Rating action

Scope Ratings GmbH (Scope) has completed a monitoring review of the senior unsecured notes issued by PolSolar Kft:

Senior unsecured bonds: HUF 70.7bn current balance: upgraded to BB from B+

The upgrade to BB from B+ is driven by the mechanical completion of five photovoltaic plants in April 2023 under budget and ahead of schedule. Commercial operations are scheduled to start in late May or early June 2023.

Scope’s monitoring review was based on project reporting information as of April 2023.

Transaction overview

The bonds were issued to fund the construction of five operational photovoltaic power plants with a total capacity of 233.5 MW_AC located in Mezöcsát, in the north-east of Hungary. Each plant has a capacity of 46.7 MW_AC.

The issuer and holdco, PolSolar Kft, has lent the bond proceeds to the five individual opcos, which respectively own the five solar plants. The issuer’s obligations are guaranteed by the five opcos. Each opco has the right to sell the electricity produced to the Hungarian transmission service operator, MAVIR Zrt, under a feed-in tariff (the KÁT tariff) according to the generation permits provided by the Hungarian Energy and Public Utility Regulatory Authority (“HEPURA”).

The sponsors of the project, Voyager Private Equity Fund and Central European Opportunity Private Equity Fund, are both midsized Hungarian equity funds, focusing on the Central and Eastern European market. The sponsors have limited experience in renewable energy projects. Sponsors’ economic incentives in the project are high because of their substantial equity contribution of total investment costs.

Rating rationale

The BB rating reflects the total expected loss (EL) of 7.28% over the loan’s life until maturity (equivalent to a 9.27-year constant-exposure expected risk horizon).

The project is characterised by very low residual construction risk, average operational risk, stable and predictable cashflows, high refinancing risk and a very weak financing and legal framework. The bonds are unsecured, and the covenant package and terms of the financing documents are not in line with our expectations for a typical project finance transaction. The HUF 70.7bn rated bonds were fully subscribed by the Hungarian National Bank and commercial investors in April 2022.

• Construction risks account for 12.5% of total EL. Mechanical completion was achieved in April 2023. The start of commercial operation is scheduled by early June 2023.
   
• Operational risks account for 8.9% of total EL. Operational complexity is average and the technology used is suitable. The project benefits from a 25-year, full-service O&M contract with a midsized Hungarian construction company.
   
• Revenue risks account for 9.2% of total EL. The project benefits from a fixed feed-in tariff under the KÁT regulatory regime that is subject to inflation-linked indexation, and mandatory offtake by the transmission system operator (MAVIR Zrt) for 24 years. Completion delays would reduce the support period, which has a fixed end date. We assess solar resource risk as low.
   
• Financial strength accounts for 12.8% of total EL. The rated bonds are partially amortising until maturity, with 50% of the original debt amount to be refinanced in 2037, representing a significant balloon repayment of c. HUF 35bn. We note that the notional refinancing debt will fully amortise before the end of the regulatory period in our rating case.

Project structure and other account for 56.5% of total EL. The project's financing and legal framework does not meet the standards of a typical project finance transaction. The contractual structure lacks standard protections to investors usually available in similar project finance transactions and presents substantial legal risks in relation to the issuer’s bankruptcy-remoteness. The bonds are unsecured. The covenant package is light in comparison with similar transactions.

Key rating drivers

Stable and predictable cashflows (positive). The project benefits from fixed feed-in tariffs set out by the KÁT regulatory regime in Hungary (rated BBB/stable by Scope) and a good-quality solar resource, underpinning cashflow stability for a 24-year period, well beyond the rated bonds tenor of 15 years.

Lack of construction risk (positive). Mechanical completion was achieved in April 2023. The project is scheduled to start commercial operations in early June 2023.

Average operational risk (positive). The technology used is proven and manufacturers of key equipment are reputable companies. Technical failure risks are somewhat diversified across the five PV parks. Limited operational complexity and a 25-year full-service O&M contract pose low operational risks.

Limited equity sponsors experience and disclosure (negative). The sponsors have limited experience in developing a solar project of such scale. There is limited information available about sponsors’ financial standing and, as a result, about the likelihood of equity support in the event of difficulties. These uncertainties are reflected in our assumption of moderate to weak credit quality of the sponsors.

High refinancing risk (negative). The balloon repayment at maturity represents around 50% of the bonds initial size. The strong dependence on market conditions prevailing around the bond’s maturity date exposes the issuer to significant refinancing risk.

Weak legal and financing framework (negative). The legal and financial framework is not in line with our expectations for a project finance transaction of this kind. The covenant package is light compared with similar project finance transactions. The financing structure, combined with the unsecured nature of the bonds, limits lenders’ ability to take over and restructure the transaction in the event of difficulties and substantially increases legal risks in an enforcement scenario.

Rating-change drivers

Positive rating-change drivers:

• An improvement of Hungary’s sovereign rating

Negative rating-change drivers:

• Lower than expected revenues and cashflows
   
• A deterioration of Hungary’s sovereign rating
   
• Worsening conditions of the financial markets leading to high risks of refinancing the Bonds

Quantitative analysis and assumptions

The total EL on the rated instrument is commensurate with a BB rating. We calculated an EL of 7.28% over the lifetime of the instrument (equivalent to a constant exposure expected risk horizon of 9.27 years) under our rating case scenario (Scope’s rating case), which is similar to the sponsor’s base case scenario. The rating case assumes P90 energy yield, 2.0% p.a. module degradation the first two years, 23.9 years of KAT off-take period, 0.7% afterwards, a 396 HUF/EUR exchange rate, an inflation of 14.5% in 2022; 16.8% in 2023; 5.78% in 2024; 3.7% in 2025; 3.55% in 2026 and 3.0% each year from 2027 onward.

We calculated an expected impairment likelihood of 18.27% 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 60.11% 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 Counterparty issues; ii) Refinancing issues; and iii) Legal or compliance issues. These three credit impairment events together contribute 73.2% of the EL for investors.

Sensitivity analysis

Scope tested the resilience of the rating against deviations of the main input parameters: risk factor scores and expected recovery rates. This analysis has the sole purpose of illustrating the sensitivity of the quantitative outcome to input assumptions and is not indicative of expected or likely scenarios.

• Sensitivity of reducing all 23 risk factors by one level: b-
   
• Sensitivity of reducing the most relevant risk factor score by two levels: b+
   
• Sensitivity of reducing the expected recovery rate by 25%: bb-

ESG risks

The rated bond is a green bond that meets the criteria defined by the Green Bond Principles 2021 and the Green Loan Principles 2021, certified by Sustainalytics on 29 March 2022.

The project contributes to Hungary's goal of increasing the share of renewable energy in its generation mix, as the project is the largest solar park in the country to date.

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 counterparty issues events cover two key revenue drivers: regulated price and production volumes. 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 prepared by the issuer and originally reviewed by EQUILOR Befektetési Zrt 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’ 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 these Credit Ratings, (General Project Finance Rating Methodology; 16 November 2022; Counterparty Risk Methodology, 14 July 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Project Finance Expected Loss Model version1.2), available in Scope Ratings’ list of models, published under 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.

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, 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 these 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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Michel Graire, Senior Analyst
Person responsible for approval of the Credit Ratings: Aaron Konrad, Executive Director
The Credit Ratings were first released by Scope Ratings on 14 April 2022. The Credit Ratings were last updated on 25 May 2022.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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