The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the B+/Stable issuer rating on Hungarian aluminium processor Inotal Zrt. Scope has also affirmed the B+ senior unsecured debt rating.

Rating rationale

Inotal’s business risk profile (assessed at B) continues to be supported by strong geographical, customer and end-market diversification; direct customer relationships; access to scrap through associate Martin Metals and its slag recycling operation; and the effective management of metals price risk through customer and supplier contracts and hedging. The business risk profile is constrained by Inotal’s small size in a global context and limited profitability, which is under pressure from rising energy costs. While Inotal plans to invest into a solar park in 2023 to decrease its energy dependency, its ability to mitigate risks in the face of swings in gas and electricity prices remains limited.

The financial risk profile (assessed at BB-) reflects strong interest coverage, with EBITDA/interest cover expected to remain around 8x until 2024. Scope expects leverage as measured by Scope-adjusted debt/EBITDA to deteriorate to 4x in 2023, in line with the expected drop in profitabiltiy. A gradual recovery is expected thanks to the long-term debt maturity profile comprising a HUF 6bn bond with a yearly installment (12.5% of the face value) due from 2023. Scope expects Scope-adjusted free operating cash flow/debt to remain negative in the coming years, mainly based on the assumption that the high maintenance capex will follow depreciation.

Liquidity is adequate, with no debt maturity other than the future amortization of the bond. The bond amortization, along with the negative Free-operating cash flow, is expected to be fully covered by the available liquid assets.

Scope acknowledges the ongoing ownership change at Inotal. Scope’s base case assumes neither the management’s financial policy to become more aggressive nor any additional debt to be transferred to Inotal as a result of the ownership change. Thus, Scope considers this change credit-neutral.

Outlook and rating-change drivers

The Stable Outlook reflects the assumption that Inotal can maintain its current financial risk profile in the medium term. Scope’s base case assumes profitability below historical averages due to challenging market conditions including softening end-market demand and high energy prices. However, Scope expects EBITDA/interest cover to remain at around 8x and leverage as measured by Scope-adjusted debt/EBITDA to remain at around 4x.

A positive rating action could be warranted if profitability, measured by Scope-adjusted EBITDA would move sustainably above 5%, while Scope-adjusted Debt/EBITDA moves below 3x.

A negative rating action could occur if leverage significantly exceeded 4x on a sustained basis. This could result from further deterioration of profitability, or drawing of additional third party debt. Additionally, inability to bring FOCF to positive levels on the medium term might warrant a negative rating action.

Scope notes that Inotal’s senior unsecured bond issued under the Hungarian Central Bank’s Bond Scheme has an accelerated repayment clause. The clause requires Inotal to repay the nominal amount (HUF 6bn) within 30 days after the bond rating falls below a B-, which could have a default implication.

Long-term debt ratings

In September 2020, Inotal issued a HUF 6bn senior unsecured bond (ISIN: HU0000359948) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds have been used to refinance the existing third-party debt. The bond’s tenor is seven years, with a fixed coupon of 3.2%. Bond repayment is in five tranches: 12.5% of the face value payable yearly between 2023 and 2025, and 50% at maturity in 2027.

Scope has rated the senior unsecured debt issued by Inotal at B+, the same level as the issuer rating. Recovery is ‘average’ for senior unsecured debt holders in a liquidation scenario.

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, (General Corporate Rating Methodology, 15 July 2022; Metals and Mining Rating Methodology, 27 October 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 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 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: Istvan Braun, 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 20 May 2020. The Credit Ratings/Outlook were last updated on 6 May 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.