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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 B+ from BB- and revised the Outlook to Negative. Concurrently, the senior secured debt rating has been downgraded to BB from BB+ and the senior unsecured debt rating has been downgraded to B+ from BB-.

The downgrade reflects a one-notch negative adjustment for governance on the BB- standalone credit assessment. Persistent pressure on EBITDA has weakened credit metrics, resulting in repeated covenant breaches for bank loans in recent years. The recurrence of such breaches, together with the reliance on retroactive waivers to their resolution, drives the negative rating adjustment. The Negative Outlook reflects limited visibility on a meaningful recovery in profitability and credit metrics as well as the unresolved covenant breaches on bank loans at the June 2025 testing date. Waiver approval risks are mitigated by positive preliminary discussions between Pannonia and the lenders involved as well as the company’s established record of obtaining lender support, which underpins expectations for a good resolution.

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). Pannonia’s business risk profile continues to benefit from still-supportive profitability and its highly efficient production facility (ESG: credit-positive environmental risk factor) which, due to its large scale and favourable location, supports a competitive operating cost structure. Conversely, the company’s business risk profile remains constrained by its significant exposure to commodity markets, weak asset and product diversification, and the absence of low-cyclicality specialty chemicals. In addition, high ethanol imports from outside the EU continue to weaken the effectiveness of market protection measures, thereby limiting Pannonia’s market position.

Based on H1 2025 results, Pannonia’s profitability has come under pressure from adverse supply conditions. The company is continuing to predominantly process aflatoxin-contaminated corn, while feedstock costs remain elevated due to ongoing challenging harvest conditions in Hungary. In addition, higher-than-expected costs related to the management of advanced ethanol, particularly logistics, have weighed on margins. Consequently, Scope has revised its projections of Scope-adjusted EBITDA* to around EUR 42m for the full-year 2025, 40% lower than in 2024. This corresponds to an EBITDA margin of around 7.5%, in line with the interim results, down from 13.5% in 2024. The agency expects a modest improvement in 2026-2027 but factors in some persisting pressure as part of its prudent approach. Scope therefore forecasts EBITDA of around EUR 60m and the EBITDA margin improving slightly to 10.6%, below 2024 levels. Supply conditions remain volatile and highly dependent on the quality of the upcoming corn harvest, which Scope will continue to monitor. Although the outlook appears somewhat more favourable than in 2024, persistent drought conditions in the region continue to pose a material risk. An improvement in harvest quality could allow Pannonia to resume processing standard corn and support operating performance in 2026–2027. At the same time, a recurrence of heavily contaminated harvests, combined with elevated logistics costs and strong import volumes, would likely keep profitability under pressure over the next two years.

Financial risk profile: BB (revised from BB+). The financial risk profile has been revised downwards in light of weaker-than-anticipated credit metrics. In addition, Scope expects ethanol prices to remain under pressure due to high import volumes from outside Europe, intensifying competition for domestic producers. This, combined with increasingly unpredictable harvest conditions and elevated operating costs, adds to market volatility, further pressuring margins and ultimately prolonging uncertainty over the timing and sustainability of a meaningful recovery of credit metrics. In addition, the unresolved waiver approval for the leverage and cash flow covenant on bank loans introduces further risks, although Scope expects a pragmatic solution to be reached with the financing banks.

Under current conditions, Scope projects that leverage – as measured by debt/EBITDA – will rise above 6.0x at YE 2025, before gradually improving over the next two years, supported by a modest recovery in EBITDA from 2025 lows. Nevertheless, the agency expects leverage to remain slightly above 3.5x by 2027. Scope has not applied cash netting in its debt calculation. This is in line with the agency’s General Corporate Rating Methodology, which only allows netting for issuers rated in the BB category or higher.

Given the current margin weakness, Pannonia has revised downwards its capex commitments from the previous base case in order to alleviate pressure on credit metrics. In line with guidance, Scope assumes capex of EUR 57m over 2025–2027 (peaking in 2025), down from the EUR 82m previously projected. Management has also indicated further flexibility in executing 2026–2027 investments should EBITDA recovery remain subdued.

Interim results for 2025 indicate some volatility in working capital, with cash absorption in the first eight months driven by the sale of advanced ethanol, subsequent purchase of conventional ethanol, and elevated inventory levels yet to be sold. For the full year, Scope expects a partial normalisation of working capital, with cash flow cover – as measured by free operating cash flow/debt – reaching breakeven, reflecting low EBITDA and capex of EUR 27m. Thereafter, Scope projects cash flow cover to average around 17% in 2026–2027, assuming annual capex of EUR 15m.

