Rating action

Scope Ratings GmbH (Scope) has today affirmed the rating of the Class A1 securities issued by Virtuo Finance SARL as follows:

Class A1 securities USD 84.5m: affirmed at BBB.

The affirmation of the bonds’ BBB rating considers the weak credit quality of the Republic of Egypt (rated B-/stable by Scope), significant external risks and high domestic interest rates, all of which contribute to Scope’s country risk assessment. The rating also takes into account the further significant depreciation of the Egyptian pound, in particular since the Central Bank of Egypt’s decision on 6 March 2024 to devalue the pound (to EGP 48 from EGP 31 per USD) and commit to a flexible exchange rate regime as part of the successful renegotiation of the IMF Extended Fund Facility.

Scope has updated its EGP/USD exchange rate assumptions in the rating case to reflect current forward rates over the next two years but has left its long-term depreciation assumption of 7% p.a. from 2027 to 2041 unchanged. This reduces the minimum ADSCR in Scope’s rating case to 1.09x (2026) from 1.13x (2026) as a result. While this ADSCR level would imply a covenant breach, Scope draws comfort from the available structural mitigants to liquidity risk such as DSRA and distribution lock-up tests, the project’s solid operational performance to date, and the gradually improving ADSCRs in subsequent years, as reflected in the average ADSCR of 1.31x in Scope’s rating case.

Transaction overview

The bonds were issued to support the refinancing of six operational photovoltaic power plants with a total capacity of 300MWAC located near Benban city, Egypt (together the project). The plants are part of the 1.8GW Benban solar cluster.

The issuer, Virtuo Finance SARL, is a Luxembourg compartment has on-lent the bond proceeds to each individual opco. Each opco has entered into a long-term power purchase agreement (PPA) with the Egyptian Electricity Transmission Company (EETC). The Egyptian Ministry of Finance (MoF) guarantees EETC’s obligations under each PPA.

The rated Class A1 bonds benefit from political risk insurance (PRI) of the Multilateral Investment Guarantee Agency (MIGA, part of the World Bank group) and a credit enhancement facility (CEF) by the European Bank for Reconstruction and Development (EBRD). Only Class A1 benefits from these instruments.

All six power plants have been operating since Q4/2019. The operating performance in 2023 has continued to be positive, with full-year production being 2.7% above budget. Moreover, the latest two compliance certificates showed solid debt service coverage ratios on a backward-looking, rolling 12-month basis: 1.42x (09/2023) and 1.39x (03/2024). However, the forwarding-looking test ratios reflect the significant depreciation in the Egyptian pound against the US dollar: 1.22x (09/2023) and 1.21x (03/2024).

Rating rationale

The BBB rating reflects the total expected loss (EL) of 1.73% over the loan’s life until maturity (equivalent to a 7.80-year constant-exposure expected risk horizon).

The project benefits from stable and predictable cashflows, low operational risk and a solid financing structure. Strong financial covenants and a subordinated liquidity facility by EBRD further enhance the credit quality of the bonds. Political risk insurance by MIGA mitigates the severity of potential country risk events related to the weak credit quality of the Egyptian sovereign, transfer & convertibility risks, and the risk of expropriation. The project's high dependency on the power purchase agreements with the Egyptian Electricity Transmission Company, the only partially hedged exposure EGP/USD exchange rate volatility, and some sensitivity to future US CPI inflation constrain the rating.

• Construction risks account for 0.0% of total EL. Bondholders are not exposed to construction risk. All six PV plants have been operating since 2019.
   
• Operational risks account for 15.3% of total EL. Production levels were above budget in every year since 2021. Operational complexity is low and the technology used is suitable. The project benefits from a 25-year, full-service O&M contract with Scatec Solar Solutions Egypt LLC.
   
• Revenue risks account for 17.5% of total EL. The six power plants sell its power under a 25-year power purchase agreement on a take-and-pay basis. Solar resource risk is very low due to the excellent quality and low variability of solar irradiation.
   
• Financial strength risks account for 41.3% of total EL. Debt repayment risk has increased mainly due to exchange rate volatility and despite the fundamentally low expected cashflow volatility. The significant depreciation of the Egyptian pound to the US dollar has led to a weak minimum DSCR of 1.13x (2025) in Scope’s rating case. However, the resulting decline in the average DSCR to 1.32x from 1.44x is more muted. In addition, a six-month debt service reserve account and a subordinated, revolving liquidity facility from the EBRD (with respect to debt repayment issues related to the PPAs) provide significant liquidity support.
   
• Project structure and compliance risks account for 26.0% of total EL. The financial and legal framework conforms to international project finance standards. The security package is comprehensive, covers all material project assets, and includes direct agreements with all major project parties. Finally, the bonds benefit from political risk insurance by MIGA, which substantially mitigates the severity of potential country risk events.

Key rating drivers

No construction risk (positive). All six PV plants have been operating since 2019. Most teething issues have been resolved and performance in since 2021 was above expectations.

