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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating on Hungarian aluminium processor Inotal Zrt. and revised the Outlook to Stable from Positive. Scope has also affirmed the B+ senior unsecured debt rating.

The revision of the Outlook to Stable from Positive is driven by the continued negative free operating cash flow as the company has embarked on significant investment projects including solar power generation and an energy storage facility. While these investments are expected to reduce the issuer's exposure to energy price volatility and improve medium-term profitability visibility, the capex-heavy business cycle results in negative free operating cash flow until 2026. The execution risk associated with these large-scale investment projects, in addition to the liquidity risk pertaining to the refinancing of the amortising long-term debt in 2025, could lead to a deterioration in Inotal’s liquidity profile.

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 supported by high diversification in terms of customers, suppliers and geographies. Inotal’s main products (wire rods, aluminium strips, drawn wire and aluminium granules) are used by a number of industries, from construction and automotive to energy. This enables Inotal to benefit from different demand patterns across industries. In terms of geographies, Inotal remains focused on Central and Eastern Europe and the Balkans, with Romania and Bosnia being its most important export markets in 2023. The customer portfolio is well diversified, with no single customer accounting for more than 10% of revenues, and the top five customers accounting for 33% of revenues in 2023.

Inotal’s business risk profile is also supported by operating profitability, positively affected by: i) suspension of the loss-making production of aluminium slugs; and ii) lower energy prices. The primary and scrap aluminium procured is smelted before the processing of semi-finished products. This is a highly energy-intensive process and a major factor influencing operating profitability. For 2024, Scope forecasts EBITDA levels close to the previous year, accounting for potentially weaker end-market demand in the second half of the year. Beyond 2024, Scope expects operating profitability to gradually improve towards 8%, driven by increased demand and completed machinery investments. Scope’s financial forecast does not include any potential positive impact on EBITDA from the solar investment. This is to account for potential delays in its construction. Scope notes the potential dilution of the Scope-adjusted EBITDA margin* in the consolidated financials, as the EBITDA margin of Martin Metals is significantly lower than that of Inotal.

Inotal’s business risk profile remains constrained by its limited absolute size, both in a European and global context. Revenues decreased by 27% in 2023 compared to the previous year, and volumes sold have declined steadily until 2023. In H1 2024, however, volumes sold increased by 6% compared to the same period last year, as end-market demand was stimulated by legislative changes. Under new EU regulations, European manufacturers are required to source at least 51% of raw materials from the EU for their aluminium products to carry the "Made in EU" label. This gives Inotal a competitive advantage over Middle Eastern and Chinese competitors.

Financial risk profile: BBB- (unchanged). The financial risk profile reflects good leverage metrics and strong interest cover, while being constrained by the negative cash flow cover.

Inotal has embarked on a significant investment project in 2024, the development of a solar park with a capacity of 6 MW, which will cover approximately 30% of the issuer's energy consumption. Inotal is also planning to invest in an energy storage facility with a capacity of 20 MW/h as an extension to the solar park. Gross capex for these two projects amount to EUR 9.4m in 2024 and EUR 14.9m in 2025. While these investments are expected to reduce the issuer's exposure to energy price volatility and improve medium-term profitability visibility, the capex-heavy business cycle results in negative free operating cash flow until 2026. Scope notes that these investments are partially financed by government subsidies (EUR 1.5m expected to be received in 2024 and EUR 4.6m in 2025). Additionally, the investments are expected to be covered by dedicated long-term investment credits, using only minimal own sources. Scope highlights the prolonged negative free operating cash flow generation compared to the previous forecasts, as the execution risk related to the aggressive investment strategy could negatively impact free operating cash flow generation beyond Scope’s current base case.

In 2024, Inotal became the majority owner of Martin Metals, increasing its shareholding to 51% from 40%. Martin Metals is a scrap metal trader and a strategic supplier to Inotal, procuring the majority of Inotal's aluminium scrap. Martin Metals' business is highly integrated with Inotal's and operates from shared premises. From 2025, Inotal plans to consolidate Martin Metals in proportion to its shareholding. Inotal does not yet have full control as the minority shareholders (two private individuals) have veto rights on certain issues.

