/raid1/www/Hosts/bankrupt/TCREUR_Public/171024.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, October 24, 2017, Vol. 18, No. 211
Headlines
F R A N C E
3AB OPTIQUE: Fitch Assigns B+ Rating to EUR250MM Sr. Sec. Notes
G E O R G I A
LIBERTY BANK: Change of Control No Impact on Fitch B+ Rating
G E R M A N Y
AIR BERLIN: Eurowings to Offer Discounts to Stranded Travellers
JT TOURISTIK: Travel Packages Guaranteed Until End-December
H U N G A R Y
OTP BANK: Moody's Hikes Jr. Sub. Debt Rating to Ba3(hyb)
K A Z A K H S T A N
ASIA LIFE: Fitch Assigns B Insurer Financial Strength Rating
L U X E M B O U R G
INEOS GROUP: Moody's Hikes CFR to Ba2, Outlook Stable
INTRALOT CAPITAL: Fitch Rates EUR500MM Bond BB- Sr. Unsec. Rating
N E T H E R L A N D S
CAIRN CLO III: Fitch Assigns B- Rating to EUR8MM Class F Notes
EA PARTNERS: Fitch Lowers Rating on US$700MM Notes to CC
P O L A N D
VS NDT: Files Bankruptcy Motion in Gdanks Court
R O M A N I A
OLTCHIM SA: Administrator Chooses 3 Firms to Buy Company's Assets
R U S S I A
B&N BANK: Bank of Russia to Participate in Resolution Measures
KHANTY-MANSIYSK: S&P Affirms Then Withdraws BB+' ICR
UFA: S&P Affirms Then Withdraws 'BB-' Issuer Credit Rating
S P A I N
INSTITUTO VALENCIANO: S&P Affirms 'BB/B' ICR, Outlook Stable
TDA SA NOSTRA 1: Fitch Keeps BB Notes Rating on Watch Positive
U N I T E D K I N G D O M
ABSOLUTE LIVING: 7 People Face Questioning in Court Over Collapse
ERPE MIDCO: Fitch Assigns 'B' Long-Term Issuer Default Rating
FLY SALONE: Two Former Directors Get 7 Year Disqualifications
GREENWOODS: Bought Out of Administration by Verstatile Int'l
MILLER HOMES: S&P Assigns 'B+' Corp Credit Rating, Outlook Stable
SHOP DIRECT: Fitch Assigns B+ Long-Term IDR, Outlook Stable
STONE FIRMS: Parent Company Sues Barclays, KPMG Over Collapse
WARWICK FINANCE: Moody's Assigns Caa1 Rating to Class E Notes
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F R A N C E
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3AB OPTIQUE: Fitch Assigns B+ Rating to EUR250MM Sr. Sec. Notes
---------------------------------------------------------------
Fitch has assigned France-based 3AB Optique Developpement
S.A.S.'s EUR250 million fixed rate senior secured notes due 2023
and EUR175 million floating rate senior secured notes due 2023 a
final rating of 'B+'/RR3-. The notes have been issued as part of
the refinancing by the parent company, France-based Lion/Seneca
France 2 S.A.S. (as the entity controlling the optical franchisor
Afflelou).
Fitch has also affirmed Afflelou's Long-Term Issuer Default
Rating (IDR) at 'B' and the EUR30 million super senior revolving
credit facility (SS RCF) at 'BB-'/RR2/90%. The Outlook is Stable.
Furthermore, following the redemption of the existing notes,
Fitch has withdrawn the 'BB-' rating of the EUR365 million senior
secured notes issued by 3AB Optique Developpement S.A.S. and the
'CCC+' rating of the EUR75 million senior notes issued by
Lion/Seneca France 2 S.A.S.
The assignment of the final rating and the affirmation of the IDR
and the SS RCF instrument rating follow a review of the final
documentation which materially conforms to the information
received at the time the agency assigned an expected rating to
the notes on 3 October 2017.
The new notes are secured by pledges over certain share pledges,
bank accounts and intercompany receivables and benefit from
senior, joint and several guarantees provided by certain group
entities. On enforcement, the notes will rank behind the SS RCF.
KEY RATING DRIVERS
Lower Recoveries for Senior Secured Creditors: Fitch projects the
new senior secured notes will see lower recoveries equivalent to
'RR3' compared with 'RR2' under the previous structure given a
higher amount of senior secured debt post refinancing.
Transaction Improves Financial Profile: The completed refinancing
has reduced gross debt to EUR425 million (excluding the EUR30
million RCF) from EUR440 million and will provide increased
leverage and financial flexibility headroom at the current
ratings. Following the refinancing and as a result of continued
growth in profits Fitch projects FFO adjusted gross leverage will
reduce to 6.2x for the financial year to July 2018 (from 6.7x at
FYE17) and decrease towards 6.0x thereafter. The new capital
structure will result in lower interest costs leading to improved
coverage metrics with FFO fixed charge coverage trending towards
2.5x by FY20 from 1.9x at FY17.
Stable Operating Performance: Afflelou's healthy results
continued in FY17, with network sales, group revenue and EBITDA
all exceeding Fitch previous expectations. This was driven by
growth in all regions, with strong like-for-like (lfl) increase
in France. Cooperation with major care networks is continuing to
bear fruit, which is reflected in higher network activity and
increased earnings. Such operating developments reflect a
successful implementation of Afflelou's business strategy and
adaptation of the company to an evolving trading environment.
Strong Cash Flow Generation: Fitch projects Afflelou will
generate consistently positive and growing free cash flows (FCF)
with FCF margins improving from around 6% in FY17 towards 10% in
FY19-20. Moreover, Afflelou's cash conversion as measured by
FCF/EBITDA (as defined by Fitch) is fairly strong relative to the
medians for European leveraged retail peers in the 'B' rating
category. This assumption is supported by steadily expanding
EBITDA, which is driven by higher network activity, coupled with
lower cash interest expenses following the refinancing.
In addition, Afflelou's efforts to reduce the number of directly-
owned stores through sale or closure should improve cash flows
and credit metrics, underpinning the asset-light nature of
Afflelou's business model as a franchisor model. Small-scale
acquisitions are embedded in the current ratings, and they can be
comfortably funded by internal cash.
DOS Reduction Viewed Positively: Management's efforts to reduce
the group's portfolio of directly owned stores (DOS) in the
medium term could provide some upside to the current ratings if
successfully implemented as it would result in lower rental
expenses and capital expenditure and have an immediate positive
impact on EBITDA, FCF generation and adjusted credit metrics.
Fitch does not includes a material reduction in DOS in Fitch
current rating case given the execution risks associated with
disposing the shops as well as the group's recent track record of
trying to reduce the estate. However, should management
successfully implement this plan, it would be positive for the
ratings.
DERIVATION SUMMARY
Afflelou's Long-Term IDR of 'B'/Stable reflects a symbiotic
business model with healthcare and retail components. The
business benefits from a favourable reimbursement policy for eye
care in France. This provides for greater operational stability
compared with conventional retailers, who face less predictable
consumer behaviour, and as a result, are exposed to higher sales
and earnings uncertainties.
Consequently, Afflelou's operational resilience tolerates
slightly higher financial risk compared with pure retail peers
such as Mobilux 2 SAS (B/Stable), New Look Retail Group Ltd (CCC)
and Financiere IKKS S.A.S. (CCC). Compared with healthcare peers
such as Synlab Unsecured Bondco PLC (B/Stable), Afflelou is rated
at the same level despite a slightly lower leverage due to a
retail element in its business model.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Afflelou
include:
- Revenue growth of 3% in FY18 decelerating gradually
thereafter, marking the ongoing transition to closer
cooperation with care networks;
- EBITDA margin improving towards 21.4% by FY20 from 20.6% in
FY17 driven by the top line and product mix;
- Trade working capital outflow of EUR6 million per annum;
- One-off payment of EUR6 million to management included in
FY18;
- Capex remaining stable at EUR11 million per annum;
- Small bolt-on acquisitions annually offset by some asset or
store disposals.
RECOVERY ASSUMPTIONS
Fitch has used the going concern approach given Afflelou's asset
light business model. The EBITDA discount of 20% applied to FY
EBITDA of EUR77 million leading to post-restructuring EBITDA of
around EUR 60 million. At this level of EBITDA Afflelou's
internal cash generation would be negative, with a capital
structure considered as largely unsustainable in such
hypothetical scenario with FFO adjusted leverage of 8.0x.
Fitch assumes the company will retain access to capital leases,
the cost of which is estimated at EUR0.25 million, which Fitch
has deducted from the distressed EBITDA and consequently excluded
from the creditor mass. Using a distressed Enterprise Value
(EV)/EBITDA multiple of 5.5x Fitch arrives at the post-
restructuring EV of EUR336 million.
After distributing 10% of this value for administrative claims,
the new super senior RCF, which Fitch assumes will be fully drawn
in a distress scenario, is estimated to recover up to 90% of the
face value, capped by the French jurisdiction in accordance with
Fitch's country-specific treatment of recovery ratings. The
senior secured note holder would be able to recover 64%, implying
a one notch uplift from the IDR, or 'B+'/RR3.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- Consistently improving EBITDA as a result of increased network
activity and no negative impact from regulatory changes;
- FCF margin of at least 5% on a sustained basis;
- FFO adjusted gross leverage moving sustainably towards 5.5x,
and
- FFO Fixed Charge Cover improving towards 2.5x.
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- Deterioration of EBITDA and FCF margins as a result of
continued weak network activity, impact of regulatory changes,
adverse supplier or product mix changes or material increase
in the DOS segment;
- FFO adjusted gross leverage above 7.0x with no evidence of
deleveraging, for example because of operating
underperformance or aggressively debt-funded acquisition
activity;
- Unsuccessful integration of new acquisitions, and
- FFO Fixed Charge Cover of 1.8x or lower.
LIQUIDITY
Comfortable Liquidity: Fitch projects Afflelou will generate
comfortable free cash flow of EUR22 million in FYE July 2018
followed by EUR40 million per year thereafter, supported by
strong network performance, the impact of the national care
networks and evolving product mix. This strong internal liquidity
should comfortably accommodate small scale business additions.
Fitch projects the super senior revolving credit facility (RCF)
of EUR30 million committed until April 2022, will remain undrawn
until maturity.
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G E O R G I A
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LIBERTY BANK: Change of Control No Impact on Fitch B+ Rating
------------------------------------------------------------
Fitch Ratings says that the recent announcement by Georgia's JSC
Liberty Bank (LB, B+/Stable/b+) of the change in its controlling
shareholder to European Financial Group B.V. (EFG) should be
neutral for the bank's ratings.
As a result of the ownership change, 74.64% of LB's voting
ordinary shares came under the control of Netherlands-based EFG,
the ultimate beneficiaries of which are three individuals -
Irakli Rukhadze, Ben Marson and Igor Alexeev. Prior to that, a
majority 58% stake in the bank had been encumbered due to an
ongoing litigation process. This has now been resolved.
LB's ratings factor in the bank's reasonable asset quality
metrics supported by the stabilised economic environment and lari
exchange rate, strong profitability, adequate capitalisation and
stable funding base. There is a record of good performance and
Fitch's base-case expectation is that there will be no radical
shifts in LB's business model as a result of the ownership
change. Fitch believes that the control change may help the bank
to diversify its funding base, as LB might now gain access to
wholesale funding sources which were previously unavailable due
to the encumbrance of the bank's shares.
Upside potential for LB's ratings is limited, although a material
strengthening of bank's franchise, while maintaining asset
quality, strong profitability and capitalisation metrics, would
be credit positive. Material negative changes in the bank's
business model under the new shareholders, if they were to
involve increased risk appetite with a deterioration in asset
quality metrics and capital erosion, could lead to a ratings
downgrade.
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G E R M A N Y
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AIR BERLIN: Eurowings to Offer Discounts to Stranded Travellers
---------------------------------------------------------------
Klaus Lauer at Reuters reports that Lufthansa's budget airline
Eurowings will offer steep discounts to holidaymakers left
stranded abroad after insolvent Air Berlin stops flying this
week.
Lufthansa has agreed to take over 81 of Air Berlin's roughly 130
planes in a EUR210 million euro (US$248 million) deal to cement
its position in Germany and expand Eurowings, Reuters relates.
According to Reuters, Thorsten Dirks, Eurowings chief executive,
said on Oct. 20 holidaymakers who were due to return home on an
Air Berlin flight between Oct. 28 and Nov. 15 may be able to get
a Eurowings ticket home at half the normal price.
"We will fly these people back, so long as we have enough
capacity," Reuters quotes Mr. Dirks as saying.
The offer only applies to tickets to destinations outside Germany
that were booked before Air Berlin filed for insolvency, Reuters
notes.
German Justice Minister Heiko Maas called on Lufthansa to accept
Air Berlin tickets on routes it was taking over from the
insolvent airline as part of its deal to buy planes, Reuters
relays.
About Air Berlin
In operation since 1978, Air Berlin PLC & Co. Luftverkehrs KG is
a global airline carrier that is headquartered in Germany and is
the second largest airline in the country.
In 2016, Air Berlin operated 139 aircraft with flights to
destinations in Germany, Europe, and outside Europe, including
the United States, and provided passenger service to 28.9 million
passengers. Within the first seven months of 2017, the Debtor
carried approximately 13.8 million passengers. It employs
approximately 8,481 employees. Air Berlin is a member of the
Oneworld alliance, participating with other member airlines in
issuing tickets, code-share flights, mileage programs, and other
similar services.
Air Berlin has racked up losses of about EUR2 billion over the
past six years, and has net debt of EUR1.2 billion.
