/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/200109.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 Thursday, January 9, 2020, Vol. 21, No. 7 Headlines C Z E C H R E P U B L I C [*] CZECH REPUBLIC: Number of Company Bankruptcies Up in 2019 I T A L Y OFFICINE MACCAFERRI: Moody's Lowers CFR to Ca, Outlook Negative N E T H E R L A N D S GLOBAL UNIVERSITY: Fitch Rates Planned EUR980MM Sr Sec Debt B+(EXP) T U R K E Y YAPI VE KREDI: S&P Withdraws 'B+/B' Issuer Credit Ratings U N I T E D K I N G D O M NEKTAN GIBRALTAR: Administrators Sell UK B2C Biz to Grace Media PREMIER OIL: Creditor Opposes Proposed US$2.9-Bil. Refinancing SIRIUS MINERALS: In Talks w/ Anglo American for Possible Cash Offer SOUTH WESTERN: May Face Nationalization After Going Concern Doubt SURF INTERMEDIATE I: Fitch Assigns 'B-' LT IDR, Outlook Stable SURF INTERMEDIATE II: Moody's Assigns B3 CFR, Outlook Stable VORDERE PLC: Focuses on Lifting Share Trading Suspension [*] Neil Devaney Joins Weil, Gotshal's London Office as Partner - - - - - =========================== C Z E C H R E P U B L I C =========================== [*] CZECH REPUBLIC: Number of Company Bankruptcies Up in 2019 ------------------------------------------------------------- Brian Kenety at Radio Prague, citing the Czech Credit Bureau (CRIF), reports that the number of bankruptcies of companies and entrepreneurs increased in 2019 after a six-year decline. The number of businesses declaring bankruptcy rose by 22 over the previous year to 680, Radio Prague discloses. According to Radio Prague, the data show the respective rise for entrepreneurs was starker, increasing by 2,440 to 7,940. CRIF analyst Vera Kamenickova said that the number of bankruptcies of companies in 2019 was still quite low compared to the period of 2008 through 2017, Radio Prague relates. ========= I T A L Y ========= OFFICINE MACCAFERRI: Moody's Lowers CFR to Ca, Outlook Negative --------------------------------------------------------------- Moody's Investors Service downgraded the probability of default rating of Officine Maccaferri S.p.A. to Ca-PD/LD from Caa3-PD and its corporate family rating to Ca from Caa3 after the company has missed the payment of its interest following the expiration of the grace period. Concurrently, Moody's has downgraded to Ca from Caa3 the rating of the EUR190 million senior unsecured notes due June 2021 issued by Maccaferri. The outlook remains negative. "Today's rating action reflects the fact that Maccaferri has not cured the missed interest payment on its notes within the 30-day grace period, which constitutes a default under Moody's definition, and paves the way for a debt restructuring on distressed terms," says Igor Kartavov, Moody's lead analyst for Maccaferri. "Failure to pay interest on the notes stems from the company's very weak liquidity due to its constrained access to external financing and deterioration in payment terms on the back of the debt restructuring process pursued by Maccaferri's parent company," adds Mr. Kartavov. RATINGS RATIONALE The downgrade of Maccaferri's PDR to Ca-PD/LD reflects the company's failure to make the semiannual interest payment of approximately EUR5.5 million, originally payable on December 1, 2019, on its 5.75% EUR190 million senior unsecured notes within the 30-day grace period, which expired on December 31, 2019. On the same date, Maccaferri announced that it aims at entering into a forbearance agreement with the majority of the noteholders. Moody's has also appended Maccaferri's PDR with an "/LD" (limited default) designation, indicating that the company is in default on a limited set of its obligations. This reflects the fact that a missed interest payment extending beyond the applicable grace period is considered a default under Moody's definition. The downgrade of Maccaferri's CFR to Ca reflects a high probability of debt restructuring, which, in Moody's view, will likely entail a significant loss for creditors. Based on information currently available, the CFR of Ca incorporates the rating agency's expectation of a family recovery rate of around 50%. However, there is significant uncertainty regarding the actual recovery rate in a restructuring scenario. Failure to make an interest payment on the notes results from a protracted deterioration in Maccaferri's liquidity over the second half of 2019, including the company's inability to extend some of the maturing uncommitted short-term credit lines, reduced access to factoring and reverse factoring instruments and less favorable payment terms with its suppliers, all of which led to a significant depletion of its cash cushion and, ultimately, a failure to disburse interest while meeting operational liquidity requirements. This ongoing liquidity crisis has been primarily driven by (1) the debt restructuring process pursued by Maccaferri's ultimate parent -- SECI S.p.A. -- and some of SECI's subsidiaries (excluding Officine Maccaferri), which has resulted in growing risk aversion by the company's creditors and counterparties; (2) a significant weakening in the company's operating performance in the first nine months of 2019, with a 32% year-on-year drop in reported EBITDA; and (3) a number of one-off cash outflows in Q4 2018, which led to Maccaferri increasingly relying on short-term uncommitted bank financing. ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS The rating action incorporates material governance considerations affecting Maccaferri's credit profile, including (1) the fact that Maccaferri's parent company is undergoing a debt restructuring process, which has translated into a weakening of the company's liquidity due to growing risk aversion by its creditors, and ultimately led to the missed interest payment; (2) high management turnover, including Chief Executive Officer changes in May and December 2019; and (3) the company's aggressive liquidity management, characterised by its excessive reliance on short-term funding, which has ultimately resulted in its inability to make an interest payment and in an elevated risk of debt restructuring. RATIONALE FOR NEGATIVE OUTLOOK The negative outlook reflects Moody's view that Maccaferri is likely to pursue a restructuring of its debt on distressed terms which could lead to substantial losses for the noteholders. WHAT COULD CHANGE THE RATINGS UP/DOWN The ratings could be downgraded if the company defaults on its other debt obligations or pursues a formal debt restructuring, or if Moody's estimates of expected losses for the company's creditors become higher than those implied by the Ca CFR. An upgrade of Maccaferri's ratings is currently unlikely, and would be conditional upon the company completing a refinancing of its debt and restoring its liquidity position. LIST OF AFFECTED RATINGS Issuer: Officine Maccaferri S.p.A. Downgrades: Probability of Default Rating, Downgraded to Ca-PD /LD from Caa3-PD Corporate Family Rating, Downgraded to Ca from Caa3 Senior Unsecured Regular Bond/Debenture, Downgraded to Ca from Caa3 Outlook Action: Outlook, Remains Negative PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Building Materials published in May 2019. COMPANY PROFILE Officine Maccaferri S.p.A., incorporated in Bologna, Italy, is a leading designer and manufacturer of environmental engineering products and solutions, with a global footprint. It reports under four divisions: the Double Twist Mesh products, the Geosynthetics polymer materials, the Rockfall and snow protections nets and the Other Products division, which includes a range of tunneling and wall reinforcing products, as well as engineering solution services and wire products. For the twelve months ended September 30, 2019, the company reported revenue of EUR513 million and EBITDA of EUR37 million. ===================== N E T H E R L A N D S ===================== GLOBAL UNIVERSITY: Fitch Rates Planned EUR980MM Sr Sec Debt B+(EXP) ------------------------------------------------------------------- Fitch Ratings assigned Global University Systems Holding B.V's planned EUR980 million senior secured debt issue an expected rating of 'B+(EXP)' with a Recovery Rating of 'RR3'. The debt will be issued by Markermeer Finance B.V. Fitch has also affirmed GUSH's Long-Term Issuer Default Rating at 'B' with a Stable Outlook. Markermeer Finance B.V. is the issuing vehicle for the GUSH restricted group. Markermeer's planned euro-tranche term loan B is guaranteed by GUSH and so has the same 'B+(EXP)'/RR3 senior secured rating as its guarantor. The new senior secured debt will be used to refinance Markermeer's existing multi-tranche GBP800 million (equivalent) TLB and distribute GBP100 million to shareholders. The conversion of the expected ratings into final ratings is conditional upon the completion of the transactions, and final terms and conditions of the TLB being in line with information Fitch has already received. KEY RATING DRIVERS Acquisitive Entity: The May 2019 debt-funded acquisitions in India, together with the Caribbean R3 acquisition (set to complete in February 2020), are consistent with GUSH's history of buying private higher-education entities to complement group activities including its central recruitment & retention division. Other existing group entities include the University of Law (ULaw), online specialist Arden University, University Canada West and St Patrick's International College. High FFO-based Leverage: Fitch expects GUSH to maintain funds from operations (FFO)-adjusted net leverage at around 4x (similar levels on an EBITDA basis), with post-acquisition spikes, and a FFO-based fixed-charge cover ratio greater than 3x (fiscal year to November 30, 2018: 2.3x). Fitch expects FY19's FFO-adjusted gross leverage to increase above its negative rating sensitivity of 6x but this ratio only includes part-year EBITDA contributions from recent acquisitions. Fitch projects this metric to return to 6x in FY20 on a gross (4x net of cash) basis, in line with the rating. Recurring Diverse Income Stream: GUSH benefits from a varied income stream stemming from its offering of geographically diverse, single- or multi-year courses covering different subjects that also span vocational and professional tuition. Revenue visibility enhances management of the group's cost base. GUSH continues to grow organic revenue using course material across group entities, from growth of online education (through Arden), and by targeting part-time as well as full-time offers. Improving Cash Generation: Acquisitions may cause an increase in leverage but GUSH has healthy prospective free cash flow (FCF), which provides it with the capacity to deleverage within 18 to 24 months of a given size of acquisition. Compared with its historical profile, GUSH has become more cash-generative as (i) the cost of its debt has been successively lowered; and (ii) the recruitment & retention division's front-loaded multi-year revenue flows through to FFO for the group in later years. In FY16 and FY17, these revenue flows did not happen as this division's revenue included cash flows due to be received in year two and three, whereas the cost base was expensed as incurred. However, the difference between recognised EBITDA and received cash narrowed in FY18 and FY19 as those year-two and -three receipts were collected and improved the group's FFO (FY18: GBP76 million). Private Education Offer and Demand: GUSH's cash flow stability and debt service capabilities are further supported by the non-cyclical nature of higher education enrolment. There is growing inherent demand for higher education both from within the UK and particularly from emerging countries (Africa, Asia), coupled with an attraction to study for UK qualifications in London, online, or at group entities overseas. The Indian and Caribbean/US acquisitions further diversify GUSH's geographical presence. Limited Impact from Brexit: Demand for GUSH's courses span local and international students including emerging market countries across Africa and Asia. With regard to Brexit, Fitch believes that the UK government may raise the bar for overseas