/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/171222.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 Friday, December 22, 2017, Vol. 18, No. 254 Headlines A Z E R B A I J A N BANK OF BAKU: Moody's Cuts Deposit Ratings to Caa3, Outlook Neg. G E O R G I A BASISBANK: Fitch Upgrades Long-Term IDR to B+, Outlook Stable G E R M A N Y AIR BERLIN: Brussels Okays Lufthansa's Acquisition of Assets NIKI LUFTFAHRT: Niki Lauda Submits Offer for Airline NIKI LUFTFAHRT: Ryanair Won't Bid for Assets VOITH GMBH: Moody's Withdraws Ba1 CFR, Outlook Stable ZF FRIEDRICHSHAFEN: Moody's Ups ZF North's Note Rating From Ba1 G R E E C E ELETSON HOLDINGS: Moody's Lowers CFR to Caa1 on Weak Liquidity I R E L A N D BLACK DIAMOND 2015-1: Moody's Rates Class E Notes (P)Ba2 HARVEST CLO V: Fitch Affirms BBsf Ratings on 3 Tranches I T A L Y CREDITO VALTELLINESE: DBRS Lowers LT Issuer Rating to BB UNIONE DI BANCHE: DBRS Cuts Subordinated Debt Ratings to BB(high) L U X E M B O U R G EVRAZ GROUP: S&P Ups CCR to 'BB' on Expected Strong Performance P O L A N D BANK MILLENNIUM: Moody's Hikes LT Bank Deposits Rating From Ba1 VISTAL GDYNIA: Court Declares Unit Bankrupt P O R T U G A L DOURO MORTGAGES NO. 3: Fitch Affirms Bsf Rating on Cl. D Notes R U S S I A BANK RESPUBLIKA: Moody's Lowers Long-Term Deposit Rating to Caa1 PROMSVYAZBANK PJSC: S&P Retains 'B+' CCR on CreditWatch Negative VOZROZHDENIE BANK: S&P Cuts LT Counterparty Credit Rating to 'B' S P A I N IM SABADELL 11: Moody's Rates EUR332.5MM Series B Notes Caa3 U N I T E D K I N G D O M ANGLIAN WATER: Moody's Affirms Ba3 Rating on GBP240MM Sr. Notes CROWN AGENTS: Fitch Revises Outlook to Stable, Affirms BB IDR MUTUAL SECURITISATION: S&P Lowers Class A2 Notes Rating to 'CCC-' SOUTHERN WATER: Moody's Affirms Ba1 Sub. Regular Bonds Rating TOYS R US: Pension Fund Backs Company Voluntary Arrangement VOYAGE BIDCO: Fitch Affirms & Withdraws B- Long-Term IDR YORKSHIRE WATER: Moody's Affirms (P)Ba1 Sub. MTN Program Rating X X X X X X X X * BOOK REVIEW: The Money Wars ********* =================== A Z E R B A I J A N =================== BANK OF BAKU: Moody's Cuts Deposit Ratings to Caa3, Outlook Neg. ---------------------------------------------------------------- Moody's Investors Service has downgraded OJSC Bank of Baku's (BoB) long-term foreign- and local-currency deposit ratings to Caa3 from Caa1. The bank's baseline credit assessment (BCA) and adjusted baseline credit assessments were downgraded to caa3 from caa1. The outlook on the long-term local- and foreign-currency deposit ratings remain negative. The bank's Not-Prime short-term foreign-currency and local- currency deposit ratings were affirmed. Concurrently, Moody's has downgraded the bank's long-term Counterparty Risk Assessment (CR Assessment) to Caa2(cr) from B3(cr) and affirmed its short-term CR Assessment of Not Prime(cr). The rating action reflects Moody's concerns regarding the depletion of the bank's equity as a result of heavy net losses, and the need for equity injection to meet the regulatory capital requirements. The negative outlook is driven by downside risks for the bank's financial standing stemming from ongoing net losses and weak pre-provision income. RATINGS RATIONALE BoB reported a negative tangible common equity of AZN4.9 million at the end 2016 under IFRS (unaudited report) as per Moody's estimates. This was largely driven by heavy credit costs in 2015- 16. Over the first eleven months of 2017 the bank recognized a net loss of AZN35.2 million, according to its local GAAP accounts, due to elevated provisioning charges, along with weakened pre-provision income. This caused regulatory capital falling to AZN24.8 million as of December 1, 2017, which is below the minimal regulatory threshold of AZN50 million. In addition, regulatory Tier 1 and Total Capital Adequacy Ratios (CAR) fell to 3.8% and 7.3%, respectively below the required 5% and 10% as of the same date. The bank has informed Moody's that it is currently under regulatory forbearance until further notice. Despite the shareholders' decision to increase the bank's equity by AZN91 million, taken at the general meeting in June 2017, no capital has been injected to date by the shareholders. The rating agency is not aware of the shareholders' definitive plans and the timing of any support for BoB, or plans to merge it with other local banks. Moody's expects that BoB will remain loss-making in the next several quarters, and consequently, it needs an equity injection to meet the regulatory requirements. In addition, the business model of BoB and several other banks, focused on high-risk, unsecured consumer lending, is not sustainable in the current environment as the debt servicing capacity of households remains weak. This partially explains the regulatory forbearance measures applied to a few local banks, which solvency materially suffered over the recent challenging years. WHAT COULD MOVE THE RATINGS UP / DOWN The ratings could be upgraded and the outlook could be changed to stable if the shareholders replenish the bank's equity, or the bank improves its recurring revenues and net financial result, while maintaining adequate level of capitalization to meet the regulatory requirements. The ratings could be lowered if there are indications of the bank's failure such as liquidity support beyond that normally associated with the particular class of institution, forbearance in order to delay loss recognition or resolution proceedings, or merger that is effectively mandated by the government on terms unlikely to be available commercially. LIST OF AFFECTED RATINGS Issuer: OJSC Bank of Baku Downgraded -- LT Bank Deposits, Downgraded to Caa3 from Caa1, Outlook Remains Negative -- Adjusted Baseline Credit Assessment, Downgraded to caa3 from caa1; -- Baseline Credit Assessment, Downgraded to caa3 from caa1 -- LT Counterparty Risk Assessment, Downgraded to Caa2(cr) from B3(cr) Affirmations: -- ST Bank Deposits, Affirmed NP -- ST Counterparty Risk Assessment, Affirmed NP(cr) Outlook Actions: -- Outlook, Remains Negative PRINCIPAL METHODLOGY The principal methodology used in these ratings was Banks published in September 2017. ============= G E O R G I A ============= BASISBANK: Fitch Upgrades Long-Term IDR to B+, Outlook Stable ------------------------------------------------------------- Fitch Ratings has upgraded Basisbank's (Basis) Long-Term Issuer Default Rating (IDR) to 'B+' from 'B' and affirmed Cartu Bank's (Cartu) and Halyk Bank Georgia's (HBG) IDRs at 'B+' and 'BB-', respectively. Fitch has revised the Outlook on Cartu to Negative from Stable. The Outlooks on Basis and HBG are Stable. Fitch has also upgraded Basis's Viability Rating (VR) to 'b+' from 'b' and affirmed Cartu's VR at 'b+'. KEY RATING DRIVERS IDRS, VIABILITY RATINGS (VRs) Basis's and Cartu's IDRs are driven by the banks' standalone creditworthiness, as expressed by their VRs. The upgrade of Basis's Long-Term Foreign Currency IDR reflects the upgrade of the bank's VR. The latter captures the bank's extended track record of profitable growth, while maintaining reasonable asset quality metrics and a solid capital cushion. The affirmation of Cartu's ratings and revision of the Outlook to Negative factors in the pressures the bank faces as a result of deteriorating asset quality, which could also negatively impact performance and capitalisation. Basis's and Cartu's VRs also consider high loan dollarisation levels (end-3Q17: 68% and 71%, respectively), sizeable balance sheet concentrations, the risks associated with largely unseasoned loan books after recent rapid growth and franchise limitations. The ratings also factor in both banks' reasonable profitability metrics, sizeable equity cushions and moderate refinancing risks. HBG's IDRs are driven by the potential support it may receive, if needed, from its sole shareholder Halyk Bank of Kazakhstan (HBK, BB/Stable). The one-notch differential between HBK's and HBG's IDRs reflects the cross-border nature of the parent-subsidiary relationship, and the so far limited track record and contribution of the Georgian subsidiary to overall group performance. The Stable Outlook on HBG mirrors that on the parent. Fitch has not assigned a VR to HBG because of its high management and operational integration with HBK and significant reliance on parent funding. BASIS's VR At end-1H17, Basis's non-performing loans (NPLs, overdue more than 90 days) remained low at 2.2% of loans, fully covered by reserves. Performing restructured loans contributed a further 4.4% of loans (13% of equity) and were weakly provisioned. Regulatory impaired loans (the bottom three risk categories) were broadly stable, at 4.5% of loans at end-3Q17, and almost fully covered by reserves. High FX lending, mostly to unhedged borrowers, and large borrower and sector concentrations heighten the bank's risk profile. At end-1H17 the largest 25 groups of borrowers amounted to a sizeable 50% of loans or 1.5x equity. The bank's lending growth was very rapid at 54% on average in 2014- 2015, but moderated to 21% in 2016-1H17. Profitability metrics have been good, supported by still wide margins, although these are decreasing due to high competition, and growing economies of scale. Low risk costs (the annualised loan impairment charges/average gross loans ratio was 1% in 9M17, according to regulatory accounts) also support the bottom line, with solid annualised ROAA and ROAE of 2.4% and 13.1%, respectively, in 9M17 (2016: 2.9% and 15.4%). Fitch expect Basis's profitability will continue to benefit from lending growth, while asset quality trends remain key to performance. The capital cushion is solid. At end-2016 (the date of the latest available IFRS accounts) the Fitch Core Capital (FCC) ratio was a high 24%. The regulatory Tier 1 capital adequacy ratio was adequate at 15.3% at end-3Q17 (reflecting the high 175% risk weight applied for loans denominated in foreign-currency loans), allowing the bank to additionally reserve up to 10% of gross loans without breaching the minimum required regulatory capital ratios. Customer funding (66% of total liabilities at end-3Q17) is generally stable, albeit highly concentrated - top 10 groups of depositors comprised a sizeable 59% of total customer accounts. Related-party funding was 11% of liabilities. Non-deposit funding was mainly in the form of term loans from IFIs (24%) with limited refinancing risks on these. At end-3Q17, liquid assets (mainly cash and equivalents, but also a portion of unencumbered securities) covered 45% of customer accounts. CARTU's VR NPLs at Cartu grew to 12.9% of end-1H17 loans from 11.7% at end- 2016, covered 82% by reserves. These were mostly from the corporate lending segment and included legacy exposures originated in 2011 (43% of the total NPLs). Regulatory impaired loans grew to a large 33% at end-3Q17 from 22% at end-2016 and reserve coverage was a modest 42%. Regulatory impaired loans captured most of the major exposures, which Fitch has identified to be of higher risk, mainly due to the borrowers' weak or deteriorating financial profiles. These exposures represented 30% of loans or, net of specific reserves, were equal to 1.3x of end- 3Q17 equity. Cartu's lending remained highly concentrated. At end-1H17, exposure to the top 25 groups of borrowers made up 57% of total gross loans (equal to 2.5x equity); the largest construction and real estate segment accounted for 21% of loans. The bank's recent credit growth was rapid at around 45% on average in 2014-2015 but slowed sharply to around zero on average in 2016-1H17. Profitability metrics are reasonable, with annualised ROAA and ROAE of 1.4% and 7.9%, respectively, in 9M17. Loan impairment charges were equal to a relatively high 3% of average gross loans in 9M17 (annualised) although recoveries from previously written- off loans have underpinned the net results. Fitch expect that provisioning requirements will remain high given weakening asset quality and large unreserved problem assets that will keep performance under pressure. Cartu's FCC ratio was a solid 19% at end-2016. The regulatory Tier 1 capital adequacy ratio stood at a lower 11.4% as of end- 3Q17, allowing the bank to create additional reserves equal to a moderate 7% of loans. Subordinated debt contributed by the shareholder, equal to 13% of risk-weighted assets, could help protect senior creditors in case of erosion of the bank's core capital. However, Fitch has not notched up the bank's Long-Term IDR (which captures default risk on senior obligations) from the VR (which reflects failure risk) due to significant uncertainty about recapitalisation needs in case of failure. Customer funds (77% of liabilities) are highly concentrated and could be volatile. The top 10 groups of depositors comprised 47% of total customer funding. Wholesale funding has been low. The liquidity cushion is reasonable: at end-3Q17, liquid assets (mainly cash and equivalents, but also a portion of unencumbered securities) covered around 45% of Cartu's total deposits. SUPPORT RATINGS AND SUPPORT RATING FLOORS Basis and Cartu's Support Ratings of '5' and Support Rating Floors of 'No Floor' reflect the two banks' limited systemic importance, and consequently Fitch's view that state support cannot be relied upon. Potential support from the private shareholders is also not factored into the ratings, as it cannot be reliably assessed. HBG's Support Rating of '3' reflects the moderate probability of support from HBK. RATING SENSITIVITIES BASIS, CARTU Cartu's ratings could be downgraded if the increased provisioning of impaired exposures results in significant capital erosion. Downward pressures on Basis could arise if there is a material weakening of asset quality metrics, resulting in deterioration of the bank's profitability and capital. Diversification of the banks' profiles and improvements in asset quality metrics (Cartu) would be credit positive. HBG HBG's support-driven Long-Term IDR is sensitive to changes in Fitch's assessment of support from its parent bank. The rating actions are: JSC Basisbank Long-Term Foreign-Currency IDR: upgraded to 'B+' from 'B'; Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: upgraded to 'b+' from 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No floor' Cartu Bank Long-Term Foreign-Currency IDR: affirmed at 'B+'; Outlook revised to Negative from Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Halyk Bank Georgia Long-Term Foreign-Currency IDR: affirmed at 'BB-', Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Support Rating: affirmed at '3' ============= G E R M A N Y ============= AIR BERLIN: Brussels Okays Lufthansa's Acquisition of Assets ------------------------------------------------------------ Rochelle Toplensky at The Financial Times reports that Brussels approved Lufthansa's acquisition of parts of Air Berlin with conditions, after the market-leader scaled back the deal. The competition watchdog gave the green light for Lufthansa to buy 20 aeroplanes and Air Berlin's regional carrier Luftfahrtgesellschaft Walter (LGW) after the German airline agreed to buy fewer landing slots at Duesseldorf airport than originally agreed, the FT relates. Lufthansa originally agreed to buy most of its nearest rival for about EUR210 million in October, the FT recounts. That deal included LGW, a feeder airline for Berlin and Duesseldorf airports; Niki, an Austrian holiday airline established by Formula 1 driver Niki Lauda; and 20 aeroplanes, the FT states. According to the FT, Margrethe Vestager, EU competition commissioner approved the takeover since Lufthansa offered "improved remedies" which addressed her competition concerns particularly at DÅsseldorf airport where "Lufthansa's slot portfolio would (now) only increase by 1% -- half of all the slots would be held by Lufthansa's competitors". Approval was expected after Lufthansa scaled-back the original deal last week, the FT notes. The carrier abandoned its plan to buy Niki after its latest remedy offer failed to assuage the regulator's concerns that deal would lead to higher prices and less consumer choice, the FT 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. NIKI LUFTFAHRT: Niki Lauda Submits Offer for Airline ---------------------------------------------------- Kirsti Knolle at Reuters reports that former motor racing driver Niki Lauda has submitted an offer for the insolvent Austrian airline Niki, which he founded in 2003. "I can confirm that Niki Lauda handed in an offer (for Niki)," Reuters quotes a spokeswoman for Mr. Lauda as saying. "I can't say how much he offered." Asked whether he made the bid alone or whether he teamed up with another interested party, she said she did not know, Reuters notes. As reported by the Troubled Company Reporter-Europe on Dec. 15, 2017, the management of NIKI Luftfahrt GmbH on Dec. 13 filed with the local court of Berlin-Charlottenburg a petition for the opening of insolvency proceedings over the assets of NIKI. NIKI will discontinue to operate further flights for the time being. 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. NIKI LUFTFAHRT: Ryanair Won't Bid for Assets -------------------------------------------- Victoria Bryan at Reuters reports that Ryanair has decided against bidding for assets of insolvent Austrian airline Niki. "Regrettably there is insufficient clarity about Lufthansa aircraft leases to Niki which we couldn't resolve in time," Reuters quotes Ryanair as saying in an emailed statement. As reported by the Troubled Company Reporter-Europe on Dec. 15, 2017, the management of NIKI Luftfahrt GmbH on Dec. 13 filed with the local court of Berlin-Charlottenburg a petition for the opening of insolvency proceedings over the assets of NIKI. 