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Rating action

Scope Ratings GmbH (Scope) has today assigned a B+/Stable issuer rating to Lithuanian investment company UAB Atsinaujinancios Energetikos Investicijos (AEI). Scope has assigned a BB- rating for senior unsecured debt.

Rating rationale

AEI’s issuer rating is solidly supported by the company’s business risk profile. While the capacity of operated power generation assets held by AEI’s portfolio companies currently is rather small (~65 MW) and not overly granular, the anticipated ramp-up of the aggregated portfolio will likely provide more diversified cash streams and reduce concentration risks amid a ramp-up to an expected total capacity of more than 300 MW. Nonetheless, the issuer rating remains largely constrained by the comparatively weak financial risk profile, which Scope assesses conservatively particularly in the beginning of the holding company’s investment ramp-up. This is strongly driven by Scope’s view that the company’s total cost coverage in the phase of the portfolio ramp-up, will remain at a level of between 0.5-0.8x, implying that recurring cash income such as interest and dividends from main investments (shareholder loans to portfolio companies) will not be sufficient to cover all cost at holding level. Hence, the company is expected to remain reliant on its cash buffer, external funding and potential asset sales over the next three years. While Scope does not see significant liquidity risks during that period, the agency points to the significant cliff risks regarding to the refinancing requirements towards the end of 2025 which requires the successful sale of portfolio ventures in order to cover all outstanding debt at holding level that is expected to be placed under the company’s green bond programme.

Scope expects AEI’s leverage – as measured by a loan-to-value – to increase significantly during the ramp-up phase of the holding’s investment portfolio, from low level of about 5% at YE 2021 to about 26% once the planned asset portfolio has been ramped-up. As the holding will use its cash proceeds from external funding such as capital market and equity funding to reinvest in shareholder loans to portfolio ventures, its total indebtedness – as signaled by a Scope-adjusted debt – is likely to increase from EUR 3.7m at YE 2021 to a peak at about EUR 35m expected at YE 2022 driven by constant payouts to portfolio ventures in the form of shareholder loans facilitating the construction works of new wind and solar assets at the level of portfolio ventures. Total indebtedness can only be scaled back through asset disposals at the level of the portfolio companies and a corresponding redemption of shareholder loans. LTV is expected to improve drastically towards the envisioned lifetime of the investment holding and the planned redemption of shareholder loans that follow the sale of portfolio companies.

Scope positively views the limitation on the holding’s leverage through the implementation of the following financial covenants as laid out in the “Unsecured Fixed Rate Note Programme” which aims at enabling the company to raise a maximum of EUR 100m through the placement of senior unsecured bonds: i) equity ratio at the holding level – measured as equity divided by total assets – should be kept at least 50% at all times, ii) the leverage ratio taking also into account the indebtedness of portfolio companies – measured as Consolidated External Financial Debt (capital market debt + bank loans at project level) divided by the sum of Equity and Consolidated External Financial Debt – shall not exceed 75%. Moreover, Scope points to the potential early redemption requirements for bonds (redemption of bonds including accrued interest) used at the holding level which could be triggered through the cross-default clause embedded in the document of the holding’s “Unsecured Fixed Rate Note Programme”.

While Scope sees limited refinancing risks over the next few years during the ramp-up phase of the fund, significant cliff risk (tail risk) regarding the financing of an assumed debt volume of about EUR 65m is apparent for 2025. Significant refinancing risks could arise if: i) portfolio ventures cannot be sold on a timely basis and shareholder loans cannot be redeemed in full as expected before the maturity dates of the debt financing instruments used at the holding level or ii) if sales prices for portfolio ventures and associated redemptions of shareholder loans cannot be achieved as expected.

Scope deems AEI’s liquidity as adequate. While no upcoming debt maturities over the short-term pop up, the heavily negative FOCF (as a result of the significant portfolio ramp-up) requires external funding that is planned to be covered by external debt and equity funding. 

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation about a significant ramp-up of the closed-end fund through the construction of renewable generation assets within its various portfolio companies in Poland and Lithuania which is backed by the provision for shareholder loans from the holding. This is accompanied through increase of the holding’s LTV up to 26%. During the investment period until 2024 the investment holding will not generate sufficiently recurring cash income from interest on shareholder loans and dividends that would sufficiently cover cost at the holding level.

A negative rating action would be considered if AEI’s total cost coverage remained at the lower end of the expected corridor of 0.5-0.8x. This could be the result of lower-than-expected cash-interest contributions from portfolio companies, triggered by material underperformances of power generating assets or material construction delays which endanger the timely payment of interest income to AEI. Moreover, a default of one of the portfolio companies could trigger a cross-default that could result in a significant deterioration of AEI’s liquidity profile.

A positive rating action could be considered if the holding’s total cost coverage was expected to improve significantly to a sustained level of above 0.8x bolstered by cash-interest payments related to provided shareholder loans or cash recognition of extra-ordinary dividend payments from its portfolio companies. 

Long-term debt rating

Senior unsecured debt has been assigned a BB- rating, one notch above of the issuer rating.

Scope expects an above-average recovery for senior unsecured debt issued by AEI (basically senior unsecured bonds issued under the Unsecured Fixed Rate Note Programme). Scope expects no debt to rank above unsecured debt at holding level. Scope's recovery assessment is based on liquidation value at a potential default, though the debt category rating reflects a conservative approach.

In a liquidation scenario, project debt (bank loans) to special-purpose vehicles owned by portfolio companies and to which AEI has provided shareholder loans will be recovered first. Remaining proceeds from the disposal of operational and unfinished renewable energy power plants could be used to redeem the shareholder loans, which would support the recovery of senior unsecured debt at holding level.

Scope's recovery analysis signals a robust, conservative advance rate for recoverable assets (e.g. 50% on expected property, plant and equipment), warranting a one-notch uplift for senior unsecured debt and leading to the BB- debt category rating.

Disclosure
Scope Ratings uses the following key credit metrics to gauge the financial risk profile of an investment holding company: total cost coverage; leverage (LTV); and liquidity. Scope Ratings uses total cost coverage as the key indicator. The rating agency defines the total cost coverage ratio as cash inflows versus non-discretionary cash outflows at the holding company level. The ratio signals the extent to which an investment holding company can cover all its discretionary payments. An investment holding company’s leverage – measured as the LTV ratio – only serves as a supplementary credit ratio, indicating its headroom for additional external funding, should this be required to cover upcoming debt maturities. However, as the LTV of an investment holding company tends to be volatile due to constant changes in the portfolio’s market value, Scope Ratings only focusses on this ratio in the event of major debt repayments over the foreseeable future. Scope Ratings assesses the liquidity of an investment holding company in a similar way to its assessment of liquidity for any other non-financial corporate.  

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

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021), is 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 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: Kamila Bernadeta Hoppe, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 20 June 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
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