---

       T R O U B L E D   C O M P A N Y   R E P O R T E R

                          E U R O P E

          Tuesday, February 11, 2020, Vol. 21, No. 30

                           Headlines



A Z E R B A I J A N

PASHA BANK: S&P Lowers ICR to 'B+' on Weaker Capitalization


I R E L A N D

SORRENTO PARK: Moody's Affirms EUR17.5M Class E Notes at 'B2'


I T A L Y

MONTE DEI PASCHI: Misses Income Targets Under Restructuring Plan


R O M A N I A

COS TARGOVISTE: Laminorul Danube to Discuss Acquisition Terms


U N I T E D   K I N G D O M

AXMINSTER CARPETS: Seeks Buyer to Avert Second Collapse
MIZZEN MEZZCO: S&P Withdraws 'B' LongTerm Issuer Credit Rating
MONSOON ACCESSORIZE: Princes Quay Store to Close on Feb. 22
NMC HEALTH: Receives Preliminary Takeover Interest From KKR, GK
SIRIUS MINERALS: Urges Shareholders to Support GB524MM Rescue Bid

TALKTALK TELECOM: Fitch Alters Outlook on 'BB-' IDR to Stable

                           - - - - -


===================
A Z E R B A I J A N
===================

PASHA BANK: S&P Lowers ICR to 'B+' on Weaker Capitalization
-----------------------------------------------------------
S&P Global Ratings lowered its long-term issuer credit rating on
Azerbaijan-based PASHA Bank to 'B+' from 'BB-'. The outlook is
stable.

S&P also affirmed its 'B' short-term rating on the bank.

The downgrade reflects S&P's view that PASHA bank's credit profile
has deteriorated over the past year due to sustained pressure on
its capitalization and higher share of problem loans than S&P
previously anticipated. Furthermore, contrary to S&P's previous
expectations, over the past three years the bank's rapid business
growth has not led to a material improvement in customer diversity
comparable with that of major peers in the region.

In 2019, PASHA Bank's asset quality deteriorated with the share of
problem assets, which comprise Stage 3 loans under International
Financial Reporting Standards (IFRS) and repossessed collateral,
rising to 14.5% of the loan portfolio as of mid-year 2019 from
10.0% in 2018. Similarly, the bank's annualized cost of risk
increased to 2.9% from 0.5% a year ago. This development reflects
financial difficulties of the bank's two largest borrowers, which
represent about 70% of total problem assets. Nevertheless, S&P
notes a number of mitigating factors. First, the bank's asset
quality is now close to that of the rest of the system. Second,
cash collateral covers about 40% of total problem loans. Finally,
besides the two problem borrowers, the rest of the portfolio
demonstrates good performance with past due loans (NPLs) at around
5.0% of the portfolio.

S&P said, "We expect that the bank's capital position at the
consolidated level (including subsidiaries in Turkey and Georgia),
as reflected in our risk-adjusted capital (RAC) ratio, will remain
under pressure over the next two years. This is due to the combined
effect of high business growth of 15%-20%, high dividend payments,
a lack of Tier 1 capital support from the shareholder, and lower
profitability on the back of high provisioning needs. We estimate
that the bank's consolidated RAC ratio was close to 5.5% at
year-end 2019, down from 6.6%, and we forecast it will deteriorate
to 4.7%-4.9% in the next 12-18 months.

"We view PASHA Holding's capital policy in relation to the bank as
aggressive. PASHA Holding did not provide capital support or lower
dividend aspirations in 2019 and we do not incorporate into our
forecast new Tier 1 capital injections over the next two years
except subordinated debt with low capacity to absorb losses. The
latter supports regulatory metrics but is excluded from our RAC
ratio. However, the shareholder may consider capital support for
the new strategic period commencing 2021. The shareholder may also
consider deconsolidating PASHA Bank Georgia and PASHA Bank Turkey
to reduce sensitivity of the bank's capital position from negative
foreign currency movements. We will revise our base-case forecast
as soon as we get more details on planned capital injections or
changes in PASHA Bank's group structure. In our base case, we
assume the bank will continue distributing 60% of its net income as
dividends.

