/raid1/www/Hosts/bankrupt/TCREUR_Public/160906.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Tuesday, September 6, 2016, Vol. 17, No. 176
Headlines
G E O R G I A
SILKNET JSC: Fitch Assigns 'B+' Long-Term IDR, Outlook Stable
S L O V A K R E P U B L I C
SBERBANK SLOVENSKO: Fitch Withdraws 'BB+' Long-Term IDR
U N I T E D K I N G D O M
HOCHSCHILD MINING: Fitch Affirms 'BB+' IDR, Outlook Stable
INDUS PLC: Fitch Affirms 'Dsf' Rating on Class C Notes
SPIRIT ISSUER: Fitch Raises Rating on Notes to 'BB+'
*********
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G E O R G I A
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SILKNET JSC: Fitch Assigns 'B+' Long-Term IDR, Outlook Stable
-------------------------------------------------------------
Fitch Ratings has assigned JSC Silknet a Long-term Issuer Default
Rating of 'B+'. The Outlook for the Long-Term Rating is Stable.
KEY RATING DRIVERS
Silknet is the incumbent fixed-line telecoms operator in Georgia,
holding sustainably strong market positions of above 40% in both
fixed-voice and broadband services. Faced with falling voice
revenue, it has long-term growth prospects from broadband, and
generates stable cash flow from a growing subscriber base. The
lack of significant mobile operations is a strategic weakness as
is its small absolute scale -- Silknet services less than 375,000
fixed lines and it generated GEL55 million (approximately USD24
mil.) EBITDA in 2015.
Silknet's liquidity is weak as the company relies on uncommitted
facilities from its relationship bank to regularly re-finance its
amortizing debt, so far without disruption. Refinancing risk is
mitigated by moderate leverage -- Fitch projects it to remain at
or below 2x FFO adjusted net leverage (1.6x at end-2015).
However, the company is facing high FX risks with over 90% of its
debt being USD-denominated while its revenue and cash flow are
predominantly in the local currency. The company's corporate
governance has been weak, but recent changes suggest that it is on
track to improve.
Strong Incumbent Positions Outside Tbilisi
Silknet benefits from its strong position of the incumbent fixed-
line telecoms provider across most of the territory of Georgia,
with the notable exception of capital Tbilisi and some other large
cities. The company was relatively late to realize the potential
of broadband services. Competitors have taken a significant
broadband market share as they rolled out their own infrastructure
and have been able to cherry pick the most commercially attractive
locations, typically in large cities.
Fitch expects Silknet to defend its market position. Its
advantage of being able to offer almost nationwide ADSL coverage
across its existing fixed-line franchise will be supported by
significant investments into new fiber infrastructure.
Competition is typically less intense outside large cities, and
the lower speed ADSL-based service remains competitive in those
areas.
Although from a late start, the company's large fixed-line
franchise and extensive copper infrastructure has allowed it to
rapidly develop its broadband subscriber base and become the
largest broadband operator in Georgia. In June 2016 the company
controlled 45% of fixed lines and a larger 61% share of fixed
voice revenues in the country; its subscriber and revenue
broadband market shares were equal to 40% and 41% respectively.
Revenue Growth Challenges
Fitch expects Silknet revenues to remain on a sluggish growth
path, with growth rates in the low-to-mid single digit percentage
range. The traditional fixed-line voice segment is in a
structural decline, which is likely to continue. This segment
accounted for 20% of Silknet's 2015 revenue, and its double-digit
contraction significantly weighs on the total. Fixed-to-mobile
substitution is likely to continue unabated, as customers are
typically facing better pricing options on mobile-to-mobile calls.
Broadband and pay-TV services remain key growth drivers. However,
their contribution is likely to offset voice decline and keep
revenue growth slightly positive. Subscriber broadband growth has
significantly slowed in Georgia since 2014. Potential revenue
growth from upselling bundled services and market share gains is
likely to be limited, due to continued competition and relatively
limited consumer purchasing power outside the large cities.
