/raid1/www/Hosts/bankrupt/TCREUR_Public/200403.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, April 3, 2020, Vol. 21, No. 68
Headlines
E S T O N I A
ODYSSEY EUROPE: Moody's Places B2 CFR on Review for Downgrade
F R A N C E
ALAIN AFFLELOU: S&P Cuts Rating to 'B-' on Low Covenant Headroom
FNAC DARTY: Moody's Places Ba2 CFR on Review for Downgrade
RENAULT SA: Fitch Downgrades LT IDR to BB+, Outlook Negative
G E R M A N Y
ADLER PELZER: S&P Downgrades ICR to 'B-' on Liquidity Concerns
GALERIA KARSTADT: Seeks Creditor Protection to Avert Collapse
METRO AG: Moody's Places Ba1 CFR on Review for Downgrade
VAPIANO SE: Files for Insolvency in Cologne Court
I R E L A N D
MAN GLG VI: Moody's Assigns Ba3 Rating to Class E Notes
I T A L Y
DECO 2019-VIVALDI: DBRS Changes Trend to Neg. on 4 Note Classes
GAMENET GROUP: Moody's Places B1 CFR on Review for Downgrade
SAIPEM SPA: Moody's Affirms Ba1 CFR, Alters Outlook to Negative
SISAL GROUP: Moody's Places B1 CFR on Review for Downgrade
L U X E M B O U R G
AI AQUA: S&P Raises Issuer Credit Rating to 'B', Outlook Stable
BL CARDS 2018: DBRS Confirms BB Rating on Class E Notes
KIWI VFS SUB 1: S&P Downgrades ICR to 'B', Outlook Negative
N E T H E R L A N D S
AMMEGA GROUP: S&P Downgrades ICR to 'B-' on Delay In Deleveraging
HEMA BV: Moody's Cuts CFR to Caa3, Outlook Still Negative
MAXEDA DIY: Moody's Cuts CFR to Caa1, Outlook Negative
R U S S I A
CHUVASHCREDITPROMBANK JSC: Declared Bankrupt by Chuvash Court
LIPETSK REGION: Fitch Affirms BB+ LT IDR, Alters Outlook to Stable
NATIONAL FACTORING: Fitch Assigns B+ LT IDR, Outlook Negative
SVERDLOVSK REGION: Fitch Affirms BB+ IDR, Alters Outlook to Stable
S E R B I A
SERBIA: Fitch Affirms BB+ LT Issuer Default Rating, Outlook Stable
S P A I N
CATALONIA: Fitch Affirms BB LT IDR, Alters Outlook to Neg.
CIRSA ENTERPRISES: Moody's Cuts CFR to B2, On Review for Downgrade
CODERE SA: Moody's Cuts CFR to Caa1 & Alters Outlook to Negative
LA RIOJA: Fitch Upgrades LT Issuer Default Rating to CC
TENDAM BRANDS: Moody's Cuts CFR to B2, Outlook Negative
S W E D E N
STENA AB: S&P Alters Outlook to Negative & Affirms 'B+' LT Rating
[*] SWEDEN: Hotel & Restaurant Bankruptcies Rise in March 2020
S W I T Z E R L A N D
BREITLING HOLDINGS: Moody's Cuts CFR to B3, Outlook Negative
T U R K E Y
ARCELIK AS: S&P Cuts Rating to 'BB' on Less Demand Due to COVID-19
U N I T E D K I N G D O M
ATLANTICA YIELD: Fitch Affirms BB LongTerm IDR, Outlook Stable
CANTERBURY FINANCE 1: Fitch Affirms BBsf Rating on Class F Debt
CANTERBURY FINANCE 2: Fitch Assigns BB+sf Rating on Class F Debt
CANTERBURY FINANCE 2: Moody's Gives B3 Rating to Class F Notes
CHESTER B1: S&P Assigns Prelim CCC+ (sf) Rating to X-Dfrd Notes
DIGNITY FINANCE: Fitch Affirms BB+ Rating on Class B Notes
E-CARAT 11: DBRS Finalizes BB Rating on Class F Notes
FINABLR: Ernst & Young Steps Down as Auditor
FINSBURY SQUARE 2019-1: DBRS Confirms CC Rating on Class X Notes
HNVR MIDCO: S&P Cuts Rating to CCC+ on COVID-19 Impact, Outlook Neg
MB AEROSPACE: S&P Cuts Issuer Rating to 'CCC+' on Weak Liquidity
MISSOURI TOPCO: Moody's Cuts CFR to Caa1 & Alters Outlook to Neg.
TRONOX HOLDINGS: Moody's Assigns B1 Rating, Outlook Now Stable
X X X X X X X X
[*] BOOK REVIEW: BOARD GAMES - Changing Shape of Corporate Power
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E S T O N I A
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ODYSSEY EUROPE: Moody's Places B2 CFR on Review for Downgrade
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Moody's Investors Service placed the ratings of Odyssey Europe
Holdco S.a.r.l. -- the holding company of Olympic Entertainment
Group -- on review for downgrade, including the company's B2
Corporate Family Rating, B2-PD Probability of Default Rating, and
B2 rated Senior Secured Notes.
"Olympic's review for downgrade reflects the rapid and widening
spread of the coronavirus outbreak, which has prompted the closure
of land-based casino operations in all of Olympic's six markets -
Estonia, Latvia, Lithuania, Slovakia, Italy and Malta. This is
likely to cause Olympic's revenues and EBITDA to fall sharply in
2020 and lead to a drain on the company's cash flow and liquidity"
said Florent Egonneau, Associate Vice President and Moody's lead
analyst for Olympic.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The gaming sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand. More specifically, its
action reflects the impact on Olympic of the breadth and severity
of the shock, as well as the broad deterioration in earnings it has
triggered for an unknown period of time.
The review will focus on Olympic's ability to preserve its
liquidity during this period of significant earnings decline and
the resilience of the company's credit metrics following the
disruption of its operations. Moody's will also evaluate Olympic's
ability to reduce expenses and take other actions to preserve cash,
as well as the effects of financial measures and policies that have
been announced by European governments.
LIQUIDITY
Olympic has adequate liquidity including EUR45 million of cash on
balance sheet and a EUR25 million undrawn revolving credit
facility, as of February 29. As part of the documentation, the RCF
contains a springing financial covenant based on a super senior net
leverage set at 0.79x and tested on a quarterly basis only when the
RCF is drawn by more than 35%. The rating agency expects Olympic to
comply with this covenant, and calculates that it would only breach
this covenant in March 2021 if operations remain closed until then.
A breach in this covenant will result in an event of default.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the high uncertainty over the length of the lockdowns,
positive pressure on the rating is unlikely in the near-term, but
could occur if: (i) a proven track record as a private equity-owned
business is established; (ii) Moody's-adjusted leverage declines
below 3.5x on a sustained basis; and (iii) free cash flow remains
consistently above 10% of Moody's-adjusted debt while maintaining a
good liquidity profile.
Negative pressure on the rating could occur if: (i) conditions for
a stable outlook not being met; (ii) Moody's-adjusted leverage
increases sustainably to or above 5.0x; or (iii) liquidity
deteriorates.
STRUCTURAL CONSIDERATIONS
Using Moody's Loss Given Default for Speculative-Grade Companies
Methodology, the PDR is B2-PD, in line with the CFR, reflecting its
assumption of a 50% recovery rate as is customary for capital
structures including notes and bank debt. The senior secured notes
are rated B2 in line with the CFR due to a limited amount of RCF
which has priority over the proceeds in an enforcement under the
Intercreditor Agreement.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Headquartered in Tallinn (Estonia), Olympic is a European gaming
group with leading positions in the Baltic region and operations in
Slovakia, Italy and Malta. It also operates a leading online gaming
and betting platform in Estonia. As at September 30, 2019, the
company had a total of 114 casinos (24 in Estonia, 52 in Latvia, 17
in Lithuania, 6 in Slovakia, 14 in Italy and 1 in Malta) and 20
betting points. At the same date, Olympic employed 2,849 employees
in 6 countries. In the first nine months of 2019, Olympic generated
EUR150 million of revenue before gaming taxes and EBITDA of EUR36
million. The company was acquired by funds managed by Novalpina in
2018 and delisted from the Tallinn Stock Exchange.
RATING ACTION
On Review for Downgrade:
Issuer: Odyssey Europe Holdco S.a.r.l.
Probability of Default Rating, Placed on Review for Downgrade,
currently B2-PD
Corporate Family Rating, Placed on Review for Downgrade, currently
B2
Senior Secured Regular Bond/Debenture, Placed on Review for
Downgrade, currently B2 (LGD3)
Outlook Actions:
Issuer: Odyssey Europe Holdco S.a.r.l.
Outlook, Changed To Rating Under Review From Stable
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F R A N C E
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ALAIN AFFLELOU: S&P Cuts Rating to 'B-' on Low Covenant Headroom
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S&P Global Ratings lowered its ratings on Alain Afflelou SA to
'B-'.
S&P said, "Afflelou will experience sharp declines in volumes sold,
revenues, and EBITDA in 2020, in our view. As an optical retailer,
Afflelou had to close its retail network in France and Spain this
month--representing more than 90% of its total sales. Our
assumption to date is that shops in France and Spain will remain
closed for two-to-three months. Because Afflelou manages a network
of franchises, it is likely to have to provide financial support of
EUR10 million-EUR15 million to help franchises meet mandatory
expenses, while facing a period with no revenues. We note that the
French and Spanish governments have said they will provide support
to ease the pressure on companies whose income streams have dried
up, but it is currently unclear as to exactly how much this will
help Afflelou. We understand that rents might be postponed and the
group's cost base may become more flexible, but we still expect a
sharp reduction in EBITDA in 2020.
"Afflelou is taking steps to ensure a significant liquidity
cushion, but we believe it may face tight headroom on its springing
covenant. Afflelou decided to draw on its entire EUR30 million RCF
this month. We see this as prudent and we believe it will help the
group withstand potential liquidity needs. However, the RCF has a
springing covenant, tested if more than EUR5 million of the line is
drawn, which requires EBITDA to be above EUR45 million. Although
our base case is that Afflelou will remain above the covenant test
in 2020, we believe headroom will be tight (we expect less than 10%
headroom). We also think the situation could worsen and the
covenant might be at risk of breach if retail shops need to stay
closed for more than three months.
"S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. Some
government authorities estimate the pandemic will peak about
midyear, and we are using this assumption in assessing the economic
and credit implications. We believe the measures adopted to contain
COVID-19 have pushed the global economy into recession. As the
situation evolves, we will update our assumptions and estimates
accordingly
"The negative outlook reflects our view that the situation might
deteriorate further, for example if shops remain closed for longer
than we currently anticipate, or the recovery post-closure is
milder than our current base case. If this resulted in an EBITDA
base of EUR45 million or lower, Afflelou would breach its covenant
on its RCF and we would lower our ratings.
"We could lower our ratings if Afflelou's liquidity situation
deteriorated, for example if we believed the covenant might be
breached. This could happen if its shops stay closed for more than
three months, in turn leading to EBITDA generation of less than
EUR45 million. We would, in that case, factor in the risk that
banks might accelerate mandatory repayment of Afflelou's debt
facilities, leading to a liquidity crisis.
"We would raise our ratings if pressure on covenant headroom
reduced. This could happen if retail shops reopened soon and if we
saw a strong recovery in sales and EBITDA generation following the
period of mandatory quarantine and confinement."
FNAC DARTY: Moody's Places Ba2 CFR on Review for Downgrade
----------------------------------------------------------
Moody's Investors Service has placed on review for downgrade
France-based retailer FNAC DARTY SA's Ba2 corporate family rating
and Ba2-PD probability of default rating. Concurrently, Moody's has
placed on review for downgrade the Ba2 senior unsecured ratings of
Fnac Darty's EUR300 million notes due in 2024 and EUR350 million
notes due in 2026.
RATINGS RATIONALE
The rapid and widening spread of the Coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented.
Although Fnac Darty has achieved good credit ratios in recent
quarters, with for instance a Moody's-adjusted (gross) debt/EBITDA
ratio of 3.5x on December 31, 2019, its credit quality is likely to
deteriorate in 2020 because of the Coronavirus epidemic, which led
the company to close all its stores in France, Belgium and Spain.
Although most European governments have announced a package of
measures to support corporates, which will limit losses and cash
outflows during the lockdown period, Moody's believes that Fnac
Darty's earnings could fall sharply because of the coronavirus
crisis, causing its Moody's-adjusted debt/EBITDA to rise above the
4.5x threshold commensurate with its current Ba2 rating. While
sales should pick up when stores will reopen, the duration of the
closure remains uncertain and there is a risk that the coronavirus
outbreak may have longer-lasting negative effects on customer
sentiment and purchasing power.