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. VOITH GMBH: Moody's Withdraws Ba1 CFR, Outlook Stable ----------------------------------------------------- Moody's Investors Service has upgraded the rating of German-based diversified engineering group Voith GmbH & Co. KGaA (Voith), assigning a long-term issuer rating of Baa3. The outlook is stable. Concurrently Moody's also withdrew Voith's corporate family rating (CFR) of Ba1 and probability of default rating (PDR) of Ba1-PD as per the rating agency's practice for corporates with investment grade ratings. "Triggered by a 5% revenue growth at Voith Paper, a 40% increase in profit from operations and a 24% surge in the division's order intake, Moody's upgrade of Voith to investment grade acknowledges the successful completion of the restructuring of Voith Paper, the nucleus of the family-owned engineering group", said Oliver Giani, Moody's lead analyst for Voith. "The rating action was supported by the EUR1.15 billion cash inflow from the sale of Voith's 25% stake in Kuka to Midea in January 2017 which enabled Voith to materially reduce its reported financial debt throughout the year to just EUR634 million and adds flexibility to grow its business further", he added. RATINGS RATIONALE The upgrade balances (1) the low net leverage of 1.4x net debt / EBITDA (as adjusted by Moody's), (2) strong retained cash flow coverage of 38.8% RCF / net debt and (3) the positive development at Voith Paper against (1) high gross leverage of 5.1x debt / EBITDA leaving some uncertainty regarding possible future investments and (2) weak profitability on group level with an EBITA margin of 4% in the last financial year (09/2017) which Moody's expect to improve gradually in the coming years. Voith's rating is supported by its (1) market and technology leadership in many of its relevant markets, such as hydro power plants and paper machines; (2) very diversified and well balanced portfolio, with the group serving many end markets, which typically follow different cycles in terms of length and timing, backed by healthy order backlog in excess of one year of sales; (3) strong liquidity profile; and (4) substantial financial flexibility given cash & cash equivalents of EUR1,184 million, which could bring substantial additional EBITDA to the group, if these proceeds are reinvested into profitable activities. It also reflects Voith's ability to generate positive and meaningful free cash flow through the cycle, which is also supported by a relatively conservative financial policy. However, Voith's rating is constrained by (1) the cyclical nature of most of its end-customer industries; (2) its exposure to the structurally changing paper industry through its Paper division, which has required extensive restructuring measures during 2013 - 2016; (3) its still significant exposure to Europe, where almost 40% of the group's FY16/17 revenues were generated; (4) still weak profitability with EBITA margin of 4% (c. 5% in the core businesses before start-up losses of the new division Voith Digital Solutions); (5) an improved, but still relatively weak gross leverage ratio of 5.1x debt / EBITDA, balanced however by EUR1,184 million of cash and cash equivalents resulting in a net leverage of 1.4x net debt / EBITDA. LIQUIDITY Moody's consider Voith's liquidity to be strong. Taking into account EUR602 million invested in marketable securities (largely proceeds from the sale of the 25% stake in Kuka) Voith had cash and cash equivalents of EUR1.18 billion as of September 30, 2017 on its balance sheet. This strong cash balance is further supported by an undrawn EUR770 million multicurrency syndicated credit facility which matures in 2021, without repeating MAC clause and financial covenants, as well as certain bilateral committed credit facilities. These sources are sufficient to cover liquidity needs including any intra-year movements of working capital and short-term debt maturities of EUR82.5 million. OUTLOOK The stable outlook reflects Moody's expectation that Voith will be able to further strengthen profitability in its core businesses leading to a Moody's-adjusted EBITA margin stabilizing around 6%, Moody's-adjusted retained cash flow coverage metrics of around 40% of net debt and consistently positive free cash flow leading to a further gradual net debt reduction. WHAT COULD CHANGE THE RATING UP / DOWN? Moody's could upgrade Voith in case of a sustainable strengthening of its credit profile reflected in a Moody's- adjusted EBITA margin in the high single digits and Moody's- adjusted debt/EBITDA well below 3.0x. Moody's could downgrade Voith's ratings, if its Moody's-adjusted debt/EBITDA stays sustainably above 4.0x, Moody's-adjusted RCF/net debt falls below 25%, free cash flow remains negative for a prolonged period of time, if its strong liquidity profile is weakened or in case of sizeable M&A activity. Voith is a diversified engineering group addressing primarily energy, oil & gas, paper, raw materials and transport & automotive markets. Its product offering holds leading positions in hydro power generation, paper machine technology, and selected niches of technical services and power transmission. Voith employed some 19,000 people in more than 60 countries and generated sales of EUR4.2 billion in the fiscal year ended September 30, 2017 (FY16/17). The group is privately owned by descendants of the Voith family, but has been led by non-family senior managers for decades. The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. ZF FRIEDRICHSHAFEN: Moody's Ups ZF North's Note Rating From Ba1 --------------------------------------------------------------- Moody's Investors Service has upgraded the rating of German automotive supplier ZF Friedrichshafen AG (ZF), assigning a long- term issuer rating of Baa3. Concurrently, Moody's has upgraded to Baa3 from Ba1 all senior unsecured ratings relating to the notes issued by both ZF North America Capital, Inc. and TRW Automotive Inc. The outlook on the ratings is stable. "The upgrades reflect ZF's further improved credit metrics due to a combination of debt reduction and solid operating performance. The upgrade also reflects a continuation of the successful company strategy and maintenance of its conservative financial policy, which is expected to remain largely unchanged despite the recent management changes," said Matthias Heck, a Moody's Vice President -- Senior Analyst and Lead Analyst for ZF. Moody's has also withdrawn ZF's corporate family rating (CFR) of Ba1 and probability of default rating (PDR) of Ba1-PD following its upgrade to Baa3, as per the rating agency's practice for corporates with investment grade ratings. RATINGS RATIONALE The upgrade has been driven by further improvements to ZF's credit metrics, which now meet Moody's criteria for a Baa3 rating. The improvements reflect a further reduction of gross debt due to the recent bond redemption and buybacks and a solid underlying operating performance. The rating agency now expects that gross debt/EBITDA (Moody's adjusted) of 2.7x at year end 2017, improved from 2.9x at the end of June 2017. The rating upgrade also reflects a continuation of ZF's company strategy to address the long-term challenges of the automotive industry, whilst maintaining its conservative financial policy. In terms of company strategy, Moody's notes the recent changes within the company's supervisory and management boards. The rating agency expects that these changes will, in the short term, reduce event risks in form of potential debt-financed acquisitions. The continuation of the company strategy might therefore place more emphasis on organic growth and require ongoing high R&D spending. However, it still adds a degree of uncertainty about the long-term strategy that will be put in place by a new, still to be nominated, CEO. ZF has applied a conservative financial policy, which has resulted in a material de-leveraging since high levels of 4.7x at the end of 2015, when it acquired TRW in the US. The de-leveraging was also supported by very low dividend payments of only EUR50 million per year. ZF's shareholder has recently revised the dividend policy by implementing a new pay-out ratio of 18% on net profits. Assuming an ongoing stable industry environment, Moody's considers the higher dividend pay-outs as affordable and ZF as being able to maintain credit metrics in line with the criteria for a Baa3 rating. The Baa3 rating reflects as positives the company's: (1) leading market position as one of the largest Tier 1 global automotive suppliers combined with its sizeable industry-facing operations, and both regional and customer diversification; (2) clear focus on innovation and new product development; (3) positive strategic alignment to address the disruptive trends of automotive electrification and autonomous driving; (4) conservative financial policy as reflected in moderate dividend payments, which emphasizes debt reduction and cash flow generation; and (5) a good liquidity profile. The rating also reflects as negatives the company's: (1) leverage with debt/EBITDA (as measured by Moody's) of 2.9x at the end of H1-2017, taking into account the fact that the automotive industry is at its or very close to its peak; (2) modest operating profitability with EBITA margins of 7.5% (LTM June 2017) albeit in-line with the industry average; and (3) continued high capital and R&D expenditure reflecting the group's focus on innovation. LIQUIDITY ZF's liquidity profile is good, even after the redemption and buyback of bonds in H2 2017, totalling $1.3 billion. The main sources of liquidity over the next 12-months comprise expected approximately EUR1.0 billion of cash on hand (including expected proceeds from asset disposals), funds from operations of approximately EUR3.0 billion, as well as EUR3.0 billion availability under the revolving credit facility (RCF). This totals to approximately EUR7.0 billion and substantially exceeds expected cash needs totalling to slightly above EUR4.0 billion for working cash (EUR1.1 billion), capex (EUR2.0 billion), short- term debt maturities (EUR0.8 billion) as well as cash outflow for increased dividend payments (EUR0.2 billion). RATIONALE FOR STABLE OUTLOOK The stable outlook reflects an ongoing stable industry environment for automotive suppliers as well as Moody's expectation that ZF will continue its conservative financial policy and further gradual but steady strengthening of credit metrics. Moody's expects that ZF's leverage will remain within a range of 2.0x-3.0x debt/EBITDA (Moody's adjusted), which is commensurate with a Baa3 rating. WHAT COULD CHANGE THE RATING UP/DOWN A further upgrade would be conditional to (1) a further improvement in EBITA margins to above 8% (Moody's adjusted), (2) a further reduction in leverage, as evidenced by debt / EBITDA moving towards 2.0x (Moody's adjusted), and (3) an increase in retained cash flow (RCF) / net debt sustainably above 35%. Conversely, ZF's ratings might be downgraded if (1) EBITA margins were to fall below 6.5%, (2) debt / EBITDA would increase above 3.0x sustainably, or (3) FCF generation would weaken to below EUR500 million p.a. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Global Automotive Supplier Industry published in June 2016. ZF Friedrichshafen AG (ZF), headquartered in Friedrichshafen, Germany, is a leading global automotive technology company specialised on driveline and chassis technology as well as active and passive safety technology. The company, which completed the acquisition of TRW Automotive in May 2015, generates the majority of its revenues within the passenger car and commercial vehicle industries, but also delivers to other markets including the construction and agricultural machinery sector. Following the acquisition of TRW, ZF is one of the largest automotive suppliers on a global scale with revenues of EUR35 billion (2016), having a similar size as Bosch, Denso and Magna. RATING LIST The following ratings are affected: New assignment Issuer: ZF Friedrichshafen AG Long-term issuer rating, Baa3 Withdrawal: Issuer: ZF Friedrichshafen AG -- Corporate Family Rating, withdrawn (Ba1) -- Probability of Default Rating, withdrawn (Ba1-PD) Upgrade: Issuer: ZF North America Capital, Inc. -- Backed Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1 Issuer: TRW Automotive Inc. -- Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1 Outlook Actions: Issuer: ZF Friedrichshafen AG -- Outlook, stable Issuer: ZF North America Capital, Inc. -- Outlook, stable Issuer: TRW Automotive Inc. -- Outlook, stable =========== G R E E C E =========== ELETSON HOLDINGS: Moody's Lowers CFR to Caa1 on Weak Liquidity -------------------------------------------------------------- Moody's Investors Service downgraded the corporate family rating (CFR) of shipping company Eletson Holdings Inc. (Eletson) to Caa1 from B3, its probability of default rating (PDR) to Caa1-PD from B3-PD and the rating on its $300 million first preferred ship mortgage notes due in 2022 to Caa1 from B3. The outlook on all ratings remains negative. "Our downgrade of Eletson's ratings reflects its weak liquidity profile, as market conditions in tankers and LPG/LEG remain very difficult and the company's free cash flow generation remains negative, increasing the risk of a distressed exchange or default in its interest payment obligations," says Maria Maslovsky, a Moody's Vice President and lead analyst for the issuer. "The downgrade also takes into account Eletson's material obligations with respect to its newbuilding programme," adds Ms. Maslovsky. RATINGS RATIONALE The downgrade primarily reflects Eletson's weak liquidity profile, with continuing negative free cash flow generation driven by the very challenging tanker and LPG/LEG market conditions and corresponding low spot rates. This has increased the risk of a distressed exchange or default. Eletson disclosed in its third quarter press release that the company had discussed a bond buyback which could be viewed as a distressed exchange; these discussions are no longer ongoing. Also, Eletson stated in its third quarter press release that it had breached a number of its bank covenants and was working with the relevant financial institutions to receive waivers. Moody's currently has a negative outlook on the tanker sector driven by the expectations of additional new deliveries with the orderbook at approximately 12% of total fleet according to Drewry Maritime Research. The oversupply which became material in early 2017 has negatively affected spot rates with long-range product tankers (LR1) rates declining by 33% to $12,600 in November 2017 from $18,750 in 2016 and Aframax rates declining by 29% to $15,600 in November 2017 from $22,100 in 2016. For the restricted group, in the first nine months of 2017, EBITDA declined to $15,392 from $50,771 in the corresponding prior-year period owing to the sharp deterioration in spot rates. This reduction in EBITDA drove leverage for the restricted group to 17.9x based on a debt/EBITDA metric for the twelve months ending September 30, 2017. For 2016, debt/EBITDA leverage for the restricted group was 7.4x. Eletson's liquidity is weak. Historically, it relied primarily on operating cash flows, but these have been pressured by persistent weakness in spot rates. Positively, in September 2017, the company refinanced a final maturity of a term loan from Citibank totaling approximately $83 million. Over the coming quarters Eletson also faces debt amortization payments of approximately $7 million in 2017 and $35 million in 2018, as well as close to $23 million in equity commitments for vessels under construction, according to the company. This figure excludes expected LPG vessel deliveries to the joint venture which are funded with Blackstone equity contributions. The company had $57 million of cash, restricted cash and short term investments on hand at September 30, 2017 and no availability under its revolving facilities. Moody's expects that Eletson's liquidity profile will continue to weaken, as its cash balance will be consumed owing to negative free cash flow. Positively, the liquidity within the restricted group is better than for the company as a whole with approximately $51.5 million of cash and equivalents at September 30, 2017, no additional debt repayments in 2017 and approximately $7.2 million of amortization scheduled in 2018. In addition, Eletson is in discussions with Shanghai Waigaoqiao Shipbuilding and Offshore Co., Ltd.(SWS) to postpone the payments for its Aframax newbuilding programme for which the company still has to contribute almost $23 million of equity. RATIONALE FOR THE NEGATIVE OUTLOOK The negative outlook reflects the risk of further pressure on Eletson's rating if market conditions remain unchanged and liquidity further weakens particularly as a result of failure to negotiate with the shipyard to postpone remaining equity commitments for the newbuilding Aframaxes. WHAT COULD CHANGE THE RATING UP/DOWN Eletson's rating could be upgraded if market conditions in tankers and/or LPG/LEG improve, resulting in the company returning to positive free cash flow generation, and if its liquidity profile improves. Eletson's rating could be downgraded if (1) its liquidity profile further weakens including failure to receive waivers for covenant breaches or inability to postpone payments for its Aframaxes; or (2) if the company engages in debt buy back activities which would be classified as a distressed exchange by Moody's. Eletson Holdings Inc. (Eletson) is an owner and operator of product tankers and liquefied petroleum gas carriers, with a double-hulled fleet of 21 product tankers and 11 LPG carriers as at September 30, 2017. The group recorded total revenues of $254 million and EBITDA of $38 million in the last twelve months to 30 September 2017. The principal methodology used in these ratings was Global Shipping Industry published in February 2014. ============= I R E L A N D ============= BLACK DIAMOND 2015-1: Moody's Rates Class E Notes (P)Ba2 -------------------------------------------------------- Moody's Investors Service has assigned the following provisional ratings to seven classes of notes to be issued by Black Diamond CLO 2015-1 Designated Activity Company, (the "Issuer"): -- EUR176,300,000 Refinancing Class A-1 Senior Secured Floating Rate Notes due 2029, Assigned (P)Aaa (sf) -- USD67,200,000 Refinancing Class A-2 Senior Secured Floating Rate Notes due 2029, Assigned (P)Aaa (sf) -- EUR24,300,000 Refinancing Class B-1 Senior Secured Floating Rate Notes due 2029, Assigned (P)Aa2 (sf) -- EUR30,000,000 Refinancing Class B-2 Senior Secured Fixed Rate Notes due 2029, Assigned (P)Aa2 (sf) -- EUR22,900,000 Refinancing Class C Senior Secured Deferrable Floating Rate Notes due 2029, Assigned (P)A2 (sf) -- EUR24,800,000 Refinancing Class D Senior Secured Deferrable Floating Rate Notes due 2029, Assigned (P)Baa3 (sf) -- EUR23,600,000 Refinancing Class E Senior Secured Deferrable Floating Rate Notes due 2029, Assigned (P)Ba2 (sf) Moody's issues provisional ratings in advance of the final sale of financial instruments, but these ratings only represent Moody's preliminary credit opinions. Upon a conclusive review of a transaction and associated documentation, Moody's will endeavour to assign definitive ratings. A definitive rating (if any) may differ from a provisional rating. RATINGS RATIONALE Moody's provisional ratings of the refinancing notes address the expected loss posed to noteholders. The ratings reflect the risks due to defaults on the underlying portfolio of assets, the transaction's legal structure, and the characteristics of the underlying assets. The Issuer will issue the Refinancing Class A-1 Notes, the Refinancing Class A-2 Notes, the Refinancing Class B-1 Notes, the Refinancing Class B-2 Notes, the Refinancing Class C Notes, the Refinancing Class D Notes and the Refinancing Class E Notes (the "Refinancing Notes") in connection with the refinancing of the Class A-1 Senior Secured Floating Rate Notes due 2029, the Class A-2 Senior Secured Floating Rate Notes due 2029, the Class B-1 Senior Secured Floating Rate Notes due 2029, the Class B-2 Senior Secured Fixed Rate Notes due 2029, the Class C Senior Secured Deferrable Floating Rate Notes due 2029, the Class D Senior Secured Deferrable Floating Rate Notes due 2029 and the Class E Senior Secured Deferrable Floating Rate Notes due 2029 ("the Original Notes") respectively, previously issued on September 03, 2015 (the "Original Closing Date"). The Issuer will use the proceeds from the issuance of the Refinancing Notes to redeem in full the Original Notes that will be refinanced. On the Original Closing Date, the Issuer also issued one class of rated notes and two classes of subordinated notes, which will remain outstanding. Other than the changes to the spreads and coupon of the notes, no other material modifications to the CLO are occurring in connection to the refinancing. Black Diamond CLO 2015-1 DAC is a managed cash flow CLO. The issued notes will be collateralized primarily by broadly syndicated first lien senior secured corporate loans. At least 90% of the portfolio must consist of senior secured loans or senior secured bonds and up to 10% of the portfolio may consist of unsecured senior loans, second lien loans, mezzanine obligations and high yield bonds. The underlying portfolio is expected to be 100% ramped as of the refinancing date. Black Diamond CLO 2015-1 Adviser, L.L.C. (the "Manager") manages the CLO. It directs the selection, acquisition, and disposition of collateral on behalf of the Issuer. After the reinvestment period, which ends in October 2019, the Manager may reinvest unscheduled principal payments and proceeds from sales of credit improved and credit risk obligations, subject to certain restrictions. The transaction incorporates interest and par coverage tests which, if triggered, divert interest and principal proceeds to pay down the notes in order of seniority. Factors that would lead to an upgrade or downgrade of the ratings: The performance of the Refinancing Notes is subject to uncertainty. The performance of the Refinancing Notes is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The Manager's investment decisions and management of the transaction will also affect the performance of the Refinancing Notes. Loss and Cash Flow Analysis: Moody's modeled the transaction using CDOEdge, a cash flow model based on the Binomial Expansion Technique, as described in Section 2.3 of the "Moody's Global Approach to Rating Collateralized Loan Obligations" rating methodology published in August 2017. