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Rating action

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

The two-notch downgrade is mainly due to growing liquidity concerns as the EUR 200m bond matures in May 2025, just eight months away, with the refinancing plan still lacking sufficient clarity from Scope’s viewpoint. Although the company had intended to present a refinancing strategy in recent months, no formal plan has emerged, increasing these concerns. Informal discussions have yet to yield tangible results, and the situation is further aggravated by the company’s weakened negotiating position with creditors after a year of underperformance when considering the CO2 contested tax marked by significantly lower-than-expected EBITDA. This suboptimal performance is largely due to external pressures, including the retroactive imposition of the CO2 emissions tax, effective since 1st January 2023, and continued weakness in market prices for calcium ammonium nitrate (CAN), both of which have severely strained Nitrogénművek’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+ (unchanged). Nitrogénművek's profitability has deteriorated significantly, with 2024 EBITDA now projected at HUF 8-10bn (EUR 20-25m), down from earlier estimates of HUF 15bn (EUR 38m). This decline is primarily driven by the retroactive CO2 tax imposed since January 2023, which cannot be mitigated fully through recent improvements in CAN prices. The CO2 tax, subject of a legal dispute that could take up to 18 months to settle, has significantly impacted EBITDA during the first half of 2024, amounting to an impact of HUF 5.7bn (EUR 14m). As a result, EBITDA margins have dropped to around 3%, whereas they could have exceeded 10% without this burden. High utilisation rates of 85% have been maintained, but operational costs continue to pressure profitability.

Despite this, Nitrogénművek's business fundamentals remain stable, with the company maintaining its market share across Central and Eastern Europe (CEE) and Western Europe. The fertilizer market correction anticipated earlier in 2024 is now evident, yet Nitrogénművek's role as Hungary's sole nitrogen fertilizer producer remains crucial for national food security, with market demand trends continuing to reinforce its position.

Financial risk profile: CC (revised from CCC). The Financial Risk Profile (FRP) has been revised due to persistently high leverage ratios and the retroactive CO2 tax that continues to burden profitability notwithstanding some improvements in CAN prices. Despite the resumption of plant operations in February 2024, leverage remains elevated, with projected leverage ratios – as measured by Scope-adjusted debt/EBITDA* – of 11.5x by the end of 2024 and around 8.4x by 2025, assuming a successful bond refinancing. These ratios reflect a slight improvement, but overall debt levels remain high, exacerbated by the lack of a concrete refinancing plan for the EUR 200m bond maturing in May 2025.

Interest coverage, which was negatively impacted in 2023 due to operational challenges, is expected to recover modestly to 1.2x in 2024 and 1.5x in 2025 due to higher interest rates from a potential bond refinancing. While Scope-adjusted EBITDA is forecasted to increase slightly, the higher interest burden will counterbalance any operational improvements.

The company's working capital remains subject to inherent volatility driven by the seasonal nature of its operations, further compounded by factors such as CO2 emission permits, VAT claims, and fluctuations in natural gas costs. These factors, combined with inventory management strategies, have led to pressure on cash flow, and cash flow coverage is expected to remain slightly negative through most forecast periods, with minor improvements projected by 2025.

Refinancing the EUR 200m bond on favourable terms (e.g. through a new bond or loan) will likely face significant challenges unless there is a marked improvement in the company’s financial health before the bond's maturity. Despite initial steps like declaring no dividends on 2023 results, further measures, including strict adherence to capital expenditure limits and maintaining a conservative dividend policy, will be necessary to restore confidence among potential financiers. However, the absence of clear signs of recovery since the last review three months ago increases the risk of continued financial strain.

Liquidity: inadequate. Liquidity is considered inadequate and, in Scope's opinion, justifies a negative three-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 that could serve as a fallback. Cash reserves as of H1 2024, approximately EUR 76m, cover one third of gross debt. As such, Scope has incorporated a further negative adjustment within the FRP to reflect these liquidity concerns.

The combination of a BRP of B+ and an FRP of CC results in an issuer rating of CC, driven by the critical importance of liquidity for Nitrogénművek. While Scope recognises certain strengths in the business model, the company’s liquidity challenges are pivotal. Regardless of a firm's operational strengths, liquidity is the weakest link and remains an essential condition for financial stability.

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 despite preliminary discussions with bondholders, a definitive refinancing strategy has not been finalised and consequently increased default risk. The under-review status also accounts for ongoing uncertainty around production volumes and pricing for the remainder of 2024, with only half year figures currently available. Maintaining this status will allow Scope to monitor the situation closely and assess the company's refinancing efforts and operational performance in the coming months. Scope’s aims to resolve the under-review status as soon as additional clarity is provided.

The upside scenario for the ratings is (individually):

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

The downside scenario for the ratings is (individually):

• Increased concerns about liquidity and refinancing risks, e.g. through the lack of a tangible refinancing concept well ahead of the EUR 200m bond maturity
   
• Increased risk about an unfavourable debt restructuring of the EUR 200m bond

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 CC 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 100% 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: CC/Under Review, downgrade

Senior unsecured debt rating: CC/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 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.

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, 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 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 21 June 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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