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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of Hungarian utility Greenergy Holding Vagyonkezelő Zrt. (Greenergy). Scope has also affirmed the BB+ rating on senior unsecured debt.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB-. The business risk profile continues to be constrained by 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. Profitability on the other hand remains a key supportive element, despite facing some pressure in the next few years.

After the exceptionally positive result in 2022, Scope-adjusted EBITDA* declined to HUF 5.5bn (down 36% YoY) in 2023, while profitability, as measured by the EBITDA margin declined to 22.1% (down 13pp YoY). This was mainly driven by lower power prices and unfavourable regulation (i.e Gas Act) which led to an increase in gas procurement costs that could not be fully passed on to customers. This mainly affected the EBITDA of the district heating and CHP generation. The company managed to partially offset this effect thanks to an increased EBITDA contribution from renewables, which benefitted from new capacity additions as well as high priced sold volumes. Scope expects this negative trend to continue also in 2024, with EBITDA further decreasing below HUF 4bn and EBITDA margin projected at around 17%. However, this is deemed to be somewhat temporary, as the agency sees good chances that Greenergy’s EBITDA margin will gradually recover to above 20% in 2025-2026, driven by i) the phasing out of the aforementioned regulatory effect in October 2024; ii) power prices, although declining, remain above the levels of before the Russian war on Ukraine; and ii) the margin-enhancing effect of newly commissioned assets such as renewable energy plants and energy storage facilities.

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).

Financial risk profile: BBB+. Greenergy’s financial risk profile remains the main supportive element of the issuer rating. Over the 2024-2026 period, Scope forecasts that the exceptionally favourable pricing environment that has supported positive results in the last three years will gradually normalise. Although credit metrics are projected to slightly weaken due to lower margins and the company’s mounting investment efforts, they will remain broadly in line with the current assessment.

In 2023, Greenergy delivered an overall good performance, although weaker compared to the record year of 2022. Leverage, as measured by debt/EBITDA, stood at 1.6x, up from the 2022 all-time low of 1.1x, although Scope-adjusted debt decreased to HUF 7.7bn (vs HUF 8.2bn at YE 2022). This result was mainly driven by the aforementioned reduction in EBITDA.

In terms of cash flow cover, Greenergy displays a combination of negative and positive peaks in 2022 and 2023, largely attributable to fluctuations in working capital. For the period 2024-2026, Scope anticipates free operating cash flow (FOCF)/debt to remain highly volatile. Scope expects the company's internal financing capacity to be impacted by the projected margin decline and increased capex, with FOCF forecasted to land in negative territory in 2024 and 2025. Consequently, the agency believes that Greenergy’s investment plan will most likely be partially financed through external funding.

For this reason, Scope expects debt to increase to between HUF 12bn and HUF 12.5bn over the projected period. EBITDA is forecasted to range between HUF 3.5bn and HUF 5.5bn, with the lowest level projected in 2024, before gradually improving in 2025-2026. As a result, debt/EBITDA is expected to peak at 2.5x in 2024, before reversing to below 2.5x in the following two years.

Regarding debt protection, Greenergy has shown very strong ratios in recent years, as evidenced by an EBITDA interest coverage that has consistently exceeded 20x. Scope expects this trend to reverse slightly over the 2024-2026 period, primarily due to Greenergy’s increasing debt exposure and lower margins. However, the agency believes that EBITDA interest cover will still remain comfortably above 10x, also supported by the favourable interest rates achieved on newly contracted financings and the repayment of higher interest-bearing financings.

Liquidity: adequate. Greenergy’s liquidity profile remains adequate as signalled by a projected liquidity ratio of above 200% in 2024 and above 110% in 2025-2026 despite pressure on FOCF stemming from lower margins and increasing capex. Debt repayments of respectively HUF 0.4bn, HUF 1.3bn and HUF 1.9bn are scheduled from 2024 to 2026. These amounts as well as the planned capex are expected to be covered by available cash sources such as the operating cash flow and the significant cash buffer (HUF 9bn at YE 2023).

