Rating action

Scope Ratings GmbH (Scope) has today assigned a preliminary rating to the Class A1 Guaranteed secured securities to be issued by Virtuo Finance SARL (issuer and lender to six operational photovoltaic power plants) as follows:

Class A1 Guaranteed secured securities: USD 86m assigned a preliminary rating of (P)BBB+

Preliminary ratings rely on the information made available to Scope up to 11 March 2022. Scope will assign final ratings conditional to a review of the final version of all transaction documents and legal opinions. Final ratings may deviate from preliminary ratings.

Transaction overview

• The bonds to be issued will support the refinancing of six operational photovoltaic power plants with a total capacity of 300MWAC located near Benban city, Egypt (together the project). The plants are part of the 1.8GW Benban solar cluster.
   
• All six power plants have been operating since Q4/2019.
   
• The issuer, Virtuo Finance SARL, is a Luxembourg compartment which will on-lend the bond proceeds to each individual opco. Each opco has entered into a long-term power purchase agreement (PPA) with the Egyptian Electricity Transmission Company (EETC). The Egyptian Ministry of Finance (MoF) guarantees EETC’s obligations under each PPA.
   
• The rated Class A1 bonds will benefit from political risk insurance (PRI) of the Multilateral Investment Guarantee Agency (MIGA, part of the World Bank group) and a credit enhancement facility (CEF) by the European Bank for Reconstruction and Development (EBRD). Only Class A1 will benefit from these instruments.
   
• Class A2 (unrated) will be funded by Development Finance Institutions that were part of the original financing.
   
• All PV plants have formally achieved taking-over in Q4/2019. Operational performance in 2021 was satisfactory after some teething issues affecting the project in 2019/20 have been resolved.
   
• The main sponsor of the project, Scatec ASA (51% equity share), is an experienced independent solar power producer listed on the Oslo stock exchange. The company develops, builds, owns, operates and maintains solar power plants. The other sponsors are Africa50 (25%, pan-African infrastructure fund), Norfund (12%, Norwegian development fund), and KLP (12%, Norwegian pension fund).
   
• Scatec Solar ASA, through its subsidiary Scatec Solar Solutions Egypt LLC, provides operation and maintenance (O&M) services to all six plants.

Rating rationale

• The (P)BBB+ rating reflects the total expected loss (EL) of 1.20% over the loan’s life until maturity (equivalent to a 8.76-year constant-exposure expected risk horizon).
   
• The project benefits from stable and predictable cashflows, low operational risk and a solid financing structure. Strong financial covenants and a subordinated liquidity facility by EBRD further enhance the credit quality of the bonds. Political risk insurance by MIGA mitigates the severity of potential losses in the event the PPAs were terminated as well as country risk events related to the weak credit quality of the Egyptian sovereign, transfer & convertibility risks, war and civil unrest, and the risk of expropriation.
   
• The project's high dependency on the power purchase agreements with the Egyptian Electricity Transmission Company, some sensitivity to future US CPI inflation, and some exposure to EGP/USD exchange rate volatility constrain the rating.
   
• Construction risks account for 0.0% of total EL. Bondholders are not exposed to construction risk. All six PV plants have been operating since 2019.
   
• Operational risks account for 22.3% of total EL. Production levels were above P50 in 2021. Operational complexity is low and the technology used is suitable. The project benefits from a 25-year, full-service O&M contract with Scatec Solar Solutions Egypt LLC.
   
• Revenue risks account for 23.9% of total EL. The six power plants sell its power under a 25-year power purchase agreement on a take-and-pay basis. Solar resource risk is very low due to the excellent quality and low variability of solar irradiation.
   
• Financial strength risks account for 21.4% of total EL. Debt repayment risk is low because of low expected cashflow volatility in combination with solid DSCRs: 1.29x minimum (2025) / 1.44x average in Scope's rating case. A six-months debt service reserve account and a subordinated, revolving liquidity facility by EBRD provide substantial liquidity support.
   
• Project structure and compliance risks account for 32.4% of total EL. The financial and legal framework conforms to international project finance standards. The security package is comprehensive, covers all material project assets, and includes direct agreements with all major project parties. Finally, the bonds benefit from political risk insurance by MIGA, which substantially mitigates the severity of potential country risk events.

Key rating drivers

• No construction risk (positive). All six PV plants have been operating since 2019. Most teething issues have been resolved and performance in 2021 was in line with expectations. Despite the teething issues, total production was close to P50 since commissioning.
   
• Stable and predictable cashflows (positive). The Egyptian Electricity Transmission Company (EETC) has agreed to purchase all of the project’s produced power for a fixed tariff of USD 84/MWh equivalent until 2044. The project’s geo-graphical location enjoys exceptionally high levels of solar irradiation year-round.
   
• No refinancing risk (positive). The loans are fully amortising through annuities until maturity in 2041. The rated notes further benefit from the transaction’s ten-year tail between maturity and the end of the project’s useful life.
   
• Low operational risk (positive). Operational risks are low because of the well-known technology used and the 25-year full-service O&M contract with Scatec Solar Solutions Egypt LLC. Lifecycle investment costs are small and supported by a maintenance reserve account. RINA, the lenders’ technical adviser, is satisfied with the sizing of the MRA and the O&M budget.
   
• Solid financing structure (positive). The transaction conforms to international project finance standards. The assets are ringfenced and the security package is comprehensive. A USD 21m revolving, subordinated liquidity facility by EBRD supports debt service in the event of PPA payment interruptions. Financial covenants are strong.
   