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the binomial distribution assumed for the portfolio default rate. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario and (ii) the loss derived from the cash flow model in each default scenario for each tranche. As such, Moody's encompasses the assessment of stressed scenarios. The key model inputs Moody's used in its analysis, such as par, weighted average rating factor, diversity score and the weighted average recovery rate, are based on its published methodology and could differ from the trustee's reported numbers. For modeling purposes, Moody's used the following base-case assumptions: Performing par, recoveries and principal proceeds balance: EUR400,000,000 Defaulted par: EUR5,790,731 Diversity Score: 56 Weighted Average Rating Factor (WARF): 3338 Weighted Average Spread (WAS): 4.60% Weighted Average Recovery Rate (WARR): 46.0% Weighted Average Life (WAL): 5.9 years As part of the base case, Moody's has addressed the potential exposure to obligors domiciled in countries with local currency country risk ceiling (LCC) of A1 or below. Given the portfolio constraints and the current sovereign ratings in Europe, such exposure may not exceed 10% of the total portfolio with exposures to countries with local currency country risk ceiling of Baa1 to Baa3 further limited to 5%. As a worst case scenario, a maximum 5% of the pool would be domiciled in countries with A3 and a maximum of 5% of the pool would be domiciled in countries with Baa3 local currency country ceiling each. The remainder of the pool will be domiciled in countries which currently have a local currency country ceiling of Aaa or Aa1 to Aa3. Given this portfolio composition, the model was run with different target par amounts depending on the target rating of each class as further described in the methodology. The portfolio haircuts are a function of the exposure size to peripheral countries and the target ratings of the rated notes and amount to 0.75% for the Refinancing Class A-1 Notes and Refinancing Class A-2 Notes, 0.50% for the Refinancing Class B-1 Notes and Refinancing Class B-2 Notes, 0.38% for the Refinancing Class C Notes and 0% for Refinancing Class D Notes and Refinancing Class E Notes. Stress Scenarios: Together with the set of modelling assumptions above, Moody's conducted an additional sensitivity analysis, which was a component in determining the ratings assigned to the Refinancing Notes. This sensitivity analysis includes increased default probability relative to the base case. Below is a summary of the impact of an increase in default probability (expressed in terms of WARF level) on the Refinancing Notes (shown in terms of the number of notch difference versus the current model output, whereby a negative difference corresponds to higher expected losses), assuming that all other factors are held equal. Percentage Change in WARF -- increase of 15% (from 3338 to 3839) Rating Impact in Rating Notches: Refinancing Class A-1 Senior Secured Floating Rate Notes: 0 Refinancing Class A-2 Senior Secured Floating Rate Notes: 0 Refinancing Class B-1 Senior Secured Floating Rate Notes: 0 Refinancing Class B-2 Senior Secured Fixed Rate Notes: 0 Refinancing Class C Senior Secured Deferrable Floating Rate Notes: 0 Refinancing Class D Senior Secured Deferrable Floating Rate Notes: 0 Refinancing Class E Senior Secured Deferrable Floating Rate Notes: 0 Percentage Change in WARF -- increase of 30% (from 3338 to 4339) Rating Impact in Rating Notches: Refinancing Class A-1 Senior Secured Floating Rate Notes: 0 Refinancing Class A-2 Senior Secured Floating Rate Notes: 0 Refinancing Class B-1 Senior Secured Floating Rate Notes: -2 Refinancing Class B-2 Senior Secured Fixed Rate Notes: -2 Refinancing Class C Senior Secured Deferrable Floating Rate Notes: -2 Refinancing Class D Senior Secured Deferrable Floating Rate Notes: 0 Refinancing Class E Senior Secured Deferrable Floating Rate Notes: 0 Further details regarding Moody's analysis of this transaction may be found in the related new issue report, published after the Original Closing Date in September 2015 and available on Moodys.com. Methodology Underlying the Rating Actions: The principal methodology used in these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in August 2017. HARVEST CLO V: Fitch Affirms BBsf Ratings on 3 Tranches ------------------------------------------------------- Fitch Ratings has upgraded three tranches of Harvest CLO V plc and affirmed the others, as follow: Class B: affirmed at 'AAAsf'; Outlook Stable Class C-1: upgraded to 'AAsf' from 'Asf'; Outlook Stable Class C-2: upgraded to 'AAsf' from 'Asf'; Outlook Stable Class D: upgraded to 'BBB+'sf from 'BBB'sf; Outlook Stable Class E-1: affirmed at 'BBsf'; Outlook Stable Class E-2: affirmed at 'BBsf'; Outlook Stable Class Q: affirmed at 'BBsf'; Outlook Stable Harvest CLO V is a cash flow collateralised loan obligation. At closing a total note issuance of EUR650 million was used to invest in a target portfolio of EUR632 million. The portfolio is managed by Investcorp Credit Management EU Limited. KEY RATING DRIVERS The affirmation of the class B notes and upgrade of the C notes reflects increases in credit enhancement due to the transaction's deleveraging. The limited upgrades on the class D notes reflect an increase in obligor concentration. The affirmation of the class E notes reflects that although it is exposed to increase obligor concentration and FX risk, this could be offset by portfolio prepayment. Over the past year, the class A-D, A-R and A-2 notes have been paid in full and the class B notes have been paid down by EUR28.5 million. The deleveraging of the transaction has led to a significant increase in credit enhancement available to the senior notes. The deleveraging was also accompanied by an increase in obligor concentration. The number of performing obligors decreased to 40 from 78 over the past year and the top 10 obligors now represent 41.3% of the performing portfolio, excluding principal proceeds. Fitch expects obligor concentration to increase further as the transaction continues to deleverage. This may cause performance volatility if large obligors are downgraded. As such, Fitch has upgraded the class C and D notes below their model-implied ratings. The transaction was originally structured with A-R variable funding notes, various FX options and interest rate cap. The A-R notes were recently paid in full and the options and interest rate cap have now matured. As of the October 2017 investor report, all liabilities are denominated in EUR while unhedged USD and GBP assets represent approximatively 19% of the performing portfolio excluding cash. Cash flow from these non-euros will need to be converted into EUR to repay the outstanding notes, exposing noteholder to FX volatility. Fitch has found that the class B to D notes can withstand the various combinations of interest rate and currency stresses between USD, GBP and EUR assets at the current rating levels. The class E notes may be negatively affected by a high depreciation of the USD and GBP FX rates. The average credit quality of the portfolio has remained broadly stable at 'B' over the past year. As of the October 2017 investor report, all the over-collateralisation and collateral quality tests were passing. The class Q combination note comprises the class C1 and E1 notes. Therefore the lowest-rated class E1 notes drive the rating of the combination note. RATING SENSITIVITIES A 125% default multiplier applied to the portfolio's mean default rate, and with this increase added to all rating default levels, would not impact the rating of the senior and mezzanine notes but may lead to a downgrade of up to two notches for the most junior notes. A 25% reduction in recovery rates would not impact the rating of the senior and mezzanine notes but may lead to a downgrade of up to three notches for the most junior notes. ========= I T A L Y ========= CREDITO VALTELLINESE: DBRS Lowers LT Issuer Rating to BB -------------------------------------------------------- DBRS Ratings Limited, in mid-November 2017, lowered Credito Valtellinese SpA's (Creval or the Bank) Long-Term Issuer Rating as well as its Long-Term Senior Debt and Long-Term Deposits ratings to BB from BB (high). Concurrently, the Bank's Intrinsic Assessment (IA) was lowered to BB from BB (high), whilst the support designation was maintained at SA3. As part of this rating action, the Bank's subordinated debt was downgraded to B (high) from BB (low). At the same time, DBRS placed Creval's ratings Under Review with Negative implications. The rating action is due to weaker than expected third quarter results as of September 2017, the implications for the Bank's capital position, and the challenges associated with the planned capital increase. In Q3 17, Creval reported a net loss of EUR208 million following the introduction of new credit policies which resulted in additional provisioning costs of EUR185 million. At end-September 2017, the Bank's capital buffers deteriorated with the CET1 and total capital ratios down to 9.4% and 11.3% respectively from 10.5% and 12.5% in Q2 2017. This leaves a buffer of just 5 basis points (bps) over the Bank's minimum SREP Total Capital requirement. The review with negative implications also reflects the challenges and the risks associated with the capital increase announced by Creval. With the publication of the Q3 17 results, on November 7, 2017, Creval announced a plan to increase its capital with a rights issue of up to EUR700 million. The additional capital is expected to increase the Bank's provisioning levels and accelerate the process of scaling back the large stock of non-performing exposures (NPEs). In particular, as part of a new business plan for 2018-2020, the Bank expects a reduction in NPEs by approximately EUR2 billion mainly via disposals and securitisations in 2018. As a result, the Bank is targeting a reduction in its gross NPE ratio to 10.6% in 2018 (9.6% in 2020) from the current very high level of 21.1% at September 2017, whilst the net NPE ratio would stand at 4.2% in 2020 with a total cash coverage of 59.1% in 2020. The capital increase would allow Creval to improve its risk profile in line with the current best practices in the Italian banking sector. However, DBRS considers the transaction entails a significant execution risk, given the size of the rights issue which is approximately four times bigger than the Bank's current market capitalisation, based on market data as of 15 November 2017. An inability to execute this transaction could increase the risks faced by the Bank's bondholders. The rights issue is expected to be approved in December 2017 and launched in February 2018 subject to market conditions. The transaction is supported by a pre-underwriting agreement with Mediobanca, which is in line with market practices for similar transactions. RATING DRIVERS The review with negative implications reflects DBRS' view that Creval's ratings may be downgraded should the Bank face challenges in executing the capital raise. During the review, which is typically resolved within a 90-day period, DBRS will monitor any progress of the Bank's capital plan including investor sentiment and market conditions. UNIONE DI BANCHE: DBRS Cuts Subordinated Debt Ratings to BB(high) ----------------------------------------------------------------- DBRS Ratings Limited downgraded the ratings of Unione di Banche Italiane SpA (UBI or the Bank), including the Long-Term Issuer Rating to BBB from BBB (high) and the Short-Term Issuer Rating to R-2 (high) from R-1 (low). The trend on the ratings is now Stable. Concurrently, DBRS lowered the Bank's Intrinsic Assessment (IA) to BBB while the Support Assessment remains unchanged at SA3. This rating action follows DBRS's annual review of the Bank's credit profile. The downgrade of the ratings has been driven by the Bank's high stock of Non-Performing exposures (NPEs) as well as the challenges to improve its profitability. With gross and net NPE ratios of 14% and 9%, respectively, as of September 2017, the Bank continues to exhibit weaker asset quality and profitability metrics relative to peers rated by DBRS at BBB (high). Despite the recent downward trend in default rates and improving coverage levels, the Bank's stock of unreserved NPEs remains high. In addition, DBRS sees the increasing pressure from regulators and market participants to speed up the reduction in NPEs as a potential additional challenge for the Bank. The ratings also take into account the Bank's stable franchise and liquidity position, as well as DBRS' expectation that the Bank will make gradual progress in reducing NPEs. In addition, DBRS expects UBI to make further progress in simplifying the organisation and integrating the recent acquisitions. UBI's franchise is underpinned by stable market shares in retail and commercial banking across the wealthy regions of Lombardy and Piedmont, especially in the provinces of Bergamo, Brescia and Cuneo, as well as solid deposit-gathering base in central and southern parts of Italy. In 2017, the Bank's market shares expanded in the regions of Central Italy following the acquisition of three small regional banks in May (Nuova Banca delle Marche, Nuova Banca dell' Etruria e del Lazio e Nuova Cassa di Risparmio di Chieti, collectively "the three banks1"). These were the new banking entities resulting from a resolution procedure in 2015. The acquisition was supported by a capital increase of EUR 400 million completed in July 2017. In line with the business plan 2019-2020 updated in May 2017, UBI made progress towards simplifying its organisation to improve future efficiency and controls. In 2017, the Bank completed the merger of seven banking subsidiaries into the parent bank, and reached agreements to downsize the branch network and workforce. In addition, as part of the integration process of the newly acquired banks, UBI completed the merger of two banks and expects to finalise the IT migration in early 2018. Future challenges related to the post-acquisition integration include the extension of UBI's policies, procedures and models, as well as the achievement of the financial break-even. The Bank's risk profile is impacted by a high stock of problem loans. Following the acquisition of the three banks, UBI's gross stock of NPEs increased to EUR 14 billion at September 2017 from EUR 12.5 billion at YE 2016. On a net basis, NPEs increased more moderately as a result of the allocation of EUR 507 million of bad-will for the provisioning of unlikely to pay loans. As a result, the total cash NPE coverage increased to 40% (or 48.6% including write-offs) from 35.7% (45.8%) at YE 2016. The Bank's coverage levels, however, remain below those of many peers, and the stock of unreserved NPEs relative to capital remains high. In relative terms, the Bank's gross and net NPE ratios slightly improved to 14% and 9%, respectively, from 14.4% and 9.8% at YE 2016, also taking into consideration the new loans from the acquisition. The Bank's asset quality indicators for 2017 showed a downward trend in default rates and improving collections supported by a reorganisation of the credit division and investments in resources and IT systems. However, despite the improvement, the Bank's asset quality ratios compare unfavorably with European peers. According to the latest business plan disclosed in May 2017, UBI expects the total gross and net NPE ratios to improve gradually to 11.9% and 7.9% in 2020 mainly via higher recovery rates and lower NPE inflows. UBI's profitability remains generally modest. The Bank's net interest income continues to reflect pressure due to modest lending volumes, the low interest rate environment, high market competition and lower activity on the Italian sovereign bonds. Fees and commission income increased, supported by the placement of asset management and insurance products, while efficiency starts to improve following recent restructuring actions. The Bank's cost of credit improved in 2017, but remains sensitive to potential future increase in coverage levels for NPEs. The Bank's net result for 9M 2017 which totaled EUR 702 million was impacted by one-off events, including the positive contribution of EUR 616 million in bad-will resulting from the acquisition. In the same period of 2016, UBI reported a net loss of EUR 755 million mainly due to increased provisioning costs and restructuring charges. UBI's funding and liquidity conditions remain stable. The Bank is largely funded by deposits with retail customers, and maintains good access to the wholesale market. At September 2017, the Bank reported LCR and NSFR above 100% and a stock of liquid assets for EUR 14.9 billion. The Bank's capital ratios slightly improved in 2017 following the completion of the capital increase and the allocation of bad-will which helped to offset the increase in RWAs resulting from the acquisition. At September 2017, UBI reported a CET 1 fully loaded ratio of 11.54% from 11.2% at YE 2016. However, the Bank's capital position could come under pressure if the Bank faces pressure to accelerate the disposal of NPEs. In the medium term, the Bank's capital buffers are expected to benefit from the recognition of DTAs, bad-will reversal and adoption of the AIRB model for the newly acquired banks. RATING DRIVERS Deterioration in the Bank's asset quality and capital position or a weakening in UBI's franchise and reputation could contribute to negative pressure. Sustained improvement in risk profile and profitability supported by adequate capital buffers could contribute to positive rating implications. The Grid Summary Grades for Unione di Banche Italiane Spa are as follows: Franchise Strength - Good; Earnings Power - Moderate; Risk Profile - Moderate; Funding & Liquidity - Good; Capitalisation - Moderate. Notes: All figures are in Euros unless otherwise noted. The ratings issued are: Debt Rated Action Rating Trend ---------- ------ ------ ----- Long-Term Issuer Rating Downgraded BBB Stb Short-Term Debt Downgraded R-2 (high) Stb Long-Term Senior Debt Downgraded BBB Stb Long Term Critical Obligations Rating Downgraded A(low) Stb Short Term Critical Obligations Rating Trend Change R-1 (low) Stb Mandatory Pay Subordinated Debt - Tier 2 (ISIN: XS1404902535) Downgraded BB (high) Stb Mandatory Pay Subordinated Debt - Tier 2 (ISIN: XS1580469895) Downgraded BB (high) Stb Long-Term Deposits Downgraded BBB Stb Short-Term Deposits Downgraded R-2 (high) Stb Short-Term Issuer Rating Downgraded R-2 (high) Stb =================== L U X E M B O