Revenue growth in the Georgian telecoms market has slowed to
single digit percentages and, we believe, acceleration from the
current levels is unlikely. expanding segments of broadband and
pay-TV grew by only 2.7% yoy and 8.1% yoy respectively in revenue
terms in 2Q16, compared with 18.0% yoy and 21.3% yoy growth
respectively in 2Q15, based on regulator GNCC data. Slower
organic growth may lead to intensifying price competition, as
smaller players tend to become more disruptive if unable to
achieve meaningful expansion of their subscriber base.
Low GDP Per Capita is Growth Constraint
Relatively low GDP per capita of USD3,249 (at market exchange
rates in 2015) in Georgia is likely to constrain both revenue
growth and efforts to increase an average telecom bill through
offering premium quality services at a higher price.
The current moderate broadband subscriber penetration level of
close to 50% of households in Georgia suggests some longer-term
subscriber growth potential. However, year-on-year subscriber
growth had already slowed to 6% at end-1H16, with revenue growth
lagging due to price competition. Key urban areas have already
been covered, while less populated areas have lower affluence than
the national average.
Fibre Improves Competitiveness, With Execution Risks
The company's strategy of rapid fiber development will improve its
competitive position. Fitch believes the company's plans to
achieve ARPU growth from the existing customer base may be more
challenging.
Silknet plans to continue to make significant fiber investments,
which would allow it to achieve network quality parity with its
key broadband competitors that typically operate proprietary fiber
networks. While Silknet's ability to offer ADSL service on its
legacy copper network gave it an advantage of quick subscriber
coverage, fiber peers can offer higher speed, better quality
broadband connection.
Improving network quality will come at a price. There is a risk
that investments may not be quickly recouped from higher,
incremental revenue. The management expects that the current ADSL
customer base is likely to migrate to a better quality fiber
service, and that customers are more likely to pay more for higher
connection speeds, while increasingly taking up pay-TV that would
further increase ARPUs. Fitch believes some positive traction is
likely; however, the mass market is extremely price sensitive in
Georgia, while competition remains intense.
Small Scale Limits Efficiency Gains, Funding Options
The company's small absolute scale will likely be a drag on the
company's efforts to improve profitability. It will also be a
limiting factor for its funding options. A small operational size
of less than 375,000 fixed-lines may hamper its ability to achieve
economies of scale on par with larger peers. Also, Silknet's
small scale may hamper access to international financial markets.
Lack of Mobile is a Strategic Disadvantage
Silknet does not have any significant mobile operations, which
Fitch views as a strategic disadvantage. The company is
potentially facing quad-play competition from Megticom, Georgia's
largest mobile operator, which recently acquired Caucasus Online,
the second largest broadband operator and Silknet's key rival.
Silknet has a portfolio of mobile frequencies including for LTE
services; however, organic mobile development would entail
significant execution risks and will likely weigh on the company's
financial results and leverage. The Georgian mobile market is
highly competitive, with third entrant Vimpelcom still struggling
to stabilize its EBITDA margin at above 20% in spite of
controlling almost 25% of the subscriber base -- which does not
leave many opportunities for a new potential entrant. Silknet's
acquisition of one of the existing mobile operators would be
treated as an event risk.
Cost Optimization Contributes to Gradual Margin Improvement
Silknet is going to remain focused on cost optimization leading to
gradual profitability improvement. The company spun off certain
non-core service operations, including network repair and
subscriber installations, into ServiceNet LLC (ServiceNet) in
2015. It concurrently entered into a long-term contract with this
entity aiming to achieve a 5% cost saving on these services. The
spin-off will likely result in higher reported EBITDA and capex as
some costs that had previously been treated as operating may now
be capitalized, but this should only have a minor impact on free
cash flow.
Evolving Corporate Governance
Silknet is a subsidiary of Silk Road Group, a diversified group of
companies with assets in transportation, trading, real estate,
retail and banking sectors of Georgia. The group is ultimately
majority controlled by Mr. Ramishvili, a Georgian national, along
with two other individuals through a number of holding companies.