On Aug. 15, 2017, Air Berlin applied to the Local District Court
of Berlin-Charlottenburg, Insolvency Court for commencement of an
insolvency proceeding. On the same day, the German Court opened
preliminary insolvency proceedings permitting the Debtor to
proceed as a debtor-in-possession, appointed a preliminary
custodian to oversee the Debtor during the preliminary insolvency
proceedings, and prohibited any new, and stayed any pending,
enforcement actions against the Debtor's movable assets.
To seek recognition of the German proceedings, representatives of
Air Berlin filed a Chapter 15 petition (Bankr. S.D.N.Y. Case No.
17-12282) on Aug. 18, 2017. The Hon. Michael E. Wiles is the
case judge. Thomas Winkelmann and Frank Kebekus, as foreign
representatives, signed the petition. Madlyn Gleich Primoff,
Esq., at Freshfields Bruckhaus Deringer US LLP, is serving as
counsel in the U.S. case.
JT TOURISTIK: Travel Packages Guaranteed Until End-December
-----------------------------------------------------------
fvw reports that holidays of insolvent German tour operator JT
Touristik have been guaranteed up to the end of December while a
buyer is sought.
According to fvw, the tour operator's provisional insolvency
administrator, Stephan Thiemann, said Oct. 17 that all booked
holidays with departures up to December 31 can go ahead following
"intensive negotiations with all involved parties".
"The result is very satisfactory as JT Touristik customers can go
on holiday as planned up to the end of the year. The trips,
including the return journey, are guaranteed. This positive
solution applies to more than 95% of all bookings," the report
quotes Mr. Thiemann as saying.
The exception is for package holidays involving an Air Berlin
flight from October 28 onwards, the report says. These bookings
have all been cancelled due to the end of Air Berlin flights on
that date and as no replacement flights could be secured.
In particular, insurer Generali played a major role in ensuring
that customers could go on holiday as booked. However, it was
unclear whether the insurance company, which had cancelled JT
Touristik's insolvency insurance as of October 31, 2017, will
bear the costs of holidays in November and December or whether a
different solution has been found, fvw states.
Berlin-based JT Touristik declared bankruptcy on September 29 but
remained in business under Germany's insolvency protection laws.
Mr. Thiemann and his adviser, tourism expert Stefan
Ohligschlager, are now seeking a buyer for the company, fvw
discloses.
Mr. Thiemann stressed in an interview with fvw: "Our priority and
the aim of the insolvency process are to keep the company in
business, the smooth organisation of all current and planned
holidays, and the protection of jobs." He confirmed that he is
open for discussions "with all potential buyers" but declined to
disclose details of any current discussions.
Mr. Ohligschlager, who previously advised on the sale of
insolvent tour operators Nicko Tours and Urlaubstours, told fvw
that JT Touristik "is very well structured and organised" and
praised the management and staff for "giving full power in this
extreme situation".
Asked about the tour operator's chances of survival, he said a
buyer would benefit from the company's access to the German
market, technology and staff as well as the brand's value, fvw
relays. "Now it is a question of finding someone who is ready to
pay for the market entry."
JT Touristik had some 346,000 customers and turnover of EUR176
million in 2015/16, according to fvw's annual German tour
operators dossier. This made it the second-largest dynamic
packages specialist, behind Vtours (revenues of EUR206 million)
and ahead of LMX (EUR146 million), Tropo (EUR83 million) and
Ferien Touristik (EUR64 million), fvw notes.
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H U N G A R Y
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OTP BANK: Moody's Hikes Jr. Sub. Debt Rating to Ba3(hyb)
--------------------------------------------------------
Moody's Investors Service has upgraded OTP Bank NyRt's (OTP Bank)
long-term and short-term local-currency deposit ratings to
Baa2/Prime-2 from Baa3/Prime-3. The bank's Baa3/Prime-3 long-term
and short-term foreign-currency deposit ratings, constrained by
the respective country ceiling for Hungary, were affirmed. The
outlook on OTP Bank's local-currency deposit rating is changed to
stable from positive, whilst on the foreign-currency deposit
rating the outlook remains stable. Concurrently, the rating
agency has upgraded the bank's baseline credit assessment (BCA)
and adjusted BCA to ba1 from ba2 and its junior subordinated debt
rating to Ba3(hyb) from B1(hyb). The bank's long-term and short-
term Baa2(cr)/Prime-2(cr) Counterparty Risk Assessments (CRA)
were affirmed.
The upgrade of OTP Jelzalogbank Zrt.'s (OTP Mortgage Bank) backed
issuer rating to Baa3 from Ba1 is driven by the upgrade of its
parent OTP Bank's ratings and reflects the high level of
integration, the full ownership and the guarantee from its
parent. OTP Bank fully, irrevocably and unconditionally
guarantees all of OTP Mortgage Bank's unsubordinated obligations.
Consequently, the rating is aligned to the rating level that
would have been assigned to OTP Bank's senior unsecured debt
based on Moody's Advanced Loss Given Failure (LGF) analysis. OTP
Mortgage Bank's Baa2(cr)/Prime-2(cr) CRAs were affirmed in line
with the CRAs of the parent bank.
The full list of the affected ratings can be found at the end of
this press release.
RATINGS RATIONALE
According to Moody's, the upgrade of OTP Bank's local-currency
deposit ratings was driven by: (1) the upgrade of the bank's BCA
and adjusted BCA to ba1 from ba2; (2) maintaining two notches of
rating uplift from Moody's Advanced Loss Given Failure (LGF)
analysis; and (3) maintaining Moody's assumptions of moderate
support from the government of Hungary (Baa3 Stable), which
nevertheless results in no further uplift at the current
sovereign rating level.
The upgrade of OTP Bank's BCA reflects improvements in the bank's
asset quality and profitability, as well as maintaining adequate
capitalisation and good funding profile. OTP's non-performing
loans (NPL), defined as all loans 90+ days past due, declined to
12.2% of gross loans as of end-June 2017 from 14.7% at the end of
2016 and 17% at the end of 2015. The decline in NPL ratio was
driven by a reduction in the NPLs stock in all core markets of
the group. Risks stemming from the still large stock of NPLs are
mitigated by a high level of cash coverage, with loan loss
reserves standing at 97.7% of the NPLs as of June 2017.
OTP Bank's net income for H1 2017 amounted to HUF134 billion, an
increase of 44% from the corresponding period of 2016 (excluding
income from the VISA sale transaction recorded in 2016).
Consequently, the bank's return on assets (ROA) rose to 2.2% in
the first six months 2017 from 1.74% in the first six months
2016.This improvement was mainly due to a sizable reversal of
loan loss reserves but also rising net interest and fee incomes.
OTP's capitalisation is adequate with consolidated CET1 ratio of
14.1% as of end-June 2017, rising from 13.5% in December 2016.
Moody's expects the bank's capital adequacy to moderate at lower
levels over the next few years due to planned acquisitions and a
stronger lending growth.
OTP Bank's funding remains primarily based on deposits, which
account for 87% of total liabilities as of end-June 2017. The
bank's loan to deposit ratio increased slightly to 80.4% as of
end-June 2017 from 78.2% as of year-end 2016. The group's largest
Hungarian and Bulgarian operations are market leaders in their
respective countries for retail deposits.
The stable outlook on OTP Bank's deposit ratings reflects Moody's
expectation that upward and downward pressures on the ratings
will be balanced over the next 12-18 months.
The upgrade of OTP Bank's junior subordinated debt rating to
Ba3(hyb) from B1(hyb) is driven by the upgrade of the bank's
adjusted BCA to ba1 from ba2. The rating of the junior
subordinated instrument is positioned two notches below the
bank's adjusted BCA and reflects the structural subordination of
this instrument in the capital structure.
RATIONALE FOR THE AFFIRMATION OF THE CRA
Moody's has also affirmed OTP Banks long- and short-term CRAs of
Baa2(cr)/Prime-2(cr), two notches above the adjusted BCA of ba1
(from three notches above the previous adjusted BCA of ba2). CRAs
are typically capped at the level of government debt rating plus
one additional notch unless the bank's adjusted BCA is higher
than the government debt rating.
Consequently, OTP Bank's long-term CRA of Baa2(cr) is capped at
that level, one notch higher than the Hungarian government's Baa3
debt rating.
-- WHAT COULD MOVE THE RATINGS UP/DOWN
An upgrade of OTP's Baa2 local-currency deposit ratings could be
prompted by (a) an upgrade of its BCA, or (b) an increase in
uplift resulting from Moody's LGF analysis. The bank's Baa3
foreign-currency deposit rating is constrained by the respective
country ceiling for Hungary and will be upgraded if the ceiling
is raised. OTP Bank's BCA could be upgraded in the event of a
further material improvement in asset quality while preserving
adequate capitalisation and good profitability.
A downgrade of OTP Bank's Baa2 local-currency deposit ratings
could be triggered by a downgrade of its BCA and/or a reduction
in rating uplift as a result of Moody's LGF analysis. The bank's
Baa3 foreign-currency deposit rating will not be affected by a
one-notch downgrade of the local currency deposit rating, because
it is rated one notch lower due to the sovereign ceiling
constraint. OTP Bank's BCA could be downgraded in case of a
material erosion of the bank's capital or a significant
deterioration of asset quality.
LIST OF AFFECTED RATINGS
Issuer: OTP Bank NyRt
Upgrades:
-- Adjusted Baseline Credit Assessment, upgraded to ba1 from ba2
-- Baseline Credit Assessment, upgraded to ba1 from ba2
-- Long-term Bank Deposit (Local Currency), upgraded to Baa2
Stable from Baa3 Positive
-- Short-Term Bank Deposit (Local Currency), upgraded to P-2
from P-3
-- Junior Subordinated Regular Bond/Debenture (Foreign
Currency), upgraded to Ba3(hyb) from B1(hyb)
Affirmations:
-- Short-term Counterparty Risk Assessment, affirmed P-2(cr)
-- Long-term Counterparty Risk Assessment, affirmed Baa2(cr)
-- Long-term Bank Deposit (Foreign Currency), affirmed Baa3
Stable
-- Short-term Bank Deposit (Foreign Currency), affirmed P-3
Outlook Action:
-- Outlook changed to Stable from Stable(m)
Issuer: OTP Jelzalogbank Zrt. (OTP Mortgage Bank)
Upgrade:
-- Backed Long-term Issuer Rating (Local Currency), upgraded to
Baa3 Stable from Ba1 Positive
Affirmations:
-- Long-term Counterparty Risk Assessment, affirmed Baa2(cr)
-- Short-term Counterparty Risk Assessment, affirmed P-2(cr)
Outlook Action:
-- Outlook changed to Stable from Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks
published in September 2017.
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K A Z A K H S T A N
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ASIA LIFE: Fitch Assigns B Insurer Financial Strength Rating
------------------------------------------------------------
Fitch Ratings has assigned Kazakhstan-based Joint-Stock Company
Life Insurance Company Asia Life (Asia Life) an Insurer Financial
Strength (IFS) Rating of 'B' and a National IFS Rating of
'BB+(kaz)'. The Outlooks are Stable.
KEY RATING DRIVERS
The ratings reflect the weak business profile of Asia Life, which
is constrained by its small size and its limited track record.
This is offset by Asia Life's capital strength and profitable
financial performance.
Asia Life is a small start-up life insurer founded in September
2014. The company aims to grow 16% in 2017 and 19% in 2018 in
profitable market segments. Fitch views this business plan as
conservative based on its implied market share of less than 6% of
gross written life premiums by end-2018 (2016: 3.1%). However,
Fitch assessment of the business profile is weakened by the
company's start-up nature, which translates into a limited track
record and small size.
Asia Life writes a significant and rising share of workers'
compensation business. This rose to 44% on a net basis in 2016
from 29% in 2015. The company has a conservative underwriting
approach for this line relative to peers, rejecting clients with
a known history of large losses. However, the considerable
exposure of Asia Life's workers' compensation business and the
potential for large and long-tailed losses are negative for the
company's business profile.
Fitch assessment of Asia Life's capital strength, as measured by
Fitch Prism factor-based capital model (FBM), was 'Somewhat Weak'
at end-2016. Fitch assessment of available capital benefitted
from robust profit generation, offsetting considerable dividend
outflows. From a regulatory capital perspective, the company is
in compliance with solvency requirements with a solvency margin
ratio of 164% at end-2016 and 165% at end-6M17 (2015: 161%).
Asia Life has paid out significant dividends over the past two
years. The dividend payout ratio, calculated as dividends paid
out divided by net profit of the prior year, rose in 6M17 to 77%
of the net profit generated in 2016, from 58% in 2015. The
company has indicated that the future dividend payout ratio would
range between 55% and 80%.
Fitch views the company's financial performance as a rating
strength. Asia Life reported net profit of KZT410 million in 2016
and of KZT781 million in 2015. The 2016 net result was supported
by robust investment returns, which helped offset negative
underwriting results. In 6M17 Asia Life's net loss of KZT27
million was mainly caused by the seasonal absence of large
contract renewals over the semester.
Asia Life's business plan projects a return on equity of 10% in
2017 and 13% in 2018, based on an expected average premium growth
of 15% in 2017 and 19% in 2018. The company expects investment
returns to offset negative underwriting results. Asia Life's
growth plan is likely to reduce the company's solvency margin to
around 130% at end-2017.
RATING SENSITIVITIES
Asia Life's ratings could be upgraded as the company's track
record develops, as evidenced by steadily improving profitability
and maintenance of capital strength.
The ratings could be downgraded if the insurer's capital position
weakens or financial performance deteriorates.
