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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating and the senior unsecured debt rating on Hungarian metalworking company MetMax Europe Zrt. to B- and changed the Outlook to Negative from Stable. The HUF 5.0bn senior unsecured guaranteed bond (ISIN: HU0000360169) has been assigned a new instrument rating of B-. The senior unsecured debt category rating has been withdrawn due to business reasons.

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). MetMax Europe’s business risk profile continues to be constrained by the company’s size, low product diversification and high customer concentration.

Despite another decrease in 2023, profitability (as measured by the Scope-adjusted EBITDA margin* in a peer group context) remains the main support for MetMax Europe’s business risk profile. In line with Scope's expectations, the EBITDA margin remained well below 20% at 17.3% in 2023, marking the third consecutive year of margin decline. In addition to a gross profit margin still below 50% in 2023, continued pressure from wage inflation meant that personnel costs grew significantly faster than revenue and weighed on profitability. Revenue declined by 6.6% YoY in 2023, as price increases with MetMax Europe’s key customers in H1 were more than offset by a decline in volumes, especially in H2. As a result of the lower profitability and the fall in revenues, EBITDA decreased to HUF 813m in 2023 from HUF 991m in 2022.

The weak volume development of H2 2023 continued in H1 2024, with revenue dropping by around 21% YoY to HUF 2.0bn, compared to HUF 2.6bn in H1 2023. While MetMax Europe indicated a recovery in its order books in Q3 vs. Q2 2024, volumes are still around 20% lower than in 2023 in some key cases. In H1 2024, MetMax Europe has started serial production for three large European companies. However, the revenue contribution from new customer projects will still be fairly marginal in 2024. Overall, Scope has factored in revenues of HUF 3.8bn (down 19% YoY) for the full year 2024, based on its conservative view for H2 2024.

Revenue visibility for 2025 is low. Scope notes the fragile global economic environment, MetMax Europe’s vulnerable business model with high customer and product diversification, and the fact that volume declines at some of MetMax Europe’s existing customers have structural reasons. On a positive note, the new customer projects are forecast to contribute significant revenues in 2025. Scope has factored in revenue of around HUF 4.3bn (up 12% YoY) in 2025.

Reported EBITDA decreased by 50% YoY from HUF 470m in H1 2023 to HUF 234m in H1 2024. The negative impact of lower revenue was compounded by a drop in profitability, as reflected in the reported EBITDA margin of 11.6% in H1 2024 compared to 18.4% in H1 2023. This was due to both lower cost coverage as a result of lower revenues and a further increase in personnel costs. Based on the H1 2024 results, Scope expects the EBITDA margin to drop to around 9% in 2024, which, coupled with its revenue forecast, translates into EBITDA of around HUF 340m.

Scope expects MetMax Europe’s profitability to improve in 2025, driven by: i) better cost coverage through higher revenue from new projects; ii) the planned headcount reduction in Q4 2024; and iii) an improvement in the gross profit margin, supported by the recent expansion of the customer portfolio towards high value-added components and the commissioning of two PV power plants, which should reduce energy costs from 2025. While all these are likely to improve MetMax Europe’s profitability in 2025, the exact extent of the recovery is very unclear. Furthermore, after the fourth year of declining profitability, Scope needs to see evidence that MetMax Europe’s will be able to turn the corner and return profitability towards 20%. For the time being, Scope expects an EBITDA margin of around 15% in 2025, which translates into EBITDA of about HUF 650m.

Financial risk profile: B- (revised from B+). The downgrade of the financial risk profile reflects Scope’s revised expectation for EBITDA in 2024-25, now with weaker expected credit metrics in these years, as well as the inadequate liquidity assessment in view of the threat of the accelerated repayment of the bond in October 2025.

Leverage, as measured by debt/EBITDA, deteriorated to 6.8x in 2023 from 5.6x in 2022, driven by the decline in EBITDA as lower revenue combined with lower profitability weighed. Scope expects the debt/EBITDA ratio to rise further to around 17x in 2024 based on its revised EBITDA expectations for the year. Although Scope expects debt/EBITDA to improve to around 8x on the back of the expected recovery in EBITDA, the agency believes it will remain high.

MetMax Europe’s interest coverage ratio decreased to 4.0x in 2023 from 5.9x in 2022. Scope calculates this ratio by looking at the ‘gross interest’ expense rather than ‘net interest’ due to intra-group charges. Based on its revised expectation for EBITDA in 2024-25, Scope projects interest cover of around 1.8x in 2024 and about 3.3x in 2025.

Contrary to Scope’s expectations, free operating cash flow (FOCF) turned negative in 2023, at around HUF 195m (vs. HUF 453m in 2022), as higher-than-expected capex weighed on top of lower-than-expected EBITDA. The higher capex reflects the HIPA investment programme which, following the consolidation of MetMax Vagyonkezelő Kft., continued at the level of MetMax Europe.

In H1 2024, unaudited reported FOCF was negative HUF 67m (HUF 63m in H1 2023) as a result of a decline in EBITDA and still high capex (HUF 358m) in connection with the HIPA investment programme. Scope expects FOCF to remain negative at around HUF -200m for the full year 2024. In 2025, the agency anticipates an improvement in FOCF to around HUF 390m supported by significantly reduced capex after the completion of the HIPA programme in 2024, as MetMax Europe plans to focus on cash preservation in the short term.

