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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB issuer rating of Hungarian agricultural and construction machinery distributor AXIÁL Javító, Kereskedelmi és Szolgáltató Kft and revises the Outlook to Negative from Stable. Scope has also affirmed the senior unsecured debt rating at BB+.

Rating rationale

The rating action reflects the current pressure on credit metrics and the deterioration of the liquidity ratio. In 2023, AXIÁL’s revenues decreased by 5.5% to HUF 144.2bn as a result of lower sales from new machinery but also second-hand machinery as customers postponed related investments. These lower sales were partially compensated by higher demand for rental machinery, services and spare parts. The company had to invest into rental machinery to meet the related demand, resulting in higher working capital needs. As a consequence, reported financial debt rose by almost 60%, mainly due to an increase in short-term debt to HUF 22.2bn (up HUF 12bn YoY). With Scope-adjusted EBITDA declining to HUF 16.6bn in 2023 (down by 22% YoY), Scope-adjusted debt/EBITDA deteriorated to 2.1x (vs 0.6x in 2022). Scope-adjusted EBITDA interest cover was down to 8x in 2023 from 33x in 2022. This reflects the increased use of short-term financial debt in a high interest rates environment (interests paid increased to HUF 2.4bn in 2023 from HUF 1bn in 2022).

2024 will be a transitional year for the company as farmers are waiting to know the exact amount of subsidies they will receive. This information should be available only by end-2024. Therefore, Scope expects AXIÁL’s revenue to decrease by around 20% in 2024 before improving in both 2025 and 2026. Scope forecasts the same trend in Scope-adjusted EBITDA. As a result, Scope forecasts leverage (Scope-adjusted debt/EBITDA) to peak at above 2.5x in 2024. Scope-adjusted EBITDA interest cover will hit its low at around 6x in 2024. Leverage and interest cover should recover thereafter reaching around 2x and 10x, respectively. Scope expects a profitability margin (Scope-adjusted EBITDA margin) of between 8% and 10% in the coming years, a bit lower than in 2023 due to expected higher staff costs. Scope’s forecasts are supported by the company’s proven good track record on exceeding business targets communicated to Scope. Indeed, AXIÁL has been able to exceed Scope’s expectations and has shown cautiousness in its day-to-day running business activity. The overall financial risk profile (revised to BB from BBB-) remains constrained by low free operating cash flow due to investments.

AXIÁL’s liquidity is seen as inadequate following the spike in the use of short-term financial debt in 2023. As a consequence, cash sources (HUF 5.3bn of available cash and equivalents as of end-2023, committed short-term credit lines totaling HUF 1.9bn and expected positive free operating cash flow of HUF 7.4bn in 2024) will not be sufficient to cover cash uses (short-term debt of HUF 22.2bn). Scope expects this situation to remain for the upcoming years but sees associated risk to be manageable. The company has a strong track record in rolling over short-term debt, which was its preferred source of funding prior to the issuance of bonds under the MNB Bond Programme, which replaced most of its short-term debt obligations. Scope gains further comfort as short-term financing is provided under a syndicated loan agreement that determines the accessible financing by a formula which limits the overfinancing risk and reduces the liquidity risk. In addition, Scope expects the issuer to be able to refinance some of its short-term debt with new long-term financing, given its favourable access to bank loans. This reflects the company's strong position in the Hungarian market as one of the leading agricultural machinery distributors. In addition, AXIÁL may sell some of its fixed assets and inventories in order to meet its financial obligations.

The rating reflects the company’s position as one of the top-three agricultural machinery dealers in Hungary, its leadership position in spare parts and a market share of around 25% in Hungary’s agricultural machinery sector. The company benefits from a good position in a niche market, which ensures stable revenue. While waiting for the official disclosure of the new agricultural subsidy program and so the rebound in sales of new machinery and second-hand machinery, AXIÁL can still count on its rental machinery business but also spare pare business to generate revenues.

AXIÁL’s business risk profile (unchanged at BB-) is constrained by its low geographical diversification, but product diversification is adequate (50% of total net sales come from new agricultural machinery and 30% come from spare parts). The non-domestic country exposure represents less than 10% of total consolidated net sales. This is too small to offset any negative macro developments in the home market of Hungary. AXIÁL also faces an ageing and shrinking labour force in the agricultural sector. It is overcoming this negative factor by focusing more on construction, where its sales have been modest compared to the agricultural sector, which could lead to a shrinking customer base and decreasing sales. AXIÁL is the exclusive distributor of several globally known brands, such as Claas, Manitou, Horsch and Hyundai, which demonstrates its reputation in the sector.

Scope currently sees no company-specific ESG factor deemed to have a substantial impact on the overall assessment of credit risk.

Outlook and rating-change drivers

The Negative Outlook reflects the risk of continued inadequate liquidity given the financial outlay to fund the growth of the rental fleet to meet changing customer demand. In addition, the Outlook reflects continued pressure on credit metrics with leverage of around 2.5x (Scope-adjusted debt/EBITDA) and lower debt protection of around 10x due to limited visibility on end-customer funding.

A positive rating action, such as a revision of the Outlook to Stable, could be warranted if AXIÁL's liquidity ratio were to return to an adequate level, while leverage, as measured by Scope-adjusted debt/EBITDA, could be kept below 2.5x on a sustainable basis.

The rating could be downgraded if AXIÁL's liquidity ratio were to remain inadequate due to the high proportion of short-term financial debt.

Long-term debt rating

In September 2020, AXIÁL issued a HUF 15bn senior unsecured bond (ISIN: HU0000359930) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were fully used to refinance its short-term financial debt. The bond has a tenor of 10 years and a fixed coupon of 2.0% with a bullet maturity. Scope notes that AXIÁL’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has no accelerated repayment clause, but bond covenants include a pari passu clause and negative pledge.

Scope has affirmed the senior unsecured debt category at BB+. Scope still expects an ‘above average’ recovery for senior unsecured debt, including for the HUF 15bn bond issued in September 2020 under the Hungarian National Bank’s Bond Funding for Growth Scheme. This recovery expectation translates into a BB+ rating for senior unsecured debt. Scope highlights that senior unsecured debt has a subordinate ranking to payables and to debt raised for working capital and capex financings.

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, (Retail and Wholesale Rating Methodology, 26 April 2024; 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.
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 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 June 2020. The Credit Ratings/Outlook were last updated on 15 May 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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