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L U X E M B O U R G
===================
INEOS GROUP: Moody's Hikes CFR to Ba2, Outlook Stable
-----------------------------------------------------
Moody's Investors Service has upgraded Ineos Group Holdings
S.A.'s (Ineos) Corporate Family Rating (CFR) to Ba2 from Ba3 and
Probability of Default Rating (PDR) to Ba2-PD from Ba3-PD.
Concurrently, Moody's has upgraded the ratings of the senior
secured tem loan facilities due March 2022 and March 2024
borrowed by INEOS US Finance LLC and INEOS Finance Plc; upgraded
the rating of the senior secured notes due May 2023 issued by
INEOS Finance Plc to Ba1 from Ba2; and upgraded the ratings of
the senior unsecured notes due August 2024 issued by INEOS Group
Holding SA to B1 from B2. The outlook on all ratings is stable.
"The upgrade reflects Ineos' strong operating performance since
2015 and Moody's expectation of robust performance in the next 12
months, resulting in solid credit protection metrics supporting
the higher rating," says Hubert Allemani, Moody's Vice
President -- Senior Analyst and lead analyst for Ineos. "The
upgrade also reflects Ineos' strong free cash flow generation,
low leverage and financial policy commitment to maintain a net
leverage of under 3x through the cycle, which should provide the
company with a stronger ability to manage a downcycle."
RATINGS RATIONALE
While the company's revenues have been declining to EUR12.6
billion in 2016 from EUR18.2 billion in 2012, Ineos profitability
has substantially increased with EBITDA on a Moody's adjusted
basis increasing to EUR2.6 billion at the end of 2016 from EUR1.6
billion in 2012. Benefitting from a mix of divestment of low
margin assets and top of cycle like market conditions, Ineos'
Moody's adjusted EBITDA margin increased to a high of 20.5% at
the end of 2016 from 8.7% in 2012. Moody's expects that the
company will be able to maintain such margin to the end of 2017,
as evidenced by current trading. However, Moody's expects Ineos'
adjusted EBITDA to decline to approximately EUR2 billion in 2018.
Moody's believes that market conditions will soften with added
competition from additional ethylene capacity from the US and the
Middle East, on average cheaper than European produced ethylene.
The rating agency expects the top of the cycle conditions in
olefin and polymers in the US and Europe to normalise next year.
Competitors' investments in new ethylene and polyethylene
capacities should create an oversupplied market and margin
reductions. However, the decline in market conditions should not
be as substantial as previously expected by Moody's because
several new US ethylene capacity additions have been delayed and
are not expected to become fully operational before 2019. The
performance of the Chemical Intermediates division is expected to
improve from the bottom of the cycle conditions they have been in
for some time. Moody's also believes that the low cost base of
Ineos will continue to support the profitability despite the
expected softening of the olefin and polymers market next year.
Moody's still expects Ineos to generate significant positive
free-cash flow (FCF) in the next 12 months, despite the rating
agency expectations of a decrease in the Moody's adjusted EBITDA.
Ineos cash generation should remain strong and Moody's expects
the company to continue to build up cash that could be used to
either repay debt to further reduce leverage or be kept on the
balance sheet to enhance the liquidity position. Ineos' FCF has
been high at approximately EUR1 billion since 2015. Moody's
expects the company to report similar cash generation this year
before a decline to levels ranging between EUR500 million and
EUR600 million over the next two years.
Ineos' Moody's adjusted leverage at the end of June 2017 was low
at 2.9x, down from 4x at the end of 2016. Ineos' gross debt to
EBITDA reduced because of both stronger EBITDA and debt repayment
of approximately EUR1.2 billion made during the first quarter of
2017. In line with Moody's expectations of lower EBITDA in 2018,
Moody's adjusted leverage should increase to around 3.5x. Moody's
believes that both Ineos' current and expected credit metrics for
2018 are commensurate with a Ba2 rating category, which
adequately positioned the company through the cycle.
Ineos' Ba2 CFR primarily reflects the group's: (1) strong market
position as one of the world's largest chemical groups, enjoying
leading market positions across a number of key commodity
chemicals, mainly olefins; (2) vertically integrated business
model, which ensures Ineos can capture margins across the value
chain, whilst benefitting from certainty of supply and economies
of scale; (3) well-invested production facilities, with Moody's
estimation that the majority rank in the first or second
quartiles on the regional industry cost curve; (4) track record
of generating positive cash flows in most of the last five years,
including ca EUR1 billion of free cash flow in both 2015 and
2016; and (5) focus on reducing leverage as demonstrated by the
EUR1.2 billion debt payment made during Q2 2017. This further
supported by the announced financial policy to maintain net
leverage of under 3x through the cycle.
However, the rating also reflects the group's (1) exposure to
weakening US margins in the next two or three years mostly due to
expected new US capacity gradually coming online from 2018
onward; (2) inherent cyclicality and exposure to volatile raw
material prices; (3) current high middle to top of cycle like
market environment and (4) risk of mergers and acquisitions as
well as related party loans or transactions that would use cash
that otherwise could repay debt or support the liquidity.
LIQUIDITY
Moody's views Ineos current liquidity as strong underpinned by
positive cash generation and EUR1.3 billion of cash on the
balance sheet at end of June 2017. Ineos cash generation should
also benefit from the lower cash interest with savings estimated
at around EUR100 million on an annualised basis from the re-
pricing exercises conducted by the company over the last twelve
months.
In addition to the positive FCF, which Moody's expects at
approximately EUR1 billion this year, the company can access a
EUR800 million securitization program to support its working
capital swings. The availability under this facility was of
EUR385 million at the end June 2017. However the company does not
have any committed revolving facilities, which is seen as a
negative in Moody's liquidity assessment.
The company's maturity profile is long and apart from the
securitization program due in December 2018, the first maturity
is the EUR3.1 billion senior secured term loan B facilities which
are due in March 2022. The remaining instruments maturities are
in 2023 and 2024.
RATING OUTLOOK
The stable outlook incorporates Moody's expectations that current
top of the cycle conditions for much of Ineos' businesses will
turn down but that the company's credit metrics including
leverage and free cash flow will not worsen substantially, and
that its underlying chemical markets do not significantly
deteriorate.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating could be upgraded if (1) retained cash flow to debt is
consistently above 25%; (2) Moody's adjusted gross debt to EBITDA
is sustained below 2.5x; (3) Ineos maintains good liquidity and
(4) the company develops a track record of a conservative
financial policy.
Conversely, the ratings could be downgraded if (1) Moody's
adjusted gross debt to EBITDA rises sustainably over 4x; (2)
retained cash flow to debt is consistently less than 15%; (3)
liquidity profile deteriorates and (4) the company's financial
policy deteriorates notably with increased dividends or a
material change in the company's relationship with the wider
INEOS Limited group of companies.
Incorporated in Luxembourg, Ineos Group Holdings S.A. (IGH) is
one of the world's largest chemical companies as measured by
revenue, and a large global manufacturer of petrochemical
products, mainly olefins and polyolefins. The key olefins
manufactured by the petrochemical industry are ethylene and
propylene and these olefins are in turn used to produce
polyolefins and other olefin derivatives.
IGH operates 31 manufacturing sites in six countries. As of
December 31, 2016 total chemical production capacity was
approximately 21,400 kta, of which 59% was in Europe and 41% was
in North America. IGH also operates in APAC.
The principal methodology used in these ratings was Global
Chemical Industry Rating Methodology published in December 2013.
Upgrades:
Issuer: Ineos Group Holdings S.A.
-- Corporate Family Rating, Upgraded to Ba2 from Ba3
-- Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD
-- Backed Senior Unsecured Regular Bond/Debenture, Upgraded to
B1 from B2
Issuer: Ineos Finance plc
-- Backed Senior Secured Bank Credit Facility, Upgraded to Ba1
from Ba2
-- Backed Senior Secured Regular Bond/Debenture, Upgraded to
Ba1 from Ba2
Issuer: Ineos US Finance LLC
-- Backed Senior Secured Bank Credit Facility, Upgraded to Ba1
from Ba2
Outlook Actions:
Issuer: Ineos Finance plc
-- Outlook, Remains Stable
Issuer: Ineos Group Holdings S.A.
-- Outlook, Remains Stable
Issuer: Ineos US Finance LLC
-- Outlook, Remains Stable
INTRALOT CAPITAL: Fitch Rates EUR500MM Bond BB- Sr. Unsec. Rating
-----------------------------------------------------------------
Fitch Ratings has assigned Intralot Capital Luxembourg S.A's
EUR500 million bond a final senior unsecured rating of 'BB-' with
a Recovery Rating of 'RR3'. The bond is rated one notch above
Intralot's Long-Term Issuer Default Rating of 'B+'/Stable. The
amount of the bond is EUR50 million higher than anticipated by
the company at the time when Fitch Ratings assigned it a 'BB-
(EXP)' rating last month.
Proceeds from the notes, which mature in September 2024, will be
used for early redemption of the company's EUR250 million 6%
notes due 2021 as well as other outstanding credit facilities.
The planned notes are guaranteed by Intralot SA and some material
subsidiaries, and will rank pari passu with all existing and
future unsecured indebtedness of the issuer that is not
subordinated to the notes, including senior credit facilities
that are not secured.
The new notes marginally enhance Intralot's financial flexibility
by extending the average debt maturity profile and reduce
interest costs. Intralot's high leverage remains not fully
aligned with a 'B+' rating despite improved performance
continuing into the first half of 2017, but Fitch expects the
company to deleverage from 2018. The rating profile remains well
anchored around a business profile commensurate with a 'BB'
rating category for the sector. Any evidence of contracts not
being renewed or renewed on worse terms, or unexpected cash
leakages, combined with growing gross debt, could be negative for
the rating.
KEY RATING DRIVERS
Recurring Contracted Revenue Base: Intralot's credit profile
benefits from more than 85% of revenues recurring and contracted
up until 2021, with only three contracts up for renewal in 2018.
The group has recently secured long-term contract renewals in the
US, resulting in securing EUR35 million of EBITDA until 2025 in
that market. This amount should increase to about EUR50 million a
year if the new Illinois contract is secured. Fitch expects many
of the contracts to be renewed due to high switching costs,
although Fitch continues to believe these could be on lower
margins and may require a higher renewal fee.
Margin Affected by Business Mix: The strong growth of Licenced
Operations (21.9% in H117) is having a negative impact on group
EBITDA margins, which were 12.6% in the first half of 2017
compared to 14% last year. Licenced Operations represented 78% of
total group sales in 1H17 compared with 73% in 1H16.
This is a significantly less profitable division than Technology
and Management Contract Businesses, which has not performed as
anticipated this year mainly due to weaker performance in Turkey
and some one-off effects in the US. However, this is partly
offset by the recent disposal of the Jamaican business for USD40
million, which should have a positive impact on group EBITDA
margins.
Weak Free Cash Flows: Fitch expects free cash flow (FCF) to be
negative in 2017 and 2018, mainly due to one-off investments
related to the new Illinois contract and some contract renewal
fees. FCF can be volatile as a result of upfront investments
related to new contracts of contract renewals. However, this does
contribute to steady operating cash flow generation due to its
recurring profit stream and is a key credit support. After 2018
the group does not have any major contract renewals until 2021
and therefore capex should remain lower.
Capex Driving Higher Leverage: Fitch now expects funds from
operations (FFO) adjusted gross leverage to rise to 6.6x in 2017
and 2018, due to the additional EUR50 million of debt. This level
of leverage is not commensurate with a 'B+' rating, which
indicates low financial headroom. However, Fitch expects
continued deleveraging from 2018 through improvements in
underlying group operating performance, and application of
proceeds from disposals to gross debt reduction. Fitch now
expects FFO adjusted net leverage to reach 4.7x in FY18, lower
than previously forecast due to capex more evenly spread,
reducing subsequently.
In addition, Fitch base-case projections do not factor in any
proceeds from the expected sale of the group's stake in Gamenet
during the IPO process. These options provide additional
flexibility for Intralot and if executed successfully could
result in significant net debt reduction, bringing net leverage
back within Fitch sensitivity guidance for the current rating
level.
Reputable Gaming Operator, Technology Supplier: Intralot has
established itself in the international gaming sector as a
reputable provider of, among other products, systems to manage
lotteries through software platforms and hardware terminals, and,
in betting, a large algorithm-based sportsbook. This has enabled
it to win important contracts for the supply of technology and
the management of lotteries in the US and Greece and for sports
betting in Turkey and Germany.
Scope for Growth: The gradual liberalisation of gaming markets,
governments' keenness on finding ways to raise tax proceeds and
the increasing supply of new games should all provide increasing
opportunities for Intralot. The company should be able to
leverage on its experience and reputation and benefit from the
limited number of reputable suppliers in the industry, allowing
it to expand into new countries. Intralot is also well positioned
to benefit from opportunities in the US.
Limited Links with Greece: Intralot generates less than 10% of
its EBITDA in Greece (rated 'B-'). Fitch views Greece's low
sovereign rating as neutral for Intralot's ratings due to its
contractual requirement to maintain large portions of its cash
outside Greek banks. Less than 10% of cash is held in Greece, and
following the new transaction, the group will have less reliance
on funding from Greek banks due to a higher capital markets
allocation. Intralot's wide geographic diversification of its
business and lack of meaningful reliance on Greek banks for
funding mitigates its exposure to Greece and other countries with
a 'b' economic environment.
DERIVATION SUMMARY
Intralot is positioned well in the 'B' rating category compared
to its peers. The main differentiating factor is its visibility
of revenue from recurring contracted EBITDA. Intralot has smaller
revenue and EBITDA than Ladbrokes Coral (BB/Stable), William
Hill, IGT, and Scientific Games. However, it does have good
geographic diversification and benefits from the more profitable
emerging markets. It also has an established position in the US,
and is well placed for potential growth opportunities. Intralot
has characteristics that differentiate it from peers at the 'B'
rating level, such as the contracted EBITDA and specialist
supplier technology expertise.
