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

Rating action

Scope has affirmed the BB+/Stable issuer credit rating of Hungary-based utility ALTEO Energiaszolgáltató Nyrt (ALTEO) along with its BBB- long-term senior unsecured debt rating and S-3 short-term debt rating.

Rating rationale

The issuer rating is largely supported by ALTEO’s balanced mix of regulated and unregulated activities in electricity and heat generation, and energy supply and services, resulting in a solid cash flow profile. While Covid-19-related lockdowns will continue to have a negative impact on some of ALTEO’s energy clients (primarily small and mid-sized companies), the overall cash flow impact is expected to remain limited and counterbalanced by the growth in power generation.

The updated HUF 20bn investment plan, while unlikely to help with deleveraging over the next three years as it is largely debt-financed, is expected to give a material boost to operating performance, due to its focus on organic growth (primarily in power generation) and smaller bolt-on acquisitions of single generation projects in renewables and/or cogeneration. This growth strategy is further expected to gradually reduce asset concentration risks in power generation and maintain group profitability at a solid double-digit level.

Operating cash flows are expected to improve gradually on the back of ALTEO’s growing outreach and scale, although free operating and discretionary cash flows are still expected to be affected by the ongoing investment phase. Based on the increasing need to finance the investment plan externally (through banks or capital markets), Scope anticipates leverage to be sustained at around 3.5-4.5x over the next few years. Scope also positively acknowledges the dividend cut in 2020 aimed at preserving liquidity and the company’s credit profile, even given its insignificant effect on overall cash flow.

The debt profile has become well balanced after HUF 7bn of amortising project finance debt was refinanced early via a HUF 8.6bn 10-year bond issued under the Bond Funding for Growth Scheme of the Hungarian National Bank. Upcoming debt maturities are expected to be covered reliably by available liquidity sources. The HUF 2.15bn ALTEO 2020/I bond is likely to be redeemed using the remaining HUF 4.8bn cash buffer at YE 2019. Furthermore, the amortising project finance debt of around HUF 500-600m annually and the two zero-coupon bonds (ALTEO 2022/I and ALTEO 2022/II) totalling HUF 2.3bn in 2020 are expected to be covered by free operating cash flow and more than HUF 2bn of committed bank facilities. However, Scope believes that outstanding capital market debt and the investment programme are likely to be (re)financed via new bond issues and loans with established banks.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that the largely debt-financed execution of ALTEO’s investment plan will not significantly burden the financial profile, with leverage as measured by Scope-adjusted debt/EBITDA expected to remain at around 4.0x and debt protection as measured by EBITDA interest coverage to remain above 5.0x.

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, though this is unlikely over the next two years in light of the updated, increased investment plan.

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 if further debt-financed M&A projects weigh on leverage, resulting in a Scope-adjusted debt/EBITDA of above 4.5x and EBITDA interest coverage of below 5x for a prolonged period.

Long-term and short-term debt ratings

Scope retains its view on an ‘above-average recovery’ for senior unsecured debt, even after senior secured debt (primarily non-recourse project finance debt and finance leases) has fully been covered. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario of around HUF 23bn after administrative claims. Hence, Scope has affirmed the BBB- rating for the senior unsecured debt category.

The S-3 short-term debt rating has been affirmed, reflecting ALTEO’s sound liquidity profile with the expectation of comfortable internal and external liquidity metrics and good access to external funding (i.e. banks and capital markets).

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, published on 26 February 2020; Rating Methodology for European Utilities, published on 18 March 2020; Rating Methodology for European Renewable Energy Corporates, published on 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 rating process was conducted:
With 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 rating: public domain, the rated entity 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the rating: Philipp Wass, 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
© 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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