visa applications. However, GUSH states that only 5% of its 2018 students were EU students at UK institutions. Similar political noise concerning oversea student visa applications in the US could affect the group's volumes, although management reports little direct effect at this stage. DERIVATION SUMMARY Compared with Fitch's credit opinions on private education providers at the lower end of the 'B' rating category, GUSH benefits from a more diversified income by geography and by type of higher education (business, vocational/professional, under- and post-graduate) as well as format (traditional campus or online learning). Its ULaw and LSBF institutions have a higher profile than some peers' portfolios. GUSH is able to plug its acquired entities into the group's high-margin centralised recruitment and retention platform, particularly since student recruitment and marketing costs are a significant cost burden for smaller education groups. Compared with Dubai-concentrated and twice as large GEMS Menasa (Cayman) Ltd (IDR: B/Stable), GUSH has comparable FFO gross leverage at around 6x. GUSH has a higher group EBITDA margin (last 12 months November 2019: 31%) due to product mix, is more geographically diverse and has a wider choice of courses and disciplines across physical and digital course platforms. GUSH is more acquisitive than the GEMS group of entities, thus Fitch expects GUSH to use its available FCF to acquire other entities to enhance its recruitment & retention division platform. Fitch expects both privately-owned groups to maintain their leverage at around 6x due to debt funding of expansion plans. KEY ASSUMPTIONS Strong revenue growth over the next four years given significant FY19 acquisitions (UPES, CAES and R3) and appetite for future acquisitions. Fitch assumes GBP50 million of capital outlay per year during FY20 to FY22; Organic revenue growth to remain strong at around 6% to 8% per year. This includes price increases, incremental revenue as courses are developed for online, existing materials used across different group entities, and capacity optimisation; Fitch's rating case keeps operating costs stable as a percentage of revenue (without including the benefits of further synergies), leading to the EBITDA margin remaining at around 32%; A 20% tax rate; Capex of around GBP30 million in FY19, increasing to GBP55 million in FY22. FCF to be used in FY20 and FY21 to acquire entities using GBP50 million cash each year at a Fitch-assumed acquisition EBITDA multiple of 8x. Acquired entities are assumed to have an EBITDA margin of 20%, resulting in incremental revenue of around GBP31million; Planned TLB refinancing completed in 1Q20. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action Maintaining a 30% EBITDA (comparable to 20% FFO) margin with positive cash flow contribution from recruitment and retention, stemming from successful integration of lower profit-margin acquisitions into the group (FY18 actual: 34%); FFO adjusted gross leverage below 4.5x (FFO net leverage below 3.5x) on a sustained basis (FY18: 5.7x); FFO fixed-charge cover above 2.5x on a sustained basis (FY18: 2.3x); Sustained positive FCF after acquisitions (FY18: negative). Developments That May, Individually or Collectively, Lead to Negative Rating Action Evidence of more aggressive debt-funded acquisition activity that leads to a FFO adjusted gross leverage above 6.0x (FFO net leverage 5.0x-5.5x) on a sustained basis; FFO fixed-charge cover below 2.0x on a sustained basis; EBITDA margin below 20% (and/or FFO margin below 10%); FCF margin falling to low single-digits ( =========== T U R K E Y =========== YAPI VE KREDI: S&P Withdraws 'B+/B' Issuer Credit Ratings --------------------------------------------------------- S&P Global Ratings withdrew its 'B+/B' long- and short-term issuer credit ratings on Turkish bank Yapi ve Kredi Bankasi A.S. (Yapi). At the same time, S&P withdrew its 'trA+/trA-1' long– and short-term Turkey national scale ratings on Yapi. The ratings were withdrawn at Yapi's request. At the time of the withdrawal, the outlook was stable. =========================== U N I T E D K I N G D O M =========================== NEKTAN GIBRALTAR: Administrators Sell UK B2C Biz to Grace Media --------------------------------------------------------------- Nektan plc on Jan. 7 provided an update following the appointment of administrators to a Group subsidiary, Nektan (Gibraltar) Limited ("NGL"). Following their appointment to NGL, the administrators have sold Nektan's UK B2C business to Grace Media Limited (the "buyer"), part of the Active Win Group, for total cash consideration of GBP200,000, payable as an initial payment of GBP50,000 with the balance payable subject to the UK B2C business meeting a series of agreed KPIs. For the year ended 30 June 2018, being its most recent audited accounts, Nektan's UK B2C business generated turnover of GBP19.4 million and was loss making. The sale proceeds will be used by the administrators in the course of running the administration of NGL. The sale of the UK B2C business has no impact on the ongoing business of the Company and, as part of the sale of the UK B2C business, the Company has entered into a B2B partnership with the buyer to facilitate continued, uninterrupted delivery of services to the UK B2C business. As is the normal business model for a B2B partnership, Nektan will receive ongoing monthly royalties from the buyer. Gary Shaw, Interim Chief Executive Officer of Nektan, said: "For the Administrators of NGL to secure the sale of the UK B2C business to a group of the calibre of Active Win Group, in order to see the continued, uninterrupted delivery of the white label operation the Group has built over the years, is very reassuring to all stakeholders involved. We look forward to working in partnership through the B2B relationship with the buyer as they take the business forward." Warren Jacobs, CEO of Active Win Group, said: "The opportunity to acquire the UK B2C business allows Active Win Group to expand further into the