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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Wellis Magyarország Zrt. to CCC from B-. The senior unsecured guaranteed bond (ISIN: HU0000360250) rating has been affirmed at B-. Both ratings have been placed under review for a possible downgrade.

The full list of rating actions and rated entities is at the end of this rating action release.

The downgrade is indicative of weaker EBITDA generation compared to Scope's forecast, resulting in a slower recovery in credit metrics and a lower build-up of cash reserves in 2024. In addition, the majority of secured debt (HUF 6bn) is scheduled to mature in 2026. This will put increased pressure on the medium-term liquidity profile and will require the refinancing of financial debt.

The under review placement for a possible downgrade is driven by Scope's mounting concerns regarding the deterioration of Wellis's short-term liquidity profile. According to the amortisation schedule for secured financial debt, Wellis is obligated to repay HUF 4bn in 2025. Despite the initial repayment of the first quarterly instalment (HUF 1bn), Scope has limited visibility regarding sources for the remaining scheduled debt service for the year, especially considering weak Q1 2025 EBITDA generation (around HUF 226m). The issuer has started negotiations with the financing banks to reschedule the existing financial debt, intended to alleviate immediate liquidity pressure.

Key rating drivers

Business risk profile: B (unchanged). Wellis’s business risk profile continues to be supported by moderate diversification in terms of geographies, customers and suppliers. Further support is provided by the issuer’s brand strength, benefitting from the international scope of branded sales as well as the solid quality of its products.

The issuer’s business risk profile remains constrained by volatile operating profitability. Although the Scope-adjusted EBITDA margin* improved significantly in 2024 (2024: 6.4% compared to 2023: 0.6%) further visibility is limited. On the one hand, Wellis reduced its staff by 194 to around 650 in Q4 2024, which will result in lower costs, stimulating operating profitability. On the other hand, demand conditions on key Western European markets are still highly volatile and could be subject to rapid deterioration. Scope has therefore taken a more conservative stance regarding EBITDA margin development, foreseeing a gradual improvement to over 7% in 2025 and 2026.

The company’s business risk profile is also constrained by its limited absolute size. Revenues increased by 28% to HUF 39bn in 2024, driven primarily by an expansion of market share in the US. However, Wellis remains a small player compared to multinational competitors and has limited capacity to mitigate the risks stemming from more challenging market conditions, such as the US tariffs introduced for EU goods in 2025. The 10% increase in tariffs may require price adjustments, potentially leading to a competitive disadvantage compared to US-based manufacturers. Concurrently, the majority of competitors maintain manufacturing operations in China, where higher tariffs are in effect. This provides Wellis with a competitive advantage. At present, the impact of the tariffs can only be estimated, and there is limited medium-term visibility. Scope has reflected this limited visibility in a conservative assessment of revenue development, anticipating a 2% increase in 2025 and a 3% increase in 2026.

Financial risk profile: CCC (revised from B-). The financial risk profile is supported by the moderate interest cover. It is constrained by high leverage and volatile cash flow cover.

Leverage, measured by debt/EBITDA, remained high in 2024 (9.1x) despite having improved considerably from the unsustainable levels in 2022 and 2023 (above 100x), stimulated by enhanced EBITDA generation and sizeable amortisation of financial debt. Scope forecasts that leverage will fall below 6.0x by 2026, thanks to a gradual EBITDA margin improvement and the significant debt amortisation (HUF 4bn in 2025 and HUF 6bn in 2026).

In 2024, interest paid increased to HUF 962m, reflecting the higher average cost of financial debt post-restructuring. However, interest cover improved to 2.5x from under 1.0x in 2023, mainly because of the higher EBITDA generation. Given the significant debt repayments due in the coming years, Scope anticipates that interest paid will gradually decrease. The rating agency expects interest cover to rise to above 3x in 2025 and over 4x in 2026 as profitability improves further.

Free operating cash flow turned positive in 2024, primarily due to the positive development of working capital and lower capex than in previous years. Going forward, free operating cash flow/debt is expected to remain in positive territory, supported by reduced capex needs and positive cash flow from the changes in working capital (especially the inventory reduction).

