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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Hungary-based Hell Energy Magyarország Kft (Hell Energy) at B+/Positive. Scope has also affirmed the senior unsecured debt rating of B+.

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 supported by the regional market leadership and strong brand recognition as well as historically solid profitability. The business risk profile remains constrained by the company’s still relatively small size, as well as by moderate diversification in terms of product categories, geographical scope and production sites.

The company is the market leader for energy drinks in Hungary as well as in eight other countries, mostly in CEE. It also has been improving its diversification within the non-alcoholic beverages segment, supported by a granular client and supplier base. Despite operating in over 50 countries and a with a gradually increasing portion of international sales, most of Hell Energy’s sales are still in CEE (core markets are Hungary and Romania), with domestic sales accounting for over 40% of consolidated revenues in 2023.

Hell Energy’s business risk profile is somewhat constrained by a limited diversification with regard to product categories (non-alcoholic beverages only) and high concentration of sales in two CEE countries. The company’s relatively small absolute size compared to larger non-alcoholic beverage multinationals is another constraint. The single production site also hinders international growth.

Revenue grew by nearly 10% YoY in 2023, driven by higher prices offsetting lower volumes. Scope anticipates a revenue increase of approximately 25% in 2024 (H1 2024: 22% YoY), partly attributed to the implementation of the can deposit system in Hungary (HUF 50 added to the price of each can for recycling purposes) and due to increased volumes following the completion of the new facility complex in Szikszó, which has expanded capacity by over one third for both can manufacturing and can filling. The enhanced capacity is expected to support revenue growth throughout 2025. However, regulatory impacts may partially limit revenue growth. Romania has in fact enacted a law in February 2024 restricting the sale of energy drinks to minors. This law does not affect other beverages from Hell Energy’s portfolio, such as iced coffee, as they are not labelled as energy drinks. A similar bill is under discussion in the Hungarian Parliament which may moderately affect Hell Energy’s domestic sales and profitability if approved. Scope does not include the impact of such event in its forecasts.

In 2023, Scope-adjusted EBITDA* increased to HUF 28.8bn from HUF 18.5bn in 2022, with an EBITDA margin of 17.8% (up 5.5pp YoY) mainly driven by declining input costs (especially energy) and higher pricing. Such effects have been carried over also in H1 2024, resulting in a temporarily high EBITDA margin of 19% as of H1 2024. This, however, is expected to change in H2 2024 due to the implementation of the can deposit system in Hungary during H1 2024 that has a diluting effect on the company’s margin given its pass-through nature. Scope expects margins to decline to approx. 14% in 2024 (currently at 14.3% in the 9M 2024). The EBITDA margin, which is expected to be between 12%-15% over time, places Hell Energy at the upper end of the Hungarian consumer products peers and at the European average. The company’s above-average vertical integration and efficient, and relatively new production facilities have shielded its profitability from the strong wage inflation in Hungary. The facility also provides an advantage over competitors with less modern, less automated production facilities.

Financial risk profile: B (unchanged). The financial risk profile remains weak and constrained by high leverage and negative cash flow cover, partly supported by a good EBITDA interest cover. Nevertheless, credit metrics are improving after the completion of the large expansionary capex cycle in 2023 (the bonds issued in 2021 were earmarked to finance the expansion of its manufacturing and warehouse facilities).

Debt/EBITDA improved to 4.1x in 2023 from 5.5x in 2022 thanks to higher EBITDA that offsets the higher debt level. As the company finalised its capacity expansion, Scope expects lower yet still sustained capex going forward in conjunction with only slightly increasing EBITDA up to HUF 30bn per year, leading leverage to remain between 4.0x-5.0x over time.

