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Rating action

Scope Rating GmbH (Scope) has today downgraded the issuer rating of Hungarian biofuels producer Pannonia Bio Zrt (‘Pannonia’) to BB- from BB. Concurrently, the senior secured debt rating has been downgraded to BB+ from BBB-, while the senior unsecured debt rating has been downgraded to BB- from BB. All ratings have been placed under review for a possible downgrade.

The downgrade is driven by persistent challenging and more volatile market conditions, with margins stabilising below historical levels entailing an overall weaker business and financial risk profile. The under-review placement reflects pending risks connected with the waiver approval by Pannonia’s pool of bank lenders regarding a potential breach of the leverage covenant for FY 2024. Failure to obtain such waiver could theoretically trigger an accelerated repayment of the outstanding bank debt, which might have default implications for Pannonia. This scenario is deemed highly remote in light also of preliminary discussion with involved lenders.

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+ (-1 notch). The revision of the business risk profile assessment is linked to persistent pressure on Pannonia’s profitability due to volatile sector conditions affecting ethanol crush margins. Additionally, the business risk profile remains constrained by strong exposure to commodity markets, weak asset and product diversification, and the absence of low-cyclicality specialty chemicals products. Conversely, Pannonia’s business risk profile continues to benefit from its highly efficient plant (ESG: a credit-positive environmental risk factor), whose large scale and favourable location help maintain competitive advantage in operating costs.

Based on interim reports and discussions with management, Scope expects Scope-adjusted EBITDA* to rise to EUR 69.6m in 2024, with the EBITDA margin recovering to around 13% from a record low of approx. 6% in 2023 but remaining below expectations. The improvement is driven by operational efficiencies, stable production, growing demand for protein concentrates, and easing energy costs. However, Q4 2024 results are expected to weigh on 2024 performance due to higher supply costs from poor harvest conditions and delayed ethanol sales.

The 2024 European corn harvest was hampered by adverse weather developments, disease outbreaks, and regional challenges. Heavy rainfall in France and Germany reduced yields and delayed harvesting, while drought in Southern and Eastern Europe further cut output, driving up corn prices. In Hungary, high aflatoxin contamination rendered much of the crop unsuitable for food and feed, forcing supply chain adjustments. In response, Pannonia pivoted in Q4 2024 to exclusively processing toxic corn. This required adjustments in procurement, certification, and regulatory approvals across multiple EU countries and the UK to classify its ethanol as "advanced" under RED III. The company also adapted its sustainability certifications, such as the International Sustainability & Carbon Certification (ISCC), and implemented a process with the Hungarian Food and Feed Safety Authority to certify the toxic nature of the corn. The shift initially increased costs and delayed ethanol sales, impacting Q4 EBITDA. However, lower corn costs and premium pricing for advanced ethanol are expected to support profitability in 2025, offsetting lower DDGS (dried distillers grains with soluble) sales premiums. If aflatoxin contamination levels exceed 20 parts per billion, by-products such as DDGS cannot be sold for food or feed and are instead redirected to alternative uses, such as biogas production, entailing lower premiums. The move also enhances resilience against future market volatility. Nonetheless, high ethanol imports continue to pressure prices, entailing also decreasing effectiveness of market protective measures. Despite a sharp decline in European ethanol prices in late 2023 and a narrower price gap with the US and Brazil, the EU market remained attractive in 2024. This trend is likely to persist, intensifying price volatility and competition for domestic producers.

Scope conservatively projects a gradual EBITDA margin improvement to 14-16% in 2025-2026, supported by higher production, premium ethanol pricing, and energy efficiency investments. However, Scope believes that sustained high imports and the growing unpredictability of harvest conditions have added to market volatility, impacting profitability recovery and resulting in an overall weaker business risk assessment.

Financial risk profile: BB+ (-1 notch). Pannonia’s financial risk profile remains the main supportive factor for the issuer rating. However, the downward revision of the assessment reflects weaker credit metrics, paired with uncertainty of covenant compliance at YE 2024. While Scope continues to forecast a gradual improvement in credit metrics over the 2024-2026 period, following the all-time weak results of 2023, this recovery is largely contingent on a rebound in margins that are still expected to remain below historical levels. Moreover, sector-related risks are likely to persist, prolonging uncertainty around the timing and sustainability of a meaningful recovery. Additionally, the unresolved waiver approval for the leverage covenant breach on bank loans introduces further risks, with potential repercussions on Pannonia’s financial stability if not secured. With regard to the latter, Scope expects a pragmatic solution with the financing banks, given the company's solid overall credit metrics, its position in the Hungarian and international markets, as well as its long-standing banking relationships over the past years, which have previously allowed for covenant waivers.

Scope expects leverage, as measured by debt/EBITDA (calculated applying a 25% haircut on cash and cash equivalents), to decline to 3.5x in 2024, down from the peak levels of over 8.0x in 2023, which were impacted by unforeseen adverse market conditions. This improvement is expected to be driven by a significant increase in cash flow generation, supported by margin recovery and asset disposals. Scope projects this gradual deleveraging trend to continue over the next two years with leverage expected to around 2.0x by 2026. This should benefit from further margin improvements. Nevertheless, Scope notes that some elements of risk such as high import volumes and volatile corn yields still persist. Lower-than-expected ethanol prices paired with higher-than-expected corn prices would compress crush margins, negatively impacting Pannonia’s EBITDA and deleveraging trend.

