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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating of Hungarian food producer Tranzit Food Kft. (Tranzit) and revised the Outlook to Stable from Positive. Concurrently, Scope has withdrawn the senior unsecured debt rating at its current level of BB and assigned BB ratings to the senior unsecured guaranteed bond issued by Tranzit Food Kft. (ISIN: HU0000360599), guaranteed by Tranzit-Ker Zrt.

Rating rationale

The rating action reflects a deterioration in the Scope-adjusted EBITDA margin (2023: 9.6%; down by 4.2pp YoY), which fell below the historical range of 10-15%. While in 2023 the pressure from the input side (animal feed prices, energy costs, wage inflation) had eased, the lower demand and more price-sensitive consumer behaviour on major end-markets (Hungary, Germany, Central and Eastern Europe) had a significant negative effect on the gross margin. Average selling prices decreased by up to 25%, with the duck and goose segment being particularly affected, as this product category has discretionary characteristics and is likely to be substituted with low-cost alternatives. Concurrently, the volume of processed products declined only marginally in both the chicken and duck and goose segments. Scope expects further deterioration of the EBITDA margin in 2024, driven by market prices sustained at a lower level, and a gradual improvement in the medium term in line with the recovery of demand conditions. The erosion of margins, caused by weaker profitability, had only a limited impact on the credit metrics in 2023, which remained at a strong level (Scope-adjusted debt/EBITDA below 1.0x and positive net interest income generation), indicating the resilience of the financial risk profile. In addition, Scope considers Tranzit’s investment strategy, which prioritises labour-intensive processes to enhance capacity rather than improving efficiency, as a potential source of risk.

The business risk profile (revised to BB- from BB) continues to be driven by Tranzit’s market share, which benefits from the leading position in Europe as a goose and duck meat producer. Tranzit’s poultry meat production continues to be well diversified. As trade revenues remained relatively stagnant in 2023, Tranzit remains a small player in both the European market and for chicken meat, the most sold type of poultry. Although chicken sales have levelled off over the past two years, the company’s currently ongoing investments will allow it to continue reducing sales seasonality and thereby benefit from the larger chicken market while maintaining duck and goose as niche markets. Chicken accounts for 40% of total revenues as of 2023, decreasing the seasonality of the business. Moderate diversification by product and geography is impaired by an increasing concentration in terms of customers and sales channels. In 2023, the domestic market represented 51% of total sales, a figure unchanged compared to 2022, indicating that Tranzit is fairly concentrated in its domestic market. The business risk profile is constrained by the deteriorating operating profitability. Scope expects that the unfavourable market conditions and lower selling prices will persist in 2024. The EBITDA margin forecasted by Scope for 2024 is expected to be close to 6.5%, with a gradual improvement towards 10% in the medium term. This improvement is anticipated to be driven by the positive effect of the capital investment programme undertaken by Tranzit in addition to the improving demand conditions.

The financial risk profile (assessed at BB+) remains supported by low leverage and strong EBITDA interest cover. While leverage, as measured by Scope-adjusted debt/EBITDA, has remained below 1.0x in recent years, Scope foresees a temporary hike towards 1.5x in 2024, mainly as a result of the more conservative EBITDA margin forecast impacted by weaker demand. Beyond 2024, Scope expects leverage to return below 1.0x, in line with debt amortization and the projected gradual improvement in operating profitability. The Scope-adjusted debt calculation includes partial netting of the cash, with 30 % haircut applied to account for the seasonal swings in working capital during the business year.

In 2023, Tranzit realized net interest income (HUF 685m) because of the high cash level (YE 2023: HUF 19.6bn) and favourable deposit rates. Interest expenses amounted to HUF 347m (average interest rate of 2.4%), benefiting from the low coupon of the bond (2%) and the moderate debt level. In the medium term, Scope forecasts cash interest paid between HUF 300-400m (average interest rate close to 3%). While this represents a significant increase in interest paid, Tranzit is expected to have a very strong EBITDA interest coverage of close to 10.0x in 2024. Scope expects further positive improvement in the medium term as a result of the lower level of financial debt, in line with the scheduled amortization and recovery of the Scope-adjusted EBITDA margin.

Cash-flow cover is expected to remain volatile, with significant swings between highly positive and highly negative values. In 2023 the strong positive development of year-end working capital (mainly as a result of lower receivables) has resulted in positive free operating cash flow generation of HUF 7.8bn, despite the higher CAPEX (HUF 7.4bn) financed mainly from equity and only to a lesser extent by financial debt. In 2024 Scope expects the days sales outstanding to return close to historical averages (around 68 days vs 43 days in 2023), increasing the working capital needs of the company. This effect, in addition to capital expenditure remaining high as per management guidance both for 2024 and 2025 is expected to result in negative free operating cash flow generation.

Liquidity is assessed as adequate, as the sources (HUF 13.7bn available unrestricted cash) fully covers the scheduled debt amortization of HUF 3.9bn and negative free operating cash flow of HUF 7.7bn forecasted for 2024.

Scope highlights that Tranzit-Food’s senior unsecured guaranteed 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 9.2bn) if the debt rating of the bonds 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 2 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

The supplementary rating drivers no longer reflect credit-negative implications pertaining to weak transparency. Scope has assessed the quality, consistency and timing of financial reporting as adequate, providing sufficient visibility on the company’s underlying financial health.

Outlook and rating-change drivers

The Stable Outlook reflects Scope's expectation that Tranzit Food's EBITDA margin will remain below 10% in the medium term, impacted by the adverse market environment characterised by lower selling prices and dampened demand in the duck and goose segment. Despite the lower profitability, Scope expects credit metrics to remain strong, with Scope-adjusted debt/EBITDA below 1.0x and interest cover close to 20x.

A positive rating action could be warranted if Tranzit-Food grows in size, coupled with less volatile profitability that is close to historical averages (Scope-adjusted EBITDA margin of 10-15%), e.g. by growing the chicken business, while credit metrics remain in line with Scope’s guidance.

A negative rating action may be taken if Scope-adjusted debt/EBITDA reaches around 4.0x on a sustained basis. An increase in leverage could be triggered by a rise in net debt from larger than anticipated capex or from a slower recovery of the poultry market, weighing on the company’s profitability.

Long-term debt rating

In 2021 Tranzit Food issued a HUF 9.2bn senior unsecured guaranteed bond (ISIN: HU0000360599) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 7 years, with a fixed coupon rate of 2.0% and repayment in four tranches: 10% in 2025, 20% in 2026 and 2027 and a 50% tranche at maturity in 2028. The bond has been issued with a guarantee from the related company Tranzit Ker Zrt.

The recovery analysis indicates an ‘excellent’ recovery for the senior unsecured guaranteed bond and for all other senior unsecured debt positions at the level of Tranzit Food even after all senior secured debt would have been fully recovered. The recovery is benefiting from the high level of fixed assets (mainly consisting of PPE), translating into a debt instrument rating of the senior unsecured guaranteed bond one notch above the issuer rating (BB). Although this recovery rate allows for more than one notch uplift compared to the issuer rating, the up-notching was limited to one notch due to the potential volatility in the capital structure on the path to default, and the issuer’s ability to raise additional debt ranking above the senior unsecured guaranteed bond.

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 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: Istvan Braun, 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 22 October 2019. The Credit Ratings/Outlook were last updated on 8 June 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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