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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on Hunland Trade Kft., a Hungarian agribusiness company. Scope has also affirmed its B+ rating on the HUF 24.15bn guaranteed senior unsecured corporate bond (HU0000360680).

Rating rationale

The rating action reflects Scope’s unchanged view on the company’s credit quality amid the creation of a group holding company (Hunland Group Holding Kft) and the series of demergers which has taken place in Hunland Group in order to separate its production, trading and maintenance business lines into different legal entities. On 1 January 2022, Hunland Group Holding Kft, which is a pure holding company and is fully directly owned by Mr. and Ms. Janssen, was created and has become one of the guarantors of the bond issued as part of the MNB programme. Hunland Trade Kft was demerged from its B2C trading business (named Hunland Feed). Scope believes that this demerger will have a limited impact on the ratings as most assets and liabilities remain in the demerged Hunland Trade Kft. In addition, B2C trading activity only accounted for less than 2.5% of net revenues and EBITDA. Hunland Feed (B2C trading activity) has become one of the guarantors of the bond. Three of the four guarantors have also been demerged, leading to the following seven guarantors: Hunland Trans Kft, Bovinia Kft, Hunland Production Kft, Hunland Dairy Kft, HLT Production, Hunland Service and HLT Telep. In the course of 2022, the group plans to merge its B2C feed trading companies (Hunland Feed and HLT Production) and its maintenance companies (Hunland Service, HLT Telep and HLT Farm). These new entities will guarantee the bond, along with Hunland Trans Kft, Bovinia Kft, Hunland Production Kft and Hunland Dairy Kft.

Hunland Trade’s business risk profile is still supported by its leading position in the Hungarian livestock export market. The company continues to benefit from a large customer base, though with some concentration risk. However, Hunland Trade’s business risk profile remains constrained by its high level of receivables. This is due to the nature of its business and the low diversification of its activities.

Regarding Hunland Trade’s financial risk profile, Scope expects leverage, as measured by the Scope-adjusted debt/EBITDA ratio, to remain high: peaking at 7.5x in 2021 before decreasing to below 6.5x. The agency expects the interest cover ratio to reach above 6x and underlying profitability to remain low, but stable, at around 2.5%. Scope also expects free operating cash flow to be positive.

Outlook and rating-change drivers

The Stable Outlook for Hunland Trade incorporates Scope’s view that key credit metrics over the next three years will be weaker overall, with Scope-adjusted debt/EBITDA of 5.5x-7.5x. It also incorporates Hunland Trade’s position as the leading Hungarian livestock exporter and Scope’s expectation that Hunland Trade’s EBITDA margin will remain stable at around 2.5%.

Scope deems a positive rating action remote in light of Hunland Trade’s increasing indebtedness. However, it could be warranted by Scope-adjusted EBITDA/interest cover of above 7x on a sustained basis and by an improved business risk profile, for example with a sustained Scope-adjusted EBITDA margin of over 3.5%.

The rating could come under pressure if debt protection remained persistently below 4x, for example as a result of significantly lower contributions to earnings from cattle and pig sales.

Long-term debt rating

Scope expects an ‘average’ recovery for guaranteed senior unsecured debt, which is based on an anticipated liquidation value in a hypothetical default scenario. Guaranteed senior unsecured debt ranks below short-term and long-term debt (excluding the bond issue) raised from financial institutions and payables which are secured by asset pledges. Consequently, in the event of a hypothetical default, creditors of the guaranteed senior unsecured bond are likely to be repaid from the liquidation proceeds remaining after repayments to senior secured debt creditors; the guarantors’ current assets; and property, plant and equipment; reduced by long- and short-term financial debt as well as payables. Scope’s recovery expectation takes into consideration uncertainties regarding the value of claims at the guarantors’ level at the point of a hypothetical default of the bond issuer but also uncertainties about the debt positions of the guarantors at the point of a hypothetical default of the bond issuer and the seniority of the claim. These recovery expectations translate into a rating of B+.

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, 6 July 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-EU. 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 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, 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 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: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 February 2021.
The bond Credit Rating was first released by Scope Ratings on 13 July 2021.

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
© 2022 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.