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Rating action

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

Rating rationale

The rating affirmation is supported by ALTEO’s solid position as a multi-utility with a moderately diversified asset base along the utility value chain ranging from power generation to energy trading, supply and services (business risk profile assessed at BB+) paired with good credit metrics expected for the next few years (financial risk profile assessed at BBB-).

Scope expects the company’s competitive position to be further enhanced along the investment phase over the next few years. The focus of the investment is a ramp-up in renewables capacity and investment in conventional generation capacity to address the current concentration of assets within the power generation portfolio (~150MWel and ~200MWth). Further widening of the company’s generation portfolio ranging from solar and wind farms to gas-fired combined heat and power plants (CHP), that can be combined in a virtual power plant and steered via the company’s Control Centre to provide balancing energy services to the grid operator at very favourable pricing, is steadily enhancing the company’s value proposition. This promises solid cash flow upside because balancing is in increasing demand in Hungary with the country’s ramp-up of more volatile renewable energy capacity, primarily photovoltaic generation assets (ESG factor: credit-positive environmental factor).

Nonetheless, ALTEO remains dependent on external non-controllable parameters such as weather developments, fluctuating energy prices and gas procurement. While the company has performed very well amid the persistent energy crisis in Europe in benefiting from elevated power prices, particularly in its energy trading and supply division and the provision of balancing power, it is not immune to deteriorating macroeconomic conditions and potentially stricter regulation of Hungary’s energy market or the increased risk of receivables write-offs over the next few years. However, Scope believes that ALTEO can largely cope with such potential adverse factors considering its solid finances and the important earnings contribution from regulated and unregulated electricity and heat generation, providing more than 80% of recurring EBITDA.

ALTEO announced on 14 September plans to place multiple bonds over the next few months under a newly launched HUF 20bn bond scheme¹. The company wants to use the bond proceeds for working capital management including covering the increased short-term funding requirements for margining deposits at ALTEO’s energy trading unit and for the company’s ambitious growth plans over the next few years predominantly related to smaller bolt-on acquisitions with a focus on single-project companies in renewables, cogeneration capacities or waste management facilities.

The company’s credit metrics are likely to deteriorate due to a doubling of ALTEO’s gross debt exposure over the next few years to more than HUF 50bn by 2025 from HUF 21.4bn as of June 2022. The increase is associated with the execution of its investment plan which coincides with increased shareholder remuneration and interest payments as well as the likely return of energy prices to normalised levels in the medium term. Leverage as measured by a Scope-adjusted debt (SaD)/Scope-adjusted EBITDA is expected to be volatile reflecting the pricing environment and its impact on the results at ALTEO’s unregulated power generation business. The company’s leverage over the next two years is likely to be supported by a strong expected operating performance due to tailwinds from elevated energy and balancing prices. However, a reversion of energy prices to more normal levels in the medium term is likely to lead to higher leverage metrics compared with current low levels: e.g. SaD/Scope-adjusted EBITDA standing around 1.5x in 2021 and 2022E. Scope expects ALTEO’s leverage to settle at the lower end of the leverage range of 3.5-4.5x that defines the rating case in the medium term, based on a sustained yearly EBITDA of about HUF 15-20bn at the end of the investment phase.

Debt protection – as measured by Scope-adjusted EBITDA interest coverage – will be squeezed by a sharp increase in ALTEO’s average interest rate, set to rise to more than 8% over the next few years from 3-4% over the past few years after the likely placement of new bonds in the context of Hungary’s rising interest rates. While Scope expects that EBITDA interest coverage will remain rock-solid over the next two years at a level of more than 5x, the company’s interest coverage is at risk of deteriorating, assuming earnings from the unregulated power generation and supply business shrink amid ‘normalising’ price levels, and if the EBITDA contributions from newly developed/acquired business activities turn out to be lower than expected.

Scope regards ALTEO’s liquidity as ample. Upcoming debt maturities between 2022-2024 totalling HUF 3.9bn – of which HUF 2.3bn related to two bonds have already been redeemed from ALTEO’s cash buffer in January and June 2022 – should be covered comfortably by a cash buffer of HUF 7.9bn at end-June 2022, strongly positive FOCF and overdraft facilities of more than HUF 2.5bn as of July 2022. From today’s perspective, Scope has no significant concern for the group’s liquidity in terms of the refinancing of the newly issued medium-term debt positions of an estimated HUF 15bn in 2025, likely covered by available liquidity (without refinancing).

Moreover, ALTEO maintains a prudent financial policy. The company’s investment programme is heavy over the next few years and will increase overall indebtedness, but the company has good organic and dynamic growth opportunities if they are seized in the same diligent fashion as in the past. Smaller bolt-on acquisitions of ready-to-build projects or smaller operating ventures, likely to contribute to operating results shortly after integration, would provide extra impetus to earnings growth. Scope expects shareholder remuneration to remain aligned with ALTEO’s operating performance and is unlikely to compromise credit quality. Shareholder remuneration would likely be adjusted if required to preserve the company’s credit profile, which seems a clear focus of management, as happened in 2020 during the Covid-19 crisis.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that ALTEO’s financial position will remain solid amid its largely debt-funded growth strategy as displayed by a Scope-adjusted leverage (SaD/Scope-adjusted EBITDA) remaining at the lower end of the range for the rating (3.5x-4.5x) and an EBITDA interest coverage staying above 5x. However, the headroom to such expectations is gradually shrinking in the context of rising interest rates in Hungary, increasing pressure on ALTEO’s EBITDA interest coverage over the next few years.

Despite the company’s very solid credit metrics, a positive rating action signalling the company entering investment-grade quality is remote. This is due to the company’s still limited overall size and outreach and the accompanying potential cash flow volatility. Nonetheless, Scope could consider a positive rating action if SaD/Scope-adjusted EBITDA were kept solidly below 3.5x and EBITDA interest coverage improved to over 7x for a prolonged period alongside a significant business expansion.

A negative rating action could be considered if growth did not materialise as expected: e.g. through significantly lower earnings contributions from the new power generation capacities or the prospect of further debt-financed M&A projects pushing up leverage, resulting in SaD/Scope-adjusted EBITDA rising above 4.5x and EBITDA interest coverage falling below 5x on a sustained basis.

Long-term and short-term debt ratings

Scope has affirmed the BBB- rating for senior unsecured debt issued by ALTEO. While Scope’s recovery expectations for senior unsecured debt, such as ALTEO’s current and future corporate bonds, remain ‘above-average’, after senior secured debt (primarily non-recourse project finance debt and finance leases) has been fully covered, recovery expectations have slightly worsened to below 100% in a hypothetical default scenario. This is due to the expected significant ramp-up of gross financial debt over the next few years, comprising both senior secured and unsecured debt, and the growing uncertainty about the recoverable value of future assets along the company’s ambitious investment path. Moreover, the recovery expectations are somewhat burdened should ALTEO issue a large share of new debt denominated in euros. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario of around HUF 53bn after administrative claims.

ALTEO’s 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 solid access to external funding (i.e. banks and capital markets).

Rating driver references
1. 14 Sep 2022 ALTEO press release about new debt issuance programme

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, (General Corporate Rating Methodology, 15 July 2022; European Utilities: Renewable Energy Rating Methodology, 17 January 2022; 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the 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 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: 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 7 August 2019. The Credit Ratings/Outlook were last updated on 30 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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