As mentioned, Scope expects Pannonia’s deleveraging to be supported by its cash flow generation. The agency projects positive free operating cash flow (FOCF) over the 2024-2026 period with capex fully covered by operating cash flows. In 2024, FOCF is expected to increase to approximately EUR 70m, with cash flow cover – as measured by FOCF/debt – improving to around to above 25% from breakeven in 2023. This improvement should be primarily driven by higher EBITDA, working capital inflows, and cash proceeds from the disposal of the solar project, which will cover the entire EUR 20m of expected capex. Scope projects that cash flow cover will remain positive in the following two years, ranging between 15% and 30%, with capex projected to increase to over EUR 40m in 2025 before decreasing to EUR 18m in 2026. However, despite positive expected FOCF in 2025-2026, external financing may be required for larger-scale development projects.

Debt protection – as measured by EBITDA interest coverage – continues to support the financial risk profile. Historically, Pannonia has demonstrated strong debt protection, with the ratio remaining consistently above 10x until 2022, despite an increase in financial liabilities to support capex and dividend payments. However, in 2023, debt protection reached an all-time low of 3.1x, driven by a significant decline in EBITDA and a higher interest rate environment. From 2024 onwards, Scope expects debt protection to recover to a range of 6x and 11x, with a gradual improvement over time, supported by recovering profitability and a declining gross debt position.

Liquidity: adequate (unchanged). Scope considers Pannonia’s liquidity to be adequate. Upcoming debt maturities (EUR 90m in 2025, and EUR 86m in 2026; including approx. EUR 50m of WC facility roll over) are expected to be covered by unrestricted cash, positive FOCF, and approximately EUR 5m in undrawn committed credit lines as of December 2024. The liquidity ratio is projected to drop to approx. 100% in 2025, reflecting peak debt repayments, limited credit line headroom, and lower FOCF due to increased capex. However, given the company's track record and expected recovery above 100% in subsequent years, Scope does not assume a material impact on Pannonia’s liquidity profile.

Pannonia’s bank loans are subject to financial covenants related to leverage, cash flow cover, gearing, and liquidity. Due to weak profitability, the company breached covenants in 2023 and Q1 2024, specifically on cash flow cover, leverage, and the equity ratio, but received a full waiver from lenders. While all covenants were met in Q2 and Q3 2024, Scope’s projections and discussions with management indicate a covenant breach regarding leverage at YE 2024. Pannonia plans to submit a waiver request once preliminary 2024 results are available with discussions expected to be finalised by Q1 2025. For the time being, Scope assumes no impact on liquidity considering the high probability of a positive resolution backed by the company’s strong banking relationships, past waivers approvals, and management assurances. Potential refinancing of existing bank loans is not excluded, which could lead to a resetting of financial covenants. However, the agency will continue to closely monitor the following steps. An increased perceived risk of failure to obtain the waiver would result in a multi-notch downgrade on the issuer rating.

Supplementary rating drivers: credit-neutral (unchanged). Scope views the company’s financial policy, peer group considerations, parent support and governance to be credit neutral overall.

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

Under review for a possible downgrade

Pannonia’s issuer rating has been placed under-review for a possible downgrade due to unresolved waiver approval on a potential leverage covenant breach with discussions with the involved banks being at an early stage. Scope intends to resolve the under-review status as soon as possible.

The rating could be downgraded, possibly by several notches, if the risks of the issuer failing to obtain such a waiver increase and the risk of accelerated debt repayment increases.

The rating could be affirmed if Pannonia manages to obtain waiver from the pool of lenders and/or the company secures a resetting of applicable waivers.

The upside scenario for the ratings and Outlook is remote.

Debt ratings

Scope has downgraded the senior secured debt to BB+ following the downgrade of the issuer rating. This is based on Scope’s recovery analysis that indicates an ‘excellent’ recovery for senior secured debt in the event of a corporate default. The recovery is based on an expected liquidation value in a hypothetical default scenario in 2025. While an excellent recovery rate allows for up to three notches uplift from the issuer rating for senior secured debt, the two-notch uplift reflects Scope’s cautious stance regarding the volatility of some recovery rate such as inventory and tangible fixed asset which are subject to the evaluation at the time of liquidation as well as some uncertainties regarding investment plans in the upcoming years, potentially financed by new debt which could impair the expected recovery rates.

Scope’s recovery analysis indicates an ‘average’ recovery for senior unsecured debt, including the HUF 15bn bond (ISIN: HU0000359112) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. The recovery is based on an expected liquidation value in a hypothetical default scenario in 2025. These expectations translate into a BB- for this debt category, in line with the issuer rating.

Environmental, social and governance (ESG) factors

Pannonia does not have a formalised ESG strategy; however, it operates in a sector that requires compliance with stringent sustainability standards, including certifications for grain sourcing, biofuel production, and carbon accounting. The company's adherence to these requirements ensures regulatory alignment and market access. Additionally, Pannonia’s large plant size, proximity to low-price corn-producing areas, good logistical infrastructure and continuous investment in efficiency initiatives make operating costs for the plant among the lowest in the European industry (ESG: credit-positive environmental risk factor).

All rating actions and rated entities

Pannonia Bio Zrt

Issuer rating: BB-/Under review for a possible downgrade, downgrade and under review placement

Senior secured debt rating: BB+/Under review for a possible downgrade, downgrade and under review placement

Senior unsecured debt rating: BB-/Under review for a possible downgrade, downgrade and under review placement

The rating was prepared with the application of Scope’s General Corporate Rating Methodology, 16 October 2023. The application of the General Corporate Rating Methodology, 14 February 2025, does not have an impact on the rating.

*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, 14 February 2025; Chemical Rating Methodology, 16 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 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 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 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: Herta Loka, Senior Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 July 2019. The Credit Ratings/Outlook were last updated on 21 February 2024.

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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