UK online casino market, furthering our growth in this market from being a white label operator ourselves, to working with the full complement of business partners established by Nektan in recent years. We believe that with the right focus and attention, in a changing and dynamic market, that we will be able to deliver for all our stakeholders, including all of our newly acquired white label partners. We look forward to working together with Nektan as our exclusive B2B partner as we grow the business in the coming years." Nektan plc (AIM: NKTN) is the fast growing, award-winning international gaming technology platform and services provider. PREMIER OIL: Creditor Opposes Proposed US$2.9-Bil. Refinancing -------------------------------------------------------------- Nathalie Thomas at The Financial Times reports that Premier Oil is facing a showdown with a hedge fund that is its biggest creditor over a proposed US$2.9 billion refinancing and an US$871 million acquisitions spree in the UK North Sea. The FTSE 250 group announced on Jan. 7 that it had struck a US$625 million deal with BP, plus a second agreement worth up to US$246 million with Korean-owned Dana Petroleum, to buy a number of key assets in the North Sea, which would be partly financed via a US$500 million equity raise, the FT relates. At the same time, Premier published refinancing proposals that would give it a further two and a half years of breathing space, to November 2023, on all its credit facilities and also relax some of the stringent conditions attached to its loans that were imposed after a previous refinancing in 2017, the FT discloses. The painful 2017 refinancing left Premier having to seek permission from lenders before committing to significant new investment projects but under the new arrangements, the company, as cited by the FT, said it would regain "greater operational flexibility" in return for improved economic terms for lenders. But Premier is facing a battle from Hong Kong-based Asia Research and Capital Management, which declared on Jan. 7 that it would "take all steps to oppose" the company's refinancing proposal and said it was "deeply concerned" at its intention to acquire further assets in the ageing UK North Sea, the FT notes. While Premier highlighted that the acquisitions would generate more than $1bn of free cash flow by the end of 2023, ARCM said the deals would add "hundreds of millions" of dollars to the company's already considerable decommissioning liabilities in the UK North Sea, the FT relays. ARCM, which holds more than 15% of Premier's debt and has a significant short position representing nearly 17% of its stock, said in a statement that Premier's management should instead prioritize "transactions that facilitate a significant deleveraging of the company's highly levered balance sheet", according to the FT. Followers of Premier Oil suggested ARCM's objections had "nothing to do" with the company's debt but were rather aimed at recovering losses on its short position in the equity, the FT recounts. Premier's net debt stood at US$1.99 billion at the end of 2019, down from US$2.33 billion a year earlier, the FT says. Its total debt facilities reach nearly US$2.9 billion, although not all of that is drawn down, according to the FT. Premier Oil plc is an independent UK oil company with gas and oil interests in the UK, Asia, Africa and Mexico. SIRIUS MINERALS: In Talks w/ Anglo American for Possible Cash Offer ------------------------------------------------------------------- Jon Yeomans at The Telegraph reports that Yorkshire-based fertilizer miner Sirius Minerals could be rescued from collapse thanks to a last-minute takeover bid by Anglo American. According to The Telegraph, the FTSE 100 giant said it was in "advanced discussions" with Sirius over a possible cash offer of 5.5p a share, valuing the company at around GBP386 million. Sirius, which is midway through building a giant mine in the North Yorks Moors, has suffered a slump in its share price after warning last September that multibillion dollar funding for the next stage had fallen through, leaving it with only enough cash to last another six months, The Telegraph relates. SOUTH WESTERN: May Face Nationalization After Going Concern Doubt ----------------------------------------------------------------- Tanya Powley at The Financial Times reports that the strike-ridden South Western Railway franchise is at risk of being nationalized within the next 12 months after its accounts warned of significant doubt over whether Britain's second-biggest commuter network could continue operating. According to the FT, the train operator has been in discussions with the Department for Transport for months over the terms of its contract, blaming its losses partly on delayed infrastructure upgrades, timetabling delays and industrial action. But in its latest accounts, published on Jan. 7, South Western directors warned the franchise continued to be lossmaking, and said its forecasts suggested these losses would exceed a GBP146 million cash provision its parent groups -- FirstGroup and Hong-Kong based MTR -- had set aside for future losses before the end of this year, the FT relates. While talks with the DfT continue, the train operator said two potential outcomes could either see it forced to submit proposals for a new short-term management contract, or the termination of its contract within the next 12 months with the services taken over by a state-owned operator, the FT notes. The financial warning comes at the end of 28 days of strike action on South Western -- the longest strike action taken by the RMT union on the railways, the FT relays. The franchise covers around 600,000 passenger journeys daily into and out of London, the FT states. Its accounts show that it made an operating loss of GBP137.8 million in the year to the end of March 2019, according to the FT. South Western's auditor, Deloitte, wrote in the accounts that "a material uncertainty exists that may cast significant doubt on the company's ability to