Silknet's corporate governance situation is evolving as the
company is putting in place certain formal procedures with an aim
to increase transparency and introduce some checks on
shareholders' access to the company's cash flows.
Silknet has a history of upstreaming cash to shareholders through
large loans that were later set off against equity. It also
effectively guaranteed debt of its sister companies. The company
expects these practices to be stopped. Silknet made amendments to
its charter of incorporation in July 2016 that imposed certain
restrictions on dividend distributions and related-party
transactions. Although shareholders retain a liberty to reverse
most of these changes, Fitch views these amendments as positive.
The board practices are somewhat informal, with no representation
of independent directors.
Moderate Leverage, Improving Cash Flow Generation
Silknet's leverage was moderate at 1.6x FFO adjusted net leverage
and 1.7x ND/EBITDA at end-2015. Fitch expects leverage to remain
at or below 2x on an FFO adjusted basis in the medium-to-long
term. 2015 funds from operations were boosted by significant one-
off IRU proceeds that are likely to decline, Fitch therefore
projects that FFO adjusted net leverage would somewhat rise in
2016 but does not exceed 2x. The company's leverage may come
under pressure from an ambitious investment program unless
accompanied by significant EBITDA growth on the back of wider
fiber take-up and improved market share.
Fitch projects Silknet's pre-dividend cash flow to start gradually
increasing, helped by an ongoing focus on improving cost
efficiency, modest revenue growth and lower corporate profit tax
in Georgia. Fitch expects that the company's capex will not
exceed 25% of revenue on average across 2016-2019.
High FX Risks
Silknet's leverage is sensitive to FX volatility, as its revenues
are predominantly in the domestic currency while most of its debt
and a significant share of operating expenses are in foreign
currency, mainly USD. The company is making efforts to increase
the share of GEL debt but it remains to be seen how much success
it can achieve, as local currency debt is typically more expensive
and shorter-dated.
In addition to equipment spare parts that are almost entirely
imported, most of its content and international interconnect
costs, including for internet traffic, are foreign currency
denominated. Fitch estimates that proportion of Silknet's
operating expenses in foreign currency is higher than most of its
international peers.
Stretched Liquidity
Silknet does not have sufficient liquidity to repay its amortizing
debt of slightly above GEL15 million per annum. The company
heavily relies on Bank of Georgia (BB-/Stable), by far the largest
creditor and key relationship bank, for refinancing. Although
Silknet had a GEL217 million credit line with this bank at end-
2015, this facility is uncommitted. High refinancing risk is
partly mitigated by Silknet's moderate leverage.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Silknet
include:
-- a significant reduction in cash flow from IRU, leading to
weaker 2016 funds from operations compared to 2015;
-- low-to-mid single digit percentage organic revenue growth
2016-2019;
-- low corporate profit tax on the back of tax reforms in
Georgia;
-- a sharp one-off improvement in the reported 2016 EBITDA
margin, driven by a spin-off of ServiceNet in 2015; and
-- capex at approximately 25% of revenues on average across
2016-2019.
RATING SENSITIVITIES
Positive: future developments that may, individually or
collectively, lead to positive rating action include:
-- a significant decrease in the amount of foreign currency
debt and stronger liquidity, combined with a stable
operating environment and improved FCF generation,
alongside a track record of improved corporate governance.
These improvements may not be realistically achieved in the
next few years.
Negative: future developments that may, individually or
collectively, lead to negative rating action include:
-- increased leverage to sustainably above 2.5x FFO adjusted
net leverage without a clear path for deleveraging. This
may be a result of continuing aggressive capex or
shareholder remuneration, coupled with the impact of FX
volatility; and
-- a rise in corporate governance risks due to, inter alia,
related-party transactions or upstreaming loans to
shareholders.
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S L O V A K R E P U B L I C
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SBERBANK SLOVENSKO: Fitch Withdraws 'BB+' Long-Term IDR
-------------------------------------------------------
Fitch Ratings has withdrawn Sberbank Slovensko a.s.'s (SBSK)
ratings.
