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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Hungarian chicken meat producer Baromfi-Coop Kft. to BB/Stable from BB-/Positive. Further, the senior unsecured debt rating has also been upgraded to BB from BB-.

Concurrently, Scope has withdrawn the BB senior unsecured debt rating due to business reasons and assigned a BB rating on the senior unsecured bonds issued by Baromfi-Coop Kft. and guaranteed by its subsidiary Master Good Kft. (ISINs: HU0000359294, HU0000359302, HU0000360706).

The upgrade is mainly driven by the significant revenue and EBITDA growth following capacity expansion and high food price inflation in Hungary. It is also supported by fast deleveraging and operation of a resilient business model with low volatility of operating profitability.

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). The business risk profile is driven by Baromfi-Coop’s leading position in Hungary, solid product quality and developing brand, leading to a moderate market share and brand strength assessment. Profitability is in the double-digit range with low-to-medium volatility. Low diversification in terms of product categories and the locations of production assets constrains the assessment.

Baromfi-Coop slaughters around half of all the chickens raised in Hungary, many of them produced in its own integration. It is one of the largest food producers in Hungary with 2023 revenues of HUF 236.8bn (EUR 0.6bn, up 8.7% YoY). In Europe, Baromfi-Coop holds 1.5%-2.0% of the market, ranking it top 25 for chicken. Other large chicken producers, such as the French European leader LDC Group (majority owner of Tranzit Food Kft.), typically have farms and slaughterhouses in larger regions and several countries. This provides more revenues groupwide but means they are smaller on their domestic markets. A significant improvement in the issuer’s growth is limited by its single location in eastern Hungary. Scope notes that setting up a new location with a circular economy takes time. In addition, growth investment is limited by high interest rates, sluggish funding opportunities and by internal management capacity constraints on the execution of plans of such scale.

Baromfi-Coop sells to all significant retailers in Hungary and has major international anchor buyers such as OSI Food (McDonald’s) and Iceland Foods. Exports are strong, accounting for 39% of revenues in 2023 (down 3pp YoY), mainly in the European hospitality and catering industries, which Scope expects to continue. Relationships with retailers are also strong. The size of the company has become system relevant for the Hungarian food industry. Baromfi-Coop has shown resilience to epidemics through its closed and controlled operating model, which is credit-positive and a comparative advantage. The duck market has collapsed, resulting in losses at other poultry processors including Baromfi-Coop‘s main competitors Hungerit (Bonafarm Group) and Tranzit Group. Baromfi-Coop was not impacted by the collapse because it only focuses on chicken. This may allow the group to gain further market share and grow at a faster pace than its competitors, as it maintained strong operating cash flow, which it invests in scaling up activities and automation.

Baromfi-Coop has moderate operating profitability in Hungary but is below the European consumer products average. Double-digit profitability is achievable in Hungary only for vertically integrated consumer products including agricultural activity such as that performed by the issuer. Positively, Scope-adjusted EBITDA margins* have been fairly stable ranging between 10% and 13% from 2019 until H1 2024. Nominal EBITDA has been increasing since 2015. Scope expects EBITDA to normalise in 2024 from the exceptional HUF 28.3bn in 2022 (up 75.4% YoY) and the slight decrease in 2023 (down 7.0% YoY). The agency therefore expects EBITDA exceeding HUF 30bn on average for 2024-26. This is underpinned by H1 2024 EBITDA (unaudited) of HUF 14.7bn and Scope notes the seasonality towards the second half of the year.

Brand strength is moderate, and Scope’s assessment reflects emerging brand MasterGood, now marketed heavily in Hungary and set to replace the SáGa processed poultry products brand. The brand strength assessment is constrained by the high share of non-branded or retailer/restaurant-branded chicken but supported by premium GMO-free labels. Baromfi-Coop was the first company able to build a strong brand on fresh meat sold by retailers (in modified atmosphere packaging).

Financial risk profile: BB (revised from BB-). The group’s moderate financial risk profile is supported by good leverage as a result of a strong deleveraging phase, robust interest cover due to mainly low fixed-rate debt and the partial conversion of debt to euros. It is constrained by weak and volatile cash flow cover due to the capex intensity of the industry and owner-management’s growth aspirations.