On the positive side, Fnac Darty's liquidity remains adequate. At
year-end 2019, it had EUR996 million of cash and EUR400 million of
undrawn RCF maturing in 2023, with no significant debt maturity
until then.
The review process will focus on (1) the duration of the
coronavirus epidemic and the measures that states will implement to
support their economies; (2) the effects of the outbreak on
customer demand; (3) the trajectory of Fnac Darty's earnings,
leverage and free cash flows; and (4) its ability to maintain
adequate liquidity.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Its action reflects the impact on Fnac Darty of the
breadth and severity of the shock, and the broad deterioration in
credit quality it has triggered.
STRUCTURAL CONSIDERATIONS
The Ba2 rating assigned to the EUR650 million senior unsecured
notes, which is in line with the CFR, reflects their pari passu
position in the capital structure with the EUR200 million unsecured
term loan and the EUR400 million RCF. The senior unsecured notes
benefit from the same guarantor package as the term loan and RCF,
which include upstream guarantees from Fnac Darty's guarantor
subsidiaries. Moody's ranks Darty's UK pension liabilities (legacy
pension scheme from Comet) at the top of the debt waterfall,
followed by all unsecured creditors, together with the trade
payables.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
COMPANY PROFILE
Fnac Darty is one of the leading European retailers of cultural,
leisure and technological products, with EUR7,349 million of
revenue in 2019. It has a diversified product mix across consumer
electronics (TV, video, audio, photo and phones), household
appliances, editorial products (books, audio, video, gaming, toys)
and services (after-sales, insurance, ticketing and gift cards,
among others). The company has become the market leader in consumer
electronics and leisure products in France after the acquisition of
Darty in 2016.
RENAULT SA: Fitch Downgrades LT IDR to BB+, Outlook Negative
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Fitch Ratings has downgraded Renault SA's Long-Term Issuer Default
Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'. The
Outlook on the IDR is Negative.
The downgrade reflects its view that the COVID-19 pandemic will
weigh on Renault's earnings and cash flow in 2020 and materially
hinder or delay the recovery in the group's credit metrics assumed
in its February 2020 review. Fitch's current base case includes a
significant global economic downturn through 2Q20 that will
significantly affect new vehicle sales in 1H20. Fitch expects a
rebound in sales over 2H20 and into 2021 but to a lower level than
previously assumed.
The Negative Outlook reflects the risk of further deterioration in
Renault's credit profile if confinement measures and production
stoppages related to COVID-19 are prolonged, further stressing
Renault's operations and liquidity. The Negative Outlook also
reflects the risk of a protracted weakened economic environment and
its potential effect on new vehicle sales, particularly in Europe.
A weaker-than- expected rebound in sales further impairing
Renault's financial performance could lead to another downgrade.
KEY RATING DRIVERS
Delayed Recovery: The pandemic is compounding Renault's challenges
that first surfaced in 2019. Its previous rating case assumed a
gradual improvement of the financial profile by end-2022, including
recovery of free cash flow (FCF) to positive territory, operating
margin to 5% from a trough of just above 3% in 2020 and funds from
operations (FFO)-adjusted net leverage to below 1.5x from 1.7x in
2020. Its current base case incorporates weaker operating and FCF
margins and higher leverage in 2020-2022.
Fall in Revenue: Fitch expects car sales to plummet in Europe in
1H20 as a result of extended confinement measures in the largest
automotive markets, further intensifying existing sales pressures
due to the sector's cyclical downturn that started before the
outbreak. Emergency measures and lockdown decisions in several
countries have led to a sharp decline in dealership visits and
widespread postponements of new vehicle purchases, bringing new
vehicle sales to a halt for several weeks.
European Sales Hardest-hit: Renault derives about half of its unit
sales and about two thirds of its revenue from Europe. Fitch
estimates that an 80% yoy sales decline in Europe could represent
for the group more than EUR500 million in lost revenue per week.
Other regions where Renault is active have so far been less
affected by the outbreak, except for South Korea, but will also
record lower sales. Renault does not have operations in the US and
its presence in China is not material.
Profitability Hit: The fall in revenue will strongly impair fixed
cost absorption and have a material effect on operating margins at
least in 1H20. Fitch believe that Renault's industrial operating
margin could become negative in 2020, down from 2.7% in 2019 and
4.4% in 2018 but the magnitude of the impact will depend on the
duration and extent of the production stoppages and sales decline.
Profitability recovery will depend on the success of the ongoing
cost-saving initiatives and restructuring measures to be announced
later in the year.
Working Capital Absorption: The automotive industry typically
displays negative working capital, including shorter-term
receivables than payables. A sudden fall in sales causes a rapid
decline in trade receivables while payables are still due for a
further two-to-three months. Factory shutdowns across Europe will
curb inventory pile-up and shrink receivables but Fitch expects a
significant cash outflow from working capital developments in the
next couple of months from sharply lower payables.
Working Capital Release Uncertain: Fitch expects a recovery in
sales to trigger a symmetric inflow of working capital, similar to
what happened in 2009, but the timeline is hard to predict at this
point and could extend into 2021. It will depend on upcoming demand
and potential government decisions to spur demand and steer
financial relationships between various companies in the supply
chain.
Further Pressure on FCF: Its previous assumption of negative FCF in
2020 is compounded by the risk of worse-than-expected funds from
operations (FFO) in 1H20. Working capital developments will be
pivotal to FCF but are difficult to project. Fitch also forecasts a
cut in capex and dividends to preserve cash but expect investments
to remain driven by the need to meet stringent emission regulation.
Furthermore, Fitch expects a cut in dividends up-streamed from
Nissan for longer than previously forecast as Nissan also faces
significant pressure on its financial profile.
Upcoming Restructuring Measures: Renault has identified significant
savings worth about EUR2 billion, or about 20% of its total fixed
costs, in the next three years from non-core asset sales and the
alignment of its global production footprint to its revised
expectations for the automotive market and its own sales. It said
that it will detail the cost and timeframe of its programme in May
2020 but the pandemic could change the agenda and scope of the
plan. Fitch is also cautious that renewed synergies with Nissan
could take longer than expected to accrue from relationships on the
mend and from heavy resistance from some stakeholders to
cost-cutting.
Difficult Compliance with Emission Targets: Despite its advantage
of being an early entrant on the electric vehicle (EV) market,
Renault still has to fill a material gap to its 2020 CO2 targets to
avoid heavy fines. To meet these targets, Fitch expects
acceleration of EV sales, but potentially at a loss, as well as
substantial additional investments, including in hybrid
powertrains, which Renault has so far largely overlooked.
Furthermore, Fitch expects COVID-19-related measures to disrupt EV
production and availability in 2020 and hinder some crucial model
development.
Regulation Potentially on Hold: The evolution of the product mix is
difficult to forecast and the immediate sales recovery could be
focused on smaller, more fuel-efficient models supporting Renault's
average CO2 emissions. Likewise, regulatory response is hard to
anticipate at this point. European regulators have so far taken a
hard stance towards lowering fuel emissions but exceptional
circumstances may warrant special derogations for carmakers,
depending on the duration and magnitude of the crisis.
Disruptive Management Changes: The departure of CEO and Chairman
Carlos Ghosn has opened up a period of turbulence at senior
management level. A new Chairman was appointed in early 2019, who
focused on stabilising the relationship between Renault and Nissan.
A new CEO has also been chosen in early 2020 but will join the
group only in July 2020, after the restructuring plan has been
announced. Various other senior managers have also left the
company. Fitch expects the new management team to bring some
balance to the group but this could be drawn-out.
Strained Alliance: While Renault's scale remains modest on a
standalone basis, compared with large international peers such as
Volkswagen and Toyota, it can derive material synergies from its
alliance with Nissan, which was completed by Mitsubishi recently.
This is an important advantage for new powertrains and autonomous
driving technologies but which Fitch believe has not been leveraged
to its full potential. Investigations into Carlos Ghosn have
triggered some turmoil between the two partners and disrupted
several joint projects. Nonetheless, Fitch believe that the new
management at Nissan and Renault will bring stability, having
agreed to coordinate strategies and name leaders for regions and
technologies.
Effect from ESG Factors: Renault has an ESG Relevance Score of 4
for GHG Emissions & Air Quality and Governance Structure. The group
is facing stringent emission regulation, notably in Europe, which
is its main market. Investments in lower emission are a key driver
of the group's strategy and cash generation. The Governance
Structure score reflects the complex shareholding structure,
including the partial ownership of the French State and
cross-shareholdings with Nissan. The complicated relationship was
recently illustrated by the developments surrounding merger
discussions between Renault and FCA, which ultimately failed.
DERIVATION SUMMARY
On a standalone basis, Renault is smaller than General Motors
Company (GM, BBB/Stable), Ford Motor Company (BBB-/Negative) and
Hyundai Motor Company (BBB+/Stable), but Renault's alliance with
Nissan, extended to Mitsubishi Motors, provides it with a capacity
for substantial economies of scale and synergies, although Fitch
believe that these synergies have not yet delivered their full
potential.
Renault's brand positioning is moderately weaker than US peers'.
Nonetheless, Fitch believe Renault's relative position should
incorporate Dacia, which despite not having a high brand value and
leading market shares, enhances product and geographic
diversification and is a healthy contribution to profitability.
Compared with Hyundai and Kia Motors Corporation (BBB+/Stable),
Fitch sees a much closer comparison in competitiveness and brand
positioning.
Renault's financial profile has deteriorated compared with 'BBB'
global automotive manufacturers. Renault's automotive operating and
FCF margins are now expected to be lower than GM's, Ford's, PSA's
and FCA's. In addition, FFO-adjusted net leverage is also expected
to be higher than these peers'. No country-ceiling,
parent/subsidiary or operating environment aspects impact the
rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- High single-digit decline in global light vehicle volumes in
2020, some recovery in 2021 and very low single-digit growth over
the medium term;
- Industrial operations revenue declining 9% to 10% in 2020, and
recovering gradually through to 2023;
- Automotive operating margin (including Avtovaz) turning
negative in 2020 and 1% to 1.5% in 2021, before improving toward 3%
in 2022. Group margin falling below 2% in 2020 and 4% in 2021,
before recovering to approximately 5% in 2022;
- Capex on average at about 7.1% of industrial sales between 2020
and 2023, after peaking at 9.6% in 2019;
- Dividend payment of around EUR0.3 billion in 2020 and none in
2021; and
- No material acquisitions or disposals.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action, although an upgrade is unlikely until the
global environment has normalised.
- Group operating margin recovering to 3% (2019: 4.8%, 2020E:
1.5%).
- FCF margin recovering to 1% (2019: -1.8%, 2020E: -5.5%).
- Cash flow from operations (CFO)/lease-adjusted debt above 30%
(2019: 30%, 2020E: 11%).
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Increasing risk of deteriorating liquidity.
- Group operating margin below 2%.
- FCF margin remaining negative by 2022.
- CFO/lease-adjusted debt below 20%.
- FFO-adjusted net leverage above 2x (2019: 1.3x, 2020E: 2.6x).
- Material negative changes to the benefits derived from the
Nissan alliance.
LIQUIDITY AND DEBT STRUCTURE
Working Capital to Affect Liquidity: Fitch expects negative working
capital developments in 2Q20 to strain liquidity. Renault had
EUR9.9 billion in trade payables at its automotive operations at
end-2019, which were partly covered by EUR1.3 billion in trade
receivables. Further coverage was provided by EUR13.5 billion of
reported cash and cash equivalents and financial assets for
industrial operations at end-2019, before Fitch's adjustments for
minimum operational cash of about EUR1.3 billion and not readily
available financial assets. In addition, undrawn committed credit
lines of EUR3.5 billion are available at the automotive division.
Renault has a record of maintaining a prudent financial policy,
including a reported net cash position and availability under
revolving credit lines of at least 20% of revenue.
Diversified Debt Structure: The debt structure at Renault is
diversified and consists mainly of euro- and yen-denominated
unsecured bonds. The notes' maturities are well-spread from July
2020 to October 2027. The group has also raised debt through bank
credit lines, including at the level of its subsidiaries. For its
short-term financial needs, the group has direct access to
EUR3.5billion of undrawn revolving credit facilities and recourse
to a EUR2.5 billion euro commercial paper programme, of which
EUR0.6 billion was used at end-2019. It can also use account
receivables factoring (several receivables securitisation
programmes in different countries) to fund its working capital
needs.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch adjusts leverage metrics for financial services operations.
Fitch calculated a target debt-to-equity ratio of 5x for Renault
Banque (RCI Banque), below the actual ratio of 8.8x at end-2019.