Fitch is withdrawing the ratings as SBSK has chosen to stop
participating in the rating process. Therefore, Fitch will no
longer have sufficient information to maintain the ratings.
Accordingly, Fitch will no longer provide ratings or analytical
coverage for SBSK.
KEY RATING DRIVERS
On Dec. 21, 2015, Fitch placed SBSK's ratings on Rating Watch
Negative (RWN), following the announcement of SBSK's parent,
Sberbank Europe AG (SBEU; BB+/Negative), that it had signed an
agreement with Penta Investments to sell SBSK. On July 29, 2016,
SBEU announced that it has completed the sale of SBSK to Penta
Investments.
Fitch has withdrawn SBSK's ratings without resolving the Rating
Watch due to insufficient information to assess the bank's current
and future credit profiles. Fitch believes that as a result of
the change in the ownership the bank's credit profile will no
longer benefit from potential institutional support from its
previous ultimate parent Sberbank of Russia
(SBRF, BBB-/Negative), and its Long-Term Issuer Default Rating
(IDR) would therefore reflect its intrinsic creditworthiness, as
expressed by its Viability Rating (VR). Fitch does not rate Penta
Investments and therefore cannot reliably assess its ability to
provide support to SBSK.
Given the insufficient information available, Fitch is not able to
determine the appropriate level of SBSK's VR, and hence the bank's
Long-Term IDR following the change in ownership, and has therefore
withdrawn the ratings without affirmation. However, the agency
believes that the appropriate level of the Long-Term IDR based on
the VR would likely be lower than the 'BB+' rating, which was
based on support from Sberbank.
RATING SENSITIVITIES
Not applicable
The ratings have been withdrawn without affirmation:
Long-Term IDR: 'BB+'; on RWN
Short-Term IDR: 'B'
Support Rating: '3'; on RWN
Viability Rating: 'bb-'
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U N I T E D K I N G D O M
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HOCHSCHILD MINING: Fitch Affirms 'BB+' IDR, Outlook Stable
----------------------------------------------------------
Fitch Ratings has affirmed the Long-Term Foreign and Local
Currency Issuer Default Ratings of Hochschild Mining Plc, and
$350 million 7.75% senior unsecured notes due 2021 issued by the
company's 100%-owned subsidiary in Peru, Compania Minera Ares
S.A.C. (Cia Minera Ares), at 'BB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Swift Reduction in Net Leverage:
Hochschild successfully deleveraged over the last 12 months ended
June 30, 2016, to net debt/EBITDA of 1.0x as the company benefited
from the successful start-up of its Inmaculada mine, coupled with
a strong rally in commodity prices. Hochschild has also benefited
from the removal of taxes on exports and dividends in Argentina,
with a positive impact on its San Jose mining operations which
account for approximately 25% of the company's EBITDA generation.
Fitch projects Hochschild's net leverage to be around 0.7x for
2016 and fall to below 0.5x by 2017, absent a material change in
the company's cost structure, significant acquisitions, or
increased dividends.
Realization of Cost Improvements:
Hochschild's focus on cost reductions over the last 12 months have
also contributed to its strong cash flow generation, as the
company's all-in sustaining cost of production of silver
equivalents declined to USD10.9/per ounce as of June 30, 2016,
compared to USD 12.9/per ounce in 2015 and USD 17.4/per ounce in
2014. The decline in Hochschild's all-in sustaining cost of
production of silver equivalents was a result of the full
contribution from its Inmaculada mine, which has a standalone all-
in sustaining cost of production of silver equivalents of USD9 per
ounce, lower fuel and input prices, coupled with the
aforementioned tax reforms in Argentina. Hochschild's ability to
maintain its mining operations at lower costs will be crucial, as
Fitch projects commodity prices will decline over the coming
months, reducing margins and cash flow.