KEY ASSUMPTIONS
Fitch's key assumptions within Fitch ratings case for the issuer
include:
- revenue growth of 5%-6% in 2017 as a result of strong growth
in licenced betting operations, staying in the mid-single
digits thereafter due to a combination of new contracts and
some organic growth, albeit partly offset by the disposal of
the Jamican stake;
- EBITDA margin decreasing to 13% in 2017, remaining at about
15% thereafter;
- rental expenses lower as a result of leases associated with
expiring contracts;
- minority profits fully paid out as dividends totalling EUR39
million in 2017, EUR37 million in 2018;
- capex higher in 2017-2018 due to contract renewals and
investments in new contracts;
- no common dividends.
RECOVERY ASSUMPTIONS:
In Fitch bespoke going-concern recovery analysis Fitch look at
Intralot's 2016 EBITDA of EUR106 million (after deducting
attributable EBITDA to minority interests) and this is further
discounted to arrive at an estimated post-restructuring EBITDA
available to creditors of around EUR86.4 million. Fitch apply a
conservative distressed enterprise value /EBITDA multiple of 5.0x
to Intralot's wholly owned operations.
Fitch also estimates EUR78 million of additional value stemming
from minority interests. This is lower than Fitch previous
estimate of EUR100 million, following the disposal of the stake
in the Jamaican business.
In terms of distribution of value, all unsecured debt including
the planned new bond would recover 52% in the event of default
(assuming the EUR125 million unsecured revolving credit facility
will be fully drawn). This is consistent with an 'RR3' Recovery
Rating and an instrument rating of 'BB-'. The current Recovery
Rating does not tolerate any incremental amount of secured debt
nor further asset disposals if the proceeds are not applied to
gross debt reduction or reinvested in an asset of comparable
value and quality.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- Revenue growth and steady profitability supported by a
stronger
return on capital on existing and future contracts with
limited
capex outlays
- FFO adjusted net leverage reducing sustainably below 3.0x (or
FFO gross lease-adjusted leverage below 4.0x), with cash
deposited predominantly at investment grade-rated
counterparties
- FFO fixed charge cover above 3.0x, unaided by favourable
interest carry
- Evidence of sustained positive FCF generation in the low to
mid-single digits of sales
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- Evidence that new contracts or renewals are occurring at
materially less favourable conditions for Intralot, resulting
in continuing weak EBIT margins of under 7%, large upfront
concession fees or capex outlays (2016: 8.2%)
- FFO adjusted net leverage sustainably above 4.5x (FFO adjusted
gross leverage above 5.5x; FY16: 4.3x and 5.6x, respectively)
- FFO fixed charge cover below 2.0x (2016: 1.8x)
- Material reduction in liquidity without a commensurate
reduction in gross debt
LIQUIDITY
Comfortable Liquidity Following Refinancing: Fitch expects the
group's liquidity profile to improve following the recent
transaction. There will now only be EUR250 million maturing in
2021, while the new notes will not be repayable until September
2024. Fitch expects the group to have available cash on balance
sheet of about EUR258 million at end-2017 and this will be
complemented by around EUR125 million in committed unsecured
credit facilities.
=====================
N E T H E R L A N D S
=====================
CAIRN CLO III: Fitch Assigns B- Rating to EUR8MM Class F Notes
--------------------------------------------------------------
Fitch Ratings has assigned Cairn CLO III B.V.'s refinancing notes
final ratings and affirmed the others:
EUR181.5 million class A-R notes: assigned 'AAAsf'; Outlook
Stable
EUR28 million class B-R notes: assigned 'AAsf'; Outlook Stable
EUR20 million class C-R notes: assigned 'Asf'; Outlook Stable
EUR16.5 million class D-R notes: assigned 'BBBsf'; Outlook Stable
EUR22 million class E notes: affirmed at 'BBsf'; Outlook Stable
EUR8 million class F notes: affirmed at 'B-sf'; Outlook Stable
Cairn CLO III B.V. is a cash flow collateralised loan obligation
securitising a portfolio of mainly European leveraged loans and
bonds. Net proceeds from the notes are being used to refinance
the current outstanding A to D notes. The portfolio is managed by
Cairn Loan Investments LLP.
KEY RATING DRIVERS
'B'/'B-' Portfolio Credit Quality
Fitch expects the average credit quality of obligors to be in the
'B'/'B-' category. The weighted-average rating factor (WARF) of
the current portfolio is 33.3, below the covenanted maximum for
assigning the final ratings of 34.
High Recovery Expectations
At least 90% of the portfolio will comprise senior secured
obligations. Recovery prospects for these assets are typically
more favourable than for second-lien, unsecured and mezzanine
assets. The Fitch weighted average recovery rate (WARR) of the
current portfolio is 66.3%. This is above the covenanted minimum
for assigning the final ratings of 54.5% which corresponds to the
Fitch matrix of top 10 obligors at 23%, WARF of 34, and a
weighted average spread of 4%.
Extended Weighted Average Life (WAL)
On the refinancing date, the issuer extended the WAL covenant by
1.5 years to 7.5 years as part of the refinancing of the notes
and updated the Fitch matrix. Fitch tested all the points in the
matrix based on the extended WAL covenant.
Limited Interest Rate Risk
Unhedged fixed-rate assets cannot exceed 1% of the portfolio.
Consequently, interest rate risk is naturally hedged for most of
the portfolio through floating-rate liabilities.
Diversified Asset Portfolio
The transaction contains no covenant that limits the top 10
obligors in the portfolio. The transaction consists of three
Fitch matrices that the portfolio manager may choose from,
corresponding to top 10 obligors of 20%, 23% and unlimited.
TRANSACTION SUMMARY
Cairn CLO III B.V. closed in March 2013 and was reset in October
2015. The transaction is still in in its reinvestment period,
which is set to expire in October 2019. The issuer has issued new
notes to refinance part of the original liabilities. The class A,
B, C and D notes have been redeemed in full as a consequence of
the refinancing.
The refinancing notes bear interest at a lower margin over
EURIBOR than the notes being refinanced. The remaining terms and
conditions of the refinancing notes (including seniority) are the
same as the refinanced notes.
In its analysis, Fitch has applied a 15bp haircut to the weighted
average spread calculation. In this transaction, the aggregate
funded spread calculation for floating-rate collateral debt
obligation with an Euribor floor is artificially inflated by the
negative portion of Euribor.
RATING SENSITIVITIES
A 25% increase in the obligor default probability would lead to a
downgrade of up to two notches for the rated notes. A 25%
reduction in expected recovery rates would lead to a downgrade of
up to two notches for the rated notes.
EA PARTNERS: Fitch Lowers Rating on US$700MM Notes to CC
--------------------------------------------------------
Fitch Ratings has downgraded EA Partners I B.V.'s (Partners I)
senior secured US$700 million 6.875% notes due 2020 and EA
Partners II B.V.'s (Partners II) senior secured USD500 million
6.75% notes due 2021 to 'CC' from 'CCC-'. The Recovery Ratings
are 'RR3'.
The downgrade reflects the change in Fitch assessment of the
recovery prospects for the notes. The Recovery Rating is now
'RR3' compared to the previous Recovery Rating of 'RR2'. This is
driven by Fitch re-assessment of legal, operational and strategic
ties between Etihad Airways PJSC (Etihad, A/Stable) and its
equity airline partners, which are obligors under these
transactions.
Given the notes' recourse to each obligor on a several basis, the
senior secured ratings reflect the creditworthiness of the
obligor of the weakest credit quality as well as the recovery
prospects for the notes. Fitch assess that the liquidity pool is
not sufficient to cover the coupon payments of two defaulted
obligors - Air Belin and Alitalia, for the whole duration of both
transactions.
KEY RATING DRIVERS
Case-by-Case Approach to Partners: As part of Etihad's strategic
review, each equity airline partner was analysed as a standalone
commercial investment in the context of its strategic importance
to Etihad and in the context of the political bilateral
relationships between Abu Dhabi (AA/Stable) and the relevant
government where applicable.
Fitch believes that this approach is likely to govern Etihad
Aviation Group's decisions regarding future financial support for
partner airlines. Future cooperation is likely to be carried out
primarily with a focus on Etihad's core business. While Fitch
believes Etihad may provide support to its equity airline
partners in the future, Fitch can no longer expects this support
to be unconditionally committed.
Lower Recovery Prospects: Fitch now assess the recovery (given
default) prospect of the notes as good (51%-70%, RR3) compared to
previous assessment of superior (71%-90%, RR2). This is driven by
the fact that Fitch re-assessed the strength of the ties between
Etihad and its equity airline partners and calculate the recovery
prospect for the notes based on the standalone performance of
most obligors and their respective recoveries upon default.
Fitch assess the immediate liquidity position of Air Serbia to be
adequate but it is likely to require external funding to repay
its obligations under the transactions. The liquidity profiles of
Air Seychelles and Jet Airways are weak. However, Fitch believes
Jet Airways has good access to external funding supported by its
profitable operations and Fitch expects it to be able to
refinance its debt and manage covenants under several loan
agreements. Jet Airways plans to repay its obligations under
Partners I's transaction in 2018. See key assumptions section
below for Alitalia and Air Berlin.
Liquidity Pool: The transactions contain a liquidity pool, their
only cross-collateralised feature (excluding the ratchet account
component, which is not cross-collateralised), which is available
to service the interest or principal on the notes, if an obligor
fails to pay interest or principal on their respective debt
obligation when due. Contractually, the liquidity pool does not
have to be replenished if it is used to service the notes. The
utilisation of 100% of the liquidity pool is challenging due to a
75% threshold that triggers a remarketing of the debt obligation;
it is also subject to bondholders' choices.
Insufficient Liquidity: The liquidity pool is not sufficient to
cover all coupon payments of Alitalia and Air Berlin through the
whole duration of the notes under both Partners I and Partners
II. Assuming that all other obligors will remain performing, the
amount of the total liquidity pool only covers Alitalia's and Air
Berlin's coupon payments until March 2019 under Partners I (notes
due in September 2020) and until December 2018 under Partners II
(notes due in June 2021).
Remarketing Event: If the liquidity pool is drawn to cure a
default of an obligor to pay interest on their debt obligation
and falls below 75% of the initial deposits (initial deposits
account for most of the liquidity pool), this will trigger the
remarketing of the concerned debt obligation. Assuming that all
other obligors will remain performing, the liquidity pool will
cover Alitalia's and Air Berlin's coupon payments until and
including December 2017 under Partners I and until and including
September 2017 under Partners II before the first remarketing
event is triggered.
If the remarketing agent determines that the funds in the
liquidity pool together with the highest bid received in the debt
obligation remarketing are insufficient to redeem the notes at
par, the remarketing agent shall not consummate the debt
obligation remarketing and the trustee shall give notice of a
note event of default. However, a note event of default can be
triggered at the discretion of bondholders and they can choose
for the bonds to continue performing. In addition, a note event
of default may lead to a remarketing of all debt obligations
under the notes and does not trigger cross acceleration.
Cross Default: The notes do not have a cross-default provision,
which means that a default by one obligor under its debt
obligation does not constitute an event of default under other
debt obligations incurred under this transaction by other
obligors. However, events of default under each debt obligation
include a customary cross-default provision which states that a
failure by the respective 'obligor or any of its material
subsidiaries to pay any of its own financial indebtedness when
due' will lead to an event of default under the debt obligations
of this obligor but not of any other obligor other than in the
case of Etihad and Etihad Airport Services (EAS).
EAS is considered a material subsidiary of Etihad under this
transaction's documentation, despite the restructuring of the
Etihad Aviation Group. Therefore, an uncured failure by EAS to
make payments under this transaction's debt obligation will
constitute an event of default under Etihad's debt obligation
under this transaction.
This lack of a legal obligation to support other entities
underpins this transaction's rating approach based on the credit
profile of the weakest obligors rather than on the stronger
entities supporting the weakest.
Weakest Obligor Credit: Given the transactions' recourse to each
obligor on a several basis, the ratings for the notes reflect the
creditworthiness of the obligor of the weakest credit quality
(Alitalia and Air Berlin) and recovery prospects for the notes.
This is due to the sole cash flow for the service and repayment
of the notes being the individual cash flow streams from the
obligors under their respective loans. These transactions'
noteholders are thus exposed to the underlying creditworthiness
of each individual obligor.
DERIVATION SUMMARY
The notes' rating reflects Fitch views of the creditworthiness of
the obligor of the weakest credit quality and the recovery
prospects for the notes. The credit quality of the obligors
varies substantially depending on their business profiles and
financial profiles that Fitch generally see as weak compared with
peers. Both Alitalia and Air Berlin filed for insolvency
proceedings. Etihad's 'A' IDR is three notches below that of the
Emirate of Abu Dhabi.
KEY ASSUMPTIONS
Fitch's key assumptions within Fitch ratings case for the issuer
include:
- The proceeds from the notes' issue will be on-lent to
obligors;
- These transactions' notes are secured over assets that
represent senior unsecured claims to respective obligors;
- The notes do not have a cross-default provision.
Key Recovery Rating Assumptions
- Fitch currently assess the recovery (given default) prospect
of the notes based on Alitalia's entry into administration,
Air Berlin's insolvency proceedings, and assuming no committed
financial support from Etihad to its equity airline partners,
recoveries upon default for most of the obligors and other
features of the transactions.