"In our view, Pasha Bank's strong market position in Azerbaijan's
corporate lending segment continues to support business stability.
The bank's market share in this segment increased to 18.6% as of
Oct. 1, 2019, versus 15.6% at year-end 2018, and we think it may
reach 22%-24% in 2020. However, contrary to what we expected
earlier, the growth in market share has not led to meaningful
customer diversity, which remains weaker than for leading banks in
neighboring countries. This, in turn, reflects the relatively low
size of Azerbaijan's economy and the bank's business model with its
exclusive focus on corporate business.

"We think that the bank's ample liquidity buffer and stable
depositor base support its credit profile. As of year-end 2019,
liquid assets, including cash, interbank deposits, and liquid
investment in securities, covered about 48% of customer deposits.
We also note that the bank's funding metrics look better than
peers' due to a relatively low dependence on wholesale funding and
a large buffer of liquid assets. On June 30, 2019, the stable
funding ratio was about 214%, versus the 140% peer average, while
customer loans to customer deposits stood at 45%, compared with the
120% peer average.

"The stable outlook on PASHA Bank reflects our view that its solid
corporate business franchise in Azerbaijan, high liquidity buffer,
and stable customer deposits will support its credit profile over
the next 12-18 months. Despite a somewhat more aggressive capital
policy, the stable outlook includes the ongoing benefits Pasha Bank
receives as part of the larger PASHA Holding.

"We could take a negative rating action in the next 12-18 months if
the bank's capital position continues deteriorating with our
forecast RAC ratio falling below 3.0%. We could also consider a
downgrade if pressure on the bank's asset quality results in
problem assets significantly higher than peers' in Azerbaijan and
credit losses materially exceeding our expectations.

"We could consider a positive rating action if the bank improves
its asset quality and capital sustainability, coupled with better
customer diversity. A material improvement in the bank's capital
position on the group level with our forecast RAC sustainably above
7.0% may also prompt us to take a positive rating action."




=============
I R E L A N D
=============

SORRENTO PARK: Moody's Affirms EUR17.5M Class E Notes at 'B2'
-------------------------------------------------------------
Moody's Investors Service has upgraded the ratings on the following
notes issued by Sorrento Park CLO Designated Activity Company:

EUR28.75 million Class A-2A-R Senior Secured Floating Rate Notes
due 2027, Upgraded to Aaa (sf); previously on May 16, 2017 Assigned
Aa1 (sf)

EUR30 million Class A-2B-R Senior Secured Fixed Rate Notes due
2027, Upgraded to Aaa (sf); previously on May 16, 2017 Assigned Aa1
(sf)

EUR30 million Class B-R Senior Secured Deferrable Floating Rate
Notes due 2027, Upgraded to Aa3 (sf); previously on May 16, 2017
Assigned A2 (sf)

EUR28.75 million Class C-R Senior Secured Deferrable Floating Rate
Notes due 2027, Upgraded to Baa1 (sf); previously on May 16, 2017
Assigned Baa2 (sf)

Moody's has also affirmed the ratings on the following notes:

EUR290 million(Current Outstanding amount 189.4M) Class A-1A-R
Senior Secured Floating Rate Notes due 2027, Affirmed Aaa (sf);
previously on May 16, 2017 Assigned Aaa (sf)

EUR5 million (Current Outstanding amount 3.3M) Class A-1B-R Senior
Secured Fixed Rate Notes due 2027, Affirmed Aaa (sf); previously on
May 16, 2017 Assigned Aaa (sf)

EUR30 million Class D Senior Secured Deferrable Floating Rate Notes
due 2027, Affirmed Ba2 (sf); previously on May 16, 2017 Affirmed
Ba2 (sf)

EUR17.5 million Class E Senior Secured Deferrable Floating Rate
Notes due 2027, Affirmed B2 (sf); previously on May 16, 2017
Affirmed B2 (sf)

Sorrento Park CLO Designated Activity Company, issued in October
2014 and refinanced in May 2017, is a collateralised loan
obligation (CLO) backed by a portfolio of mostly high-yield senior
secured European loans. The portfolio is managed by Blackstone/GSO
Debt Funds Management Europe Limited. The transaction's
reinvestment period ended in November 2018.