Baromfi-Coop had HUF 81.1bn in gross debt at YE 2023 (flat YoY) in the form of three senior unsecured bonds totalling HUF 51.5bn as well as HUF 29.6bn in senior secured bank loan facilities. The cash balance stayed high at HUF 19.6bn at YE 2023, which is partially earmarked for the repayment of the HUF 14.0bn bond maturing in November 2026. This provides comfort for the large upcoming debt maturity and reduces refinancing risk. In 2023, leverage metrics were flat YoY at debt/EBITDA of 2.3x and funds from operations/debt slightly above 40%.

Baromfi-Coop is going through an aggressive growth phase, which was followed by a strong deleveraging path from debt/EBITDA of 3.9x in 2021 and 3.6x in 2020. The deleveraging was driven by nominal EBITDA growth to HUF 26.3bn in 2023 from HUF 13.8bn in 2020 as a result of the capacity increase and high food price inflation in Hungary (above 50% in the 2020-23 period).

Scope forecasts an increase in debt/EBITDA of slightly above 2.5x in 2024 due to: i) one of the largest investments in 2024-25 in the Hungarian meat industry, at subsidiary Sága Foods Zrt. with an estimated investment value of around HUF 20bn (EUR 50m) for the modernisation and capacity increase of the manufacturing of processed poultry products; and ii) the development of 10.5 MW in solar power generation at subsidiary Master Good Kft. to be self-sustainable with regard to energy needs (ESG factor: credit positive). A delay in the execution of capex may result in temporarily better metrics, which Scope expects to deteriorate slightly in the short term, but to recover as energy costs decrease and new production ramps up. Management has a good track record of executing large-scale investments.

Free operating cash flow/debt has been historically negative. This is because the Bárány family has continuously expanded the business after the generation change to reach full vertical integration and achieve a circular economy (ESG factor: credit positive). The expansion of the business has also required a rise in working capital. The high nominal EBITDA, high level of automation and low volatility in operating profitability coupled with the reinvestment of profits (low dividend policy) allows Baromfi-Coop to continue its aggressive growth path without significantly increasing leverage.

Stronger deleveraging is hindered and figures may become volatile due to expected negative working capital related cash outflow and some uncertainty related to investment subsidies and the sales/production ramp up. Scope estimates funds from operations/debt well above 30% for 2024-26. This will be driven by high EBITDA, low interest rates (subsidised and largely fixed well below 5% annually; switch of most working capital loans to EUR from HUF) and low taxation (due to investment related tax reliefs).

Baromfi-Coop operates with a high share of fixed interest rate debt facilities, which offer significant debt protection. The exceptionally strong EBITDA growth and high interest received on cash deposits allowed for a very strong EBITDA/interest cover of 80x in 2023 (up from 32x in 2022 and 16x in 2021). The agency expects EBITDA/interest cover in the range of 10-15x for 2024-26, based on the persistent high-interest rate environment and decreasing cash reserves as they are spent on growth capex and debt reduction. Scope notes the good performance in H1 2024. Interest payments on drawn debt were partially (close to half) neutralised by interest received on cash deposits. Scope therefore expects this metric to be strong in 2024, continuing at least into H1 2025.

Liquidity: adequate (unchanged). Baromfi-Coop’s liquidity metrics are above 110% and Scope expects them to remain solid at least until YE 2025 assuming that overdrafts and working capital facilities are rolled over. Liquidity metrics may come under pressure in 2026 when the company faces large debt maturities of HUF 14bn in expiring bond from the Bond for Growth programme and HUF 6.0bn in loans from the Baross Gábor programme while continuing aggressive growth funded by own cash sources and cash flow.

Scope notes that liquidity metrics are volatile, but Baromfi-Coop holds significant cash reserves of HUF 19.6bn at YE 2023 (HUF 23.8bn on 30 June 2024, not audited). Leverage metrics also allow for further debt issuance, if needed. The company has a good track record of rolling over debt for working capital and issuing debt in general. Scope sees refinancing risk as manageable.

Baromfi-Coop Kft. issued three series of senior unsecured bonds with a total value of HUF 51.5bn over 2019-2021. The bond proceeds were used for capex to increase production capacity and deepen vertical integration. The bonds have long tenors and low fixed coupons of 2.7%-3.0%. The bonds have bullet repayment, with HUF 14bn repayable in November 2026, HUF 14.5bn in May 2028 and HUF 23bn in July 2031.