U R G =================== EVRAZ GROUP: S&P Ups CCR to 'BB' on Expected Strong Performance --------------------------------------------------------------- S&P Global Ratings said that it has raised its long-term corporate credit ratings on Luxembourg-domiciled integrated steel producer Evraz Group S.A. and its core financial subsidiary EvrazHolding Finance LLC to 'BB' from 'BB-'. The outlooks on both entities are stable. S&P said, "We also raised our issue rating on Evraz's senior unsecured debt to 'BB' from 'BB-'. "The upgrade reflects our expectation that Evraz will post strong operating and financial results for 2017, owing to the rebound in commodity prices and increased demand for steel in Russia, especially for products used in the construction, railway, and infrastructure sectors. We estimate that steel products demand in these Russian sectors will increase by 6%-10% this year. Evraz is also a significant producer of coking coal; we expect its output will have expanded to 16.6 million tons in 2017, a year-on-year increase of 7%, and therefore benefit greatly from elevated prices observed this year. We project EBITDA will be about $2.5 billion for the full year, compared with $1.15 billion in the first six months of 2017 and $1.54 billion for full-year 2016, as well as positive FOCF and FFO to debt of about 35%. "We factor in that Evraz's reduced debt levels should enable the company to maintain a ratio of FFO to debt above 30% in 2018- 2019, even though we expect some decline in coking coal prices and steel demand growth in Russia. We also believe that, in the event of a moderate downturn in the industry, similar to 2015- 2016, the company will remain resilient and continue to generate neutral-to-positive FOCF, and FFO to debt higher than 20%. We therefore now regard Evraz's financial risk profile as significant rather than aggressive, including the potential for volatility. "Moreover, we take into account the company's financial policy track record and its continued focus on debt reduction over the past several years. Evraz has reduced capital expenditure (capex) and dividends, with no dividends paid in 2016, and was able to generate positive discretionary cash flow even in difficult industry conditions. We estimate that this will lead to a drop in reported gross debt to $5.4 billion-$5.6 billion as of Dec. 31, 2017, from $7.4 billion in 2013. While we anticipate higher dividends and capex from 2018, given more favorable industry conditions, we believe the company will cut them once again in a downturn, in line with its financial policy target of net debt to EBITDA below 2.0x. "We view Evraz's overall business risk profile as similar to those of other Russian steelmakers, such as Metalloinvest, Severstal, and NLMK, since they are all largely constrained by exposure to Russia's high country risk and inherent volatility of cycle steel industry. Like its Russian peers, Evraz benefits from vertical integration into raw materials and relatively low operating costs in the global context, which is key in the commoditized steel industry. Evraz in particular benefits from a solid market share in the domestic construction steel, coking coal, and rails production sectors, which underpins its satisfactory competitive position. "The stable outlook on Evraz reflects our view that, thanks to low production costs and reduced debt, the group should remain resilient to industry volatility. We notably expect FFO to debt of above 30% under currently supportive market conditions and comfortably above 20% during the bottom of the cycle, complemented by consistently positive FOCF generation. We also consider management's demonstrated commitment to deleveraging and its long-term financial policy target of keeping net debt to EBITDA below 2.0x. We also expect that Evraz will continue managing its refinancing risks in a proactive manner. "We would consider a downgrade if Evraz's profits and credit metrics deteriorated significantly without short-term prospects of recovery, with FFO to debt falling below 30% despite supportive market conditions, or below 20% in a cyclical low point. This could happen in the event of a global steel industry downturn similar to that of 2009, or if the Russian economy went into recession for several years. "Although currently unlikely in the next 12 months, we might consider a positive rating action if the group's credit metrics improved significantly as a result of gross debt reduction, supported by industry and price improvements, such that FFO to debt is sustainably above 45%. This would also require management's commitment to such lower leverage levels." =========== P O L A N D =========== BANK MILLENNIUM: Moody's Hikes LT Bank Deposits Rating From Ba1 --------------------------------------------------------------- Moody's Investors Service has upgraded the ratings of mBank S.A., Bank Millennium S.A. and Bank BGZ BNP Paribas S.A. It also affirmed the ratings of Powszechna Kasa Oszczednosci Bank Polski S.A. and its domestic mortgage lender subsidiary, PKO Bank Hipoteczny S.A. The rating action is driven by greater clarity on the legislative proposal regarding foreign currency mortgages at Polish banks, and Moody's assessment that the costs associated with the draft legislation will be manageable for the banks. "The costs of the proposed legislation to banks will be manageable and will be phased in over multiple quarters," said Arif Bekiroglu, an Associate Vice President at Moody's. "The legislation is likely to be implemented without compromising banks' solvency, and are being made at a time of continuing strong economic growth in Poland." Earlier draft bills that proposed a forced conversion of Swiss franc mortgage loans into Polish zloty are unlikely to be implemented in Moody's opinion. These bills would have resulted in excessive costs to banks and undermined overall financial stability. The following banks' ratings are affected by actions: - mBank S.A.'s long-term local and foreign-currency deposit ratings were upgraded to Baa1 from Baa2, its long-term Counterparty Risk Assessment (CRA) was upgraded to A3(cr) from Baa1(cr), its baseline credit assessment (BCA) was upgraded to ba1 from ba2; its adjusted BCA was upgraded to baa3 from ba1; the outlook on the long-term deposit ratings is changed to positive from stable. The bank's short-term Prime-2 deposit ratings and Prime-2(cr) CRA are affirmed. - Bank Millennium S.A.'s long-term and short-term local and foreign-currency deposit ratings were upgraded to Baa3/Prime-3 from Ba1/Not Prime, the long-term and short-term CRA were upgraded to Baa2(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr), the BCA and adjusted BCA were upgraded to ba2 from ba3; the outlook on the long-term deposit ratings is stable. - Bank BGZ BNP Paribas S.A.'s long-term local and foreign- currency deposit ratings were upgraded to Baa1 from Baa2. At the same time, Prime-2 short-term local and foreign-currency deposit ratings; A3(cr)/Prime-2(cr) long-term and short-term CRA; the ba2 BCA and baa3 adjusted BCA were affirmed; the outlook on the long- term deposit ratings is stable. - Powszechna Kasa Oszczednosci Bank Polski S.A.'s A2/Prime-1 long-term and short-term local and foreign-currency deposit ratings; A2(cr)/Prime-1(cr) long-term and short-term CRA; A3 long-term senior unsecured debt and (P)A3/(P)Prime-2 long-term and short-term local and foreign-currency medium term note program ratings were affirmed. Additionally, the BCA and adjusted BCA were affirmed at baa2; the outlook on the long-term deposit and senior unsecured debt ratings is stable. - PKO Bank Hipoteczny S.A.'s Baa1/Prime-2 long-term and short- term local and foreign-currency issuer ratings and A3(cr)/Prime- 2(cr) long-term and short-term CRA were affirmed; the outlook on the long-term issuer ratings is stable. The full list of the affected ratings can be found at the end of this press release. RATINGS RATIONALE (1) GREATER CLARITY ON LEGISLATIVE PROPOSAL ON CONVERSION OF FOREIGN-CURRENCY MORTGAGES AND STRONG ECONOMIC GROWTH UNDERPINS RATING ACTION A draft bill in the Polish parliament, which Moody's believes is now the most likely legislation to be implemented, proposes establishing a relief fund for Polish borrowers who have taken out mortgages in foreign currencies (FX), in particular in Swiss francs. The proposal calls for banks to contribute 0.5% of their total foreign currency-mortgage exposures to the fund every quarter. The proposal, which might yet be softened as it moves through the legislative process, underlines the regulator's intention to provide a transparent framework to reduce the risks of foreign currency mortgages, at a cost that is significantly less onerous for banks than in previously proposed bills. The previously proposed bills that envisioned a much higher financial burden on banks are on hold, or have been discontinued. Under the current draft bill, Moody's believes that Polish banks will be able to absorb the extra costs without compromising their credit growth and stability. The proposal comes at a time of robust economic growth in Poland. Moody's forecasts real GDP growth of 3.5% in 2018 and 3.2% in 2019, following current solid growth of about 4.3% in 2017. The benign economic environment will continue to provide Polish banks with new lending and revenue opportunities and keep loan- provisioning costs at bay, thus helping banks digest the additional expense of the mortgage relief fund. The rating action captures Moody's sensitivity studies which assess the impact on profits and capital of the most impacted banks. Besides the cost of the proposed FX-mortgage relief fund, the rating agency's analysis also incorporates (a) the decline of Tier 1 capital ratios of the banks on 1st of December, following a 50% increase in FX-mortgages' risk weights to 150% under standard approach of risk weighted assets (RWA) calculation, and (b) Moody's expectation of some potential increase in RWAs for foreign currency mortgages under internal ratings-based (IRB) approaches applicable to mBank and Bank Millennium, due to a likely introduction by Polish regulators of a loss-given-default floor. The adverse impact of the RWA increase will gradually decline as these FX-mortgages are converted into local currency, providing capital relief due their lower RWAs at 35% or 75% under the standard approach depending on the type of appraisal used for the underlying property. (2) BANK-SPECIFIC CONSIDERATIONS - mBank S.A. The one-notch upgrade of mBank's long-term deposit ratings was driven by: (1) the one notch upgrade of the bank's BCA to ba1 from ba2; (2) the rating agency's unchanged high affiliate support assumption from its parent, Commerzbank AG (LT Deposits A2 positive, ST Deposits Prime-1; BCA baa3), resulting in a one- notch rating uplift and a higher adjusted BCA of baa3 from ba1 previously; and (3) maintaining two notches of rating uplift from Moody's Advanced Loss Given Failure (LGF) analysis. The upgrade of the bank's BCA reflects the resilience of mBank's solvency metrics to the anticipated impact of the proposed FX mortgage conversion measures. mBank's capitalisation improved in the first nine months of 2017, with the Common Equity Tier 1 (CET1) ratio of 17.8%, up from 17.3% at year-end 2016. Moody's expects that a potential increase in RWAs for FX-mortgages under IRB approach for banks, including, mBank, will not materially diminish the robust capital adequacy of mBank. The bank's non-performing loans (NPL) ratio was little changed in the first nine months of 2017 and stood at 5.2%, better than the average 6.3% for the Polish banking sector. mBank's exposure to Swiss Franc mortgages is still sizeable despite gradually declining to 18.2% of total loans as of September 2017 from 22.6% in December 2016. Despite the low margins on foreign-currency mortgages and the introduction of a bank levy from 2017, mBank has managed to maintain stable profitability, with its net income averaging about 0.76% of tangible assets for the past two years. Moody's believes that mBank will maintain satisfactory profitability even after the contributions to the proposed FX- mortgage relief fund. The bank's overall liquidity profile is adequately supported by mostly domestic deposit funding. It has, however, a high reliance on derivatives to finance FX-mortgages. The positive outlook on mBank's long-term deposit rating reflects a combination of (a) Moody's expectation of further improvements in the bank's credit profile over the next 12 to 18 months, owing to continued reduction in tail risks as FX-mortgages continue to decline; and (b) the positive outlook on the parent bank's ratings. - Bank Millennium S.A. The one-notch upgrade of Bank Millennium's long-term deposit ratings was driven by: (1) the one notch upgrade of the bank's BCA and adjusted BCA to ba2 from ba3; (2) maintaining the current two-notches rating uplift for deposit ratings from Moody's Advanced LGF analysis; and (3) no rating uplift from government support. The one notch upgrade of Bank Millennium's BCA reflects its resilience to the expected impact of the upcoming FX mortgage conversion measures but also the rating agency's considerations about correlation risk between subsidiaries and their weaker parent banks which constrains Bank Millenium's BCA at this time. The bank displays strong capitalization with a CET1 ratio of 20.51% and CET1 over total assets leverage ratio at 9.46% and could accommodate a potential increase in RWA under the IRB approach on FX-mortgages. Its good profit generation, with net income of 0.95% of tangible assets enables Bank Millenium to absorb the contributions to the proposed FX-mortgage relief fund and maintain a sound bottom line. Although gradually declining, FX mortgages still amount to 30% of the bank's gross loans, the highest proportion amongst its peers, as of Q3-2017. Bank Millenium's overall liquidity profile is sound, supported by primarily domestic deposits funding and a high derivatives reliance to finance FX-mortgages. Furthermore, Moody's consider that subsidiaries are likely to be affected by the weaker credit profile of their parent. As a result, the three-notch difference between the BCA's of Bank Millennium and its parent Banco Comercial Portugues, S.A. (BCP: LT Deposits B1, stable, ST Deposits Not Prime; BCA b2), is underpinned by the limited operational inter-linkages, full funding independence from the parent, and close regulatory supervision by the Polish Financial Supervision Authority. However, this also acts as a constraint on Bank Millennium's BCA going forward. The stable outlook on Bank Millennium's long-term deposit ratings reflects Moody's expectation of no material changes in the bank's credit profile over the next 12 to 18 months and is in line with the stable outlook on BCP's ratings. - Bank BGZ BNP Paribas S.A. (BGZ BNPP) The one-notch upgrade of BGZ BNPP's long-term deposit ratings was driven by: (1) the affirmation of the bank's BCA, (2) affirmation of the bank's adjusted BCA that incorporates two notches of uplift from Moody's assumption of high parental support from BNP Paribas (LT Deposits Aa3 stable, ST Deposits Prime-1, BCA baa1), (3) increase to two-notches from one-notch the rating uplift for deposit ratings from Moody's Advanced LGF analysis; and (4) no rating uplift from government support. The increase in the uplift provided from Moody's Advanced LGF analysis to two notches from one is supported by the growth of BGZ BNPP's deposit base and reduction in inter-group funding. This resulted in a relatively higher share of bail-in able junior deposits in the banks' liability structure, implying a lower loss-given-failure in resolution the depositors. The affirmation of BGZ BNPP's BCA reflects the improving solvency of the bank, supported by moderate asset quality with non- performing to gross loans ratio of 7.1% and manageable exposure to FX-mortgages which amount to approximately 10% of its gross loans (largely in line with the system average, as of Q3 2017), allowing the bank to absorb the additional capital impact and cost associated with the proposed FX mortgage conversion measures. However, BGZ BNPP's capitalisation with a CET1 ratio of 10.66% and leverage ratio at 8.2%, remains relatively lean and is improving at only modest pace. The bank has strengthened net income of 0.61% of tangible assets, annualised based on Q3-2017 figures, compared with just 6 basis points reported a year earlier. The core profitability improvement is sustainable in the rating agency's view as it was achieved on the back of the absorption of merger costs and increased synergies and cost cuttings, and timely to support the absorption of cost related to the contributions to the proposed FX-mortgage relief fund. The bank's overall liquidity profile is strong, supported by primarily domestic deposits funding and moderate market funding reliance. The stable outlook on BGZ BNPP's long-term deposit ratings reflects Moody's expectation of no material changes in the bank's credit profile over the next 12 to 18 months and is in line with the stable outlook on BNP Paribas. - Powszechna Kasa Oszczednosci Bank Polski S.A (PKO-BP) The affirmation of PKO BP's ratings is driven by: (1) affirmation of the bank's BCA and adjusted BCA; (2) maintaining the current two-notches rating uplift for deposit and one notch rating uplift for senior unsecured ratings from Moody's Advanced LGF analysis; and (3) one notch rating uplift from government support on senior ratings. The affirmation of PKO BP's BCA reflects the bank's resilience to the expected impact of the upcoming FX mortgage conversion measures on the back of strong solvency and satisfactory asset quality with moderate exposure to FX-mortgages at approximately 12% of its gross loans. It has strong capital, with a CET1 ratio of 16.77% and leverage at 10.95%. Combined with good profit generation, with net income at 1.05% of tangible assets, this will provide a comfortable loss absorption cushion against the bank's exposure to FX-mortgages and potential cost to the FX- mortgage relief fund. The bank's overall liquidity profile is strong, supported by primarily domestic deposit funding and increasing covered-bond reliance. The stable outlook on PKO-BP's long-term deposit ratings reflects Moody's expectation of no material changes in the bank's credit profile over the next 12 to 18 months and is in line with the stable outlook on Poland (A2, stable). - PKO Bank Hipoteczny S.A. The affirmation of the PKO BH's issuer ratings follows the affirmation of PKO BP's ratings. PKO BH's ratings are positioned one notch below the senior unsecured debt rating of its parent, PKO BP. This reflects (1) PKO BP's full ownership of PKO BH, as well as its strategic fit and high operational integration within the group; and (2) PKO BP's commitment to maintain the capital and liquidity of its subsidiary at satisfactory levels, meeting all regulatory requirements. The bank has no exposure to FX mortgages and will therefore not be directly impacted by the upcoming legislations regarding FX-mortgages. The stable outlook on PKO-BH's long-term issuer ratings is in line with that of PKO BP's and reflects Moody's expectation of no material changes in the bank's credit profile over the next 12 to 18 months. -- WHAT COULD MOVE THE RATINGS UP/DOWN A material reduction in the banks' foreign currency-mortgage exposure, without a significant adverse cost could provide positive pressure on the banks' ratings. An adverse policy proposal on foreign currency mortgages that will result in the banks bearing a higher-than-anticipated burden in Moody's sensitivity studies