Positive Free Cash Flow (FCF) Generation:
Fitch expects Hochschild to generate FCF of around USD125 million
in 2016 and USD90 million in 2017 following FCF of negative USD91
million in 2015 as the company benefits from its low-cost
Immaculada mine coupled with reduced capex over the next several
years. The company's strong performance over the LTM June 30,
2016, has allowed it to announce a dividend of USD7 million for
the year. Fitch projects Hochschild will increase dividends over
the next several years as the company repays its shareholder
following a USD95 million equity injection during November 2015.
FCF was negative since 2012 as the result of a number of
acquisitions and investments, exacerbated by declining precious
metal prices.
Pablo Vein Progress:
Hochschild has completed portions of the infrastructure
development necessary for access to the Pablo vein the company
discovered near its Pallancata mine, which is expected to further
bolster the company's production and credit profile. The
exploration and drilling in the area surrounding the Pablo vein is
in the preliminary stage; however, expectations are that the
average ore grade of Pablo is higher than that of Inmaculada, its
most profitable mine. Existing production facilities at
Pallancata are expected to process the new ore from Pablo
resulting in extremely low AISC estimated at around USD12-USD13/oz
of silver equivalents. The ramp-up period for production at the
Pablo vein is pending environmental
permits, but is expected to begin during 2017. Further studies by
Hochschild also resulted in the discovery of an additional vein
near Pallancata called Pablo Piso, which is also high grade and
should increase capacity utilization at the Pallancata operations
to treating 2,350 tonnes per day by the end of 2017.
KEY ASSUMPTIONS
-- Average silver price of USD18.00/oz in 2016, USD17.78/oz in
2017, USD 18.02/oz in 2018, USD18.23/oz in 2019;
-- Average gold price of USD1,168/oz in 2016, USD1,100/oz
thereafter;
-- Consolidated silver equivalent production of 34 million oz
in 2016, 38 million oz in 2017, and 40 million oz in 2019.
RATING SENSITIVITIES
Deterioration of Cost Structure:
Hochschild's ratings could be downgraded or result in a Negative
Outlook following a structural shift in the company's cash cost
position that resulted in sustained low operating cash flow
generation and persistent negative free cash flow, affecting its
ability to satisfactorily weather a period of low commodity
prices. Resulting financial performance consistently worse than
Fitch's base case, such as sustained total debt/EBITDA leverage
above 3.5x, could trigger a negative rating action. A change in
the conservative capital structure philosophy to a more aggressive
one by the company's management could also impact ratings.
Positive Rating Momentum:
Ongoing improvements in Argentina's operating environment in
collaboration with continued reduction in production costs to
remain profitable through precious metal pricing troughs could
lead to a positive rating action for Hochschild. A sustained
reduction in leverage with total debt/EBITDA ratios around or
below 1.5x, sustained free cash flow generation, and a reinforced
liquidity position are also prerequisites for a positive rating
action.
LIQUIDITY
Improved Liquidity Position:
Hochschild improved its cash position to USD103 million as of
June 30, 2016 from USD84 million as of Dec. 31, 2015, due to
stronger cash generation from its mines (+USD75 million from
Inmaculada, +USD15 million from Arcata, +USD4 million from
Palancata, +USD38 million from San Jose). Additional liquidity
was made available from its shareholder during 2015 of
USD95 million. Reinforcing Hoschchild's strong position within
its rating level, the company repaid USD105 million of debt during
2015 and an additional USD70 million during the first six months
of 2016. Net debt fell to USD267 million as of June 30, 2015,
compared to USD351 million as of Dec. 31, 2015. Hochschild's
strategic plan is to be net debt-neutral over the coming years.
FULL LIST OF RATING ACTIONS
Fitch affirms these ratings:
Hochschild Mining Plc
-- Long-Term Foreign Currency Issuer Default Ratings (IDR) at
'BB+';
-- Long-Term Local currency IDR at 'BB+'.
The Rating Outlook is Stable.
Compania Minera Ares S.A.C.
-- Senior unsecured debt rating at 'BB+'.
