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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating on Éltex Kft., a Hungarian waste management company, at BB-/Stable. Scope has also affirmed its BB- rating on the senior unsecured debt issued by Éltex.

Despite the weaker-than-expected operating results in 2023, the affirmation is driven by the credit metrics, which have remained at a good level despite increasing pressure from the more challenging market environment. The underperformance of certain industries (most notably automotive and battery manufacturing) has resulted in a lower amount of waste generated, which has in turn led to a decline in demand and a negative impact on prices. Additionally, prices have decreased significantly in the secondary raw material markets (materials recovered from industrial waste), a sector where Éltex has made significant investments in recent years. The volatility in demand is somewhat offset by Éltex's role as a subcontractor of MOHU-MOL, the structure of the concession waste management system providing a reliable revenue stream.

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 is driven by the moderate service strength with low churn rates and long-term customer contracts, on top of the strong domestic market position well-diversified customer portfolio. The business risk profile is constrained by the deteriorating operating profitability, small absolute size and limited diversification in terms of activity and geographies.

While revenues of Éltex remained relatively stagnant in 2023 (HUF 34.3bn) Scope foresees a decrease of revenues in 2024 towards HUF 29bn. Despite the shrinking revenues, the market share of Éltex remained unchanged, the lower revenues being a sign of the pro-cyclical nature of the market rather than the loss of market share. The absolute size of the issuer in terms of revenues remained small in a global and European context.

Éltex has a zero-landfill policy (credit-positive ESG factor). Nevertheless, as hazardous waste recycling accounts around 10% of total sales on average, Éltex is exposed to environmental risk (credit-negative ESG Factor).

Éltex's EBITDA* margin has increased significantly over the last few years, remaining above 10% until 2022. This changed from H2 2023, in line with the economic slowdown in certain segments, lower demand and increasing operating costs. The EBITDA margin has deteriorated to 6.3% in 2023 (2022: 11.6%), reflecting the more unfavourable market conditions and showing significant volatility. Profitability is expected to gradually improve in the future, driven by the stimulated demand resulting from higher domestic GDP growth and increasing volumes of generated waste. However, this improvement is expected to be incremental, with the EBITDA margin only reaching 8% by 2026.

Financial risk profile: BBB- (revised from BBB). The financial risk profile is supported by the strong debt protection and adequate liquidity, while being constrained by increasing leverage and volatile free operating cash flow generation. Scope notes the limited predictive power of the forecasts provided by the management (YE2023 results significantly below the management plan received in October 2023). This factor significantly reduces visibility and might lead to a quick deterioration of the credit metrics (credit-negative ESG Factor).

The additional debt intake in 2023, coupled with a significant deterioration in the EBITDA margin year-on-year, has led to an increase in leverage, as measured by debt/EBITDA, to above 2.0x (2023: 2.3x). This is expected to increase further in 2024, reaching close to 3.0x. Going forward, the amortisation of the financial debt (approximately HUF 700 million per year) and the forecasted improving profitability are expected to result in a positive shift in leverage, improving below 2.0x by 2026.

While debt protection, as measured by EBITDA interest cover, remains the strongest element of the financial risk profile, Scope anticipates deterioration from 2024 onwards. This is due to an increase in debt levels and, consequently, higher interest expenses, with an estimated HUF 240m forecast for 2024 compared to HUF 135m in 2022. Beyond 2024, Scope expects a gradual decrease in interest expenses, primarily driven by debt amortisation.

FOCF generation has been highly volatile in the previous years, impacted mainly by the level of CAPEX. Scope considers the investment strategy rather opportunistic, and the visibility on CAPEX spending beyond 2024 rather limited.

Liquidity: Liquidity is adequate, as sources (HUF 1.7bn cash as of YE2023) and HUF 584m free operating cash flow forecasted for 2024 fully cover the uses (short term debt of HUF 1.2bn). Going forward liquidity is expected to stay above 200%, benefitting from the positive free operating cash flow generation. The bond amortization is expected to start from 2024, with a tranche of HUF 490mn payable yearly.

Scope highlights that Éltex’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 2.45bn) 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 company’s liquidity profile. The rating headroom to entering the grace period is 2 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

Supplementary rating drivers: credit-neutral (unchanged): Supplementary rating drivers are deemed credit-neutral.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook incorporates Scope’s expectations that i) key credit metrics over the next three years will develop in line with Scope’s financial forecast, translating into debt/EBITDA between 2x-3x, debt protection remaining above 10.0x and positive free operating cash flow generation; and ii) Éltex will remain top three in waste management in Hungary, while demand conditions gradually improve in the medium term.

The upside scenario for the ratings and Outlook is seen as remote, but could materialise if Éltex:

• Improved its business risk profile, while credit metrics do not deteriorate

The downside scenario for the ratings and Outlook is:

• Debt/EBITDA sustained above 3.0x

Debt rating

Scope expects an ‘above-average’ recovery for senior unsecured debt, such as the HUF 2.45bn bond issued under the Hungarian National Bank’s programme. Despite the above-average recovery, Scope refrains from granting an uplift as the assessment is very sensitive to applied advance rates, especially the one related to tangible assets. Additionally, the issuer’s ability to raise additional external debt, ranking above the senior unsecured debt, might affect the recovery rate significantly. Thus, this recovery expectation translates into a BB- rating for the senior unsecured debt category, in line with the issuer rating.

Scope’s recovery expectations are based on an anticipated liquidation value in a hypothetical default scenario at the end of 2026. Short-term and long-term debt (excluding the bond issue) raised from financial institutions, undrawn committed medium- and long-term facilities as well as payables rank higher than senior unsecured debt in terms of repayment.

Environmental, social and governance (ESG) factors

Éltex aims to return waste to the circular economy and create resource efficiencies through the addition of value-adding treatment processes. It acquires waste from the cleanest sources, which are production lines. Handling all recyclable materials on-site is beneficial both environmentally and economically.

All rating actions and rated entities

Éltex Kft.

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB-, 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 Business and Consumer Services Rating Methodology, 15 January 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/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: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 October 2020. The Credit Ratings/Outlook were last updated on 7 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.