Business 29 May 2024, 12:31pm

Nitrogénművek management speaks out after action by two credit rating agencies

Portfolio

After Hungarian fertiliser producer Nitrogénművek recently reported a financial loss of HUF 22.6 billion in 2023 on the Dublin Stock Exchange in respect of the EUR 200 million bond issued there, and last Friday Fitch Ratings and on Tuesday Standard and Poor's also made a decision on the company's credit rating, Zoltán Bige, Strategic Director and László Bige, owner, spoke out.

Last Friday, Fitch Ratings maintained Nitrogénművek's 'CCC+' Long-Term Issuer Default Rating (IDR) and senior unsecured rating on Rating Watch Negative (RWN). The Recovery Rating is 'RR4'. Fitch has simultaneously withdrawn the ratings for commercial reasons.

"The RWN reflects that Nitrogénművek continues to face very high refinancing risk for its May 2025 Eurobonds and a substantially increased possibility of default, in the absence of a significant improvement in fertiliser prices in 2024 or an unanticipated equity cure. The introduction of a tax on CO2 emissions applied retrospectively puts further pressure on the company's financial profile," Fitch said.

On Tuesday, Standard & Poor's lowered to 'CCC' from 'CCC+' its long-term issuer credit rating on Nitrogénművek and its issue rating on the company's senior unsecured notes.

The company has yet to refinance its €200 million senior unsecured notes, due May 14, 2025. "Given the approaching maturity date, tight financing conditions, and difficult operating environment, S&P Global Ratings sees an increased risk of a debt restructuring or default within the next 12 months," the rating agency said.

It ahs also removed all ratings from CreditWatch negative, where it placed them on 1 December, 2023, and assigned a negative outlook to the long-term issuer credit rating on Nitrogénművek.

"The negative outlook indicates that Nitrogénművek faces mounting refinancing risks; in our view, the likelihood of a debt restructuring is rising and we could lower our ratings further if the company makes no progress on its refinancing plans," it added.

After this, Bloomberg contacted the management of Nitrogénművek, and Zoltán Bige, the strategic director, and László Bige, the owner, responded by email. In it they stressed:

We are working on a number of options and structures to ensure a successful refinancing strategy, which we will target when we have good visibility on the industry recovery and the tax challenge, which we expect in the coming months.

In addition, they stressed that Nitrogénművek has an "attractive level of funding liquidity" through its bond. They also highlighted that they are now focused on optimally addressing short-term financing needs while managing challenges including local taxes, volatile markets and the underperformance of the sector.

According to a response sent to the news agency, management also aims to support a long-term financing strategy that includes further efficiency improvements and preparation for decarbonisation.

With regard to the carbon dioxide quota tax introduced last year, which amounted to HUF 9.8 billion, the company's management stressed in its response that they see a good chance of success in the European Court of Justice in the case against the Hungarian regulation.

The company has issued legal challenges against Hungary's emission trading system (ETS) decree in both the national and European courts, and filed an application for immediate legal protection at the Veszprém General Court on April 5, 2024.

Fitch noted that the company faces around HUF10 billion of payments per year, due to the new CO2 emission tax of about EUR 36 per tonne and a 15% transaction fee on a CO2 emission quota sale. The company is contesting the tax legality but Fitch believes this may take several years.

"Payment of CO2 emissions tax, along with our assumptions for fertiliser and gas prices, will lead to highly pressured EBITDA until 2025 and moderate recovery from only 2026, jeopardising business sustainability," it said.

Fitch forecasts that Nitrogénművek will maintain adequate liquidity to meet its short-term financial obligations and CO2 emission taxes by end-2024, supported by its planned inventory release and despite pressured EBITDA. "However, with profitability likely to continue being squeezed by still elevated gas costs and depressed sales prices, Nitrogénművek will have to explore alternative solutions to manage the partial repayment or refinancing of its 2025 Eurobond," it warned.

S&P warned that "the options for refinancing the notes could be constrained by the difficult economy," as well as by uncertainty regarding the company's litigation against the ETS decree and the related CO2 quota tax.

"As the window for refinancing the notes before they mature gets narrower over the next 12 months, Nitrogénművek 's cushion against potential underperformance will shrink. Consequently, the longer the delay, the greater the likelihood that Nitrogénművek 's creditors will be forced to accept a restructuring proposal that we would classify as a distressed exchange. We consider exchanges to be distressed if we believe that noteholders will receive less than they were promised under the original terms," S&P said.