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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB+/Stable issuer credit rating on Hungary-based utility ALTEO Energiaszolgáltató Nyrt (ALTEO) along with its BBB- long-term senior unsecured debt rating and S-3 short-term debt rating.

Rating rationale

ALTEO’s credit rating remains widely supported by solid cash flow streams derived from its growing outreach as a multi-utility with a balanced exposure to regulated and unregulated electricity and heat generation, energy supply and services. The utility’s balanced power generation portfolio, with almost 70 MW of regulated and unregulated renewable energy generation assets, 67 MW of thermal capacity from small gas-fired power plants and almost 200 MW of heat generation capacity, provides significant support for recurring earnings, contributing more than 75%. The company’s further ramp-up of generation assets is gradually reducing concentration risks and ensuring a robust group margin of about 15%.

The combined generation portfolio of volatile renewable assets and peak-load-capable combined heat generation gas-fired power plants provide a competitive edge, providing reserve capacity in a ‘virtual power plant’ in Hungary through ALTEO’s Control Centre (ESG factor: credit-positive environmental factor). This puts the company into a favourable position to provide balancing energy services to the grid operator, delivering solid cash flow upside when the demand for balancing services is increasing along the strong ramp-up of volatile renewable energy capacities in Hungary, primarily for photovoltaic generation assets. As such, Scope expects cash flow from balancing services to largely offset negative effects from unregulated renewable power generation, expected for the current year. Moreover, the critical size of ALTEO’s power generation mitigates concerns about potential regulatory risks for regulated renewables.

Scope anticipates credit metrics to remain commensurate with a BB+ financial risk profile, except for the extraordinarily strong levels expected for the current year. There is little room for deleveraging over the next three years due to the large investment programme of HUF 20bn, targeted at organic growth and smaller bolt-on acquisitions of mostly single project companies in renewables, cogeneration capacities (currently executed), storage and waste management. Scope expects net debt as measured by Scope-adjusted debt to gradually increase from HUF 22.6bn at YE 2020 to almost HUF 30bn by YE 2023.

Given that such investments quickly contribute earnings, Scope expects ALTEO’s leverage to remain at around 4.0x, which is fair for an integrated utility with a large exposure to regulated business. Debt protection as measured by Scope-adjusted EBITDA interest coverage is expected to remain at 6-7x, reflecting gradual EBITDA growth and the steady increase in interest in conjunction with the rise in gross debt.

ALTEO’s liquidity position remains sound. Scope expects cash sources to comfortably cover the HUF 5.8bn of upcoming debt maturities until 2023 (HUF 1.3bn in 2021; HUF 3.5bn in 2022; HUF 1.1bn in 2023), through its cash buffer which is estimated to stand well above HUF 5.0bn at the end of the second quarter 2021 (HUF 4.25bn as of March 2021), positive free operating cash flow of HUF 0.5bn-2.0bn yearly, and available overdraft facilities, expanded to about HUF 3.5bn at YE 2020. Scope believes liquidity can fully back a cash-funded redemption of the two zero-coupon bonds (totalling HUF 2.3bn) maturing in 2022 without the need to refinance via new debt issuance.

While the investment plan bears some execution risks, ALTEO is unlikely to jeopardise its credit profile in its implementation, indicated by the focus on smaller bolt-on acquisitions and the scrapping of dividends in 2020 amid the Covid-19 turbulence. Scope also believes the company’s credit profile can well absorb the resumption of dividend pay-outs in 2021, even with the increased rate of 50% against the 2019 level (based on dividend per share).

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 the largely debt-financed investment plan will not significantly burden the financial profile, with leverage as measured by Scope-adjusted debt/EBITDA, expected to remain within 3.5-4.5x and debt protection as measured by EBITDA interest coverage to remain above 5.0x.

A positive rating action is likely to be warranted if ALTEO improved its outreach via further strong growth and if its leverage reduced below 3.5x and EBITDA interest coverage improved to around 7x for a prolonged period. However, this is deemed unlikely over the next two years in light of the company’s investment plan.

A negative rating action could be required if growth does not materialise as expected, e.g. through significantly lower earnings contributions from new assets, or if further debt-financed M&A projects weigh on leverage, resulting in a Scope-adjusted debt/EBITDA of above 4.5x and EBITDA interest coverage of below 5x on a sustained basis.

Long-term and short-term debt ratings

Scope has affirmed the BBB- rating for senior unsecured debt. Recovery expectations for senior unsecured debt remain ‘above-average’, even after senior secured debt (primarily non-recourse project finance debt and finance leases) has fully been covered. Recovery expectations are based on an expected liquidation value in a hypothetical default scenario of around HUF 33bn after administrative claims.

The S-3 short-term debt rating has been affirmed, reflecting ALTEO’s sound liquidity with the expectation of comfortable internal and external liquidity metrics and a continued solid access to external funding (i.e. banks and capital markets). 

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, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Utilities, 18 March 2021; Rating Methodology: European Renewable Energy Corporates, 18 January 2021), 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 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 Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings 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: Sebastian Zank, 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 7 August 2019. The Credit Ratings/Outlook were last updated on 29 July 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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