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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Hungarian construction products wholesaler and retailer Stavmat Építőanyag Kereskedelmi Zrt. (Stavmat) to B/Stable from B+/Negative. Stavmat’s senior unsecured debt rating has also been downgraded to B+.

The downgrade is driven by the deterioration of Stavmat’s financial risk profile as its operating profitability continues to decline. The Hungarian construction market remains sluggish in 2024, characterised by low demand and strong price competition putting pressure on gross margin. The government subsidies announced in 2024 have not yet resulted in the recovery of the market. Stavmat’s Scope-adjusted EBITDA margin* is forecasted to drop to 3.9% in 2024 from 5.3%, negatively impacting Stavmat’s credit metrics as exemplified by debt/EBITDA increasing to 5.9x from 4.2x in 2023.

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). Stavmat’s business risk profile continues to be constrained by its limited size and low diversification as it is exposed to a single product category and operates in a single country. Although Stavmat is one of the leading wholesalers of construction materials for professional customers in Hungary, it operates on a fragmented market and thus faces strong competition, which limits its ability to set prices. In addition, the company’s high dependency on the underlying construction market affects its operating profitability as evidenced by the deterioration in the 2023 financials.

Stavmat’s revenue and reported EBITDA decreased by 24% and 70% YoY respectively in 2023 and are expected to deteriorate further in 2024. Low demand and strong price competition have caused the company’s gross margin to decline to 5% in 2023 where it is expected to remain in 2024, down from the exceptional level of 9% in 2022. The EBITDA margin continues to be negatively impacted by the price competition and a high inflationary environment leading to a significant increase in overhead costs. Although management has implemented several cost-saving initiatives, such as the optimisation of the workforce and working capital management, these have not been able to mitigate the unfavourable macroeconomic headwinds. Demand is expected to increase as financing conditions become more favourable and government subsidies become more accessible (e.g. Home Renovation Programme¹), leading to a slow market recovery and a steady increase in Stavmat’s operating profitability towards its historical average of around 5%.

Although the Dabas paving stone plant has started its operations in Q3 2023, it will take at least two years for the plant to ramp up its production and contribute materially to Stavmat’s performance.

Financial risk profile: B+ (revised from BB). In 2023 gross debt increased as Stavmat contracted debt in the amount of HUF 840m to finance a site acquisition, however in 2024 no additional debt has been contracted. Nevertheless, in 2024 credit metrics are expected to further deteriorate from their 2023 levels due to lower operating profitability: debt/EBITDA is expected to peak at around 5.9x and the funds from operations/debt will be at an all-time low of 14% in 2023 before their slow recovery towards 4.5x and 20% respectively. The financial risk profile continues to benefit from the strong interest coverage as the debt portfolio has fixed, subsidised interest rates. Nevertheless, interest coverage also deteriorates and is forecasted to remain between 5.5-8.5x.

With the completion of the Dabas paving stone plant, the cash flow cover is forecasted to significantly improve as it benefits from the company’s moderate cash flow generation and limited capex plans for the next two years. Although the company has communicated conservative investment capex plans for 2025 and 2026, Scope expects the company to continue its expansion strategy as soon as the construction market recovers, which would put pressure again on the cash flow cover.

Liquidity: adequate (unchanged). The assessment is backed by the considerable sources of liquidity (HUF 400m^a of unrestricted cash as at end-2023), which cover by more than 200% of the bank debt repayments (with HUF 168m annual amortisation) for 2024 and 2025. Liquidity sources can be supplemented, if needed, by the annually rolled over credit lines of HUF 500bn (as customary in Hungary) and the sell-out of inventory at a discounted price. In 2026 the senior unsecured bond is scheduled to start its amortisation by HUF 500m, which Scope assumes the company will refinance. Liquidity could come under pressure if the company does not address the refinancing risk well in advance.

Scope highlights that Stavmat’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 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 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: -1 notch (unchanged). The standalone credit assessment of B+ has been adjusted by one notch due to Stavmat’s aggressive financial policy. This is shown by the distribution of HUF 1.8bn in committed reserves to shareholders in 2020 and for the high execution risk related to the company’s high investment capex phase. Positively, the company has suspended dividends since 2020 and has taken a financially more prudent decision to finance its site acquisitions primarily through equity. Nevertheless, Scope would need a longer track record before considering the removal of the negative one-notch adjustment.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that although the slowdown in the Hungarian construction market will continue to put pressure on credit metrics, leverage (as measured by debt/EBITDA) will not exceed 6x. The Outlook assumes a recovery in market conditions driven by the Hungarian government initiatives to simulate demand in the construction market which should support revenue and EBITDA growth of 5% and more than 45% per annum going forward, respectively. The Outlook further reflects that the issuer addresses refinancing risk well in advance.

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

1. Debt/EBITDA improving to well below 4x on a sustained basis;
    
2. A less aggressive financial policy is achieved, allowing the removal of the negative notch for financial policy with credit metrics developing along Scope’s rating case.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA deteriorates to 6x or above on a sustained basis.

Debt rating

Scope has downgraded the ratings for senior unsecured debt to B+ from BB-, in line with the rating action on the underlying issuer rating. The recovery analysis is based on a hypothetical default scenario in 2026 and assumes outstanding senior secured debt of HUF 847m and senior unsecured debt of HUF 4.5bn with available overdrafts fully drawn. Scope’s analysis assumes a liquidation scenario given the significant asset balance, including fixed assets with high recoverable values. Scope estimates the recovery for senior unsecured debt to be ‘above average’ and therefore assigns the debt category a B+ rating, one notch above the underlying issuer rating.

In July 2021, Stavmat issued a HUF 5bn senior unsecured green bond through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for the paving plant capex and for working capital financing. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in six tranches starting from 2026, with 10% of the face value payable yearly, and a 50% balloon payment at maturity. Scope notes that Stavmat’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Stavmat to repay the nominal amount (HUF 5bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and additional indebtedness covenants.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Stavmat Építőanyag Kereskedelmi Zrt.

Issuer rating: B/Stable, downgrade

Senior unsecured debt rating: B+, downgrade

*All credit metrics refer to Scope-adjusted figures.

a. Liquid sources of HUF 1.2bn as at December 2023, including cash and cash equivalents, of which HUF 800m are assumed to be restricted

Rating driver references
1. 18 November 2024 The announcement of the re-launch of the Hungarian Renovation Programme

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, 15 October 2023; Retail and Wholesale Rating Methodology, 26 April 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 May 2021. 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
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