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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating on Hungarian gear manufacturer Szabó Fogaskerékgyártó Kft. (Szabó) to B- from B and maintained the Negative Outlook. Scope has also downgraded the rating for the senior unsecured debt to B from B+, maintaining one notch of uplift to the issuer rating.

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). Szabó’s business risk profile continues to be constrained by its size, low product diversification and high customer concentration. Historically, Szabó's profitability, as measured by the EBITDA* margin, has been over 20%. Profitability is therefore the main pillar of the company's business risk profile despite the downward revision of profitability expectations for 2025-26. Scope’s profitability assessment also takes into account the inherent risk of an unexpected deterioration in profitability given Szabó’s small size, high customer concentration and low share of recurring revenues, which has increased EBITDA margin volatility in the recent past.

The business environment deteriorated markedly in 2024 and remained muted in H1 2025. In response, Szabó further reduced its workforce in H1 2025. The company also postponed the relocation of production from the old plant to the new one and is looking into the possibility of alternative usage of the new site. The reported revenue figures for 2024 and H1 2025 include proceeds from asset sales. As this is not part of Szabó’s usual operations, Scope has deducted respective amounts from the reported revenue figures. Based on these adjustments, Szabó's revenue declined by 54% YoY in 2024, but rebounded in H1 2025, increasing by 10% YoY to HUF 635m, mainly due to the weak reference base of the previous year. For the full year 2025, Scope expects revenue of around HUF 1.3bn (up 5% YoY). Revenue visibility for 2026 is poor because of the still-fragile global economic environment. Szabó's relatively short lead times (one to six months on average), mean that the current order backlog provides only limited visibility into 2026. The addition of new customers and increased business with newly acquired ones could stimulate growth. Furthermore, Szabó expects further increase in revenue from its main strategic product, bevel gear sets, from its major customers in 2026. Scope has factored in revenue of around HUF 1.4bn (up 10% YoY) in 2026. This cautious prognosis reflects the persistently difficult business environment and the risks associated with ramping up volumes with new customers.

In contrast to revenues, profitability declined significantly in H1 2025, with the reported EBITDA margin turning negative at around -1%, down from around 20% in H1 2024. According to Szabó, this was caused by a defectively manufactured order and the subsequent reproduction and rework costs for its two new customers, which resulted in a loss of over HUF 102m. Scope expects the EBITDA margin for the full year to decline to around 14%, from roughly 23% in 2024. The weaker anticipated profitability has led Scope to revise its 2025 EBITDA expectation downwards to approx. HUF 170m (previously around HUF 325m). According to Szabó, the factors that caused the defective manufacturing of the order were removed in 2025, and no further cost is expected. Szabó also has no plans to increase its headcount after the recent cuts. Scope expects the EBITDA margin to improve to about 25% in 2026, though it will remain below historic levels, with EBITDA growing to around HUF 320m. A more pronounced recovery would require higher volumes, the feasibility of which is currently uncertain.

Financial risk profile: B (revised from B+). The revised financial risk profile reflects Scope’s changed expectation for EBITDA in 2025-26, now with weaker credit metrics in these years. Szabó’s financial risk profile continues to be supported by good debt protection but remains constrained by weak cash flow cover and the new, weaker leverage assessment.

As anticipated, leverage, as measured by debt/EBITDA, deteriorated to over 6x in 2024 from 2.6x in 2023, reflecting the decline in EBITDA. Based on its revised expectations for EBITDA in 2025, Scope projects that debt/EBITDA will remain significantly above 6x in 2025 (previous expectation for 2025: 5.8x). In H1 2025, Szabó repaid a considerable part of its lease liabilities with Raiffeisen Bank. In parallel, Szabó raised two new loans with Erste Bank totalling around HUF 284m. Overall, Szabó plans to increase its financial debt by a total of roughly HUF 63m by the end of 2025 to approx. HUF 2.02bn. Szabó projects a minor debt reduction of around HUF 52m in 2026, driven by the repayment of leases and bank loans, and a larger reduction in 2027, when the first bond tranche of HUF 150m is due for repayment. Scope anticipates an improvement in debt/EBITDA to around 6.0x in 2026, driven by higher profitability. However, the ratio is still projected to remain above the agency’s previous expectations, and above 4x for the third consecutive year – Scope's trigger for a negative rating action.

The interest result turned slightly negative in 2024 due to a decline in interest income, which followed a reduction in the cash position during the year. Scope projects another decrease in interest income and expects the interest result to weaken further in 2025-26. Due to the anticipated decline in EBITDA, Scope projects weak interest cover of around 2.5x in 2025, followed by a moderate 4.5x in 2026 on the back of the projected improvement in profitability. The agency therefore continues to see interest cover as the main support for Szabó's financial risk profile.

Szabó’s overall financial risk profile continues to be constrained by its weak free operating cash flow (FOCF). The implementation of the investment programme resulted in negative FOCF in 2021 and 2022. Due to delays in property development, investment was partly postponed from 2023 to 2024, resulting in positive FOCF in 2023. FOCF turned deeply negative in 2024 at around HUF -2.0bn, which was broadly in line with Scope’s expectation. In addition to record-high capex, it was negatively impacted by weaker operational performance. Proceeds from the sale of assets had a positive impact on FOCF. Scope assumes that Szabó will significantly reduce its capex following completion of the investment programme in 2024. Furthermore, Szabó states that it has sold further assets in 2025. Scope therefore projects positive net capex in 2025 and positive overall FOCF of around HUF 60m. Szabó has indicated that it has no plans to divest further assets in 2026-27. Nevertheless, Scope projects slightly positive FOCF in 2026 and in 2027, supported by the reduced capex post investment cycle and higher anticipated EBITDA. The agency anticipates that cash flow cover will remain at a weak level of between 0% and 5% in 2025-27.

