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Rating action

Scope Ratings GmbH (Scope) has affirmed the B/Stable issuer rating on Hungarian limestone producer Reneszánsz Kőfaragó Zrt. Scope has also affirmed the B+ senior unsecured debt rating.

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 of Reneszánsz remains driven by its strong market position as the largest limestone dimension stone producer in Hungary. Revenues grew by 52% in 2023 to HUF 3.4bn, thanks to strong growth in the niche market of national heritage site renovations (Buda Castle and Kossuth Square in Budapest). Reneszánsz’s production capacities are fully utilized for 2024, with revenues forecasted to reach HUF 3.7bn.

The company is the largest limestone producer in Hungary with an estimated market share of 18% for dimension stone. Reneszánsz has a competitive advantage over imported products in terms of transportation costs, stone type and quality, and its skilled workforce (stonemasons). Additionally, many national heritage buildings in Budapest are constructed with limestone from the Süttő quarry, which provides a captive market for the company’s products.

Operating profitability remained stable, with only a slight deterioration in the reported EBITDA margin due to increasing input prices (mainly wage costs), the business model proving resilient in the face of more adverse market conditions. Going forward, Scope forecasts that profitability will remain relatively flat, with Scope-adjusted EBITDA margin close to 28%. As the order book is secured and no significant investments are planned, Scope expects the issuer to be able to predominantly reflect the effects of external shocks (energy price or wage cost increases) in its selling prices. The company is expected to remain a price maker in the medium term due to the highly specialized nature of its products.

Reneszánsz’s business risk profile is constrained by its small absolute size in both a European and global context as well as weak diversification in terms of activities, products, order book and geographies.

Financial risk profile: B (unchanged). The issuer’s financial risk profile benefits from strong debt protection but is constrained by high financial leverage and weak free operating cash flow generation.

Scope expects leverage, as measured by Scope-adjusted debt/EBITDA* (including the capitalisation of future mine concession payments) to gradually improve to around 6.0x (2023: 7.1x), as the bond amortisation starts from 2024 with a yearly HUF 120m in principal repayment. Debt protection (EBITDA interest cover) is expected to remain strong, at around 4.0x beyond 2023. This is due to the favourable coupon of the bond issued in 2021, which is fixed for the whole tenor, and no plans or need by the issuer to seek new interest-bearing debt. Interest expense also includes the interest component of operating lease payments, valued at HUF 201m in 2023. Cash flow cover, measured by free operating cash flow/debt has been highly negative in the previous years, mainly as a result of the significant CAPEX undertaken. Scope expects FOCF generation to be close to break-even going forward despite the lower capital expenditure, mainly due to the cash outflow related to the increasing inventory. The weak FOCF generation significantly limits the company's ability to deleverage (as debt repayments are expected to be covered by available free cash, not FOCF) and creates the need to further increase prices if capacity remains unchanged.

Liquidity: adequate. Liquidity is adequate, as sources (HUF 696 cash available as of YE 2023) fully cover the negative FOCF of HUF 145m and HUF 120m maturing short term debt in 2024.

Scope notes that Reneszánsz’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 2.3bn) 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 zero notches. Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope's assumption that Reneszánsz's credit metrics will develop in line with Scope's financial forecasts, with the EBITDA margin remaining close to historical averages (24%-28%) and EBITDA interest coverage maintained at around 4.0x. The base case also assumes significantly lower capex from 2024 (marking the end of the current investment-heavy cycle), resulting in close to break-even free operating cash flow generation after 2023. The Outlook also reflects the expectation of continued adequate liquidity and improved revenue visibility beyond 2026 within the next few months, given the issuer's unique market positioning.

The upside scenarios for the ratings and Outlook are (collectively):

1. Significant growth in size (a scenario considered remote at present)
    
2. Improvement in free operating cash flow/debt towards 15%

The downside scenarios for the ratings and Outlooks are (individually):

1. No material improvement in FOCF, i.e. higher cash consumption from net working capital, with cash generation remaining insufficient to cover annual debt repayment instalments
    
2. No improved visibility on revenue development beyond 2026 until end of H1 2025
    
3. A deterioration in EBITDA interest cover to below 2.0x

Debt rating

In April 2021, Reneszánsz issued a HUF 2.4bn senior unsecured bond (ISIN: HU0000360375) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds have been used for refinancing and capital investment, i.e. to procure new mining and stoneworking equipment and to refurbish existing equipment. The bond’s tenor is 10 years, with a fixed coupon of 3.2% and repayment in eight tranches: 5% of the face value in 2024 and 2025; 10% yearly between 2026 and 2030; and 40% at maturity in 2031.

Scope has rated the senior unsecured debt issued by Reneszánsz at B+, one notch above the issuer rating. The recovery is ‘above average’ for senior unsecured debt holders in a liquidation scenario.

Environmental, social and governance (ESG) factors

Natural stone is an environmentally friendly building material according to LEED and BREEM standards. Natural stone rates well in terms of recyclability, heat storage/reflection and service life. It also emits no volatile organic compounds. The limestone at Süttő has unique physical properties: it is exceptionally resistant to frost, salt and abrasion. The stone is mined at surface level, reducing the expense and energy consumed in extraction, with the processing plant on site and the key market in Budapest only 65 km away.

Investments in previous years have improved the production efficiency of mining and stoneworking. In addition, the procurement of new tools and the refurbishment of existing machinery have made order fulfilment quicker and the production process smoother with fewer steps involved.

All rating actions and rated entities

Reneszánsz Kőfaragó Zrt.

Issuer rating: B/Stable, affirmation

Senior unsecured debt rating: B+, 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; Metals and Mining Rating Methodology, 25 October 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
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: Istvan Braun, Senior Representative
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 29 January 2021. The Credit Ratings/Outlook were last updated on 17 November 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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