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Rating action

Scope Ratings GmbH (Scope) has today affirmed DANIELLA KFT.’s (Daniella) issuer rating at B+ and revised the Outlook to Negative from Stable. Scope has also affirmed the senior unsecured debt rating at BB-.

The Negative outlook change is driven by the deterioration of Daniella’s operating profitability and credit metrics. In 2023 Scope-adjusted EBITDA margin* dropped to 3% (from 8% in 2022) leading to an increase in debt/EBITDA to 5.6x (above the negative rating trigger of 4x). The high inflationary environment and the slowdown in the group’s underlying Hungarian construction market have put pressure on the demand for its products and operating profitability. The economic headwinds are expected to weigh on the group’s profitability going forward, its slow recovery continuing to impact Daniella’s credit metrics in 2024E.

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+ (-1 notch). Daniella's business risk profile has been negatively impacted by its deteriorating operating profitability. The unfavourable market conditions in 2023 (i.e. high inflation market, slowdown in construction, tightening of government subsidies) have put pressure on the group's EBITDA margin, which fell from 8% in 2022 to 3%. This decline illustrates the high volatility of Daniella's profitability, as the Group is strongly affected by the high cyclicality of its underlying market (the construction industry).

As market conditions no longer supported the group's second brand (DL'1 Kft.), the decision was taken to merge the already consolidated subsidiary with Daniella and at the same time to implement an organisational restructuring to shift from a geographical to a project-based sales strategy, also supporting Daniella's plan to increase its industrial clientele. Based on interim data, the group's revenue growth and EBITDA margin improved as Daniella also implemented cost saving measures. The EBITDA margin is forecast to slowly increase to 3.5% in 2024E. Over the medium term, operating profitability is expected to increase further towards 5% by 2026E, below the historical average of around 6% over the last 5 years.

The business risk profile continues to be supported by Daniella's robust market shares in Hungary, however, the group's absolute size and niche focus remain significant constraints.

Financial risk profile: BB- (unchanged). Although Daniella's debt has remained relatively stable in recent years, the group's low profitability has had a significant negative impact on the 2023 credit metrics. Furthermore, this negative effect is expected to continue to weigh on the 2024 credit metrics due to the forecasted slow recovery of the EBITDA margin.

In 2023, debt/EBITDA rose to well above 4x, where it is forecast to remain in 2024. The slow recovery in profitability, coupled with the scheduled repayment of the subsidised loan in 2025 and the bond starting in 2026, is expected to significantly improve the credit metrics after 2024: debt/EBITDA is expected to decline from 5.6x in 2023 to 2.5x in 2026. The other credit metrics follow a similar trend, as funds from operations/debt also deteriorated to 18% and is forecast to stagnate before the credit metric is estimated to increase towards historical levels, while free operating cash flow/debt becomes negative in 2023 and is forecast to remain negative in 2024E before its expected significant improvement towards 35%.

EBITDA interest cover remains the strongest credit metric, benefiting from the fixed coupon of the bond and the state-subsidised Baross Gabor loan. The metric is forecast to decrease to 5x before recovering towards 9x.

Liquidity: adequate. The main liquidity sources are HUF 852m available cash as at December 2023 and the forecasted free operating cash flow. These are insufficient to cover upcoming debt maturities of HUF 1.2m in 2025, including the state subsidized loan of HUF 944m. Despite Daniella’s internal and external liquidity ratio deteriorating to below 100% in 2025, Scope still considers the group’s liquidity to be adequate. This is because firstly the short-term credit line of HUF 300m is assumed to be automatically renewed as the group holds good banking relationships and secondly as Daniella’s inventory levels can also be considered as an alternative source of liquidity.

Supplementary rating drivers: -1 notch. Daniella previously transferred ownership of the warehouse financed by the Funding for Growth Scheme bond to HAD Real Estate, which was spun out in 2022. The spinoff has had no impact on Daniella’s credit rating since the entity was not incorporated and the transaction had no effect on cash flow. However, it implies that bond recovery proceeds would become unavailable to investors in a bankruptcy-like event. This is seen as credit-negative (ESG factor: credit-negative governance factor), leading Scope to lower the issuer rating by one notch.

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

Outlook and rating sensitivities

The Negative Outlook reflects Scope’s view that the economic headwinds (weaker demand, challenges in local construction sector) will continue to negatively impact Daniella’s operating profitability and its credit metrics. This leads to an assumption of Debt/EBITDA remaining above 4x. Scope’s base case assumes no further drawing of additional debt, Scope is drawing comfort from the covenant structure.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA remaining above 4.0x on a sustained basis

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA decreasing to 4.0x and below (Outlook revision to Stable)

Debt rating

Scope has affirmed Daniella’s senior unsecured debt rating at BB-, including the HUF 3.5bn (ISIN: HU0000359872) bond, one-notch higher than the issuer rating. This rating is based on a hypothetical liquidation scenario as of end-2026, in which Scope computed an ‘above average’ recovery for holders of senior unsecured debt based on its assumptions of attainable liquidation values.

In July 2020, Daniella issued a HUF 3.5bn senior unsecured bond through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond proceeds were used for warehouse capex and debt refinancing. The bond has a tenor of 10 years and a fixed coupon rate of 3%. Bond repayment is in five tranches starting from 2026, with 20% of the face value payable yearly. Scope notes that the senior unsecured bond has an accelerated repayment clause. The clause requires Daniella to repay the nominal amount (HUF 3.5bn) in case of a rating deterioration (two-year cure period for a B/B- rating; repayment within 10 business days after the bond rating falls below B-, which could have default implications). The rating headroom to entering the grace period is 1 notch, therefore Scope sees no significant risk of the rating-related covenant being triggered. Other bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control, dividend payment and additional indebtedness covenants.

Environmental, social and governance (ESG) factors

Overall, ESG factors have a negative impact on this credit rating action. The rating reflects a negative one-notch adjustment pertaining to the significant credit risk posed by weaknesses in the issuer’s governance as after the spinout of HAD Real Estate in 2022 from the group, there is a high likelihood that the bond proceeds would become unavailable to investors in a bankruptcy-like event.

All rating actions and rated entities

DANIELLA KFT.

Issuer rating: B+/Negative, outlook change

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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Retail and Wholesale Rating Methodology, 26 April 2024), 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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 May 2020. The Credit Ratings/Outlook were last updated on 11 September 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.