would result in negative rating implications. A improvement, or deterioration, in the country's Macro Profile, and/or in individual banks' standalone financial metrics or their majority shareholder banks' may have positive or negative rating implications. A change in the banks' liability structures may change the uplift provided by Moody's Advanced LGF analysis and lead to a higher or lower notching from the banks' adjusted BCAs, thereby affecting deposit ratings. A change in the sovereign rating of Poland could result in a change in the government support embedded into PKO BP's senior ratings. LIST OF AFFECTED RATINGS Issuer: mBank S.A. Upgrades: -- LT Bank Deposits, Upgraded to Baa1 from Baa2, Outlook Changed To Positive From Stable -- Adjusted Baseline Credit Assessment, Upgraded to baa3 from ba1 -- Baseline Credit Assessment, Upgraded to ba1 from ba2 -- LT Counterparty Risk Assessment, Upgraded to A3(cr) from Baa1(cr) Affirmations: -- ST Bank Deposits, Affirmed P-2 -- ST Counterparty Risk Assessment, Affirmed P-2(cr) Outlook Actions: -- Outlook, Changed To Positive From Stable Issuer: Bank Millennium S.A. Upgrades: -- LT Bank Deposits, Upgraded to Baa3 from Ba1, Outlook Remains Stable -- ST Bank Deposits, Upgraded to P-3 from NP -- Adjusted Baseline Credit Assessment, Upgraded to ba2 from ba3 -- Baseline Credit Assessment, Upgraded to ba2 from ba3 -- LT Counterparty Risk Assessment, Upgraded to Baa2(cr) from Baa3(cr) -- ST Counterparty Risk Assessment, Upgraded to P-2(cr) from P- 3(cr) Outlook Actions: -- Outlook, Remains Stable Issuer: Bank BGZ BNP Paribas S.A. Upgrades: -- LT Bank Deposits, Upgraded to Baa1 from Baa2, Outlook Remains Stable Affirmations: -- ST Bank Deposits, Affirmed P-2 -- Adjusted Baseline Credit Assessment, Affirmed baa3 -- Baseline Credit Assessment, Affirmed ba2 -- LT Counterparty Risk Assessment, Affirmed A3(cr) -- ST Counterparty Risk Assessment, Affirmed P-2(cr) Outlook Actions: -- Outlook, Remains Stable Issuer: Powszechna Kasa Oszczednosci Bank Polski S.A. Affirmations: -- LT Bank Deposits, Affirmed A2, Outlook Remains Stable -- ST Bank Deposits, Affirmed P-1 -- Senior Unsecured Regular Bond/Debenture, Affirmed A3, Outlook Remains Stable -- Senior Unsecured MTN Program, Affirmed (P)A3 -- Other Short Term Program, Affirmed (P)P-2 -- Adjusted Baseline Credit Assessment, Affirmed baa2 -- Baseline Credit Assessment, Affirmed baa2 -- LT Counterparty Risk Assessment, Affirmed A2(cr) -- ST Counterparty Risk Assessment, Affirmed P-1(cr) Outlook Actions: -- Outlook, Remains Stable Issuer: PKO Bank Hipoteczny S.A. Affirmations: -- LT Issuer Rating, Affirmed Baa1, Outlook Remains Stable -- ST Issuer Rating, Affirmed P-2 -- LT Counterparty Risk Assessment, Affirmed A3(cr) -- ST Counterparty Risk Assessment, Affirmed P-2(cr) Outlook Actions: -- Outlook, Remains Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks published in September 2017. VISTAL GDYNIA: Court Declares Unit Bankrupt ------------------------------------------- Reuters reports that the court declared bankruptcy of Vistal Gdynia SA's unit Vistal Construction Sp. z o.o. Founded in 1991 and based in Gdynia, Poland, Vistal Gdynia S.A. produces steel structures for the civil, energy, shipbuilding, and off-shore industries in Poland and internationally. The company operates as a general contractor of bridges; manufactures steel constructions and steel bridge structures; and builds telecommunication towers, cranes, road acoustic screens, production or sport halls, industrial constructions, and other structures. In October 2017, Vistal Gdynia filed for bankruptcy. =============== P O R T U G A L =============== DOURO MORTGAGES NO. 3: Fitch Affirms Bsf Rating on Cl. D Notes -------------------------------------------------------------- Fitch Ratings has affirmed Douro Mortgages No.1 (Douro 1), Douro Mortgages No.2 (Douro 2) and Douro Mortgages No.3 (Douro 3). This rating action follows on from the ratings being placed on Rating Watch Negative (RWN) on Oct. 15, 2017. The transactions are securitisations of seasoned Portuguese residential mortgages originated by Banco BPI, S.A. KEY RATING DRIVERS Updated Approach to Provisioning The servicer intends to amend the application of the provisioning mechanism for all three transactions. Over the coming payments dates, excess spread generated at each collection period will be used to pay down the notes, such that the collateralised notes balance will equal the performing asset balance plus any un- provisioned amounts. The amended provisioning has already been implemented for Douro 3 and will be applied for Douro 1 and Douro 2 as of the December 2017 and January 2018 payment date, respectively. Fitch is of the opinion that this corrective action will take around six to ten payment dates to align the imbalance between assets and liabilities that previously resulted in placing the note ratings on RWN. Furthermore all future realised losses will be debited to the principal deficiency ledger in addition to any amounts previously provisioned, which could lead to a build-up in over- collateralisation. As such, all note ratings have been affirmed. Criteria Variation The first variation from criteria relates to ratings of the Class D notes of Douro 2 and Douro 3 The model-implied ratings for both notes were lower than 'B-sf' and should be downgraded to distressed levels (i.e. 'Csf' to 'CCCsf') according to the Rating Determination section of the European RMBS Rating Criteria. However, the rating committee also took into account the best- pass ratings in each of the 18 cash-flow model scenarios as well as expectations that model implied ratings will increase in the future taking into account asset performance and the transaction structure. The rating committee concluded that ratings of 'BB-sf' and 'Bsf' for Douro 2 and Douro 3, respectively, were most appropriate for the Class D notes. The second variation from criteria relates to the Class C note rating of Douro 2. The model-implied rating was greater than three notches below the current note rating of 'BB+sf' and should be downgraded in line with the model implied rating, according to the Rating Determination section of the European RMBS Rating Criteria. However, the rating committee also took into account the best-pass ratings in each of the 18 cash-flow model scenarios as well as expectations that model implied ratings will increase in the future taking into account asset performance and the transaction structure. The rating committee concluded that rating of 'BB+sf' was most appropriate for the Class C note. RATING SENSITIVITIES Douro 3 currently has limited scope for permitted variations where loan spreads could compress or loan maturity dates extended. As the pool amortises the scope for such variations could potentially increase. As such, Fitch may apply more conservative assumptions to its current cash flow modelling approach. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that affected the rating analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall and together with the assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. SOURCES OF INFORMATION The information below was used in the analysis. - Loan-by-loan data provided by European Data Warehouse as at Aug. 31, 2017 for Douro 1, 29 September 2017 for Douro 2 and October 31 for Douro 3. - Transaction reporting provided by Banco BPI, S.A. as at Aug. 31, 2017 for Douro 1, 30 September 2017 for Douro 2 and October 31 for Douro 3. - Transaction reporting provided by Citibank N.A. as at Sept. 31, 2017 for Douro 1, 23 October 2017 for Douro 2 and November 21 for Douro 3. - Discussions and updates provided by Banco BPI, S.A. as at Dec. 11, 2017. MODELS EMEA Cash Flow Model. ResiEMEA. Fitch has taken the following rating action: Sagres, STC S.A. / Douro Mortgages No. 1: Class A (ISIN XS0236179270): Affirmed at 'A+sf'; Outlook Stable Class B (ISIN XS0236179601): Affirmed at 'Asf'; Outlook Stable Class C (ISIN XS0236180104): Affirmed at 'BBBsf'; Outlook Stable Class D (ISIN XS0236180443): Affirmed at 'BB+sf'; Outlook Stable Sagres, STC S.A. / Douro Mortgages No. 2: Class A1 (ISIN XS0269341334): Affirmed at 'Asf'; Outlook Stable Class A2 (ISIN XS0269341680): Affirmed at 'Asf'; Outlook Stable Class B (ISIN XS0269343389): Affirmed at 'BBBsf'; Outlook Stable Class C (ISIN XS0269343892): Affirmed at 'BB+sf'; Outlook Stable Class D (ISIN XS0269344197): Affirmed at 'BB-sf'; Outlook Stable Sagres, STC S.A. / Douro Mortgages No. 3: Class A (ISIN XS0311833833): Affirmed at 'BBB+sf'; Outlook Stable Class B (ISIN XS0311834211): Affirmed at 'BB+sf'; Outlook Stable Class C (ISIN XS0311835374): Affirmed at 'BBsf'; Outlook Stable Class D (ISIN XS0311836349): Affirmed at 'Bsf'; Outlook Stable =========== R U S S I A =========== BANK RESPUBLIKA: Moody's Lowers Long-Term Deposit Rating to Caa1 ---------------------------------------------------------------- Moody's Investors Service has downgraded Joint Stock Commercial Bank Respublika's (Bank Respublika) long-term foreign- and local- currency deposit ratings to Caa1 from B3. The bank's baseline credit assessment (BCA) and adjusted baseline credit assessments were downgraded to caa1 from b3. The outlook on the long-term local- and foreign-currency deposit ratings remain negative. The bank's Not-Prime short-term foreign-currency and local- currency deposit ratings were affirmed. Concurrently, Moody's has downgraded the bank's long-term Counterparty Risk Assessment (CR Assessment) to B3(cr) from B2(cr) and affirmed its short-term CR Assessment of Not Prime(cr). The rating action is driven by weak solvency of the bank, in particular owing to material erosion of the bank's capital and ongoing net losses, as well as the need for an equity injection to meet regulatory capital requirements. RATINGS RATIONALE The downgrade of credit ratings is driven by the bank's weaker solvency position. The bank reported a very low 4.7% tangible common equity to risk-weighted assets ratio as of year-end 2016 under IFRS as per Moody's estimates, compared to 8.7% in 2015. The drop in the capital ratio was driven by large loan provisioning charges. Amid continued losses through 2017, its regulatory capital decreased to AZN39.8 million as of December 1, 2017, which is below the minimal threshold of AZN50 million. The bank currently operates under regulatory forbearance and its shareholders are discussing capital replenishment plans including AZN10 million additional share issue. Moody's believes it may materialize early next year, if approved by the shareholders. Moody's expects that the bank's internal capital generation capacity will remain weak in the next several quarters owing to loan book deleverage. The gross loan portfolio as of 1 December was 17% below the level reported at the end of 2016, although since recently it has stabilized and returned to growth. The net interest income accounted for just 24% of net revenue over the first 11 months of 2017 under local GAAP. Moody's believes that volatile non-interest income will restrain recovery of the bank's profitability in the next 12-18 months, which is captured by the negative outlook on the ratings. The bank's non-performing loans (NPL) overdue by more than 90 days accounted for 8.9% of gross loans at the end of 2016 and restructured loans comprised another 20% according to bank's audited IFRS report. Loan loss reserves at 8.8% of gross loans fully cover NPLs, but provide only limited coverage of restructured loans suggesting additional provisioning might be required in the next 12-18 months. The bank held strong liquidity cushion with cash, cash equivalents and due from banks accounting for 56% of total assets as of 1 December 2017. Excluding due to financial institutions its adjusted liquid asset ratio amounted to 28% of balance sheet, which is considered robust by the rating agency. WHAT COULD MOVE THE RATINGS UP / DOWN A substantial improvement of the capital cushion, along with a recovery in profitability could enable a return to a stable outlook on the ratings. The ratings could be lowered if financial fundamentals, namely capitalization and asset quality, erode beyond Moody's current expectations. LIST OF AFFECTED RATINGS Issuer: Joint Stock Commercial Bank Respublika Downgraded -- LT Bank Deposits, Downgraded to Caa1 from B3, Outlook Remains Negative -- Adjusted Baseline Credit Assessment, Downgraded to caa1 from b3 -- Baseline Credit Assessment, Downgraded to caa1 from b3 -- LT Counterparty Risk Assessment, Downgraded to B3(cr) from B2(cr) Affirmations: -- ST Bank Deposits, Affirmed NP -- ST Counterparty Risk Assessment, Affirmed NP(cr) Outlook Actions: -- Outlook, Remains Negative PRINCIPAL METHODLOGY The principal methodology used in these ratings was Banks published in September 2017. PROMSVYAZBANK PJSC: S&P Retains 'B+' CCR on CreditWatch Negative ---------------------------------------------------------------- S&P Global Ratings said that it is keeping its 'B+' long-term counterparty credit rating on Russia-based Promsvyazbank on CreditWatch negative, where it was placed on Nov. 3, 2017. At the same time, S&P affirmed its 'B' short-term credit rating on the bank. The long-term rating is remaining on CreditWatch negative following the CBR's temporary administration of the bank. The CBR has stated that it won't introduce a moratorium on payments under senior creditors' claims. S&P said, "In our view, this intervention will stabilize Promsvyazbank's solvency and liquidity, which otherwise could have been under severe stress. Although we expect that CBR will provide financial resources to Promsvyazbank to ensure the continuity of the bank's operations, the bank's creditworthiness could remain under pressure-- depending on the extent of its asset-quality issues and its future business model, including governance and ownership." S&P said, "We expect that within the next 90 days, CBR will provide more details regarding its assessment of Promsvyazbank's financial standing. We also expect it to share its views on possible next steps, including the bank's recapitalization, potential changes to its business model, and changes in its shareholding structure. We will review the rating once we know these details. We will also assess the viability of the new business model, as we believe that despite its large size and good brand name, the bank's reputation could suffer from this long period of negative publicity. The temporary administration measures provide stability and, more importantly, time for the bank to solve its financial problems and consider its future business model and governance. In our view, the bank will have to make such decisions by next year to ensure longer-term viability. "We now assess Promsvyazbank's stand-alone credit profile (SACP) at 'b'. This takes into account the effect of short-term government support on its capital and earnings, risk position, and liquidity. If no government support were forthcoming in the near term, we would assess the bank's SACP in the 'ccc' category, reflecting our view that the regulatory intervention has prevented an immediate liquidity or solvency crisis. This is because we believe that the bank could be vulnerable to nonpayment without the government's support. "The bank's credit profile has suffered materially over the past several months, during which the bank faced significant negative publicity and regulatory pressures as well as the departure of a number of top managers. We estimate the overall client funds outflows from Promsvyazbank have been about 93 billion rubles (10% of the bank's total client funding) in September and October 2017. "We continue to view Promsvyazbank as a moderately systemically important bank in Russia and therefore incorporate one notch of uplift into the long-term rating to reflect the moderate likelihood of government support. "We aim to resolve the CreditWatch placement within the next three months when we get more clarity regarding the bank's financial rehabilitation plan, future strategy, governance, and ownership. "We could lower the rating if, contrary to the CBR's recent statement, we believe there is greater risk that the bank's senior creditors could suffer losses. We could also consider a downgrade if the bank's asset-quality problems turn out to be very significant, materially undermining its risk position and diminishing the benefits of CBR's expected short-term capital support. "We could affirm the rating if we observed that owing to the CBR's measures, the bank managed to restore customer confidence, liquidity, and the stability of its funding base. We would also need to confirm that the bank is able to retain its business franchise and will remain a systemically important financial institution in the Russian banking sector." VOZROZHDENIE BANK: S&P Cuts LT Counterparty Credit Rating to 'B' ---------------------------------------------------------------- S&P Global Ratings lowered its long-term counterparty credit rating on Vozrozhdenie Bank to 'B' from 'B+'. The rating remains on CreditWatch negative, where S&P placed it on Nov. 3, 2017, reflecting liquidity risks as well as the pressure on the capital and risk position of PromSvyazCapital, Vozrozhdenie Bank's parent group. At the same time, S&P affirmed its 'B' short-term rating on the bank. Vozrozhdenie Bank's sister company, Promsvyazbank, was placed under temporary administration by the banking regulator. This measure followed a prolonged period of negative publicity around the bank, regulatory and liquidity pressures, and the departure of a number of top managers. The downgrade of Vozrozhdenie Bank reflects our expectation that it could face contagion risks, resulting in client fund outflows and liquidity pressure. Although we estimate that Vozrozhdenie Bank's total client funds have been relatively stable since June 2017, when negative market sentiment around Promsvyazbank emerged, corporate deposits have decreased by about 5.6 billion rubles, which is 9.3% of total funding from corporate clients. In addition, in contrast to Promsvyazbank, Vozrozhdenie Bank is not a systemically important financial institution. S&P said, "As a result, we do not expect the regulator to provide it financial support in a stress scenario to prevent a solvency or liquidity crisis, as it did for Promsvyazbank. Furthermore, we consider that the ability of the majority owners--the Ananievs brothers-- to provide support to Vozrozhdenie Bank could be limited in light of the developments at Promsvyazbank, which is their largest asset." S&P said, "We aim to resolve the CreditWatch placement within the next three months, when we get better clarity on Vozrozhdenie Bank's ability to sustain its business franchise and maintain liquidity cushions. "We could lower the rating again if we believe that the bank has suffered client fund outflows significant enough to wipe out its liquidity buffers. We could also consider another downgrade if the bank's capitalization deteriorated materially due to increased credit costs or other unexpected losses that we do not account for in our base-case scenario, with the RAC ratio falling below 3%. "We could affirm the ratings if in our view the bank has demonstrated the sustainability of its business franchise, with no new significant outflows of client funds. This would need to be alongside sustained capitalization levels." ========= S P A I N ========= IM SABADELL 11: Moody's Rates EUR332.5MM Series B Notes Caa3 ------------------------------------------------------------ Moody's Investors Service has assigned the following definitive ratings to the debts issued by IM SABADELL PYME 11, FONDO DE TITULIZACION (the Issuer): -- EUR1,567.5M