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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Hungarian discretionary consumer goods company Naturtex Gyapjú- és Tollfeldolgozó Kft. (Naturtex) and revised the Outlook to Negative from Stable. Scope has also affirmed the B+ senior unsecured debt rating of Naturtex.

Rating rationale

The Negative outlook is driven by the unfavourable macroeconomic conditions which continue to put pressure on both net sales and profitability and have led to the significant deterioration of credit metrics in 2023. Although the challenging market conditions are not expected to ease in the following year, the lower level of Scope-adjusted debt is expected to partially counteract its negative effects. The decline in Naturtex’s financial liabilities is due to its subsidiary (NTT Manufacturing Kft.) meeting its contractual obligations, allowing Naturtex to stop providing it with the HUF 1.6bn guarantee from 2024.

2023 was characterised by low demand, leading to a 20% fall in net sales, which, together with the high inflationary environment and low efficiency had a negative impact on Naturtex’s profitability. Naturtex is currently negotiating with several partners that should increase sales in the coming years: the company plans to re-enter into and strengthen its position in several geographical markets (e.g. China, a large market that was closed due to the Covid19 pandemic lockdown, but restrictions have since eased) and to enter the hospitality sector. Naturtex is also in the process of increasing its white label contracts. However, Scope notes that the downward pressure on demand for its discretionary products is expected to continue for at least the next 12-18 months.

Although the high inflationary market negatively impacted the Scope-adjusted EBITDA margin, which declined to 8.1% from 11-13% in previous years, the company’s relatively strong profitability with medium volatility continues to support its business risk profile (assessed at B+). The Scope-adjusted EBITDA margin is expected to remain at around 9.5%, as the unfavourable macroeconomic factors prevalent in 2023 are expected to continue to put pressure on profitability in the future. The assessment of Naturtex’s business risk profile continues to be hampered by its low market share and diversification, despite the company’s strong geographic diversification as it remains small and exposed to a single product category.

The decline in the profitability margin coupled with the significant drop in sales, has led to a significant deterioration in the credit metrics for 2023. Although the downward pressure is expected to persist on both sales and profitability, credit metrics are expected to improve as Scope-adjusted debt is expected to decrease due to the relief of the HUF 1.6bn guarantee from 2024 onwards (NTT Manufacturing Kft. has fulfilled its contractual obligations based on its 2023 preliminary financial statements for Naturtex to stop providing the guarantee). The decrease in Scope-adjusted debt is considered a positive development, but Scope notes that although Naturtex’s contractual obligation to its subsidiary has ceased, it may provide financial support to NTT Manufacturing Kft. if required.

The financial risk profile (assessed at B+) continues to benefit from the relatively strong Scope-adjusted EBITDA interest cover, supported by favourable fixed interest rates, but remains constrained by the high leverage and low and volatile cash flow cover. Credit metrics are expected to bottom out in 2023 before improving: leverage as measured by Scope-adjusted debt/EBITDA, deteriorates to over 10x in 2023 before returning to below 6x next year and further improving towards 5x by 2026, while Scope-adjusted funds from operations/debt improves from 9% in 2023 towards 15% by 2026. Scope-adjusted free operating cash flow/debt is forecast to oscillate around 0% in the following years. The decrease in Scope-adjusted debt will also have a positive impact on Scope-adjusted EBITDA interest cover, which is expected to remain around 5x in the following years.

Naturtex’s liquidity position is considered to be adequate, especially when considering the unrestricted cash reserves of HUF 1.8bn as of YE 2023. This leads to a robust overall liquidity ratio of above 200% for 2024, but below 200% in 2025 as the first tranche (HUF 0.7bn) of the bond will mature in September 2025. Scope does not expect any immediate refinancing risks over the forecast period. However, in 2027, when the second tranche (HUF 2.1) of the bond matures, Scope sees some refinancing risk due to the relatively large size of the future debt maturity.

Environmental, social and governance (ESG) considerations have no material impact on the company’s credit quality.

Scope highlights that Naturtex’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 2.8bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 15 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 Outlook for Naturtex is Negative, reflecting Scope’s view that the subdued demand and high inflation environment is likely to negatively impact operating profitability going forward. Scope expects Naturtex’s leverage to peak at over 10x in 2023, before recovering towards 6x thereafter.

A downgrade could occur if Scope-adjusted debt/EBITDA remains at or above 6x, for example, due to continued challenging market conditions.

A positive rating action, expressed as a return to a Stable Outlook, could be warranted if Scope-adjusted debt improves to below 6x on a sustained basis; further rating upside is currently deemed remote.

Long-term debt rating

In September 2020, Naturtex issued a HUF 2.8bn senior unsecured bond (ISIN: HU0000359922) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing financial debt (HUF 0.98bn) and working capital financing (HUF 1.82bn). The bond has a tenor of 7 years and a fixed coupon of 3%. Bond repayment is in two tranches; the first in 2025 with 25% of the face and a 75% balloon payment at maturity in 2027.

Scope has affirmed the senior unsecured debt rating of Naturtex at B+, at the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at year-end 2026. Scope has used the liquidation scenario in the analysis due to the asset-rich nature of the company. The 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; 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, 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 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 May 2020. The Credit Ratings/Outlook were last updated on 25 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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