- Fitch applied a bespoke recovery analysis for most of the
obligors. The recoveries were driven by the liquidation value
for most of the obligors. Fitch has assumed a 10%
administrative claim. The advance rates applied for inventory
(50%), accounts receivable (70%-80%) and PPE (50%-75%) are in
line with peers and depend on the company-specific
characteristics. Capital leases are not in recovery waterfall.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- Fitch believes positive rating action is highly unlikely given
the entry into administration by Alitalia and Air Berlin's
insolvency proceedings. Nevertheless, the improvement of the
credit quality of the obligor with the weakest credit profile
may be positive for the notes' ratings.
- Sustained improvement of recovery prospects of the obligors,
unless there are limitations due to country-specific treatment
of Recovery Ratings, could also be positive for the notes'
ratings.
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- Worsening recovery prospects of the obligors.
- Deterioration of the credit quality of the obligors, including
not remedied liquidity shortfall.
===========
P O L A N D
===========
VS NDT: Files Bankruptcy Motion in Gdanks Court
-----------------------------------------------
Reuters reports that Vistal Gdynia SA said its unit, VS NDT
Sp. z o.o., has filed a motion for bankruptcy to a court in
Gdansk.
Vistal Gdynia S.A. produces steel structures for the civil,
energy, shipbuilding, and off-shore industries in Poland and
internationally.
=============
R O M A N I A
=============
OLTCHIM SA: Administrator Chooses 3 Firms to Buy Company's Assets
-----------------------------------------------------------------
SeeNews reports that the judicial administrator of insolvent
Romanian chemicals producer Oltchim SA said on Oct. 18 it has
selected three companies, to which it might sell the company's
assets.
The three companies were selected from a total of nine which had
submitted bids in the sale process, BDO Business Restructuring
said in a statement filed with the Bucharest Stock Exchange, BVB,
SeeNews relates.
According to the report, the companies with which Oltchim hopes
to conclude sales contracts are: local chemicals producer
Chimcomplex Borzesti, PVC profiles and accessories distributor
Dynamic Selling Group and investment fund White Tiger Wealth
Management Ltd.
Discussions with other bidders are still ongoing and the
completion of transactions under these contracts is subject to
certain conditions to be met, according to the statement cited by
SeeNews. The contracts need final approval by the general meeting
of the company's creditors, who will also have the final say in
the selection of the winning bidders, the report notes.
Oltchim expects to finalize the sale process in the first half of
2018, SeeNews says.
In July, Chimcomplex Borzesti submitted an offer to take over all
assets of Oltchim, SeeNews recalls. The report says Romanian
Commercial Services Group (SCR Group), who own Chimcomplex,
should have become the direct guarantor of the transaction with
over EUR120 million ($135 million), supported by four business
partners -- two Romanian, one from Turkey and one from Italy.
At the time, the biggest competitor to Chimcomplex for Oltchim's
assets was German-Polish PCC group, which currently owns 32.3% of
Oltchim, the report states.
About Oltchim
Oltchim SA is a Romanian chemical producer. Romania owns 54.8%
of the company.
Oltchim entered insolvency on January 30, 2013. The company had
EUR790 million worth of debt. The state and state-owned companies
had to recover some EUR470 million, while two banks, BCR and
Banca Transilvania, had EUR26 million worth of outstanding loans
to Oltchim, Romania-Insider.com disclosed.
In August 2016, the creditors of Oltchim agreed to extend the
company's reorganisation period by one year, according to
SeeNews. At the time, the company also launched the sale through
auctions of all or part of its assets grouped into nine bundles.
It hoped to find investors by the end of 2016 but the sale
process stalled due to lack of interest, SeeNews notes.
However, in April 2017, Romania's economy ministry and creditors
decided once again to offer the company's assets for sale bundled
in nine packages with a total market value of EUR294 million,
with the starting price set at EUR307 million, according to
SeeNews.
===========
R U S S I A
===========
B&N BANK: Bank of Russia to Participate in Resolution Measures
--------------------------------------------------------------
The Bank of Russia approved the plan of its participation in
resolution measures for B&N Bank Public Joint Stock Company.
Under the plan, the bank is to receive capital replenishment and
funds to sustain liquidity, which will increase its financial
stability and foster its further development, according to the
press service of the Central Bank of Russia.
PJSC B&N Bank was established on March 6, 1991; it is an
important credit institution ranked 8th by assets. The Bank
includes 12 branches, 1 representative office and over 400
structural divisions.
KHANTY-MANSIYSK: S&P Affirms Then Withdraws BB+' ICR
----------------------------------------------------
On Oct. 19, 2017, S&P Global Ratings affirmed its 'BB+' long-term
issuer credit rating on Russia's Khanty-Mansiysk Autonomous Okrug
(KMAO). S&P subsequently withdrew the rating at issuer's request.
At the time of withdrawal the outlook was stable.
As a "sovereign rating" (as defined in EU CRA Regulation
1060/2009 "EU CRA Regulation"), the ratings on KMAO are subject
to certain publication restrictions set out in Art 8a of the EU
CRA Regulation, including publication in accordance with a
pre-established calendar (see "Calendar Of 2017 EMEA Sovereign,
Regional, And Local Government Rating Publication Dates: Midyear
Update," published July 10, 2017, on RatingsDirect). Under the EU
CRA Regulation, deviations from the announced calendar are
allowed only in limited circumstances and must be accompanied by
a detailed explanation of the reasons for the deviation. In this
case, the reason for the deviation is the issuer's request that
we withdraw the rating.
RATIONALE
S&P said, "At the time of the withdrawal, the rating on KMAO is
constrained by our view of Russia's volatile and unbalanced
institutional framework, the okrug's weak budgetary flexibility,
and its weak financial management in an international context.
KMAO's creditworthiness benefits from the okrug's strong
liquidity, low contingent liabilities, and low debt. Our
assessment of KMAO's budgetary performance and economy are
neutral for its creditworthiness -- the okrug has very high
wealth levels in an international context but they are subject to
high concentration, in our opinion.
"At the time of withdrawal, the stable outlook on KMAO reflects
our expectation that in the next 12 months the region will
maintain its liquidity position and high operating balances."
KEY STATISTICS
Please see "Russian Region Khanty-Mansiysk Outlook Revised To
Stable; Ratings Affirmed At 'BB+'," Aug. 18, 2017
S&P said, "In accordance with our relevant policies and
procedures, the Rating Committee was composed of analysts that
are qualified to vote in the committee, with sufficient
experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related
Criteria And Research'). At the onset of the committee, the chair
confirmed that the information provided to the Rating Committee
by the primary analyst had been distributed in a timely manner
and was sufficient for Committee members to make an informed
decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee agreed that all key rating factors were unchanged.
The chair ensured every voting member was given the opportunity
to articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision.
The views and the decision of the rating committee are summarized
in the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action (see 'Related Criteria and Research').
RATINGS LIST
Rating
To From
Khanty-Mansiysk Autonomous Okrug
Issuer Credit Rating
Foreign and Local Currency BB+/Stable/-- BB+/Stable/--
Ratings Subsequently Withdrawn
Khanty-Mansiysk Autonomous Okrug
Issuer Credit Rating
Foreign and Local Currency NR BB+/Stable/--
NR--Not rated
UFA: S&P Affirms Then Withdraws 'BB-' Issuer Credit Rating
----------------------------------------------------------
On Oct. 19, 2017, S&P Global Ratings affirmed its 'BB-' long-term
issuer credit rating on Russia's City of Ufa. S&P subsequently
withdrew the rating at the city's request. At the time of
withdrawal, the outlook was stable.
As a "sovereign rating" (as defined in EU CRA Regulation
1060/2009 "EU CRA Regulation"), the ratings on City of Ufa are
subject to certain publication restrictions set out in Art 8a of
the EU CRA Regulation, including publication in accordance with a
pre-established calendar (see "Calendar Of 2017 EMEA Sovereign,
Regional, And Local Government Rating Publication Dates: Midyear
Update," published July 10, 2017, on RatingsDirect). Under the EU
CRA Regulation, deviations from the announced calendar are
allowed only in limited circumstances and must be accompanied by
a detailed explanation of the reasons for the deviation. In this
case, the reason for the deviation is the City of Ufa's request
to withdraw the rating.
RATIONALE
At the time of the withdrawal, the rating on Ufa was constrained
by our view of Russia's volatile and unbalanced institutional
framework, the city's weak economy, weak budgetary flexibility,
weak budgetary performance, less-than-adequate liquidity, and
weak financial management in an international context. Ufa's
creditworthiness benefits from its low contingent liabilities and
low debt, in S&P's view.
S&P said, "At the time of withdrawal, the stable outlook on Ufa
reflected our expectation that the city's budgetary performance
would improve slightly, notably supported by transfers from
higher government tiers. Together with the city's access to
undrawn committed bank lines and sufficient free cash, this would
enable Ufa to maintain a debt-service coverage ratio higher than
80% and low debt burden over the next 12-24 months, according to
our estimates.
"In accordance with our relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the
methodology applicable (see 'Related Criteria And Research'). At
the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was
sufficient for Committee members to make an informed decision."
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee agreed that all key rating factors were unchanged.
The chair ensured every voting member was given the opportunity
to articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision.
The views and the decision of the rating committee are summarized
in the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action (see 'Related Criteria and Research').
RATINGS LIST
Rating
To From
Ufa (City of)
Issuer Credit Rating
Foreign and Local Currency BB-/Stable/-- BB-/Stable/--
Ratings Subsequently Withdrawn
Ufa (City of)
Issuer Credit Rating
Foreign and Local Currency NR BB-/Stable/--
NR--Not rated
=========
S P A I N
=========
INSTITUTO VALENCIANO: S&P Affirms 'BB/B' ICR, Outlook Stable
------------------------------------------------------------
S&P Global Ratings affirmed its 'BB/B' long- and short-term
issuer credit ratings on financial agency Instituto Valenciano de
Finanzas (IVF), base in Spain's Autonomous Community of Valencia
(AC Valencia). The outlook is stable.
The affirmation reflects that S&P continues to consider that IVF
is a government-related entity (GRE) that enjoys an almost
certain likelihood of extraordinary support from AC Valencia.
IVF is AC Valencia's financial agency. After the regional
elections in 2015, the new regional administration drew up a
strategy for IVF, consisting of the separation of its activities
into two groups: a) the management of the region's debt and
guarantees, and the supervision of the regional financing system;
and b) the provision of credit to private entities. IVF expects
to transfer the responsibility of managing Valencia's debt and
supervising the regional financing system to the regional
administration from Jan. 1, 2018. This reorganization does not
change S&P's view of IVF as a GRE. S&P doesn't believe that this
reorganization will change its perception that there is an almost
certain likelihood that AC Valencia would provide timely and
sufficient extraordinary support to IVF in case of financial
distress. S&P bases its view on its assessment of IVF's:
-- Integral link with AC Valencia. IVF is a public entity,
created by law, that is fully owned and tightly controlled by
AC Valencia. S&P said, "We understand that IVF cannot be
privatized without a change in its bylaws, and, if dissolved,
AC Valencia would ultimately be liable for its obligations.
Moreover, AC Valencia provides a statutory guarantee on IVF's
debt, which supports our assessment of IVF's integral link
with AC Valencia. We also think that, due to the guarantee,
the markets would perceive a default by IVF as tantamount to
a default by the region. However, we do not base our ratings
on IVF on the language of the statutory guarantee. We see AC
Valencia as being strongly involved in IVF's management." The
region appoints the majority of representatives on IVF's
supervisory board as well as IVF's general director. IVF's
president is also the regional government's minister of
finance. IVF receives ongoing financial support from the
regional government through yearly operating and capital
transfers, as well as capital injections, to offset losses
and cover maturing debt, when necessary.
-- Critical role for AC Valencia as its financing agency to
implement Valencia's public credit policy by providing loans
to small and midsize enterprises (SMEs) and local businesses
in the region. IVF has a very specific business model and
strategy compared with those of commercial banks, because it
acts essentially on behalf of AC Valencia. That is why we
think a private entity could not easily take on IVF's role.
In S&P's view, the guarantee provided by the regional
government to IVF's debt highlights IVF's role for AC
Valencia. The fact that IVF expects to transfer the
responsibility on managing AC Valencia's debt to the regional
administration from 2018 does not diminish IVF's role for AC
Valencia, in our view.
IVF is currently consolidated under the scope of the European
system of national and regional accounts (ESA-2010). As a
consequence, IVF's debt maturities fall under the "Fondo de
Financiaci¢n de las Comunidades Aut¢nomas" (FFCA), the central
government's liquidity facility to fund regions' needs. However,
when IVF only acts as a public credit entity, it will no longer
be in the scope of ESA-2010, as happens with any other
promotional banks in Europe. Notwithstanding, FFCA will continue
covering AC Valencia's deficit. Therefore, in case AC Valencia
decided to inject capital into IVF, it could use the segment of
the FFCA to cover deficit to fund such capital injection. Having
said that, we think that currently IVF does not need support in
light of IVF's high capital ratio above 40%.
IVF's assets totaled EUR846 million at June 30, 2017. The asset
structure is largely based on IVF's loan portfolio (EUR717
million), which accounted for 85% of total assets. The portfolio
includes loans to the private sector (15%) and the public sector
(85%). The high proportion of loans to the public sector is a
legacy of the previous administration. The new administration's
strategy focuses its activities toward SMEs, local businesses,
and venture capital, while simultaneously reducing its exposure
to the public sector.
In light of the close link between the region and IVF, the
explicit guarantee mechanism in place, and IVF's business model
that is focused on promotional activities and the execution of
government policies, we do not derive a stand-alone credit
profile for IVF. Furthermore, S&P does not expect this strong
support framework to change over the medium term.
