, negatively impacted in 2023 due to adverse operational factors, is anticipated to recover to 2.1x in 2024 and improve slightly in 2025, following an increase Scope-adjusted EBITDA and offset partially by higher debt costs.

Working capital within the company is marked by considerable fluctuations, driven by variables including CO2 emission allowances, VAT reclaims, and advances on inventory, alongside the variable costs of natural gas. These factors have contributed to the significant volatility observed. Furthermore, the company’s cash flow in 2023 was further pressured by a dividend distribution amounting to HUF 5 billion. As a result of these pressures, the cash flow cover metric is projected to remain slightly negative in most forecasted periods, despite an anticipated slight improvement to slightly positive territory by 2025.

Scope does not yet see immediate short-term liquidity constraints over the next twelve months, given that any additional maturities before May 2025 are not significant (EUR 10.3m in 2024) and the cash buffer of the company remains solid (HUF 24.4 bn at YE 2023). However, Scope believes that refinancing of the EUR 200m senior unsecured bond that matures in May 2025 at favourable terms may pose a challenge unless the company's financial health improves significantly prior to the bond's maturity. Additionally, it is expected that the company adheres to stringent capital expenditure guidelines for an extended period, despite potential impacts on operational efficiency and competitiveness. Liquidity is considered inadequate, and in Scope’s view it warrants a minus 1 notch adjustment. This is due to the fact that the refinancing has not yet been established, and in light of the lack of committed undrawn lines. As such Scope has decided to incorporate a negative adjustment within the FRP to accurately reflect these liquidity concerns. The company informed Scope in November 2023 that several options were being discussed.

Scope notes that there are no significant changes in the Business Risk Profile (BRP), with the market share remaining stable, as it was indicated by the company that other regional players have also had to halt the production. The firm retains a good presence in the fertiliser market throughout Central and Eastern Europe (CEE) as well as Western Europe, highlighting the vital role of nitrogen as one of the three key fertilisers. Furthermore, demographic trends that bolster overall demand for fertilisers continue to be favourable. Scope notes that there have been no developments in the company's strategy to suggest a shift in the diversification of their operations. Consequently, Scope maintains that the company's operational focus continues to be directed towards a single product, produced in a single facility, within a single country. This absence of diversification, previously highlighted by Scope, remains unchanged. Companies with operations in multiple countries can better manage regulatory risk, which in this case crystalised as the CO2 tax. Regarding profitability, however, Scope does see that there has been a significant deterioration, as the metric over the last three years and one projected year is around 10%, below its peers, and logically affected by the recent changes already mentioned. Scope has consistently highlighted the exposure to commodity price volatility; however, the CO2 tax emerges as a new variable impacting the cost of operations. This tax introduces additional complexity to the cost absorption processes, in turn raising the breakeven points below which it is better to halt production.

Long-term debt rating

Scope has also downgraded the senior unsecured debt rating to B from BB-, following the downgrade of the issuer rating and an unchanged view about average recovery expectations for senior unsecured debt position at the time of a hypothetical default in 2025. The rating has also been placed under review for a possible downgrade.

Under review for a possible downgrade

The under-review placement for a possible downgrade primarily reflects the limited visibility about an adequate refinancing of the EUR 200m bond that matures in May 2025. Scope understands that the company is working on different options that would adequately address a smooth refinancing. However, Scope will closely monitor the situation over the next few months. Moreover, the under review status reflects the limited visibility on the quantities that will be produced in 2024 and the prices at which they will be sold. As such, the company’s short-term operating performance will also be a determining factor that would either support or constrain the arrangement of a valid refinancing of the bond.

Scope intends to resolve the under-review status as soon as possible reflecting the progress made on the company’s operational recovery and the refinancing plans.

A rating upgrade is deemed remote at the current stage even when the company adequate addresses the refinancing in 2025 and its overall liquidity situation. This is due to the limited potential in the short-term that the company can restore its historically solid financial risk profile.

The rating could be affirmed if concerns about a successful refinancing of the EUR200m bond in May 2025. This could be achieved if the company presented a valid refinancing plan well ahead of the bond’s maturity.

The rating could be downgraded further if concerns about the refinancing of the bond increased as the company struggles to develop a valid refinancing plan.

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, (Chemicals Rating Methodology, 17 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.

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 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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Ivan Castro Campos, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 2 July 2020. The Credit Ratings/Outlooks were last updated on 1 June 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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