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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating on Bonafarm Zrt (Bonafarm) and its fully owned subsidiary Pick Szeged Zrt (Pick). Concurrently, the BB senior unsecured debt ratings have also been affirmed.

The issuer rating on Pick, a producer of various meat products, of which the most notable is its winter salami, continues to be based on the credit metrics of its parent, Bonafarm, which is the parent company of the Bonafarm Group. The rating is based on Bonafarm’s implicit guarantee given full ownership, consolidation and operational integration, as well as Bonafarm’s unconditional and irrevocable guarantee for group debt.

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

Key rating drivers

Business risk profile: BB+ (unchanged). The business risk profile continues to benefit from Bonafarm’s market leadership in Hungary, where it is the largest agricultural and fresh food producer with consolidated revenues of HUF 323bn in 2023. Despite its moderate size in a European context, diversification is a supporting factor. The group is active in several markets in both businesses of agriculture (crop and fodder production, pig, poultry and dairy cattle breeding) and food processing (fresh and processed meat, milk, poultry, and wine). Bonafarm is also well diversified with regard to both customers and suppliers. Moreover, it has strong strategic partnerships, such as with the group owner’s asset MCS Slaughterhouse, one of the largest pork slaughterhouses in the region.

Concentration on the Hungarian market for over 80% of sales in 2023 remains a constraint. This makes the business largely dependent on local market conditions, although the vertically integrated business model for pig and poultry production reduces risks within the value chain and allows for fairly stable profitability over time. The Scope-adjusted EBITDA margin generally ranges between 5% to 10%. Scope considers this moderate compared to large European branded consumer peers. However, it is still well above local peers, also thanks to the strength of its meat and milk brands locally, particularly Pick and its salami flagship product.

After a record year in 2022, Scope-adjusted EBITDA* declined to HUF 27.8bn in 2023 from HUF 36.1bn, with the EBITDA margin down to 8.6% in 2023 from 11.3%. This was driven by a fall in commodity prices, which affected agricultural activities. In turn, weaker volumes impacted food processing activities, with an increasing share of consumers switching to cheaper or private label products, therefore limiting pricing headroom and worsening the product mix. For 2024, Scope expects Scope-adjusted EBITDA to further decline to around HUF 23bn, with a margin around 6%. This will be driven by: i) still soft – but normalising – consumer demand for branded goods; ii) cost pressure from yearly salary inflation at around 15%; and iii) persistently elevated pig prices, which cannot be fully offset by price increases given the low level of inflation. Additionally, the consolidation of Hungerit in December 2023 (poultry processing and slaughtering, the main chicken supplier for KFC in Hungary) will be margin dilutive in the short term, driven by avian influenza outbreaks and extremely weak demand in the European duck market. From 2025, the Scope-adjusted EBITDA margin is expected to normalise at around 7% to 8%, in line with the historical average, with EBITDA converging towards HUF 30bn. Scope does not expect efficiency gains from the ongoing large investment projects to kick in until 2027.

Financial risk profile: BB- (unchanged). Scope foresees a deterioration in Bonafarm’s leverage due to the consolidation of Hungerit coupled with the deployment of a large capex plan starting in 2024 (higher than Scope’s forecasts last year; capex also includes investments at Hungerit level). Despite this, the financial risk profile assessment remains unchanged at BB-, as it already incorporated some headroom for an increase in leverage. The Scope-adjusted debt/EBITDA ratio is projected to increase to around 3.0x in 2024 and towards 4.0x in 2025, following the strong levels reported in the past couple of years. In fact, leverage bottomed out at 0.9x in 2022 on record operating performance and large cash reserves. It started deteriorating to a still strong level of 1.6x in 2023 due to lower EBITDA and higher capex. Uncertainties remain regarding the potential impact of further M&A activity and capex cost overruns. However, these are mitigated by the possibility of postponing smaller capex projects, as management is committed to keeping net debt/EBITDA below 3.5x. This would also provide a certain safety buffer against the bank financing covenant of leverage below 4.0x. Similarly, Scope-adjusted funds from operations/debt reached a quite strong level over the past couple of years (66% in 2023), but is expected to decrease to a more moderate level of 25% to 30% over the medium term.

The main rating constraint is Scope-adjusted free operating cash flow (FOCF)/debt. Scope expects very negative FOCF values for the next three years, driven by accelerating capex despite some normalisation in working capital needs thanks to lower inflation. Scope anticipates total net capex of HUF 178bn in 2024-2026 (HUF 60bn higher than Scope’s assumption last year for the 2023-2025 period), with around HUF 70-75bn per year in the first two years, representing a material increase compared to HUF 20bn on average over the past five years. Strategic capex is forecasted at HUF 143bn in 2024-2026 (net of HUF 40bn in assumed subsidies). The main investments are Pick’s moulded salami brownfield factory project and Hungerit’s poultry slaughterhouse greenfield project. They should comprise over half of the gross strategic capex amount and construction is expected to start in H2 2024. Other investments will be primarily directed towards the development of poultry farming technologies. Scope’s forecasts do not include further acquisitions or dividend payments over the years 2024-2026.

