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

Rating action

Scope has assigned a first-time issuer credit rating to Hungary-based ALTEO Energiaszolgáltató Nyrt of BB+/Stable/S-3. Concurrently, we have assigned a BBB- rating for senior unsecured debt.

Rating rationale

The issuer rating is largely supported by ALTEO’s increasing cash flow exposure to regulated renewable power generation, its quasi-monopolistic position in heat generation and supply, and comfortable level of interest coverage. Moreover, the company’s creditworthiness is stabilised by its integrated energy utility model supplemented by energy services. Margins should remain stable overall – despite cash flows in unregulated power generation remaining vulnerable to merchant risks inherent to the Hungarian market – helped by high-margin regulated renewables and the company’s new strategy to mitigate energy supply risks.

The rating is constrained by ALTEO’s limited overall corporate outreach and regional risk mitigation, and by asset concentration risks in power generation. The financial risk profile represents another rating constraint, but we expect gradual improvements over the next three years through the company’s focus on organic growth and curtailment of opportunistic external growth. This should boost free and discretionary cash flows to a level which allows deleveraging. The liquidity situation is also expected to ease, following the early refinancing envisaged for the senior unsecured bond and senior secured project finance debt, through a newly issued long-term senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme with a nominal of up to HUF 9.3bn.

Rating outlook and Rating-change drivers

The Stable Outlook reflects our expectations regarding the organic growth focus, the aforementioned deleveraging over the next few years and an EBITDA interest coverage of sustainably above 5x.

A positive rating action is likely to be warranted if leverage reduced below 3.5x and EBITDA interest coverage improved to around 7x for a prolonged period.

A negative rating action could be required if growth does not materialise as expected, e.g. through significantly lower earnings contributions from the new solar and wind assets, or further debt-financed M&A projects that weigh on leverage, which will remain above 4.5x for the next few years and EBITDA interest coverage deteriorated to below 5x for a prolonged period.

Rating for senior unsecured debt

We expect an ‘above-average recovery’ for existing and future senior unsecured debt such as the HUF 1.7bn zero-coupon ALTEO 2022/II bond and the planned senior unsecured bond the MNB programme, even after senior secured debt is covered fully (non-recourse project finance debt and finance leases). Such recovery expectations translate into a BBB- rating for the senior unsecured debt category. Our recovery expectations are based on an expected liquidation value in a hypothetical default scenario, around HUF 15bn in 2021, and a 10% reduction on that value for administrative claims in a liquidation.

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

Methodology
The methodologies used for this rating and rating outlook (Corporate Rating Methodology, Utilities Rating Methodology, Renewables Rating Methodology) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity or its agents did participate in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings 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.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 7 August 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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