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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating on Hungarian tyre retailer and wholesaler MARSO Kft. (Marso) to B+/Stable from BB-/Negative. Further, Scope has also downgraded the senior unsecured debt rating to BB- from BB. Concurrently, Scope has withdrawn the BB- senior unsecured debt rating and has assigned a BB- rating to the senior unsecured bond (ISIN: HU0000359393) issued by MARSO Kft. and guaranteed by its sister company MARSO Holding Kft.

The downgrade is driven by Marso's expected further deterioration in operating profitability in 2024, as economic headwinds and other unfavourable market conditions, such as subdued demand for the company's products, are expected to persist. This will lead to weaker credit metrics in 2024, as evidenced by an expected increase in Scope-adjusted debt/EBITDA* to around 4.5x in 2024 from 3.5x in 2023.

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). Marso’s profitability has so far been a supportive feature of the company’s business risk profile, but several factors have put pressure on the EBITDA margin leading to its sustained deterioration. Economic headwinds, oversupply from manufacturer’s excess inventories and the proliferation of low-cost Asian products negatively impacted both revenue and EBITDA in 2023. The margin was also negatively impacted by the delayed inclusion of ERP (extended producer responsibility) fees in pricing. The unfavourable market conditions are expected to continue in 2024, slowing down the recovery. In 2023, the EBITDA margin has declined to 5.4% from the 2022 level of 7.1% and is forecast to decline further to 4.2% in 2024. In the medium-term Scope expects Marso’s EBITDA margin to recover and increase steadily towards 5% by 2026, which is still below historical, pre-pandemic profitability levels.

The business risk profile remains characterised by Marso’s leading market position, extensive supplier network and moderate profitability but is constrained by Marso’s small size, strong competitors and weak diversification (both geographically and product-wise).

Financial risk profile: BB- (revised from BB). The continued deterioration in EBITDA, starting in 2023, is expected to negatively impact credit metrics in 2024 and 2025. In 2023, debt/EBITDA increased to 3.5x from 2.1x in 2022.

From 2023 onwards Scope has applied a 50% haircut to the company’s cash amount as it is not considered to be permanent due to (i) the business contraction in 2023; (ii) the high cash absorption of the company’s business model (Marso finances its biannual inventory build-up – typically in Q1 and Q3 – through its cash reserves and additional short-term credit lines); and (iii) the overall declining credit quality. In addition, the exceptionally high cash balance at YE 2023, resulting from the decline in net working capital due to the experienced business contraction, is not considered to represent a sustainable level of cash going forward. These adjustments, together with the depressed EBITDA are expected to result in further increase in debt/EBITDA to around 4.5x in 2024. The funds from operations/debt ratio and cash flow coverage are also expected to deteriorate in 2023 dropping to 18% and 0% respectively from 25% and 22% in 2023.

The financial risk profile continues to benefit from Marso’s relatively high interest coverage as the majority of the company’s debt has fixed interest rates. In addition to the bond issued under the Bond Funding for Growth Scheme, Marso’s other outstanding long-term debt is part of the Baross Gabor loan programme, which provides Hungarian SMEs favourable fixed interest rates. The fixed rate loans are scheduled to mature in 2025 and 2026, which will sustain relatively strong interest coverage between 4x-7x at least until 2026.

Liquidity: adequate. The assessment is supported by the ample cash and cash equivalents and moderate free operating cash flow after 2024, which is expected to cover two large upcoming maturities scheduled for 2025 and 2026 (HUF 1.3bn and HUF 0.8bn Baross Gabor loans respectively). However, Scope notes that Marso’s interim cash levels are volatile due to the highly seasonal nature of the business. Nevertheless, Scope still considers the company’s liquidity to be adequate as inventories can also be considered as an alternative source of liquidity.

Scope highlights that Marso’s senior unsecured guaranteed bond (ISIN: HU0000359393) has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 3.6bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 10 business days after public announcement). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 1 notch.  Scope therefore sees no immediate risk of the rating-related covenant being triggered. 

Supplementary rating drivers: credit-neutral. The ratings are unaffected by supplementary rating drivers.

Outlook and rating sensitivities

The Stable Outlook incorporates Scope’s view that, although economic headwinds will continue to negatively impact MARSO’s operating profitability and its credit metrics in 2024 and beyond, the company’s EBITDA margin will not decline below 4% and Marso will maintain a relatively stable loan profile during the next 18 months. This is exemplified by the company’s debt/EBITDA ratio remaining in the 4-6x range. In addition, the Outlook reflects continued high intra-year volatility in working capital and net debt due to the seasonality of the issuer's business.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA improving to below 4.0x on a sustained basis.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA moving close to or above 6.0x.

Debt rating

In December 2019, Marso issued a HUF 3.6bn senior unsecured bond (ISIN: HU0000359393) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond is guaranteed by MARSO Holding Kft., which belongs to the same corporate group as Marso. The bond proceeds were used for warehouse capex. The bond has a tenor of 10 years and a fixed coupon of 2.3%. Bond repayment is in three tranches starting from 2027, with 33.3% of the face value payable yearly. Bond covenants in addition to the rating deterioration covenant include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and dividend payment covenants.

Scope’s recovery analysis indicates an ‘above-average’ recovery estimated in a hypothetical default scenario in 2026, which is based on the issuer’s liquidation value and an assumed outstanding senior secured debt of HUF 2.0bn and warranty of HUF 1.2bn with available credit lines fully drawn. This allows for a one-notch uplift compared to the underlying issuer rating, leading to the debt rating of BB-.

The senior unsecured debt rating has been withdrawn for business reasons.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

MARSO Kft.

Issuer rating: B+/Stable, downgrade

Senior unsecured debt rating: BB-, downgrade and withdrawal

Senior unsecured bond rating (ISIN: HU0000359393): BB-, new

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

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 October 2019. The Credit Ratings/Outlook were last updated on 20 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.