RATINGS RATIONALE

The rating actions on the notes are primarily a result of the
deleveraging of the Class A-1R notes following amortisation of the
underlying portfolio since the payment date in November 2019,
resulting in an improvement in the over-collateralisation (OC)
ratios across the capital structure.

The Class A-1 notes have paid down by approximately EUR102.3million
(35%) in the last 12 months. As a result of the deleveraging,
over-collateralisation (OC) has increased across the capital
structure. According to the trustee report dated December 2019 the
Class A Notes, Class B Notes, Class C Notes and Class D Notes OC
ratios are reported at 154.3%, 137.8%, 125.0% and 114.0% compared
to January 2019 levels of 139.0%, 128.1%, 119.2% and 111.1%
respectively.

In light of reinvestment restrictions during the amortisation
period, and therefore the limited ability to effect significant
changes to the current collateral pool, Moody's analysed the deal
assuming a higher likelihood that the collateral pool
characteristics would maintain an adequate buffer relative to
certain covenant requirements.

The key model inputs Moody's uses 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. In its base case,
Moody's analysed the underlying collateral pool as having a
performing par and principal proceeds balance of EUR387.8 million,
a weighted average default probability of 21.8% (consistent with a
WARF of 3062 and weighted average life of 4.4 years), a weighted
average recovery rate upon default of 47% for a Aaa liability
target rating, a diversity score of 45 and a weighted average
spread of 3.53%. The GBP-denominated assets are fully hedged with
swaps, which Moody's also modelled.

The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.

Moody's notes that the January 2020 trustee report was published at
the time it was completing its analysis of the December 2019 data.
Key portfolio metrics such as WARF, diversity score, weighted
average spread and life, and OC ratios exhibit little or no change
between these dates.

Methodology Underlying the Rating Action:

The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
March 2019.

Counterparty Exposure:

The rating action took into consideration the notes' exposure to
relevant counterparties, such as account bank and swap provider(s),
using the methodology "Moody's Approach to Assessing Counterparty
Risks in Structured Finance" published in November 2019. Moody's
concluded the ratings of the notes are not constrained by these
risks.

Factors that would lead to an upgrade or downgrade of the rating:

This transaction is subject to a high level of macroeconomic
uncertainty, which could negatively affect the ratings on the note,
in light of uncertainty about credit conditions in the general
economy. CLO notes' performance may also be impacted either
positively or negatively by 1) the manager's investment strategy
and behaviour and 2) divergence in the legal interpretation of CDO
documentation by different transactional parties because of
embedded ambiguities.

Additional uncertainty about performance is due to the following:

Portfolio amortisation: The main source of uncertainty in this
transaction is the pace of amortisation of the underlying
portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
beginning with the notes having the highest prepayment priority.

In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
market environment, the legal environment, specific documentation
features, the collateral manager's track record and the potential
for selection bias in the portfolio. All information available to
rating committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors, and judgments
regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.




=========
I T A L Y
=========

MONTE DEI PASCHI: Misses Income Targets Under Restructuring Plan
----------------------------------------------------------------
Sonia Sirletti at Bloomberg News reports that Banca Monte dei
Paschi di Siena SpA, the state-rescued Italian bank, missed income
targets set out in its restructuring plan, which may force the bank
to cut an additional EUR100 million (US$110 million) of costs.

The Siena-based bank said in a statement on Feb. 7 that it swung to
a fourth-quarter loss after it wrote down EUR1.2 billion (US$1.3
billion) of deferred tax assets to comply with changes in Italy's
2020 budget law, Bloomberg relates.  Net operating income, which
excludes the writedowns, totaled EUR23 million on higher revenue
and cost reductions, Bloomberg discloses.

According to Bloomberg, Chief Executive Officer Marco Morelli said
in a conference call Monte Paschi is a deep and visible
restructuring and relaunching story.

Mr. Morelli is seeking to turn around the lender by cutting costs,
selling non-performing loans and real estate and curbing risk,
Bloomberg states.  He said that as part of the strategy, the lender
is selling a package of properties and offices, and a buyer may be
chosen by the end of the week, Bloomberg notes.