Liquidity: Inadequate, -2 notches (revised from -1 notch). Liquidity is assessed as inadequate, as sources (HUF 474m of available cash at YE 2024 and HUF 4.0bn of free operating cash flow forecasted for 2025) do not cover the scheduled debt amortisation of HUF 4bn and the HUF 2.4bn short-term overdraft. Scope sees very limited headroom in terms of liquidity, and debt service (HUF 3.0bn in debt service already paid by the end 2024 and an additional HUF 1.0bn paid by the end of Q1 2025) is highly dependent on the development of working capital. Concerns related to liquidity are increasing, with volatile changes in working capital. Scope’s financial forecast includes HUF 6bn refinancing of the amortising debt in 2026. Failure to secure this additional financing before the maturity of the existing debt (March 2026) could lead to a rapid deterioration in Wellis’s liquidity profile. Scope has made a downward adjustment of the financial risk profile by two notches to reflect increased risk related to: i) limited visibility on sources of debt service in 2025; and ii) the refinancing of HUF 6bn in debt maturing in 2026; iii) rating deterioration covenant expiring in January 2026.

Scope notes that Wellis’s 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 9.9bn) 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. Following the downgrade of the senior unsecured debt rating to B- on 20 October 2022, Wellis has entered the grace period. Based on the restructured debt prospectus dated 23 September 2024, the rating deterioration covenant is waived until January 2026. This means that the company must ensure the debt rating returns to B+ before the waiver period ends. If the debt rating does not return to B+ within the waiver period, Wellis could face severe liquidity constraints and enter a default, unless it obtains refinancing that covers the early repayment of the outstanding bond amount, or it proactively obtains an investor waiver related to the accelerated repayment.

Supplementary rating drivers: credit-neutral (unchanged). While the rating assessment does not include any adjustment due to supplementary rating drivers, Scope notes the financial policy issues regarding a lack of transparency and reliable planning, as these significantly reduce visibility and may lead to a quick deterioration of credit metrics. Frequently changing financial planning is especially detrimental to creditors as this constrains visibility and may indicate underlying operational issues.

Outlook and rating sensitivities

The under-review placements reflect the issuer's short-term liquidity risk associated with meeting short-term debt service obligations. Scope's objective is to remove the under-review status as soon as there is greater visibility on either the issuer's near-term cash generation or its ability to service its debt.

Any upside scenario for the ratings and Outlook are currently deemed remote.

The ratings could be affirmed if Wellis manages to mitigate short-term liquidity risk.

The downside scenario for the ratings and Outlook is:

• A downgrade by at least one notch is possible in case of further deterioration of the liquidity profile, e.g. failure to fulfil the scheduled debt service or refinance the existing secured debt.

Debt rating

Wellis issued a HUF 9.9bn senior unsecured corporate bond under Hungary’s Bond Funding for Growth Scheme in 2021, which was restructured into a senior unsecured guaranteed bond in September 2024. The bond’s tenor is 10 years, with a coupon of 3.0% until September 2024, and 3.5% afterwards until the debt instrument rating recovers to at least B+. Repayment is in six tranches: 20% of the face value in 2026; 10% yearly between 2027 and 2030; and 40% at maturity in 2031.

The recovery expectation is ‘above average’ for senior unsecured debt holders in a hypothetical liquidation scenario occurring in 2026. The recovery calculation includes all the real estate properties of Wellis at market value, based on the valuations dated February 2025. The recovery calculation also includes the additional collateral behind Wellis’s secured debt. Scope has therefore affirmed the senior unsecured guaranteed bond (ISIN: HU0000360250) rating at B-, one notch above the issuer rating. As the rating of the bond is driven by the issuer rating, it has also been placed under review for a possible downgrade.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Wellis Magyarország Zrt.

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

Senior unsecured guaranteed debt instrument rating (ISIN: HU0000360250): B-/Under review for a possible downgrade, affirmation and under review placement

*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, (General Corporate Rating Methodology, 14 February 2025; 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.

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 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: the Rated Entity, the Rated Entities’ Related Third Parties 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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings 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 22 January 2021. The Credit Ratings/Outlook were last updated on 25 October 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
© 2025 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. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.