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      Scope affirms ALTEO’ BBB-/Stable issuer rating
      MONDAY, 27/05/2024 - Scope Ratings GmbH
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      Scope affirms ALTEO’ BBB-/Stable issuer rating

      The affirmation reflects Scope’s view that due to growing EBITDA generation ALTEO will be able to sustain pressure on credit metrics resulting from mounting capex and growing debt level.

      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 affirmed ALTEO Nyrt.’s (ALTEO) issuer rating at BBB-/Stable. Concurrently, Scope has affirmed the BBB- senior unsecured debt rating, and the S-2 short-term debt rating.

      Rating rationale

      The affirmation reflects Scope's view that ALTEO will be able to withstand pressure on its credit metrics from rising debt levels due to increased expansion investments, as these should be largely offset by the related EBITDA growth. The rating is also supported by the addition of new renewable capacity and new revenue streams from waste management and maintenance services.

      The rating continues to incorporate a BB+ business risk profile. While the assessment remains constrained by ALTEO's limited geographic reach and still comparatively small size, Scope expects the company's competitive position to strengthen further as it enters an intensive investment phase over the next few years. The focus of the investment phase remains on ramping up renewable capacity, battery storage and investments in conventional generation capacity, which would further reduce the concentration risks associated with individual assets within the current generation portfolio (~200MWth). As such, the company's steadily growing exposure to renewable generation capacity, combined with its ability to provide grid balancing, ensures a solid market position and reduces transition risks (ESG factor: credit-positive environmental factor). In addition, ALTEO's further growth through the expansion of its energy services and waste management business is expected to broaden its cash flow streams and make it less dependent on external, uncontrollable parameters such as weather developments, fluctuating energy prices and gas procurement or government intervention.

      The company performed very well during the energy crisis in Europe. Elevated energy prices had a significant positive impact on its financial performance, especially in its energy trading and supply division and in the provision of balancing power. However, the normalisation of energy prices, together with an intensive investment programme, is expected to weaken the company's profitability in the medium term, until the investment results become visible in a sustained improvement in financial performance in the long term. As a result, Scope expects the group’s Scope-adjusted EBITDA margin to fluctuate between 10-15% in 2024-2026, compared with 15-20% previously. At the same time, Scope expects profitability to be continuously supported by a very strong ROCE of 25-30%.

      Further ratings support stems from Scope’s view about ALTEO’s solid financial risk profile (assessed at BBB+). Nevertheless, Scope highlights the company's ambitious investment plan, which is mainly focused on organic and dynamic growth investments, which could total more than HUF 130bn between 2024 and 2026. While such a high capex programme is expected to be financed by the current operating cash flow and the large cash buffer of more than HUF 17bn as of March 2024, a large part of the capex will be financed by newly raised debt. As a result, Scope expects the company's gross debt to increase significantly to around HUF 120bn by YE 2026 from HUF 27bn as at YE 2023. However, such an increase in debt can be partially absorbed by the company's expected operating performance, as evidenced by an EBITDA of around HUF 20-35bn in the medium term. As a result, Scope expects the company's sustainable leverage - as measured by Scope-adjusted debt/EBITDA - to settle at 1.5-3.0x in the medium term, up from 0.2x in 2023.

      Medium-term debt protection – as measures by Scope-adjusted EBITDA interest coverage – is expected to settle at between 5-6x. While the short-term debt protection is largely supported by the company's low leverage and significant positive interest income on bank deposits, ALTEO's interest coverage is expected to be impacted by the growing debt exposure and overall higher average interest rates on outstanding debt positions. As a result, ALTEO's net interest expense is expected to increase to approximately HUF 7.7bn in 2026 from net interest income in 2023.

      Scope has limited concerns about short-term debt coverage in the coming years. Upcoming debt maturities between 2024 and 2026, totalling HUF 6.4bn, are expected to be comfortably covered by the remaining cash buffer (HUF 17.3bn at end-March 2024) and unused overdraft facilities of HUF 2.5bn.

      Scope expects that shareholder remuneration will continue to be linked to ALTEO's operating performance and is unlikely to jeopardise credit quality. Shareholder remuneration would likely be adjusted if necessary to preserve the company's credit profile, which seems to be a clear focus of management, as happened in 2020 during the Covid-19 crisis.

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

      Outlook and rating-change drivers

      The Stable Outlook reflects Scope's expectation that ALTEO's financial position will remain solid in the context of its expansion strategy, as evidenced by a medium-term leverage ratio (Scope-adjusted debt/EBITDA) of 1.5-3.0x and a Scope-adjusted EBITDA interest coverage of 5-6x. The Stable Outlook also reflects a largely unchanged shareholder structure.

      A positive rating action is considered unlikely in the foreseeable future due to the limited size and scope of the company.

      A negative rating action could be warranted if the execution of the company's growth strategy or operating performance leads to a deterioration in the financial risk profile, as evidenced by a Scope-adjusted leverage above 4.0x or an EBITDA interest coverage below 4.0x on a sustained basis.

      Long-term and short-term debt ratings

      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 affirmed at S-2 based on the BBB-/Stable issuer rating, the company’s solid liquidity profile, that is 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/or Outlook, (General Corporate Rating Methodology, 16 October 2023; 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 these 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/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

      Regulatory disclosures
      These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
      Lead analyst: Kamila Bernadeta Hoppe, Senior Specialist
      Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 7 August 2019. The Credit Ratings/Outlook were last updated on 22 June 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
      © 2024 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.

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