Hell Energy is yet to receive part of the state subsidy granted partially for the capacity expansion project (HUF 5.5bn were deferred to 2025 from 2024), therefore capex will remain elevated also in 2024. Scope forecasts free operating cash flow (FOCF)/debt will stay marginally negative in 2024 (negative 9% in 2023), and breakeven in 2025. The negative FOCF is due to the large capex programme (HUF 30bn in 2022, HUF 37bn in 2023 and expected HUF 17bn in 2024) but also working capital build-up of HUF 33bn in 2022, HUF 2bn in 2023 and expected HUF 12bn in 2024. The company has been depended on external financing to support its growth needs over the past years. Scope expects FOCF to improve from 2025 onwards, as capex requirements should significantly decline as no major investments are planned, allowing for deleveraging and an overall improvement of the financial risk profile. Nonetheless, Scope’s capex estimates incorporate a degree of conservatism to account for the potential of future investments intended to drive further growth.

The financial risk profile continues to be supported by the EBITDA interest coverage of 9.4x in 2023, which is Hell’s strongest financial metric. Scope expects this ratio to remain strong and well-above 7.0x in the next years since most of the debt is at fixed rate and gross debt is projected to remain broadly stable going forward.

Liquidity: adequate (unchanged). The liquidity profile remains adequate, supported by the unrestricted cash reserves of HUF 3.2bn as of December 2023 and the large amount of undrawn committed credit facilities of HUF 9.2bn, despite pressure on free operating cash flow. The assessment considers the expectation of liquidity ratio to be comfortably above 100% in the projected period supported by the improving FOCF and limited debt maturities. From 2027 to 2029, Hell Energy is due to pay HUF 16.2bn a year in bonds repayment principal, what still could be considered manageable, depending on the accumulation of cash over time.

Scope highlights that Hell Energy’s senior unsecured bonds 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 if the debt rating of the bonds stays below B+ for more than two years (grace period) or drops below B- (accelerated immediate repayment). 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. In addition to the rating deterioration covenant, bond covenants include a list of soft covenants, such as change of control and dividend restrictions.

Supplementary rating drivers: credit-neutral (unchanged). The rating has no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Positive Outlook continues to reflect the expectation of reduced capex levels with broadly stable profitability, resulting in debt/EBITDA remaining below 5.0x and free operating cash flow approaching break-even.

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

1. Debt/EBITDA maintained below 5.0x over time
    
2. Improving free operating cash flow to break-even on a sustainable basis

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

1. Inability to maintain debt/EBITDA below 5.0x over time
    
2. Inability to improve free operating cash flow to break-even on a sustainable basis

Debt rating

Scope’s recovery assessment for Hell Energy’s senior unsecured debt (bonds) assumes a hypothetical default scenario in 2026 and is based on an assumed liquidation of the company’s assets, which has significantly increased YoY as a result of the completion of the heavy capex phase related to the expansion of Hell Energy’s warehouse and manufacturing facilities. Overall, Scope expects an “above average” recovery and makes no uplift to the rating by one notch given the volatility in capital structure on path to default with introduction of additional secured debt. Furthermore, in case of weakening operating performance, the market value of assets will decline and thus recovery rate would drop.

Hell Energy issued two senior unsecured bonds with 10-year tenors under the Hungarian Central Bank’s Bond Funding for Growth Scheme. One bond was issued in 2020 (ISIN: HU0000359377) at HUF 28.5bn with a fixed coupon of 2.7% yearly. Another bond was issued in 2021 (ISIN: HU0000360722, guaranteed by subsidiary Quality Pack Zrt.) at HUF 67bn with a fixed coupon of 3.0% yearly. Both bonds were used mainly for capex.

Bonds repayment start in tranches from 2026 with a combine principal amount of HUF 6.7bn, HUF 16.2bn in 2027-2029, HUF 6.7bn in 2030 and the remaining HUF 33.5bn in 2031.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Hell Energy Magyarország Kft

Issuer rating: B+/Positive, affirmation

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; 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 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: Eugenio Piliego, Senior Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 8 November 2019. The Credit Ratings/Outlooks were last updated on 19 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.