Fitch assumed that Renault makes a EUR3.5 billion equity injection
into RCI Banque, to bring its debt-to-equity ratio down to 5x.
ESG CONSIDERATIONS
Renault: Governance Structure: 4, GHG Emissions & Air Quality: 4
Renault has an ESG Relevance Score of 4 for GHG Emissions & Air
Quality as Renault is facing stringent emission regulation, notably
in Europe which is its main market. Investments in lower emission
are a key driver of the group's strategy and cash generation and
this is therefore relevant to the rating in conjunction with other
factors.
Renault has an ESG Relevance Score of 4 for Governance Structure,
reflecting the complex shareholding structure, including the
partial ownership of the French State and cross-shareholdings with
Nissan. The complicated relationship has been illustrated recently
by the developments surrounding merger discussions between Renault
and FCA, which ultimately failed.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, 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.
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G E R M A N Y
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ADLER PELZER: S&P Downgrades ICR to 'B-' on Liquidity Concerns
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S&P Global Ratings lowered to 'B-' from 'B+' the issuer credit
rating on Germany-based Adler Pelzer Holding and the issue-level
rating on the company's secured bond. S&P placed all 'B-' ratings
on CreditWatch with negative implications.
Weaker market conditions will put additional strain on
profitability and credit metrics in 2020. S&P said, "On March 23,
we further lowered our forecasts for global light vehicle sales due
to the coronavirus pandemic escalation. We now project global sales
will decline by almost 15% in 2020 compared with our prior
expectation of a 3%-4% decline. We therefore expect Adler Pelzer
will not achieve the profitability level of S&P Global
Ratings-adjusted EBITDA margin of 8%-10% in 2020, which we expected
for the current rating. Under this harsh global backdrop, we
estimate Adler Pelzer's EBITDA could decrease by about 50% in 2020
and that the S&P Global Ratings-adjusted EBITDA margin shrinks to
about 5%-6%. We have consequently reassessed Adler Pelzer's
business risk profile to weak from fair, and are no longer netting
cash in the calculation of our credit ratios in line with our
ratings approach. This has then led us to reassess the company's
financial risk profile to highly leveraged from aggressive.
Furthermore, we expect the company's adjusted debt-to-EBITDA ratio
to increase to about 8.0x (without netting cash) in 2020, from
around 3.5x-4.0x at year-end 2019."
Pressure on liquidity will be intensify because of lower cash
generation and limited liquidity resources. S&P said, "We are
revising our liquidity assessment to weak from adequate primarily
because of our expectation of significantly lower levels of cash
generation over the next 12 months. Given the expected drop in
EBITDA, we expect the group's overall free operating cash flow
(FOCF) will likely be negative in 2020, compared with positive FOCF
of about EUR20 million-EUR30 million in 2019. As a result, we
believe the company's sources of cash, mainly cash on hand (EUR115
million by end-September 2019, of which about EUR30 million is not
readily available) and moderate positive funds from operations,
will likely be below its uses in 2020. This mainly consists of
meaningful short-term debt maturities, capital expenditures, as
well as intra-year working capital needs."
S&P said, "As a result, we believe Adler Pelzer depends highly on
its uncommitted credit facilities. The company might need to
arrange additional liquidity sources to withstand the adverse
effects from the coronavirus pandemic. Furthermore, Adler Pelzer's
liquidity depends on its ability to renew its short-term debt
maturities (EUR85 million by Sept. 30, 2019), which largely relate
to bilateral lines that the company is renewing before they come
due.
"Adler Pelzer could trim its capital expenditure (capex) to
safeguard liquidity. We expect this could be thanks to benefits
from working capital inflows in the short term, enabling the
company to scale back or delay some of its annual capex of EUR50
million-EUR60 million by about EUR20 million-EUR25 million to
safeguard liquidity. Furthermore, the company's liquidity position
could benefit from potential shareholder support. We understand the
company's shareholders, private equity fund FSI (a 28% stake) and
Adler Plastics (72%), are likely to support the company in the very
near-term. In April 2018, FSI stated that it may invest up to
EUR200 million to further strengthen the group's competitive
position.
"We currently expect that Adler Pelzer has enough liquidity to
repay two minor bilateral loans that have maintenance covenants.
"We expect to resolve the CreditWatch placement within the next
three months as we learn more about the severity and length of the
coronavirus impact and Adler Pelzer's financing plans and actions
to address this pronounced industry downturn.
"In the meantime, we could further lower the rating, if we perceive
that potential shareholder support is not forthcoming in the next
four weeks or is insufficient to help to restore the company's
liquidity position.
"We could also lower the rating if Adler Pelzer is unable to extend
upcoming short-term debt maturities, if its cash balance decline
materially from current levels due to less effective cash
preservation measures, or if we expect the company will pursue
financing or debt restructuring activities that we would consider
as a default under our criteria.
"We could affirm the rating if the company receives meaningful
shareholder support and ensures that its expected liquidity needs
are well covered for the next 12 months."
GALERIA KARSTADT: Seeks Creditor Protection to Avert Collapse
-------------------------------------------------------------
Ludwig Burger at Reuters reports that German department store chain
Galeria Karstadt Kaufhof is seeking protection from creditors to
stay afloat, it said on April 1, after nationwide store closures to
help to contain the spread of the coronavirus.
Galeria said that all its outlets have been closed since March 18,
leading to about EUR80 million (US$87.5 million) of lost weekly
revenue while the company continues to incur the bulk of the costs,
Reuters relates.
"The goal of the protection proceedings under self-administration
is to make use of legal options to cope with the store closures
imposed by authorities without a massive increase in financial
debt," it said in a statement made available to Reuters.
According to Reuters, the company said the filing, which also
covers sporting goods retailer Karstadt Sports, had been accepted
by a court in the city of Essen.
Frank Kebekus has been name preliminary administrator, a
spokeswoman for Duesseldorf-based insolvency law firm Kebekus und
Zimmermann said, confirming a report by weekly WirtschaftsWoche,
Reuters notes.
METRO AG: Moody's Places Ba1 CFR on Review for Downgrade
--------------------------------------------------------
Moody's Investors Service has placed on review for downgrade the
Ba1 corporate family rating and Ba1-PD probability of default
rating of METRO AG. Concurrently, Moody's has placed on review for
downgrade the Ba1 senior unsecured rating and the (P)Ba1 senior
unsecured medium-term notes program ratings of Metro and METRO
Finance B.V. The NP commercial paper rating and the (P)NP
short-term program ratings of Metro and METRO Finance B.V have been
affirmed. The outlook has been changed to ratings under review from
stable for both entities.
RATINGS RATIONALE
The rapid and widening spread of the Coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. This shock will
significantly affect Metro's earnings because it caters to many
business customers whose operations have been disrupted by the
coronavirus.
Metro's Horeca division, which serves hotels, restaurants and
caterers, accounted for 48% of its revenue in fiscal 2019 (ended on
September 30, 2019). Moody's thinks that these end-customers will
have been severely hit by the recent quarantine measures that many
European countries decided in recent weeks. Consequences on Metro's
credit quality are uncertain for the moment and will depend on the
duration of the epidemic and how it will affect consumer demand.
Most European governments, including Germany, have announced a
package of measures to support corporates, which will limit losses
and cash outflows during the lockdown period.
Moody's sees a possibility that the earnings decline may offset the
recent improvement in credit quality, and in particular liquidity,
coming from asset disposals. Since October 2019, Metro has
announced the sale of its Chinese operations for an enterprise
value of EUR1.9 billion and of its hypermarket chain Real for EUR1
billion. The group has not yet indicated how it will allocate
divestment proceeds.
On the positive side, Metro primarily sells food items, which are
more stable than non-food products in a downturn, and has a good
geographic diversity, with 91% of its reported EBITDA generated
outside Germany in fiscal year 2019.
The review process will focus on (1) the duration of the
coronavirus epidemic and the measures that states will implement to
support their economies; (2) the effects of the outbreak on Metro's
customers; (3) the trajectory of Metro's earnings, leverage and
free cash flows; (4) the allocation of divestment proceeds; and (5)
Metro's ability to maintain an adequate liquidity.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Quantitatively, Moody's would consider a negative rating action if
Metro fails to maintain a Moody's-adjusted (gross) debt/EBITDA
below 5.0x and over time below 4.75x, or if the Moody's-adjusted
retained cash flow/net debt ratio does not significantly exceed
10%. A weakening in liquidity would also trigger a rating
downgrade. A more aggressive financial policy, as shown for
instance by a failure to allocate most disposal proceeds to debt
repayment, could also cause a negative rating action.
While an upgrade is unlikely in the short-term, Moody's could take
a positive rating action if Metro improves its profitability and
stabilises its earnings in emerging markets. Quantitatively, a
positive rating action could emerge if the Moody's-adjusted (gross)
debt/EBITDA falls sustainably below 4x and if the Moody's-adjusted
retained cash flow/net debt ratio exceeds significantly 15%. A
rating upgrade would also require a reduced reliance on short-term
debt enabling Metro to maintain an adequate liquidity despite
seasonal swings in working capital.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Its action reflects the impact on Metro of the breadth
and severity of the shock, and the broad deterioration in credit
quality it has triggered.
STRUCTURAL CONSIDERATIONS
Moody's rates the senior unsecured notes Ba1, in line with the
corporate family rating despite a degree of structural
subordination arising from the material level of trade payables at
the operating subsidiary's level.
Its Loss Given Default analysis is based on an expected family
recovery rate of 50%, which reflects a capital structure comprising
bonds and bank debt.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
COMPANY PROFILE
Headquartered in Dusseldorf, Germany, Metro is one of the largest
food wholesalers and retailers in Europe, with revenue of EUR27.1
billion and Moody's-adjusted EBITDA of EUR1.5 billion in fiscal
2019. The group was created by the demerger of the former
Metro-Ceconomy group, whose shareholders agreed in June 2017 to
split the operations between CECONOMY AG, which took over consumer
electronics, and Metro Wholesale & Food Specialist, which gathered
the food wholesale and retail operations. Metro Wholesale & Food
Specialist subsequently changed its name to Metro AG.
VAPIANO SE: Files for Insolvency in Cologne Court
-------------------------------------------------
Douglas Busvine at Reuters reports that German restaurant franchise
company Vapiano said on April 2 it had applied to start insolvency
proceedings, becoming another high street casualty of a national
coronavirus lockdown that is expected to remain in force for
weeks.
Parent company Vapiano SE said it had filed for insolvency at a
district court in Cologne and was evaluating whether insolvency
applications would need to be filed for its group subsidiaries,
Reuters relates.
Shares in Vapiano, whose restaurants offer pizza, pasta and salads,
collapsed by two-thirds, bringing year-to-date losses to over 90%
and putting the company in penny stock territory with a market
value of just US$25 million, Reuters discloses.
The company, as cited by Reuters, said it had not been able to
agree with shareholders and creditors on a liquidity injection of
EUR36.7 million (US$40 million), leaving it unable to apply for aid
under a government relief program.
All German restaurants operated by Vapiano SE will remain closed
until further notice, while German and international franchisees
are not affected by the insolvency filing, Reuters notes.
=============
I R E L A N D
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MAN GLG VI: Moody's Assigns Ba3 Rating to Class E Notes
-------------------------------------------------------
Moody's Investors Service announced that it has assigned the
following definitive ratings to Notes issued by MAN GLG Euro CLO VI
Designated Activity Company:
EUR 217,000,000 Class A Senior Secured Floating Rate Notes due
2032, Definitive Rating Assigned Aaa (sf)
EUR 33,235,000 Class B-1 Senior Secured Floating Rate Notes due
2032, Definitive Rating Assigned Aa2 (sf)
EUR 5,265,000 Class B-2 Senior Secured Fixed Rate Notes due 2032,
Definitive Rating Assigned Aa2 (sf)
EUR 20,125,000 Class C Deferrable Mezzanine Floating Rate Notes due
2032, Definitive Rating Assigned A2 (sf)
EUR 23,625,000 Class D Deferrable Mezzanine Floating Rate Notes due
2032, Definitive Rating Assigned Baa3 (sf)
EUR 17,710,000 Class E Deferrable Junior Floating Rate Notes due
2032, Definitive Rating Assigned Ba3 (sf)
EUR 8,540,000 Class F Deferrable Junior Floating Rate Notes due
2032, Definitive Rating Assigned B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in its methodology.
The Issuer is a managed cash flow CLO. At least 92.5% of the
portfolio must consist of senior secured obligations and up to 7.5%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be 80% ramped up as of the closing date
and comprises predominantly corporate loans to obligors domiciled
in Western Europe. The remainder of the portfolio will be acquired
during the six months ramp-up period in compliance with the
portfolio guidelines.
