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Rating action

Scope Ratings GmbH (Scope) has today assigned an initial issuer rating of B/Stable to Hungarian independent power producer MET Hungary Solar Park Kft (MET HSP). Concurrently, Scope has assigned a B+ rating on senior unsecured debt.

Rating rationale

The rating is strongly supported by Scope’s view on the rated entity’s protected business model, bolstered by the prioritised feed-in of generated electricity at predictable prices for an extended period. However, MET HSP’s weak financial risk profile limits the rating, due to high leverage and modest debt protection (interest coverage), coupled with potential adverse regulatory risks and credit-negative factors related to governance and structure.

Scope regards MET HSP’s business risk profile (assessed at BBB-) as strongly supportive of the rating, primarily based on its widely protected business model under the current regulatory framework. The company is currently in the ramp-up phase, boosting its power generation portfolio of solar power plants from 64 MW to about 230 MW across five locations in Hungary (ESG factor: credit positive environmental risk factor). This results in robust cash flow generation owing to the prioritised feed-in of generated electricity at regulated tariffs under the KÁT system of the HEA (Hungarian Energy and Public Utility Regulatory Authority), with a regulatory asset life expected at about 20 years. This framework strongly supports an achievable EBITDA margin of around 80% and the conversion of cash into robust operating cash flows. However, Scope flags that potential adverse changes related to the KÁT feed-in tariffs or increased costs for balancing could negatively impact the company’s profitability and operating cash flows.

The company’s very limited diversification, with only a handful of regulated power generation assets, would generally not strongly constrain the rating given its considerable business protection and quasi-monopolistic position. However, MET HSP’s entire exposure to regulations in Hungary is deemed credit-negative. Whereas adverse regulatory changes related to prioritised electricity feed-in and fixed prices are currently not on the horizon, potential future amendments could negatively affect the company profitability, operating cash flow and, ultimately, credit metrics. Examples of adverse regulation include retroactive tariff adjustments and the aggregation of smaller production units into a consolidated solar park. Scope has incorporated these concerns in the rating, based on: i) Hungary’s current boom in subsidised solar power generation assets (set to reach the 2030 targets under the country’s National Energy Strategy 2030); and ii) similar adverse tariff adjustments for subsidised renewable energy assets in other markets such as France, Romania, the Czech Republic or Spain.

The rating is strongly constrained by MET HSP’s financial risk profile (assessed at B), primarily related to its very high gearing. This is because of the full debt funding of existing and future power generation assets, through a HUF 65bn bond and interest-bearing shareholder loans, with no non-recourse project funding. In the course of the current capacity ramp-up Scope expects leverage – as measured by Scope-adjusted debt (SaD)/EBITDA – to remain very high as the full debt burden until YE 2022 from the prefinancing of new assets will have no corresponding cash inflows from operating assets. Scope estimates SaD/EBITDA of above 20x and funds from operations/SaD of below 5% until YE 2022, improving to around 9x and 5% respectively once all solar parks are contributing operating cash flow in 2023 and beyond. For the medium term, deleveraging is possible through the scaling-back of debt, backed by solid free operating cash flow after the envisioned power plants are operational. This, however, assumes that no material cash amounts are distributed to shareholders.

Debt protection – as measured by Scope-adjusted EBITDA interest coverage – is not expected to strengthen before the new power plants start to contribute to earnings in YE 2022. Scope expects the figure to reach a modest level of 2.0-2.5x by YE 2024, assuming interest on shareholder loans is not deferred (which is not at the discretion of the rated entity). Scope notes that MET HSP does not intend to set up a debt service coverage ratio or an interest coverage ratio for additional creditor protection.

Scope highlights the company’s intention to provide a debt service coverage ratio related to the external debt position of slightly more than 1x for the lifetime of the planned HUF 65bn bond, which provides a degree of creditor protection. However, the fulfilment of this covenant could be jeopardised by a material underperformance of the future asset portfolio, adverse regulatory changes relating to eligible feed-in tariffs or material costs arising from balancing.

The rated entity’s expected expansion will weigh greatly on its financial risk profile, with capex scheduled at more than HUF 36bn until YE 2022 (only relating to planned engineering, procurement and construction works). This will result in heavily negative free operating cash flows until YE 2022E. From 2023, free operating cash flow should turn positive, reflecting management’s plan to maintain a steady state from when the new solar power plants are operational until the bond matures in 2031 and keep maintenance capex very low.

