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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB- issuer rating on Hungarian tyre distributor Abroncs Kereskedőház Kft. (AKH) and revised the Outlook to Negative from Stable. Further, Scope has also affirmed the senior unsecured debt rating at BB-. Concurrently, Scope has withdrawn the BB- senior unsecured debt rating and has assigned a BB- rating to the senior unsecured bond (ISIN: HU0000360177) issued by Abroncs Kereskedőház Kft. and guaranteed by its sister companies.

The change in Outlook is driven by leverage rising to 4x in 2023 and reflects the risk of prolonged high leverage due to market uncertainty.

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+. AKH’s business risk profile continues to be supported by its leading position in the Hungarian tyre market, thanks to a solid presence in both the retail and wholesale segment. The issuer has established strong brand recognition over many years, based on a partially integrated business model with a car services store and an exclusive partnership with BP Lubricants. Furthermore, AKH benefits from strong supplier relationships, with a mix of exclusive and semi-exclusive partnerships, as well as its status as a supplier of international brands, such as Continental and Bridgestone.

Despite its strong competitive positioning in Hungary, the issuer’s small size (revenue of HUF 41bn in 2023) compared to international retailers constrains the business risk profile. International expansion remains focused on neighbouring countries. However, the acquisition of ARS in Slovakia at year-end 2021 has reduced AKH’s dependency on Hungary. Slovakian sales grew to 19% of the issuer’s total sales in 2023 (from 5% in 2021).

The type of product AKH sells, which is considered cyclical, limits Scope’s diversification assessment. However, Scope views the issuer’s presence in both customer segments (retail and wholesale) and service integration positively. Moreover, in addition to typical tyre maintenance services (such as changing between summer and winter tyres and wheels, tyre balancing and tyre hotels) AKH provides the servicing and maintenance of brakes, wheel alignments, shock absorbers and small repairs, which are considered less cyclical. The company’s presence in the lubricants sector further reduces exposure to the high seasonality of tyre demand.

AKH's profitability, as measured by its Scope-adjusted EBITDA margin*, is lower than that of its retail peers. The trend has, however, been positive from 2020 to 2022. In Scope’s view, the comparatively lower profitability is due to: i) high competition, exacerbated by the proliferation of cheap Asian products; ii) AKH derives most of its sales from the wholesale business. In 2023, the decline in revenues combined with an increase in the cost of sales and salaries due to inflation led to a sharp decline in profitability to 3.8% (from 5.6% in 2022). Scope anticipates that profitability will remain below 4% in 2024, as the H1 2024 results show modest sales growth and an EBITDA margin of around 3.3%. In the following years however, Scope expects profitability to increase to around 4%, driven by improving gross margins and cost efficiency measures (the discontinuation of the unprofitable Slovenian branch, the shutdown of an inefficient point of sale in Budapest and some reorganisation of the ARS staff).

Financial risk profile: BB. AKH's financial risk profile benefits from strong interest cover and adequate liquidity. However, metrics are pressured by weakening EBITDA and high business seasonality, which causes significant cash flow swings throughout the year.

In the past, AKH benefited from historically low leverage. Leverage (debt/EBITDA) increased to 4x in 2023 due to weakening EBITDA combined with increasing debt to finance the acquisition of the real estate housing the headquarter in Budapest. Scope expects debt/EBITDA to only slightly reduce in 2024 (3.8x), as EBITDA is not forecasted to recover until 2025. Scope also expects AKH to decrease its debt, driven by the repayment of the bond and the mortgage, as well as the reduction of the guarantee given to Bridgestone for the purchase of ARS (which decreases linearly to 0 in 2026 with the payment of the remaining instalments). That said, Scope highlights the high volatility of the ratio throughout the year, driven both by EBITDA results and net working capital needs during the peak seasons.

Interest cover, which was above 7x until 2022, was also pressured in 2023 by the weakening EBITDA and rising debt, falling to 5x, from 10.2x in 2022. While Scope expects interest cover to stay around 5x in 2024, the ratio remains largely solid. Going forward, it will benefit from falling interest rates and the absence of significant new debt.

Cash flow coverage is the weakest element of AKH’s financial risk profile, as it is highly volatile. The ratio was depressed in 2022 and 2023 by higher capex, which will normalise in Scope’s forecast scenario. However, the rating agency points out that free operating cash flow can often be negative during the year, as the seasonality of the business requires a large build-up of inventories in certain months.

Liquidity: adequate. Liquidity is adequate. Available cash and free operating cash flow, which is expected to be positive from 2024 onwards, largely cover short-term debt obligations until 2026 (HUF 1,750m balloon payment of the bond in 2027). Scope notes that the issuer also has an uncommitted credit facility of HUF 2,000m maturing in 2027, which is used to cover seasonal working capital requirements.

Scope highlights the fact that AHK’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 3.5bn) if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (repayment in 90 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is one notch. 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.

Outlook and rating sensitivities

The Negative Outlook reflects the risk that debt/EBITDA will remain above 4x as, although EBITDA is expected to improve gradually, market instability and earnings volatility could jeopardise AKH's ability to restore EBITDA and deleverage.

The upside scenario for the rating and Outlook is:

• Debt/EBITDA below 4x on a sustained basis

The downside scenario for the rating and Outlook is:

• Debt/EBITDA at or above 4x on a sustained basis

Debt rating

AKH issued a HUF 3.5bn senior unsecured bond (ISIN: HU0000360177) in December 2020 through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond proceeds were used for refinancing purposes. The bond has a tenor of seven years and a fixed coupon of 2.8%. Bond repayment is in four tranches starting from 2021, with 5.7% of the face value payable yearly in 2021, 2022 and 2023, 10% of the face value payable in 2024, 10.7% of the face value payable in 2025, 12% of the face value payable in 2026, and a 50% balloon payment at maturity. The bond is guaranteed by the following related entities: AKH Vagyonkezelő és Ingatlanhasznosító Korlátolt Felelősségű Társaság; Abroncs Hungária Kereskedőház Korlátolt Felelősségű Társaság; AKH Pnevmatike Trgovina d.o.o.; AKH Pneu CZ s.r.o.; AKH Slovakia s.r.o.; SC Anvelonet s.r.l.; AKH Gume d.o.o.

Scope assigns a BB- rating to AKH’s senior unsecured guaranteed bond. Scope’s assessment considered the liquidation value based on a hypothetical default scenario in 2025, resulting in an above average recovery. Scope however refrained from up-notching the rating due to the risk and possibility that senior secured debt could increase on the path to default (volatility of the capital structure and the proportion of senior unsecured debt).

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

Abroncs Kereskedőház Kft.

Issuer rating: BB-/Negative, Outlook change

Senior unsecured debt rating: BB-, affirmation and withdrawal

Senior unsecured (guaranteed) debt instrument rating (ISIN: HU0000360177): 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 November 2020. The Credit Ratings/Outlook were last updated on 18 October 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.