S&P said, "The stable outlook on IVF mirrors that on AC Valencia.
If we downgraded AC Valencia, we would downgrade IVF.
"We could lower the ratings on IVF if we observed a weakening of
IVF's role for, or link with AC Valencia, including changes in
the guarantee structure, although we currently consider such a
scenario unlikely.
"We could upgrade IVF if we upgraded AC Valencia and we continued
to expect an almost certain likelihood of support from AC
Valencia to IVF, based on our view of IVF's integral link with
and critical role for the region."
TDA SA NOSTRA 1: Fitch Keeps BB Notes Rating on Watch Positive
--------------------------------------------------------------
Fitch Ratings has maintained TDA Sa Nostra Empresas 1 and 2,
FTA's notes on Rating Watch Positive (RWP):
TDA Sa Nostra Empresas 1 FTA
EUR6.6 million class D: 'BBsf'; maintained on RWP
EUR3 million class E: 'BBsf'; maintained on RWP
TDA Sa Nostra Empresas 2 FTA
EUR31.9 million class C: 'BBsf;' maintained on RWP
EUR9.7 million class D: 'BBsf'; maintained on RWP
TDA Sa Nostra Empresas 1 and 2 are static cash flow
securitisations of portfolios of secured and unsecured loans
granted by Caja de Ahorros y Monte de Piedad de las Baleares (Sa
Nostra; now Banco Mare Nostrum (BMN); BB/RWP/B) to small and
medium-sized enterprises (SMEs) located in Spain.
KEY RATING DRIVERS
The ratings of the notes are capped at the ratings of BMN, the
originator and account bank, which holds the reserve fund. Most
or all of credit enhancement to the notes (class D and E of TDA
Sa Nostra Empresas 1 and class C and D of TDA Sa Nostra Empresas
2) is provided by the reserve fund. The RWP on the notes mirrors
that on BMN's Long-term Issuer Default Rating (IDR).
RATING SENSITIVITIES
TDA Sa Nostra Empresas 1's class D and E notes and TDA Sa Nostra
Empresas 2's class C and D notes will be subject to a similar
rating action as BMN.
===========================
U N I T E D K I N G D O M
===========================
ABSOLUTE LIVING: 7 People Face Questioning in Court Over Collapse
-----------------------------------------------------------------
Claire Wilde at Telegraph & Argus reports that a liquidator
looking into the collapse of a controversial developer could push
for seven individuals to be questioned in court.
Absolute Living Developments went into liquidation last year,
leaving three Bradford projects unfinished and owing millions to
overseas investors, the report states.
Now liquidator Louise Brittain, who has been appointed by
creditors to attempt to recover the money owed, has said she has
received claims for losses totalling a massive GBP93 million --
far higher than original estimates, Telegraph & Argus says.
But what happened to investors' deposits remains a mystery, the
report notes.
According to Telegraph & Argus, Ms. Brittain said in a progress
report that she had sought to interview the following seven
people, but none had attended interviews to date:
* Daniel Harrison, company director, now understood to be
living in Singapore;
* Dr. Kien Cheong Yew, a former company director;
* Kay Cook and David Sewell of solicitors Oliver and Co;
* Richard Hutchinson, a director of Harbur Construction;
* Michael Roden, a former director of UM1 Limited, a building
contractor now in liquidation, and a former director of
financiers DS7 Limited; and
* Phillip Wright, a previous director of building contractor
EPG Manlet Limited.
"I will continue to chase the above individuals and in the event
they do not attend for a formal interview, I shall seek advice on
whether to proceed to make an application to court under section
236 of the Insolvency Act 1986 to seek their examination before
the court," the report quotes Ms. Brittain as saying.
Absolute Living Developments went into liquidation after Bradford
Council, which was owed more than GBP180,000 in business rates,
went to the High Court to ask for it to be wound up in April last
year, Telegraph & Argus discloses.
Its collapse sparked angry protests in Hong Kong, where many of
the buy-to-let investors are based, the report notes.
Absolute Living Developments had been working on three projects,
creating apartments within the former Bradford Council office
Olicana House in Chapel Street, Little Germany, the former Abbey
National Direct call centre Alexander House, in Bolton Road, and
the former Provident Financial base Colonnade House, now Summer
Berry Residences, in Sunbridge Road.
ERPE MIDCO: Fitch Assigns 'B' Long-Term Issuer Default Rating
-------------------------------------------------------------
Fitch Ratings has assigned a final Long-Term Issuer Default
Rating (IDR) of 'B' to Erpe Midco Limited (Praesidiad), as well
as a final instrument rating of 'B+'/'RR3' to the company's new
senior secured loans. The Outlook on the IDR is Stable.
Praesidiad's 'B' rating reflects its niche specialist business
profile that benefits from rising demand for high-security
solutions for strategic assets. Since the acquisition of HESCO in
2016, the group has improved its portfolio of high-security
products that are used in a wide range of end-markets. At the
same time, HESCO has added volatility to the group's business
model owing to HESCO's sales being partly dependant on the US
military and the occurence of armed conflicts and natural
disasters. Large exposure to the oil & gas sector also led to
below-budget operating performance in 2016.
KEY RATING DRIVERS
Niche High-Security Specialist: Following its acquisition by
Carlyle for EUR660 million (10x enterprise value-EBITDA
multiple), Fitch expects Praesidiad to focus on growing its high-
security business. Fitch continues to view the combined group as
a niche specialist in a narrowly defined, but growing, segment of
the perimeter protection (PP) market that benefits from high
barriers to entry, stable customer relationships and diversified
end-markets. However, the rating is constrained by Praesidiad's
small operating size and niche focus.
Supportive Operating Environment: Growth in the PP market is
driven by an increased demand of security and rise of natural
disasters and geopolitical events. Fitch does not expects to see
any sharp reversal of this secular trend over the rating horizon.
The pipeline of projects has provided some support for revenue
visibility and further contract win opportunities within the same
sector in the coming years. However, large exposure to oil & gas
has delayed some project starts, affecting their recent operating
performance.
HESCO Volatility Exceeds Betafence: Praesidiad continues to face
execution risks in balancing its product portfolio between the
volatile but profitable high-security segment (HESCO) and the
commoditised but stable baseline segment under Betafence. While
Praesidiad aims to increase the weight of higher-margin and
value-added services, HESCO remains a separate brand and
operating unit in the combined group.
Volatile Operating Performance: The increased contribution from
the high-security segment has increased Praesidiad's business
risk. The delayed start of key projects in the US utility sector,
deferred investment decisions in the oil & gas sector as well as
lower-than-expected sales at HESCO has led to a lower forecasted
revenue growth over the period of 2017-2020. Fitch expects
Praesidiad to stabilise its profitability with EBITDA margins
reaching 15% by 2020, reflecting its flexible cost base, which
should help absorb some of these exogenous shocks.
B-category Credit Metrics: Fitch estimates FFO adjusted gross
leverage (including factoring and operating leases adjustments)
to reach about 6.5x in 2017 pro forma to Carlyle's acquisition of
the company. The leverage profile remains high but sustainable
and in line with the 'B' rating category. Management believes
working capital can be improved, but rapid delivery maintained,
as inventory levels are high at HESCO. Profitability in the
baseline segment can be also improved with cost-restructuring
programmes.
DERIVATION SUMMARY
Praesidiad has evolved from a general fence manufacturer to a
total solution project (TSP) provider offering a full suite of
security services to a wide range of end-markets. Given its niche
strategic focus in high-security PP and perimeter control,
Praesidiad's building products peers such as Compagnie de Saint-
Gobain (BBB/Stable), CRH plc (BBB/Stable), L'isolante K-Flex
S.p.A. (B+/Stable) and Ideal Standard International SA (CC) can
only be used as a guide under Fitch peer comparison. Nonetheless,
Fitch believes Praesidiad's ratings remain constrained by its
group's small size and niche focus. Relative to certain other
security peers, Praesidiad's business model is more volatile with
earnings depending on large projects and unplanned events.
Although Praesidiad's profitability is weaker than its peers',
key credit metrics such as free cash flow (FCF), leverage and
coverage are consistent with the rating.
KEY ASSUMPTIONS
Fitch's key assumptions within Fitch ratings case for the issuer
include:
- Total revenue CAGR of 3.2% driven by a steady baseline segment
and modest growth in the high-security segment over 2016-2020;
- EBITDA margin to reach 15% by 2020, supported by an increasing
share of the higher-margin high-security segment as well as
some cost-saving initiatives;
- Capex at 2.5%-3% of total revenue;
- No extraordinary dividend payments or acquisitions.
KEY RECOVERY ASSUMPTIONS
- The recovery analysis assumes that Praesidiad would remain a
going concern in bankruptcy and that the group would be
reorganised rather than liquidated. Fitch has assumed a 10%
administrative claim in the recovery analysis.
- The recovery analysis assumes a 20% discount to Praesidiad's
LTM EBITDA for 2016, resulting in a post-reorganisation EBITDA
of about EUR50 million. At this level of EBITDA which assumes
corrective measures have been taken, Fitch would expects
Praesidiad to generate marginally positive FCF.
- Fitch also assumes a distressed multiple of 5.5x and a fully
drawn EUR80 million revolving credit facility (RCF).
- These assumptions result in a recovery rate for the senior
secured debt within the 'RR3' range to allow a single-notch
uplift to the debt rating from the IDR.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Successful transition to the high-security-focused business,
which will represent the majority of revenue.
- Stable EBITDA margin in the high teens and consistently
positive FCF.
- Funds from operations (FFO) adjusted gross leverage (including
factoring and operating leases adjustments) below 4.5x.
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
-Failure to maintain its niche position in the high-security
segment, leading to the loss of key customers.
-EBITDA margin erosion trending towards 10% and volatile FCF with
margin below 1%.
-FFO adjusted gross leverage (including factoring and operating
leases adjustments) above 7.0x for a sustained period.
LIQUIDITY
Satisfactory Liquidity: Fitch views Praesidiad's liquidity
position as satisfactory following the acquisition by Carlyle and
the new capital structure. Fitch expects Praesidiad to have
access to cash of around EUR17 million on balance sheet and an
undrawn multi-currency revolving credit facility of EUR80
million. In addition, Praesidiad utilises its factoring facility
to fund part of its working capital cycle. Fitch forecasts
sufficient internal cash flow to accommodate any capital
expenditure requirements.
FLY SALONE: Two Former Directors Get 7 Year Disqualifications
-------------------------------------------------------------
Haitham Sabrah of London and Jihad El Saleh of Sierra Leone have
been disqualified from acting as directors following an
Insolvency Service investigation.
They acted as directors for Fly Salone Airlines Limited which
operated flights from London to Sierra Leone. The company traded
for four months, from Dec. 11, 2015 to March 17, 2016. On
entering liquidation, GBP2,072,180 remained outstanding to the
company's creditors.
The directors were disqualified for failing to keep sufficient
business records to identify whether payments from the company
from Feb. 2, 2016 to March 17, 2016, totaling GBP170,913, were
genuine company expenditure.
The Secretary of State for Business, Energy and Industrial
Strategy accepted an undertaking from Haitham Sabrah effective
from September 8, and Jihad El Saleh effective from September 28.
Commenting on the disqualification, Martin Gitner, Deputy Chief
Investigator of Insolvent Investigations, Midlands & West at the
Insolvency Service, said:
"Directors have a duty to ensure proper accounting records are
maintained, preserved and, following insolvency, delivered up to
the insolvency practitioner.
"By failing to do this, the public can not be sure that all funds
received by the company were used for legitimate purposes.
"The Insolvency Service will take action against directors who do
not take their obligations seriously and abuse their position of
trust."
On Aug. 18, 2017, the Secretary of State accepted a
disqualification undertaking from Haitham Sabrah for a period of
7 years effective from Sept. 8, 2017.
The matters of unfitness, were that he failed to ensure that Fly
Salone Airlines Limited maintained or preserved, or in the
alternative, failed to deliver up sufficient accounting records
on behalf of Fly Salone Airlines Limited for the period Feb. 2,
2016 to March 17, 2016. As a result it has not been possible to
ascertain or verify:
* whether payments made to him, totalling GBP116,470 relate to
genuine company expenditure
* whether payments made to third parties in the last week of
trading, between 11 March 2016 and 17 March 2016, totalling
GBP54,443 relate to genuine company expenditure
The matters of unfitness, which Mr El Saleh did not dispute in
the Disqualification Undertaking, were that he failed to ensure
that Fly Salone Airlines Limited maintained or preserved, or in
the alternative, failed to deliver up sufficient accounting
records on behalf of Fly Salone Airlines Limited for the period
Feb. 2, 2016 to March 17, 2016. As a result it has not been
possible to ascertain or verify:
* whether payments made to Haitham Sabrah totalling GBP116,470
relate to genuine company expenditure
* whether payments made to third parties in the last week of
trading, between March 11, 2016 and March 17, 2016,
totalling GBP54,443 relate to genuine company expenditure
On liquidation, GBP2,072,180 remained outstanding to creditors
and the company had no assets.
Fly Salone was an airline based in the United Kingdom that
operated scheduled and charter flights between London and
Freetown, Sierra Leone.
Fly Salone Airlines Limited was incorporated on Aug. 18, 2015.
GREENWOODS: Bought Out of Administration by Verstatile Int'l
------------------------------------------------------------
Owen Hughes at Daily Post reports that historic menswear retailer
Greenwoods has been bought out of administration but one North
Wales store will close.
The suit shop chain dates backs to 1860 with 63 stores across the
UK -- including in Llandudno and Bangor, Daily Post notes.