The offering includes Mont Paschi assets in the centers of Milan,
Rome, Padua and Florence, Bloomberg discloses.

In December, the European Commission and Italian Ministry of
Finance agreed to postpone the presentation of a plan for the state
to sell off its 68% stake in Monte Paschi "in line with the ongoing
discussion regarding a bank de-risking operation", Bloomberg
recounts.

             About Banca Monte dei Paschi di Siena

Banca Monte dei Paschi di Siena SpA -- http://www.mps.it/-- is an
Italy-based company engaged in the banking sector.  It provides
traditional banking services, asset management and private banking,
including life insurance, pension funds and investment trusts.  In
addition, it offers investment banking, including project finance,
merchant banking and financial advisory services.  The Company
comprises more than 3,000 branches, and a structure of channels of
distribution.  Banca Monte dei Paschi di Siena Group has
subsidiaries located throughout Italy, Europe, America, Asia and
North Africa.  It has numerous subsidiaries, including Mps Sim SpA,
MPS Capital Services Banca per le Imprese SpA, MPS Banca Personale
SpA, Banca Toscana SpA, Monte Paschi Ireland Ltd. and Banca MP
Belgio SpA.

In February 2017, Italy's lower house of parliament approved a
government bid to increase public debt by up to EUR20 billion
(about US$21.3 billion) to fund a rescue package for Monte dei
Paschi di Siena (MPS) and other ailing banks.  The move comes after
the European Union approved in December 2016 the Italian
government's move to rescue MPS, the country's third-largest lender
and the world's oldest bank.




=============
R O M A N I A
=============

COS TARGOVISTE: Laminorul Danube to Discuss Acquisition Terms
-------------------------------------------------------------
Romania Insider reports that Polish investor Marek Frydrych,
currently in talks for acquiring the core industrial assets of
several Romanian metallurgical companies currently under insolvency
or bankruptcy, confirmed for Profit.ro that he was to come to
Bucharest in the first week of February for discussing the terms of
the acquisition.

According to Romania Insider, the Polish investor will carry out
the acquisition through local company Laminorul Danube
Metallurgical Enterprise, in which he controls over 90% of the
capital, through Sunningwell International Polska.  Polish
metallurgical products trader West Trade holds the remaining 10%,
Romania Insider states.

In September last year, Laminorul Danube made an offer worth EUR
38.3 million for the acquisition of the functioning assets of
insolvent steel producer COS Targoviste, Romania Insider recounts.
In a second deal, Laminorul Danube offered EUR7.5 million for the
core assets of steel wire producer Campia Turzii Wire Industry
(ISCT), also in insolvency, an offer approved by the company's
creditors last November, Romania Insider notes.  A third deal pends
on the settlement of the debts owed to the public budget by Ductil
Steel Buzau, Romania Insider states.

Laminorul Danube, Romania Insider says, is ready to pay EUR18
million for the steel production facilities.




===========================
U N I T E D   K I N G D O M
===========================

AXMINSTER CARPETS: Seeks Buyer to Avert Second Collapse
-------------------------------------------------------
Mark Kleinman at Sky News reports that Axminster Carpets, one of
the oldest names in British carpet-making, is racing to find a
buyer in a frantic bid to avoid collapsing for the second time in
seven years.

Sky News has learnt that Axminster Carpets, which has supplied
royal palaces for much of its 265-year history, has filed a notice
of intention to appoint administrators as it holds talks with a
number of prospective investors.

Duff & Phelps, the insolvency practitioner, has been put on standby
to handle the process as discussions continue with potential
buyers, Sky News relates.

The royal warrant-holder's troubles are understood to have been
prompted by weak consumer confidence, delays to corporate orders
and a hiatus in the awarding of several new rail franchises -- an
important source of revenue for it, Sky News discloses.

If it is forced into administration, it could put almost 90 jobs at
risk, and threaten the future of a prominent British brand, Sky
News notes.

The company has been run by managing director Jonathan Young for
the last 18 months, Sky News states.

Last September, Mr. Young notified employees about impending job
losses and offered voluntary redundancy, Sky News recounts.