Liquidity: adequate (unchanged). Scope considers Szabó’s liquidity and financial flexibility to be ‘adequate’. This is based on the refinancing completed in 2025, projected available liquidity reserves at year-end 2025 and only minor debt repayments in 2026. Scope's liquidity assessment also takes into account the expected slightly positive FOCF in 2026-27, which will help to repay the first bond tranche of HUF 150m due in February 2027.

Scope considers it unlikely that Szabó will have to partially repay the subsidy before 2027. Although there is a risk that the company will fail to meet the milestones, it is currently unclear whether repayment will be required after 2026 and, if so, how much it will amount to.

The new credit lines from Erste Bank contain financial covenants requiring the company to maintain an equity ratio of over 30% and a liquidity ratio of over 1x. The equity and liquidity ratios at end-June 2025 were 42.5% and 4.6x, respectively, and Scope expects Szabó to comply with these covenants in its base case.

Neither Szabó’s bond issued under the Hungarian Central Bank’s bond scheme in February 2022 nor its remaining bank loans are subject to financial covenants. That said, the bond does have an accelerated repayment clause. The clause requires the repayment of the nominal amount (HUF 1.5bn) within 10 business days after the bond rating falls below B-. There is a two-year grace period for a B/B- bond rating, which means that to avoid the accelerated repayment the company must ensure that the debt rating returns to B+ before the grace period ends. Following the downgrade of the senior unsecured bond rating to B in November 2025, Szabó has entered the grace period, which ends in November 2027. If the debt rating does not return to B+ within the grace period, the company could face severe liquidity constraints, which could have default implications, unless it obtains refinancing that covers the early repayment of the outstanding bond amount, or it proactively obtains an investor waiver related to the repayment acceleration.

Supplementary rating drivers: credit-neutral (unchanged). The rating does not incorporate any adjustments related to financial policy, peer group considerations, parent support or governance and structure.

Outlook and rating sensitivities

The Negative Outlook reflects the persistently challenging business environment in 2025, with an anticipated below-average revenue level and low profitability this year, as well as limited visibility on an operational recovery in 2026 and beyond. It also reflects the risk that Scope’s expectation of a positive FOCF in 2026 will fail to materialise. A muted operating recovery poses exacerbated risks from the scheduled debt maturities of around HUF 205m in 2027, including the start of the bond amortisation in February 2027, as well as the risk of potential subsidy repayments in 2027 due to non-fulfilment of milestones. The Negative Outlook also takes into account governance issues arising from Krisztian Szabó's acquisition of a 60% stake in Szabó Hajtástechnológia from Szabó in 2025, as well as capital transfers this year.

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

1. Easing concerns about the company’s governance principles and liquidity profile
    
2. FOCF/debt improving to around 5% on a sustained basis, e.g. due to revenue growth and/or an improvement in profitability
    
3. Greater size and improved diversification (deemed remote)

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

1. Scope’s expectation of positive FOCF does not materialise and FOCF/debt remains negative in 2026/2027
    
2. Deterioration of liquidity especially against the backdrop of upcoming maturities
    
3. Failure to address governance issues
    
4. Loss of a major customer

Debt ratings

Based on the downgrade of the issuer rating, Scope has downgraded the senior unsecured debt rating to B from B+, maintaining a one notch uplift to the issuer rating.

Scope’s recovery analysis indicates an above-average recovery for senior unsecured debt at the level of Szabó, translating into a rating one notch above the issuer rating. The recovery analysis uses a liquidation value of HUF 2.7bn for a hypothetical default scenario in 2026. This value is based on a haircut on assets and reflects liquidation costs of 10% for the assets. The relatively high assumed liquidation value reflects the large amount of PPE as a result of the ongoing investment programme, which started in 2021 and ended in 2024.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no immediate impact on this credit rating action. However, Scope highlights some governance weakness.

From a governance perspective, Scope still sees high risk around key personnel. The company is entirely managed by CEO Ferenc Szabó, the sole owner of Szabó, and his son Krisztian Szabó, the executive vice president. Consequently, the company could prove vulnerable to structural changes in management.

Governance issues also arise from the fact that, in 2025, Krisztian Szabó acquired a 60% stake in Szabó Hajtástechnológia from Szabó for a negligible amount, with Szabó retaining a 40% stake. Szabó Hajtástechnológia, a company previously wholly owned by Szabó Hajtástechnológia and managed by Krisztián Szabó, was not consolidated. Szabó Hajtástechnológia receives capital transfers from Szabó, as was recently the case. Szabó Hajtástechnológia also owns the ‘old’ production facility, which it leases to Szabó. Through this transaction, bondholders no longer have access to the assets at Szabó Hajtástechnológia in a potential distress scenario.

All rating actions and rated entities

Szabó Fogaskerékgyártó Kft.

Issuer rating: B-/Negative, 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 methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 14 February 2025), is 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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: Gennadij Kremer, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 31 January 2022. The Credit Ratings/Outlook were last updated on 18 December 2024.

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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