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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating on Hungarian utility Greenergy Holding Vagyonkezelő Zrt (‘Greenergy’) and raised the Outlook to Positive from Stable. Concurrently, Scope has affirmed the BB long-term debt rating for senior unsecured debt issued by the company.

Rating rationale

Greenergy’s credit quality is supported by its operational performance in 2021, which Scope expects will remain as solid over the next two years. The company’s overall size and outreach are expected to improve gradually through organic and dynamic investment in power generation (combined heat and power and renewables) and storage. Greenergy’s solid operating cash flow is strongly supported by macro-economic tailwinds from high energy prices for electricity and heat generation and balancing services for grid stabilisation. As Scope believes that the pricing situation in Hungary will persist into 2023, Greenergy’s financial risk profile is expected to strengthen over the next few years, much beyond Scope’s initial rating case. Scope assumes that the company will retain a large portion of operating cash flow, limiting external financing needs for its assumed HUF 10bn-11bn investment programme and contributing to Scope-adjusted leverage improving to below 3.0x (Scope-adjusted debt [SaD]/Scope-adjusted EBITDA) and EBITDA interest coverage to above 10x for the next few years (even if new debt is raised at a significantly higher interest rate than the current average interest rate of about 3.0%). Such improvements are reflected in the Positive rating Outlook that could give way to a higher rating should Scope’s expectations about sustainedly improved financials materialise over the next year.

The company has reacted to the exceptionally strong earnings growth through i) scaling back its shareholder loan exposure; ii) stepping up its investment programme; and iii) starting dividend payouts in 2022. Retained earnings are expected to support the financial risk profile. Scope believes that the company will balance higher capex and shareholder remuneration against operating cash flow to keep leverage moderate. The stepped-up investment programme of about HUF 10bn-11bn (Scope assumption) will likely be concluded by YE 2023 with most investments conducted in the current year. Execution risks are limited for greenfield projects such as new solar farms and battery storage capacity and for the integration of brownfield projects (acquired wind farms, additional cogeneration capacity or acquired ventures such as INT-NRG Zrt) given the company’s long experience in most of these activities.

The rating remains constrained by the company’s limited scale and regional risk mitigation outside of its core market. The company is in good financial shape and Scope expects a solid growth trajectory for a doubling of power generation and storage capacities to about 90 MW over the next few years following the investment plan. The overall outreach and market share within Hungary will, however, likely remain insignificant. Moreover, the high exposure to electricity generation and supply that provides more than 50% of recurring revenue bears industry-inherent volatility related to merchant risk. Whilst the company currently enjoys the pricing environment for energy sold to commercial/industrial clients and particularly for balancing power, pricing-induced volatility could turn out equally negative should achievable market prices return to historical levels (which Scope does not foresee over the next two years). Nonetheless, Greenergy’s ability to provide reserve (balancing) capacity to the national transmission grid operator MAVIR through its virtual power plant approach strengthens its market position, broadens its cash flow profile and supports overall profitability (credit-positive ESG factor).

Whilst Greenergy’s power generation and supply depend on steady gas flow and sufficient gas storage inventories in Hungary (more than 80% of Hungarian gas supplies come from Russia), Scope believes that Greenergy’s position would be partially protected should Russian gas flows come to a halt. These event risks do not determine Scope’s base case given the close ties between Hungary and Russia. Greenergy’s exposure to district heating (more than 60% of combined heat and power plants contracted for municipal district heating or providing energy to hospitals) and grid balancing would put them in a favourable position should gas flows be rationed.

Scope expects Greenergy’s liquidity to remain adequate over the next few years. Following the deconsolidation of its amortising shareholder loan from Paratus Energy Kft, scheduled debt repayments over the next few years are primarily related to bank loans of around HUF 500m-1bn per year. These volumes together with forecasted capex are expected to be solidly covered by available cash sources such as operating cash flow and a significant cash buffer (HUF 7.7bn at YE 2021). Despite its comparatively small size, Greenergy has sufficient and reliable access to external financing though established relationships with Hungarian banks such as MKB and CIB. Scope believes that an increased refinancing volume starting in 2026 – when bond amortisation of about HUF 580m will come on top of annual refinancing needs of bank loans – can be covered by Greenergy’s operating business. Greenergy will also likely develop fallback opportunities for refinancing with new debt issuances backed by its business model and a largely unencumbered asset base.

Greenergy remains rated on a standalone basis. While the company is owned by Hungarian construction company KÉSZ group (51%) and two of Greenergy's three managing directors (49%), Scope considers that the rated entity is mostly independent from its majority shareholder.

The rating continues to reflect a negative adjustment of one notch related to the company’s limited size and outreach compared to other entities in the BB rating category. While the company’s outreach has increased significantly, as displayed by a doubling of revenue and an increase of its EBITDA by 2.5x from 2020 to 2021, this has been largely due to external factors such as rising energy prices. Due to expected improvements in the financial risk profile, a BB category rating is now in reach if the company can achieve a recurring EBITDA of at least HUF 4.0bn

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that Greenergy’s leverage (SaD/Scope-adjusted EBITDA) can remain below 3.0x while interest coverage remains above 10x. The Outlook also incorporates a successful asset expansion within the growth areas of power generation and energy storage, which is consistently enhancing the company’s size and outreach.

A positive rating action may be conducted if the company’s leverage settled at below 3.0x for the next few years following the expected growth to a recurring EBITDA of over HUF 4.0bn. This can be the result of persistently high energy prices enabling the company to maintain the strong operating results of 2021 and expand the overall asset portfolio in power generation and storage.

A negative rating action such as a reversion of the Outlook to Stable could be required if Greenergy would not manage its growth trajectory on the EBITDA and Scope-adjusted leverage stayed above 3.0x. This could be the result of significantly lower earnings contributions from newly integrated power generation assets; a considerable deterioration of achievable energy prices for energy supply and balancing; or significant operational disruptions stemming from gas procurement issues. Given the material headroom of Greenergy’s expected credit metrics to a lower rating and a solid liquidity profile, a rating downgrade is deemed remote.

Long-term debt rating

Scope has affirmed the BB rating for senior unsecured debt issued by Greenergy. The two-notch rating uplift against the issuer rating reflects Scope’s expectations of a robustly superior recovery for senior unsecured debt, even after potential senior secured debt and payables have been fully covered by expected liquidation proceeds. Scope’s recovery expectations are based on a liquidation value in a hypothetical default scenario of around HUF 11.5bn after administrative claims. The recovery expectations incorporate sufficiently high discount rates on the book value of recoverable assets.

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, 6 July 2021; European Utilities Rating Methodology, 17 March 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies
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.
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, Managing 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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