continue as a going concern", the FT discloses. South Western's directors, as cited by the FT, said there was "a reasonable expectation that the discussions with the DfT will have a positive conclusion". SURF INTERMEDIATE I: Fitch Assigns 'B-' LT IDR, Outlook Stable -------------------------------------------------------------- Fitch Ratings assigned a first-time expected Long-Term Issuer Default Rating of 'B-' to Surf Intermediate I Limited, operating as Sophos Group PLC. Fitch has also assigned an expected rating of 'B'/'RR3' to the $125 million senior secured revolving credit facility and $1.43 billion first lien senior term loan. The $520 million second lien senior term loan is not being rated. Surf Holdings S.A.R.L. and Surf Holdings, LLC are co-borrowers for the RCF and term loans. The proceeds from the debt issuance, along with equity contribution from Thoma Bravo, will be used to fund the acquisition of Sophos. Thoma Bravo announced on Oct. 14, 2019 its plan to acquire Sophos for approximately $4.1 billion. The acquisition will be financed with $1.95 billion in term loans and equity contribution from Thoma Bravo. Fitch's ratings are supported by Sophos' strong position in end-point and network security solutions for the SMB and mid-market market segments. Fitch believes the private equity ownership of Sophos could limit deleveraging as its equity owners seek to optimize ROE. Fitch forecasts gross leverage to remain over 7x and FFO adjusted leverage to decline to below 7x by FY 2024 through Fitch-expected organic growth and cost efficiency improvements. The operating and leverage profiles are consistent with the 'B-' rating category. KEY RATING DRIVERS High Leverage: Fitch expects Sophos' FFO adjusted leverage to be at 11x at end-FY20 (fiscal year ending March) after the deal completes and forecasts it to rapidly decline to 8.6x in FY21 and 7.6x in FY22 driven primarily by organic EBITDA expansion and likely cost optimization efforts. Sophos should retain a strong FCF generation capacity after the transaction despite a sharp increase in debt service costs. Fitch expects the company to spend a substantial part of excess cash on debt reduction, which will also help deleveraging. The pace of deleveraging may slow down in the longer term as shareholder remuneration becomes a greater priority. Fitch believes that the large equity contribution (USD2.2 billion) to financing the transaction by Thoma Bravo, indicates the private equity sponsor's confidence in Sophos' business model. Cost Efficiency Drives Margins: Fitch expects Sophos to deliver EBITDA margin improvement in a relatively short timeframe - within the next two years. The agency's forecast envisages EBITDA margin increasing to 24% in FY23 from 17% in FY20, which will be more consistent with the industry average and with other software companies in Thoma Bravo's investment portfolio. Fitch has seen strong execution on cost savings by other Fitch-rated companies acquired by Thoma Bravo and believe that execution risks with Sophos are moderate. The agency expects that one-off costs related to optimizing operating expenses will be comparable in size with Fitch's expectation for potential cost synergies in year one. Fitch's definition of EBITDA differs from the company's definition. The agency does not include deferred revenue adjustments, which contributed around 30% to the company's defined EBITDA in FY19. However, the positive cash flow impact from deferred revenues is included in the calculation of FFO and is reflected in the FFO adjusted leverage metric. Fitch's key metrics and key financials are calculated on pre-IFRS16 basis. Sustainable Industry Growth: Fitch anticipates that the global cyber security market could grow at a CAGR of approximately 10% over the next five years. The continuing digitalization of various industries, expansion of IT applications and the protection of data and IT networks against threats support the growth of cybersecurity market. Market studies suggest that there is a growing recognition of the importance of cybersecurity by management teams at companies of all sizes. While the overall IT security addressable market has been growing, the share of legacy security software contribution developed by legacy vendors has been declining with small niche solution providers taking a larger combined share. Fragmented Industry: The cybersecurity industry remains fragmented with a large number of vendors focusing on different products, which often results in several different vendors being used by a single company. The market is going through a consolidation phase with a large number of deals happening every year. New technologies are continually developed and deployed to address an ever-evolving threat landscape, resulting in frequent new entrants. Strong Market Positions: Sophos has leading positions in its key market segments of endpoint security and network security as evidenced by high scores of market research firms and customer ratings for its products. The company is perceived as a leader in most of the rankings, which positively affects customers' decisions when choosing a cybersecurity vendor. This results in strong customer growth rates and high revenue retention rates exceeding 100% in the last four years for Sophos and demonstrating its ability to retain active subscribers and upsell additional products. Focus on SMB and mid-market: Sophos has a focus on the SMB (small to midsize businesses) and mid-market segments, which Fitch believes is a differentiating factor compared with some of its peers, many of which targeting larger companies. There is a sustainable trend on simplification, cloud solutions, integrated security solutions and managed services, which allow customers to notably reduce IT costs and effectively outsource cybersecurity issues to a third party. This trend is of particular importance for SMB and mid-market segments where companies may not be able to employ IT staff dedicated to cybersecurity. Sophos is well exposed to these trends with its innovative