It went into administration last month -- putting the future of
the stores and nearly 320 workers under threat, Daily Post
recounts.
Now the group has been bought by Versatile International Trading
Limited, Daily Post discloses.
But while the new owners have taken on the Llandudno store on
Mostyn Street -- which will remain open -- the Bangor shop is not
part of the deal and will close immediately, Daily Post relates.
According to Daily Post, a spokesman said: "The Joint
Administrators are pleased to announce the sale of the business
and assets of Greenwoods Menswear Limited to Versatile
International Trading Limited on the 20 October 2017.
"The sale will see 40 retail stores, the central warehouse and
head office functions transferring to the buyer and will protect
the jobs of 181 employees.
"The remaining 22 stores will close immediately, resulting in 88
redundancies. This follows the prior closure of two unstaffed
concessions and one store (Rugby) at an earlier stage of the
administration."
MILLER HOMES: S&P Assigns 'B+' Corp Credit Rating, Outlook Stable
----------------------------------------------------------------
S&P Global Ratings assigned its 'B+' long-term corporate credit
rating to U.K.-based homebuilder Miller Homes Group Holdings PLC
(Miller Homes). The outlook is stable.
S&P said, "At the same time, we assigned our 'BB-' long-term
issue rating to Miller Homes' GBP425 million senior secured
notes. The recovery rating on the notes is '2', indicating our
expectation of substantial (70%-90%) recovery (rounded estimate:
70%) in the event of a payment default. We are also assigning our
'BB' long-term issue rating to the company's GBP80 million super
senior revolving credit facility (RCF). The recovery rating on
the RCF is '1', indicating our expectation of very high (90%-
100%) recovery (rounded estimate: 95%) in the event of a payment
default."
The ratings are in line with the preliminary ratings we assigned
on Sept. 18, 2017 (see "U.K.-Based Miller Homes Group Holdings
PLC Assigned Preliminary 'B+' Rating; Outlook Stable," published
on RatingsDirect).
S&P said, "The rating reflects our view of the inherent
volatility and cyclicality of the homebuilding industry in the
U.K.'s highly fragmented housing market. Miller Homes' activities
cover the entire value chain, from purchasing land to building
homes and selling individual units. Revenues are mainly generated
from four-bedroom or larger family houses, with small exposure to
apartments. The company has been in business for over 80 years.
"Despite political uncertainties in the U.K. following the Brexit
vote in June 2016, we believe that demand should remain robust
for Miller Homes' main regions. The company's markets are outside
of London, including the North of England (approximately 34% of
revenues in 2016), Midlands and South of England (38%), and
Scotland (28%). Sales to international investors are small,
accounting for less than 3% of total sales. This has been
reflected in the continuously increasing sales rate per week of
0.69 on June 30, 2017, versus 0.67 on Dec. 31, 2016, and 0.59 on
Dec. 31, 2015. We expect the U.K. government to continue
supporting the domestic housing market with several initiatives
and schemes, such as help-to-buy, a segment in which Miller Homes
generates about 30%-35% of its total annual revenues."
Miller Homes' EBITDA margin, at about 20%, is in line with peers
rated by S&P Global Ratings, such as Taylor Wimpey. This reflects
Miller Homes' focus on family housing and limited exposure to the
affordable housing segment (about 7% of total revenues in 2016),
as well as an overall average selling price of about GBP237,000
as of June 30, 2017. Miller Homes ranks among the top 20
housebuilders in the U.K., but it is small in size and scale
compared with the leading corporations in the sector, Barratt
Development, Persimmon, or Taylor Wimpey.
S&P said, "We understand that the company has 5.3 years of land
supply secured, either thanks to owned landbank or controlled
landbank with planning permission already obtained. Almost all of
the construction is outsourced to a large and diverse
subcontractor base on a regional basis but managed by Miller
Homes. The company completed 2,380 homes in 2016, and it plans to
complete a total of 4,000 units by the end of 2021.
"Our assessment of Miller Homes' financial risk profile mainly
reflects the company's low ratio of free operating cash flow
(FOCF) to debt of less than 10%, given the high working capital
needs inherent to the industry and the requirement to obtain
landbank, as well as its moderate leverage ratio of debt to
EBITDA of below 4x. Miller Homes' capital structure includes
senior secured bonds of GBP425 million -- of which GBP175 million
are floating rate notes maturing in 2023 and GBP250 million are
at a coupon of 5.5% maturing in 2024 -- and a GBP80 million super
senior RCF. We understand that the proceeds of these debt
instruments have been used for financing Bridgepoint's
acquisition of Miller Homes, including about GBP117 million of
net debt repayment.
"The capital structure also includes a GBP145 million shareholder
loan that we view as equity, given it is subordinated to all the
first-lien and second-lien debt, has a maturity date at least six
months after all the senior facilities, is stapled to equity, and
has no fixed cash interest payment. In addition, about GBP151
million of mainly priority shares are provided by Bridgepoint and
the management of Miller Homes.
"We also take into account that company management and the new
shareholder are committed to deleveraging over time and
maintaining an S&P Global Ratings-adjusted ratio of debt to
EBITDA at less than 4x in the medium term.
"We acknowledge Miller Homes' solid coverage ratios with expected
post-transaction funds from operations (FFO) cash interest
coverage of above 5x and EBITDA interest coverage well above 3x.
Although we expect the company's credit metrics to improve in the
near term, our assessment of the company's financial risk profile
also incorporates its private equity ownership. This could push
the company toward more aggressive leverage or redeployment of
disposal proceeds than listed companies, for example.
"Our base-case assumptions for Miller Homes have not changed
materially since we assigned the preliminary rating.
"The stable outlook on Miller Homes reflects our view that the
company will continue to generate solid cash flow from its
homebuilding operations, with an EBITDA margin close to 20%,
despite political uncertainty around the U.K.'s Brexit
negotiations.
"The outlook also takes into account Miller Homes' prudent
working capital management, including land procurement, in line
with market demand. We anticipate the ratio of debt to EBITDA
will be below 4x and EBITDA interest coverage will stand well
above 3x in the next 12 months.
"We could lower the rating if the company's liquidity weakens as
a result of significantly higher-than-expected working capital
outflows over the next year, leading also to a significant
decrease in FOCF or if the company started distributing large
dividend payments.
"We might also lower the rating if the company's credit metrics
were to weaken, with an S&P Global Ratings-adjusted ratio of debt
to EBITDA well above 4x or EBITDA interest coverage of 3x or
less. This could result from a lower demand for family houses in
the company's operating regions, combined with significant cash
outflows or working capital needs.
"The likelihood of an upgrade is currently remote. A positive
rating action could follow, however, a material improvement in
scale and scope of the business, which would significantly expand
its FOCF, bringing the company's metrics more in line with peers
we see as having better business risk."
SHOP DIRECT: Fitch Assigns B+ Long-Term IDR, Outlook Stable
-----------------------------------------------------------
Fitch Ratings has assigned Shop Direct Limited (SDL) a Long-Term
Issuer Default Rating (IDR) of 'B+(EXP)' with a Stable Outlook.
Fitch has also assigned Shop Direct Funding plc's planned GBP700
million senior secured notes an expected senior secured rating of
'B+(EXP)'/'RR4'. The final rating is contingent upon the receipt
of final documents conforming to information already received by
Fitch.
The 'B+(EXP)' IDR reflects management's track record of generally
implementing a coherent and successful strategy with limited
execution risk, leading to a robust business model with solid
presence in online retail, improving market shares and a
commercial offer enabled by consumer financing. Such features,
mitigated by moderate scale and limited geographic
diversification, indicate a business profile commensurate with
the 'BB' rating category. Profitability and financial flexibility
are also strong, supporting the assigned rating.
However, the rating is constrained at 'B+' due to high Fitch-
adjusted funds from operations (FFO) net leverage of 5.0x at
financial year-end June 2017 (FYE17) and Fitch expectations of
neutral to mildly positive free cash flow (FCF).
A potentially high dividend pay-out exceeding GBP100 million by
FYE19 could result in permanently increased FFO adjusted net
leverage above 5.5x and diminished financial flexibility, if not
offset by a material improvement in profitability, which would
lead to a notch downgrade to 'B'. However, Fitch forecasts show
net leverage strengthening mildly over the rating horizon.
KEY RATING DRIVERS
Subsidised Online Retail Operations: SDL provides wholly owned
consumer financing as a complementary core offering to its online
general merchandise retail operations. Its profitable consumer
finance operations allow spending on operating, IT and marketing
costs to support retail sales volume growth in a symbiotic way.
Fitch views this feature as supportive of the company's superior
business model but it exposes the group to non-bank financial
institution-type risks, namely receivable asset quality through
the economic cycle, and funding/liquidity for that purpose.
Growing Very Offsets Declining Littlewood: SDL has increased
market share in UK retail despite competition from traditional
retailers with increasing online presence and pure-play internet
providers (eg Amazon, ASOS and Boohoo). This is critically driven
by the success of Very. However, Fitch positive views of SDL's
market position is offset by management's conscious decision to
run down its Littlewoods brand, managing it for profit and cash,
and its sole presence in the UK's highly competitive market with
a number of innovations in retail technology and customer reach.
Profitability Supported by Asset-Light Structure: SDL has solid
profitability adjusted for consumer financing based on Fitch
criterias relative to pure internet retailers of comparable
scale. SDL is capable of generating adequate profits and solid
FCF from its inherently asset-light structure dominated mainly by
distribution centres and consumer interface technological
platforms.
The EBITDAR margin is lower than bricks-and-mortar retailers but
this is mitigated by better cash conversion. PPI-related
exceptional costs and the securitisation interest are incurred
purely by Shop Direct Finance Company Limited (SDFC). SDFC profit
is generated largely by Very as 80% of Littlewoods' sales are on
interest-free terms.
SDFC Funding and Liquidity Constraints: Most of the group's debt
is secured despite the solid cash flow generation capabilities at
group level and the lack of meaningful debt maturities. The
encumbered nature of the assets reduces financial flexibility in
Fitch views, particularly at the SDFC level.
Pricing Mitigates High Impaired Receivables: SDL's asset quality
is relatively weak, despite improving, as indicated by a four-
year average of impaired and non-performing loans of 11.2%, which
translates to a 'b'/'bb' rating for asset quality under Fitch's
non-bank financial institution criteria. This reflects SDL's
targeted customer base at the medium/lower end of the credit
spectrum and is mitigated by adequate pricing, reflecting a
degree of pricing power, and limited variability in SDL's asset
quality indicators since 2009. Risk management procedures,
including write-off and provisioning policies, are sound.
Increased Leverage Following Refinancing: FFO adjusted net
leverage (retail only) is likely to peak at 5.5x by FYE19
following the issuance of GBP700 million bonds, from 5.0x at
FYE17, and reduce towards 4.9x over the rating horizon, mainly
due to improving sales and Fitch conservative views of a
moderately stable retail-only EBITDA margin. Such leverage is
high but acceptable for the 'B+' rating given the solid business
profile. Fitch working assumption is that most of the existing
cash and equivalents and cash overfunding will stay initially in
the business for investments and general flexibility and partly
for dividend distributions subject to maintaining solid operating
performance.
Adjustments Follow Hybrid Business Model: In Fitch approach Fitch
make adjustments by stripping out the results of SDFC to achieve
a proxy to retail cash flows available to servicing debt at SDL.
In Fitch analysis Fitch also deconsolidate the GBP1.3 billion
non-recourse securitisation financing outside of the group under
SDFC. This securitisation debt is core to the group's consumer
financing offer and is repaid by the collection of receivables
predominantly originated from retail.
However, on the basis of Fitch views of below-average asset
quality and funding and liquidity constraints for SDFC, Fitch add
back GBP274 million of debt to SDL's retail operations. This is
because Fitch consider a hypothetical equity injection from the
rated entity to SDFC (GBP274 million) to attain a capital
structure for SDFC that would require no cash calls to support
finance service operations over the rating horizon.
Adequate Financial Flexibility: The low use of operating leases
and a robust business model suggest that the FFO fixed charge
cover ratio will remain strong and above 3.0x over the rating
horizon despite the contemplated higher debt amount relative to
FYE17, which results in a lower FFO fixed charge cover ratio. In
addition, financial flexibility at group level is supported by
the lack of meaningful debt maturities over the next four years,
initial cash overfunding, and access to enlarged GBP150 million
revolving credit facilities.
Some Commitment to Deleveraging: Management and the group's
owners may remain opportunistic about part debt-financing
shareholder distributions as authorised by loan and bond
indentures despite an intention to generally reduce debt and
leverage over time.
Fitch assumes that dividend distributions will depend on future
financial performance, but SDL's governance structures are rather
opaque, with concentrated ownership and some lack of transparency
or independent oversight. This could translate into potential
misalignment between shareholders and creditors' interests over
time; however, SDFC's board has three non-executive directors
among its six members. Fitch assess financial transparency as
adequate even though SDL conducts related-party transactions with
affiliate logistics entities Yodel and Arrow XL. These contracts
run until 2022, albeit on an arm's-length basis.
DERIVATION SUMMARY
The asset base is inherently different from other traditional
retailers as over 50% of the group's consolidated total assets
related to trade receivables relative to 4% equivalent figure for
Marks and Spencer Group plc (BBB-/Stable) or 6% for New Look
Retail Group Ltd (CCC). Financial services income is driven by
the retail customer base, with over 95% of transactions including
credit.
The cost base is also different from that of traditional
retailers, with a focus on online retail operations and client
base and without any meaningful fixed assets or operating leases.
