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Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungarian consumer goods company Naturtex Kft.’s issuer rating of B+/Stable following the correction of analytical errors and senior unsecured debt rating of B+.

Rating rationale

The affirmation is despite the weaker financial risk profile (to B+ from BB-) following the correction of analytical errors. The analytical errors consisted in the Scope-adjusted EBITDA and Scope-adjusted debt calculations as Scope had previously underestimated the company’s indebtedness levels as the bank guarantee for its subsidiary (NTT Manufacturing) and its operating leases were not fully taken into account. Additionally, the non-recurring income effects have now been deducted from the reported EBITDA. The correction of these errors had negative impact on Naturtex’s financial risk profile. Scope applied additional adjustments to credit metrics to better reflect the company’s operating profitability (by excluding non-operating income effects) and indebtedness (by including operating leases and bank guarantees for a subsidiary’s loans). A EUR 0.65m working capital loan to be taken out to enhance liquidity has caused the financial risk profile to weaken further. The rating action is supported by the company’s resilient business risk profile (remaining at B+) in economically challenging times as shown by its relatively strong profitability.

As revenue normalised in 2022 after the Covid-19 pandemic, Naturtex’s business risk profile remains supported by strong operating profitability. The company’s stockpiling of raw materials when prices were cheaper has protected Scope-adjusted EBITDA from today’s increased materials and input prices triggered by the energy crisis and high inflation. The company’s brand strength also benefits the business risk profile, with its quality products earning the company a domestically well-known brand. The assessment is hindered by the low market share and diversification despite strong geographical diversification. As the company remains small and exposed to a single product category, its business risk profile remains at B+.

Scope has adjusted credit metrics to reflect a more accurate picture of operating profitability (Scope-adjusted EBITDA) and indebtedness (Scope-adjusted debt). Scope-adjusted EBITDA was adjusted to remove one-off items (e.g. sales of property) and non-operating income (e.g. state subsidies). Scope-adjusted debt now incorporates the full impact of operating leases and the bank guarantee.

These adjustments led to a generally weaker financial risk profile, which Scope forecasts will further deteriorate once a EUR 0.65m secured working capital loan is taken out to enhance liquidity in 2023. The loan, however, will be under the Baross Gabor state programme offering favourable borrowing rates to SMEs to dampen the effects of the current economic environment. The euro-denominated loan will have a favourable fixed interest rate of 3.5%, a three-year term and linear amortisation with a one-year grace period. Further constraints on the assessment are the high leverage and low cash flow cover, both expected to hit a low point in 2023 before improving as the bank guarantee exposure decreases with the amortisation of subsidiary NTT Manufacturing’s debt. On the other hand, interest cover will continue to be strong and benefit the financial risk profile, supported by the favourable fixed interest rates of the largest debt balances (existing NKP bond and upcoming Baross Gabor loan).

The company’s liquidity is adequate. Cash generation is forecasted to be sufficient to service the scheduled debt amortisation of the Baross Gabor loan, expected from 2024, and the NKP bond in 2025.

In 2022, Naturtex sold one of its properties for HUF 710m and used the proceeds to acquire a better-located property as well as majority ownership of its previously 50%-owned joint venture company, NTT Manufacturing Kft. Naturtex plans to publish consolidated financials with its subsidiary in the mid-term.

Environmental, social and governance (ESG) considerations have no significant effect on the group’s credit quality.

Outlook and rating-change drivers

The Outlook for Naturtex is Stable and incorporates Scope’s view that the higher materials and input costs may still adversely affect operating profitability. Scope expects Naturtex’s leverage to peak at above 6x after the issuance of the Baross Gabor loan and remain at 4.5x-6x in the following years.

A positive rating action could be warranted if the Scope-adjusted debt improved to below 3.5x on a sustained basis.

A negative rating action is possible if Scope-adjusted debt/EBITDA remained above 6x on a sustained basis, for example, resulting from tougher market conditions or a more aggressive debt-financed growth strategy.

Scope notes that Naturtex’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Naturtex to repay the nominal amount (HUF 2.8bn) within 15 business days after the bond rating falls below B-, which could have default implications.

Long-term debt rating

In September 2020, Naturtex issued a HUF 2.8bn senior unsecured green bond (ISIN: HU0000359922) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for 35% refinancing of loans and 65% working capital financing. The bond has a tenor of 7 years and a fixed coupon of 3%. Bond repayment is in two tranches in 2025, with 25% of the face value and 75% balloon payment at maturity. Scope notes that Naturtex’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Naturtex to repay the nominal amount (HUF 2.8bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 15 business days after the bond rating falls below B-). In addition to the rating deterioration covenant, bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and dividend covenants.

Scope has affirmed the B+ rating of senior unsecured debt issued by Naturtex, which includes the HUF 2.8bn NKP bond (ISIN HU0000359922). Scope expects an ‘average’ (30-50%) recovery for senior unsecured debt in a hypothetical event of company default in 2025 based on the company’s liquidation value.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Consumer Products, 4 November 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, 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 26 May 2020. The Credit Ratings/Outlooks were last updated on 19 April 2022.

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

Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.