cloud-enabled next generation products utilizing the latest technologies such as AI and machine learning. Sophos has a highly diversified SMB and mid-market end-customer base exceeding 400,000 as of the end of first-half fiscal 2020 across a wide range of industries. The diversification across customers, countries and industry verticals effectively minimizes customer concentration risks and reduces revenue volatility through economic cycles. DERIVATION SUMMARY Sophos' ratings are supported by its strong position in the cybersecurity market for the SMB and mid-market segments. This position is expected to be maintained as an increasing share of the company's revenue comes from next-generation products and managed services. The company benefits from a large and diversified end-customer base, high end-customer retention rates and substantial share of subscription based revenues. Sophos' operating profile compares well with other Fitch-rated cybersecurity companies, in particular Barracuda Networks, Inc. (B/Stable) and Imperva Inc. (B/Stable). Compared with its peers, Sophos has higher leverage. The company's strong cash flow generation allows it to comfortably operate with elevated leverage over the next two years, with good potential deleveraging capacity from EBITDA growth. Larger cybersecurity firms like Symantec (BB+/Negative) and Citrix (BBB/Stable) benefit from larger scale and have notably lower leverage. KEY ASSUMPTIONS Fitch's Key Assumptions Within the Rating Case for the Issuer - Revenue growth in mid-single digits; - Fitch-defined EBITDA margin at 17% in FY20 improving to 24% by FY23; - Deferred revenue included above FFO contributing around USD60 million-USD70 million per year; - Capex at around USD20 million per year in FY20-FY23; - Annual working capital outflow between USD10 million and USD12 million; - Voluntary debt prepayments between USD30 million and USD100 million in FY21-FY24 allowing the company to maintain a cash balance of around USD100 million; - Around USD40 million of one-off costs related to likely cost efficiency in FY21; - No M&A, besides earn-outs and retention payments; - USD55 million of one-off tax payment in FY23. KEY RECOVERY RATING ASSUMPTIONS The recovery analysis assumes that Sophos would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated. - Fitch estimates that the post-restructuring EBITDA would be around USD140 million. Fitch would expect a hypothetical default to come from either the group's inability to extract synergies (leading to sustained high leverage and negative cash flow), or a secular decline or a drop in revenue and EBITDA following a reputational damage or intense competitive pressure. The USD140 million GC EBITDA is 22% lower than an expected Fitch-defined pro-forma FY21 EBITDA of EUR179 million (which factors in continued market growth and some likely cost reductions). - An EV multiple of 6.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The multiple is higher than the median TMT enterprise value multiple, but is in line with other similar software companies that exhibit strong FCF characteristics. The post-restructuring EBITDA accounts for the group's scale, its customer and geographical diversification as well as its exposure to secular growth in cybersecurity market. The historical bankruptcy case study exit multiples for peer companies ranged from 2.6x-10.8x, with a median of 5.3x, however software companies demonstrated higher multiples (5.5x-10.8x). In the current transaction to acquire Sophos, Thoma Bravo is valuing the company at approximately 15x Pro-forma adjusted cash EBITDA or 23x reported FY19 EBITDA. Fitch believes that the high acquisition multiple also supports its recovery multiple assumption. - 10% of administrative claims have been taken off the enterprise valuation to account for bankruptcy and associated costs and the RCF is assumed to be fully drawn, as per Fitch's criteria. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch's expectation of FFO adjusted gross leverage sustaining below 7.0x; - Mid- to high-single digit FCF margins; - FFO fixed-charge coverage sustainably above 2.0x. Developments That May, Individually or Collectively, Lead to Negative Rating Action - A weakening market position as evidenced by slowing revenue growth rates and/or increasing customer churn; - Fitch's expectation of FFO adjusted gross leverage sustaining above 9.0x; - Low single digits FCF margin delaying deleveraging; - FFO fixed-charge coverage sustainably below 1.5x. LIQUIDITY AND DEBT STRUCTURE Strong Liquidity: Following the transaction completion, Fitch expects liquidity to remain strong in the forecast period supported by positive FCF generation, prudent approach to the amount of cash on the balance and USD125 million RCF. The nearest large debt maturity is in 2027. SUMMARY OF FINANCIAL ADJUSTMENTS Fitch has not made any material financial adjustments other than those laid out in criteria. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. SURF INTERMEDIATE II: Moody's Assigns B3 CFR, Outlook Stable ------------------------------------------------------------ Moody's Investors Service assigned a first-time B3 Corporate Family Rating and a B3-PD Probability of Default Rating to Surf Intermediate II Limited, the holding company of global cybersecurity vendor Sophos. Concurrently, Moody's has assigned a B2 rating to the proposed $1,430 million equivalent senior secured First Lien Term Loan and the $125 million senior secured Revolving Credit Facility, due in 2027 and 2025 respectively, to be issued by Surf Holdings, LLC. The outlook on the ratings is stable. Proceeds from the First Lien and Second Lien Term Loans (unrated) will be used by the company to repay existing debt and partially finance Thoma Bravo's LBO acquisition of Sophos, announced in October 2019. "The B3 rating reflects Sophos' leading position in the cybersecurity market, mostly in the small and medium-sized enterprise (SME) segment, supported by its convergent offering of end-point and network security products. The