GLG Partners LP will manage the CLO. It will direct the selection,
acquisition and disposition of collateral on behalf of the Issuer
and may engage in trading activity, including discretionary
trading, during the transaction's two-year reinvestment period.
Thereafter, subject to certain restrictions, purchases are
permitted using principal proceeds from unscheduled principal
payments and proceeds from sales of credit impaired obligations or
credit improved obligations.
In addition to the seven Classes of Notes rated by Moody's, the
Issuer will issue EUR 9,320,000 Class S-1 Subordinated Notes due
2032 and EUR 17,960,000 Class S-2 Subordinated Notes due 2032 which
are not rated. The Class S-1 Notes accrue interest. The Class S-2
is subordinated to the Class S-1.
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.
Its analysis has considered the increased uncertainty relating to
the effect of the coronavirus outbreak on the European economy as
well as the effects that the announced government measures put in
place to contain the virus, will have on the performance of
corporate assets. Moody's regards the coronavirus outbreak as a
social risk under its ESG framework, given the substantial
implications for public health and safety. It is a global health
shock, which makes it extremely difficult to provide an economic
assessment. The degree of uncertainty around its forecasts is
unusually high.
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.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated Notes' performance is subject to uncertainty. The Notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the Notes'
performance.
Moody's modeled the transaction using 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 March 2019.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR 350,000,000
Diversity Score: 45
Weighted Average Rating Factor (WARF): 2950
Weighted Average Spread (WAS): 3.75%
Weighted Average Coupon (WAC): 4.0%
Weighted Average Recovery Rate (WARR): 43%
Weighted Average Life (WAL): 6.5 years
Moody's has addressed the potential exposure to obligors domiciled
in countries with local currency ceiling (LCC) of A1 or below. As
per the portfolio constraints and eligibility criteria, exposures
to countries with LCC of A1 to A3 cannot exceed 10% and obligors
cannot be domiciled in countries with LCC below A3.
=========
I T A L Y
=========
DECO 2019-VIVALDI: DBRS Changes Trend to Neg. on 4 Note Classes
---------------------------------------------------------------
DBRS Ratings GmbH changed the trend to Negative from Stable on all
classes of notes issued by Deco 2019 - Vivaldi S.R.L., Emerald
Italy 2019 S.R.L., and Pietra Nera Uno S.R.L. Additionally; DBRS
Morningstar changed the trend on the Class B, C, D, and E notes
issued by Taurus 2018-1 IT S.R.L. to Negative from Stable. The
trend on the Class A notes remains Stable. DBRS Morningstar
currently rates the notes of the four transactions as follows:
Deco 2019 - Vivaldi S.r.l.:
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (low) (sf)
Emerald Italy 2019 SRL
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (high) (sf)
Pietra Nera Uno S.R.L.
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (sf)
-- Class E notes at B (high) (sf)
Taurus 2018-1 IT S.R.L.
-- Class A notes at AA (low) (sf)
-- Class B notes at A (sf)
-- Class C notes at BBB (sf)
-- Class D notes at BB (high) (sf)
-- Class E notes at BB (low) (sf)
The trend change for the Italian commercial mortgage-backed
securities (CMBS) transactions secured by retail properties (i.e.,
Deco 2019 - Vivaldi S.r.l., Emerald Italy 2019 SRL, and Pietra Nera
Uno S.R.L.) is a result of the expected deterioration of the
Italian retail sector following the recent outbreak of the
Coronavirus Disease (COVID-19) across the country. In DBRS
Morningstar's view, the assets' rental income will be negatively
affected by (1) the likely increase in tenants—especially small
retailers—underperforming and (2) the expected requests from
tenants for "rent holiday" or rent reduction.
In relation to Taurus 2018-1 IT S.R.L., the trend on the Class A
notes remains Stable, as the retail exposure in the transaction is
limited to the Bel Air loan, which represents only 31% of the
securitized balance. This exposure is also substantially offset by
the solid performance of the two logistics loans (i.e., the Camelot
loan and the Logo loan).
DBRS Morningstar notes that current performance data for the
transactions does not yet show the anticipated drop in rental
income for the upcoming months. However, the public control
measures put in place by the Italian authorities to mitigate the
spread of the coronavirus, such as travel restrictions, closure of
all shops (except food stores and pharmacies), and the public`s
fear of attending crowded places (such as shopping centers or
retail outlets), will undoubtedly put pressure on retail sales and
consequently the ability of the tenants to keep paying their rent
regularly.
Despite the likely decrease of rental income and the breach of loan
covenants in the forthcoming months, even if all borrowers stopped
paying interest due on the loans, DBRS Morningstar would not expect
immediate transaction note events of default to materialize mainly
because the transactions benefit from liquidity facilities. DBRS
Morningstar expects liquidity facility providers to still be
required to perform their obligations. The key exceptions would be
(1) the operation of any force majeure clauses in the contract
(which DBRS Morningstar could not identify in any of the liquidity
facility agreements of the Italian retail CMBS transactions) and
(2) the common law concept of frustration (which should not be
relevant).
Force majeure clauses in a contract will usually deal specifically
with how the party's obligations are affected by an event that
affects one of the part's ability to perform the contract. Events
such as a flu epidemic could, subject to the specific words of the
clause, be covered by the standard force majeure clause; however,
it is uncertain that a party will be able to rely on it to protect
against claims of nonperformance as these clauses are interpreted
strictly by the English courts. Typically a party will also need to
satisfy a number of tests to the court. In the absence of a force
majeure clause, the legal concept of frustration enables a party to
be discharged from its contractual obligations if a significant
change in circumstances makes it physically or commercially
impossible to perform the contract or would mean performing
radically different obligations from those originally agreed. Mere
inconvenience, hardship, or financial loss involved in performing
the contract is insufficient to amount to frustration.
Likewise, DBRS Morningstar does not expect many tenants to exercise
a tenant's right, under Italian tenancy laws, to terminate a lease
agreement at any time with six months' prior written notice for
serious reasons ("gravi motive"), including objectively and
unpredictably worsened economic and market conditions, which make
the lease permanently too onerous for the tenant. In the context of
the coronavirus outbreak in Italy and the forced closure of many
retail shops, DBRS Morningstar is of the view that a temporary
reduction in income, which may be currently experienced by certain
tenants due to the forced closure of their retail shops, is
unlikely to provide per se, at this point in time sufficient
grounds for terminating the lease agreements. A different
conclusion could be reached in respect of those tenants whose
businesses have already materially deteriorated or will do so in
the future also as a consequence of a continued lockdown.
Deco 2019 – Vivaldi S.R.L. is a securitization of two Italian
refinancing facilities: the EUR 158.8 million Franciacorta loan and
the EUR 63.3 million Palmanova loan, each backed by a retail outlet
village in the North of Italy. As for the latest available
investors report dated November 2019, the overall vacancy rate of
the portfolio increased to 10.4% compared with 8.2% at issuance,
whereas the interest service coverage (ICR) is estimated at 2.88
times (x) for the Franciacorta loan and 3.53x for the Palmanova
loan. Both loans remain in compliance with the 75% loan-to-value
(LTV) and debt yield (DY) cash trap covenants of 7.6% and 9.6%,
respectively. The first loan maturity date for both two loans is in
August 2021, and both loans have three one-year extension options
subject to hedging and no continuing events of default (EOD).
Emerald Italy 2019 S.R.L. is a securitization of EUR 100.4 million
term facility and a EUR 5.4 million capital expenditure (capex)
facility advanced by J.P. Morgan Chase Bank, N.A., Milan branch, to
Kildare Partners (the Sponsor) for the acquisition of two retail
malls and one shopping centre located in the Lombardy region of
Northern Italy. The transaction was issued in November 2019. As per
the latest available information from December 2019, the
transaction figures are mostly in line with the figures at
issuance, with the loan's LTV, debt-service-coverage ratio (DSCR),
and DY reported at 65%, 1.68x, and 8.7%, respectively and still in
compliance with its 75% LTV, 138% DSCR, and 10.7% DY default
covenants. There is currently no refinancing pressure, with the
first loan maturity date in June 2022, one-year extension options
subject to hedging, and no continuing EOD.
Pietra Nera Uno S.R.L. is a EUR 403.8 securitization of three
senior commercial real estate loans (i.e., the Fashion District
loan, the Palermo loan, and the Valdichiana loan) and two pari
passu-ranking capex facilities advanced by Pietra Nera Uno S.R.L.
(the Issuer). The collateral securing the three loans consists of
three regional outlets and one regionally dominant shopping centre
in Italy. As of the new valuations conducted in March 2019, the
Fashion District loan, the Palermo loan, and Valdichiana loan
reported LTVs of 68.9%, 82.0%, and 62.9%, respectively, which
represents an overall decrease of the aggregate LTV to 73.2% vs.
74.6% at issuance. Although the Palermo loan's LTV has increased to
82.0% from 76.4% at issuance, it remains in compliance of its 86%
LTV cash trap covenant. As of November 2019, the overall DSCR of
the transaction is estimated at 2.79x. The three loans have an
initial maturity date in May 2020, but they also have three
one-year extension options, provided they meet the hedging
requirements and no event of default is continuing.
Taurus 2018-1 IT S.r.l. is a EUR 336.6 million securitization of
three floating-rate senior commercial real estate loans including
the (1) EUR 215 million Camelot loan (backed by 16 industrial
assets), (2) EUR 110 million Bel Air loan (secured by six shopping
centers), and (3) EUR 34.6 million Logo loan (backed by three
logistic assets), which were advanced by BAML International
Limited, Milan Branch in the cases of the Camelot and Bel Air loan
and BAML International Limited for the Logo loan. Based on the
February 2020 investors report, the three loans have varying LTVs
with the Bel-Air being the lowest leveraged loan at 48.2%, the Logo
loan at 56.2%, and the Camelot loan at the highest leverage of
65.8%, for a combined leverage of 62%. The Camelot loan recently
exercised the first of three one-year extension options available,
postponing the initial maturity date to February 2021. The Logo
loan has a maturity date in May 2020 and benefits from three
one-year conditional extension options (nonpayment default and
borrower is compliant with the hedging requirements). Finally, the
Bel-Air loan benefits from a strong liquidity, with a reported DSCR
at 2.73x as November 2019 and has a maturity date in May 2021 with
two one-year extension options (subject to a 60.0% LTV and 11.0%
debt yield).
Notes: All figures are in Euros unless otherwise noted.
GAMENET GROUP: Moody's Places B1 CFR on Review for Downgrade
------------------------------------------------------------
Moody's Investors Service placed the ratings of Gamenet Group
S.p.A. on review for downgrade, including the company's B1
corporate family rating, B1-PD probability of default rating, and
B1 rated Senior Secured Notes.
"Gamenet's review for downgrade reflects the rapid and widening
spread of the coronavirus outbreak, which has prompted the closure
of the retail network and gaming venues across Italy, as well as
the suspension of sporting events across most of the World. This is
likely to cause the company's revenues and EBITDA to fall sharply
in 2020 and lead to a drain on cash flow and liquidity" said
Florent Egonneau, Associate Vice President and Moody's lead analyst
for Gamenet.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The gaming sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand. More specifically, its
action reflects the impact on Gamenet of the breadth and severity
of the shock, as well as the broad deterioration in earnings it has
triggered for an unknown period of time.
The review will focus on Gamenet's ability to preserve its
liquidity during this period of significant earnings decline and
the resilience of the company's credit metrics following the
disruption of its operations. Moody's will also evaluate Gamenet's
ability to reduce expenses and take other actions to preserve cash
as well as the effects of financial measures and policies that have
been announced by European governments.
Gamenet currently has adequate liquidity thanks to EUR170 million
of cash on balance sheet as of 20th March 2020, of which only EUR5
million are restricted. This amount includes EUR40 million of
revolving credit facility ("RCF"), drawn on 13th March 2020. The
RCF is now fully drawn. As part of the documentation, the RCF
contains a springing financial covenant based on a minimum EBITDA
set at EUR55 million and tested on a quarterly basis only when the
RCF is drawn by more than 35%. The rating agency expects Gamenet to
comply with this covenant, and calculates that it would only breach
this covenant in December 2020 if operations remain closed until
then. A breach in this covenant will result in an event of
default.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the high uncertainty over the length of the lockdowns,
positive pressure on the rating is unlikely in the near-term, but
could occur if: (i) Gamenet's scale, business diversity and
operating performance continue to improve; (ii) Moody's-adjusted
leverage falls sustainably below 2.5x while achieving meaningful
positive free cash flow, as well as good liquidity; (iii) the
company's financial policy is commensurate with the Ba-rated
category.
