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Rating action

Scope Ratings GmbH (Scope) has today upgraded ALTEO Energiaszolgáltató Nyrt’s (hereafter ‘ALTEO’) issuer rating to BBB-/Stable from BB+ and consequently resolved the under-review for a possible upgrade status. Scope has affirmed the BBB- long-term debt rating for senior unsecured debt and upgraded the short-term debt rating to S-2 from S-3.

Rating rationale

The upgrade is supported by Scope’s view about ALTEO’s improved financial risk profile that is bolstered by a sustainably strengthened leverage and interest coverage over the medium term. Moreover, the backing from the new shareholder consortium that holds 73.8% of the utility provides good comfort about a reduced probability of default over the next few years. This view primarily pertains to the backing from Hungarian oil and gas incumbent MOL via its subsidiary MOL RES Investments Zrt.

The rating continues to incorporate a BB+ business risk profile assessment. While the assessment remains constrained by ALTEO’s limited geographical outreach and still comparatively small scale, Scope expects the company’s competitive position to be further enhanced during its investment phase over the next few years. The investment focus is to ramp up renewables capacity and to diversify the conventional generation capacity, thereby reducing the concentration risks pertaining to single assets within the current power generation portfolio (150MWel and 200MWth). The recent acquisition of a ready-to-build 20 MW solar power plant project (Edelyn Solar Kft) will materially boost the company’s renewables generation portfolio to more than 90 MW. As such, the company’s consistently growing exposure to renewable energy generation capacities, combined with its capacity to providing grid balancing, ensures a solid market position and reduces transition risks (ESG factor: credit-positive environmental factor). Moreover, the company could achieve further growth through a widening of its business outreach pertaining to energy services and waste management, which would diversify ALTEO’s cash flow streams and make it less dependent on external non-controllable parameters such as weather developments, fluctuating energy prices and gas procurement or government interventions.

While the company has performed very well amid the persistent energy crisis in Europe as it benefits from increased 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/higher taxation of Hungary’s energy market or to the increased risk of receivables write-offs over the next few years. However, Scope believes that ALTEO can cope with such potential adverse factors considering its solid finances and the important earnings contribution from regulated and unregulated electricity and heat generation, providing 80-90% of recurring EBITDA. This is also displayed by a solid group EBITDA margin which Scope regards to be sustained within a range of 15-20% as well as a strong Scope-adjusted return on capital employed of 10-15%.

ALTEO’s improved financial risk profile assessment (raised to BBB+ from BBB-) supports the rating upgrade. While the very strong financials reported in 2021/2022 and those expected for 2023/2024 are not deemed representative of the company’s medium-to-long-term financial setup, Scope expects sustainably improved credit metrics over the medium term. Scope highlights the company’s ambitious capex plan that primarily relates to organic and dynamic growth capex, which overall could exceed HUF 65bn between 2023 and 2025. Whilst Scope expects this heavy investment programme to be funded substantially by ongoing operating cash flow and the large cash buffer of more than HUF 20bn as of today, a large portion of capex will likely be funded by newly raised debt (under the company’s HUF 20bn bond programme launched in Sep 2022). Consequently, the agency assumes the company’s gross debt exposure to increase materially to about HUF 54bn by YE 2025 from HUF 29bn at YE 2022. However, this debt increase can be digested comfortably by the expected operating performance of the company as displayed by a sustained EBITDA of around HUF 20bn over the medium term. As such, Scope projects leverage – as measured by Scope-adjusted debt/Scope-adjusted EBITDA – settling at 2.5-3.0x over the medium term, up from 0.6x in 2022.

Scope believes that ALTEO will continue to have sufficient internal funding capacity to fully fund maintenance and organic growth capex, thereby maintaining free operating cash flow in the positive territory. However, discretionary capex spending for dynamic growth is likely to require new external funding.

Medium-term debt protection – as measured by Scope-adjusted EBITDA interest coverage – is expected to settle at around 7x. While debt protection in the short-term is largely supported by the company’s low indebtedness and substantially positive interest income earned on the cash buffer, ALTEO’s interest coverage is expected to be affected by the growing debt exposure and overall increasing average interest rates on outstanding debt positions. ALTEO’s net interest burden is likely to increase from an insignificant amount of less than HUF 400m in 2022 and 2023 to about HUF 2.7bn in 2025, which still should result in a solid interest coverage.