rating also benefits from the strong organic growth prospects of the business together with the potential cost savings as part of the LBO transaction" says Luigi Bucci, Moody's lead analyst for Sophos. "At the same time, the rating is constrained by company's aggressive financial policy and by the very high Moody's-adjusted starting leverage which is expected to be at around 8x at year end March 2020, based on Cash EBITDA and pro-forma for the LBO transaction and potential cost synergies. Deleveraging largely relies on the delivery of synergies which entail execution risk" adds Mr. Bucci. RATINGS RATIONALE Sophos' B3 CFR reflects: (1) the company's strong position in the cybersecurity sector and its large exposure to the SME market; (2) its wide range of converged product offering in the endpoint and networks security market; (3) strong renewal and retention rates; (4) Moody's expectation of revenue and EBITDA growth, supported by next generation products & Managed Service Providers (MSP) offering together with potential cost synergies, respectively; and, (5) good liquidity supported by positive free cash flow generation and access to an ample revolving credit facility. Counterbalancing these strengths are: (1) very high Moody's-adjusted leverage (on a cash EBITDA basis) of 8x post-closing of LBO by Thoma Bravo, reducing towards 6x-7x by fiscal ended March 2022; (2) deleveraging largely relies on cost synergies which entail execution risk; (3) reliance on channel partners for the execution of its sales strategy; (4) ongoing pressures on its hardware segment; (5) exposure to the fast-growing, although very competitive, cybersecurity market; and, (6) need to invest and refocus marketing campaigns in order to enhance brand awareness across end-customers. Sophos mainly benefits from its positioning as one of the leading providers of endpoint and network security solutions. The company primarily focuses on the SME segment of the cybersecurity market where it offers a full set of security products whose key features are its protection and prevention capabilities combined with simplicity and ease of use. The majority of customers purchase products and services on a subscription basis, with 85% of fiscal 2019 billings coming from subscriptions and, therefore, indicating high revenue predictability. Moody's anticipates Sophos' revenue growth well sustained at 6%-8% through fiscal 2022 supported by its next-generation product offering, cross-selling and MSP. The rating agency notes that while fiscal 2019 billings and revenue were softer than management expectations due to strong comparatives and MSP expansion, growth over the next 24 months will be sustained, also supported by the launch of new products. EBITDA is expected to grow materially over the next 24 months mainly driven by continued organic top-line growth together with potential cost synergies coming from Thoma Bravo's LBO. Moody's believes that the company will be able to leverage on the strong track record of delivering synergies and cost savings that Thoma Bravo has achieved in its other investments. Moody's expects Free Cash Flow (FCF) to remain positive after closing despite the higher level of cash interests. Fiscal 2021 will be partially affected by likely restructuring costs with fiscal 2022 presenting a more normalized FCF level crystallizing the EBITDA growth of the business. Run-rate FCF/Debt is likely to stand at around 2%-3% in fiscal 2020 PF and improve towards 5% in fiscal 2022. The rating agency estimates Moody's-adjusted leverage post closing at around 8x on a cash EBITDA basis (accounting basis: 10x), pro forma for cost cuts expected to implemented shortly after closing and at around 10x excluding those costs reductions. Under Moody's current expectations, Sophos' adjusted leverage is expected to decline towards 6x-7x on a cash EBITDA basis by fiscal 2022 (8x-9x on an accounting basis) primarily benefitting from EBITDA growth. Moody's has considered in its analysis of Sophos the following environmental, social and governance (ESG) considerations. In terms of governance, post LBO closing Sophos will be a private company fully owned by the private equity firm Thoma Bravo. Post-closing current key management are expected to remain in place with Thoma Bravo representatives likely to join Sophos' board. Financial policy is expected to be very aggressive across the period as evidenced by the very high starting leverage which will decrease only moderately across the rating horizon. Moody's views Sophos' liquidity as good, based on the company's cash flow generation, available cash resources of $137.5 million at closing and a $125 million committed RCF, as well as an extended maturity profile. Moody's expects the company to generate positive FCF through fiscal 2022, supporting the liquidity of the business. STRUCTURAL CONSIDERATIONS The B3-PD probability of default rating reflects Moody's assumption of a 50% family recovery rate given the covenant-lite structure of the term loan. The B2 ratings on the first lien term loan and the pari passu RCF reflect their first priority claim on the transaction security, ahead of the second lien term loan. Moody's sees the security package as reasonably weak as security primarily consists of material assets of the company's US operations as well as guarantees from material subsidiaries (accounting for at least 80% of consolidated EBITDA). RATIONALE FOR STABLE OUTLOOK The stable rating outlook reflects Moody's view that Sophos will deliver growth in EBITDA over the next 24 months, driven by potential cost savings and organic revenue growth. As a result, Moody's expects that adjusted debt/EBITDA will gradually decline, from high levels, and FCF generation will improve. The stable outlook assumes no transformational acquisition and no deterioration in the liquidity profile of the company. WHAT COULD CHANGE THE RATING UP/DOWN A rating upgrade would depend on consistent and sustainable improvements in the underlying operating performance of the company. Positive pressure