Given the significant intercompany trade between Inotal and Martin Metals, the visibility of the consolidated revenues and EBITDA is currently limited. However, Scope highlights the potentially weaker consolidated credit metrics, in particular the leverage, which is expected to increase following the partial consolidation of Martin Metal’s financial debt (EUR 22m as of YE2023).

Further, Inotal plans to raise additional financial debt totalling EUR 9.0m (EUR 4.0m investment loan and EUR 5.0m long-term working capital loan to refinance the bond repayment). Inotal also intends to pay a dividend of EUR 1.0m to its shareholders. Scope notes that, under the terms and conditions of Inotal's senior unsecured bond (ISIN: HU0000359948), contracting new debt and dividend payments require the unanimous consent of all bondholders. The rating agency's current financial forecast includes the impact of both economic events.

However, leverage, as measured by debt/EBITDA, is expected it to stay close to 2.0x in the medium term (2023: 1.8x). The agency foresees a temporary spike towards 2.6x in 2025 following additional debt intake in the form of a new current asset loan and investment credit (total amount of EUR 9m). Leverage benefits from: i) debt amortization, with 12.5% of the MNB Bond’s face value and 10% of the investment loan to be repaid annually; and ii) strong EBITDA of sustainably above EUR 7.0m.

EBITDA interest coverage remains robust, with significant interest income realized through the forex swap of the bond coupon and the short-term deposit of cash in both 2022 and 2023 (lower interest income assumed beyond that time). Interest for financial debt is moderate (3.2% of the bond and 3.5% of the investment loan plus 6% assumed for new debt in 2025, denominated in euro) and fixed during the whole tenor of the debt. Scope therefore sees the development of the debt protection metric as highly dependent on the EBITDA development.

Liquidity: adequate (unchanged). Liquidity is adequate, as sources (EUR 6.7m in free cash as of YE 2023) fully cover uses (short-term debt of EUR 1.9m and negative free operating cash flow of EUR 1.8m forecasted for 2024). Scope highlights the risk of an unsuccessful refinancing of the 2025 bond redemption, which, combined with the continued externally financed spending spree, could lead to a significant deterioration in the issuer's liquidity profile. However, Scope considers this liquidity risk to be manageable for the time being, given the issuer’s relatively low leverage.

Scope notes that Inotal’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 6bn) if the debt rating of the bond 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 zero notches. Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s assumption that Inotal can maintain its robust financial risk profile, with debt/EBITDA of around 2.0x and EBITDA interest cover above 10.0x in the medium term, and that it will continue to be marginally impacted by softening end-market demand. Scope’s financial forecast assumes a period of significant investment between 2024 and 2026, with a net capital expenditure of EUR 22.3m. In addition, Scope’s base case includes the assumption of new financial debt in the amount of EUR 9.0m in 2025 and a dividend payment of EUR 1.0m occurring in the same year.

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

1. Free operating cash flow cover moving sustainably into positive territory after the current investment cycle, while keeping debt/EBITDA below 3.0x
    
2. EBITDA margin at above 5%
    
3. Improved visibility on the liquidity profile

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

1. Inability to improve visibility on the liquidity profile
    
2. Debt/EBITDA moving above 4.0x

Debt rating

In September 2020, Inotal issued a HUF 6bn senior unsecured bond (ISIN: HU0000359948) through the Hungarian central bank’s Bond Funding for Growth scheme. The bond proceeds have been used to refinance existing third-party debt. The bond has a tenor of seven years and a fixed coupon of 3.2%. Bond repayment is in five tranches: 12.5% of the face value payable yearly between 2023 and 2026, and 50% at maturity in 2027.

Scope has rated the senior unsecured debt issued by Inotal at B+, the same level as the issuer rating. This reflects an ‘average’ recovery for senior unsecured debt holders in a liquidation scenario. The rating case assumes that Martin Metals' financial debt is not guaranteed by Inotal and is therefore excluded from Scope's recovery assessment.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Inotal Zrt.

Issuer rating: B+/Stable, Outlook change

Senior unsecured debt rating: B+, 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; Metals and Mining Rating Methodology, 21 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/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: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 May 2020. The Credit Ratings/Outlook were last updated on 7 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.