Duff & Phelps also handled Axminster's previous stint in
administration in 2013, Sky News relays.

It was subsequently bought out of insolvency by Stephen Boyd, a
local businessman and quickly returned to break-even, Sky News
recounts.

However, since it last changed hands, it has been loss-making,
reporting negative earnings before interest, tax, depreciation and
amortization of GBP0.55 million in the year to February 28, 2018,
according to Sky News.


MIZZEN MEZZCO: S&P Withdraws 'B' LongTerm Issuer Credit Rating
--------------------------------------------------------------
S&P Global Ratings withdrew its 'B' long-term issuer credit rating
on Mizzen Mezzco Ltd. at the company's request. The group has no
outstanding rated debt following the redemption of its GBP189.4
million senior loan notes on Jan. 17, 2020.

At the time of the withdrawal, the outlook on Mizzen Mezzco was
stable.


MONSOON ACCESSORIZE: Princes Quay Store to Close on Feb. 22
-----------------------------------------------------------
Hannah Robinson at HullLive reports that Monsoon Accessorize will
be leaving Princes Quay shopping centre.

According to HullLive, the women and children's fashion store has
been trading within the city centre venue for years, but it has now
been revealed it will be closing its doors on Feb. 22.

The Monsoon store is located on the shopping centre's first floor,
next to TopShop, and there are currently huge reductions on the few
remaining sale items in store, HullLive discloses.

The store also holds Monsoon's Accessorize brand, which sells
jewellery, hats and other accessories, HullLive notes.

The Monsoon Accessorize brand has announced closures of stores
around the country, including York's Monks Cross shopping park, as
well as Leeds, and other cities in the UK, HullLive relates.

Last year, it was announced the brand suffered slower growth in
online sales and had entered a company voluntary arrangement (CVA),
entering a deal with its creditors to avoid administration and
collapse, HullLive recounts.

The deal meant closures of some stores and rent reductions -- a
tactic also used by Mothercare, New Look and Debenhams, HullLive
states.


NMC HEALTH: Receives Preliminary Takeover Interest From KKR, GK
---------------------------------------------------------------
Simon Foy at The Telegraph reports that NMC Health has received
"highly preliminary approaches" regarding potential takeover bids
from KKR and GK Investment.

However, the hospital operator said there had been no discussions
as to the terms of any possible offer, The Telegraph relates.

"There can be no certainty that any offer will be made for the
company, nor as to the terms on which any offer might be made," The
Telegraph quotes the FTSE 100 company as saying.

It comes after NMC hired a former FBI director last month to carry
out an investigation into allegations of financial wrongdoing, The
Telegraph notes.

In December, short-seller Muddy Waters issued an attack on NMC,
accusing it of understating debt levels by around US$320 million
(GBP242 million), The Telegraph recounts.  NMC, as cited by The
Telegraph, said the allegations were based on "demonstrably false"
assumptions.

NMC Health is a healthcare chain and distribution business in the
United Arab Emirates.  The company is headquartered in Abu Dhabi
and has branch offices in Dubai, Ajman, Al Ain and Northern
Emirates.  NMC Health is listed on the London Stock Exchange and is
a constituent of the FTSE 100 Index.


SIRIUS MINERALS: Urges Shareholders to Support GB524MM Rescue Bid
-----------------------------------------------------------------
Neil Hume at The Financial Times reports that Sirius Minerals, the
company building a giant fertilizer mine under the North York
Moors, has again urged shareholders to back a GBP524 million rescue
bid from Anglo American.

According to the FT, Sirius chairman Russell Scrimshaw said
supporting a sale to Anglo was the best way of "realising" some
value for investors as well as safeguarding the project -- the
largest mining project in the UK for a generation -- for the
benefit of the North Yorkshire region.

"We continue to face a stark choice that in the event of this
transaction being unsuccessful it is likely that the business will
need to be placed into administration, which would result in
shareholders potentially losing all of their investment," the FT
quotes Mr. Scrimshaw as saying.

Earlier, one of the company's biggest shareholders, Jupiter Asset
Management, called on management to find an alternative bailout
package to fund development of the US$5 billion project, the FT
recounts.