INDUS PLC: Fitch Affirms 'Dsf' Rating on Class C Notes
------------------------------------------------------
Fitch Ratings has affirmed Indus (Eclipse 2007-1) plc's floating
rate notes as:
GBP45.9 mil. class C (XS0294757256) affirmed at 'Dsf'; Recovery
Estimate (RE) revised to 95% from 80%
The transaction was originally a securitization of 18 loans
originated by Barclays Bank plc and one loan originated by Bank of
Scotland, backed by commercial properties in the UK.
Since April 2016, the outstanding balance of the transaction has
reduced to GBP45.9 mil. from GBP54.9 mil., at which time 220
properties remained. The debt reduction suggests that
considerable progress has been made in liquidating the underlying
collateral since then.
KEY RATING DRIVERS
The RE revision to 95% from 80% is driven by a high rate of recent
asset sales, which Fitch understands from the transaction's
servicer have been achieved at values in excess of release price
(on aggregate), with any excess funds reserved providing a buffer
against volatility. Minor interest shortfall, which explains the
'Dsf' rating, is expected to grow modestly on this class given
permanently inadequate issuer income. As it is irrecoverable,
recoveries are expected to fall marginally short of 100%.
RATING SENSITIVITIES
The rating on the notes will be withdrawn within 11 months of this
rating action.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation
to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pool and the transaction. There were no findings that were
material to this analysis. Fitch has not reviewed the results of
any third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool ahead of the transaction's initial
closing. The subsequent performance of the transaction over the
years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, Fitch's assessment of the information relied upon for the
agency's rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
SPIRIT ISSUER: Fitch Raises Rating on Notes to 'BB+'
----------------------------------------------------
Fitch Ratings has upgraded Spirit Issuer Plc's notes to 'BB+' from
'BB'. The Outlook is Stable. Spirit is a whole business
securitization of 625 managed pubs and 410 leased and tenanted
pubs located across the UK.
The upgrade reflects continued growth in Spirit's managed estate
and stabilization within the tenanted estate, cost synergies
realized from the acquisition by Greene King and our revised
expectation of reduced cash pension contributions. Under Fitch's
revised Fitch Base Case, it now expects free cash flow debt
service coverage ratio (FCF DSCR) to be above the 1.4x trigger for
a positive rating action.
Combined EBITDA to January 2016 grew (on an adjusted 52-week
basis) 11.2% y-o-y to GBP161.8 mil. This compares with the Fitch
base case (adjusted for 52-weeks) forecast to March 2016 of
GBP157.2 mil. The variance was driven by total adjusted sales
growth to January 2016 of 2.3% and stable total operating cost
increase of 0.1% as a result of synergies realized since the
acquisition by Greene King.
Although Spirit has changed the quarterly reporting periods from
1Q16, Fitch believes that seasonality in monthly performance was
limited within the year, allowing for sufficiently comparable
analysis.
The transaction is exposed to slightly lower coverage in the
earlier years of the forecast horizon and faces potentially a
minimum of 1.2x in 2027. However, the revised Fitch base case
represents an improvement on our 2015 base case and is further
supported by Spirit's position in relation to peers. Fitch views
Greene King, Marston's and M&B as the closest peers to Spirit.
M&B comprises solely managed pubs, whereas the other two
transactions consist of managed and tenanted pubs, although the
share of tenanted pubs in Spirit is much lower than in the others.
Compared with Marston's 'BB+' (Stable) rated class B notes,
Spirit's notes under Fitch base case exhibit similar FCF DSCR of
1.4x, although lower minimum FCF DSCR (1.2x versus 1.4x) but
"Stronger" debt structure and lower EBITDA leverage (based on one-
year forecast) (5.3x versus 7x). Compared with M&B class D1 notes
(rated BBB-/Negative), Spirit's notes under Fitch base case also
have similar average/medium FCF DSCR of 1.4x and minimum FCF DSCR,
in addition to a "Stronger" debt structure and similar leverage
(5.3x versus 5.4x).
