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Rating action

Scope Ratings GmbH (Scope) has affirmed the B/Stable issuer rating on Hungarian limestone producer Reneszánsz Kőfaragó Zrt. Scope has also affirmed the B+ senior unsecured debt rating.

Rating rationale

The affirmation is driven by the solid business performance of Reneszánsz in 2022, with the operating margin (Scope-adjusted EBITDA margin) of 17% exceeding Scope’s previous forecast of 12%. This was caused by the lower adverse effect of rising input prices (energy, wage costs) on margins, as Reneszánsz was able to increase its selling prices to a similar extent, benefitting from the unique properties of its products and the price taker nature of the end market. Reneszánsz has carried out significant developments in recent years, mainly to improve the efficiency of mine extraction and block processing and to expand its CNC stone carving capacity. The inventory level of the company has shown a rapid increase since 2021; this was a strategic decision by the company, enabling the timely servicing of large and medium sized projects, and avoiding delays caused by the long stoneworking process. Despite the higher inventory level resulting in negative free operating cash flow, liquidity remained adequate, as the issuer has no debt maturing in 2023 (amortisation of the HUF 2.4bn senior unsecured bond issued in 2021 will start from 2024).

The business risk profile (assessed at B+) is supported by: i) the solid market position, as Reneszánsz remains the largest limestone producer in Hungary, and has a high quality product used at numerous notable historical sites in the country; ii) a strong, although highly concentrated order book, with two major projects (the Buda Castle redevelopment project and reconstruction of the historical buildings located on Kossuth Square, Budapest) absorbing the majority of its capacity; iii) stable operating profitability, expected to stay within the range of 15-17%, benefitting from the significant machinery investments in the previous years; iv) the long reserve life of the mine. The business risk profile is constrained by the small absolute size in both European and global context, and weak diversification in terms of activity, products, order book and geographies.

The financial risk profile, assessed at B, is driven by the issuer’s high financial leverage (Scope-adjusted debt/EBITDA, including the capitalisation of future mine concession payments), expected to gradually improve towards 7.0x, as the bond amortisation starts from 2024 with a yearly HUF 120m principal payment. Debt protection (Scope-adjusted EBITDA/interest cover) is expected to remain strong at around 3.0x. This is due to the favourable coupon of the bond issued in 2021 which is fixed for the whole tenor, and no plans or need to issue new interest-bearing debt. The Scope-adjusted interest expense also includes the interest component of operating lease payments, valued at HUF 200m in 2022. Cash flow cover, measured by Scope-adjusted free operating cash flow/debt is expected to remain negative, mainly due to the cash outflow related to the increasing inventory.

Liquidity is adequate, with no short-term debt maturing other than the future amortisation of the bond, and negative free operating cash flow of HUF 1.1bn forecasted for 2023 fully covered by the liquid assets available at YE 2022 of HUF 1.7bn.

Outlook and rating-change drivers

The Outlook is Stable, reflecting the assumption that the credit metrics of Reneszánsz will develop in line with Scope’s financial forecast, with the EBITDA margin staying close to historical averages (between 16-18%) and EBITDA interest coverage sustained above 3.0x. The base case also assumes significantly lower capex beyond 2023 (marking the end of the current investment-heavy cycle), translating into positive free operating cash flow generation from 2025. Scope considers leverage metrics less meaningful because they are strongly influenced by the leasing adjustment.

A positive rating action is possible if Scope-adjusted free operating cash flow/debt improved towards 15%, through either improving operating profitability or decreasing outstanding Scope-adjusted debt.

A negative rating action, i.e. a downgrade, might occur if Scope-adjusted EBITDA/interest cover deteriorated below 2.0x in the medium term or Scope-adjusted funds from operations/debt remained below 5% beyond 2022.

Scope notes that the senior unsecured bond issued by Reneszánsz under the Hungarian Central Bank’s Bond Scheme has an accelerated repayment clause. The clause requires Reneszánsz to repay the nominal amount (HUF 2.4bn) within 30 days after the bond rating falls below a B-, which could have a default implication.

Long-term debt rating

In April 2021, Reneszánsz issued a HUF 2.4bn senior unsecured bond (ISIN: HU0000360375) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds have been used for refinancing and capital investment, i.e. to procure new mining and stoneworking equipment and refurbish existing equipment. The bond’s tenor is 10 years, with a fixed coupon of 3.2% and repayment in eight tranches: 5% of the face value in 2024 and 2025; 10% yearly between 2026 and 2030; 40% at maturity in 2031.

Scope has rated the senior unsecured debt issued by Reneszánsz at B+, one notch above the issuer rating. The recovery is ‘above 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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Metals and Mining Rating Methodology, 25 October 2023), 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and 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 29 January 2021. The Credit Ratings/Outlook were last updated on 16 November 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, 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.