Cash flow cover turned negative in 2023, compared to 8% in 2022, as a result of the negative FOCF. Scope anticipates that cash flow cover will remain negative in 2024, based on its expectations for FOCF. In 2025, the agency sees cash flow cover improving to around 7%, supported by the significant capex reduction.

Liquidity: inadequate. Scope considers MetMax Europe’s liquidity and financial flexibility as "inadequate", in view of the threat of the accelerated repayment of the bond in October 2025.

MetMax Europe’s HUF 5.0bn senior unsecured bond issued under the Hungarian Central Bank’s bond scheme in December 2020 has an accelerated repayment clause. The clause requires MetMax Europe to repay the nominal amount (HUF 5bn) within 10 business days after the bond rating falls below B-. There is a two-year grace period for a B/B- bond rating, which means that to avoid the accelerated repayment the company must ensure the debt rating returns to B+ before the grace period ends. Following the downgrade of the senior unsecured bond rating to B on 6 October 2023, MetMax Europe has entered the grace period, which ends on 6 October 2025. If the debt rating does not return to B+ within the grace period, the company could face severe liquidity constraints which could have default implications, unless it obtains refinancing that covers the early repayment of the outstanding bond amount, or it proactively obtains an investor waiver related to the repayment acceleration. MetMax Europe has informed Scope that it has already started negotiations with its main bondholders on a possible solution.

Besides the accelerated bond clause, which is weighing heavily on MetMax Europe's liquidity, Scope notes i) the successful refinancing of the NHP Hajrá line in January 2024; ii) the absence of any other obligatory maturities until the bond redemption starting in December 2025 (HUF 500m each year between 2025 and 2029 and HUF 2.5bn in 2030), iii) expected positive FOCF in 2025 and iv) access to a HUF 300m credit line provided by shareholders in 2024 (of which HUF 131m was drawn at end-June 2024).

The HUF 1.75bn HIPA subsidy is in principle non-refundable, but linked to the fulfilment of three milestones, which relate to the total headcount, total cumulative sales and total wage increase during the 2025-2029 monitoring period. Testing for repayment of subsidies starts in 2025. Scope expects that MetMax Europe will either meet the milestones or manage to postpone the completion date for the investment programme, so that the monitoring period for the achievement of the milestones would start later.

Supplementary rating drivers: credit-neutral. The rating does not incorporate any adjustments related to financial policy, peer group considerations, parent support or governance and structure.

Outlook and rating sensitivities

The revised Outlook to Negative from Stable primarily reflects the threat of accelerated repayment of the bond in October 2025 that has been placed under the Hungarian National Bank’s Bond Funding for Growth Scheme. MetMax Europe has been in the two-year grace period for a B/B- bond rating since 6 October 2023. As Scope currently sees a recovery of the debt rating to the minimum threshold of B+ as remote, MetMax Europe will likely have to obtain an investor waiver to avoid severe implications for its liquidity and likely default implications.

The upside scenario for the ratings and Outlook is:

1. Agreement with bondholders to avoid an accelerated bond repayment

The downside scenario for the ratings and Outlook is:

1. No cure to the accelerated bond repayment clause which might be triggered in October 2025

Long-term debt ratings

Scope has downgraded the senior unsecured debt rating to B-, in line with the issuer rating. The rating has subsequently been withdrawn for business reasons.

In December 2020, MetMax Europe issued a HUF 5.0bn senior unsecured guaranteed bond (ISIN: HU0000360169) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with a fixed coupon rate of 3.0% and repayment in six tranches of 10% in 2025, 2026, 2027, 2028 and 2029 and of 50% in 2030. The bond has been issued with a guarantee from CNC Tőkebefektető Kft, its parent company.

The recovery analysis indicates an ‘average’ recovery for the senior unsecured guaranteed bond and for all other senior unsecured debt positions at the level of MetMax Europe, translating into a debt instrument rating for the senior unsecured guaranteed bond at the issuer level (B-). Scope’s recovery analysis uses a liquidation value of HUF 4.1bn for a hypothetical default scenario in 2025. This value is based on a haircut on the assets and reflects liquidation costs of 10% for the assets. The haircut also assumes that the intra-group receivable from the parent (used to refinance the acquisition debt) would become non-recoverable in the event of a payment default. The guarantee provided by CNC Tőkebefektető Kft. has no impact on the expected recovery of the debt instrument.

Environmental, social and governance (ESG) factors

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

From a governance perspective, Scope still sees high key person risk as MetMax Europe’s business is still dependent on András Csoma, the CEO and majority owner (54%). However, the agency has a positive view on the transformation of the operational side of the organisation in general and the expansion of management in particular.

All rating actions and rated entities

MetMax Europe Zrt.

Issuer rating: B-/Negative, downgrade and Outlook change

Senior unsecured debt rating: B-, downgrade and subsequent withdrawal

Senior unsecured guaranteed bond rating: B-, new 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 methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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: Gennadij Kremer, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 October 2020. The Credit Ratings/Outlook were last updated on 6 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.