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Rating action

Scope Ratings GmbH (Scope) has today confirmed the issuer rating for Hungarian independent power producer MET Hungary Solar Park Kft (MET HSP) at B and assigned a Positive Outlook. At the same time, Scope has confirmed the rating on senior unsecured debt at B+. Consequently, the under-review status for a possible upgrade was resolved.

Rating rationale

The rating action is driven by Scope’s view about an improved credit profile of the rated entity reflecting: i) the more favourable assessment under Scope’s updated European Utilities Rating Methodology; ii) the diminished execution risks on ramp-up of the power plant portfolio following full completion of all three new solar power plants; and iii) solid operational performance of the expanded power generation capacities in 2023. A rating upgrade reflecting these improvements is being held back due to new concerns about bondholders’ consent on covenant compliance in 2023 (see detailed elaborations). The shift of expansion capex from 2022 to 2023 could result in technical non-compliance with the debt service coverage ratio (DSCR) covenants that is defined to take into account capex in general. While Scope strongly believes that creditors would understand that unforeseen inter-year capex shifts should not be regarded in the computation of the DSCR as they do not point to an operational weakness of the company to cover debt service on third-party debt (interest and amortisation), a rating upgrade is delayed. Nonetheless, in Scope’s view this warrants a Positive Outlook which could be followed by a rating upgrade, once more clarity on the bondholders’ view is achieved.

The rating remains supported by Scope’s view on the rated entity’s protected business model after the accomplished ramp-up of the power generation portfolio to 230 MW of photovoltaic plants in Hungary, which benefits from the prioritised feed-in of generated electricity at predictable prices for an extended period under the KÁT regime. Following the application of Scope’s updated European Utilities Rating Methodology, Scope raised the assessment of the company’s business risk profile to BBB from BBB-, reflecting: i) reduced execution risks on the company’s expansion phase and fully operational status of all solar power plants; ii) reduced concerns for the short term about adverse regulatory changes; and iii) new rating elements for market positioning and operating profitability which affect MET HSP’s business risk profile positively.

With a recurring annual power generation of roughly 300 GWh (load factor of around 15%) the company’s business model is entirely focused on the provision of clean and renewable energy in Hungary, benefiting from a very low carbon footprint on power generation (ESG factor: credit positive environmental risk factor). MET HSP is likely to enjoy widely predictable cash flow as regulated tariffs are also indexed with annual inflation. As such, the company has good chances to retain a Scope-adjusted EBITDA margin of around 80% and Scope-adjusted ROCE of 15-20% thanks to the company’s lean cost structure. Scope highlights the company’s new policy to hedge volatile costs associated with grid balancing which provides higher transparency on achievable margins and reduced overall margin and cash flow volatility.

Whilst the provision of electricity from photovoltaic power plants under the KÁT regime still poses some regulatory risk over the medium to long term, the risk of adverse tariff amendments or extra taxes has decreased for the short term given the persistently elevated power prices for unregulated electricity generation in Hungary which are even above regulated tariffs. As such, there is little room for politicians and the regulator to impose tariff cuts in the foreseeable future. Still the risk of retroactive tariff cuts or other adverse effects that would curtail the achievable margin level and operating cash flow cannot be ruled out in the medium to long term. Regulatory amendments could effectively burden MET HSP’s entire power generation portfolio which exposes material concentration risk around the three biggest power plants.

MET HSP’s financial risk profile – albeit expected to improve gradually over time – remains the major rating constraint, primarily due to persistently high leverage. Still, Scope has raised the assessment of the company’s financial risk profile to B+ from B following the application of the revised thresholds for leverage and interest coverage under Scope’s European Utilities Rating Methodology, even when applying a prudent approach due to the remaining risks related to potential adverse regulatory changes.

