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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating on UAB Atsinaujinancios Energetikos Investicijos (AEI) and revised the Outlook to Negative from Stable. Scope has also affirmed the BB- rating for senior unsecured debt.

Rating rationale

The Outlook change to Negative is driven by the delay of up to one year in the timely execution of several projects in the portfolio pipeline, especially in regard to wind assets in Lithuania. Consequently, the Negative Outlook signals increased concentration risks in terms of gross asset value and recurring income, as well as execution risks in the light of AEI’s limited lifetime. These factors have more than offset the positive impact from reliable, operating assets in Poland and Lithuania that provide recurring income to the holding company.

AEI’s business risk profile, assessed at B+, is supported by two well-established portfolio companies that operate renewable energy capacities located in northern and eastern Europe, markets with a significant electricity generation deficit (ESG positive factor). Energy Solar Projekty in Poland and Saulės energijos projektai in Lithuania, both solar assets with total installed capacity of 67 MW, operate under regulated frameworks (Contract for Difference & Feed in Tariffs) and provide recurring income to the holding company. On the other hand, the remaining five portfolio companies, spanning wind and solar assets with an expected addition of 450 MW, are in different development stages and will operate mainly under unregulated frameworks such as power purchase agreements or market price. The business risk profile is also supported by the geographically diversified assets in Poland, which helps to mitigate the negative effect from weather changes on generation volumes. Moreover, the supportive regulatory solutions in both countries, developed to accelerate the energy transition and reduce dependency on energy imports, are credit-positive.

Nonetheless, the business risk profile is constrained by the delay in investment ramp-up within four portfolio companies. This has led to higher income concentration as projects only stream income to the holding company when they are finished as well as no increase since last year in the number of recurring income-generating assets. Postponements of the commercial operation date also negatively impact total amount of cash interest flowing from portfolio companies to the holding company. Another downside is the investment holding’s limited track record, that is evidenced by the delays in the portfolio ramp-up.

The financial risk profile (assessed at B+) constrains the rating, mainly driven by Scope’s view that total cost coverage will remain at 0.5x-0.8x throughout the portfolio ramp-up. This level implies that recurring cash income will be insufficient to cover all costs at holding level. Recurring cash income includes interest and dividends from main investments streamed to portfolio companies in the form of shareholder loans or acquired bonds. Hence, the company is expected to remain reliant on its cash buffer, external funding and potential asset sales until 2025. While Scope does not see significant liquidity risks until 2025, execution risks have increased due to the delayed portfolio ramp-up followed by significant cliff risk regarding refinancing requirements towards the end of 2025 that will require the sale of portfolio ventures to cover all outstanding debt under the green bond programme.

The company’s leverage – as measured by the loan/value ratio – increased significantly as expected from a low 5% at YE 2021 to 28% at YE 2022, in line with the development of the portfolio. The holding company is reinvesting in portfolio ventures using cash proceeds from capital markets and equity funding. As a result, its total indebtedness – as signalled by Scope-adjusted debt – increased from EUR 3.7m at YE 2021 to EUR 40.1m, driven by payouts to portfolio companies to facilitate the construction of solar and wind assets. Scope expects leverage to decrease to about 17% in 2024 following asset disposals and subsequent shareholder loan redemption by portfolio companies. Scope expects total indebtedness to scale back to EUR 22.3m in 2024 following the planned asset disposal, but also through the expected replacement of the shareholder financing with bank debt within two Polish portfolio companies. On the other hand, Scope points out that the total debt exposure will also depend on the final sale price of some portfolio ventures in 2024 as well as on the amount of the future bond placement. Under the existing framework, AEI plans to issue EUR 14.3m in 2023 and EUR 15.7m in 2024.

Scope positively views the limit on the holding company’s leverage through covenants under its unsecured fixed-rate note programme, which enables the company to raise up to EUR 100m through the placement of senior unsecured bonds. These covenants are i) an equity ratio at the holding level – measured as equity divided by total assets – of at least 50% at all times; ii) a cap on leverage at 75%, which includes portfolio company debt and is measured as consolidated external financial debt (capital market debt plus debt at project level) divided by the sum of equity and consolidated external financial debt. No financial covenants have been breached as of 31 December 2022, according to the latest available compliance certificate. The equity ratio was 66%, and the leverage ratio stood at 53%. 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 under the unsecured fixed-rate note programme.

While Scope sees limited refinancing risks during the ramp-up phase, significant cliff risk (tail risk) regarding the refinancing of an assumed debt volume of about EUR 55m is apparent for 2025. Significant refinancing risks could arise if: i) portfolio ventures cannot be sold on a timely basis and shareholder loans and acquired bonds 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 there are no upcoming debt maturities over the short term, the heavily negative free operating cash flow resulting from the portfolio ramp-up requires debt and equity funding but can also be covered by interim asset sales.

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

Outlook and rating-change drivers

The Negative Outlook reflects continuously high concentration risks as a result of the construction delays. This is displayed by Scope’s unchanged view on AEI’s portfolio sustainability, measured as the number of recurring income-generating portfolio companies, which has not improved since last year and remains at 2. As a result, Scope also points out the increased concentration risks, especially in the context of AEI’s limited lifecycle.

A rating downgrade could result from i) a weaker total cost coverage ratio to below 0.5x between 2023 and 2025; ii) further delays in the portfolio ramp-up that keep the number of recurring income-generating portfolio companies below 3; or iii) the default of any portfolio company that triggers refinancing needs at the holding level and liquidity constraints.

A positive rating action, such as reversion of the rating Outlook to Stable, could result from i) a total cost coverage ratio of above 0.5x between 2023 and 2025; or ii) progress in the portfolio ramp-up that leads to in an improved portfolio sustainability, measured as the number of recurring income-generating holdings of 3 or more holdings.

Long-term debt rating

The senior unsecured debt rating has been affirmed at BB-, 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). The recovery assessment is based on a 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.

The 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.

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 Outlook, (General Corporate Rating Methodology, 15 July 2022; Investment Holding Companies Rating Methodology, 19 May 2023), 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.
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 Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Kamila Bernadeta Hoppe, Senior Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, 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/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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