Stable and predictable cashflows (positive). The Egyptian Electricity Transmission Company (EETC) has agreed to purchase all of the project’s produced power for a fixed tariff of USD 84/MWh equivalent until 2044. The project’s geo-graphical location enjoys exceptionally high levels of solar irradiation year-round.

No refinancing risk (positive). The loans are fully amortising through annuities until maturity in 2041. The rated notes further benefit from the transaction’s ten-year tail between maturity and the end of the project’s useful life.

Low operational risk (positive). Operational risks are low because of the well-known technology used and the 25-year full-service O&M contract with Scatec Solar Solutions Egypt LLC. Lifecycle investment costs are small and supported by a maintenance reserve account. RINA, the lenders’ technical adviser, is satisfied with the sizing of the MRA and the O&M budget.

Solid financing structure (positive). The transaction conforms to international project finance standards. The assets are ringfenced and the security package is comprehensive. A USD 30m revolving, subordinated liquidity facility by EBRD supports debt service in the event of PPA payment interruptions. Financial covenants are strong.

Political risk insurance (positive). The project benefits from political risk insurance (PRI) by the Multilateral Investment Guarantee Agency. The PRI covers risks related to transfer & convertibility, war and civil disturbance, expropriation, and breaches of contract under the PPAs.

Country risk (negative). The Egyptian sovereign has weak credit quality (rated B-/stable by Scope). Transfer & convertibility risk and the risk of expropriation are concerns. The PRI substantially mitigates the severity of country risks because of the comprehensive scope of its coverage.

Foreign exchange rate risk (negative). The borrower is partially exposed to the risk of the Egyptian pound depreciating against the US dollar because while 70% of the payments under the PPAs are indexed to currency fluctuations, 30% remain unhedged. This risk has become more acute following rising inflation, a strengthening of the US dollar, and the Central Bank of Egypt’s decision on 6 March 2024 to devalue the pound (to EGP 48 from EGP 31 per USD) and commit to a flexible exchange rate regime.

High dependency on the PPAs with EETC (negative). The project fully depends on EETC to purchase its output with no real alternative route-to-market in the event the PPAs are terminated. The PPAs’ termination provisions in combination with the PRI and a subordinated liquidity facility by EBRD mitigate this risk.

Sensitivity to US CPI inflation (negative). A prolonged increase in US CPI inflation would drive up operational expenditures because c. 75% of operational costs are indexed to US CPI. The project’s cashflow buffer over debt service and the debt service reserve account mitigate this risk.

Rating-change drivers

Positive rating-change drivers:

• A sustained improvement of the Egyptian economy and business environment or a stabilisation of the Egyptian pound could lead us to upgrade the rating.

Negative rating-change drivers:

• A failure to make payments under the PPA, further sovereign weakness, a stronger-than-expected depreciation of the Egyptian pound, unavailability of foreign currency, or operational underperformance could lead to a rating downgrade.

Quantitative analysis and assumptions

The total EL on the rated instrument is commensurate with a BBB rating. We calculated an EL of 1.73% over the lifetime of the instrument (equivalent to a constant exposure expected risk horizon of 7.80 years) under our rating case scenario (Scope’s rating case), which is more conservative than the sponsor’s base case scenario. Our rating case assumes P90 energy yield, 98% availability, 0.40% p.a. module degradation, a -7% compound annual growth rate in the EGP/USD exchange rate (i.e. a depreciation of the Egyptian pound against the US dollar), an average US CPI inflation of 3.7%, and operational expenditures of USD 8.05/MWp.

We calculated an expected impairment likelihood of 12.11% 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 85.72% 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 deterioration; ii) Inflation, interest or currency issues; and iii) Country or political issues. These three credit impairment events together contribute 56.8% 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 outcomes to input assumptions and is not indicative of expected or likely scenarios.

• Sensitivity of reducing all 23 risk factors by one level: bb
   
• Sensitivity of reducing the most relevant risk factor score by two levels: bbb-
   
• 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 Climate Bonds Standard Board on behalf of the Climate Bonds Initiative, certified by DNV. In its Environmental and Social Monitoring Report, the issuer confirmed that the project has avoided 486k tonnes of actual GHG emissions. The projects support Egypt's strategic objectives to diversify and decarbonise its energy generation mix.

The project is important for Egypt's strategic commitment to decrease its dependence on fossil fuels by 42% by 2050. The project contributes to Egypt's aim to increase the share of renewable energy in its generation mix as part of the Benban solar cluster, the largest solar park in the country and one of the largest in the world.

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 deterioration events cover two key revenue drivers: expected energy yield and plant availability. 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 originally prepared by La Banque Postale 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’ priorities of payment, 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 methodologies used for this Credit Rating, (General Project Finance Rating Methodology, 16 November 2023; Counterparty Risk Methodology, 13 July 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Project Finance Expected Loss Model Version 1.2), 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 Rating: 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 the Credit Rating 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 Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.
 
Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Aaron Konrad, Executive Director
Person responsible for approval of the Credit Rating: Torsten Schellscheidt, Managing Director
The Credit Rating was first released by Scope Ratings 18 May 2022. The Credit Rating was last updated on 9 May 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.

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