Interest cover continues to support Pannonia’s financial risk profile. Scope projects that EBITDA interest cover will range between 3.0x and 6.0x, gradually increasing over time assuming some recovery in margins. Net interest paid is expected to remain broadly in line with 2024 levels, particularly in 2025, in light of the additional debt of around EUR 40m.

Liquidity: adequate (unchanged). Scope views Pannonia’s liquidity profile as adequate, supported by projected liquidity ratios above 110% in 2026–2027. Upcoming debt maturities (EUR 91m yearly in 2025-2026 and EUR 89m in 2027; including approx. EUR 55m of working capital facility roll over) are expected to be covered by unrestricted cash (EUR 34m as of August 2025), positive free operating cash flow, and approximately EUR 5m in undrawn committed credit lines. For 2025, Scope expects the liquidity ratio to temporarily fall below 100% due to weak margins leading to slightly negative free operating cash flow. However, this does not materially alter Scope’s view on liquidity, as most of the 2025 maturities relate to rolled-over working capital facilities, while the remaining EUR 9m in loan repayments can be comfortably covered by existing cash of EUR 34m as of August 2025, limiting near-term liquidity risk.

Pannonia’s bank loans are subject to financial covenants on leverage, cash flow cover, gearing and liquidity. The issuer disclosed breaches of the leverage and cash flow cover covenants at the June 2025 testing date. Based on Scope’s projections, breaches are likely to persist through the remainder of 2025, potentially extending into 2026, if margins remain under pressure. Discussions with banks on a waiver approval are ongoing and expected to conclude in the coming weeks. Scope currently assumes no liquidity impact, given Pannonia’s solid banking relationships, its position in the Hungarian and international markets, its history of waiver approvals and management assurances. Management has also indicated that the waiver is likely to cover other potential near-term breaches. Scope will continue to monitor developments closely.

Supplementary rating drivers: -1 notch (revised from credit-neutral). Scope views governance as a negative rating driver, resulting in a one-notch adjustment to the standalone credit assessment. This view is driven by repeated retroactive covenant waivers in recent years which in Scope’s opinion point to limited room for pre-emptive risk-management regarding covenant compliance. In the agency’s view, reliance on retroactive measures rather than pre-emptive solutions increases refinancing and waiver risks and ultimately weighs on the issuer’s credit quality (ESG: credit-negative governance risk factor).

The company’s financial policy, peer group considerations and parent support are considered credit-neutral overall.

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

Outlook and rating sensitivities

The Negative Outlook reflects Scope’s expectation that competitive pressure from non-European import volumes, coupled with challenging supply conditions, will continue to foster a volatile operating environment, weighing on profitability, with visibility on a sustainable level currently limited. The Outlook also captures the unresolved covenant breaches on bank loans, which continue to exert rating pressure. While a positive resolution is considered highly probable, the conditions around the waiver remain uncertain as discussions are still ongoing.

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

1. Agreement on a sustained solution for covenant breaches with financing banks.
    
2. Debt/EBITDA returning below 4.0x on a sustained basis, decreasing the risk of future covenant breaches.
    
3. Stabilisation or improvement of the business environment, e.g. indicated by an EBITDA margin settling at above 10%.

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

1. Failure to obtain a waiver on covenant breaches for bank loans.
    
2. Debt/EBITDA at or above 4.0x for a prolonged period, heightening the risk of covenant breaches.
    
3. Further weakening of the business environment, e.g. negative effects resulting in profitability dropping well below 10% for an extended period.

Debt ratings

Scope has downgraded the senior secured debt rating to BB, two notches above the issuer rating. This reflects the agency’s recovery analysis, which 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 2027. While an excellent recovery rate allows for up to three notches of uplift from the issuer rating for senior secured debt, the two-notch uplift reflects Scope’s cautious stance regarding the volatility of recovery rates, such as for inventory and tangible fixed assets, which are subject to evaluation at the time of liquidation.

Scope has downgraded the senior unsecured debt rating to B+, including the HUF 15bn bond (ISIN: HU0000359112) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. This is based on Scope’s recovery analysis, which indicates an ‘average’ recovery for this debt category. The recovery is based on an expected liquidation value in a hypothetical default scenario in 2027.

Environmental, social and governance (ESG) factors

Pannonia does not have a formal 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.

As outlined above, the rating reflects Scope's negative view of the company's limited room for pro-active risk management regarding covenant compliance.

All rating actions and rated entities

Pannonia Bio Zrt.

Issuer rating: B+/Negative, downgrade and Outlook change

Senior secured debt rating: BB, downgrade

Senior unsecured debt rating: B+, downgrade

*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; Chemicals Rating Methodology, 30 June 2025), are available on 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 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 scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication/. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at 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 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: Herta Loka, Associate Director
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 28 May 2025.

Potential conflicts
See 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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