Fitch's revised base case reflects recent developments that could
impact financial performance over the forecast horizon to legal
final maturity of the notes, including the phasing-in of the
national living wage, and increasing forecast operating expenses
for the managed estate through to 2020. Following the latest
triennial actuarial valuation of the defined benefit pension
schemes, contributions to the Spirit pension scheme stopped in
2016 as the deficit recovery plan had successfully completed. As
a result, Fitch also assumes no further cash pension contributions
in Fitch base case. Overall, Fitch expects FCF DSCR (minimum of
average and median) to be 1.4x under the Fitch Base Case.
The Stable Outlook reflects Fitch's view that the securitization
will perform in line with current expectations, as reflected in
the revised Fitch Base Case.
KEY RATING DRIVERS
Industry Profile: Midrange
The operating environment is viewed as 'weaker'. While the pub
sector in the UK has a long history, trading performance for some
assets has shown significant weakness in the past. The sector is
highly exposed to discretionary spending, strong competition
(including from the off-trade or various forms of home or other
entertainment), and other macro factors such as minimum wages,
utility costs and changes in regulation with the statutory pub
code introducing in 2016 the market rent-only option (MRO) in the
tenanted/leased segment. MRO breaks the traditional tied-model
that requires tenants to buy drinks from the pubcos, usually in
exchange for lower rent. Last but not least, the implementation
of national living wage could put margins under pressure.
The barriers to entry are viewed as 'midrange'. Licensing laws
and regulations are moderately stringent, and managed pubs and
tenanted pubs (ie, non-full repairing and insuring) are fairly
capital-intensive. Switching costs within the drinking-eating out
market; however, are generally viewed as low, even though there
may be some positive brand and captive market effects.
The sustainability of the sector is viewed as 'midrange', with the
strong pub culture in the UK expected to persist, thereby taking a
large portion of the eating-drinking-out market. In relation to
demographics, mild forecast population growth in the UK is a
credit-positive.
Company Profile: Midrange
Financial performance is viewed as 'midrange'. Over the past five
years, the managed estate has achieved an EBITDA per pub CAGR of
9.5%. In relation to the tenanted estate both absolute and per
pub performance has been fairly weak; however, this weakness is
mitigated to some extent by Spirit's low exposure to the tenanted
model, with total securitized EBITDA contribution from the
tenanted estate at 19%. In addition, the tenanted estate has
started to show signs of stabilization.
The company's operations are viewed as 'midrange'. Recently-
branded pubs represent a significant portion of total securitized
pubs. Spirit has limited pricing influence but it is a fairly
large operator within the pub sector. Its acquisition by Greene
King could support further extraction of economies of scale.
While operating leverage has been increasing over the last few
years as a result of a growing food offer, the change in strategy
is viewed favorably given that the food-led approach has led to
revenue growth. Management has demonstrated a good track record
since the closing of the securitization, implementing sensible and
effective strategies in a timely manner (increasing food offer,
brand development, reducing tenanted model exposure).
Transparency is viewed as 'midrange' with the more transparent
managed business (self-operated) representing 80% and 60% of the
securitized group by EBITDA and estate, respectively.
Historically management has demonstrated some ability to adapt to
industry changes with the extensive rollout of branding and food
led offers to mitigate the declining performance of the tenanted
model.
Dependence on operator is viewed as 'midrange'. Operator
replacement is not straightforward but is possible within a
reasonable period of time (several alternative operators
available). Centralized management of the managed and tenanted
estates and common supply contracts result in close operational
ties between both estates.
Asset quality is viewed as 'midrange'. The pubs are viewed as
well-maintained following the recent completion of a three-year
GBP200 mil. investment program in relation to the managed estate.
Assets are also well-located (significant portion in London and
the south-east); however, Spirit has a significant portion of
managed pubs on leasehold, with an annual lease expense of around
GBP30 mil. The secondary market is fairly liquid (extensive
disposal programs across the industry have been absorbed).
