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 upgraded the issuer rating on Hungarian utility Greenergy Holding Vagyonkezelő Zrt (Greenergy) to BB from B+ and assigned a Stable Outlook. Scope has also upgraded the senior unsecured debt category rating to BB+ from BB. Consequently, the under-review status for a possible upgrade on the ratings was resolved.

Rating rationale

The rating upgrade is supported by a combination of factors: Firstly, the company’s strong operating performance in 2022 which Scope expects to continue over the next few years has significantly strengthened Greenergy’s financial risk profile. Secondly, the application of Scope’s updated European Utilities Rating Methodology has strengthened the company’s business risk assessment pertaining to operating profitability as well as the financial risk assessment after Scope slightly relaxed thresholds between relevant rating categories. Lastly, Scope regards that the company has achieved a critical size pertaining to recurring EBITDA, helped by market factors and its growing outreach through the addition of new assets, which led to the elimination of the previous negative rating adjustment for peer group context.

Greenergy’s issuer rating largely benefits from the financial risk profile improving to BBB+ from BBB-. While elevated energy prices in Hungary strengthened credit metrics over the past two years, primarily through higher prices for electricity and balancing capacity, the company’s investments, mostly to increase energy generation capacities, are also gradually supporting solid credit metrics. Scope expects energy prices to normalise in the next few years but remain above the historical average. This will cause earnings in the utility’s core business to shrink but still at levels close to the record high reached in FY 2022 of HUF 8.4bn, further supported by EBITDA contributed by new power generation assets. Scope also expects the utility’s overall absolute indebtedness to remain broadly constant over the next few years, with Scope-adjusted debt at HUF 8bn-10bn, which assumes that the increased capex of more than HUF 15bn will be funded mostly by operating cash flow and the significant cash buffer. This will likely support a sustained leverage – as defined by Scope-adjusted debt/EBITDA – within a range of 1.0-1.5x. Still, leverage could weaken if Greenergy were to use the headroom on its internal leverage threshold (net debt/EBITDA of less than 2.5x), for example, by spending more on growth investments that cannot amortise fast enough or on bolt-on M&A.

Free operating cash flow and internal financing capacity will remain strongly dependent on Greenergy’s flexible investment budget. While Greenergy is likely able to internally fund all or almost all capex going forward, in line with its declared plan, Scope still forecasts free operating cash flow to remain volatile, fluctuating between negative and positive.

The utility’s financial strength is supported by very strong debt protection as measured by Scope-adjusted EBITDA/interest. Scope expects interest coverage to remain very robust at above 20x even in the absence of major cash-interest income from its cash buffer beyond 2023.

Liquidity is expected to remain adequate over the next few years as signalled by strong liquidity ratios of above 200%. Debt repayments of around HUF 500m a year for bank debt and shareholder loans are scheduled for 2023 until 2025.

Such amounts as well as envisaged capex are expected to be comfortably covered by available cash sources such as operating cash flow and the significant cash buffer of HUF 5.3bn at YE 2022. Despite its small size, Greenergy has sufficient and reliable access to external financing though well-established relationships with Hungarian banks such as MKB and CIB. While the operating business is expected to cover the increased refinancing from 2026 (about HUF 580m of bond amortisation on top of the annual refinancing of bank loans), Scope thinks the company will develop a fallback for refinancing by issuing debt, backed by its business model and largely unencumbered assets.

The bond issued in 2021 under the Hungarian central bank’s programme contains two covenants that could affect liquidity: 1) Bond repayment is accelerated if the debt rating pertaining to the bond stood below B+ for more than two years or if the debt rating dropped below B-. The headroom to this covenant is large and was even widened by the rating upgrade. 2) Greenergy has a financial covenant that involves immediate bond repayment if the consolidated leverage – defined as [debt-cash]/EBITDA – exceeds 4.0x. Based on Scope’s forecasts, there is also solid headroom to this covenant going forward even if the ratio – as forecasted – deteriorates beyond the achieved ratio from 2021 and 2022 (1.6x and 1.2x respectively).

The issuer rating remains constrained by the company’s business risk profile (unchanged at BB-), largely due to the company’s limited scale, high dependence on external market developments and merchant risks, primarily related to energy price movements, and the limited risk mitigation outside of its core market.