Negative pressure on the rating could occur if: (i) Gamenet's
performance weakens or is hurt by a changing regulatory and fiscal
regime; (ii) Moody's-adjusted leverage rises sustainably above
4.0x; (iii) Free cash flow deteriorates and liquidity weakens.
STRUCTURAL CONSIDERATIONS
Using Moody's Loss Given Default for Speculative-Grade Companies
Methodology, the PDR is B1-PD, in line with the CFR, reflecting its
assumption of a 50% recovery rate as is customary for capital
structures including notes and bank debt. The senior secured notes
are rated B1 in line with the CFR due to a limited amount of RCF
which has priority over the proceeds in an enforcement under the
Intercreditor Agreement.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Founded in 2006 and headquartered in Rome (Italy), Gamenet is the
third largest operator in the Italian gaming market through a
network of 8,751 point of sales as of September 2019, of which 68
are directly managed. In recent years, Gamenet has followed a
strategy of vertical integration, based both on the direct
management of gaming machines and halls as well as distribution
insourcing. Today, the company operates in five operating segments:
(i) Retail betting consisting of sports betting and gaming through
the retail network; (ii) Online consisting of sports betting and
gaming; (iii) Amusement with prize machines ("AWP"); (iv) Video
lottery terminals ("VLT"); and (v) Retail & street operations
consisting of the management of owned gaming halls and AWPs. In
2019, the company reported net revenue of EUR 738 million and
EBITDA of EUR 165 million post IFRS 16.
SAIPEM SPA: Moody's Affirms Ba1 CFR, Alters Outlook to Negative
---------------------------------------------------------------
Moody's Investors Service has changed the outlook on Saipem S.p.A.
to negative from stable. Concurrently, Moody's has affirmed all
Saipem's ratings as well as all the ratings of its subsidiary
Saipem Finance International B.V.
RATINGS RATIONALE
Its change of the outlook to negative has been driven by a
significant deterioration of operating environment in the oil and
gas industry, which Moody's believes will have a negative impact on
Saipem's performance in the next 12-18 months. Since the beginning
of March 2020 oil prices have plummeted, hitting earnings and cash
flows of oil and gas producers worldwide. The agency also expects
that the prices will not recover back within its fundamental
medium-term oil price range of $50-$70/barrel at least until 2022,
as the coronavirus pandemics meaningfully reduces global GDP growth
and the demand for oil.
As a result, Moody's expects that oil and gas producers, including
large and diversified oil majors which are among Saipem's key
customers, will need to resort to a significant reduction of their
capital spending up to 30% in 2020 in order to protect their cash
flow generation in such a challenging environment and there is a
high degree of uncertainty whether spending level will again
increase in 2021.
The rating agency expects that this spending reduction will
negatively affect Saipem's order intake, backlog and ultimately
also its revenues and EBITDA generation in both its drilling and
E&C businesses. Moody's sees an increasing risk that Saipem will
not be able to maintain its debt/EBITDA, as adjusted by Moody's,
below 4.0x, if the challenging operating environment persists for a
longer period, which is reflected in the negative outlook.
This is despite the fact that Saipem has been strongly positioned
in its Ba1 rating category before the outbreak of the pandemics.
After delivering a strong operating performance in 2019, ahead of
Moody's expectations, the company improved its adjusted debt/EBITDA
to around 3.6x in 2019 (Moody's estimate based on preliminary
figures) from 3.8x in 2018. Taking into consideration the early
repayment of the EUR500 million bond from cash in the beginning of
March 2020, Saipem's pro-forma Moody's adjusted debt/EBITDA for
2019 would have been around 3.1x, close to Moody's upgrade
guidance.
In addition Saipem closed its financial year 2019 with a healthy
backlog of EUR21 billion (EUR25 billion with non-consolidated
entities) -- a record level since the peak in 2014 -- which is an
equivalent of 2.3x of 2019 sales. The backlog, which increasingly
contains projects related to gas and renewables, provides some
visibility already into 2021 and gives some comfort that the
deterioration of Saipem's credit metrics might not be substantial.
The affirmation of the ratings also reflects Saipem's good
liquidity position. As of the end of 2019 Saipem reported around
EUR1.8 billion freely available cash and cash equivalents
(excluding roughly EUR800 million restricted cash), further
supported by undrawn EUR1 billion committed revolving facility
maturing in 2023. The facility has a net leverage covenant of 3.0x
(0.5x in 2019) and the agency expects that Saipem should be able to
continue operating with a sufficient capacity under the covenant
even in a deteriorated environment. The maintenance of good
liquidity is a prerequisite for maintaining its current rating,
considering the company's negative working capital position
(especially in the E&C business) and the unpredictability of its
working capital swings, which can be material. After the repayment
of the EUR500 million bond originally due to in 2021, the company
does not have any sizeable debt maturities until 2022 which also
supports its current rating.
ESG CONSIDERATIONS
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The oil and gas
sector has been one of the sectors most significantly affected by
the shock given its sensitivity to consumer demand and sentiment.
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Its action reflects the impact on Saipem of the breadth
and severity of the shock, and the broad deterioration in credit
quality it may trigger.
WHAT COULD CHANGE THE RATING UP/DOWN
Conversely, Saipem's rating could be downgraded, if (1) Moody's
adjusted gross debt/EBITDA would increase above 4.0x, (2) FFO/debt
falls below 20% or (3) if liquidity deteriorates.
Over the next 12 - 18 months, an upgrade of Saipem's ratings is
unlikely. However, the ratings could be upgraded if the company
strengthens its backlog and if conditions improve in the oil and
gas services markets leading to it sustaining: (1) FFO/debt above
30%, and (2) Moody's adjusted gross debt/EBITDA below 3.0x, while
maintaining good liquidity and the company further builds a track
record of good project execution.
LIST OF AFFECTED RATINGS
Issuer: Saipem Finance International B.V.
Affirmations:
BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1
BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba1
Outlook Actions:
No Outlook
Issuer: Saipem S.p.A.
Affirmations:
LT Corporate Family Rating, Affirmed Ba1
Probability of Default Rating, Affirmed Ba1-PD
BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1
Outlook Actions:
Outlook, Changed To Negative From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Construction
Industry published in March 2017.
SISAL GROUP: Moody's Places B1 CFR on Review for Downgrade
----------------------------------------------------------
Moody's Investors Service placed the ratings of Sisal Group S.p.A.
on review for downgrade, including the company's B1 corporate
family rating, B1-PD probability of default rating, B1 rated Senior
Secured Notes.
"Sisal's review for downgrade reflects the rapid and widening
spread of the coronavirus outbreak, which has prompted the closure
of the retail network and gaming venues across Italy, as well as
the suspension of sporting events across most of the World. This is
likely to cause Sisal's revenues and EBITDA to fall sharply in 2020
and lead to a drain on the company's cash flow and liquidity" said
Florent Egonneau, Associate Vice President and Moody's lead analyst
for Sisal.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The gaming sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand. More specifically, its
action reflects the impact on Sisal of the breadth and severity of
the shock, as well as the broad deterioration in earnings it has
triggered for an unknown period of time.
The review will focus on Sisal's ability to preserve its liquidity
during this period of significant earnings decline and the
resilience of the company's credit metrics following the disruption
of its operations. Moody's will also evaluate Sisal's ability to
reduce expenses and take other actions to preserve cash, as well as
the effects of financial measures and policies that have been
announced by European governments.
LIQUIDITY
Sisal has adequate liquidity including EUR200 million of cash on
balance sheet and a EUR105 million undrawn revolving credit
facility, as of September 30, 2019. As part of the documentation,
the RCF does not contain any financial covenants. Sisal is expected
to make the payment for the second instalment (EUR111 million) of
the NTNG license renewal in June 2020. However, Moody's expects
that there may be the option to postpone this second instalment in
order to maintain an adequate level of liquidity. Otherwise,
liquidity could become stretched, especially at a time when its
retail network is shut.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the high uncertainty over the length of the lockdowns,
positive pressure on the rating is unlikely in the near-term, but
could occur if: (i) Sisal materially diversifies its product
offering beyond the gaming market or geographical presence outside
of Italy; (ii) Moody's-adjusted leverage remains sustainably below
2.5x while achieving meaningful positive free cash flow, as well as
good liquidity; (iii) Moody's has greater clarity over the
company's financial policy and a degree of certainty that
debt-funded acquisitions or dividend recaps will not lead to a
weakening in current credit metrics.
Negative pressure on the rating could occur if: (i) Sisal's
performance weakens or is hurt by a changing regulatory and fiscal
regime; (ii) Moody's-adjusted leverage rises sustainably above
4.0x; (iii) Free cash flow deteriorates and liquidity weakens.
STRUCTURAL CONSIDERATIONS
Using Moody's Loss Given Default for Speculative-Grade Companies
Methodology, the PDR is B1-PD, in line with the CFR, reflecting its
assumption of a 50% recovery rate as is customary for capital
structures including notes and bank debt. The senior secured notes
are rated B1 in line with the CFR due to a limited amount of RCF
which has priority over the proceeds in an enforcement under the
Intercreditor Agreement.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Founded in 1946 and headquartered in Milan (Italy), Sisal is the
second largest operator in the Italian gaming market. The company
offers slot machines and video lottery terminals, betting, lottery
games through a network of approximately 40,000 point of sales
consisting of newsstands, bars, tobacconists, betting shops and
corners, points of sale dedicated to gaming, gaming halls and an
online platform. Sisal was the first Italian company to operate in
the gaming sector as a government concessionaire and it has been
operating for over 70 years. Today, the company operates in five
business units: (i) Retail Gaming; (ii) Lottery; (iii) Online
Gaming; and (iv) Morocco. In 2019, Sisal carved-out its payments
and services business.
===================
L U X E M B O U R G
===================
AI AQUA: S&P Raises Issuer Credit Rating to 'B', Outlook Stable
---------------------------------------------------------------
S&P Global Ratings raised the issuer credit rating on household and
commercial water treatment services provider AI Aqua Sarl (doing
business as Culligan) to 'B' with a stable outlook, and raised the
existing issue level ratings, including the company's existing
first lien debt to 'B' from 'B'- with an unchanged recovery rating
of'3' (60% rounded estimated recovery) and second lien term loan to
'CCC+' from 'CCC' with an unchanged recovery rating of '6' (0%
rounded estimated recovery).
At the same time S&P is assigning its 'B' issue- level rating with
a '3' recovery rating (rounded recovery estimate: 60%) to the
company's proposed $300 million senior secured incremental first-
lien term loan maturing December 2023.
The upgrade reflects a combination of lower pro forma leverage for
this transaction (in part because of a significant equity component
in the financing mix), SSW disposal proceeds used for debt
reduction, and the company's improved competitive position. Pro
forma for the transaction, S&P estimates debt to EBITDA improves by
about a half-turn to just over 7.5x, compared with closer to 8x for
the 12 months ended Sept 30, 2019. The upgrade also reflects the
company's stronger market position in the U.S. with AquaVenture's
direct business (Quench), which has market-leading commercial
customer penetration, as well as the company's increased global
scale with better geographic diversification, which it has built
through mergers and acquisitions (M&A).
S&P said, "The stable outlook reflects our expectation for
comparatively stable operating performance in the current economic
environment given the recurring nature of its revenue base, for
FOCF to turn positive in fiscal 2020 with fewer integration charges
and likely declines in capex, and for leverage to steadily improve
with a full-year contribution from recent acquisitions. Given these
operating assumptions, we believe debt to EBITDA should decline
well below 7x by fiscal year-end 2020.
"We could lower the rating if debt to EBITDA stays well above 8x
and EBITDA interest coverage remains near or below 1.5x. This could
occur if Culligan remains acquisitive or if the company faces an
unanticipated significant erosion in operating performance because
of COVID 19. Either of these two scenarios could keep leverage well
above 8x possibly with negligible free cash flow generation if
one-time charges remain elevated.
"While unlikely over the near term due to its financial sponsor
ownership, we could raise the rating if Culligan sustains debt to
EBITDA below 5x, with a commitment from management to maintain
leverage in that range. We believe the current global economic
malaise would have to be short-lived and that Culligan would have
to apply its annual FOCF exclusively to debt repayment for several
consecutive years to sustain leverage below 5x."
BL CARDS 2018: DBRS Confirms BB Rating on Class E Notes
-------------------------------------------------------
DBRS Ratings Limited confirmed the ratings on the notes issued by
BL Consumer Issuance Platform S.A., acting in respect of its
compartment BL Cards 2018 (the Issuer) as follows:
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (sf)
The ratings address the timely payment of interest and ultimate
payment of principal on or before the legal final maturity date of
March 26, 2034.
