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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating of Hungarian construction company Masterplast Nyrt. to CCC from B. Scope has also downgraded the senior unsecured debt rating to CCC from B. All ratings have been placed under review for a possible downgrade due to an unresolved pending liquidity situation. Scope intends to resolve the under-review status within the next four weeks once liquidity concerns are resolved.

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

Key rating drivers

The downgrade is based on the sustained deterioration of credit metrics due to a prolonged market slowdown in Hungary, while the under review status reflects concerns over a potential liquidity crunch. The company is still negotiating final approval of a new working capital loan, intended to alleviate immediate liquidity pressures and facilitate bond amortization.

Business risk profile: B (revised from B+). Masterplast’s business risk profile has been revised downward due to weaker operating profitability, which turned negative in 2023 and remains low in 2024. The company’s market position continues to be influenced by challenges in the Hungarian construction sector, its largest market. Revenue declined sharply to EUR 145.2m in 2023, with the end-September 2024 accounts indicating that revenue for the full year 2024 is expected to fall further to around EUR 135m.

Masterplast has retained its market share despite operating in a market that has contracted for the second consecutive year. High interest rates and the expiration of Hungary's home renovation subsidy at the end of 2022 significantly curtailed renovation and construction activities. Although a new subsidy programme was introduced in 2024 to promote energy-efficient renovations, its impact has been limited as of end-September 2024. This decline in market activity has affected the entire construction segment, including Masterplast’s competitors.

Masterplast’s geographical diversification remains limited, with most of its revenue concentrated in Central and Eastern Europe. In 2023, 37% of the company’s revenue was generated in Hungary, down from 44% in 2022, with a further decline to 34% by end-September 2024. While this shift appears to improve diversification, it reflects a downturn in Hungary, Masterplast’s strongest market, rather than a broadening of its geographical footprint. Consequently, Masterplast remains highly exposed to the construction cycles of a single region, leaving revenues and earnings susceptible to regional downturns. Broader geographical diversification could reduce cash flow volatility and improve resilience against localised economic shocks.

To counteract margin pressures from high raw material costs and weaker demand, Masterplast implemented extensive cost-saving measures throughout 2023. These initiatives are expected to drive a gradual recovery in profitability, with Scope-adjusted EBITDA* forecasted to improve to around EUR 4.8m in 2024, following a negative result of -EUR 6.1m in 2023. This recovery will depend on further efficiency gains and the stabilisation of raw material costs, allowing Masterplast to gradually rebuild its profitability.

Operating profitability, as measured by the EBITDA margin, was negative throughout 2023 (YE 2022: 10.4%) due to significant cost pressures and a contraction in demand. In response, Masterplast implemented various corrective actions, and reducing its workforce by over 200 employees (though partially reversed throughout 2024), and scaling back production at several facilities. These measures began to take effect by Q1 2024, with the company returning to profitability and achieving an EBITDA margin of 2.6%. Profitability continued to improve in Q2 and Q3 2024, with EBITDA reaching EUR 3.5m for the first nine months of the year (YTD). However, operating profitability remains significantly weaker than the 10.4% EBITDA margin achieved in 2022. The full-year margin is projected to be around 3.8%, with EBITDA expected between EUR 4.5m and EUR 5.0m by the end of 2024.

Further margin improvements are anticipated by the company in 2025 and 2026, driven by additional cost-cutting measures planned for 2025, alongside the potential for operational efficiencies and economies of scale if sales volumes improve. Hungary’s new Home Renovation Programme, scheduled for adjustments in January 2025, and EU energy efficiency targets for 2030 could support topline growth and improve profitability. However, these benefits depend on broader market recovery, and the timing and extent of demand improvements remain uncertain.

Financial risk profile: CC (revised from B). Masterplast’s financial risk profile is constrained by weak debt protection, high leverage, volatile cash flow coverage and inadequate liquidity. Masterplast’s financial position was impacted by a negative EBITDA in 2023, resulting in negative credit metrics. Consequently, the most representative metrics are those forecasted by the end of 2024.