Debt Structure Class A: Stronger
The debt profile is viewed as 'midrange' for the class A notes.
The majority of principal (around 80%) is to be repaid via
scheduled amortization, with the class A6 and A7 notes due to be
paid down via cash sweep under Fitch base case (although they also
benefit from back-ended scheduled amortization).
Debt service increases gradually until 2028, meaning it is not
well-aligned with the industry risk profile; however, it gradually
reduces from 2028 to 2036. As a result of the mismatch between
the scheduled amortization profile of the class A6 and A7 notes
and the class A1 and A3 swaps, under-hedging is set to increase
gradually up to 100% by 2033. However, floating-rate risk is
mitigated by the cash sweep as prepayments eliminate under-hedging
to a maximum of 10% in 2018 and in full by 2020 under Fitch base
case.
The security package is viewed as 'stronger' for the class A notes
with comprehensive first ranking fixed and floating charges over
the issuer's assets and ultimately over all of the operating
assets.
The structural features are viewed as 'stronger'. All standard
whole business securitization legal and structural features are
present, and the covenant package is comprehensive. The financial
covenant level is fairly high (with debt service coverage ratio
(DSCR) at 1.4x) and the restricted payment condition, calculated
using synthetic (annuity-based) debt service, is set currently at
1.45x DSCR, higher than industry levels. The liquidity facility
reduces in line with principal, meaning it falls below the usual
18 months peak debt service coverage (to around 15 months by 2020)
and is not available for the last two years of the transaction.
This is credit-negative but mitigated by debt then being fully
repaid through cash sweep under Fitch base case.
RATING SENSITIVITIES
Positive - Improvement in Fitch base case FCF DSCR above 1.6x due
to further strong performance of the managed division, in addition
to continued stabilization in tenanted performance could trigger
an upgrade.
Negative - Deterioration of the forecast FCF DSCR below 1.3x could
put the ratings under pressure. This could be a result of a
change in consumer behavior e.g. as result of an increase in drink
driving alcohol limit in England & Wales or MRO/national living
wage having a materially larger negative effect than currently
expected.
*********
Monday's edition of the TCR delivers a list of indicative prices
for bond issues that reportedly trade well below par. Prices are
obtained by TCR editors from a variety of outside sources during
the prior week we think are reliable. Those sources may not,
however, be complete or accurate. The Monday Bond Pricing table
is compiled on the Friday prior to publication. Prices reported
are not intended to reflect actual trades. Prices for actual
trades are probably different. Our objective is to share
information, not make markets in publicly traded securities.
Nothing in the TCR constitutes an offer or solicitation to buy or
sell any security of any kind. It is likely that some entity
affiliated with a TCR editor holds some position in the issuers'
public debt and equity securities about which we report.
Each Tuesday edition of the TCR contains a list of companies with
insolvent balance sheets whose shares trade higher than US$3 per
share in public markets. At first glance, this list may look like
the definitive compilation of stocks that are ideal to sell short.
Don't be fooled. Assets, for example, reported at historical cost
net of depreciation may understate the true value of a firm's
assets. A company may establish reserves on its balance sheet for
liabilities that may never materialize. The prices at which
equity securities trade in public market are determined by more
than a balance sheet solvency test.
Each Friday's edition of the TCR includes a review about a book of
interest to troubled company professionals. All titles are
available at your local bookstore or through Amazon.com. Go to
http://www.bankrupt.com/booksto order any title today.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Valerie U. Pascual, Marites O. Claro, Rousel Elaine T. Fernandez,
Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and
Peter A. Chapman, Editors.
Copyright 2016. All rights reserved. ISSN 1529-2754.
This material is copyrighted and any commercial use, resale or
publication in any form (including e-mail forwarding, electronic
re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
be reliable, but is not guaranteed.
The TCR Europe subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for members
of the same firm for the term of the initial subscription or
balance thereof are US$25 each. For subscription information,
contact Peter Chapman at 215-945-7000 or Nina Novak at
202-362-8552.
* * * End of Transmission * * *