The confirmations follow an annual review of the transaction and
are based on the following analytical considerations:
-- Portfolio performance, in terms of charge-off rates, principal
payment rates, yield rates, and delinquencies as of the February
2020 payment date;
-- The ability to withstand stressed cash flow assumptions;
-- No revolving termination events have occurred;
-- Current available credit enhancement to the notes to cover the
expected losses at their respective rating levels.
The transaction is a securitization of revolving credit
receivables, originated and serviced by Buy Way Personal Finance SA
in Belgium and Luxembourg. The transaction has a pass-through,
two-step special-purchase-vehicle structure, differentiated between
purchaser and Issuer level. The transaction is currently in its
three-year revolving period, scheduled to end in March 2021,
providing no early amortization events occur.
PORTFOLIO PERFORMANCE, ASSUMPTIONS AND KEY DRIVERS
As of the February 2020 payment date, two- to three-month arrears
and 90+ arrears represented 0.2% and 0.1% of the outstanding
portfolio balance, respectively, both stable since a year ago. As
of the February 2020 payment date, the cumulative default ratio was
0.1%. In addition, the portfolio composition in terms of product
type and geographical residence complies with the portfolio
criteria. A breach of portfolio criteria limits for two consecutive
months triggers the amortization period.
As of the February 2020 payment date, the monthly principal payment
rate (MPPR) was 11.4%, the annualized charge-off rate was 0.1% and
the annualized yield rate was 12.2%. The MPPR and charge-off rates
have exhibited stable trends since closing. The yield has been
trending upwards since a year ago, while the proportion of Special
Drawings products, which carry a low or zero interest rate, has
been stable at 7.0% of the portfolio outstanding balance during the
same time.
The DBRS Morningstar base case MPPR, charge-off, and yield rates
are 7.6%, 4.4%, and 10.9%, respectively, which have been maintained
since a year ago.
CREDIT ENHANCEMENT
Credit enhancement consists of the subordination of the junior
notes. Subordination to the Class A, Class B, Class C, Class D, and
Class E Notes is currently 24.5%, 19.0%, 13.1%, 5.0% and 2.8%,
respectively, down from 25.1%, 19.6%, 13.7%, 5.7% and 3.4% since a
year ago. The decrease reflects the full amortization of the Class
F Notes through the excess spread.
The transaction benefits from a Reserve Fund that covers Issuer
senior expenses, swap payments and interest shortfall on Class A,
Class B and Class C Notes, subject to certain triggers. The Reserve
Fund is currently at its target level of EUR 2.2 million. The
transaction also has a Senior Expense Reserve Fund that covers
purchaser senior expenses and servicing fees; it is currently at
its target level of EUR 1.0 million.
Citibank Europe plc, Brussels branch acts as the Purchaser Account
Bank and Citibank Europe plc, Luxembourg branch acts as the Issuer
Account Bank for the transaction. Based on the account bank
reference rating of the parent company, Citibank Europe plc, at AA
(low), the downgrade provisions outlined in the transaction
documents, and other mitigating factors inherent in the transaction
structure, DBRS Morningstar considers the risk arising from the
exposure to the account banks to be consistent with the rating
assigned to the Class A Notes, as described in DBRS Morningstar's
"Legal Criteria for European Structured Finance Transactions"
methodology.
BNP Paribas SA acts as the swap counterparty for the transaction.
DBRS Morningstar's Long-Term Critical Obligations Rating of BNP
Paribas SA at AA (high) is above the First Rating Threshold as
described in DBRS Morningstar's "Derivative Criteria for European
Structured Finance Transactions" methodology.
Notes: All figures are in Euros unless otherwise noted.
KIWI VFS SUB 1: S&P Downgrades ICR to 'B', Outlook Negative
-----------------------------------------------------------
S&P Global Ratings lowered its long-term issuer credit rating on
Kiwi VFS SUB 1 S.a.r.l (VFS) to 'B' from 'B+'.
The downgrade reflects an immediate and steep decline in EBITDA and
cash flows. Kiwi VFS SUB 1 S.a.r.l (VFS) is directly affected by
an immediate and potentially prolonged decline in the demand for
visa application services due to the spread of the coronavirus.
Operations at VFS's visa application centers are temporarily
suspended at key global locations, and S&P expects negligible
application volumes in the second quarter of 2020. As a result, it
forecasts a significant increase in VFS's leverage compared to 2019
and our previous expectations.
S&P said, "We consider that the severe travel restrictions imposed
by multiple governments leave VFS susceptible to further downside
risks, especially if the pandemic is not contained by mid-2020. We
assume that travel will start to recover in the second half of
2020, although we do not anticipate it recovering to prior-year
levels until 2023. This is due to our expectations of a global
recession and prolonged damage to discretionary spending. This
could delay the recovery in the demand for visa applications.
"We expect VFS's liquidity to come under pressure in the coming
months. We have revised downward our view of VFS's liquidity to
less than adequate from adequate. Given the ongoing uncertainty
following the COVID-19 outbreak, we forecast negative free
operating cash flow (FOCF) generation, a sharp fall in EBITDA, and
a potential covenant breach under the group's revolving credit
facility (RCF) by year-end 2020. This is being partly mitigated by
VFS's ongoing cost reduction initiatives, flexible cost structure,
and ability to scale back capital expenditure (capex), and other
measures we understand the group is exploring to address its
short-term liquidity concerns."
The negative outlook reflects the uncertainty around the impact of
the COVID-19 pandemic on visa applications, and a recessionary
backdrop that could impair VFS's ability to restore its credit
metrics and liquidity in 2021 after a severe near-term shock.
S&P said, "We could lower the rating on VFS if the global travel
disruptions are prolonged, resulting in higher leverage, sustained
negative FOCF, and a further deterioration in liquidity.
"We could revise the outlook to stable after the containment of the
COVID-19 pandemic, and once we have more certainty on when normal
travel activity will resume, as well as on the steps VFS will take
to shore up its liquidity."
=====================
N E T H E R L A N D S
=====================
AMMEGA GROUP: S&P Downgrades ICR to 'B-' on Delay In Deleveraging
-----------------------------------------------------------------
S&P Global Ratings lowering to 'B-' from 'B' our long-term issuer
credit rating on Netherlands-based belting producer Ammega Group
B.V. and its issue rating on its term loan B.
S&P said, "Due to the coronavirus pandemic and resulting
expectation of global recession across industries, we no longer
think that Ammega Group B.V. will be able to improve its S&P Global
Ratings-adjusted gross debt to EBITDA to about 6.5x in 2020. This
level of leverage was necessary for maintaining the previous
ratings following the EUR150 million term loan B add-on. We expect
that the coronavirus pandemic is likely to materially reduce global
GDP growth, which we forecast will fall to 1.0%-1.5% from about
3.2% under our previous base case. We expect Ammega to benefit from
its exposure to relatively stable end markets such as food,
pharmaceuticals, and logistics, which together represent about 35%
of group revenues. However, we expect the weaker economic
environment and production shutdowns in the general industry to
reduce Ammega's sales volumes in 2020. We therefore now forecast a
contraction in organic revenues of 5%-10% in 2020, down from growth
of 1%-5% in our previous base case."
S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. S&P said,
"Some government authorities estimate the pandemic will peak about
midyear, and we are using this assumption in assessing the economic
and credit implications. We believe the measures adopted to contain
COVID-19 have pushed the global economy into recession. As the
situation evolves, we will update our assumptions and estimates
accordingly."
S&P said, "For 2020, we continue to forecast a positive EBITDA
contribution from the acquisition of Midwest Industrial Rubber
(MIR), which was funded entirely with equity, and an improvement in
EBITDA margins to about 19.0% from about 17.7% in 2019, linked to
internal cost rightsizing and the realization of synergies.
However, due to the weaker demand prospects, we now forecast that
Ammega's adjusted gross debt to EBITDA will only decline to about
8.0x in 2020 from 9.0x in 2019, compared to about 6.5x under our
previous base case. In February 2020, Ammega raised an EUR150
million add-on to its term loan B to refinance drawings under its
revolving credit facility (RCF) that it used to fund bolt-on
acquisitions in 2019. At the time, we affirmed the rating at 'B' as
we believed the group had steep deleveraging prospects.
"We still expect that Ammega will deleverage in 2020, but at a
slower pace, on the back of sustainably positive free operating
cash flow (FOCF). We view Ammega as highly leveraged, but the
group's financial risks are partly mitigated by the relatively low
capital-intensity of its business. We estimate replacement capital
expenditure (capex) at only about 2.5% of sales and moderate
working capital needs. Therefore, we expect the group to be able to
sustain positive FOCF of about EUR25 million-EUR35 million in 2020,
despite the challenging market conditions and its relatively high
cash-paying interest and tax burden. We also view positively the
group's relatively solid funds from operations (FFO) cash interest
coverage, which we forecast will remain around 2.5x–3.0x over
2020-2021.
"Ammega's solid liquidity position following the term loan add-on
and RCF drawdown support the rating. We understand that as a
matter of precaution, the group has fully drawn down its EUR150
million RCF. The group's cash balance is therefore about EUR250
million. We take a positive view of the group's solid liquidity
position, and do not foresee any liquidity constraints in the near
term.
"The stable outlook reflects our expectation that Ammega will still
be able to generate positive free cash flow and gradually
deleverage over the coming 12 months despite the challenging
operating environment.
"Negative rating pressure could emerge over the next 12 months
should the difficult operating environment result in weaker credit
ratios than we project, such that Ammega's capital structure
becomes unsustainable. We could also lower the rating if Ammega's
operating performance weakens to such an extent that FOCF turns
negative. These scenarios could materialize in the event of a
steeper decline in revenues and EBITDA than we anticipate.
"We could consider raising our ratings on Ammega if it manages to
significantly improve its operating and financial performance so
that leverage improves to below 6.5x. This could result from
stronger resilience to the economic slowdown, higher synergies, or
an earlier upturn in the group's end markets than we expect."
HEMA BV: Moody's Cuts CFR to Caa3, Outlook Still Negative
---------------------------------------------------------
Moody's Investors Service has downgraded to Caa3 from Caa1 the
corporate family rating of Dutch retailer Hema B.V. Concurrently,
the rating agency has downgraded Hema's probability of default
rating to Caa3-PD from Caa1-PD. Moody's has also downgraded to Caa2
from B3 the EUR600 million senior secured floating rate notes due
2022 issued by HEMA Bondco I B.V. and to Ca from Caa3 the EUR150
million senior unsecured notes due 2023 issued by HEMA Bondco II
B.V. The outlook for all entities remains negative.
"The decision to downgrade Hema and to maintain the negative
outlook reflects the rapid and widening spread of the coronavirus
outbreak and its expectations that operational disruptions
associated with the outbreak will further weaken the company's
liquidity and increase the risk of a debt restructuring" said
Francesco Bozzano, Moody's lead analyst for Hema and Assistant Vice
President.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The apparel sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand and sentiment.
More specifically, the closure of many stores across Europe will
likely lead to depressed sales and cash received by the company
over the coming months, potentially lower orders from wholesale
customers and potential supply chain disruptions - around 30% of
its products are manufactured in China, where the coronavirus first
hit.
Hema's rating takes into account its aggressive financial policy,
which is reflected by its high leverage. In the current
environment, it is highly uncertain whether Hema and its
shareholder Ramphastos will be willing and able to repay or convert
to equity the outstanding pay-in-kind (PIK) toggle notes of EUR40
million plus capitalized interest at AMEH XXVI B.V., Hema's parent
company. Although the PIK is outside Hema's restricted group,
failure to repay it would result in a cross default for Hema's
financial liabilities.
Moody's expects that a deterioration in EBITDA will also lead to a
reduction in the headroom it has under its springing net leverage
covenant. Under this covenant, which is tested when drawings exceed
40% under the company's revolving credit facility (RCF), Adjusted
EBITDA should be at least EUR70 million (EUR107.8m as of the end of
Q3 2019).
As of November 3, 2019, the company had a very limited liquidity
cushion with only EUR27.4 million of cash and cash equivalents and
EUR49 million available under its EUR80 million committed RCF.
Combined with Moody's expectations of negative free cash flow
generation in the next 12 months, the company's liquidity will be
very stretched in the coming quarters, especially given the
company's very sizeable working capital swings and seasonality.
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. action reflects the impact on Hema of the breadth and
severity of the shock, and the broad deterioration in credit
quality it has triggered.
