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Rating action

Scope Ratings GmbH (Scope) has downgraded its issuer rating on Hungarian textile retailer and consumer products manufacturer Textura Zrt. to CCC/Negative from B-/Negative. Scope has also downgraded the rating on the senior unsecured bond (ISIN HU0000361449) guaranteed by the state-owned MFB Hungarian Development Bank to B- from B.

Rating rationale

The downgrade of the issuer rating reflects the stressed credit metrics due to inability to ramp up sales of the plastics division, lower profitability and restructuring of the textile division and the deteriorated liquidity.

The Negative Outlook reflects the below-plan operating performance and the unresolved covenant breach related to rating deterioration, which could result in a default by February 2025 if left untreated.

Textura’s business risk profile (revised to B from B+) has deteriorated due to the poor operating profitability of the textile retail-wholesale division and slower than expected sales ramp-up of the plastics division in 2023, with no quick rebound expected. Textura’s business risk profile is supported by the regional outreach of the textile division and diversification – albeit gradually – into new plastics products (coffee capsules and pools).

The textile division underwent operational restructuring in 2023, which entailed layoffs and revenue contraction. The EBITDA of the textile segment was close to nil in 2023 and a rebound is only expected in the second half of 2024. The Scope-adjusted EBITDA of HUF 356m in 2023 (down from HUF 552m in 2022) was mainly contributed by the plastics division. The Scope-adjusted EBITDA margin has deteriorated to 7.4% in 2023 from 9.5% in 2022 and the Scope-adjusted return on assets has fallen to 5.9% in 2023 from 17.8% in 2022. Scope expects operating profitability to improve somewhat in 2024 but to remain below historical levels as the textile division does not seem to have fully recovered in H1 2024 and the contribution from the plastics division is not yet significant.

Scope is concerned about management’s ability to sell Textura’s early-phase products of the plastics division due to the very limited contract backlog. In the plastics division Textura operates with framework contracts, where yearly planned volumes are agreed. However, there is no undertaking from the buyer on minimum volumes, nor any penalty for not meeting planned volumes.

Textura has three contracts signed in the coffee capsule segment, totaling 90 million capsules in 2024 and 185 million capsules in 2025. In Q1 2024 only 2 million capsules were sold, which can be explained by the fact that two contracts out of the three were signed on 15th March 2024. Nevertheless, Textura is not the only capsule supplier to these customers and there is no track record of customers drawing down under these framework agreements. The full drawdown of the framework contracts would result in revenues of HUF 1.4bn for 2024 and HUF 2.0bn in 2025.

Textura has only one contract signed in the pool segment for 1,500 pools, out of which around 200 were sold in Q1 2024 from inventory. This released some working capital, which was offset by the reduction of accounts payable to nil, indicating no supplier credit and a distressed situation. Pools have a high seasonality with a peak in Q2-Q3, which partly explains the low Q1 sold volume. Nevertheless, the pools segment may produce up to HUF 0.9bn revenues in 2024 if the contractually planned volumes are fully met.

Textura’s financial risk profile (revised to CCC from B-) is driven by inadequate liquidity and high and deteriorating leverage, with Scope-adjusted debt/EBITDA of 21.1x at YE 2023 (up from 13.6x at YE 2022). Scope expects leverage to stay highly volatile and well above 10x in 2024 even if the existing framework contract volumes will be fully met.

Scope-adjusted funds from operations/debt was low at 3% in 2023. Scope expects it to remain in the 5%-7% range in the next two years, with possible upside if new production lines for the plastics business are filled with orders, something not considered in Scope’s rating case. Further improvement is limited, based on existing EBITDA and the lack of visibility on potential new sales and additional related EBITDA.

Scope-adjusted free operating cash flow/debt is expected to remain negative in 2024-25. This is because planned Phase II investments commencing in H2 2024 will lead to significant cash absorption, thus limiting room to maneuver for further working capital needs in the plastics division. In Scope’s view, additional external funding is needed to cover future liquidity requirements while maintaining the flexibility to manage risks associated with the production ramp-up in the plastics division, which will lead to increasing debt.

