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Rating action

Scope Ratings assigns a corporate issuer rating of B+/Stable to Hungarian-based Naturtex Kft (‘Naturtex Gyapju -es Tollfeldolgozo Kft’). Senior unsecured debt is also rated B+.

Rating rationale

The issuer rating reflects a business risk profile incorporating medium cyclicality from an exposure to durable consumer goods. As one of the leading bedding brands in Hungary, Naturtex has a healthy domestic market share. Nonetheless, it is a relatively small producer in the fragmented European bedding market. Inherent cyclicality risk is reduced by the generation of around 80% of revenue by exports to 46 different countries and acceptable customer diversification. This is also evident in the company’s recent profitability, with EBITDA averaging around 10%. However, some cyclicality remains and there is clear seasonal volatility, as the demand for Naturtex´s products has a seasonal character (from September to January). The latter has actually reduced the direct consequences of Covid-19 pandemic so far, as Q2 is a low season for the company.

Naturtex’ financial risk profile is stronger than its business risk profile. In the recent past, the company has reported relatively conservative financial leverage, with credit ratios such as Scope-adjusted debt (SaD)/EBITDA of below 2x and funds from operations (FFO)/SaD of above 40%. From 2020, Scope sees credit metrics deteriorating because of: i) the temporary Covid-19 pandemic impact on sales and profitability; and ii) the company’s plan to use some proceeds from a proposed MNB bond (see below) to increase inventory levels to provide greater flexibility to tackle the seasonal nature of raw material purchases (feather and down). As a result, Scope anticipates a SaD/EBITDA of 3-4x and an FFO/SaD of around 25% in the medium term. Free operating cash flow (FOCF) has been somewhat volatile in the past and is expected to remain so going forward. Following the planned discretionary inventory build-up, Scope does not expect positive FOCF in the medium term, which remains a key constraint on the company’s financial risk profile.

Historically, Naturtex’ financial risk profile has been weakened by its over-reliance on short-term debt, which has exposed the company to some refinancing risk. Following the proposed refinancing (expected in Q3 2020), the company will be less exposed to liquidity issues and refinancing risk. This is because one-third of the proceeds from the new proposed bond (seven-year HUF 3.5bn) under the Hungarian central bank (MNB) scheme would be used to refinance a large part of bank debt. The remaining part would be used for discretionary inventory build-up, which the company can control and would happen over time. Scope therefore expects a larger cash balance in the short term and much lower short-term maturing debt (HUF 115m) in the medium term.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that the financial effects of the Covid-19 pandemic will be manageable for Naturtex, with a return to a more normal situation in 2021. This translates into an expectation of SaD/EBITDA at around 3-4x and FFO/SaD at around 25% in the medium term, coupled with acceptable liquidity, due to the discretionary nature of the expected inventory build-up that causes FOCF to be negative in Scope’s base case.

A positive rating action could be warranted if Naturtex experiences higher demand than expected, translating into higher profitability and cash flow, accompanied by lower negative working capital build-up. This could be exemplified by significantly positive FOCF on a sustained basis, which is being used to strengthen the balance sheet.

A negative rating action is possible if SaD/EBITDA moves above 4x and FFO/SaD remains below 15% on a sustained basis, resulting from a more aggressive debt-financed growth strategy or tougher market conditions.

Long-term and short-term debt ratings

Scope expects an average recovery for future senior unsecured debt, such as the planned seven-year amortising HUF 3.5bn bond to be issued in 2020 under the MNB Bond Funding for Growth Scheme. This recovery expectation translates into the same rating as the issuer rating of B+. Scope’s recovery expectations are based on an expected liquidation value in a hypothetical default scenario in 2022, following the proposed refinancing (when most debt is senior unsecured and pari passu with negative pledge covenants) and inventory levels have built up substantially.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) (Corporate Rating methodology, dated 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The 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 rating: public domain, the rated entity, agents of the issuer and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings 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.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 26 May 2020.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.