Very strong Scope-adjusted EBITDA interest cover supports the financial risk profile, thanks to a financing structure featuring fixed rates between 0% and 2%. Furthermore, Bonafarm generated finance income on excess cash in Hungarian forint, as deposit rates were well above 10% from mid-2022 throughout most of 2023 (currently on a declining trend). This led to net interest income for the years 2022-2023, which Scope expects to continue in 2024 (around HUF 2bn). Scope expects a return to yearly net interest expenses ranging between HUF 1.2bn and HUF 1.6bn in 2025-2026, which still allows for comfortable EBITDA interest cover of around 20x.

Liquidity: Adequate. Although liquidity coverage ratios are forecasted to turn negative in 2024 and 2025, driven by the large expansionary capex, these investments are expected to be entirely pre-financed. Moreover, the debt maturity profile is fairly back-loaded, with no large maturities over the next 18 months. The HUF 27bn bond issued by Pick is repayable only at maturity in 2029. The liquidity assessment also reflects the assumption that the company will have the flexibility to postpone smaller capex when needed, although Scope still expects further shareholder support to cover the negative FOCF. The company has a HUF 7.3bn overdraft facility, currently mostly unused and to be renewed in January 2025. Additionally, Bonafarm benefits from a large balance of cash and equivalents of HUF 31bn at YE 2023, which Scope conservatively assumes that it will be largely used over the next 18 months to finance the investment projects. Overall, Scope still sees limited risk of Bonafarm breaching the 4.0x net debt/EBITDA banking covenant.

Supplementary rating drivers: +1 notch. Scope maintains the one-notch supplementary rating driver for parent support, demonstrated by recurring capital injections in the past, and the expectation of further capital increases (and/or a subordinated owner’s loan with the intention to convert it into equity), which Scope assumes will be over 15% of the resources required for the ongoing large investment projects. Moreover, Scope expects the continuation of the zero-dividend policy. Bonafarm is fully controlled by renowned businessman and banker Dr. Sándor Csányi through his holding company Bonitás 2002 Zrt. In June 2023, the shares of Bonitás 2002 Zrt. were transferred to a family trust named Unity Asset Manager Foundation for generation change purposes. Ownership interests can only be inherited within the Csányi family. Scope therefore sees the transaction as credit neutral, since the family’s support and the family-run nature of the group will continue to benefit the rating.

Outlook and rating sensitivities

The Stable Outlook reflects increasing leverage amid the company’s planned investment programme and consolidation of Hungerit but which remains commensurate with the current rating.

The downside scenario for the ratings and Outlooks is:

• Scope-adjusted debt/EBITDA deteriorating to 4.0x or above on a sustained basis.

The upside scenario for the ratings and Outlooks is:

• Remote in light of the upwards trajectory on leverage, but it could be considered when FOCF becomes breakeven on a sustained basis.

Debt ratings

Scope has affirmed the BB senior unsecured debt rating of Bonafarm and Pick, which is in line with the issuer rating.

Pick issued a HUF 27bn senior unsecured bond unconditionally and irrevocably guaranteed by the parent company, Bonafarm (ISIN: HU0000359336, issued in December 2019), through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The only bond issuance within Bonafarm Group was made at the Pick Szeged level, while Bonafarm Group has other senior unsecured debt ranking pari passu in the form of payables.

The senior unsecured bond issued by Pick ranks below the HUF 23bn senior secured bank debt of Bonafarm. The group has a strong asset base, but Scope has applied a significant discount to the recovery rates for the ageing processed meat products plants and the growing portion of assets under construction intended to replace them. As a result, Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2026.

The bond proceeds are earmarked for Pick’s new processed meat products plant, whose construction is expected from H2 2024, and for general group financing purposes. The bond proceeds have been set aside as cash and in Hungarian sovereign bonds until construction starts. The bond has a tenor of 10 years, a fixed coupon of 2.0% and bullet repayment.

Scope notes that Pick’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 27bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (immediate repayment). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is three notches. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition to the rating deterioration covenant, soft covenants include those addressing cross default (with the senior secured club facilities agreement having a net debt/EBITDA covenant of 4.0x, mitigated by the large headroom to actual levels) and a change of control (initially limited to Dr. Sándor Csányi as final beneficial owner; in 2023 bondholders agreed to a change of control to a Csányi family trust).

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Bonafarm Zrt.

Issuer rating: BB/Stable, affirmation

Senior unsecured debt rating: BB, affirmation

Pick Szeged Zrt.

Issuer rating: BB/Stable, affirmation

Senior unsecured debt rating: BB, affirmation

*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 and/or Outlooks, (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
Bonafarm Zrt.: The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
Pick Szeged Zrt.: 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 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eugenio Piliego, Senior Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlooks were last updated on 17 August 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, 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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.