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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable corporate issuer rating on Hungarian Nitrogenmuvek Zrt. The BB- senior unsecured debt rating was also affirmed. 

Rating rationale

The issuer rating continues to reflect a business risk profile of B+ and a financial risk profile of BB+. The rating benefits from Nitrogenmuvek’s position as the sole producer of nitrogen fertilisers in Hungary and its solid position in other countries in Central and Eastern Europe (CEE). In this region, the company is supported by its Genezis partner network, as well as trading activities allowing it to leverage on existing business with farmers. However, its limited scale (sales of around EUR 250m) in relation to those of chemical companies globally, fertiliser companies in particular, hampers its market position. Weak diversification also holds back Nitrogenmuvek’s competitive position: the company has only one production site, product concentration on nitrogen fertilisers, which are sold in one end-market, and a modest contribution of specialty chemicals products to sales. Despite volatile profitability (EBITDA margin), the EBITDA margin remains credit-positive, averaging 19% during 2010-20.

The financial risk profile still constitutes the main support for the rating, despite we expect key credit ratios to deteriorate in the current year. More precisely, we expect the most relevant ratio for the assessment, funds from operations to Scope-adjusted debt (FFO/SaD), to plummet to 14% in 2021 from 33% in 2020 and revert to 57% in 2022. This assumes likely penalty payment arising from an investigation by the Hungarian Office of Economic Competition to determine whether the company infringed competition law. According the Nitrogenmuvek, similar investigations in Hungary led to penalty payments equating to 1%-10% of sales. The decision can still be appealed, which could result in a partial or full refund of the penalty payment. Even so, Nitrogenmuvek’s free operating cash flow generation remains a positive rating factor, as the company have achieved to strengthen it since 2019. Based on our understanding the company will come to a decision on an additional expansion programme not before year-end 2022. Liquidity also remains adequate, with improved ratios on internal and external liquidity sources, primarily helped by positive free operating cash flow since 2019 and limited short-term debt.

We continue to make no adjustment for supplementary rating drivers. We maintain our positive view on the financial policy based on the achieved deleveraging, which we reflect in the company’s financial risk profile.

Outlook and rating-change drivers

The Outlook is Stable. This assumes FFO/SaD remains above 15% in 2022, which goes hand in hand with the key assumption of our base case. The Outlook also assumes that the site has no unexpected major outages and that the second round of the capex programme occurs after 2022.

A positive rating action may be triggered if business activities expand while FFO/SaD remains above 30%, for instance, through a higher profit contribution from crop trading together with reduced costs in the core business.

A negative rating action may be warranted if FFO/SaD persisted below 15%, for instance, if the company faces additional penalties and/ or severe production outages than reflected in our base case.

Long-term and short-term debt ratings

All senior unsecured debt has been affirmed at BB-, the level of the issuer rating. The recovery analysis is based on a hypothetical default scenario in 2022, including the following key assumptions: i) provisions for environmental protection are ranked above senior unsecured debt; ii) bank debt is ranked pari passu to senior unsecured debt; and iii) the committed credit line is fully drawn. The outcome of our recovery analysis indicates an ‘average recovery’ for senior unsecured debt.

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, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Chemical Corporates, 23 April 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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 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 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: Klaus Kobold, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 July 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services 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.