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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer credit rating of B+/Stable to Hungary-based utility Greenergy Holding Vagyonkezelő Zrt. Concurrently, Scope has assigned a first-time long-term debt rating of BB to senior unsecured debt issued by the company.

Rating rationale

The B+ issuer rating primarily reflects Greenergy’s solid cash flow generation in the context of the company’s size and its changing financial risk profile amid its current strategic investment phase. While small, with a generation capacity of only about 45MW, primarily related to gas-based combined heat and power cogeneration assets, Greenergy’s cash flow profile and credit quality are supported by its solid position in power generation. Scope sees heat generation and supply as providing stable cash flows, bolstered by local oligopoly or even monopoly positions, a robust and flexible tariff setting framework and medium- to long-term contracts with industrial/commercial off-takers or municipal off-takers for district heating.

In contrast, Greenergy’s exposure to electricity generation and supply, which provides about 50% of the company’s revenues, is subject to industry-inherent volatility related to merchant risks. Such potential earnings volatility can only be partly offset by Greenergy’s ability to provide balancing capacity to Hungary’s transmission grid operator MAVIR via its ‘virtual power plant’. Consequently, the company’s power generation fleet with a peak- and baseload-capable decentralised cogeneration portfolio, enhanced by renewable energy capacities (ESG factor), is seen as a positive environmental ESG rating driver, which supports the stability and diversity of Greenergy’s business model and limits regulatory risk.

Greenergy’s rating is held back to some extent by its limited scale and regional risk mitigation. Although Scope expects a steep growth trajectory, with a doubling of generation capacity in cogeneration and unregulated renewables, supplemented by additional growth in energy storage and energy services, the company will remain rather small in terms of cash flow generation. Scope judges execution risks related to the capacity ramp-up and envisioned strengthening of the business services segment to be low. The integration of new greenfield and brownfield power plants should not be overly challenging, given the company’s long-standing expertise in operating small-scale, decentralised combined heat and power plants. Similarly, Scope does not expect the integration of selective brownfield wind or solar parks to raise major concerns.

The company’s solid cash flow generation is evidenced by its sound recurring EBITDA margin, which we expect to range between 15% to 23%. The margin is largely supported by the higher-margin generation business and somewhat diluted by the services and trading business. Scope expects Greenergy’s margin profile to improve slightly over the next few years, bolstered by a larger share of higher-margin power generation activities. This should counterbalance the likewise growing absolute exposure to business services and scaling effects amid the company’s overall growth. However, Scope highlights the material cash flow risk arising from potential adverse forex effects and a non-controllable pricing environment for gas procurement.

The company’s expected organic and dynamic expansion, with scheduled capex of more than HUF 8bn between 2021 and 2023, will weigh heavily on free operating cash flow and its financial risk profile. However, Scope assumes that required funding will be made available in line with the company’s funding strategy, primarily based on the placement of a HUF 5.7bn bond under the MNB Bond Funding for Growth Scheme. Incorporating Scope’s expectations regarding Greenergy’s growth trajectory over the next few years, leverage (which comprises contingent liabilities for asset overhauls and restricted cash earmarked for investment) is anticipated to settle at about 4.0x-4.5x over the medium term. While material investments will burden leverage metrics in the short term, the expected cash contributions from new investments, for which Scope sees little execution risk, are likely to strengthen the company’s leverage.

Following the finalisation of the medium-term investment programme by YE 2023, Scope assumes that expected operating cash flow of about HUF 1.3bn will be fully sufficient to cover annual maintenance capex of about HUF 0.5bn. This should provide some headroom to actively scale back debt in 2024 and beyond, if such headroom is not used for shareholder remuneration. Debt protection, as measured by Scope-adjusted EBITDA interest coverage, is expected at a comfortable level of about 7x and above in the coming years.

Scope regards Greenergy’s liquidity position over the next few years as adequate. Scheduled debt repayments from the shareholder loan in addition to the early repayment of bank debt (development loan) in 2021 are expected to be fully covered by available cash sources and operating cash flow after investments. This, however, assumes the placement of a HUF 5.7bn bond and the consistent availability of Greenergy’s HUF 1.3bn capex loan facility with CIB Bank, which needs to be extended on an annual basis. In light of Greenergy’s business model and largely unencumbered asset base, Scope believes that external funding should reliably be available. Scope assumes that debt repayments related to the shareholder loan may be delayed if cash sources are instead used for investments or other operational purposes. Moreover, Scope trusts that the company is in a good position to negotiate new loans for specific additional capex if needed, either on a non-recourse project basis or recourse corporate basis.

Scope rates Greenergy on a standalone basis. While the company’s direct 100% parent PARATUS Energy Kft is owned by Hungarian construction company KÉSZ group (51%) and two of its three Managing Directors (49%), Scope considers the rated entity to be steered largely independently from its majority shareholder.

The company’s limited size and outreach compared to other entities rated in the BB rating category hinder it to exceed the assigned B+ issuer rating (reflected by a negative one notch adjustment on the standalone rating).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Greenergy’s largely debt-funded growth ambitions over the next few years, which are likely to weigh on its financial risk profile by YE 2023 and a materially increasing leverage (Scope-adjusted debt/Scope-adjusted EBITDA) which is expected to settle at around 4x by the end of the investment phase. However, the anticipated growth strongly supports solid interest coverage remaining consistently above 6x.

A positive rating action may be warranted if the company achieves growth resulting in the removal of the negative rating adjustment for peer group while at least maintaining its current financial risk profile. For the time being, this is deemed remote. Alternatively, Scope may consider a positive rating action if leverage improves to around 3x on a sustained basis.

A negative rating action could be required if Greenergy’s growth trajectory does not materialise as expected, e.g. with significantly lower earnings contributions from newly integrated power generation assets. The shortfall in expected earnings growth could result in a sustained Scope-adjusted leverage of above 4.5x or EBITDA interest coverage materially below 5x on a sustained basis, which could lead to a negative rating adjustment.

Long-term debt rating

Scope expects a well above-average recovery for existing and future senior unsecured debt. Greenergy changed its funding structure a few years ago, moving from funding at the project level to funding at the corporate level. However, certain debt raised for specific expansion projects, such as Greenergy’s contracted capex facility, can benefit from collateral in the form of assets, providing such creditors with higher security and recovery than investors in senior unsecured debt.

Greenergy plans to issue a HUF 5.7bn (equivalent to around EUR 16m) senior unsecured bond in Q3 2021 under the Bond Funding for Growth Scheme of the Hungarian National Bank. The bond’s tenor is expected to be ten years with 50% of its face value subject to amortisation in 2026-2030 and the remaining 50% in 2031. The coupon will be fixed and payable on an annual basis. Proceeds from the bond placement are intended to be fully used to support the company’s extensive capex programme between 2021 and 2023.

Scope has assigned a BB rating to Greenergy’s senior unsecured debt, two notches above the issuer rating. The rating agency’s recovery assessment includes the planned HUF 5.7bn senior unsecured bond issuance. Scope sees a high likelihood that senior unsecured debt positions will largely be recovered in a hypothetical default scenario even after senior secured debt positions are fully covered. However, this incorporates the assumption that Greenergy’s exposure to new senior secured debt will not materially go beyond the currently contracted volume linked to its capex facility. Scope’s recovery expectations are based on a theoretical liquidation value of above HUF 9bn before administrative claims in a liquidation which incorporates a material discount on the expected total asset value amid the current expansion phase.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Utilities, 18 March 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information 
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 15 June 2021. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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