Although debt levels have remained stable and are expected to do so in the near term, EBITDA interest cover remains weak due to the company's inability to operate at full capacity at its production facilities until demand improves. By the end of 2024, EBITDA interest cover is expected to be only around 2x. While EBITDA is expected to improve in 2025, driven initially by operating measures as outlined above, the key recovery in EBITDA will depend on whether sales volumes increase. However, the timing and extent of the recovery remain uncertain and depend on market conditions.

As of end-September 2024, bank debt stood at EUR 29.5m, of which EUR 18.3m was short-term. The short-term bank debt has been extended by 12 months to October 2025, alleviating immediate refinancing risks, but underscoring the company’s dependence on rolling over such facilities annually to meet obligations. An additional EUR 7.6m in bank debt is expected to be drawn in the coming weeks through a working capital loan, yet to be finalised, aimed at alleviating immediate liquidity concerns and facilitating the repayment of EUR 7.6m in bond obligations due in the coming weeks.

While EBITDA has begun to recover in 2024, the pace has been much slower than originally forecast. Masterplast’s leverage, as measured by its debt/EBITDA, is estimated to be 17.7x by the end of 2024, based on a forecasted EBITDA of EUR 4.8m. Even with an expected improvement in EBITDA in 2025, leverage will remain very elevated. The anticipated increase in bank debt to offset scheduled bond amortisations will keep overall debt levels stable while altering the debt composition. Debt levels are not expected to reduce in the near term due to the company’s current operations, which do not generate sufficient cash flow for deleveraging.

While FFO/debt was negative in 2023, it is projected to turn positive by the end of 2024, with further improvement anticipated in 2025 and 2026 as the company benefits from operational efficiencies and an expected gradual recovery in demand.

In the first nine months to end-September 2024, Masterplast’s capex amounted to EUR 2.3m, reflecting the company’s shift towards cash preservation. Growth-oriented investments have been suspended, with spending focused on routine maintenance until sales volumes and profitability recover meaningfully. Free operating cash flow (FOCF) is expected to remain negative through 2024, with a return to positive levels anticipated throughout 2025. Future capex plans will depend on improvements in the availability and cost of capital, which remain elevated under the company’s current conditions.

If sales remain at current levels or improve only marginally, the company’s ability to sustainably manage upcoming bond amortisations in December 2025 (EUR 7.6m) and December 2026 (EUR 7.6m) could be constrained. Poor sales would limit internal cash generation, keeping free operating cash flow low and reducing the financial flexibility to build liquidity buffers. As a result, this could necessitate further reliance on refinancing through additional bank facilities, exposing the company to potential risks from higher interest rates or tightening credit conditions.

Masterplast is required to meet several financial maintenance covenants for its interest-bearing liabilities, including maintaining a net debt/EBITDA ratio not exceeding 3.5 throughout the life of the bonds. Due to negative EBITDA in 2023, these covenants were breached. However, Masterplast obtained a waiver from bondholders, providing details of the financial situation for 2023 and outlining measures aimed at returning to profitability in 2024. Given that the company’s EBITDA has not rebounded as quickly as anticipated, Masterplast will likely require an additional waiver for 2024. Scope assesses the likelihood of not securing this waiver as relatively low, supported by historical waivers obtained and ongoing dialogue with bondholders described as supportive.

Liquidity: inadequate. Liquidity remains inadequate and concerns have increased, as sources (EUR 4.8m of cash available as at end-Sept 2024) do not cover uses (some of which due as early as December 2024). As at end-Sept 2024, Masterplast has EUR 25.8m in short-term debt outstanding (YE 2023: EUR 26.5m), of which EUR 7.6m relates to bond repayments due in December 2024 and EUR 18.3m relates to short-term bank debt that has been successfully rolled over until October 2025.