Credit metrics remain strongly impacted by the high exposure to interest-bearing debt of about HUF 89bn after the full completion of the asset generation ramp-up. Following the full operation of the company’s power generation portfolio in 2023, leverage – as measured by Scope-adjusted debt/EBITDA which takes into account the treatment of the shareholder loan (SHL) exposure as debt and no cash netting – is expected to stand at an elevated level of 9.6x at YE 2023 and to gradually improve over the medium term towards about 7x, backed by continued debt amortisation pertaining to the MNB bond but also the scaling back of shareholder loan exposure. While Scope does not account for any equity-credit related to MET HSP’s exposure to shareholder loans (given that only one out of five criteria for hybrid debt is fulfilled), it is highlighted that the reflection of a 50% equity credit would not materially alter the rating case. SHLs represent roughly 35% of MET HSP’s gross financial debt exposure with an effect relating to a 50% equity credit for SHLs on Scope-adjusted debt/EBITDA amounting to 1.5-1.7x for 2023/2024.

In light of the consistently high leverage, ratings support is provided by sufficient interest coverage. Debt protection – as measured by Scope-adjusted EBITDA interest coverage – is expected to move to a corridor of 2-2.5x on a sustained basis helped by the full operation of MET HSP’s fully ramped-up power generation portfolio, assuming that interest on shareholder loans is not deferred and compounded at the discretion of the rated entity. MET HSP could take advantage of interest deferral in case operating results would come in significantly lower than expected, thereby providing some cushion on a fully sufficient interest coverage. Still, Scope flags that any significant adverse regulatory changes related to feed-in tariffs could negatively affect operating cash flow and hence interest coverage.

In addition, Scope highlights the company’s reduced dependence on external funding following the completion of its investment phase. Apart from potentially insignificant maintenance capex, no investment needs occur for the next few years. While free operating cash flow (FOCF) for 2023 is still expected at a negative level due to time shifts of capex from 2022 to 2023 (shifted financial settlement), FOCF is expected to settle at a very solid level of about HUF 4-5bn beyond 2023. Paired with Scope’s assumption of no dividend payouts over the next few years, this grants sufficient headroom for deleveraging.

Scope expects MET HSP’s liquidity position to remain adequate over the next few years amid the amortisation period of the MNB bond. Expected debt repayments from the amortisation of the MNB bond and the shareholder loan exposure, are likely to be fully covered by available cash sources after scheduled maintenance capex investment. This also assumes that amortisation on the shareholder loan will be flexible and linked to the cash cushion the company obtains (no fixed repayment schedule). Scheduled debt maturities (excluding SHL amortisation) of HUF 3.6bn in 2023, HUF 3.9bn in 2024 and HUF 3.9bn in 2025 are expected to be covered by available cash sources. While for 2023 Scope expects capex and scheduled debt repayments to be covered by available cash, e.g. more than HUF 800m as of June 2023, and the usage of new shareholder loan debt, scheduled debt repayments beyond 2023 are expected to be primarily covered by FOCF of HUF 4bn-5bn per annum. This would also allow for a gradual repayment of shareholder loans.

While the improved assessments on MET HSP’s business and financial risk profiles could trigger a rating upgrade, most importantly, the current issuer rating is constrained at B by pending risks about covenant compliance pertaining to the debt service coverage ratio (DSCR) set as a financial covenant which could trigger accelerated debt repayment of the bond placed under the MNB bond for growth scheme. The DSCR pertains to a minimum debt service coverage of at least 1.1, defined as (EBITDA – capex – corporate tax liability + received and non-repayable grants) / (interest on external debt + repayment of external debt) with the first covenant test performed for FY 2023. The aforementioned capex shift of about HUF 7.7bn to 2023 from 2022 due to shifted financial settlement to contractors, could have severe consequences for calculated covenant compliance for FY 2023. Scope computes an insufficient DSCR of 0.2 when taking into account the full amount of capex, however, a fully compliant DSCR of 1.6 when stripping out expansion capex – a similar picture that is also forecasted for the years beyond 2023. Scope highlights that the non-compliant DSCR which would include the shifted capex is merely of technical nature. It does not point to any operational non-performance of the company nor a potential inability to reliably cover its debt service on external debt. MET HSP’s management has indicated it will open a dialogue with bondholders in order to find a pragmatic solution over the next few months. Scope is convinced that a pragmatic solution is to be found given the fundamental nature and logic behind a potential technical covenant breach. Nonetheless, in light of the pending outcome of discussions, the rating will remain at the current level.

