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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating on Hungarian household paper goods producer Vajda-Papír Kft. (Vajda-Papír) to B+/Stable from B/Stable. Further, Scope has affirmed Vajda-Papír’s senior unsecured debt rating at B+.

The rating upgrade is based on the improved financial risk profile which is positively impacted by (1) the better-than-expected operating performance as evidenced by Scope-adjusted EBITDA margin* which increased to 19% in 2023, and (2) the reduction of debt as a result of the consolidation of the HUF 4.5bn intercompany loan provided by Vajda-Papír Scandinavia AS, as the sister company was consolidated through a capital increase against contribution in kind. Credit metrics are expected to improve further as the scheduled debt repayments likely lead to a deleveraging effect and the group’s limited investment plans for the medium-term are expected to result in a positive cash flow cover after the intensive investment programme of recent years.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB- (unchanged). Vajda-Papír remains one of the leading consumer goods companies in Hungary with a market share of around 30% in the household paper market. It has good market positions in several European countries and maintains a solid geographical diversification with more than 50% of its revenue coming from exports. The consolidation of Vajda-Papír Scandinavia (a sister company operating a household paper goods factory in Norway) has had a positive impact on the group’s size and profitability. However, the group’s business risk profile continues to be hindered by its limited size, low product diversification, below-average brand strength compared to its peers and historically volatile profitability.

In 2023, market conditions became more favourable and input prices (i.e. for cellulose and energy) normalised compared to the elevated levels in 2022. In addition, the production of base paper exceeded the amount required for the group’s production which supports a less volatile profitability by eliminating base paper suppliers. Vajda-Papír’s operating profitability, as measured by the EBITDA margin, increased from 2% in 2022 to 19% in 2023. In 2024, Scope expects the EBITDA margin to decline to around 13%, as the level achieved in 2023 is considered exceptional. This is due to (1) a change in consumer behaviour towards more budget-friendly private label products, (2) volatile input prices coupled with management’s reluctance to implement hedging strategies and (3) pressure from customers to lower prices. Scope expects operating profitability to remain in the low double digits for the next few years.

Financial risk profile: B+ (revised from B-). The positive impact of the exceptional operating profitability in 2023 and the debt reduction as a result of the consolidation of the HUF 4.5bn intercompany loan provided by Vajda-Papír Scandinavia resulted in stronger credit metrics. Leverage metrics, measured as debt/EBITDA, improved to 3.3x from well over 6x last year, and funds from operations/debt increased to 25% from -2%. The group’s interest cover improved to 6x in 2023 from less than 1x in 2022, as it continues to benefit from the fixed interest rates of the bonds. The cash flow cover remained significantly negative in 2023 at -57% as the second phase of the base paper production investment was completed and activated.

With no significant investments planned for the short to medium term, the group is forecast to start deleveraging based on its debt amortisation schedule (the bonds issued under the Bond Funding for Growth Scheme start amortising in 2025E and 2026E and the working capital lines are due to be repaid in 2025E). As management does not plan to refinance the loans with new debt, credit metrics are forecast to improve significantly: debt/EBITDA to decrease towards 2.5x, funds from operations/debt to rise above 30%, interest cover is forecast to improve further towards 7x and the cash flow cover is forecast to turn positive by 2025E. However, Scope notes the weak predictability of the business plan and loose forecasting due to the group’s lax hedging strategy and opportunistic investment decisions.

Liquidity: adequate (unchanged). The assessment is backed by the ample free operating cash flow and cash and cash equivalents, which can be supplemented, if needed, by the annually rolled over credit lines of around HUF 6bn (as customary in Hungary). Cash and cash generation are forecast to fully cover the HUF 4bn of bank debt maturing in the 12 months to year-end 2024 and the HUF 5bn of bank debt maturing in 2025. Scope assumes that upcoming debt maturities will be funded internally, without the need to raise new debt. Consequently, gross debt is expected to decrease.

Scope highlights that Vajda-Papír’s senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme have a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 11.2bn and HUF 9.9bn) if the debt rating of the bonds 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 group’s liquidity profile. The rating headroom to entering the grace period is zero notches. Given the limited rating headroom, the group must at least maintain its current credit profile to avoid triggering the rating-related covenant.

Supplementary rating drivers: credit-neutral (unchanged). The ratings are unaffected by supplementary rating drivers. However, Scope notes the weak predictability of the business plan and loose forecasting due to the group’s lax hedging strategy.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that credit metrics will continue to improve as exemplified by debt/EBITDA remaining well below 4x. This is based on the assumption that (1) there will be no significant investment capital expenditure plans and (2) that there will be no refinancing of the amortising debt by means of new debt, despite the decline forecast for the group's EBITDA margin, which Scope expects to remain in the low double digits, although remaining prone to volatility.

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

1. reduction in volatility of profitability;
    
2. improving debt/EBITDA to below 3.0x on a sustained basis.

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

1. adverse market developments which could negatively impact profitability and credit metrics;
    
2. deterioration of debt/EBITDA to 5.0x or higher.

Debt rating

In November 2020, Vajda-Papír issued a HUF 11.2bn senior unsecured bond (ISIN: HU0000359989), followed by a second HUF 9.9bn senior unsecured green bond (ISIN: HU0000360474) in May 2021, both through the Hungarian central bank’s Bond Funding for Growth Scheme. The bonds are guaranteed by VAJDA REAL ESTATE Kft., which is part of the same corporate group as Vajda-Papír. The bond proceeds were used for refinancing loans, investment capex to increase base-paper production and working capital financing. Both bonds have tenors of 10 years and fixed coupon rates of 3.5%. The bond repayment schedule is the same for the two bonds: in six instalments with 10% of the face value payable yearly starting in the fifth year and a balloon payment of 50% at maturity. Amortisation of the bonds commences in 2025 and 2026 respectively. In addition to the rating deterioration covenants, the bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and dividend payment restrictions.

Scope’s recovery analysis incorporates a hypothetical default scenario in 2026, based on the liquidation value of the group’s assets and an assumed outstanding senior unsecured debt of HUF 17.9bn with available overdrafts fully drawn. Scope has equalised the senior unsecured debt rating with the B+ issuer rating despite estimating an ‘above-average’ recovery. This is because management’s commitment to keep indebtedness stable will expire in 2025.

Environmental, social and governance (ESG) factors

One of Vajda-Papír’s bonds (ISIN code: HU0000360474) is a green bond. The group was one of the first entities to issue a green bond within the Bond Funding for Growth Scheme. This green bond framework sets multiple objectives, primarily related to resource management, that the group must comply with by 2030. In April 2022, Vajda-Papír published the bond’s allocation report, which details its fulfilment of the bond’s framework objectives.

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

All rating actions and rated entities

Vajda-Papír Kft.

Issuer rating: B+/Stable, upgrade

Senior unsecured debt rating: B+, affirmation

The rating was prepared following Scope’s Consumer Products Rating Methodology, 3 November 2023. The application of the Consumer Products Rating Methodology, 31 October 2024, does not have an impact on the rating.

*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; Consumer Products Rating Methodology, 31 October 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: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 October 2019. The Credit Ratings/Outlook were last updated on 3 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
© 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.