STRUCTURAL CONSIDERATIONS
The Caa3-PD PDR, in line with the CFR, reflects Moody's assumption
of a 50% Loss Given Default, typical for essentially
all-bond-secured capital structures with a single springing
covenant under the RCF with significant headroom. The EUR600
million senior secured notes are rated Caa2, one notch above the
CFR, reflecting their more senior ranking in the waterfall and the
buffer provided by the EUR150 million senior unsecured notes. The
Ca rating on the EUR150 million senior unsecured notes reflects
their subordinated position in the capital structure, with the
EUR600 million senior secured notes and EUR80 million RCF
contractually ranking senior to them.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the uncertainty around the repayment
of the PIK instrument due in June 2020 and Hema's, and its
shareholder Ramphastos ability and willingness to repay the PIK to
avoid a default of Hema's debt. The negative outlook also reflects
the uncertainty around Hema's ability to preserve its operations
and liquidity during this period of significant earnings decline,
and the impact on future sales from the spread of the coronavirus
in Europe.
Downward pressure on the ratings could result from a debt write-off
for Hema's lenders, resulting in a Distressed Exchange (DE).
Upward pressure on the rating is unlikely in the short term, but
could arise if the company successfully refinances its debt
facilities, including the PIK instrument and achieves a sustainable
recovery in profitability, leading to Moody's-adjusted gross
leverage sustainably to less than 7.0x and interest coverage
sustainably above 1.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
COMPANY PROFILE
Hema is a general merchandise retailer, operating a network of 762
stores as at the beginning of February 2019, principally in Benelux
(645), France (75), Germany (19), Spain (nine) and the UK (10). In
2018, Hema generated net sales of EUR1,269.9 million and adjusted
EBITDA of EUR111.7 million. On November 29, 2018, Ramphastos
Investments, a Dutch private equity company, acquired Hema from
Lion Capital.
MAXEDA DIY: Moody's Cuts CFR to Caa1, Outlook Negative
------------------------------------------------------
Moody's Investors Service has downgraded to Caa1 from B2 the
corporate family rating and to Caa1-PD from B2-PD probability of
default rating of Maxeda DIY Holding B.V. Concurrently, Moody's has
downgraded to Caa1 from B2 the instrument rating of the EUR475
million senior secured notes due 2022 issued by Maxeda. The outlook
remains negative.
"The decision to downgrade Maxeda's ratings reflects Moody's
expectations that the spread of the coronavirus will disrupt the
company's operations and will further weaken the already weak
liquidity buffer of the company" said Francesco Bozzano, Assistant
Vice President and Moody's lead analyst on Maxeda.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The retail sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand and sentiment.
More specifically, the weaknesses in Maxeda's credit profile,
including its weak profitability and its exposure to store
retailing and discretionary spending, have left it vulnerable to
shifts in market sentiment in these unprecedented operating
conditions.
In particular, Maxeda's rating reflects the very stretched
liquidity of the company. Most governments in Europe have announced
a package of financial measures to support corporates, which will
help limit the negative effects during the lockdown period, but
despite these measures Moody's considers that the company has a
very limited liquidity cushion with only EUR10 million of cash and
cash equivalents and EUR30 million available under its EUR50
million committed RCF as of 3 November 2019.
Combined with Moody's expectations of negative free cash flow
generation in the first half of 2020, the company also experiences
very sizeable working capital swings and seasonality, which given
the uncertain effects of the Coronavirus could cause these swings
to be more unpredictable. The next maturity is the super senior
revolving credit facility in January 2022 while the notes mature is
in July 2022. Maxeda will need to refinance the RCF and notes
against a backdrop of potentially weak 2020 results and economic
environment.
Moody's expects that a deterioration in EBITDA will also lead to a
reduction in the headroom it has under its springing net leverage
covenant. Under this covenant, which is tested on a quarterly basis
when drawings exceed 40% under the company's revolving credit
facility (RCF), net leverage should be less than 7.0x (around 4.1x
as of the end of Q3 2019).
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Its action reflects the impact on Maxeda of the breadth
and severity of the shock, and the broad deterioration in credit
quality it has triggered.
STRUCTURAL CONSIDERATIONS
The Caa1 rating assigned to the EUR475 million senior secured notes
reflects (1) the upstream guarantees and share pledges from
material subsidiaries of the group, and (2) pledges on certain
movable assets of the group. The Caa1 rating also takes into
account the presence of a super senior revolving credit facility in
the structure and sizeable trade payables claims at the level of
operating subsidiaries.
The Caa1-PD probability of default rating, in line with the CFR,
reflects Moody's assumption of a 50% family recovery rate, typical
for secured bond structures with a limited set of financial
covenants. More specifically, the documentation includes a net
leverage financial covenant to be tested quarterly if the RCF is
drawn more than 40%.
NEGATIVE OUTLOOK
The negative outlook reflects the downside risks related to a
prolonged operating disruption, which could approach the second
half of the year, and which could further weaken the company's
liquidity and credit metrics. The outlook also reflects Moody's
concerns over the company's ability to fully recover from the
present disruption and ultimately to successfully refinance its
debt before its maturity.
The outlook could be stabilized if the company manages to
significantly improve its free cash flows and its liquidity.
WHAT COULD CHANGE THE RATINGS UP/DOWN
An upgrade is unlikely in the short term. However, upward pressure
on the ratings in the medium term could be exerted as a result of a
material improvement in the company's liquidity.
A higher rating would also require the company to achieve a Moody's
adjusted leverage below 6.0x and the generation of positive FCF.
Conversely, downward pressure could be exerted on the ratings if
FCF remains negative, which could arise from prolonged operational
disruption caused by the coronavirus, which could further
deteriorate the company's liquidity.
Moody's could also consider a downgrade if the next 12 to 18 months
Maxeda's financial leverage fails to decrease below 7.0x or there
are indications that the company will be challenged to refinance
its RCF and 2022 debt maturities on a timely basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
COMPANY PROFILE
Maxeda, domiciled in Amsterdam, the Netherlands, is a DIY retailer
that operates in the Netherlands, Belgium and Luxembourg, via
various offline and online formats. Its offline network comprises
365 stores, of which 234 are its own stores. For fiscal 2018, the
company reported revenue of EUR1.39 billion and an EBITDA of EUR92
million.
===========
R U S S I A
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CHUVASHCREDITPROMBANK JSC: Declared Bankrupt by Chuvash Court
-------------------------------------------------------------
The provisional administration to manage the credit institution
JOINT-STOCK COMMERCIAL BANK CHUVASHCREDITPROMBANK (hereinafter, the
Bank) appointed by Bank of Russia, by virtue of Order No. OD-2566,
dated November 7, 2019, following the banking license revocation,
in the course of its inspection of the Bank, established evidence
suggesting the Bank's assets had been siphoned off by extending
loans to individuals incapable to meet their liabilities, and by
disposing real estate.
According to the provisional administration's assessment, the value
of the Bank's assets is insufficient to fulfil its obligations to
creditors.
On February 20, 2020, the Arbitration Court of the Chuvash Republic
recognized the Bank as bankrupt. The State Corporation Deposit
Insurance Agency was appointed as receiver.
The Bank of Russia submitted the information on the financial
transactions suspected of being criminal offences that had been
conducted by the Bank's officials to the Prosecutor General's
Office of the Russian Federation and the Investigative Committee of
the Ministry of Internal Affairs of the Russian Federation for
consideration and procedural decision-making.
LIPETSK REGION: Fitch Affirms BB+ LT IDR, Alters Outlook to Stable
------------------------------------------------------------------
Fitch Ratings has revised Lipetsk Region's Outlook to Stable from
Positive while affirming the region's Long-Term Foreign- and
Local-Currency Issuer Default Ratings at 'BB+'.
The revision of Outlook reflects Fitch's expectation that the
economic impact, triggered by the coronavirus pandemic, will
mitigate improvements in the region's debt sustainability metrics,
such that Fitch no longer foresees an upgrade as per its previous
forecast. Lipetsk's debt payback ratio is more likely to remain
below 7.5x in 2020-2024, versus the previously expected improvement
to below 5x.
While Russian local and regional governments' (LRGs) most recently
available data may not have indicated performance impairment,
material changes in revenue and cost profiles are occurring across
the sector and likely to worsen in the coming weeks and months as
economic activity suffers and government restrictions are
maintained or broadened. Fitch's ratings are forward-looking in
nature, and Fitch will monitor developments in the sector for their
severity and duration, and incorporate revised base- and
rating-case qualitative and quantitative inputs based on
performance expectations and assessment of key risks.
CRA3 DEVIATION
Under EU credit rating agency (CRA) regulation, the publication LRG
reviews is subject to restrictions and must take place according to
a published schedule, except where it is necessary for CRAs to
deviate from this in order to comply with their legal obligations.
Fitch interprets this provision as allowing us to publish a rating
review in situations where there is a material change in the
creditworthiness of the issuer that Fitch believe makes it
inappropriate for us to wait until the next scheduled review date
to update the rating or Outlook/Watch status. The next scheduled
review date for Fitch's rating on Lipetsk Region is June 12, 2020,
but Fitch believes that developments in the country warrant such a
deviation from the calendar and its rationale for this is laid
out.
KEY RATING DRIVERS
The rating action reflects the following key rating drivers and
their relative weights:
HIGH
Debt Sustainability Assessment: 'aa'
Under Fitch's rating-case scenario, Lipetsk Region's debt
sustainability is assessed at 'aa'. This reflects a debt payback
ratio (net adjusted debt/operating balance) remaining below 7.5x in
2020-2024, in line with its previous assessment. Given the
uncertain global environment, Fitch however no longer expects
improvements of the region's payback to below 5x on a sustained
basis.
Fitch expects a moderately negative effect from the pandemic on
Lipetsk Region's revenue. The region's revenue is historically
marked by volatility, due to dependence on the metals industry, as
the tax base is concentrated on metal producer, PJSC Novolipetsk
Steel (BBB/Stable). Corporate income tax (CIT), which is linked to
the economic cycle and the most volatile tax revenue item,
historically averaged at 36% of the region's total revenue in
2015-2018 (preliminary 2019: 32%). As CIT's volatility is already
factored in the rating case scenario Fitch will evaluate whether
the additional decline of CIT is a one-off in 2020 or will have
medium-term consequences.
LOW
Risk Profile: Weaker
Fitch assesses Lipetsk Region' risk profile as 'Weaker,' reflecting
a 'Weaker' assessment for key risk factors of revenue robustness
and adjustability; and expenditures adjustability. The other
attributes, of expenditure sustainability; liabilities and
liquidity robustness and flexibility, are assessed at 'Midrange'.
DERIVATION SUMMARY
Lipetsk Region's standalone credit profile (SCP) is assessed at
'bb+', which reflects a combination of the region's 'Weaker' risk
profile and 'aa' debt sustainability. The SCP, positioned in the
'bb' category, also reflects Lipetsk Region's comparison against
international peers.
KEY ASSUMPTIONS
Qualitative assumptions and assessments and their respective weight
in the rating decision:
Risk Profile: Weaker, Low weight
Revenue Robustness: Weaker, Low weight
Revenue Adjustability: Weaker, Low weight
Expenditure Sustainability: Midrange, Low weight
Expenditure Adjustability: Weaker, Low weight
Liabilities and Liquidity Robustness: Midrange, Low weight
Liabilities and Liquidity Flexibility: Midrange, Low weight
Debt sustainability: 'aa' category, High weight
Extraordinary Support: n/a
Asymmetric Risk: n/a
Quantitative assumptions - issuer-specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2015-2019 figures and 2020-2024 projected
ratios.
The key assumptions for the scenario include:
- Tax revenue growth at 105.4% CAGR in 2020-2024
- Operating expenditure growth at 104.1% CAGR in 2020-2024
Fitch's rating case envisages the following stress compared with
the base case:
- Stress of corporate income tax by -2.25 pp annually in
2020-2024 compared with base-case growth;
- Stress on operating expenditure 0.5 pp annually to reflect
higher operating expenditure growth in the rating case.
Figures as per Fitch's sovereign forecast for 2020 and 2021,
respectively:
- GDP per capita (US dollar, market exchange rate): 12,351,
12,508
- Real GDP growth (%): 1, 2
- Consumer prices (annual average % change): 3.2, 4.1
- General government balance (% of GDP): 0.7, 0.3
- General government debt (% of GDP): 15.7, 16.6
- Current account balance plus net FDI (% of GDP): 3.1, 2.3
- Net external debt (% of GDP): -36.6, -37.1
- IMF Development Classification: EM
- CDS Market Implied Rating: n/a
RATING SENSITIVITIES
A positive rating action may result from the debt payback ratio
falling below 5x on a sustained basis in its rating case.
Lipetsk Region could be downgraded if its debt payback ratio
overshoots 7.5x on a sustained basis in its rating case.
ESG CONSIDERATIONS
ESG issues are credit neutral or have only a minimal credit impact
on the entity(ies), either due to their nature or the way in which
they are being managed by the entity(ies).