Scope considers MET HSP’s ultimate 100% shareholder – the Swiss energy trading company MET Holding AG – to have higher credit quality than MET HSP. However, Scope assesses parent support as credit-neutral, based on the parent’s assumed limited willingness to provide support on a sustained basis.

Lastly, the issuer rating retains a negative one-notch adjustment, 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, several points pose credit risks: (1) The rated entity’s management also holds functions within MET Holding AG, meaning that they hold management positions at sister companies or the parent company. This raises some 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 as services not being billed in line with the lean management of the rated entity or profit being distributed to the detriment of creditor interests. (2) While transfer pricing covers all the services that the rated entity sources from within MET Holding AG, outsourced services are basically used for almost all of MET HSP’s operations, which gives the rated entity little control over provided services.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s conviction that a pragmatic solution about the treatment of 2023 capex for the covenant test for 2023 will be found, leading to reduced concerns that a bond repayment acceleration clause could be triggered. The Positive Outlook also reflects the prospects for a gradual improvement of credit metrics, following limited capex and a scaling back of both external and intercompany debt.

A positive rating action, i.e. a rating upgrade, could be warranted if a solution on covenant compliance was implemented that would not trigger any bond repayment.

A negative rating action could be conducted if: i) Scope’s expectations about deleveraging and a sustained EBITDA interest coverage of 2.0x and higher were threatened, leading to a reversion of the Outlook to Stable or even worse; or ii) if no solution about covenant compliance was implemented over the next few months, leading to increasing concerns about the possibility of an accelerated debt repayment of the MNB bond and liquidity issues, likely leading to a multi-notch downgrade.

Long-term debt rating

The rating on senior unsecured debt is confirmed at B+, one notch higher than the rated entity’s issuer rating.

No debt is ranked superior to senior unsecured debt, such as the senior unsecured bond which was placed under the MNB’s bond for growth scheme. This is likely until 2031, when the planned bond matures, given the negative pledge.

Recovery expectations are based on a liquidation value reflecting the good recoverability of the company’s major unencumbered assets, e.g. the five different solar parks. Although a bailout by the ultimate parent in a hypothetical insolvency of the rated entity is not ruled out, Scope believes an insolvent company would be liquidated, primarily through the sale of various power plants. Scope believes that such assets would easily find a buyer without significant haircuts to their book values in light of the assets’ ESG footprints, their remaining regulatory lifetimes and Hungary’s energy market fundamentals. While execution risks on the ramp-up of the asset portfolio have diminished and Scope expects a ‘superior’ recovery for senior unsecured debt, which reflects a high advance rate for property, plant and equipment, the debt category rating remains constrained by the above-mentioned risks related to bondholders’ consent on covenant compliance. Hence, for the time being, Scope refrains from granting a two-notch uplift for such recovery expectations.

Scope acknowledges that MET HSP’s senior unsecured bond also has an accelerated repayment clause which requires the company to repay the nominal amount if its debt rating pertaining to the bond stood below B+ for more than two years or if the debt rating dropped below B-. Such ratings development could have default implications. While the ratings headroom on the debt rating currently is zero as it just meets the minimum requirement for a B+ rating, Scope is rather optimistic that the ratings headroom could be enlarged (once the issue on the DSCR covenant has been solved).

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 Outlooks, (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 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Sebastian Zank, Managing Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 November 2021. The Credit Ratings/Outlooks were last updated on 31 March 2023.

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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