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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Negative issuer rating on Hungarian transport and logistics company Trans-Sped Kft. Scope has also affirmed the B+ senior unsecured debt rating.

Rating rationale

The affirmation of the issuer rating at B+/Negative is driven by the weaker profitability reported in the preliminary financial statements for 2023, remaining below historical averages. The more adverse domestic macroecomic conditions (high inflation, softening demand, lower freight volumes, increased competition resulting in customer loss) have led to weaker operating performance, emphasising the highly cyclical nature of the transportation/logistics industry. The weaker Scope-adjusted EBITDA margin (Scope-adjusted EBITDA margin at 6.9% in 2023) is negatively affecting all credit metrics, most notably leverage as measured by Scope-adjusted debt/EBITDA, now persisting above 5.0x. Scope notes that the HUF 1.6bn write-off of long-term financial assets in Q4 2023 is deemed credit neutral and has no impact on Trans-Sped’s issuer rating.

The business risk profile (assessed at B) continues to be driven by the improved service diversification. In addition to the core transportation and logistics business, Trans-Sped has made efforts to offer its customers additional, more complex services. Additionally, the business risk profile is driven by the adequate operating profitability, Scope-adjusted EBITDA margin is forecasted to gradually recover towards 8% till 2026 after a temporary deterioration. The forecasted improvement is driven by cost savings and efficiency measures as well as the impact from investments in the past two years, which clearly focused on higher value added business lines (real estate, warehouse logistics and e-commerce) on top of modernising the existing vehicle fleet. The business risk profile remains constrained by the issuer’s limited size, a weak position in a highly competitive market that is dominated by multinational companies as well as limited geographical diversification (Hungary and Central and Eastern Europe).

The financial risk profile continues to be assessed at B+, with preliminary credit metrics at YE 2023 in line with Scope’s previous forecasts. The assessment is positively driven primarily by the Scope-adjusted EBITDA interest cover, which - while showing a temporary deterioration to below 5.0x as a result of the increased interest expenses related to working capital financing – remains solid. Scope considers this deterioration temporary, and expects Scope-adjusted interest cover to move towards 7.0x in the medium term. Scope expects financial leverage, measured by Scope-adjusted debt/EBITDA, to remain above 5x until 2025 followed by a gradual improvement towards 4x, which will likely be supported by cash-funded debt amortisation. This gradual deleveraging assumes that i) the new investments, most notably the increased warehousing capacity, will generate profit once the construction is finished; and ii) the intensive capex phase will gradually slow down, with no additional investment credits drawn beyond 2023. Free operating cash flow has been negative in recent years due to intensive investment in property, plant and equipment, typically financed by external debt. Cash flow cover, measured by free operating cash flow/EBITDA, is expected to turn positive in 2025 once the investment cycle comes to an end.

Liquidity is adequate, able to cover the sole need to cover the HUF 2.6bn of short-term debt at YE 2023. The rolling exposure to drawn credit facilities (HUF 1.19bn as of December 2023) has no definite maturity but is reviewed yearly by the financing banks and comes with the option to cease the annual extension. Scope expects the facilities to continue to be extended, based on the long term, well-established relationship between the issuer and its financing banks. Sources of liquidity comprise HUF 761m of free cash and HUF 4.4bn of open, committed credit lines forecasted for 2024, fully covering the negative free operating cash flow of HUF 0.2bn and short term debt of HUF 560m forecasted for the respective year.

Scope highlights that Trans-Sped’s 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 5bn) if the debt 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. The rating headroom to entering the grace period is zero notches. Given the unchanged tight rating headroom, the company must address its credit weaknesses to avoid entering the grace period or the more severe event of the debt rating being downgraded below B-.

Outlook and rating-change drivers

The Negative Outlook reflects the risk that credit metrics could remain stressed, e.g. with a leverage of more than 5.0x for a prolonged period. A recovery of credit metrics, possible from 2024 onwards, is highly dependent on: i) the effectiveness of the company’s programme to cut costs and improve efficiency; and ii) macroeconomic developments and demand in the logistics sector.

A positive rating action as expressed by a return to a Stable Outlook could be warranted if Scope’s expectations about a prolonged period of constrained credit metrics, e.g. a leverage of above 5.0x, were not to materialise and the company deleveraged again on a sustained basis as a result of the Scope-adjusted EBITDA margin returning to around 8% and/or better-than-expected cash flow coverage. Further ratings upside, i.e. a higher rating, is deemed remote.

A downgrade could be triggered if the Scope-adjusted debt/EBITDA ratio stayed above 5.0x longer than currently expected. This can be the result of a slower than anticipated recovery in Scope-adjusted EBITDA margin to a level of around 8% caused by unfavourable market developments, a failure to improve operating profitability by reducing costs and improving efficiency or adverse working capital developments and pressure on free operating cash flow.

Long-term debt rating

In March 2020, Trans-Sped issued a HUF 5bn senior unsecured bond (ISIN: HU0000359500) through the Hungarian National Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 2.8bn), financing acquisitions (HUF 0.6bn) and capex (HUF 1.6bn). The bond has a tenor of 10 years and a fixed coupon of 2.5%. Bond repayment is in four tranches starting in 2026, with 7.5% of the face value payable yearly and a 70% balloon payment at maturity.

Scope has affirmed Trans-Sped’s senior unsecured debt rating at B+, the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at YE 2025. Scope has used the liquidation scenario in the analysis due to the asset-rich nature of the company, including fixed assets with high resale values (warehouses, vehicle fleet). Recovery is ‘average’ for senior unsecured debt holders in this scenario.

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; European Real Estate Rating Methodology, 28 March 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                                        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/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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 February 2023. The Credit Ratings/Outlook were last updated on 6 October 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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