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Rating action

Scope assigns a first-time issuer rating of B+/Stable to Optimum Solar Kft., a solar EPC company active in Hungary. Senior unsecured debt is rated B+.

Rating rationale

Optimum Solar Kft is one of the leading Hungarian solar EPC (engineering, procurement and construction) companies, founded in 2011 and privately owned by its management and employees.

The B+ issuer rating is supported by Optimum Solar’s stable profitability and the supportive regulatory environment in Hungary (National Energy Strategy 2030) that stimulates demand for the sector’s services, despite the limited cash flow visibility from the contracted backlog. The rating is further supported by good EBITDA interest cover and adequate liquidity.

The rating is mainly constrained by the company’s small scale in both a European and domestic construction context, with a mono-line focus on photovoltaic power stations. It is further constrained by weak diversification, namely a lack of geographical diversification (predominantly active in Hungary), segment concentration and an exposure to counterparties with relatively weak credit quality. The rating is further limited by the anticipated increase in leverage driven by a forecast of negative Scope-adjusted free operating cash flow – however, this is a typical feature for growth companies.

Positive rating drivers

• Stable profitability at around the sector average, with limited volatility to continue thanks to a supportive regulatory environment that stimulates demand for the company’s services
• Adequate liquidity, with short-term maturities relating to working capital facilities
• Healthy debt protection metrics despite the strong expected increase in interest-bearing debt

Negative rating drivers

• Small-scale construction company in a European context, with a lack of geographic and segment diversification, somewhat mitigated by politically induced demand and the good position within a niche market
• Short contracted backlog providing limited visibility on future revenues
• Negative free operating cash flow, which also translates into negative Scope cash flow metrics; while this is typical for growth companies, it indicates a continued need for debt increases
• Future growth at the expense of increased leverage

Liquidity 

Scope considers liquidity to be adequate. In detail:

Position: YE 2019E I YE 2020E

Unrestricted cash: HUF 114m I HUF 6,027m
Open committed credit lines: HUF 0.0m I HUF 0.0m
Free operating cash flow (t+1): HUF -216m I HUF -3,520m
Short-term debt: HUF 1,516m I HUF 860m

Coverage: -0.1x I 2.9x

Scope judges the company’s liquidity to be adequate, with unrestricted cash exceeding short-term debt, even if free operating cash flow turns further negative. Given the long maturity of the prospective bond, upcoming short-term maturities are likely to be manageable for the foreseeable future.

Outlook and rating-change drivers

The Outlook for Optimum Solar is Stable and incorporates Scope’s view of a positive politically induced business environment thanks to the National Energy Strategy 2030. Furthermore, Scope foresees Optimum Solar to benefit from i) the existing market backlog of projects to be fulfilled by 2021 for KAT, the expired Hungarian feed-in tariff scheme; and; ii) the company’s expansion into small and medium-sized power plants, supported by existing partners. All aspects should lead to at least stable revenue generation going forward. The Outlook also incorporates a successful placement of the HUF 6bn bond in H1 2020 and assumes that the proceeds are used as planned.

Scope’s rating scenario assumes the following:

• Revenue growth of 10% in 2019, -1.5% in 2020, and 29% in 2021. This is in line with current contracted projects and the letter-of-intent backlog as per year-end 2019
• EBITDA margin of 7.2% for 2019 in line with historical margins, 6.4% in 2020 and 6.7% in 2021
• Issuance of a HUF 6bn (~ EUR 18m) bullet bond in H1 2020 under the MNB Bond Funding for Growth scheme, with an expected coupon of 3.5% and a maturity of seven years
• Capital expenditure of around HUF 650m in 2020 and HUF 1.1bn annually thereafter
• Dividend payouts of 35% of the previous year’s net profit as per the company’s maximum dividend policy and covenant restrictions
• Restricted cash relates to cash pledged as collateral for banks to issue guarantees

A positive rating action may be warranted if the company can increase visibility on contracted revenues beyond 2020, via a solid contracted backlog in medium-sized power plants, in addition to reducing its leverage, measured by debt to EBITDA (Scope-adjusted figures), to below 3.5x on a sustained basis.

A negative rating action could occur if debt to EBITDA (Scope-adjusted figures) were to increase to above 5x on a sustained basis or liquidity were to worsen. An increase in leverage could be triggered by an adverse operational development leading to reduced profitability and cash flows. Liquidity could worsen if, e.g. i) customers delay payments significantly; or ii) the company becomes exposed to the non-recoverable cost overruns of its projects.

Long-term and short-term debt instrument ratings

The rated entity plans to issue a HUF 6bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme. The planned bond has a 3.5% coupon and is non-amortising with a tenor until 2027.

Proceeds from the bond are earmarked for capex to expand Optimum Solar’s operational assets and headquarters (HUF 1.65bn), for covering deposit needs resulting from bank guarantees, allowing for the redemption of performance guarantees and warranties (HUF 1.5bn), and for financing working capital for supplier advances (HUF 2.85bn).

Scope’s recovery analysis is based on a hypothetical default scenario occurring at year-end 2021, which assumes an outstanding senior unsecured bond debt of HUF 6.0bn in addition to the existing HUF 2.7bn of debt positions. An ‘average recovery’ is expected for the company’s unsecured debt, resulting in a B+ rating for this debt class (the same as the issuer rating).

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/or rating outlook (Corporate Rating Methodology; Rating Methodology: European Construction Corporates) 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 and/or its agents participated 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, the rated entities' agents, 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: Thomas Faeh, Executive Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 4 February 2020.

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
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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.

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