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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating for Hungarian independent power producer MET Hungary Solar Park Kft (MET HSP) to B+/Stable from B/Positive. At the same time, Scope has upgraded the rating on senior unsecured debt to BB- from B+.

Rating rationale

The rating action is driven by dispelled concerns about covenant compliance following the re-definition of the debt service coverage ratio for FY 2023 through a circular voting process among bondholders.

On 6 November 2023, MET HSP received approval from 100% of the bondholders of the HUF 65bn senior unsecured bond issued in December 2021 under the Hungarian National Bank’s Bond Funding for Growth Scheme (ISIN: HU0000360953) to re-define the applicable debt service coverage ratio covenant for FY 2023. Following the amendment, the covenant is defined as: (EBITDA – capex – corporate tax liability + change in shareholder loans + received and non-repayable grants) divided by (interest on external debt + repayment of external debt). The amendment of the covenant refers to the integration of the positive impact of the change in shareholder loans, which are used to cover capex. The definition of the debt service coverage ratio for the covenant tests in the years 2024 and thereafter remains untouched.

Scope’s previous issuer rating on MET HSP was largely constrained by the uncertainty around covenant compliance for FY 2023. Non-compliance could have triggered an accelerated repayment of the outstanding bond volume. Following the re-definition of the covenant for FY 2023, Scope is confident about full covenant compliance based on its conservative forecasts. Scope projects the debt service coverage ratio to stand at about 1.6x in FY 2023, which provides good headroom to the minimum requirement of 1.1x. Moreover, Scope expects solid headroom on covenant compliance for the year 2024 and thereafter at around 1.5x, well above the minimum threshold of 1.1x.

Scope estimates that besides marginal administrative and legal costs, the company did not face significant costs related to the restructuring of the covenant definition. The fundamental rating case including financial forecasts for the next few years remains largely unchanged compared to Scope’s rating case as of 23 August 2023.

While Scope’s assessments on the company’s business risk profile (BBB) and financial risk profile (B+) remain unchanged, the comfort pertaining to covenant compliance leads to a higher assessment of MET HSP’s standalone credit quality of BB-, up from B+. The overall issuer rating stands at B+ (up from B), which integrates an unchanged negative one-notch adjustment capturing the company’s inherent weaknesses on governance and structure related to the interaction within the MET Holding AG group (credit-negative ESG factor).

All other rating drivers remain unchanged. The issuer rating is supported by a protected business model pertaining to the operation of a power generation portfolio of 230 MW of photovoltaic plants in Hungary (credit-positive ESG factor), which benefits from the prioritised feed-in of generated electricity at predictable prices for an extended period under the KÁT regime. Moreover, the company’s risk profile is supported by strong profitability as measured by a Scope-adjusted EBITDA margin of around 80% and a Scope-adjusted return on capital employed sustained at 15%-20%.

Besides the company’s limited diversification, the financial risk profile – albeit expected to improve gradually following the end of the company’s heavy investment phase supported by largely positive free operating cash flow and limited dividend payouts – remains the major rating constraint. This is depicted by high leverage measured by Scope-adjusted debt/EBITDA expected to move towards 8.0x over the next two-to-three years from 13.5x as of H1 2023 (based on LTM figures). The high leverage is paired with a modest EBITDA interest coverage of 2.0.-2.5x projected over the next few years (assuming that interest on shareholder loans is not deferred and compounded at the discretion of the rated entity). Despite high leverage, Scope deems liquidity to remain solid during the amortisation period of the company’s HUF 65bn bond and annual debt repayments of HUF 3.6bn-4.7bn from 2023 to 2025.

Ultimately, Scope’s assessment of the aforementioned weakness on governance and structure related to the interaction within the MET Holding AG group remains credit negative. While MET HSP’s management determines strategy, finances (budget) and operations, several points pose credit risks: (1) 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 some 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, i.e. when billing services within the group that are not in line with a lean management of the rated entity or when profit is being distributed to the detriment of creditor interests. (2) 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 acknowledges that MET HSP’s senior unsecured bond has an accelerated repayment clause requiring the company to repay the nominal amount if the debt rating pertaining to the bond stood below B+ for more than two years or if the debt rating dropped below B-, which could have default implications. Scope flags that following the upgrade of the debt category rating for senior unsecured debt, the headroom on covenant compliance has increased and Scope has limited concerns about a potential covenant breach of the ratings-related covenant.

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 expectations that MET HSP’s free operating cash flow will return being positive from 2024, which would allow for a gradual scaling back of both external and intercompany debt and for leverage (Scope-adjusted debt/EBITDA) to fall to about 8x by YE 2025 while keeping EBITDA interest coverage solidly above 2.0x.

A positive rating action is remote over the next two-to-three years but could be triggered by a faster-than-expected deleveraging to a Scope-adjusted debt/EBITDA of about 7.5x. This could be the result of equity injections or a conversion of shareholder loans into equity.

A negative rating action could be conducted if Scope’s expectations about deleveraging and a sustained EBITDA interest coverage of 2.0x and higher were threatened, e.g. due to a prolonged underperformance of the company’s power generation portfolio.

Long-term and short-term debt ratings

The rating on senior unsecured debt has been upgraded to BB- from B+ and still stands one notch higher than the rated entity’s issuer rating.

No debt is ranked superior to senior unsecured debt, such as the senior unsecured bond which was placed under the Hungarian National Bank’s Bond Funding for Growth Scheme. This is likely to remain so until 2031, when the planned bond matures, given the negative pledge.

Recovery expectations are based on a liquidation value reflecting the good recoverability of the company’s major unencumbered assets, e.g. five different solar parks. 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. Such assets would easily find a buyer without significant haircuts to their book values in light of the assets’ ESG footprints, their remaining regulatory lifetimes and Hungary’s energy market fundamentals. While execution risks on the ramp-up of the asset portfolio have diminished and Scope expects a ‘superior’ recovery for senior unsecured debt, which reflects a high advance rate for property, plant and equipment, the debt category rating remains constrained by the lack of operational data of operating assets for a longer period. Hence, Scope refrains from granting a two-notch uplift for such recovery expectations.

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 March 2023), 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. 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, Managing Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 November 2021. The Credit Ratings/Outlook were last updated on 23 August 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.

Conditions of use/exclusion of liability
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