Anglo, the FT says, is offering just 5.5p a share in cash for
Sirius, which traded as high as 46p in 2016 before the company hit
financing troubles last year.

In takeover documents released on Feb. 7, Sirius, as cited by the
FT, said it had looked at raising US$600 million via an equity
issue to finance the next phase of the project's development only
to conclude that there would be "insufficient appetite to complete
such a transaction."

The company examined an alternative US$680 million financing
proposal, which was conditional on the company undertaking a
"substantial new equity raising", but decided it could not be
delivered by the end of March -- when it is set to run out of cash,
the FT discloses.


TALKTALK TELECOM: Fitch Alters Outlook on 'BB-' IDR to Stable
-------------------------------------------------------------
Fitch Ratings revised the Outlook on TalkTalk Telecom Group Plc's
Long-Term Issuer Default Rating to Stable from Negative and
affirmed the IDR at 'BB-'.

The prospective sale of FibreNation and the near completion of
TalkTalk's cost reduction plan should enable the company to bring
funds from operation (FFO) adjusted net leverage to below 3.8x and
within the thresholds for the company's rating. Combined with
improving leverage headroom over the next two to three years, this
has driven the revision of the Outlook to Stable.

KEY RATING DRIVERS

FibreNation Sale: TalkTalk announced in January its intention to
sell FibreNation and its shareholding in Bolt Pro Tem Limited to
CityFibre for an aggregate cash consideration of GBP200 million.
The transaction is conditional on shareholder approval and is
expected to close in March 2020. In addition, TalkTalk will enter
into a long-term wholesale agreement with CityFibre for rental of
fibre to the premise lines. The agreement will gradually reduce the
company's dependence on Openreach for access to the local loop.
Fitch believes there is a high probability that transaction will
complete and has adjusted its base case forecasts to include the
proceeds from the sale.

Proceeds Used to Reduce Debt: Fitch expects TalkTalk to use the
majority of the proceeds from the sale of its fibre assets to
reduce debt. Fitch consequently expects TalkTalk's FFO adjusted net
leverage to decrease to about 3.6x in FY20 and FY21 (financial year
ending March) from 4.4x in FY19 and below the downgrade thresholds
of the rating. The company's short-term free cash flow (FCF)
excluding asset sales, will be constrained by higher working
capital requirements, cash tax increases and exceptional
restructuring costs.

Building Capital Structure Discretion: Fitch's base case forecasts
envisages that TalkTalk's organic deleveraging capacity will grow
to around 0.2x FFO adjusted net leverage per year from FY22. This
assumes the company's dividend payments remain stable. The
deleveraging capacity will increase the company's financial
flexibility and ability to manage unforeseen operational pressures.
Fitch views retaining this capacity as important for the company's
credit profile, due to risks relating to changes in the competitive
and regulatory environment that could impact gross margins, cost to
grow, churn and pricing. These risks have driven a more cautious
approach to its medium- to long-term forecasts for the company in
its base case scenario.

Sizeable Position, Low Margins: TalkTalk has around 4.2 million
broadband subscribers in the UK and a market share that Fitch
estimates to be about 16%. The company has a value-for-money
product proposition that appeals to a cross-section of the UK
telecoms market. TalkTalk also operates national telecoms
infrastructure with local access that is largely achieved through
the purchase of regulated wholesale products, largely from
incumbent BT Group Plc.

The company's current scale drives a business model with fairly low
operating and pre-dividend FCF margins (7%-8% and negative 3%,
respectively, over the next two years). This leaves little room for
manoeuvre and exposes the financials to competitive risks in the
sector

Slowing Growth, Competitive Market: Fitch estimates that growth in
total UK broadband market lines by December 2019 will have slowed
to around 1% from an average of 2%-3% over the preceding four
years. The slowdown makes growing TalkTalk's subscriber base harder
as it increasingly depends on the churn of other operators and
sustaining its existing customer base. Many of TalkTalk's
competitors operate sizeable convergent telecoms platforms,
targeting multiple market segments with investments in exclusive
content and stronger operating margins.