Series A Notes due June 2057, Definitive Rating Assigned Aa3 (sf) -- EUR332.5M Series B Notes due June 2057, Definitive Rating Assigned Caa3 (sf) IM SABADELL PYME 11, FONDO DE TITULIZACION is a securitisation of loans granted by Banco Sabadell, S.A. ("Banco Sabadell", Long Term Deposit Rating: Baa2 Not on Watch /Short Term Deposit Rating: P-2 Not on Watch; Long Term Counterparty Risk Assessment: Baa2(cr) Not on Watch /Short Term Counterparty Risk Assessment: P-2(cr) Not on Watch) and by banks belonging to Banco Sabadell group, to small and medium-sized enterprises (SMEs) and self- employed individuals. RATINGS RATIONALE The ratings of the notes are primarily based on the analysis of the credit quality of the underlying portfolio, the structural integrity of the transaction, the roles of external counterparties and the protection provided by credit enhancement. In Moody's view, the strong credit positive features of this deal include, among others: (i) granular and diversified pool across industry sectors; and (ii) a simple structure. However, the transaction also presents challenging features, such as: (i) around 7.2% of the pool balance consists of loans not originated by Banco Sabadell; (ii) the portfolio includes loans whose purpose is linked to the repayment of existing debt (23.6% of the pool balance); (iii) there is no interest rate hedge mechanism in place; and (iv) strong linkage to Banco Sabadell as it holds several roles in the transaction (originator, servicer and accounts bank). - Key collateral assumptions: Mean default rate: Moody's assumed a mean default rate of 14.8% over a weighted average life of 3.5 years (equivalent to a B2 proxy rating as per Moody's Idealized Default Rates). This assumption is based on: (1) the available historical vintage data, (2) the performance of the previous transactions originated by Banco Sabadell and (3) the characteristics of the loan-by-loan portfolio information. Moody's took also into account the current economic environment and its potential impact on the portfolio's future performance, as well as industry outlooks or past observed cyclicality of sector-specific delinquency and default rates. Default rate volatility: Moody's assumed a coefficient of variation (i.e. the ratio of standard deviation over the mean default rate explained above) of 30.7%, as a result of the analysis of the portfolio concentrations in terms of single obligors and industry sectors. Recovery rate: Moody's assumed a stochastic recovery rate with a 40% mean, primarily based on the characteristics of the collateral-specific loan-by-loan portfolio information, complemented by the available historical vintage data. Portfolio credit enhancement: the aforementioned assumptions correspond to a portfolio credit enhancement of 22.3%, that takes into account the current local currency country risk ceiling (LCC) for Spain of Aa2. As of November 2017, the audited provisional asset pool of underlying assets was composed of a portfolio of 32,282 contracts amounting to EUR2,568.6 million. The top industry sector in the pool, in terms of Moody's industry classification, is Beverage, Food & Tobacco (18.5% of the pool volume). The top borrower group represents 1% of the portfolio and the effective number of obligors is 805. The assets were originated mainly between 2015 and 2017 (85.7% of the pool volume) and have a weighted average seasoning of 2.1 years and a weighted average remaining term of 5.7 years. The interest rate is fixed for 65.2% of the pool while the remaining part of the pool bears a floating interest rate. The weighted average spread on the floating portion is 1.8%, while the weighted average interest on the fixed portion is 3.2%. Geographically, the pool is concentrated mostly in the regions of Catalonia (33.2%), Valencia (12.6%) and Madrid (11.8%). Loans more than 30 days in arrears amount to 0.7% of the pool balance. At closing, assets for more than 60 days in arrears will be excluded from the final pool. In addition, refinanced loans will be limited to 6.5% of the pool balance at closing. Around 16.5% of the portfolio is secured by mortgages over different types of properties. - Key transaction structure features: Reserve fund: The transaction benefits from a reserve fund which at closing amounts to EUR93.1 million, equivalent to 4.9% of the initial balance of the Series A and Series B notes, fully funded with a subordinated loan by Banco Sabadell. The reserve fund provides liquidity protection to the notes during the life of the deal, covering principal payments only by legal maturity. No hedging arrangement: The portfolio comprises a significant portion of fixed rate loans (65.2%), while the rated notes pay three-month Euribor plus a spread. Moody's has applied haircuts to the portfolio yield to account for the spread compression due to prepayments and renegotiations, as well as additional haircuts to address a potential basis mismatch and fixed/floating interest mismatch between assets and notes. - Counterparty risk analysis: Banco Sabadell will act as servicer of the loans for the Issuer, while Intermoney Titulizaci¢n S.G.F.T., S.A. (not rated) will be the management company (Gestora) of the transaction. All of the payments under the assets in the securitised pool are paid into the collection account at Banco Sabadell. There is a daily sweep of the funds held in the collection account into the Issuer account, which is also held at Banco Sabadell, without a transfer obligation in case of Banco Sabadell downgrade by Moody's. In its analysis Moody's has neither modelled commingling nor issuer account risk, as per Moody's counterparty methodology (see "Moody's Approach to Assessing Counterparty Risks in Structured Finance", published in July 2017). - Stress scenarios: Moody's also tested other sets of assumptions under its Parameter Sensitivities analysis. For instance, if the assumed default rate of 14.8% used in determining the initial rating was changed to 19.2% and the recovery rate of 40% was changed to 30%, the model- indicated rating for Series A and Series B of Aa3 (sf) and Caa3 (sf) would be Baa3 (sf) and Ca (sf) respectively. - Principal Methodology: The principal methodology used in these ratings was "Moody's Global Approach to Rating SME Balance Sheet Securitizations" published in August 2017. - Factors that would lead to an upgrade or downgrade of the ratings: The notes' ratings are sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The evolution of the associated counterparties risk, the level of credit enhancement and Spain's country risk could also impact the notes' ratings. 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 with respect to the notes by the legal final maturity. Moody's ratings address only 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. =========================== U N I T E D K I N G D O M =========================== ANGLIAN WATER: Moody's Affirms Ba3 Rating on GBP240MM Sr. Notes --------------------------------------------------------------- Moody's Investors Service has affirmed the Ba3 rating on the GBP240 million senior secured seven-year notes due January 2018 and GBP450 million senior secured medium-term notes due 2023 and 2026, issued by Anglian Water (Osprey) Financing plc (Osprey), a finance subsidiary of Osprey Acquisitions Limited (OAL), the intermediate holding company of Anglian Water Services Ltd. (Anglian Water). Concurrently, the rating agency changed the outlook on the ratings to negative from stable. The ratings and outlook of Anglian Water and its financing subsidiaries are unaffected. This action follows publication, on 13th December, by the Water Services Regulation Authority (Ofwat), the economic regulator for water companies in England and Wales, of its final methodology for the 2019 price review (PR19), including guidance on allowed cost of capital for the period from April 2020 to March 2025 (AMP7). RATINGS RATIONALE RATIONALE FOR NEGATIVE OUTLOOK The change in Osprey's outlook to negative from stable reflects its risk exposure -- through its core subsidiary Anglian Water -- to the likely cut in allowed returns from 2020, as guided by the regulator in its final PR19 methodology. The level of dividend distributions available to Osprey, its primary source of income to meet interest payments on its debt, is highly sensitive to Anglian Water's operational and financial performance against regulatory assumptions. The likely cut in allowed returns and more challenging efficiency targets expose Osprey to potentially reduced financial flexibility and headroom against its financial covenants. Ofwat published its final methodology for PR19, setting out requirements and expectations for companies' business plans and the regulator's assessment of these. Compared with the July draft consultation, the final methodology includes small changes to the total expenditure incentive regime as well as outcome delivery targets, but overall efficiency requirements will likely remain challenging. The regulator is proposing to reward companies whose business plans it assesses as exceptional or enhanced, but the monetary adjustment will provide limited relief against the low headline return. As part of its methodology, Ofwat provided guidance on the allowed cost of capital for AMP7. Given the continuing low yield environment, a cut in allowed returns is to be expected and the regulator has guided to a reduction to 2.3% (real, assuming Retail Prices Index, or RPI, inflation) from currently 3.6% for the regulated water and wastewater wholesale activities. The regulator's proposal to link revenue and asset inflation to a measure of the Consumer Prices Index, adjusted for housing costs (CPIH) will increase the overall allowed return, albeit at the expense of future growth in the regulatory capital value (RCV). Nevertheless, the allowed cost of capital will still fall by around 0.8%, assuming a 100bps wedge between RPI and CPIH. Anglian Water's net debt (Moody's adjusted) was 79% of its RCV as at 31 March 2017; however, including the Osprey debt, consolidated gearing at the holding company level is at 87% of Anglian Water's RCV. This level of gearing is above both the sector average of around 70% and the gearing assumed by the economic regulator at previous price controls (62.5% at PR14). RATIONALE FOR RATING AFFIRMATION Affirmation of the ratings reflects that while Osprey's credit quality will be pressured by the proposed cut in allowed returns for Anglian Water, the PR19 process is in the early stages and the reduction may be less than currently proposed and/or mitigated by other aspects of Ofwat's final determination. Moody's also takes into account (1) that management have some time to adapt financial policies and bolster financial flexibility ahead of AMP7; (2) shareholders have demonstrated a willingness to support the group's credit quality, including an equity injection in a period of temporary low inflation in 2009 to avoid a lock-up covenant breach at Anglian Water; (3) the strong track record of Anglian Water's operational outperformance; and (4) the reduction in Osprey's future interest costs following the 7th December issuance of a GBP240 million fixed 4% coupon bond maturing in 2026, the proceeds of which will be used to refinance a bond with a fixed 7% coupon maturing in January 2018. Affirmation of the rating also reflects Anglian Water's sound business risk profile as monopoly provider of essential water and sewerage services and the stable cash flows generated under a transparent and well-established regulatory regime. WHAT COULD CHANGE THE RATING UP/DOWN The outlook could be stabilised if Moody's concludes that the impact of the forthcoming price review is likely to be adequately mitigated taking into account (1) potential future performance of Anglian Water, in particular post 2020; and (2) any additional measures management or shareholders may be willing to implement. Conversely, the rating could be downgraded if, taking into account such measures as management and shareholders may implement, it appears that Anglian Water will likely have insufficient financial flexibility to accommodate dividend distributions to Osprey to allow a dividend cover in excess of 3.0x on a sustainable basis, even when taking into account the expected reduction in allowed returns and potentially more challenging efficiency targets at PR19. Furthermore, downward pressure could result from (1) unexpected, severe deterioration in operating performance at Anglian Water; (2) a material change in the regulatory framework for the UK water sector leading to a significant increase in Anglian Water's business risk; and/or (3) unforeseen funding difficulties. The principal methodology used in these ratings was Regulated Water Utilities published in December 2015. Anglian Water (Osprey) Financing plc is the financing subsidiary of Osprey Acquisitions Limited (OAL), an intermediate holding company in the Anglian Water Group. The principal operating subsidiary in the group is Anglian Water Services Ltd., a regulated water and sewerage company operating in the east and north-east of England. OAL is indirectly owned by a consortium comprising Canada Pension Plan Investment Board, Colonial First State Global Asset Management (the asset management division of Commonwealth Bank of Australia), Industry Funds Management and 3i Group plc. The company was formed for the purpose of acquiring AWG plc, Anglian Water's then publicly listed parent company and completed the acquisition in late 2006. CROWN AGENTS: Fitch Revises Outlook to Stable, Affirms BB IDR ------------------------------------------------------------- Fitch Ratings has revised Crown Agents Bank Limited's (CABK) Outlook to Stable from Evolving, while affirming the bank's Long- Term Issuer Default Rating (IDR) at 'BB'. Fitch has also affirmed CABK's Short-Term IDR at 'B', Viability Rating (VR) at 'bb' and Support Rating at '5'. KEY RATING DRIVERS IDRS AND VR The Outlook revision reflects progress made by CABK in implementing its new strategy since its acquisition by Helios Investment Partners LLP (Helios) in March 2016, which involves a significant increase in the scale of its business model. The Outlook revision also reflects more definitive strategic objectives and reduced likely volatility in the bank's business profile. A still limited record of implementation of its expansion strategy and a small capital base are balanced by an established, but somewhat concentrated, deposit franchise and low-risk and liquid balance sheet. Fitch understands from management that the bank will maintain a high proportion of liquid assets over the medium term. CABK's management has scaled back its medium-term growth plans since a year ago, when it was targeting a more than doubling of the balance sheet by end-2021. However, growth targets remain material, and the latest management forecasts signal that the balance sheet will grow by 50% from end-2016 to end-2019. The targeted growth is part of CABK's aim to become a major transactional bank between developed and emerging market counterparties, providing payments, foreign exchange, treasury services and trade finance for non-governmental organisations, local banks and non-bank counterparties. The bank's balance sheet is likely to remain deposit-driven, and revenue will continue to be dominated by foreign exchange and money market income and payment services. As part of the targeted business model, the bank will also gradually expand its trade finance activity, including increasing its on-balance sheet trade finance exposure. However, Fitch understand from management that trade finance will not be a primary focus for the bank and will form only a small portion (less than 5%) of total assets; most trade finance exposure will be off-balance sheet and either cash- collateralised or covered by World Bank or UK Export Finance guarantees. Establishing strong, experienced and well-functioning risk management and operational teams, technology and processes will be key to handling a growing flow of small transactions sufficiently. Fitch believes that if successfully implemented, the expansion will help bring some diversification to the business and improve structural profitability in the medium term. Earnings have improved in 2017 and Fitch expect profitability to strengthen to adequate levels in the medium term, assuming successful strategic implementation. CABK expects to break even in 2017 although short-term internal capital generation will likely remain modest. CABK's capital base grew to GBP42 million at end-2016 (2015: GBP27 million) on injections from the owner; further injections in 2017 helped capital to grow to GBP58 million to date. However, the capital base remains small in absolute terms and therefore offers little protection for creditors in Fitch view, and Fitch believe that the additional capital injections only partly mitigate the possibility of increased operational risk as part of the expansion plans. The bank has invested in strengthening internal controls and capabilities to meet its targeted growth, as well as planning further investments in digitalisation and to expand its payments functionality. Fitch believe that these investments have helped to strengthen CABK's internal control environment although the lack of track record of these under a significantly higher volume business model is a constraint on the rating. High concentrations on both sides of the balance sheet are also negative rating considerations. CABK's franchise is niche given its business focus but the business is supported by the bank's long-standing relationship network and brand recognition with clients in targeted regions. As part of its expansion the bank has increased its risk appetite moderately, albeit from conservative levels. Historically, CABK has had a conservative appetite for credit risk as its business model concentrated on disbursing aid to developing countries while holding funds for various local and central banks in the form of short-term highly-rated assets. Although CABK's role as a depositor bank is expected to remain a fundamental part of the updated strategy, Fitch believes that given the weak profitability of this business, its importance will gradually reduce as the business model evolves. The expansion of trade finance activity should be mitigated by the bank's planned low-risk underwriting standards as well as the low-risk nature of the bulk of the targeted asset base, comprising certificates of deposit, money market exposures and high-quality liquid assets held with highly-rated counterparties. The bank will also continue to be exposed to settlement arising from its FX transactions with its core African market, although Fitch believe the risk is manageable due to fairly conservative exposure limits that will curb potential losses. CABK's Short-Term IDR of 'B' is based on the bank's Long-Term IDR of 'BB' and reflects the mapping relationship between Long- and Short-Term IDRs as outlined in Fitch's Global Bank Rating Criteria. SUPPORT RATING Fitch views CABK's owner as the most likely source of support for the bank. However, Fitch believe that such support, while possible, cannot be relied upon, mainly because the agency views the owner as a financial, rather than strategic, investor. This is reflected in Fitch Support Rating of '5'. RATING SENSITIVITIES IDRS AND VR Fitch expects less downside risk to the bank's business model as its expansion continues, which is reflected in the Outlook revision. CABK's ratings are primarily sensitive to the bank's ability to continue to successfully implement its planned expansion. If