Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Hungarian construction company Optimum Solar Kft. and changed the Outlook to Negative. Scope has also affirmed the B+ rating for senior unsecured debt.

Rating rationale

In early May 2020 Optimum Solar issued a HUF 6bn bond with a maturity in 2027 and a coupon of 3.5%. The amortisation schedule stipulates a 5% repayment in 2023, 15% repayment in 2025, 20% repayment in 2026 and the remainder as a balloon payment at maturity. The intended usage is for working capital needs and financing bank guarantees.

Optimum Solar’s business was not impacted by Covid-19 until late May 2020, when the debt servicing moratorium implemented by the MNB started to affect the financing of Optimum Solar’s customers. As existing loans in banks were not being serviced/repaid, credit conditions for new loans were tightened. A number of Optimum Solar’s projects were delayed due to clients not being able to obtain financing. No contracts have been cancelled (so far), and the regulator has allowed an extension of the building period for all KAT licences (favourable feed-in tariffs). The deadline for completed construction has been pushed from 2021 to 2022. Linked to these delays, Optimum Solar’s revenue for 2020 came in at HUF 13.2bn compared to the expected HUF 16.4bn and the ramp-up of its 50MW projects has been moved to late 2021, pushing those revenues predominantely into 2022. The company mitigated the shortfall on construction in 2020 somewhat by selling more planning/development services and focused on building up its pipeline by participating in many large tenders.

The B+ issuer rating is supported by Optimum Solar’s profitability of around 7% and the supportive regulatory environment in Hungary (National Energy Strategy 2030), which stimulates demand for the sector’s services, indicated by the cash flow visibility from the contracted backlog. The rating is further supported by good EBITDA interest cover and adequate liquidity.

The rating is mainly constrained by the company’s small scale in both a European and domestic construction context, with a mono-line focus on photovoltaic power stations. It is further constrained by a lack of geographical diversification (Optimum Solar is predominantly active in Hungary) and segment concentration. The rating is also limited by the anticipated increase in leverage, driven by a forecast of weak EBITDA and the need for additional debt/guarantees to pre-finance large-scale projects. However, this is a typical feature for growth companies.

Optimum Solar’s main owner, Roland Lugos, is also its top management and there is no independent board to provide an oversight function (ESG Factor: credit-negative). While Scope understands the family-owned nature of the company, an improvement in corporate governance and a broadening of management would be positive to reduce key person risk given Optimum Solar’s expected growth in scale.

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

Outlook and rating-change drivers

The Outlook for Optimum Solar is Negative due to elevated leverage forecasted for 2021 and an increased risk that leverage will remain above 5x going forward. On the other hand it also incorporates our view of a positive politically induced business environment thanks to the National Energy Strategy 2030. Furthermore, we foresee that Optimum Solar will benefit from: i) the existing market backlog of projects to be fulfilled by 2022 for the KAT system; and ii) the company’s expansion into small and medium-sized power plants, supported by existing partners. All of these aspects should lead to increased revenue generation going forward, but with greater associated execution risk as the company enters uncharted territory.

A positive rating action, i.e. a Stable Outlook, may be warranted if the company manages to decrease Scope-adjusted debt/Scope-adjusted EBITDA to below 5x on a sustained basis.

A negative rating action could occur if SaD/Scope-adjusted EBITDA were to remain above 5x on a sustained basis paired with low visibility on short-term cash generation or liquidity were to worsen. An increase in leverage could be triggered by an adverse operational development leading to reduced profitability and cash flows. Liquidity could worsen if, for example: i) customers delay payments significantly; or ii) the company becomes exposed to the non-recoverable cost overruns of its projects.

Long-term and short-term debt ratings

The rated entity issued a HUF 6bn senior unsecured corporate bond under the MNB Bond Funding for Growth Scheme in May 2020. The bond has a 3.5% coupon and is amortising, starting after three years, with a tenor until 2027.

Scope’s recovery analysis is based on a hypothetical default scenario occurring at year-end 2022, in which the rating agency assumed outstanding senior unsecured bond debt of HUF 6.0bn in addition to HUF 3.8bn of secured bank debt and secured guarantee positions, HUF 1.3bn in payables and HUF 1.9bn in off-balance sheet guarantees. Scope expects an ‘average recovery’ for the company’s unsecured debt, resulting in a B+ rating for this debt class (the same as the issuer rating).

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, (Rating Methodology: European Construction Corporates, 15 January 2021; Corporate Rating Methodology, 26 February 2020), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation       YES
With access to internal documents                                           YES
With access to management                                                    YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook 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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 February 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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