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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary-based CLA Pig Kft’s issuer rating at B+/Stable. The instrument rating of the HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) has been affirmed at BB-.

The affirmation is based on the solid financial risk profile, although profitability in 2023 remained at a relatively lower level compared to historical averages (approximately 20%). The revenues of CLA Pig increased to HUF 6.5bn, representing a 19% year-on-year (YoY) growth, driven by the higher European market prices for pork. Furthermore, the price of animal feeds has demonstrated a consistent decline since the peak levels observed in 2022. Despite the favourable developments in the business environment, the EBITDA* margin has exhibited only a modest improvement (13.3% in 2023 from 12.9%), significantly constrained by a force majeure event – a fire on the CLA Pig premises, resulting in damage to the farrowing house and the loss of a portion of the pig herd.

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 (unchanged). The business risk profile is supported by the operating profitability, while being constrained by the limited market share and diversification.

Scope forecasts a notable increase in operating profitability in 2024 (EBITDA margin of 19%) due to higher selling prices combined with input costs sustained at a lower level compared to previous years. Beyond 2024, the EBITDA margin is forecasted to improve gradually, as the completed Kisbaráti investment is expected to have a positive effect not only on revenues, but also on the profit-generating capability of CLA Pig. This investment aims to significantly improve the energy efficiency of the expanded pig farm by utilising renewable energy sources, thereby reducing exposure to energy price volatility (credit-positive ESG factor).

Scope notes that the issuer’s operating profitability remains highly dependent on the European Union’s Common Agricultural Policy subsidies as recurring subsidies have been a reliable source of income over the past few years. Any changes in the subsidy system can significantly impact CLA Pig’s operating cash flow and profitability.

With an estimated domestic market share of around 7%, CLA Pig remains one of the smaller players in the Hungarian pork segment. The ongoing capacity expansion (new pig farm located in Kisbaráti, Hungary) of up to 280k animals would double CLA Pig’s market share, placing it amongst the medium-sized pig farms in a heavily fragmented domestic market.

The low degree of diversification, both in terms of geographies and product categories, limits CLA Pig’s ability to mitigate external shocks and makes it more difficult to cope with changes in market conditions.

Financial risk profile: BB+ (unchanged). The financial risk profile reflects CLA Pig’s solid credit metrics and moderate indebtedness. The main constraint to the financial risk profile remains the negative free operating cash generation.

The company's profitability remained below the historical average, resulting in leverage, as measured by the debt/EBITDA, remaining above 4.0x (2023: 4.4x). Given the one-off, extraordinary nature of the fire incident, the deterioration is deemed temporary. In the medium term, leverage is expected to improve to below 3.0x, given the anticipated increase in EBITDA and the absence of any additional third-party debt until 2026.

Similarly to 2022, CLA Pig generated positive net interest income in 2023, benefitting from the high level of unrestricted cash (part of the bond proceeds not yet spent) and the interest received on short-term deposits. While Scope’s financial forecast includes only limited interest income beyond 2023 (HUF 50m), EBITDA interest cover is expected to remain sustained at a very high level, consistently above 10.0x, and to improve further in line with the increasing EBITDA and amortisation of the financial debt.

Cash flow cover, measured by free operating cash flow (FOCF)/debt is projected to be negative till YE 2024, marking the end of the current capex-heavy period. However, negative FOCF is not expected to have a significant adverse impact on liquidity as the planned HUF 5bn Kisbaráti investment is likely covered by the proceeds of the bond issuance (and the associated retained cash buffer) and investment subsidy. As beyond 2024 only maintenance capex is forecasted (HUF 500m), FOCF is expected to turn positive in 2025, and FOCF/debt is expected to move sustainably above 20% in the medium term.

Liquidity: adequate. Liquidity is adequate, backed by the HUF 1bn unrestricted cash available as of YE 2023, fully covering the negative FOCF of HUF -0.6bn in 2024 and the short-term debt repayments of HUF 0.2bn forecasted for 2024.

Scope notes that CLA Pig’s guaranteed senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires CLA Pig to repay the nominal amount (HUF 3.26bn) if the debt rating of the bond 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 two notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

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

Outlook and rating sensitivities

The Stable Outlook reflects the assumption that the credit metrics of CLA Pig will develop in line with Scope’s rating case forecast, and the leverage, measured by Scope-adjusted debt/EBITDA will move below 3.0x in the medium term. Scope’s forecast deems the deterioration of operating profitability in 2022 and 2023 to be temporary, and assumes an EBITDA margin close to historical averages (near 20%) beyond 2023.

The upside scenario for the rating and Outlook is:

• Significantly improved business risk profile and operational scale (remote)

The downside scenario for the rating and Outlook is:

• Debt/EBITDA sustained significantly above 4.0x 

Debt rating

In August 2021, CLA Pig issued a HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with a fixed coupon rate of 2.9% and repayment in five tranches of 10% in 2026, 2027, 2028, 2029 and 2030 and a 50% tranche in 2031. The bond has been issued with a guarantee from the related company CLA Service Kft.

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 CLA Pig 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 the recovery rate allows for more than one notch uplift compared to the issuer rating, the up-notching remains limited to one notch due to the potential volatility in the company’s capital structure on the path to default, and the issuer’s ability to raise additional debt ranking above the senior unsecured guaranteed bond. The guarantee of CLA Service Kft. has no significant effect on the expected recovery of the debt instrument.

Environmental, social and governance (ESG) factors

Overall, ESG factors were neutral for the rating. This reflects the credit positive assessment of operational efficiency following the investment in renewable energy sources, as well as the credit neutral assessment of the issuers' inherent vulnerability to regulatory risk (changes in the EU Common Agricultural Policy directly affect operating profitability) and corporate structure (lack of group-level disclosures and consolidated financial statements).

All rating actions and rated entities

CLA Pig Kft.

Issuer rating: B+/Stable, affirmation

Senior unsecured guaranteed bond 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 methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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, the Rated Entities’ Related Third Parties, 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: Istvan Braun, Senior Representative
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 August 2021. The Credit Ratings/Outlook were last updated on 23 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
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