Scope highlights that Baromfi-Coop Kft.’s senior unsecured bonds guaranteed by subsidiary Master Good Kft. and 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 51.5bn) 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 two notches. 

In addition to the rating deterioration covenant, bond covenants include a list of other covenants such as change of control. Financial covenants in bank agreements contain net debt/EBITDA of max. 3.5x, compared to which Baromfi-Coop has around 1x comfortable headroom. Scope therefore sees no significant risk of the covenants being triggered and/or enforced. 

Supplementary rating drivers: credit-neutral (unchanged). Scope deems parent support credit-neutral and financial policy supportive based on owner-management’s commitment to keeping net leverage below 3.5x and the dividend payout capped at 20% of profit after tax. Corporate structure complexity, non-consolidation of all companies owned in the value chain and no reliance on a Tier 1-2 auditor for the group’s size are constraints, which are partially mitigated by its investor presentations and public disclosures.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation of debt/EBITDA of around 2.5x or below in the next couple of years, investments in a new processed poultry products plant and solar power generation for own use, as well as continued positive performance thanks to a resilient business model.

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

1. Improved business risk profile (reduced concentration/cluster risk on product portfolio and production asset location) – remote possibility
    
2. Solid credit metrics (debt/EBITDA sustained well below 3.0x)

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA increasing above 3.0x

Debt ratings

Scope has upgraded the rating of the senior unsecured debt to BB from BB-, in line with the issuer rating. The debt category rating reflects the ranking of the debt, at below a significant amount of the HUF 38bn of senior secured bank debt and HUF 22bn in Hungarian state and European Union subsidies assumed at YE 2026. The recovery analysis indicates an ‘above average’ recovery for the senior unsecured guaranteed bonds and for all other senior unsecured debt positions in a hypothetical default scenario based on a liquidation value at YE 2026. Nevertheless, there is no uplift compared to the issuer rating due to the potential volatility in the company’s capital structure on the path to default, and the issuer’s ability to raise additional debt ranking above the senior unsecured debt positions.

Concurrently, Scope has withdrawn the BB senior unsecured debt rating due to business reasons and assigned a BB rating on the senior unsecured bonds issued by Baromfi-Coop Kft. and guaranteed by its subsidiary Master Good Kft. (ISINs: HU0000359294, HU0000359302, HU0000360706). There is no uplift given for the corporate guarantee as it is a fully consolidated subsidiary.

Environmental, social and governance (ESG) factors

Baromfi-Coop contributes to the circular economy through its vertical integration. It has its own agricultural activity, highly automated slaughterhouses and by-product facilities, and solar energy production (credit-positive factor for resource management and production efficiencies).

Baromfi-Coop has issued a green bond (Second Party Opinion available on its Green Bond Framework), underpinning the group’s commitment to ESG principles.

Strategic owners (the Bárány family via their family trust after the corporate structure reshuffling in H2 2023) have a hands-on management approach and reinvest most of the profits. Growing the group also means consolidating several small entities, though regulation has been slowing the process. Non-consolidation of all production assets and a boutique auditor, however, are negative governance factors. These are mitigated by consolidation efforts, the willingness of the managing owners to simplify the structure over time, and increased communication with capital markets through information sharing on the Budapest Stock Exchange.

Baromfi-Coop’s ESG strategy is credit-neutral. Scope nevertheless notes that the commitment to ESG principles is resulting in lower financing rates. At the same time, risk around energy prices is mitigated by the group’s own production, and high automation makes labour scarcity manageable.

All rating actions and rated entities

Baromfi-Coop Kft.

Issuer rating: BB/Stable, upgrade

Senior unsecured debt rating: BB, upgrade and subsequent withdrawal

Senior unsecured guaranteed debt instrument ratings (ISINs: HU0000359294, HU0000359302, HU0000360706): BB, new

*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 Outlooks, (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, the Rated Entities' Related Third Parties, third parties 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 the 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Marlen Shokhitbayev, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 September 2019. The Credit Ratings/Outlooks were last updated on 5 December 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.