on Sophos' ratings could arise if: (1) Moody's-adjusted FCF/debt reached sustainably the mid-single digits in percentage terms; and, (2) Moody's-adjusted debt/EBITDA (on a cash EBITDA basis) fell to around 6.5x. Moody's would consider a rating downgrade if the company's operating performance were to weaken significantly or if the company failed to execute the potential cost synergies. The rating would come under negative pressure if: (1) FCF turned negative; or, (2) cash based Moody's-adjusted leverage was greater than 8.5x for a sustained period; or, (3) liquidity weakened. LIST OF AFFECTED RATINGS Issuer: Surf Holdings, LLC Assignments: BACKED Senior Secured Bank Credit Facility, Assigned B2 Outlook Actions: Outlook, Assigned Stable Issuer: Surf Intermediate II Limited Assignments: LT Corporate Family Rating, Assigned B3 Probability of Default Rating, Assigned B3-PD Outlook Actions: Outlook, Assigned Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Software Industry published in August 2018. COMPANY PROFILE Headquartered in Abingdon-on-Thames, Sophos is a global provider of endpoint and network security solutions. Primarily focusing on the SME market, Sophos sells the entirety of its products through its channel of more than 50,000 partners worldwide. Over LTM September 2019, Sophos generated $726.9 million and $131.2 million, in revenue and reported EBITDA, respectively. VORDERE PLC: Focuses on Lifting Share Trading Suspension -------------------------------------------------------- Alliance News reports that Vordere PLC said it is now focused on lifting the suspension of its shares from trading in London amid sharply widened loss in the first half of its current financial year. According to Alliance News, the German property investment & development company said its pretax loss widened in the six months to the end of September to GBP10.4 million from GBP1.3 million reported a year earlier, amid a net loss of GBP8.0 million from fair value adjustment on property. Meanwhile, revenue grew by 43% to GBP115,587 from GBP80,670 a year before, Alliance News discloses. In July, Vordere requested the suspension of its shares to assess accurately its financial position, Alliance News relates. That suspension continues, Alliance News notes. "There is still no certainty that the suspension of the company's shares will be lifted. Your board continues to consult with its advisers and the Financial Conduct Authority," Alliance News quotes Chair Peter Hewitt as saying. Vordere plc, formerly Acorn Growth Plc, is a United Kingdom-based property investment and development company. [*] Neil Devaney Joins Weil, Gotshal's London Office as Partner --------------------------------------------------------------- International law firm Weil, Gotshal & Manges LLP disclosed that Neil Devaney will join the Firm as a partner to play a leadership role in its market-leading Business Finance & Restructuring practice. Mr. Devaney is a restructuring partner at Akin Gump Strauss Hauer & Feld, and he has extensive cross-border finance, restructuring and insolvency expertise. His practice is focused on advising clients on complex, high-value debt restructurings. Mr. Devaney also handles bespoke financing arrangements in stressed, distressed and special situations. Weil's London Business Finance & Restructuring practice is widely recognized as a leader in its field and was ranked first for European restructurings by value and volume in Debtwire's most recent Europe Restructuring Advisory Mandates report. Weil Executive Partner Barry Wolf said: "Neil is a perfect fit for our world-renowned Business Finance & Restructuring practice and he will be a key part of our continuing success." Matt Barr said: "Gary Holtzer, Ray Schrock and I, as Co-Heads of Weil's Business Finance & Restructuring practice, are thrilled to welcome Neil to the Firm. Our entire department looks forward to working with him advising clients on the most significant global distressed situations." Weil London Managing Partner Mike Francies said: "We are delighted to have one of the leading restructuring lawyers of his generation join our market-leading restructuring practice. Neil will work closely with our highly regarded team in London and other senior Business Finance & Restructuring leaders around the world to continue to build out our platform in Europe and globally." About Weil's Business Finance & Restructuring Practice Weil -- https://www.weil.com/ -- invented much of what has become standard practice in the restructuring field. For more than 45 years, Weil has played a pivotal role in defining this field by offering creative, practical and thoughtful solutions for its clients. The Firm has served as chief debtors' counsel in six of the seven largest U.S. bankruptcy filings in history and has had key creditor roles in some of the most innovative and complex matters. Weil's global restructuring group of more than 100 dedicated lawyers coordinate across the United States, Europe and Asia to provide clients with innovative, bespoke solutions to complex cross-border restructurings. Weil's broad-based practice also includes numerous significant creditor representations, representations of purchasers and sellers of distressed assets, and substantial litigation. About Weil Founded in 1931, Weil, Gotshal & Manges LLP -- http://www.weil.com -- has been a preeminent provider of legal services for more than 80 years. With approximately 1,100 lawyers in offices on three continents, Weil has been a pioneer in establishing a geographic footprint that has allowed the Firm to partner with clients wherever they do business. The Firm's four departments, Corporate, Litigation, Business Finance & Restructuring, and Tax, Executive Compensation & Benefits, and more than two dozen practice groups are consistently recognized as leaders in their respective fields. ********* 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 2020. 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. 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