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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating on Trans-Sped Kft. to B/Stable from B+/Negative. The senior unsecured debt rating has been affirmed at B+.

The downgrade is a consequence of the deterioration in Trans-Sped's credit metrics, as evidenced in the H1 2024 financial statements. Scope anticipates that operating profitability will remain below historical averages (H1 2024 EBITDA* margin at 6%, down from 8.2% in 2023), with economic headwinds having a significant impact. Furthermore, an additional debt intake of HUF 1bn (lease liability for the replacement of the truck fleet) is expected to increase leverage, measured by debt/EBITDA, to above 6.0x in 2024.

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). Trans-Sped’s business risk profile remains supported by its well diversified service offering (including additional, complex services on top of the core transportation and logistics business). The business risk profile is constrained by deteriorating operating profitability, a weak position in a highly competitive market that is dominated by multinational companies, and limited geographical diversification.

Trans-Sped is a medium-sized player in the heavily fragmented Hungarian freight and logistics market. In 2023 the issuer achieved revenue of HUF 31.3bn, with a further increase to HUF 33.8bn forecasted for 2024. In terms of revenue, Trans-Sped is among the top 20 in Hungary’s logistics and transportation sector, a market led by well-known multinationals such as Waberer’s, DHL and Duvenbeck.

In addition to the core transportation business, Trans-Sped has made efforts to offer additional, more complex services to its clients. Investments in the past two years were clearly aimed at enabling growth from new, higher added valued business lines (real estate, warehouse logistics and e-commerce) on top of modernising the existing vehicle fleet. Geographical diversification is limited, focusing mainly on Hungary and the CEE region, making the issuer vulnerable to adverse macroeconomic developments.

In 2023, Trans-Sped's EBITDA margin was above 8%, in line with historical averages (7%-9%). However, negative macroeconomic developments have begun to exert increasing pressure on transportation segment margins, as evidenced by the H1 2024 accounts. This is primarily due to reduced demand, resulting in lower transported volumes and warehousing requirements, coupled with an increase in operating expenses. Scope expects a gradual recovery in sector performance starting after 2025 stimulating demand, which will have a positive effect on Trans-Sped's margin. Scope forecasts that the EBITDA margin deteriorates towards 6% by 2025, followed by gradual improvement, stimulated by the improving market environment.

Financial risk profile: B (revised from B+). The revision of the financial risk profile is driven by the deterioration in credit metrics, resulting from the weaker operating profitability and additional debt intake.

Scope expects financial leverage, measured by Scope-adjusted debt/EBITDA, to rise above 7.0x by 2025 as a result of weaker profitability and additional debt intake of HUF 1bn in 2024. Beyond 2025, Scope forecasts a gradual improvement towards 6.0x in the medium term. This gradual deleveraging assumes that: i) the new investments, most notably in the increased warehousing capacity, will generate additional EBITDA; and ii) the intensive capex phase will gradually phase out, with no significant new financial debt drawn beyond 2024. Working capital management remains a strategic focus of the management. The issuer aims to lower the utilisation of financing credit lines even further, resulting in declining interest expense going forward.

Free operating cash flow has been negative in recent years due to intensive investment in property, plant and equipment, typically financed by external debt. The metric is expected to remain under pressure in 2024, despite the comparatively lower CAPEX (HUF 2.0bn in 2024 and around HUF 1.5bn beyond as per management’s forecast). This is expected to result in negative free operating cash flow/debt (-1%) in 2024, and is forecasted to remain close to break-even in the medium term.

Scope’s assessment remains primarily supported by Trans-Sped’s EBITDA interest cover, which the agency expects to remain close to 5.5x in 2024, despite lower EBITDA generation. Beyond 2024, interest cover is expected to move paralelly to the development of EBITDA; deteriorating towards 5.0x in 2025, followed by an improvement above 6.0x in 2026.

Liquidity: adequate. Liquidity is adequate and is forecasted to be sufficient to cover the short-term debt of HUF 1.7bn (including HUF 1.1bn short-term lease liability) and negative free operating cash flow of HUF 0.2bn in YE 2024. Sources of liquidity comprise HUF 761m of free cash and HUF 1.6bn of open, committed credit lines.

Scope notes that Trans-Sped’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 5bn) if the 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 unchanged tight rating headroom, the company must address its credit weaknesses to avoid entering the grace period or the more severe event of the debt rating being downgraded below B-.

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 Trans-Sped’s credit metrics will develop in line with Scope's financial forecasts, with the EBITDA margin staying below historical averages (7-9%) in the upcoming years. Scope expects the capex-heavy period, that started in 2020, to end in 2024, with gradual deleveraging in line with the debt amortisation, translating into debt/EBITDA improving towards 6.0x, EBITDA interest cover consistently above 4.0x and free operating cash flow generation close to break-even in the upcoming years.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA significantly below 6.0x

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

1. EBITDA interest cover below 3.0x
    
2. Negative free operating cash flow for a prolonged period

Debt rating

In March 2020, Trans-Sped issued a HUF 5bn senior unsecured bond (ISIN: HU0000359500) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to refinance financial debt (HUF 2.8bn) and finance acquisitions (HUF 0.6bn) and capex (HUF 1.6bn). The bond has a tenor of 10 years and a fixed coupon of 2.5%. Bond repayment is in four tranches starting from 2026, with 7.5% of the face value payable yearly and a 70% balloon payment at maturity.

Scope has rated the senior unsecured debt issued by Trans-Sped at B+, one notch above the issuer rating. The recovery analysis is based on a hypothetical default scenario at YE 2025. Scope used a liquidation scenario in its analysis due to the asset-rich nature of the company, including fixed assets with high resale values (warehouses and the vehicle fleet). Following the valuation of all properties, a fair value adjustment of HUF 8bn was booked, starting from 2023. Additionally, the completion of the warehouse construction has eliminated execution risk and led to increased fixed assets. These effects improved the recovery expectations significantly, resulting in an ‘excellent’ recovery for senior unsecured debt. Although this recovery rate allows for an uplift to the issuer rating of more than one notch, Scope limited the uplift to one notch. This is due to potential volatility in the capital structure on the path to default and the issuer’s ability to raise additional debt ranking above the senior unsecured debt.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Trans-Sped Kft.

Issuer rating: B/Stable, downgrade

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; European Real Estate Rating Methodology, 28 March 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                                      NO
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: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 February 2023. The Credit Ratings/Outlook were last updated on 15 April 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
© 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.