The company’s overall outreach and market share within Hungary will likely remain insignificant, even after the envisioned doubling of power generation and storage capacities to about 130 MW over the medium term. Whilst the company is enjoying the high prices for energy sold to commercial and industrial clients, particularly for balancing power, the volatility in the prices could also play out equally negatively should achievable prices return to historical levels. However, Scope does not foresee this to happen in the next two years. Nonetheless, Greenergy’s ability to provide reserve (balancing) capacity from its peak-load eligible power generation fleet (CHP assets and storage facilities) to the national transmission grid operator MAVIR through its so-called virtual power plant approach strengthens its market position, broadens its cash flow profile and supports overall profitability (credit-positive ESG factor).

Profitability remains a core supportive factor for Greenergy’s business risk assessment. Scope acknowledges that margin improvements – referring to the Scope-adjusted EBITDA margin – have been bolstered by the aforementioned market tailwinds and elevated energy prices that have doubled the margin to a record of 35% in 2022 (from 17% in 2019). For the next few years, Scope expects the margin to reduce but remain higher than the historical average, at 25-30%. This will be driven by i) continued favourable prices in the core business; and ii) the margin-enhancing effect from newly commenced assets such as renewable energy plants and energy storage facilities. The company also performs well for Scope’s new profitability measure of Scope-adjusted ROCE, with levels of reliably above 30%, benefitting from the double income on Greenergy’s CHP plants, which are depreciated to a large extent.

Concerns about reduced or stopped gas flows from Russia to Hungary have eased. Greenergy’s business model in power generation and supply, however, remains vulnerable to gas flows and sufficiently filled gas storage inventories in Hungary, as more than 80% of Hungary’s gas comes from Russia. Scope believes that Greenergy’s position would be partially protected should gas flows become threatened given the utility’s exposure to district heating (more than 60% of CHP plants contracted for municipal district heating or providing energy to hospitals) and grid balancing which puts it into a favourable position should gas flows be rationed.

Greenergy remains rated on a standalone basis. This is because the rated entity operates largely independently of its majority shareholder, Hungarian construction company KÉSZ group, which owns 51% (the remaining 49% by two of the three managing directors). Scope acknowledges the ratings differential between Greenergy’s upgraded issuer rating of BB and the BB- issuer rating of KÉSZ group. Nonetheless, Greenergy’s operational and financial independence means the issuer’s rating is not explicitly capped by that of its ultimate parent.

Scope has eliminated the negative one-notch adjustment for the company’s limited size and outreach compared to other entities rated in the BB category. This is because the company has achieved a critical size pertaining to its recurring EBITDA, which reached more than HUF 4.0bn (around EUR 10m), backed by market tailwinds and the company’s constant investment in new cash-generating assets. As such, Scope deems the negative ratings adjustment for peer group context that kept the rating below the BB category in previous years as being obsolete.

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 Greenergy’s financial risk profile has stabilised, as displayed by a Scope-adjusted debt/EBITDA sustained at well below 2.5x. As flagged in the assessment of the financial risk profile the Stable Outlook incorporates the possibility that Greenergy deploys the large headroom to its internal leverage target e.g. for bolt-on acquisitions or more capex. The Stable Outlook also reflects Scope’s assumption that the credit quality of KÉSZ group remains broadly unchanged.

A positive rating action is deemed remote. Such an action would require an improved business risk profile as signalled by a significantly improved diversity of the operating business and a significant addition of energy generation and storage assets.

A negative rating action could be triggered by a sustained deterioration of the company’s financial risk profile, e.g. through Scope-adjusted debt/EBITDA increasing to around 3.5x. Such an increase would reduce the headroom to the aforementioned financial covenants. In addition, the rating could come under pressure if the credit rating of KÉSZ group was at risk to deteriorate significantly.

Long-term debt rating

The agency has upgraded the senior unsecured debt category rating along the upgrade of the underlying issuer rating. Scope continues to expect a robustly superior recovery for senior unsecured debt in a hypothetical default scenario, even after expected liquidation proceeds are used to cover senior secured debt and payables. Scope’s recovery expectation is based on an expected liquidation value in a hypothetical default scenario of around HUF 18.0bn after administrative claims at YE 2025. The recovery expectations incorporate adequately high discount rates on the book values of recoverable assets. Still, the upgrade to BB+ from BB reflects Scope’s cautious stance regarding Greenergy’s investment phase over the next years. As such, the debt rating will remain non-investment grade until Scope gains more confidence about the company’s asset composition in the medium term.

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 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 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 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: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 15 June 2021. The Credit Ratings/Outlook 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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.