ALTEO’s liquidity remains ample, limiting concerns about sufficient capex and debt maturity coverage over the next few years. Upcoming debt maturities in 2023-2025 amount to HUF 1.9bn, after the HUF 6.0bn short-term shareholder loan from ALTEO’s previous majority shareholder Wallis Asset Management has already been redeemed in full during H1 2023 from cash sources. Remaining upcoming debt maturities are expected to be comfortably covered by positive annual free operating cash flow, the remaining cash buffer of HUF 26.2bn as of March 2023 and freely available credit facilities of about HUF 3.0bn. Larger debt refinancing will arise in 2029 when the bullet payment of the first MNB bond (HUF 8.6bn) is due. From today’s perspective, Scope is confident about a successful refinancing of this maturity, particularly after the change in the company’s shareholder structure.

Moreover, ALTEO maintains a prudent financial policy that Scope does not expect to change with the new shareholder structure. While the company envisions the aforementioned heavy capex programme over the next few years, which includes dynamic growth opportunities, M&A activities will likely relate to smaller bolt-on acquisitions, e.g. ready-to-build projects or smaller operating ventures in the utility’s core segments, generation or services. Scope does not see major integration risks or larger delays on earnings accretion; hence acquired businesses will likely provide extra impetus to earnings growth. Scope expects shareholder remuneration to remain aligned with ALTEO’s operating performance and unlikely to compromise credit quality. Shareholder remuneration would likely be adjusted if required to preserve the company’s credit profile, which is deemed to be a clear focus for management, as happened in 2020 during the Covid-19 crisis. Ultimately, Scope highlights the newly implemented long-term incentives that have been set for ALTEO’s board of directors. Such incentives pertain to i) financial KPIs and ii) sustainability targets. As such, Scope has become more confident that ALTEO’s operations will be steered in a prudent and conservative fashion in the interest of creditors.

The utility’s shareholder structure is reflected as credit-neutral in the rating, not providing any rating adjustments to its standalone credit assessment. Since the execution of the tender offer from the new shareholder consortium that has been led by MOL RES Investments Zrt, there is no factual majority shareholder that obtained control over ALTEO (each of the three shareholders including Főnix Private Equity Fund and Riverland Private Equity Fund hold 24.6%). Nonetheless, Scope considers Hungary’s oil and gas incumbent MOL (the ultimate parent of MOL RES Investments Zrt) the leader among the new shareholders. Scope assumes MOL to have a long-term investment horizon for ALTEO and to regard the utility as an associated subsidiary that could strengthen MOL’s ambitions to diversify outside of its core business. The agency regards MOL’s creditworthiness to be slightly better than ALTEO’s standalone credit profile, with much stronger financial power in the context of size and funding channels. This implies that MOL would likely be able to provide funding support to ALTEO, if needed, on either the execution of capex or refinancing needs. While overall, the shareholder structure does not result in any rating adjustments, it justifies ALTEO’s investment-grade rating.

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 expansion strategy as displayed by medium-term leverage (Scope-adjusted debt/Scope-adjusted EBITDA) settling at below 3.0x and an EBITDA interest coverage staying around 7x. Moreover, the Stable Outlook incorporates a broadly unchanged shareholder structure.

A positive rating action is deemed remote in the foreseeable future, due to the company’s limited scale and outreach.

Scope emphasises that following the strong improvement of the utility’s financial risk profile and the new shareholder structure the headroom to a negative rating action is substantial. A negative rating action could be warranted if the execution of the company’s growth strategy or its operating performance resulted in a deteriorating financial risk profile as displayed by a Scope-adjusted leverage of close to 4.0x or an EBITDA interest coverage that dropped to close to 4.0x on a sustained basis.

Long-term and short-term debt ratings

Following the upgrade of the issuer rating to BBB-, Scope has affirmed the BBB- rating for senior unsecured debt issued by ALTEO. This is aligned with Scope’s general rating approach for senior unsecured debt of investment-grade rated issuers.

ALTEO’s short-term debt rating has been upgraded to S-2 from S-3 based on the upgrade of the underlying BBB-/Stable issuer rating and the company’s solid liquidity profile, characterised by consistently strong liquidity and an adequate access to external funding channels.

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; European Utilities Rating Methodology, 17 March 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 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 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: 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 7 August 2019. The Credit Ratings/Outlook were last updated on 20 December 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 Rating.

Conditions of use/exclusion of liability
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