Scope-adjusted EBITDA/interest cover was 2.7x at YE 2023. Scope expects it to deteriorate to 2.3x at YE 2024 and to stay above 2.0x thereafter. This is the strongest metric bolstering Textura’s financial risk profile. The moderate ratio is supported by (i) improving nominal EBITDA in 2024-25 due the restructuring of the textile division and contribution of the plastics division, and (ii) by purely fixed-rate debt of HUF 7.5bn, which does not entail any interest rate risk in the short run. Scope-adjusted EBITDA/interest cover may, however, deteriorate if Textura’s lenders decide to renegotiate the financing terms related to the ongoing covenant breach.

Liquidity has become inadequate as there is no contracted working capital financing for the plastics division, existing cash is mainly earmarked for capital expenditure and debt acceleration related to a covenant breach may occur in the next twelve months. Textura does not have sufficient cash to repay its debt in the event of a debt acceleration.

Scope highlights that Textura Zrt.’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme have a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 5.0 bn) if the debt rating of the bonds deteriorated to B or B-. Such covenant breach can be cured if the issuer rating reaches B+ within two years from the downgrade of the bond ratings. Should the bond rating drop below B-, immediate accelerated repayment occurs. Such a development could adversely affect the company’s liquidity profile.

Following the downgrade of the senior unsecured guaranteed bond rating to B on 6th of February 2023, Textura Zrt. has entered the grace period. This means the company must ensure the issuer rating improves to B+ before the grace period ends on 5th February 2025. If the issuer rating does not improve to B+ within the grace period, the company could face severe liquidity constraints and enter a default, unless it obtains refinancing that covers the early repayment of the outstanding bond amount or it proactively obtains an investor waiver related to the accelerated repayment.

Scope has received no information that the bondholders intend to waive the covenant breach under the bond prospectus. Scope sees a ratings upgrade as unlikely until February 2025. Therefore, a failure by Textura to obtain a waiver from bondholders may result in a distressed liquidity situation and hence a ratings downgrade not limited to one notch by the end of 2024.

Scope considers management’s forecast that net debt/EBITDA will decrease to below 3x by YE 2024 to be very optimistic and has therefore included reasonable discounts in its calculations and based its analysis on signed sales contracts. Management is very small and there is key person risk (ESG factor: credit-negative governance factor).

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook remains Negative as Textura has been unable to ramp up sales for the plastics division since 2022 and the textile business has been under operational restructuring since 2023 with deteriorated profitability. In addition, the Negative Outlook reflects the continued breach of the rating deterioration covenant, which, if not remedied, would lead to debt acceleration by February 2025, resulting in distressed liquidity and a potential default situation.

A downgrade would be considered if leverage, as measured by Scope-adjusted debt/EBITDA, is not likely to improve to around 4x by 2025. A downgrade could also be considered if liquidity weakens further because of additional capital expenditure without improved visibility on sales from the plastics division. A downgrade would also occur if the rating deterioration covenant were not cured or waived by 2025.

Scope does not expect the issuer rating to stabilise at the current level.

An upgrade would be justified if: i) Scope-adjusted debt/EBITDA became likely to improve to around 4.0x by 2025, placing an issuer rating upgrade to B+ by February 2025 within reach and the rating deterioration covenant is cured or ii) the rating deterioration covenant is waived. This could occur if the plastics division achieves significant EBITDA growth, and the textile division is successfully restructured, or an agreement is reached with bondholders and lenders.

Long-term debt ratings

The rating of the HUF 5.0bn senior unsecured bond (ISIN HU0000361449) guaranteed by the Hungarian Development Bank was downgraded by one notch to B- from B, in line with the downgrade of the issuer rating.

The bonds are rated one notch above the issuer rating. This reflects Scope’s assessment of an above average recovery due to the guarantee from the Hungarian Development Bank (BBB/Stable).
 
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 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 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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 3 February 2022. The Credit Rating/Outlook was last updated on 6 December 2023.
The bond final Credit Rating was first assigned by Scope Ratings on 21 February 2022. The Credit Rating was last updated on 6 December 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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