CABK operates at its targeted larger scale, expanding its customer franchise, while improving profitability and internal capital generation, strengthening risk controls and maintaining sound asset quality and liquidity, then this would likely be positive for the ratings. Conversely, negative pressure on the ratings could arise if the bank falls significantly behind its medium-term targets, such as below-target revenue growth resulting in ongoing weak internal capital generation that is insufficient to offset the higher cost base, or if material impairment or operational charges transpire. A downgrade would also be possible if the bank adopts a more aggressive risk appetite than Fitch current expectations or if it materially tightens its liquidity. MUTUAL SECURITISATION: S&P Lowers Class A2 Notes Rating to 'CCC-' ----------------------------------------------------------------- Standard & Poor's Ratings Services said that it lowered its issue rating on Mutual Securitisation PLC's class A2 notes to 'CCC-' from 'CCC'. S&P said, "The rating action reflects both the application of our updated criteria and increased risk of nonpayment owing to weaker collateral performance. "On Oct. 1, 2012, we updated our criteria for assigning 'CCC+', 'CCC', 'CCC-', and 'CC' ratings. According to our updated criteria, we believe payment of principal and interest is highly dependent on favorable business, financial, and economic conditions. Moreover, we consider that recent and expected collateral performance is increasing the risk of nonpayment." Principal and interest due under the notes are serviced out of future emerging surplus from a defined pool of National Provident Life Ltd.'s (NPL; not rated) life and pensions insurance policies and a reserve account. Emerging surplus for year-end June 2012 was about 34% lower than expected in 2011 owing to poor investment returns and a strengthening of the reserving basis. S&P said, "In our opinion, timely payment of principal and interest is likely to continue for at least the next five years, based on current information and base-case assumptions relating to investment returns. In addition to emerging surplus, payments are currently supported by the reserve account balance, which we understand totaled about GBP50 million at Sept. 30, 2012. However, as the underlying pool of policies and related aggregate emerging surplus decline, the likelihood of a recovery in collateral performance to fully amortize the notes diminishes. As a result, we believe there is an increasing probability of eventual default. Final maturity of the A2 notes is due in 2022. The A1 notes were fully repaid in September 2012." RATINGS LIST Mutual Securitisation PLC GBP260 Million Limited-Recourse Bonds Class Rating To From A2 CCC- CCC SOUTHERN WATER: Moody's Affirms Ba1 Sub. Regular Bonds Rating ------------------------------------------------------------- Moody's Investors Service has affirmed the Baa2 corporate family rating of the seventh-largest UK water company, Southern Water Services Limited. The rating agency also affirmed the Baa1 senior secured and Ba1 subordinated debt ratings of the Class A and Class B notes issued by Southern Water Services (Finance) Limited, and guaranteed by Southern Water. The outlook on all ratings remains negative. Ratings and outlooks of notes that benefit from a financial guarantee will be unaffected. This action follows publication, on December 13, by the Water Services Regulation Authority (Ofwat), the economic regulator for water companies in England and Wales, of its final methodology for the 2019 price review (PR19), including guidance on allowed cost of capital for the period from April 2020 to March 2025 (AMP7). RATINGS RATIONALE RATIONALE FOR NEGATIVE OUTLOOK Moody's decision to maintain the negative outlook reflects Southern Water's exposure to the likely cut in allowed returns from 2020, as guided by the regulator in its final PR19 methodology. Specifically, it reflects the risk that the company may not be able to maintain a financial profile in line with Moody's existing guidance for its current rating levels, which may tighten as the PR19 process evolves. It also takes into account (1) financial leverage of around 80% of the RCV; and (2) the cost and maturity profile of the company's debt in the context of likely financing and refinancing requirements over the 2020-25 period. Ofwat published its final methodology for PR19, setting out requirements and expectations for companies' business plans and the regulator's assessment of these. Compared with the regulator's July draft consultation, the final methodology includes small changes to the total expenditure incentive regime as well as outcome delivery targets, but overall efficiency requirements will likely remain challenging. The regulator is proposing to reward companies whose business plans it assesses as exceptional or enhanced, but the monetary adjustment will provide limited relief against the low headline return. As part of its methodology, Ofwat provided guidance on the allowed cost of capital for AMP7. Given the continuing low yield environment, a cut in allowed returns is to be expected and the regulator has guided to a reduction to 2.3% (real, assuming Retail Prices Index, or RPI, inflation) from currently 3.6% for the regulated water and wastewater wholesale activities. The regulator's proposal to link revenue and asset inflation to a measure of the Consumer Prices Index, adjusted for housing costs (CPIH) will increase the overall allowed return, albeit at the expense of future growth in the regulatory capital value (RCV). Nevertheless, the allowed cost of capital will still fall by around 0.8%, assuming a 100bps wedge between RPI and CPIH. Southern Water's net debt (Moody's adjusted) was over 80% of its RCV as at 31 March 2017. This level of gearing is above both the sector average of around 70% and the gearing assumed by the economic regulator at previous price controls (62.5% at PR14). Consequently, the company is relatively exposed to any divergence between its borrowing costs and those allowed by the regulator, particularly given that its effective average interest rates of 2.6% and 5.7% for index-linked and nominal fixed-rate debt, respectively, in the year to March 2017, remain well above the sector average of 2.0% and 4.9%. While Southern Water will benefit from currently low rates as it refinances, the duration of its debt, with average debt maturities around 14 years, means that the company's debt may not refresh as quickly as assumed by Ofwat when setting allowances for the cost of debt. In addition to its outright borrowings, Southern Water holds a portfolio of inflation-linked derivatives with a notional amount of approximately GBP1.3 billion, which had a negative mark-to- market (MTM) value of around GBP1.3 billion on a credit value adjusted basis, equivalent to approximately 28% of the RCV, as at March 2017. Moody's views these derivatives as credit negative, taking into account (1) that while the cash flows received under the swaps boost interest cover as calculated for the purposes of financial covenant metrics, they do not result in long-term cash flow benefit and may serve to undermine the value of the creditor protections; (2) the need to refinance accreted inflation with index-linked instruments in order to preserve its funding mix; and (3) the large mark-to-market position may reduce shareholder willingness to support credit quality by reducing dividends and/or injecting equity. RATIONALE FOR RATING AFFIRMATION Affirmation of the ratings reflects that while Southern Water's credit quality will be pressured by the proposed cut in allowed returns, the PR19 process is in the early stages and the reduction may be less than currently proposed and/or mitigated by other aspects of Ofwat's final determination. Moody's also takes into account that (1) management have some time to adapt financial policies and bolster financial flexibility ahead of AMP7; and (2) shareholders have demonstrated a willingness to support Southern Water's credit quality, in particular taking no dividends during the period 2010-15, albeit the rating agency notes that low yields and high mark-to-market loss may have eroded incentives to provide additional equity. Moody's notes the regulator's duties, in particular to ensure that efficient companies can finance their functions but also Ofwat's focus on a notional capital structure, with notional gearing proposed at 60% of the RCV for PR19, to set the allowed return. Affirmation of the rating also reflects Southern Water's sound business risk profile as monopoly provider of essential water and sewerage services and the stable cash flows generated under a transparent and well-established regulatory regime. WHAT COULD CHANGE THE RATING UP/DOWN The outlook could be stabilised if Moody's concludes that (1) financial metrics for the period from 2020 are likely to meet the rating agency's guidance for the current rating, in particular an adjusted interest coverage ratio of at least 1.2x and leverage not exceeding the low-80s in percentage terms (net debt/RCV); and (2) the risk exposure of Southern Water's capital structure remains manageable and does not impair the company's financial flexibility in comparison with industry peers, taking into account any additional measures management or shareholders may be willing to implement to mitigate the company's exposure and timing of the same. Any stabilisation of the rating will also consider the continuing incentives for shareholders to provide additional support given the impact of the low yield environment on the debt fair value and derivative valuations. Conversely, the rating could be downgraded if, taking into account such measures as management and shareholders may implement, it appears that Southern Water will likely have insufficient financial flexibility to accommodate the expected reduction in allowed returns and more challenging efficiency targets at PR19. Furthermore, downward pressure could result from (1) unexpected, severe deterioration in operating performance that results in the company remaining persistently in breach of its distribution lock-up triggers; (2) a material change in the regulatory framework for the UK water sector leading to a significant increase in Southern Water's business risk; and/or (3) unforeseen funding difficulties. The principal methodology used in these ratings was Regulated Water Utilities published in December 2015. LIST OF AFFECTED RATINGS Confirmed: Issuer: Southern Water Services (Finance) Limited -- Senior Secured Collateralized Note , Mar 31, 2021,; Confirmed -- Senior Secured Collateralized Note, Mar 31, 2041,; Confirmed -- Senior Secured Collateralized Note, Mar 31, 2029,; Confirmed -- Senior Secured Collateralized Note, Mar 31, 2034,; Confirmed -- Senior Secured Collateralized Note, Mar 31, 2034,; Confirmed -- Senior Secured Collateralized Note, Mar 31, 2052,; Confirmed Affirmations: Issuer: Southern Water Services (Finance) Limited -- Backed Subordinate Regular Bond/Debenture, Affirmed Ba1 -- Senior Secured, Affirmed Baa1 -- Underlying Senior Secured, Affirmed Baa1 -- Backed Senior Secured, Affirmed A2 Issuer: Southern Water Services Limited -- LT Corporate Family Rating, Affirmed Baa2 Outlook Actions: Issuer: Southern Water Services (Finance) Limited -- Outlook, Remains Negative Issuer: Southern Water Services Limited -- Outlook, Remains Negative Southern Water is the seventh largest of the ten water and sewerage companies in England and Wales, with a Regulatory Capital Value (RCV) of GBP4.6 billion as at March 2017. It provides water and sewerage services to a population of approximately 2.5 and 4.6 million, respectively, in the south- east of England, including the counties of Kent, East Sussex, West Sussex, Hampshire and the Isle of Wight. Since October 2007, Southern Water's ultimate parent has been Greensands Holdings Limited, which is in turn owned by a consortium of infrastructure investment funds, pension funds and private equity. The largest single shareholders are UBS Asset Management (21.92%), JPMorgan Asset Management (39.83%) and Hermes Infrastructure (21%). The principal methodology used in these ratings was Regulated Water Utilities published in December 2015. TOYS R US: Pension Fund Backs Company Voluntary Arrangement ----------------------------------------------------------- Ashley Armstrong at The Telegraph reports that Toys R Us has been handed a last-minute lifeline after making concessions to the UK's pensions lifeboat in order to secure its approval for a restructuring plan. The future of Toys R Us and its 32,000 workers had been hanging by a thread while negotiations between the Pension Protection Fund and Toys R Us's advisers continued on the sidelines of a creditors' meeting, causing the vote to be delayed twice, The Telegraph relates. According to The Telegraph, the PPF, Toys R Us's largest single creditor, had said that it would vote against the retailer's plan after being concerned that it would further weaken the pension scheme. However, it changed its mind at the eleventh hour after striking an agreement with Toys R Us and voted in favour of the company voluntary arrangement (CVA), The Telegraph discloses. In the end, 98% of creditors, which includes landlords and suppliers, approved the CVA, The Telegraph relays. Under the terms of the CVA, Toys R Us plans to shut at least 26 stores, which still puts around 800 jobs at risk, The Telegraph states. The CVA will mean that all Toys R Us shops will continue trading throughout Christmas until Spring 2018, The Telegraph notes. About Toys "R" Us Toys "R" Us, Inc., is an American toy and juvenile-products retailer founded in 1948 and headquartered in Wayne, New Jersey, in the New York City metropolitan area. Merchandise is sold in 880 Toys "R" Us and Babies "R" Us stores in the United States, Puerto Rico and Guam, and in more than 780 international stores and more than 245 licensed stores in 37 countries and jurisdictions. Merchandise is also sold at e-commerce sites including Toysrus.com and Babiesrus.com. On July 21, 2005, a consortium of Bain Capital Partners LLC, Kohlberg Kravis Roberts and Vornado Realty Trust invested $1.3 billion to complete a $6.6 billion leveraged buyout of the company. Toys "R" Us is now a privately owned entity but still files with the Securities and Exchange Commission as required by its debt agreements. The Company's consolidated balance sheet showed $6.572 billion in assets, $7.891 billion in liabilities, and a stockholders' deficit of $1.319 billion as of April 29, 2017. Toys "R" Us, Inc., and certain of its U.S. subsidiaries and its Canadian subsidiary voluntarily filed for relief under Chapter 11 of the Bankruptcy Code (Bankr. E.D. Va. Lead Case No. Case No. 17-34665) on Sept. 19, 2017. In addition, the Company's Canadian subsidiary voluntarily commenced parallel proceedings under the Companies' Creditors Arrangement Act ("CCAA") in Canada in the Ontario Superior Court of Justice. The Company's operations outside of the U.S. and Canada, including its 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and CCAA proceedings. Grant Thornton is the monitor appointed in the CCAA case. Judge Keith L. Phillips presides over the Chapter 11 cases. In the Chapter 11 cases, Kirkland & Ellis LLP and Kirkland & Ellis International LLP serve as the Debtors' legal counsel. Kutak Rock LLP serves as co-counsel. Toys "R" Us employed Alvarez & Marsal North America, LLC as its restructuring advisor; and Lazard Freres & Co. LLC as its investment banker. It hired Prime Clerk LLC as claims and noticing agent. A&G Realty Partners, LLC, serves as its real estate advisor. On Sept. 26, 2017, the U.S. Trustee for Region 4 appointed an official committee of unsecured creditors. The Committee retained Kramer Levin Naftalis & Frankel LLP as its legal counsel; Wolcott Rivers, P.C. as local counsel; FTI Consulting, Inc. as financial advisor; and Moelis & Company LLC as investment banker. VOYAGE BIDCO: Fitch Affirms & Withdraws B- Long-Term IDR -------------------------------------------------------- Fitch Ratings has affirmed Voyage Bidco Limited's (Voyage) Long- Term Issuer Default Rating (IDR) at 'B-' with Stable Outlook. Fitch has also affirmed Voyage Care BondCo plc's senior secured notes at 'BB-'/'RR1' and second lien notes at 'B-'/'RR4'. Concurrently, Fitch has also withdrawn Voyage's IDR and instrument ratings for commercial reasons. Fitch will no longer provide ratings or analytical coverage of Voyage. The ratings reflect growing pressure on margins and free cash flow (FCF) generation due to rising staff costs, high dependence on local-authority funding and Voyage's strategy to expand substantially the high-growth yet lower-margin community-based care services business. The ratings are also restricted by high funds from operations (FFO) adjusted gross leverage, which is expected to peak at 7.8x by financial year ending 31 March 2018 following its refinancing in April 2017. Fitch acknowledge Voyage's position as the UK's largest independent provider of support to people with learning disabilities and focus on high acuity care, which provides some resilience to government spending pressures. However, Fitch views Voyage's high financial risks as being more consistent with a 'B- ' profile relative to sector peers. KEY RATING DRIVERS Pressure on Credit Metrics: Fitch expects FFO adjusted gross leverage to peak at 7.8x in FY18 with only gradual and modest deleveraging thereafter based on the agency's conservative projections. The expected high leverage and weak FCF generation, together with FFO fixed charge cover of just above 1.5x, underpin the IDR at 'B-'. However, Fitch expect slightly better financial flexibility by way of lower interest costs leading to improved FCF generation and FFO fixed charge cover trending towards 2.0x over the next two to three years. Diversified Services Support Credit Profile: Voyage's business risk profile is supported by the company's diversified service offering covering the full spectrum of social care needs for people with learning disabilities in either a registered care home, a supported living setting or as outreach services. Voyage's service line diversification provides resilience to the tightening in registered care homes eligibility criteria set by local authorities as they move towards less costly options such as supported living and domiciliary care. Meaningful Execution Risk: Voyage's strategy is to expand substantially the company's community-based care services business, which bears some execution risks in Fitch view. However, Fitch sees Voyage's ability to offer the full service spectrum to local authorities as a key competitive advantage compared with smaller, less diversified players. Dependence on Local-Authority Funding: Voyage's ratings are constrained by high dependence on local government, which accounts for over 95% of the company's funding. Due to the current reduction in UK local-authority budgets, Fitch expects the average level of fees paid by them to remain under pressure. The implementation of the council tax precept (an option to increase council tax with revenue ring-fenced for social care) by the majority of local authorities has resulted in an increase in average fees, although not sufficient to fully compensate the existing under-funding of care, which has been exacerbated by the introduction of the National Living Wage. As a result, Fitch expects Voyage's EBITDA margin to remain under pressure. Volatile Outlook for UK Social Care: The UK social care market will remain difficult, entering a