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      Optimum Solar C/Negative rating reinstated following selective default
      WEDNESDAY, 28/09/2022 - Scope Ratings GmbH
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      Optimum Solar C/Negative rating reinstated following selective default

      Scope reinstates Optimum Solar’s issuer rating of C/Negative and the senior unsecured debt rating of C as the restructuring plan ensures the company remains a going concern, after a selective default due to a distressed exchange.

      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 moved Optimum Solar Zrt. Issuer rating to selective default as well as moved the company’s senior unsecured debt to default status. Subsequently Scope Ratings GmbH (Scope) has moved Optimum Solar Zrt. issuer rating back to C/Negative as well as moved the company’s senior unsecured debt to C.

      Rating rationale

      After the initial standstill agreement with bondholders in May, Optimum Solar Zrt. engaged with its restructuring advisor EY to work on a fact-finding report and subsequently draft a restructuring business plan and put a corporate guarantee from Lugos Renewables Zrt in place covering all payment obligations. This process, originally aimed to be concluded by end-June 2022, took longer than anticipated and resulted in rolling forward the temporary standstill by bondholders during July. The restructuring business plan was finalised at end-July and thereafter accepted and signed off by its bondholders, providing a waiver on acceleration and security enforcement, though it does not include suppliers. Banking partners have signed separate waivers not enforcing security nor accelerating their interest-bearing debt. The acceptance resulted in an annex to its temporary standstill agreement, which grants the company a waiver to the accelerated repayment clause of the principal amount of its bond as long as the monthly (in 2022) and later quarterly (from 2023) milestones under its restructuring business plan are fulfilled in time. While fragile in nature due to the continuous pressure of reaching the pre-defined milestones, Scope views the standstill agreement as more permanent and views the waiver to the debt acceleration clause as a change to the original terms of the bond, constituting a selective default according to our rating definition. The restructuring terms were registered together with other changes to the corporate legal structure and the registration order at the stock exchange and the registry court respectively at end-August (submitted by the company on 25.08.2022), at which time it became factual for Scope. We assessed the restructuring as a distressed exchange because the creditor’s claims have diminished value relative to the original terms of the debt. Furthermore, we consider the likely aim of the waiver to be avoiding a payment failure in the short term as Optimum Solar would have lacked the resources to repay the bond in full, as per Scope’s view. A distressed exchange constitutes default in our rating definitions (link to the rating definition).

      After having assessed Optimum Solar Zrt. to be in selective default (‘SD’) upon the more permanent standstill agreement being assessed as a distressed exchange, Scope has re-assessed the company’s going concern status.

      Based on the restructuring business plan and the company’s success in achieving a solution with bondholders, Scope reinstates the issuer rating of Optimum Solar Zrt. to C with a negative Outlook and reinstates the C rating for the senior unsecured bond issuance, respectively. The rating action reflects Scope’s view of a very fragile going concern nature of the company with little margin for errors under its restructuring business plan, granting the aforementioned standstill.

      The standstill agreement would be withdrawn, resulting in accelerated bond repayment, in the event of: i) a breach of any condition in the standstill agreement and its annex or the bond documentation; or ii) the initiation of any legal proceeding, especially on insolvency or bankruptcy, which can be triggered by other debtors, suppliers or guarantors. Given the bondholders’ and banks’ reluctance to provide new funds, financing and working capital financing going forward must come from the owner, financial intermediaries and the suppliers. The fragile nature of Optimum Solar’s going concern status was also highlighted by Optimum Solar’s outgoing auditor, though the auditor did not issue a qualified opinion.

      While governance and transparency has not yet significantly improved in our view due to receiving conflicting documents and statements (ESG-factor: credit negative), Scope acknowledges the installation of a supervisory board (of which one independent member with consultation rights can be elected by the bondholders, currently not the case) and a requirement of joint signatures on its enlarged board of directors (which includes minimum one independent member). Transparency could also be improved by shedding more light on the company’s significant order backlog of HUF59bn and when and how it will be executed and provide cash conversion.

      Outlook and rating-change drivers

      The outlook for Optimum Solar is Negative as the company’s performance in 2022 depends on the successful execution of one large project that accounts for over 80% of projected revenues, exposing the company to significant execution risk while also being a precondition for its standstill agreement. Any delay in the single cash flow generating project, the failed recovery of the SGF Silu contract amount (HUF 740m), not performing an increase in equity of at least HUF 800m or not having trade supplier credits for minimum 90 days where required could result in breaching the milestones set under the company’s rating remedy plan as accepted by bondholders.

      A negative rating action could occur if the company breaches any of the conditions and milestones defined in the rating remedy business plan and the standstill annex agreement, which would likely result in a termination of the waiver for an accelerated repayment of the nominal bond amount within 10 working days. Such a scenario is therefore likely to result in a default situation.

      A positive rating action that stabilises the Outlook may be warranted if enough liquidity, such as via a substantial capital injection and recuperation of the SGF Silu contract funds, is secured and the execution of the large contract goes according to the rating remedy plan, resulting in significant cash inflows to the company. In addition, increased visibility on the company’s backlog and its cash conversion from projects for the next two years, while demonstrating secured working capital financing and a committed buyer for the projects in special purpose vehicles are required for a positive rating action.

      Long-term and short-term debt ratings

      The rated entity issued a HUF 6bn senior unsecured corporate bond under the Hungarian Bond Funding for Growth Scheme in May 2020. The bond has a 3.5% coupon and starts to amortise three years after issuance (in May 2023), with a tenor until 2027.

      Scope’s recovery analysis is based on a hypothetical default scenario occurring in the near-term future (within the next rolling 3-month period), which assumes outstanding senior unsecured bond debt of HUF 6.0bn in addition to HUF 214m of secured bank debt, HUF 431m in payables, HUF 4.25bn in advances, HUF 2.6bn in guarantee positions and HUF 3.3bn in trade payables (amounts are based on preliminary unaudited H1 2022 accounts). Scope expects a ‘below average’ recovery for the company’s unsecured debt. Given the still heightened default potential, this results in a C rating for this debt class (aligned with 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/or Outlook, (General Corporate Rating Methodology, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 2022), 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 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, 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/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: Thomas Faeh, 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 4 February 2020. The Credit Ratings/Outlook were last updated on 14 April 2022.

      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
      © 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services 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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