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

Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary-based CLA Pig Kft’s issuer rating at B+/Stable. The instrument rating of the HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) has been affirmed at BB-.

Rating rationale

The affirmation is driven by the solid financial risk profile despite the temporarily weakened profitability. While CLA Pig’s revenues increased to HUF 5.5bn (up 8% YoY), the EBITDA margin has been negatively impacted by the rapid increase of animal feed prices during the course of 2022. Scope-adjusted EBITDA margin dropped from 19% in 2021 to 13% in 2022. The deterioration of the Scope-adjusted EBITDA margin, however, is deemed only temporary, and is expected to return to close to historical averages (around 20%) in the medium term, in parallel with the normalisation of animal feed prices, which is happening so far in 2023, reflected in the interim management accounts reviewed by Scope.

In June 2023 a fire broke out at CLA Pig’s premises, damaging the farrowing house and killing part of the pig herd. Scope’s rating case includes a more conservative profitability forecast for 2023 to account for the potential negative effects of the force majeure event.

The business risk profile (assessed at B) continues to be the main constraint of the issuer rating. As witnessed in the 2022 accounts, CLA Pig – despite its largely integrated business model including raw material procurement from other group ventures – has limited ability to mitigate the increased pressure on EBITDA margin from raw material costs. The issuer’s limited size in both a domestic and European context, and low degree of diversification make it vulnerable to external macroeconomic shocks or volatile market prices. Moreover, Scope notes that the issuer’s operating profitability remains highly dependent on the European Union’s Common Agricultural Policy subsidies as recurring subsidies have been a reliable source of income over the past few years. Any changes in the subsidy system can significantly influence CLA Pig’s operating cash flow and profitability.

CLA Pig’s domestic market share is estimated at around 7% based on information received from the management. The ongoing capacity expansion (new pig farm located in Kisbaráti, Hungary) of up to 280k animals would double CLA Pig’s market share, placing it amongst the medium-sized pig farms in a heavily fragmented domestic market. The capital investments will also significantly increase the energy efficiency of the expanded pig farm by utilising renewable energy sources, reducing exposure to the change in energy costs (credit positive ESG factor).

The financial risk profile (assessed at BB+) remains supported by robust interest coverage; in 2022 CLA Pig realised positive net interest income, benefitting from the high level of freely available cash (part of the bond proceeds not yet spent), and the interest received on short-term deposits. As Scope’s financial forecast does not include any received interest going forward, the Scope-adjusted EBITDA/interest ratio is expected to be around 5.0x in 2023 and to stay above 6.0x in the medium term. Leverage, measured by Scope-adjusted debt/EBITDA, has deteriorated above 4.0x in 2022 due to worsening profitability. As the negative effect on EBITDA is deemed temporary, a gradual recovery is forecasted, improving to around 2.0x in 2023. Cash flow cover, measured by free operating cash flow/Scope-adjusted debt is projected to be volatile till YE 2024 (the end of the current capex-heavy period), heavily impacted by the capital expenditures and investment subsidies received. However, negative free operating cash flow is not expected to have a significant adverse impact on liquidity as the planned HUF 5bn Kisbaráti investment is still covered by the proceeds of the bond issuance (and the associated retained cash buffer) and investment subsidy.

Liquidity is adequate, backed by the HUF 1.55bn unrestricted cash available as of FYE 2022 and positive free operating cash flow of HUF 0.4bn in 2023, fully covering the short-term debt repayments of HUF 0.3bn forecasted for 2023.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects the assumption that the credit metrics of CLA Pig will develop in line with Scope’s rating case forecast, and the leverage, measured by Scope-adjusted debt/EBITDA will decrease to around 3.0x in the medium term. Scope’s forecast deems the deterioration of operating profitability to be temporary, and assumes an EBITDA margin close to historical averages (near 20%) beyond 2023. Additionally, the successful execution of CLA Pig’s ongoing capital expenditure is assumed, without significant delays or cost overruns.

A positive rating action is deemed as being remote for the time being due to the company’s constrained outreach and scale. A positive rating action would require a significantly improved business risk profile and operational scale.

A negative rating action could be required if the company’s leverage (Scope-adjusted debt/EBITDA) moved significantly above 4.0x amid its expansion phase or if the company faced significant pressure in keeping its EBITDA margin at 20% or higher in case it failed to pass on higher input prices to customers or to collect operational subsidies on a sustained basis.

Long-term debt ratings

In August 2021, CLA Pig issued a HUF 3.26bn senior unsecured guaranteed bond (ISIN: HU0000360672) through the Hungarian central bank’s Bond Funding for Growth Scheme. The bond’s tenor is 10 years, with a fixed coupon rate of 2.9% and repayment in five tranches of 10% in 2026, 2027, 2028, 2029 and 2030 and a 50% tranche in 2031. The bond has been issued with a guarantee from the related company CLA Service Kft.

The recovery analysis indicates an ‘above average’ recovery for the senior unsecured guaranteed bond and for all other senior unsecured debt positions at the level of CLA Pig even after all senior secured debt would have been fully recovered. The recovery is benefiting from the high level of fixed assets (mainly consisting of PPE), translating into a debt instrument rating of the senior unsecured guaranteed bond one notch above the issuer rating (BB-). The guarantee of CLA Service Kft. has no significant effect on the expected recovery of the debt instrument.

Scope notes that CLA Pig’s guaranteed senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires CLA Pig to repay the nominal amount (HUF 3.26bn) in case of a rating deterioration pertaining to the debt instrument rating (two-year cure period for a B/B- rating, repayment 30 days after the bond rating falls below B-, which could have default implications). From today’s perspective, there is solid headroom before that covenant would be breached.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), is 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/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: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 August 2021. The Credit Ratings/Outlook were last updated on 3 August 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.