period of short-term volatility, characterised by continued growth in demand, further expected wage inflation and a potentially widening labour shortage as a result of the focus on limiting immigration. Fitch is sceptical about the current political will and ability to address the long-term funding issues given the current political priorities relating to Brexit and the uncertainty it presents to the long-term planning of public finances. In Fitch's opinion, this will remove some of the visibility for the sector and increase short-term volatility, which could delay any further consolidation in the short term. Significant Asset Base: Voyage's instrument ratings and recovery prospects are underpinned by the company's ownership of 90% of its registered properties. Valued at GBP360 million in November 2016 (freehold and long leasehold assets), Voyage's strong portfolio of freehold assets properties gives the company greater operating flexibility due to lower rental costs. This underpins Fitch superior recovery expectations for the secured notes, which are reflected in the instrument rating being three notches above the IDR. Fitch bases its recovery analysis on the company's underlying asset values, by applying a liquidation approach. DERIVATION SUMMARY Fitch has observed significantly pressures on ratings in the UK leveraged care home sector that has been affected by a reduction of local authorities' fee rates in real terms, with pressures on profitability exacerbated by increasing costs as a result of the increase in the National Living Wage from April 2016. This has led to impaired profitability across the sector as cost inflation could not be passed on to payers, increasingly threatening the underlying business model of operators and making leveraged capital structures increasingly unsustainable. However, immediate funding pressures have eased as local authorities are now able to raise the social care council tax precept, which -- as it is applied cumulatively over years -- has alleviated imminent funding shortages. During late 2016 the sector saw for the first time funding increases, predominantly in areas of most critical needs such as elderly services. KEY ASSUMPTIONS Fitch's Key Assumptions within Fitch Rating Case for the Issuer - Increase in sales by 4% in FY18 and around 12% thereafter, mainly driven by a significant growth of community-based care services including the Focus Healthcare acquisition, together with an increase in local-authority average weekly fee funding the registered care division. - EBITDA margins declining to 14.5% in FY21 from 18.2% in FY17, mainly due to a shift in Voyage's business mix with expansion of the low-margin Community Base Care Services division, which is expected to represent 45% of Voyage Care revenue in 2020. In addition, the increasing payroll costs as a result of the increasing National Living Wage is expected to continue putting pressure on profitability as it is not adequately compensated by the local authorities' increase in fees, especially for the Community Base Care Services division. - Capex around 5% of sales in FY18, around 4% of sales thereafter. Capex is mainly for maintenance, which is compulsory for the reputation and the occupancy rate of the business. - FCF generation positive, albeit thin, at 2-4% of sales over the next four years. - No dividends paid. RATING SENSITIVITIES Rating sensitivities are no longer relevant given rating withdrawal. LIQUIDITY Satisfactory Liquidity: Fitch views Voyage's liquidity as satisfactory with cash-on-balance sheet of GBP16.4 million at end-September 2017, and an undrawn revolving credit facility of GBP28 million, in the absence of short-term financial liability. YORKSHIRE WATER: Moody's Affirms (P)Ba1 Sub. MTN Program Rating --------------------------------------------------------------- Moody's Investors Service has affirmed the Baa2 corporate family rating of the fifth-largest UK water company, Yorkshire Water Services Limited (Yorkshire Water). The rating agency also affirmed the Baa1 senior secured and Ba1 subordinated debt ratings of the Class A and Class B notes issued by Yorkshire Water Services Bradford Finance Ltd, the Baa1 senior secured debt ratings of Yorkshire Water Services Finance Limited, and the Baa1 senior secured debt ratings of Yorkshire Water Services Odsal Finance Limited (all issuance guaranteed by Yorkshire Water) were also affirmed. At the same time, Moody's changed the outlook for the ratings to negative from stable. This action follows publication, on 13th December, by the Water Services Regulation Authority (Ofwat), the economic regulator for water companies in England and Wales, of its final methodology for the 2019 price review (PR19), including guidance on allowed cost of capital for the period from April 2020 to March 2025 (AMP7). RATINGS RATIONALE RATIONALE FOR NEGATIVE OUTLOOK The negative outlook reflects Yorkshire Water's exposure to the likely cut in allowed returns from 2020, as guided by the regulator in its final PR19 methodology. Specifically, it reflects the risk that the company may not be able to maintain a financial profile in line with Moody's existing guidance for its current rating levels, which may tighten as the PR19 process evolves. It also takes into account (1) financial leverage of currently around 77% of the RCV, albeit declining; and (2) the cost and maturity profile of its debt in the context of likely financing and refinancing requirements over the 2020-25 period. Ofwat published its final methodology for PR19, setting out requirements and expectations for companies' business plans and the regulator's assessment of these. Compared with the regulator's July draft consultation, the final methodology includes small changes to the total expenditure incentive regime as well as outcome delivery targets, but overall efficiency requirements will likely remain challenging. The regulator is proposing to reward companies whose business plans it assesses as exceptional or enhanced, but the monetary adjustment will provide limited relief against the low headline return. As part of its methodology, Ofwat provided guidance on the allowed cost of capital for AMP7. Given the continuing low yield environment, a cut in allowed returns is to be expected and the regulator has guided to a reduction to 2.3% (real, assuming Retail Prices Index, or RPI, inflation) from currently 3.6% for the regulated water and wastewater wholesale activities. The regulator's proposal to link revenue and asset inflation to a measure of the Consumer Prices Index, adjusted for housing costs (CPIH) will increase the overall allowed return, albeit at the expense of future growth in the regulatory capital value (RCV). Nevertheless, the allowed cost of capital will still fall by around 0.8%, assuming a 100bps wedge between RPI and CPIH. Yorkshire Water's net debt (Moody's adjusted) was around 77% of its RCV as at 31 March 2017. This level of gearing is above both the sector average of around 70% and the gearing assumed by the economic regulator at previous price controls (62.5% at PR14). While management is working towards reducing gearing further, the company remains exposed to any divergence between its borrowing costs and those allowed by the regulator. Its effective average interest rates of 2.5% and 5.7% for index-linked and nominal fixed-rate debt, respectively, in the year to March 2017, remained well above the sector average of 2.0% and 4.9%, albeit ongoing derivative restructuring will reduce the cost of index- linked debt towards 1.7%. While Yorkshire Water will also benefit from currently low rates as it refinances, the duration of its debt, with average debt maturities around 15 years, means that the company's debt may not refresh as quickly as assumed by Ofwat when setting allowances for the cost of debt. In addition to its outright borrowings, Yorkshire Water holds a portfolio of inflation-linked derivatives with a notional amount of approximately GBP1.3 billion, which had a negative mark-to- market (MTM) value of just under GBP2.6 billion, equivalent to approximately 40% of the RCV, as at March 2017 (a similar value compared with the previous year). Yorkshire Water's exposure to a persistently low interest rate environment has reduced in light of the measures that management and shareholders have been taking during 2017 and will continue to work on through the current regulatory period. The de-gearing through repayment of an intercompany loan by an intermediate holding company in the wider group as well as ongoing reduction in distributions to external shareholders will provide additional financial flexibility within the capital structure. This, coupled with a re-couponing exercise that will see cash interest payments reduce as the company enters the next price review in 2019, has provided some headroom, but the company will have to continue to work on additional measures and/or outperformance opportunities to accommodate the material reduction in allowed returns for the UK water sector from 2020. RATIONALE FOR RATING AFFIRMATION Affirmation of the ratings reflects that while Yorkshire Water's credit quality will be pressured by the proposed cut in allowed returns, the PR19 process is in the early stages and the reduction may be less than currently proposed and/or mitigated by other aspects of Ofwat's final determination. Moody's also takes into account that (1) management have some more time to adapt financial policies and bolster financial flexibility ahead of AMP7, and indeed have publicly committed to a path that would reduce gearing and interest rate exposure; and (2) shareholders have demonstrated a willingness to support credit quality by reducing dividend requirements, albeit low yields and high mark- to-market loss may have eroded incentives to provide additional equity. Moody's also notes the regulator's duties, in particular to ensure that efficient companies can finance their functions but also Ofwat's focus on a notional capital structure, with notional gearing proposed at 60% of the RCV for PR19, to set the allowed return. Affirmation of the rating also reflects Yorkshire Water's sound business risk profile as monopoly provider of essential water and sewerage services and the stable cash flows generated under a transparent and well-established regulatory regime. WHAT COULD CHANGE THE RATING UP/DOWN The outlook could be stabilised if Moody's concludes that (1) financial metrics for the period from 2020 are likely to meet the rating agency's guidance for the current rating, in particular an adjusted interest coverage ratio of at least 1.2x and leverage not exceeding the low-80s in percentage terms (net debt/RCV); and (2) the risk exposure of Yorkshire Water's capital structure remains manageable and does not impair the company's financial flexibility in comparison with industry peers, taking into account any additional measures management or shareholders may be willing to implement to mitigate the company's exposure and timing of the same. Any stabilisation of the rating will also consider the continuing incentives for shareholders to provide additional support given the impact of the low yield environment on the debt fair value and derivative valuations. Conversely, the rating could be downgraded if, taking into account such measures as management and shareholders may implement, it appears that Yorkshire Water will likely have insufficient financial flexibility to accommodate the expected reduction in allowed returns and more challenging efficiency targets at PR19. Furthermore, downward pressure could result from (1) unexpected, severe deterioration in operating performance that results in the company remaining persistently in breach of its distribution lock-up triggers; (2) a material change in the regulatory framework for the UK water sector leading to a significant increase in Yorkshire Water's business risk; and/or (3) unforeseen funding difficulties. The principal methodology used in these ratings was Regulated Water Utilities published in December 2015. LIST OF AFFECTED RATINGS Affirmations: Issuer: Yorkshire Water Services Bradford Finance Ltd -- Backed Subordinate MTN Program, Affirmed (P)Ba1 -- Backed Subordinate Regular Bond/Debenture, Affirmed (P)Ba1 -- Backed Subordinate Regular Bond/Debenture, Affirmed Ba1 -- Backed Senior Secured MTN Program, Affirmed (P)Baa1 -- Backed Senior Secured Regular Bond/Debenture, Affirmed Baa1 Issuer: Yorkshire Water Services Finance Limited -- Backed Senior Secured Regular Bond/Debenture, Affirmed A2 -- Backed Senior Secured Regular Bond/Debenture, Affirmed Baa1 -- Senior Secured - Underlying , Affirmed Baa1 Issuer: Yorkshire Water Services Odsal Finance Ltd -- Backed Senior Secured MTN Program, Affirmed (P)Baa1 -- Backed Senior Secured Regular Bond/Debenture , Affirmed Baa1 Issuer: Yorkshire Water Services Limited -- LT Corporate Family Rating, Affirmed Baa2 Outlook Actions: Issuer: Yorkshire Water Services Bradford Finance Ltd -- Outlook, Changed To Negative From Stable Issuer: Yorkshire Water Services Finance Limited -- Outlook, Changed To Negative From Stable Issuer: Yorkshire Water Services Odsal Finance Ltd -- Outlook, Changed To Negative From Stable Issuer: Yorkshire Water Services Limited -- Outlook, Changed To Negative From Stable Yorkshire Water is the fifth largest of the ten water and sewerage companies in England and Wales by both RCV and number of customers served. Yorkshire Water provides drinking water to around 5 million people and around 130,000 local businesses over an area of approximately 14,700 square kilometres encompassing the former county of Yorkshire and part of North Derbyshire in Northern England. Its parent company, Kelda Group Limited, is ultimately owned by GIC Special Investments Pte Limited, the private equity investment arm of the Government of Singapore, Corsair Infrastructure Management, as a custodian for a number of infrastructure investment funds, Deutsche Asset Management's infrastructure investment arm and SAS Trustee Corporation, the trustee of certain New South Wales public sector superannuation schemes. =============== X X X X X X X X =============== * BOOK REVIEW: The Money Wars ----------------------------- Author: Roy C. Smith Publisher: Beard Books Softcover: 370 pages List Price: $34.95 Review by David Henderson Get your own personal today at http://www.amazon.com/exec/obidos/ASIN/1893122697/internetbankrup t Business is war by civilized means. It won't get you a tailhook landing on an n aircraft carrier docked in San Diego, but the spoils of war can be glorious to behold. Most executives do not approach business this way. They are content to nudge along their behemoths, cash their options, and pillage their workers. This author calls those managers "inertia ridden." He quotes Carl Icahn describing their companies as run by "gross and widespread incompetent management." In cycles though, the U.S. economy generates a few business warriors with the drive, or hubris, to treat the market as a battlefield. The 1980s saw the last great spectacle of business titans clashing. (The '90s, by contrast, was an era of the investment banks waging war on the gullible.) The Money Wars is the story of the last great buyout boom. Between 1982 and 1988, more than ten thousand transactions were completed within the U.S. alone, aggregating more than $1 trillion of capitalization. Roy Smith has written a breezy read, traversing the reader through an important piece of U.S. history, not just business history. Two thirds of the way through the book, after covering early twentieth century business history, the growth of financial engineering after WWII, the conglomerate era, the RJR-Nabisco story, and the financial machinations of KKR, we finally meet the star of the show, Michael Milken. The picture painted by the author leads the reader to observe that, every now and then, an individual comes along at the right time and place in history who knows exactly where he or she is in that history, and leaves a world-historical footprint as a result. Whatever one may think of Milken's ethics or his priorities, the reader will conclude that he is the greatest financial genius this country has produced since J.P. Morgan. No high-flying financial era has ever happened in this country without the frothy market attracting common criminals, or in some cases making criminals out of weak, but previously honest men (and it always seems to be men). Something there is about testosterone and money. With so many deals being done, insider trading was inevitable. Was Michael Milken guilty of insider trading? Probably, but in all likelihood, everybody who attended his lavish parties, called "Predators' Balls," shared the same information. Why did the Justice Department go after Milken and his firm, Drexel Burnham Lambert with such raw enthusiasm? That history has not yet been written, but Drexel had created a lot of envy and enemies on the Street. When a better history of the period is written, it will be a study in the confluence of forces that made Michael Milken's genius possible: the sclerotic management of irrational conglomerates, a ready market for the junk bonds Milken was selling, and a few malcontent capitalist like Carl Icahn and Ted Turner, who were ready and able to wage their own financial warfare. This book is a must read for any student of business who did not live through any of these fascination financial eras. Roy C. Smith is a professor of entrepreneurship, finance and international business at NYU, and teaches on the faculty there of the Stern School of Business. Prior to 1987, he was a partner at Goldman Sachs. He received a B.S. from the Naval Academy in 1960 and an M.B.A. from Harvard in 1966. ********* Monday's edition of the TCR delivers a list of indicative prices for bond issues that reportedly trade well below par. Prices are obtained by TCR editors from a variety of outside sources during the prior week we think are reliable. Those sources may not, however, be complete or accurate. The Monday Bond Pricing table is compiled on the Friday prior to publication. Prices reported are not intended to reflect actual trades. Prices for actual trades are probably different. Our objective is to share information, not make markets in publicly traded securities. Nothing in the TCR constitutes an offer or solicitation to buy or sell any security of any kind. It is likely that some entity affiliated with a TCR editor holds some position in the issuers' public debt and equity securities about which we report. Each Tuesday edition of the TCR contains a list of companies with insolvent balance sheets whose shares trade higher than US$3 per share in public markets. At first glance, this list may look like the definitive compilation of stocks that are ideal to sell short. Don't be fooled. Assets, for example, reported at historical cost net of depreciation may understate the true value of a firm's assets. A company may establish reserves on its balance sheet for liabilities that may never materialize. The prices at which equity securities trade in public market are determined by more than a balance sheet solvency test. Each Friday's edition of the TCR includes a review about a book of interest to troubled company professionals. All titles are available at your local bookstore or through Amazon.com. Go to http://www.bankrupt.com/booksto order any title today. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. 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 publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000 or Joseph Cardillo at 856-381-8268. * * * End of Transmission * * *