• Political risk insurance (positive). The project benefits from political risk insurance (PRI) by the Multilateral Investment Guarantee Agency. The PRI covers risks related to transfer & convertibility, war and civil disturbance, expropriation, and breaches of contract under the PPAs.
   
• Country risk (negative). The Egyptian sovereign has weak credit quality (privately rated by Scope). Transfer & convertibility risk and the risk of expropriation are concerns. The PRI substantially mitigates the severity of country risks because of the comprehensive scope of its coverage.
   
• High dependency on the PPAs with EETC (negative). The project fully depends on EETC to purchase its output with no real alternative route-to-market in the event the PPAs are terminated. The PPAs’ termination provisions in combination with the PRI and a subordinated liquidity facility by EBRD mitigate this risk.
   
• Sensitivity to US CPI inflation (negative). A prolonged increase in US CPI inflation would drive up operational expenditures because c. 75% of operational costs are indexed to US CPI. The project’s reassuring cashflow buffer over debt service, the EBRD subordinated liquidity facility, and the debt service reserve account mitigate this risk.
   
• Unusually high insurance deductible (negative). Marsh, the lenders’ insurance adviser, has highlighted an unusually high “special deductible” of 30% in the projects’ property damage & business interruption insurance policy. Marsh recommends its removal at the earliest opportunity. Our sensitivity analysis of insurance cost increases gives additional comfort.

Rating-change drivers

Positive rating-change drivers:

• Smooth performance and continued deleveraging could lead us to upgrade the rating.

Negative rating-change drivers:

•  A failure to make payments, disputes under the PPA, or operational underperformance, could result in a rating downgrade.

Quantitative analysis and assumptions

• The total EL on the rated instrument is commensurate with a BBB+ rating. We calculated an EL of 1.20% over the lifetime of the instrument (equivalent to a constant exposure expected risk horizon of 8.76 years) under our rating case scenario (Scope’s rating case), which is more conservative than the sponsor’s base case scenario. Our rating case assumes P90 energy yield, 98% availability, 0.40% p.a. module degradation, a -2.4% compound annual growth rate in the EGP/USD exchange rate (i.e. a depreciation of the Egyptian pound against the US dollar), an average US CPI inflation of 2.8%, and operational expenditures of USD 8.05/MWp.
   
• We calculated an expected impairment likelihood of 6.89% for this project, commensurate with a PD strength of bb+ when expressed using the levels of our idealised PD curves, as per our methodology. The project’s PD strength and EL results from the aggregated risk of the construction and operational phases.
   
• We calculated a total expected recovery rate of 82.7% on credit impairments for the project. The total expected recovery rate is the probability-weighted average recovery rate of all 16 credit impairment events.
   
• We performed a detailed estimation of the expected severity of the three credit impairment events that are most relevant for investors. These are: i) Revenue deterioration; ii) Inflation, interest or currency issues; and iii) Country or political issues. These three credit impairment events together contribute 25.9% of the EL for investors.

Sensitivity analysis

• Scope tested the resilience of the rating against deviations of the main input parameters. The rating on the Class A1 bonds is robust, showing limited sensitivity to sizeable changes in analytical assumptions. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.
   
• The model-implied rating would be BB+, or one rating category lower, if all 23 risk factor scores are reduced by one level.
   
• The model-implied rating would be BB+, or one rating category lower, if the most relevant risk factor scores are reduced by two levels.
   
• A 25% haircut to the expected recovery rate implies a rating of BBB-.

ESG risks

• The rated bond is a green bond that meets the criteria defined by the Climate Bonds Standard Board on behalf of the Climate Bonds Initiative, certified by DNV. In its annual Environmental and Social Monitoring Report 2021, the issuer confirmed that the projects have avoided 486k tonnes of actual GHG emissions. The projects support Egypt's strategic objectives to diversify and decarbonise its energy generation mix.
   
• The project is important for Egypt's strategic commitment to decrease its dependence on fossil fuels by 42% by 2050. The project contributes to Egypt's aim to increase the share of renewable energy in its generation mix as part of the Benban solar cluster, the largest solar park in the country and one of the largest in the world.

Stress testing
Scope Ratings’ General Project Finance Methodology considers a rating case that embeds stress when compared to the sponsor’s base case. Additionally, the recovery analysis takes into consideration the extreme events in the recovery distribution curves. These elements can be considered a form of stress testing. The stresses of the rating case incorporate haircuts to the cash flows for investors using the project’s financial model.
Scope Ratings stressed the key inputs to the project’s financial model based on the conditions implied by the respective credit impairment event. For example, the stresses applied to estimate the expected recovery rate in revenue deterioration events cover two key revenue drivers: expected energy yield and plant availability. Scope Ratings derived the expected recovery rate by calculating the net present value of all cash flows available for debt service under the assumptions of the respective most relevant credit impairment event.

Cash flow analysis
Scope Ratings relied on the project’s financial model originally prepared by Scatec ASA for the cash flow analysis of the transaction. The cash flow analysis incorporates Scope Ratings’ own assumptions over the economic life of the project, considering the transaction’s main structural features, such as the bonds’ priorities of payment, the bonds’ notional amount and coupons. The cash flow analysis is used to assess the different risk factors and recovery risk factors as well as to determine the expected recovery of the top three credit impairment events, considered in Scope Ratings’ General Project Finance Methodology.

Methodology
The methodology used for the Credit Rating, (General Project Finance Rating Methodology,11 Novemeber 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Project Finance Expected Loss Model v.1.2), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies..
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 this Credit Rating 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 Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Aaron Konrad, Executive Director
Person responsible for approval of the Credit Rating: Torsten Schellscheidt, Executive Director
The preliminary Credit Rating was first released by Scope Ratings on 18 March 2022.

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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.