Scope Ratings (‘Scope’) affirms the BBB- rating of the EUR 15m senior secured corporate bond (6.5% 2013/2020) of BET. The instrument rating is based on a Corporate Issuer Credit Rating of BB-. Both outlooks are stable.

The ratings reflect BET’s quasi-monopoly as a producer of district heating in Taufkirchen, and nearby communities, in Germany. Moreover, the rating incorporates the business model’s robustness, which stems strongly from the regulated sale of district heating and electricity. As a result, BET generates robust and plannable operating cash flows despite its small size and strong dependence on only one service territory. Moreover, the ratings incorporate the company’s continuous deleveraging in terms of Debt/EBITDA (6.1x in 2014 versus 6.7x in 2013), as well as the solid fixed charge cover of measured as an EBITDA fixed charge cover of 2.5x in 2014 versus 2.4x in 2013. Scope expects further improvement in key financial measures in 2015 and 2016, driven by the company’s scheduled debt reduction and positive Free Cash Flows. However, the ratings are largely constrained by the strong dependence on one servive territory and the lack of equity base.

With a collateral package that comprises material parts of its district heating network, easements, a biomass cogeneration plant, and a liquidity reserve, Scope considers the recovery prospects of BET’s senior secured bond to be very strong (significant overcollateralisation), which is reflected positively in the BBB- rating of BET’s EUR 15m senior secured corporate bond (6.5% 2013/2020).

KEY RATING DRIVERS

Very small independent power producer with quasi-monopolistic market position. With an annual EBITDAR of EUR 4m in 2014 and a power plant capacity of 32 MW_th and 5 MW_el, BET is a very small, alternative independent power producer (‘IPP’). Despite its size and dependency on one service territory, BET holds a quasi-monopoly in a market with high entry barriers due to the company-owned district heating network of roughly 41 km in Taufkirchen, and nearby communities, in Germany. This network ensures sales in district heating. In addition, BET can stabilise its business model through the guaranteed sale of electricity under the German Renewable Energy Act (‘Erneuerbare-Energien-Gesetz’ - EEG). Scope considers the sales and margins resulting from BET’s strong market position as very solid and predictable, and resilient to external shocks.

Improved profitability. Despite ist high dependency on the volatile price developments of renewable combustibles, (such as wood, biogas) but also oil and gas as well as weather effects the company’s margins are comparably robust. Benefiting from reduced market prices for biogenic combustibles but also oil and gas BET improved its EBITDA margin to 33.9% in 2014 (2013: 28%). Due favourable price developments for combustibles and slightly increased prices for district heat, Scope expects the company’s EBITDA margin to remain above 30% in the next two years.

Stable operating cash flows and comfortable fixed charge coverage. The rating reflects BET’s comparably stable positive operating cash flows with an average operating cash flow yield of 20%. As a result BET displays some comfortable fixed charge coverage (EBITDA fixed charge cover 2014: 2.5x vs 2.4x in 2013). As major investment projects, such as the further expansion of the company-owned, local heating network, were finalised in 2013, Free Cash Flows are expected to remain positive over the next two years (FCF 2016E: EUR 2.2m) Scope expects the company to use free cash flows to improve its debt position.

High leverage typical for IPPs with a recoverable asset base. Despite the company’s low equity capitalisation BET’s leverage – measured as Debt/EBITDA of 6.1x in 2014 (Net Debt/EBITDA 2014: 5.7x) – is typical for a utility. With an improved EBITDA, continued amortisation of bank loans and no significant investment needs, Scope expects BET to further improve its leverage to 5.7x in 2015. BET’s EBITDA fixed charge cover was moderate at 2.5x in 2014, and is expected to improve to 3.1x in 2016.

Solid liquidity and no short-term refinancing needs. BET’s liquidity is regarded as strong as it can sufficiently cover scheduled short-term debt positions in 2015 (liquidity well above 100%). Furthermore, the company has no significant refinancing needs by 2020 when the EUR 15m senior secured corporate bond matures.

Overcollateralisation of corporate bond through recoverable assets. The EUR 15m corporate bond (6.5% 2013/2020) is secured by ample collateral, which comprises easements, material parts of a biomass cogeneration plant and as well as material parts of the company-owned district-heating network (~16.5 km). In this context, Scope rates highly the value of BET’s district heating network given its position as a quasi-monopoly. Scope notes that the corporate bond strongly benefits from overcollateralisation even after the application of valuation discounts which is reflected in the assigned instrument rating. In addition, the corporate bond is secured through a liquidity reserve in trust. The strong collateral of the bond is regarded strongly positively for bondholders and the rating of the corporate bond.

Outlook: Stable. The Outlooks are Stable. The rating is strongly constrained by the company’s size and scope. A lower rating would be warranted in case of deterioration of the company’s equity base or a significant worsening of the company’s leverage above 7.0x or its EBITDA fixed charge coverage below 2.0x.

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Regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst. Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history (Instrument rating)
Date | Rating action | Rating
9 July 2014 | Affirmation | BBB- Outlook Stable
9 July 2013 | Initial | BBB- Outlook Positive

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
- Website of the rated entity
- Detailed information provided on request
- Valuation reports, other opinions
- Data provided by external data providers
- Audited annual reports of the rated entity
- External market reports
- Current performance record of the rated entity
- Press reports/other public information
- Interview with the rated entity
- Bond Prospectus

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Alternative Energy Corporates) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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