The new EUR 7.6m working capital loan is expected to alleviate immediate liquidity concerns and facilitate the successful amortisation of the bond in the coming weeks. However, if the facility is not secured, Masterplast may be unable to meet its bond repayment obligations, significantly exacerbating its liquidity pressures. Though Scope’s base case assumes Masterplast will successfully draw down the full proceeds by the bond repayment date, keeping net debt unchanged. This is contingent on a final waiver being granted by the bondholders, which is also assumed in our base case scenario. Masterplast’s constrained EBITDA limits its capacity to reduce debt in the short to medium term, leaving the company dependent on refinancing to meet its obligations and sustain sufficient liquidity.

Masterplast's reliance on short-term debt rollovers underscores the importance of its established banking relationships. With capex plans concluded, apart from routine maintenance, refinancing risks persist. Adverse macroeconomic developments, such as tighter credit conditions or rising interest rates, could hinder the company’s ability to secure favourable terms, placing further strain on its finances.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

Under review for a possible downgrade.

The rating has been placed under review for a possible downgrade, reflecting ongoing downside risks as the final approval for the new working capital loan, intended to alleviate immediate liquidity pressures and enable the bond amortisation in the coming weeks, is still pending. While some waivers have been secured, the process remains incomplete as not all bondholders have provided the necessary consent. Scope will continue to monitor developments and intends to resolve the under-review status once the new loan has been approved, drawn down, and the bond amortisation addressed.

An upgrade would require Masterplast to obtain the new working capital loan while its business prospects improve significantly to a degree that cash flows cover upcoming amortisation of bonds/loans, reducing the dependency of continuous external financing.

A rating confirmation could occur once Masterplast successfully secures the new working capital loan and repaid the bond amortisation dues.

A downgrade could occur if Scope observes any delay in obtaining the new working capital loan, as this will put pressure on a successful bond amortisation and the likelihood of an unsuccessful refinancing increases.

Debt ratings

In December 2019, Masterplast issued a HUF 6bn senior unsecured bond (ISIN: HU0000359369) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to repay a high portion of short-term debt. The bond has a tenor of seven years and a fixed coupon of 2.00%. Bond repayment is in four tranches starting from December 2023, with 25.00% of the face value payable yearly.

In December 2020, Masterplast issued a HUF 6bn senior unsecured bond (ISIN: HU0000360219) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to refinance current debt and finance further capital expenditure and business acquisitions. The bond has a tenor of seven years and a fixed coupon of 2.10%. Bond repayment is in four tranches starting from December 2024, with 25.00% of the face value payable yearly.

In August 2021, Masterplast issued a HUF 9bn senior unsecured bond (ISIN: HU0000360748) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for capital expenditure and business acquisitions. The bond has a tenor of 10 years and a fixed coupon of 2.90%. Bond repayment is in four tranches starting from August 2027, with 12.5% of the face value payable yearly, and a 50% balloon payment at maturity.

Scope’s recovery analysis incorporates a hypothetical default scenario in 2025, based on the liquidation value of the company’s assets and an assumed outstanding senior secured bank debt of EUR 46.4m, with available overdrafts fully drawn, and senior unsecured debt of EUR 35.2m. The recovery analysis was previously based on the enterprise value as a going concern. However, if sales were to deteriorate at a similar rate over the next 12 months, liquidation would become more likely.

Scope estimates the recovery for all senior secured debt to be ‘above average’ but, given the existing uncertainties in the construction industry, Scope has equalised the senior unsecured debt rating with the issuer rating of CCC and places it under review for a possible downgrade.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Masterplast Nyrt.

Issuer rating: CCC/Under Review for a possible downgrade, downgrade

Senior unsecured debt rating: CCC/Under Review for a possible downgrade, downgrade

*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, (General Corporate Rating Methodology, 16 October 2023; Construction and Construction Materials Rating Methodology, 25 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.

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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 September 2019. The Credit Ratings/Outlook were last updated on 28 February 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.