The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the B/Stable rating on MET Hungary Solar Park Kft (MET HSP). Scope has also affirmed the B+ rating on senior unsecured debt.

Rating rationale

The rating remains strongly supported by the rated entity’s protected business model alongside the ramp-up of a power generation portfolio of 230 MW of photovoltaic plants in Hungary, bolstered by the prioritised feed-in of generated electricity at predictable prices for an extended period. However, MET HSP’s financial risk profile constrains the rating due to high leverage and modest debt protection (interest coverage), although it is expected to gradually improve following the ramp-up of the power generation portfolio. The issuer rating assessment also remains conservative due to the risk of adverse regulatory changes and the credit-negative governance and structure aspects.

Scope retains its BBB- assessment on MET HSP’s business risk profile. The assessment benefits the most from the exposure to fully regulated photovoltaic power plants in Hungary, with guaranteed take-off and inflation-adjusted remuneration of electricity generated under the country’s KÁT system. The expansion of power generation to about 230 MW across five locations in Hungary is expected to be finalised by YE 2022 and run broadly according to plan with limited cost overruns. The company’s business model is entirely focused on the provision of clean and renewable energy in Hungary, with expected annual generation of roughly 300 GWh and a load factor of around 15% (ESG factor: credit-positive environmental risk factor). Cash flow is largely predictable thanks to the regulated asset life of 20 to 25 years and the annual indexation of regulated tariffs to inflation. As such, the company is likely to keep EBITDA margins at around 80%, if not higher, as revenue growth is likely to outpace that of the already lean cost base.

Nonetheless, the provision of non-controllable electricity from photovoltaic power plants still poses some regulatory risk albeit Scope does not foresee regulatory changes to materialise in the short to medium term considering the current forward price curve on electricity wholesale prices in Hungary. This cautious view has become more pertinent given the current challenges in Hungary to keep electricity costs low for end-customers. Adverse regulatory changes could affect MET HSP’s power generation portfolio, with any impact exacerbated by the material concentration risk around the three biggest power plants, currently a credit-negative factor. The risk of adverse regulatory change has become more pronounced with the soaring energy prices and the accelerated country-wide ramp-up of solar power generation under the National Energy Strategy 2030, which makes the integration of new renewable energy capacities much more difficult. Adverse regulatory changes could include retroactive tariff cuts (similar to those in France, Romania, the Czech Republic or Spain) or a mechanism under which solar power plants operators have to cover more of the national grid operators’ costs for grid balancing related to the non-controllable feed-in of volatile energy from their power plants.

The rating remains strongly constrained by the financial risk profile (assessed at B). Credit metrics are heavily influenced by significant capex of around HUF 71bn in 2021 and 2022 (only slight cost overruns) related to the acquisition of project development rights and the execution of construction works, mainly financed by the HUF 65bn bond under the MNB scheme and a loan from the shareholder. Gearing will likely remain substantial over the next few years as investments are fully funded by interest-bearing debt at the level of the rated entity (i.e. no non-recourse project debt). After this, free operating cash flow is expected to become positive and help with deleveraging. The leverage metrics of Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt are expected to remain weak, at around 8-9x and 5-8% respectively. This incorporates the interest-bearing shareholder loan treated by Scope as debt with no equity (while the loan’s interest can be deferred and compounded, other features under Scope’s rating framework that would allow partial equity treatment are lacking). In the medium term, a scaling-back of debt would make deleveraging possible, backed by solid free operating cash flow sustained at above HUF 4bn over the next few years. Deleveraging over the medium term also assumes no material shareholder distributions in cash, e.g. through dividend payouts.

Debt protection, as measured by Scope-adjusted EBITDA interest coverage, is expected to remain weak until YE 2022, when the newly commenced power plants begin to contribute earnings and eventually push up interest coverage to a modest range of 2.0x to 3.0x. This assumes that interest on shareholder loans is not deferred and compounded at the discretion of the rated entity. Scope also flags that significant adverse regulatory changes related to feed-in tariffs or significant costs related to balancing could still negatively affect operating cash flow and hence interest coverage.