Scope regards MET HSP’s liquidity position as adequate over the next few years. Available cash sources such as the company’s expected cash buffer and free operating cash flow should cover all expected debt repayments related to the amortisation of the HUF 65bn bond (starting in 2023) but also shareholder loans without significant refinancing needs until YE 2027E. Debt repayments thereafter would likely require significant refinancing, particularly the repayment of the remaining bond volume of HUF 32.5bn in 2031. A delay in the repayment of shareholder loans could somewhat relax the pressure on refinancing.

The rating incorporates a negative adjustment of one notch, reflecting governance and structure weaknesses (negative ESG factor related to governance). While management determines strategy, finances (budget) and operations, several points pose credit risks:

• The rated entity’s management also holds functions within MET Holding AG, meaning that they hold management positions at sister companies or the parent company. This raises concerns over the alignment of management’s interests with those of stakeholders, which include creditors of the rated entity and the management of group companies. This could materialise as services not being billed in line with the lean management of the rated entity or profit being distributed to the detriment of creditor interests.
   
• While transfer pricing covers all the services that the rated entity sources from within MET Holding AG, outsourced services are basically used for almost all of MET HSP’s operations, which gives the rated entity little control over provided services.

Scope considers MET HSP’s ultimate 100% shareholder to have higher credit quality than MET HSP. However, Scope assesses parent support as credit-neutral, based on the parent’s assumed limited willingness to provide support on a sustained basis.

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

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation that MET HSP will ramp up its power generation on solar parks from 64 MW currently to about 230 MW by YE 2022, widely funded by potential proceeds from a HUF 65bn bond issue plus remaining funds of about HUF 22bn provided through additional funding from the shareholder. This rating case is coupled with expectations of a medium-term leverage of 9x and EBITDA interest coverage exceeding 2x after the execution of the investment phase. The rating case and Outlook assume no capacity additions until 2031 beyond what is currently under development. Scope also deems ratings upside related to the removal of the ‘malus’ for Corporate Governance as remote in the short-term.

A positive rating action could be warranted if the company’s leverage – as measured by SaD/EBITDA – moves below 9x and EBITDA interest coverage moves closer to 3x. This development could result from stronger-than-expected cash inflows from MET HSP’s power generation, bolstered by significantly higher generation volumes or, alternatively, significant usage of non-interest-bearing funding.

The rating could come under pressure if MET HSP’s leverage remained substantially above 9x and EBITDA interest coverage stayed below 2x on a sustained basis. This could result from lower-than-expected operating cash flows stemming from an underperformance of solar power plants or amended feed-in tariffs. Alternatively, the company’s financial setup could be challenged if it starts to distribute money to its shareholders other than interest on shareholder loans.

Furthermore, any additional operations of the company beyond the expected capacity ramp-up could affect the rating positively or negatively depending on the funding of such activities.

Long-term debt rating

Following the expected recapitalisation through a HUF 65bn bond issuance, no debt will rank superior to senior unsecured debt. This is likely until 2031, when the planned bond matures, given the negative pledge.

Scope’s recovery expectations are based on liquidation value. Although a bailout by the ultimate parent in a hypothetical insolvency of the rated entity is not ruled out, Scope believes an insolvent company would be liquidated, primarily through the sale of various power plants. Scope does not expect these liquidation proceeds to fully cover outstanding senior unsecured debt in the year of a hypothetical default (2023) because gearing is high relative to the envisioned funding of the power plants. Reflecting a sufficiently high advance rate of 85% for property, plant and equipment, recovery expectations for senior unsecured debt are ‘above-average’ (with significant headroom on advance rates before reaching just ‘average’ recovery expectations). Consequently, Scope has applied a one-notch uplift to senior unsecured debt, considering the large exposure to valuable unencumbered assets.

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 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 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, the Rated Entities’ Related Third Parties and Scope Ratings' internal sources. Historical data used for these Credit Ratings is limited.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. Scope Ratings notes that the Credit Ratings are based on limited historical data.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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 November 2021.

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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

Conditions of use/exclusion of liability
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