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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating of Nitrogénművek Zrt to B- from B, and has kept the rating under review for a possible downgrade. Scope has also downgraded the senior unsecured debt rating to B- from B, and kept it under review for a possible downgrade.

The credit rating's one-notch downgrade is predominantly attributed to rising liquidity concerns as the maturity of the EUR 200m bond approaches. Notably, the absence of a coherent refinancing strategy has intensified these concerns. This is further complicated by the company's deteriorated negotiating power with potential creditors, which is a direct result of a year marked by below-average operational performance. This suboptimal performance stems largely from significant external challenges, including the new imposition of CO2 emissions tax retroactive since 1st January 2023 and a downturn in the market prices of calcium ammonium nitrate (CAN), factors which have heavily impacted the company’s financial health and operational efficiency.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: B+. Scope notes that there are no significant changes in the Business Risk Profile, with market share remaining stable. Other regional participants such as Yara also curtailed production at several production plants in 2023 due to market conditions, consequently, Nitrogénművek 's robust presence in the fertiliser market across Central and Eastern Europe (CEE) and Western Europe is maintained. This underscores the vital role of nitrogen as one of the three key fertilisers. Should the influx of fertilisers from Russia pose a threat to European producers, the existing legal framework for imposing sanctions acts as a mitigant, grounded not only in political rationale but also in the preservation of market competitiveness. Russian fertiliser producers benefit from lower energy costs and fewer sustainability constraints, resulting in higher greenhouse gas emissions.

Furthermore, demographic trends driving overall fertiliser demand remain favourable. Scope observes no developments in the company's strategy that suggest a change in the diversification of its operations. Consequently, the company's operational focus remains on a single product, produced at a single facility, within a single country. This lack of diversification, previously highlighted by Scope, remains unchanged. Companies with operations in multiple countries can better manage regulatory risk, as evidenced by the CO2 tax, which has materially impacted the company and if this tax would be abolished things would be much brighter and there would be a potential upside in operating cash flows.

In terms of profitability, Scope notes significant deterioration, with indicators over the last three years and one projected year averaging around 10%, which is below its peers. This decline is logically affected by unfavourable CAN and Gas prices, a fact that Scope has consistently highlighted indicating their exposure to commodity price volatility. An additional layer is the novel CO2 tax, which introduces a new variable impacting operational costs. This tax adds complexity to cost absorption processes, raising the breakeven points to levels where it may be more viable to halt production and increasing the likelihood of halting plant operations. Nitrogénművek is currently contesting the CO2 tax's legality in court, a process that may span several years due to the complexity of the legal proceedings.

Financial risk profile: CCC. The FRP has been revised to CCC from B- due to ongoing high leverage ratios, still unfavourable CAN prices, a CO2 tax burdening profitability, and inefficient cost absorption. Despite no major debt maturities until May 2025, leverage remains high but is expected to improve slightly as plant operations resumed in February 2024. Leverage ratios are projected to improve to 6x by the end of 2024 and around 5.8x in 2025, assuming successful bond refinancing.

Interest coverage, negatively impacted in 2023 due to adverse operational factors, is anticipated to recover to 2.3x in 2024 and slightly worsen in 2025 to 2.0x, following a slight increase in Scope-adjusted EBITDA* countered by higher interest rates as a consequence of debt refinancing.

The company's working capital is marked by considerable fluctuations, driven by variables including CO2 emission permits, VAT claims, and inventory advances, alongside variable natural gas costs. These factors have contributed to significant observed volatility. As a result of these pressures, the cash flow coverage indicator is projected to remain slightly negative in most forecasted periods, despite a slight improvement expected to slightly positive territory by 2025.

Scope believes that refinancing the EUR 200m senior unsecured bond maturing in May 2025 on favourable terms may pose a challenge unless the company's financial health improves significantly before the bond's maturity, which still shows no clear signs of improvement three months after the last review. To improve its position for refinancing, the company is anticipated to adopt a more conservative dividend policy to gain the confidence of external financiers, having already given the first step and declaring no dividend on 2023 results. Additionally, the company is expected to adhere to strict capital expenditure guidelines for an extended period, despite potential impacts on operational efficiency and competitiveness.

Liquidity: inadequate. Liquidity is considered inadequate and, in Scope's opinion, justifies a two-notch adjustment. This is due to the refinancing for the EUR 200m bond still not being established and the lack of unused committed credit lines. Cash reserves as of Q124, approximately EUR 86m, cover only 43% of the debt, highlighting a substantial potential liquidity shortfall of EUR 114m. As such, Scope has incorporated a negative adjustment within the FRP to reflect these liquidity concerns. The company informed Scope in June 2024 that it is considering refinancing, with the process beginning in August 2024 once the audited first-half 2024 accounts are available, although there is currently no draft term sheets.

Supplementary rating drivers: no supplementary rating drivers have been considered.

Outlook and rating sensitivities

The maintenance of the under-review status for a possible downgrade primarily reflects the still limited visibility on adequate refinancing of the EUR 200m bond maturing in May 2025. Scope understands that the company is working on different options that would adequately address smooth refinancing, with the next milestone being to contact potential interested parties with the audited interim accounts for the first half of 2024, expected by August 2024. Scope will continue to closely monitor the situation over the coming months. Additionally, the under-review status reflects limited visibility on the quantities to be produced in 2024 and the prices at which they will be sold. As such, the company's short-term operational performance will also be a determining factor that will either support or limit the market appetite to refinance the bond.

Scope intends to resolve the under-review status as soon as possible, reflecting progress made in the company's operational recovery and refinancing plans.

The upside scenario for the ratings is:

• Reduced concerns about liquidity and high refinancing risks in May 2025, e.g. through the presentation of a tangible refinancing concept well ahead of the EUR 200m bond maturity.

The downside scenario for the ratings is:

• Increased concerns about liquidity and high refinancing risks in May 2025, e.g. through the lack of a tangible refinancing concept well ahead of the EUR 200m bond maturity.

Debt rating

The rated debt is issued by Nitrogénművek Zrt. The senior unsecured bond displays standard bond documentation, including pari passu and negative pledge.

Scope has downgraded the rating for senior unsecured debt to B- and maintained the under-review status for a possible downgrade, in line with the rating action on the underlying issuer rating.

Despite a high projected recovery rate of 94% for senior unsecured debt in a hypothetical default scenario at the end of 2025, the debt rating is aligned with the issuer's to factor in the inherent uncertainty on the refinancing.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action. Scope views the CO2 tax as a change in policy stance rather than a penalty for increased pollution by the company.

All rating actions and rated entities

Nitrogénművek Zrt

Issuer rating: B-/Under Review, downgrade

Senior unsecured debt rating: B-/Under Review, downgrade

*All credit metrics refer to Scope-adjusted figures.

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, (General Corporate Rating Methodology, 16 October 2023; Chemicals Rating Methodology, 16 April 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.

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 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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Ivan Castro Campos, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 July 2020. The Credit Ratings were last updated on 27 March 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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