Scope highlights that Greenergy’s senior unsecured bond issued in 2021 under the Hungarian National Bank’s Bond Funding for Growth Scheme has two covenants that could adversely affect company’s liquidity and lead to an accelerated repayment of the outstanding nominal debt amount (HUF 5.7bn): 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- (accelerated repayment within 15 days). 2) Greenergy has a financial covenant that involves immediate bond repayment if the consolidated leverage – defined as [debt-cash]/EBITDA – exceeds 4.0x for two consecutive years or in any year in 2029-2030. Based on the bond’s current rating and the agency’s forecasts regarding leverage, Scope does not see significant risk of neither of these covenants being triggered.

Supplementary rating drivers: credit neutral. The rating has no adjustments related to financial policy, peer group considerations, parent support, or governance and structure. Despite being 51% owned by Hungarian construction company KÉSZ Holding Zrt. (the remaining 49% by two of the three managing directors), Greenergy remains rated on a standalone basis. Scope acknowledges the ratings differential between Greenergy’s issuer rating of BB and the BB-/Negative issuer rating of KÉSZ Holding Zrt. Nonetheless, the agency does not see an immediate impact on Greenergy’s rating considering i) the operational and financial independence of the rated entity from its majority shareholder, meaning that the issuer’s rating is not explicitly capped by that of its ultimate parent; and ii) the sufficiently high cash reserves at KÉSZ level¹, which largely mitigate the risks of an extraordinary cash outflow for Greenergy. However, Scope will continue to monitor developments closely. Further credit deterioration on KÉSZ group would result in rating pressure on the issuer rating.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that Greenergy’s financial risk profile will remain in line with the current assessment, despite increasing capex and EBITDA facing pressure from declining power prices and unfavourable regulatory interventions set to phase out in October 2024. Leverage, as measured by debt/EBITDA, is expected to remain below 3x over the 2024-2026 forecast period. The Stable Outlook also reflects Scope’s assumption that the credit quality of KÉSZ group remains broadly unchanged.

The upside scenario for the rating and Outlook is:

1. 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 scenario considered remote).

The downside scenarios for the rating and Outlook are (individually):

1. Sustained deterioration of the company’s financial risk profile, e.g. through debt/EBITDA increasing to around 3.5x. Such an increase would reduce the headroom to the financial covenant on senior unsecured debt.
    
2. Significant deterioration of the credit rating of KÉSZ group.

Debt rating

Scope has affirmed the BB+ rating to senior unsecured debt, which relates to the HUF 5.7bn bond (ISIN HU0000360797) issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope’s recovery analysis, based on an expected liquidation value in a hypothetical default scenario, indicates a robustly superior recovery for senior unsecured debt. This opens for up to two notches uplift to issuer rating. Nonetheless, the BB+ rating 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 the agency gains more confidence about the company’s asset composition in the medium term.

Environmental, social and governance (ESG) factors

In line with its sector, the main ESG factors to which Greenergy the environmental impact of its products and production. On one hand, Greenergy’s ability to provide reserve (balancing) capacity to the national TSO from its peak-load eligible power generation fleet supports its market positioning and cash-flow (credit-positive ESG factor). On the other hand, despite CHP power plants (largest part of Greenergy’s energy production) being classified as sustainable energy sources under the EU taxonomy, their carbon footprint is not overly favourable. This has led to the company’s carbon footprint being slightly higher than the European average. Nevertheless, as the company’s renewable capacity is expected to double by 2027, Greenergy’s carbon footprint should improve, partially already visible in 2023. Scope deems this as ESG credit-neutral for the time being. Moreover, regulatory risks are viewed as overall credit-neutral given that Greenergy is not significantly exposed to regulated income from renewable energy generation capacities, which could be affected by adverse regulation, nor it is exposed to electricity supply to residential customers for which prices are legally capped.

All rating actions and rated entities

Greenergy Holding Vagyonkezelő Zrt.

Issuer rating: BB/Stable, affirmation

Senior unsecured debt rating: BB+, affirmation

*All credit metrics refer to Scope-adjusted figures.

Rating driver references
1. 4 April 2024, Rating Action Release on KÉSZ Holding Zrt

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 June 2024), 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: Herta Loka, Senior Analyst
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 20 September 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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