This is reflected in a stronger EBITDAR-based profit margin
conversion into FCF after dividends. Shop Direct's dedicated
online retail activities are enabled (subsidised) by consumer
finance operations via intra-group loans. This is an unusual
corporate business arrangement but it helps support the company's
commercial proposition.
Shop Direct's product and service offering to clients is very
compelling relative to key competitor Amazon, Inc. or pure online
start-ups such as Bohoo and ASOS. Shop Direct also benefits from
efficient distribution infrastructure, with the lowest picking
costs and an established online platform without duplication of
costs/capex compared to M&S, New Look or other bricks-and-mortar
retailers with expanding online presence.
KEY ASSUMPTIONS
Fitch's key assumptions within Fitch ratings case for the issuer
include:
- annual retail revenue growth rate averaging 3.2% by FY20 over
the rating horizon;
- retail-only EBITDA margin reaching 11.5% in FY18, then
gradually reducing, reflecting weaker gross margin to help
recruit customers;
- capex/revenue ratio of around 4%, in line with the
management's revised projections;
- pension contribution of GBP15 million a year until 2021
recorded as other items before FFO;
- non-operating/non-recurring cash outflows in line with the
management plan mainly related to distribution centres;
- up to GBP100 million shareholder distribution assumed by Fitch
spread between FY18 and FY19.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that SDL would be considered a
going concern in bankruptcy and that the company would be
reorganised rather than liquidated. Fitch has assumed a 10%
administrative claim.
Going-Concern Approach
Fitch follows a going-concern approach for recovery analysis as
Fitch expects better valuation in distress than liquidating the
assets (and extinguishing the securitisation debt) after
satisfying trade payables. Fitch analysis focuses on a surviving
online retailer with consumer finance structured differently
(joint venture or owned by a third-party bank), and therefore a
corporate.
Fitch use Fitch proxy retail-only EBITDA of GBP80.8 million
excluding marketing contribution from SDFC. Fitch also strip out
the GBP1.3 billion non-recourse securitisation financing outside
the group under SDFC as Fitch assume that consumer finance can be
arranged or structured by a third-party bank or in a joint
venture after restructuring.
Fitch apply an 8% discount to EBITDA, which results in stabilised
post-restructuring EBITDA of GBP74 million. Fitch use a 5.0x
distressed enterprise value/EBITDA multiple, reflecting the
growing online retail and technology platform and competitive
position enabled by consumer finance, which mitigates the lack of
tangible asset support. Other retail peers such as M&S conduct
consumer finance activities in a JV where financing is
effectively provided by external party bank.
Therefore in a hypothetical distressed situation a relatively
undamaged asset-light online retail brand with adjacent (instead
of core) consumer financing could realise 5.0x post-restructuring
EBITDA in Fitch views.
For the debt waterfall Fitch assumed a fully drawn super senior
revolving credit facility of GBP100 million and GBP4.3 million of
debt located in non-guarantor entities. This debt ranks ahead of
the planned bonds. After satisfaction of these claims in full,
any value remaining would be available for noteholders (GBP700
million notional) and a GBP50 million pari passu revolving credit
facility issued by Shop Direct Funding plc. This translates into
an instrument rating for the proposed bonds of
'B+(EXP)'/'RR4'/31%.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- Retail-only FFO adjusted net leverage consistently below 4.5x
(FY17: 5.0x)
- Improvement in the business model through increasing
diversification and scale, and a proven track record of
strategy implementation over the medium term, leading to a
retail-only FFO margin sustainably above 8% (FY17: 8.7%) and
continuing positive FCF generation through the cycle with FCF
margin in the low to mid positive single digits
- Significant improvements in asset-quality metrics translating
into improved profitability within SDFC
- Maintenance of solid FFO fixed charge cover and liquidity
cushion
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- Inability or lack of commitment to bring retail-only FFO
adjusted net leverage below 5.5x over the rating horizon, for
example prompted by dividend payments of more than GBP100
million by FY19 if not offset by material improvement in
profitability
- Weak business growth (neutral to mildly positive sales growth)
and profitability under more challenging market conditions in
the UK reflected in FFO margin below 7%
- Neutral to positive FCF before exceptional dividend
distributions over the rating horizon along with FFO fixed-
charge cover metrics below 3.0x
- Deterioration in SDL's asset quality negatively affecting its
SDFC profitability and cash flows, and ultimately its ability
to support its retail activities through SDFC's profitability
LIQUIDITY
Comfortable Liquidity: Sufficient availability exists under the
enlarged committed credit lines (GBP150 million) and headroom
under covenants to temporarily cover short-term liquidity
requirements for operational needs. SDL will benefit from a
comfortable level of liquidity comprising readily available cash
of GBP117 million as of FYE17, cash overfunding, and Fitch
expectations of at least mildly positive FCF. However, the level
of liquidity may fluctuate with the amount and timing of
dividends to be paid over time.
FULL LIST OF RATING ACTIONS
Shop Direct Limited
-- Long-Term IDR at 'B+(EXP)'
Shop Direct Funding plc
-- Senior secured notes at 'B+(EXP)/RR4'
STONE FIRMS: Parent Company Sues Barclays, KPMG Over Collapse
-------------------------------------------------------------
Alex Hawkes at The Mail On Sunday reports that Portland Stone
Holdings Limited is suing Barclays and former administrators KPMG
alleging that they conspired to put Stone Firms Limited, its
subsidiary, into administration.
Entrepreneur Geoffrey Smith had bought the quarrying businesses
in 2004, The Mail On Sunday recounts. After several years of
successful trading the group hit cashflow difficulties following
a row over a new quarry and the development of a new factory, The
Mail On Sunday relays.
According to The Mail On Sunday, Barclays transferred the group
to its business support unit and subsequently put it into
administration after it was unable to pay a debt to HM Revenue &
Customs. Mr. Smith later got finance to buy back the business as
part of a voluntary arrangement with creditors and still runs it
now, The Mail On Sunday discloses.
Barclays disputes the claim, saying in court documents that it is
"a straightforward case of Stone Firms Limited becoming insolvent
through the decisions of Mr. Smith, which allowed a huge unpaid
debt of over GBP760,000 to HMRC to build up", The Mail On Sunday
relates.
"We strongly refute the allegation that KPMG or the officeholders
acted improperly," The Mail On Sunday quotes a KPMG spokesman as
saying. "We believe this claim has no merit in fact or law and
we will continue to vigorously defend the firm and officeholders
against it."
WARWICK FINANCE: Moody's Assigns Caa1 Rating to Class E Notes
-------------------------------------------------------------
Moody's Investors Service has assigned definitive long-term
credit ratings to notes issued by Warwick Finance Residential
Mortgages Number Three PLC:
-- GBP1,469.2M Class A Mortgage Backed Floating Rate Notes due
December 2049, Definitive Rating Assigned Aa2 (sf)
-- GBP128.6M Class B Mortgage Backed Floating Rate Notes due
December 2049, Definitive Rating Assigned A1 (sf)
-- GBP64.3M Class C Mortgage Backed Floating Rate Notes due
December 2049, Definitive Rating Assigned Baa2 (sf)
-- GBP36.7M Class D Mortgage Backed Floating Rate Notes due
December 2049, Definitive Rating Assigned Ba2 (sf)
-- GBP36.7M Class E Mortgage Backed Floating Rate Notes due
December 2049, Definitive Rating Assigned Caa1 (sf)
Moody's has not assigned ratings to the Principal Residual
Certificates or Revenue Residual Certificates.
Moody's assigned provisional ratings to these notes on October
13, 2017.
The portfolio backing this transaction consists of UK non-
conforming and buy-to-let residential loans originated by
Platform Funding Limited and GMAC-RFC Limited.
RATINGS RATIONALE
The ratings of the notes take into account, among other factors:
(i) the historical performance of the collateral; (ii) the credit
quality of the underlying mortgage loan pool, (iii) the level of
arrears in the pool, (iv) the seasoning of the loan pool, and (v)
the credit enhancement provided to the senior notes by the junior
notes.
Expected Loss and MILAN CE Analysis
Moody's determined the MILAN credit enhancement (MILAN CE) and
the portfolio's expected loss (EL) based on the pool's credit
quality. The expected portfolio loss (EL) of 4.8% and the MILAN
CE of 19% serve as input parameters for Moody's cash flow and
tranching model, which is based on a probabilistic lognormal
distribution. The MILAN CE reflects the loss Moody's expects the
portfolio to suffer in the event of a severe recession scenario.
The key drivers for the MILAN CE of 19%, which is lower than the
UK non-conforming sector average (25%) and is based on Moody's
assessment of the loan-by-loan information, are: (i) the WA
current LTV of 81.38% (as calculated by Moody's), which was
higher than in the previous Warwick transactions; (ii) the
weighted average seasoning of the pool of 11.0 years; (iii) the
presence of 49.5% loans where the borrowers self-certified their
income; (iv) borrowers with adverse credit history with 3.4% of
the pool containing borrowers with CCJ's; (v) the level of
arrears of around 9.0% (including all technical arrears) at the
end of September 2017, of which 2.7% are 90+ days in arrears, and
(vi) the presence of 30.0% of restructured loans in the
portfolio, which are mainly legacy restructurings with
approximately 11.1% of the portfolio containing loans that have
been restructured after 2012.
The key drivers for the portfolio's expected loss of 4.8%, which
is in line with the UK non-conforming sector average (4.8%) and
is based on Moody's assessment of the lifetime loss expectation,
are: (i) benchmarking with comparable transactions in the UK non-
conforming market via analysis of book data provided by the
seller on defaults, delinquencies and recoveries (ii) the
collateral performance to date along with an average seasoning of
11.0 years of the portfolio; and (iii) the current economic
conditions in the UK and the potential impact of future interest
rate rises and inflation on the performance of the mortgage
loans.
-- Operational Risk Analysis
Western Mortgage Services Limited ("WMS", not rated) is acting as
servicer. In order to mitigate the operational risk, Homeloan
Management Limited ("HML", not rated) is appointed as a back-up
servicer, and there is a back-up servicer facilitator, Intertrust
Management Limited ("Intertrust", not rated) from close. In its
role of facilitator, Intertrust will use best endeavors to
appoint a back-up servicer in the event of servicer termination;
or if the back-up servicer either becomes the primary servicer or
is no longer able to fulfill the role.
Co-operative Bank plc (currently rated Caa2/ NP/ B3(cr)/ NP (cr)
is acting as cash manager. The transaction also benefits from an
independent back-up cash manager, Citibank, N.A. (London Branch)
(A1/(P)P-1), which is in place from closing and has the ability
to assume cash management duties within 5 business days. To
ensure payment continuity over the transaction's lifetime the
transaction documents incorporate estimation language whereby the
cash manager can use the three most recent servicer reports to
determine the cash allocation in the event of the servicer report
not being delivered in time.
Unlike in other previous UK RMBS transactions from this
originator, there is no reserve fund or liquidity facility being
established at closing to cover for potential interest shortfall
on the notes. The ratings assigned to the notes take into account
this lack of liquidity available to the notes, in particular to
cover for the potential financial disruption risk, but also give
credit to the presence of a warm back-up servicer and the overall
back-up arrangement as described above.
-- Transaction structure
Principal to pay interest mechanism is always available to pay
interest on the Class A notes. After the Class A notes are paid
in full, principal can be used to pay interest on the most senior
note outstanding. In addition, Moody's notes that unpaid interest
on Class A to E is deferrable. Non-payment of interest on any
rated notes including Class A will not constitute an event of
default.
-- Interest Rate Risk Analysis:
The interest rate risk in the transaction is unhedged. There are
SVR linked (0.5% of the portfolio), Bank of England Base rate
linked (69.9% of the portfolio) and 3 months Libor linked loans
(29.6% of the portfolio) in the portfolio, therefore the
transaction is exposed to basis risk. Moody's has taken this lack
of hedging of the basis risk into account in the cash flow
modelling of the transaction.
The ratings address the expected loss posed to investors by the
legal final maturity of the notes. In Moody's opinion the
structure allows for timely payment of interest and ultimate
payment of principal at par on or before the rated final legal
maturity date for all rated notes. Moody's ratings only address
the credit risk associated with the transaction. Other non-credit
risks have not been addressed, but may have a significant effect
on yield to investors.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
September 2017.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
Factors that would lead to an upgrade or downgrade of the
ratings:
Factors that would lead to an upgrade of the ratings include
economic conditions being better than forecast resulting in
better-than-expected performance of the underlying collateral.
Factors that would lead to a downgrade of the ratings include
economic conditions being worse than forecast resulting in worse-
than-expected performance of the underlying collateral,
deterioration in the credit quality of the counterparties and
unforeseen legal or regulatory changes.
Stress Scenarios:
Moody's Parameter Sensitivities: At the time the ratings were
assigned, the model output indicated that the Class A Notes would
still have achieved Aa2(sf), even if the portfolio expected loss
was increased to 7.2% from 4.8% and the MILAN CE from 19.0% to
26.6%, assuming that all other factors remained the same. Moody's
Parameter Sensitivities quantify the potential rating impact on a
structured finance security from changing certain input
parameters used in the initial rating.
Moody's Parameter Sensitivities provide a quantitative/model-
indicated calculation of the number of rating notches that a
Moody's structured finance security may vary if certain input
parameters used in the initial rating process differed.
The analysis assumes that the deal has not aged and is not
intended to measure how the rating of the security might migrate
over time, but rather how the initial rating of the security
might have differed if key rating input parameters were varied.
Parameter Sensitivities for the typical EMEA RMBS transaction are
calculated by stressing key variable inputs in Moody's primary
rating model.
*********
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-
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Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2017. All rights reserved. ISSN 1529-2754.
This material is copyrighted and any commercial use, resale or
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