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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB-/Stable issuer rating on Hungarian agribusiness company Hunland Trade Kft. Scope has also affirmed the BB- rating on the senior unsecured guaranteed bond (ISIN: HU0000360680).

The affirmation of the issuer rating is supported by the moderate financial risk profile, which includes: i) consistently positive net interest income resulting in very strong debt protection, following the implementation of cross-currency interest rate swaps in 2022; and ii) gradually improving leverage metrics, with debt*/EBITDA expected to move towards 4.0x in the medium term.

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). Hunland Trade's leading market position on the Hungarian livestock export market provides a solid foundation for the company's business risk profile. In 2023, the issuer's revenues increased to EUR 505m (+38% compared to the previous year), driven by increased sales of cattle in the Middle East. Hunland Trade has been active in the livestock and meat trade market for over 25 years, making it a major player in the global food supply chain and the market leader in Hungary for live animal export. In 2023, the issuer accounted for 60% of the Hungarian cattle exports and 51% of the Hungarian pig and sheep exports. Hunland Trade’s vertically integrated business model mitigates business risk , as the sister companies belonging to the same owner provide a secure stream of animals, mitigating the risk related to fluctuation in supply.

Hunland Trade's business risk profile is supported by geographical diversification, with operations in more than 40 countries worldwide. The company's domestic market focus remains limited, with approximately 27% of revenues generated in Hungary as of 2023. In 2023, the company's primary export markets included Turkey, Croatia, Libya, and Romania. The customer portfolio remains well diversified, with the top 10 customers representing 32% of total sales as of 2023, and the largest customer accounting for 8% of the total sales. However, the product portfolio is less diversified, with livestock accounting for 92% of revenues and meat and other products accounting for 4%–4%, respectively.

The business risk profile is constrained by the weak operating profitability, which has deteriorated below 2% in 2023. Hunland Trade's financial statements reflect a low EBITDA margin, indicating that the company is primarily engaged in the trading of agricultural products — an industry with comparatively narrow profit margins compared to producers. Beyond 2023, Scope assumes a slightly more conservative outlook on Hunland Trade's EBITDA margin (forecasted to be between 1.7% and 1.9% until 2026) in anticipation of potential wage pressures and a slowdown of price growth over the coming years.

Financial risk profile: BB (unchanged). The financial risk profile remains supported by the robust debt protection. In 2022, the issuer entered into a cross-currency interest swap for the full term of its senior unsecured guaranteed bond. This swap allows Hunland Trade to pay interest in euros instead of forints, as the notional amount in forints was swapped for euros. However, due to the significant difference in base interest rates between the euro and forint, the swaps resulted in negative interest rates in euros (-0.8% on average), meaning that Hunland Trade is actually receiving interest instead of paying it. This is expected to result in consistently positive interest income in the upcoming years.

Scope expects leverage, as measured by debt/EBITDA, to remain within a range 3.5x and 5.0x till 2026, while Scope expects EBITDA generation to remain relatively flat. In 2026, the credit metric is expected to move below 4.0x as the amortisation of the bond begins, resulting in a significantly lower level of financial debt.

Free operating cash flow is more volatile than EBITDA, significantly impacted by shifts in the net working capital, and changes in CAPEX. Scope forecasts considerable volatility going forward, with cash flow cover measured by free operating cash flow/debt fluctuating between 6% and 20% till 2026.

Liquidity: Adequate (unchanged). Liquidity is assessed as adequate as sources in Scope’s liquidity forecast for 2025 fully cover uses (the company has minimal short-term debt as at YE 2024). Sources comprise EUR 27.7m of unrestricted cash available as at YE 2024 and FOCF of EUR 6.3m forecasted for 2025. Scope believes that a worsening of liquidity, e.g. through rapidly increasing working capital needs, is unlikely thanks to the significant cash balance available to the company.

Scope highlights that Hunland-Trade’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 24.2bn) 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 two notches. Scope therefore sees no significant risk of the rating-related covenant being triggered.

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

Outlook and rating sensitivities

The Stable Outlook incorporates Scope’s view that key credit metrics over the next three years will improve overall, with Scope-adjusted debt/EBITDA at 3.5x-5.0x, positive net interest income and free operating cash flow/debt consistently above 5%. It also incorporates Hunland Trade’s position as the leading Hungarian livestock exporter and Scope’s expectation that Hunland Trade’s EBITDA margin will remain stable close to 2%.

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

1. Debt/EBITDA below 4.0x on a sustained basis.
    
2. Improved business risk profile, e.g. demonstrated by improved profitability on a sustained basis.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA above 6.0x on a sustained basis

Debt rating

Scope expects an ‘above-average’ recovery for the HUF 24.2bn guaranteed senior unsecured bond, which is based on an anticipated liquidation value in a hypothetical default scenario occurring in 2026. The guaranteed senior unsecured bond ranks below short-term and long-term debt raised from financial institutions (excluding the bond) and payables that are secured by asset pledges. Consequently, in a hypothetical default, creditors of the guaranteed senior unsecured bond are likely to be repaid from the liquidation proceeds remaining after repayments to senior secured debt creditors; the guarantors’ current assets; and property, plant and equipment; reduced by long- and short-term financial debt as well as payables. Scope’s recovery expectation takes into consideration uncertainties regarding the value of claims at the guarantors’ (Hunland Trans Kft, Bovinia Kft, Hunland Production Kft, Hunland Dairy Kft, HLT Production, Hunland Service, HLT Telep, Hunland Feed and Hunland Group Holding) level at the point of a hypothetical default of the bond issuer. The value of claims at default is strongly driven by short-term assets such as inventory, receivables and financial assets whose value is deemed as uncertain at default. It also considers uncertainties about the debt positions of the guarantors at the point of a hypothetical default of the bond issuer and the seniority of the claim. Hence, Scope has refrained from granting an uplift to the bond rating, resulting in the affirmation of the BB- senior unsecured guaranteed bond rating.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Hunland-Trade Kft.

Issuer rating: BB-/Stable, affirmation

Senior unsecured (guaranteed) bond rating (ISIN: HU0000360680): BB-, 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 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: Istvan Braun, Senior Representative
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 February 2021. The Credit Rating/Outlook were last updated on 14 December 2023.
The bond Credit Rating was first released by Scope Ratings on 13 July 2021. The Credit Rating was last updated on 14 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, Scope Innovation Lab 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.