The establishment of a debt service coverage ratio covenant of slightly more than 1x for external debt, applicable until the HUF 65bn bond matures, provides some creditor protection. Scope’s rating case forecasts comfortable headroom before the threshold can be breached. However, a breach could still occur in the event of a material underperformance of the future asset portfolio, adverse regulatory changes relating to eligible feed-in tariffs or material costs arising from the balancing for solar power plant operators in Hungary.

MET HSP’s liquidity position is deemed to remain adequate over the next few years. Expected debt repayments from the amortisation of the MNB bond and the envisioned reduction of the shareholder loan exposure, both starting in 2023, are likely to be fully covered by available cash after scheduled maintenance capex. This is backed by expected free operating cash flow of more than HUF 4.0bn annually and a cash buffer of about HUF 1.0bn expected at YE 2022. We expect that the company’s available cash sources will remain fully sufficient to cover non-discretionary debt repayments that refer to the amortisation payments for the MNB bond. As MET HSP has discretion about the repayment of its shareholder loan exposure (no fixed repayment schedule), we deem it likely that the rated entity will not require any external refinancing over the next few years until the final redemption of the MNB bond in 2031 (HUF 32.5bn).

Scope considers MET HSP’s ultimate 100% shareholder, Swiss energy trading company MET Holding AG, to have a higher credit quality than MET HSP. However, Scope assesses parent support as credit-neutral.

Scope retains the negative one-notch adjustment on the issuer rating, reflecting the company-inherent weaknesses on governance and structure related to the interaction within the MET Holding AG group (negative ESG factor). While MET HSP’s management determines strategy, finances (budget) and operations, credit risk remains in the following area: The rated entity’s management also holds functions within MET Holding AG, meaning they hold management positions at sister companies or the parent company. This raises concerns over the alignment of management’s interests with those of stakeholders, which include creditors of the rated entity and the management of group companies. This could materialise in the form of services not being billed in line with the lean management of the rated entity or profit being distributed at the detriment of creditor interests.

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

Outlook and rating-change drivers

The Outlook remains Stable and reflects Scope’s expectation that MET HSP will finalise the ramp-up of its power plant portfolio to about 230 MW by YE 2022, mostly financed by the HUF 65bn bond issue and shareholder funds. This rating case assumes medium-term leverage of around 9x and EBITDA interest coverage sustained at more than 2x.

The rating case and Outlook assume no capacity additions until 2031, beyond what is currently under development. Scope also deems ratings upside related to the removal of the ‘malus’ for governance and structure as remote in the short term.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA improved to below 9x and EBITDA interest coverage moved closer to 3x. This could result from either stronger-than-expected cash inflow from power generation bolstered by significantly higher generation volumes or a significant reduction in interest-bearing shareholder loan.

The rating could come under pressure if Scope-adjusted debt/EBITDA remained well above 9x and EBITDA interest coverage stayed below 2x. This could result from lower-than-expected operating cash flows due to an underperformance of solar power plants or amended feed-in tariffs. The company’s financial setup could also be challenged if shareholder distributions went beyond the interest on shareholder loans.

Any additional operations undertaken apart from the expected capacity ramp-up could affect the rating positively or negatively depending on how they are financed.

Long-term debt rating

The rating on senior unsecured debt has been affirmed at B+, one notch higher than the issuer rating.

Following the recapitalisation in 2021 through the issuance of the HUF 65bn bond, no debt ranks above senior unsecured debt. This is likely to remain until the bond matures in 2031 given the negative pledge.

Recovery expectations are based on a liquidation value that reflects the good recoverability of major unencumbered assets. Although a bailout by the ultimate parent in a hypothetical insolvency of the rated entity cannot be ruled out, Scope expects the company would be liquidated upon insolvency, primarily through the sale of power plants. Scope expects a ‘superior’ recovery for senior unsecured debt (largely the HUF 65bn corporate bond), which reflects a sufficiently high advance rate for property, plant and equipment. However, Scope has for now refrained from granting a two-notch uplift for such recovery expectations given the execution risks on the ramp-up of the solar power plant portfolio and realised performance data as well as the aforementioned regulatory risks.

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), 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 and Scope Ratings' internal sources. Historical data used for these Credit Ratings is limited.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. Scope Ratings notes that the Credit Ratings are based on limited historical data.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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 November 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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

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.