Gradually Improving Key Performance Indicators: TalkTalk's 1H19
results indicate that company has sustained improvements in a
number of operational areas such as churn, fibre subscriber net
additions, growth in higher-margin elements of the corporate
segment and reductions in operating expenses. The sustainability of
these improvements over the next two to three years is key for
stability of revenue and lower cost structure.

Cost Structure Realignment: TalkTalk's current cost structure is
too heavy given its scale, investment requirements and costs to
grow and retain market share. The company has successfully
repositioned its strategy to focus primarily on fixed broadband and
is upgrading its network. This should allow it to simplify
operations and reduce costs. TalkTalk has reduced its headcount and
relocated the bulk of its London-based operations. The company
estimates that this will release GBP25 million to GBP30 million in
annualised opex and capex savings. TalkTalk will need to maintain
improvements in other aspects of its cost structure to enhance the
sustainability of its business model.

Long-Term Business Model Unknowns: The continued growth of
fibre-based broadband lines creates some uncertainties about
TalkTalk's future product mix and cost structure. Fibre-based local
access lines, while benefiting from higher average revenue per user
(ARPU), also have higher regulated wholesale costs. The growth of
fibre could imply TalkTalk's business model may change to
incorporate a greater mix of variable costs with lower operating
margins. The company should be able to offset lower margins through
reduced network capex at the FCF level. Visibility of the eventual
outcome for TalkTalk is currently low but improving.

DERIVATION SUMMARY

TalkTalk's rating reflects a sizeable broadband customer base and
the company's positioning in the value-for-money segment within a
competitive market structure. TalkTalk's operating margins are
below the telecoms sector average. This largely reflects an
unbundled local exchange network architecture and dependence on
regulated wholesale products for 'last-mile' connectivity. The
company is less exposed to trends in cord 'cutting' or 'shaving'
where consumers trade down or cancel pay-TV subscriptions in favour
of alternative internet or wireless-based services. However,
TalkTalk's business model faces some uncertainties in its long-term
cost structure as a result of increasing fibre-based products,
evolving regulation and a continued need to improve its cost to
serve.

Peers such as BT Group Plc (BBB/Stable) and Virgin Media Inc.
(BB-/Stable) benefit from various combinations of full local loop
network access ownership, and/or greater revenue diversification as
a result of scaled positions in multiple products segments, such as
mobile and pay-TV, and higher operating margins.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Its Rating Case for the Issuer

  - Revenue decline of 4% in FY20, growth of about 1% in FY21 and
    around 2% FY22-FY23;

  - EBITDA margin about 16.5% in FY20 gradually increasing to
    just under 18% by FY23;

  - Capex-to-sales ratio of around 7.5% FY20-FY23;

- Increase in working capital of GBP80 million in FY20 and GBP40
   million in FY21;

  - Gross proceeds of GBP200 million from the sale of FibreNation
    largely used to reduce gross leverage;

  - Stable dividends of GBP28 million per year; and

  - A blended operating lease multiple of 5.3x.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to
Positive Rating Action

  - Strong operational performance leading to high-single
    digit pre-dividend FCF margin

  - Comfortable liquidity headroom and FFO fixed charge cover
    above 3.0x

  - FFO adjusted net leverage sustainably below 3.3x

Developments that May, Individually or Collectively, Lead to
Negative Rating Action

  - A material deterioration in key performance indicators
    or an increase in competitive intensity in the UK broadband
market

  - A contraction in pre-dividend FCF margin to low single digits

  - Shrinking liquidity headroom or FFO fixed charge cover being
    sustained below 2.5x

  - FFO adjusted net leverage sustained above 3.8x.

LIQUIDITY AND DEBT STRUCTURE

Satisfactory Liquidity: As of end FY19, the company had access to
total committed revolving credit facilities of GBP640 million
(undrawn GBP292 million). The group's debtor securitisation of
GBP75 million is partly drawn (GBP61 million drawn) and Fitch
expects the company to roll this over when it comes due in FY20.
Fitch's base case forecasts envisage that TalkTalk will be FCF
negative in FY20, with FCF turning positive from FY21.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or to the way in which they are being
managed by the entity.



                           *********


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.

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.


                * * * End of Transmission * * *