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Rating action

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

Rating rationale

The issuer rating continues to reflect a business risk profile of B+ and a financial risk profile of BB+. Nitrogenmuvek’s business risk profile continues to be characterised by its position as the sole producer of nitrogen fertilisers in Hungary and its solid position in other countries in Central and Eastern Europe. In this region, the company’s position is supported by its Genezis partner network, as well as trading activities that allow it to leverage on existing business with farmers. However, its limited scale (sales of around EUR 250m) in relation to those of integrated chemical companies globally, fertiliser companies in particular, hampers its market position. In addition, weak diversification holds back Nitrogenmuvek’s business risk profile. Worth mentioning in this regard is the single production site, product concentration on nitrogen fertilisers, particularly calcium ammonium nitrate, which are sold in one end-market, and the overall modest contribution of specialty chemicals products to sales. Despite its volatility, the EBITDA margin remains credit-positive, averaging 18% during 2010-2021.

Based on its very conservative base case, Scope expects Nitrogenmuvek’s credit metrics to remain solid despite the HUF 8.4bn penalty payment imposed by the Hungarian Office of Economic Competition for cartel activity (see: Nitrogenmuvek: Hungarian Office of Economic Competition (GVH) fine in line with Scope’s expectations). Following its appeal in October 2021, Nitrogenmuvek request for not paying the penalty payment until the final court decision. This was rejected in April 2022. The first hearing is expected to be in June 2022. This comes on top of a sharp higher increase in natural gas prices, higher logistics costs and temporary halt ammonia production in March 2022. That said, market prices for nitrogen fertilisers have also increased due to high soft-commodity prices following considerable demand for the plant season in spring and the Russian/Ukraine war. The company recorded a good first quarter in 2022, benefiting from higher nitrogen fertiliser prices, but Scope thinks these tailwinds will ease in the second quarter. Moreover, financial results were negatively impacted by a shutdown for maintenance in May 2022. In this environment and given the uncertainty on the development of natural gas and fertiliser prices in 2022 and 2023, Scope’s expected credit ratios have remained in line with a BB+ rated financial risk profile. Nitrogenmuvek’s credit metrics continue to benefit from: i) the limited investments in property, plant and equipment as the second capex cycle is expected to be delayed; ii) running cost containment measures; iii) decent balance sheet liquidity; and iv) the financial policy of no shareholder renumeration via dividends. In the light of the concentrated maturity profile – its EUR 200m bond is maturing in 2025, dominating gross debt – Nitrogenmuvek’s liquidity continues to be adequate. Despite lacking access to external sources of liquidity, cash and free operating cash flow cover short-term debt.

Supplementary rating drivers continue to have no impact on Nitrogenmuvek’s stand-alone rating.

Outlook and rating-change drivers

The Outlook is Stable. This assumes funds from operations/Scope-adjusted debt remains above 15% in 2022, based on the key assumptions of the rating base case.

A positive rating action may be triggered if activities expanded, for instance, through a higher profit contribution from crop trading. That said, we judge the likelihood to be remote given the uncertainties around potential further legal and tax investigations as well as trend in future operating conditions.

A negative rating action may be warranted if funds from operations/Scope-adjusted debt persisted below 15%, for instance, if penalties were higher and/or production outages more severe than in Scope’s base case.

Long-term and short-term debt ratings

All senior unsecured debt (ISIN: XS1811852521; EUR 200m) 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 Scope’s 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, 6 July 2021; Chemical Corporates Rating Methodology, 22 April 2022) are available on https://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 https://www.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 https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-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 https://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 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. The Credit Ratings/Outlook were last updated on 7 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.