NATIONAL FACTORING: Fitch Assigns B+ LT IDR, Outlook Negative
-------------------------------------------------------------
Fitch Ratings has assigned National Factoring Company JSC (NFC) a
Long-Term Issuer Default Rating of 'B+' with Negative Outlook.
KEY RATING DRIVERS
IDRS
The IDRs of NFC reflects a narrowly focused monoline business model
with high risk appetite, modest capital and concentrated funding,
as well as an untested market funding capacity. Positively, NFC's
viable niche franchise, healthy portfolio diversification and a
record of credit risk control support the ratings. The Negative
Outlook reflects increased economic uncertainties due to the
COVID-19 pandemic and oil price-decline effects.
NFC operates under a limited banking license (not allowed to
attract retail deposits) and is regulated by the Central Bank of
Russia (CBR). It is, however, a closely integrated part of the
wider NFC Group that includes a non-regulated factoring entity -
NFC-Premium, where higher-risk activities are present. NFC
accounted for 52% of group's assets as of end-2019. The assets are
fungible within the group.
NFC is a mid-range factoring company in Russia, with a developed
franchise in servicing local-currency smaller-ticket SME factoring.
NFC's portfolio is granular and well-diversified. Main competitors
include larger-sized bank-owned, as well as smaller SME-specialised
factoring companies.
NFC's risk appetite is shaped by the company's strategy to
underwrite smaller SME tickets or finance non-standard receivables
of larger companies, where competitive pressure is much lower.
NFC's standalone asset quality is adequate, compared with NFC
Group's, which is notably worse. Recoveries of problematic loans
were solid at an average of 86% in 2017-2019, despite an
effectively uncollateralised exposure. Impaired loans-to-total
loans were 2.3% at end-2019, well-covered by provisions at 147%.
NFC's revenue was mainly interest from factoring activities with a
solid net interest margin (NIM) at around 7% in 2019, which
comfortably covered inherently high operational costs. However,
profitability was low, with returns on average assets (ROAA) and
return on average equity (ROAE) at 0.9% and 4.7% in 2019, due to a
hike in impairment costs. Its low profitability volatility is yet
to be tested though-the-cycle.
NFC's leverage is subject to volatility, caused by a high turnover
in the short-term portfolio. Tangible leverage was 3x at end-2019,
with NFC-Premium's leverage notably higher. Management expects to
grow the group's receivables by around 26% in 2020, which would
push NFC Group's tangible leverage higher to above 8x at end-2020.
NFC's Tier 1 ratio (N1.2) was at 12.9% at end-3Q19, comfortably
above the CBR-required buffer of 8.25%. NFC's absolute capital size
is small and, in its view, can leave the company vulnerable to
unforeseen events and operational risk. NFC's capitalisation should
also be viewed in the context of additional risks in NFC-Premium.
NFC's standalone funding profile is less than developed, as the
company sources most of its funding (93% at end-2019) from a
related party - a sister bank JSC Bank Uralsib (BB-/Stable), which
is currently under a financial rehabilitation jointly overseen by
the CBR and Deposit Insurance Agency. NFC's assets and liabilities
are adequately matched in currency and maturity. It has access to
uncommitted funding from local banks and a foreign-currency credit
line from an international financial institution.
NFC has an ESG Relevance Score of 4 for Governance Structure, as
Fitch believe that its sizable unregulated sister company
NFC-Premium, which books higher-risk assets and has higher
leverage, decreases NFC's transparency and exposes it to contagion
risk.
RATING SENSITIVITIES
IDRS
Rating upside is limited by the ongoing market uncertainty and
instability and largely depends on the state of the Russian
economy. An upgrade would require a strengthening of the franchise,
a record of stable profitability and proven funding
capacity/diversification.
The rating could be downgraded on significant deterioration of
asset quality and profitability, due to slowing new business
origination both at NFC and NFC Group. The rating could also be
downgraded on reduced availability of related-party funding and
limited access to sustainable funding sources. Deterioration in the
regulatory capital buffer to below 100bp would put pressure on
ratings.
ESG CONSIDERATIONS
NFC has an ESG Relevance Score of 4 for Governance Structure, which
reflects the presence of higher-risk related parties.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of 3. This means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity(ies), either due to their nature or the way in which
they are being managed by the entity(ies).
SVERDLOVSK REGION: Fitch Affirms BB+ IDR, Alters Outlook to Stable
------------------------------------------------------------------
Fitch Ratings has revised Sverdlovsk Region's Outlook to Stable
from Positive, while affirming the region's Long-Term Foreign- and
Local-Currency Issuer Default Ratings at 'BB+'.
The revision of Outlook reflects Fitch's expectation that the
economic impact, triggered by the coronavirus pandemic, will
mitigate improvements in the region's debt sustainability metrics,
such that Fitch no longer foresees an upgrade as per its previous
forecast.
CRA3 DEVIATION
Under EU credit rating agency (CRA) regulation, the publication of
local and regional governments' (LRGs) reviews is subject to
restrictions and must take place according to a published schedule,
except where it is necessary for CRAs to deviate from this in order
to comply with their legal obligations. Fitch interprets this
provision as allowing us to publish a rating review in situations
where there is a material change in the creditworthiness of the
issuer that Fitch believe makes it inappropriate for us to wait
until the next scheduled review date to update the rating or
Outlook/Watch status. The next scheduled review date for Fitch's
rating on Sverdlovsk Region is April 10, 2020, but Fitch believes
that developments in the country warrant such a deviation from the
calendar and its rationale for this is laid out.
KEY RATING DRIVERS
While Russian LRGs' most recently available data may not have
indicated performance impairment, material changes in revenue and
cost profiles are occurring across the sector and likely to worsen
in the coming weeks and months as economic activity suffers and
government restrictions are maintained or broadened. Fitch's
ratings are forward-looking in nature, and Fitch will monitor
developments in the sector for their severity and duration, and
incorporate revised base- and rating-case qualitative and
quantitative inputs based on performance expectations and
assessment of key risks.
The rating action reflects the following key rating drivers and
their relative weights:
HIGH
Debt Sustainability Assessment: 'a'
Under new Fitch's rating-case scenario, Sverdlovsk Region's debt
sustainability is assessed at 'a', down from previous assessment of
'aa'. Due to the uncertainty triggered by the current pandemic,
Fitch no longer expects scope for improvements of the debt payback
ratio to 5x or of the actual debt service coverage ratio (ADSCR) to
1.2x. According to its revised rating case Sverdlovsk Region's debt
payback is more likely to approach 9x in 2020-2024, while ADSCR
will deteriorate to below 1x.
Fitch expects a moderately negative effect from the pandemic on
Sverdlovsk Region's revenue. Corporate income tax (CIT), which is
the largest tax revenue source for Sverdlovsk Region, is linked to
the economic cycle and is the most volatile tax revenue item. It
historically averaged 30% of the region's total revenue in
2014-2019 (2019: 34%). Fitch has already factored CIT's historical
volatility in its rating case, and applies a further 2pp negative
stress to CIT proceeds for 2020. Fitch will evaluate whether the
additional decrease of CIT is a one-off in 2020 or whether it will
have medium-term consequences.
LOW
Risk Profile: Low Midrange
Fitch has assessed Sverdlovsk Region's risk profile at 'Low
Midrange'. This reflects a 'Midrange' assessment for key risk
factors of revenue robustness; expenditure sustainability; and
liabilities and liquidity robustness and flexibility. Revenue and
expenditure adjustability are assessed as 'Weaker'. Fitch has
revised its assessment of Sverdlovsk Region's revenue robustness to
'Midrange' from 'Weaker' based on the region's improved revenue
base and diversification, which has led to the overall 'Low
Midrange' risk profile.
DERIVATION SUMMARY
Sverdlovsk Region's standalone credit profile (SCP) is assessed at
'bb+', which reflects a combination of a 'Low Midrange' risk
profile and 'a' debt sustainability. It also reflects a sound
fiscal debt burden and comparison with peers. The IDRs are not
affected by any asymmetric risk or extraordinary support from an
upper government tier. As a result, the region's IDRs are equal to
the SCP.
KEY ASSUMPTIONS
Qualitative assumptions and assessments and their respective weight
in the rating decision:
Risk Profile: Low Midrange, Low weight
Revenue Robustness: Midrange, Low weight
Revenue Adjustability: Weaker, Low weight
Expenditure Sustainability: Midrange, Low weight
Expenditure Adjustability: Weaker, Low weight
Liabilities and Liquidity Robustness: Midrange, Low weight
Liabilities and Liquidity Flexibility: Midrange, Low weight
Debt sustainability: 'a' category, High weight
Extraordinary Support: n/a
Asymmetric Risk: n/a
Quantitative assumptions - issuer-specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2015-2019 figures and 2020-2024 projected
ratios.
The key assumptions for the scenario include:
- Tax revenue growth at 106% CAGR in 2020-2024
- Operating expenditure growth at 106.4% CAGR in 2020-2024
Fitch's rating case envisages the following stress compared with
the base case:
- Additional cumulative stress on CIT by 9.6% leading to
operating revenue stress by 3.65% in 2020-2024
- Additional cumulative stress on operating expenditure by 2.5%
in 2020-2024
Figures as per Fitch's sovereign forecast for 2020 and 2021,
respectively:
- GDP per capita (US dollar, market exchange rate): 12,351,
12,508
- Real GDP growth (%): 1, 2
- Consumer prices (annual average % change): 3.2, 4.1
- General government balance (% of GDP): 0.7, 0.3
- General government debt (% of GDP): 15.7, 16.6
- Current account balance plus net FDI (% of GDP): 3.1, 2.3
- Net external debt (% of GDP): -36.6, -37.1
- IMF Development Classification: EM
- CDS Market Implied Rating: n/a
RATING SENSITIVITIES
Improvements of the debt payback ratio to below 5x or ADSCR toward
1.2x under Fitch's rating case on a sustained basis could lead to
an upgrade.
Deterioration of the debt payback ratio to above 9x under Fitch's
rating case on a sustained basis would result in a downgrade.
ESG CONSIDERATIONS
ESG issues are credit neutral or have only a minimal credit impact
on the entity(ies), either due to their nature or the way in which
they are being managed by the entity(ies).
===========
S E R B I A
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SERBIA: Fitch Affirms BB+ LT Issuer Default Rating, Outlook Stable
------------------------------------------------------------------
Fitch Ratings has affirmed Serbia's Long-Term Foreign-Currency
Issuer Default Rating at 'BB+' with a Stable Outlook.
KEY RATING DRIVERS
The resilience of Serbia's rating to the coronavirus shock is
supported by its minimal exposure to tourism, the positive impact
of lower energy prices, increased foreign exchange reserves and
moderate non-resident holdings of government debt. The
near-balanced budget coming into 2020 and central government
deposits provide some fiscal space to respond, and the fiscal
discipline in recent years enhances confidence in a post-crisis
adjustment. Nevertheless, Serbia's small, open economy is exposed
to the eurozone, and foreign currency external debt is relatively
high.
Serbia's governance, ease of doing business, and human development
indicators compare favourably with the 'BB' medians. The IMF Policy
Coordination Instrument (PCI) in place since July 2018 provides a
policy anchor and has underpinned a stable macroeconomic position
in recent years, including low inflation, higher FX buffers, and
enhanced fiscal policy credibility. Set against these factors are
Serbia's higher public debt, greater share of foreign-currency
denominated debt, higher net external debt, and somewhat lower GDP
growth potential relative to the peer medians. The current account
deficit, averaging 5.7% of GDP in 2017-2019, is also wider than the
'BB' median of 2.9% although it has been fully covered by strong
FDI flows.
Fitch forecasts GDP growth will slow to 0.2% in 2020, from 4.2% in
2019, a 3.4pp downward revision since its last review six months
ago due to the impact of the coronavirus outbreak, and with a
sizeable further downside risk. 4Q19 growth outperformed
expectations, at 6.2% yoy on the back of surging investment, and
activity remained strong early this year, with base effects and a
large pipeline of public infrastructure projects providing momentum
ahead of a sharp contraction forecast in 2Q20. Fitch assumes more
far-reaching restrictions on movements during the three-month
"state of emergency" than those already announced (a ban on
movement of the elderly, evening curfew, and restrictions on social
gatherings). The initial policy response includes fiscal measures
totalling 0.9% of GDP and a 90-day moratorium on loan repayments.
The National Bank of Serbia cut the policy interest rates by 50bp
to 1.75% (and narrowed the interest rate corridor to 1.0pp from
1.25pp) and Fitch forecasts a further 75bp of cuts this year.
Inflation remained low and stable at 1.9% in February, with core
inflation 1.5% (and averaging 1.4% since 2015). Fitch forecasts GDP
growth of 5.8% in 2021 (2.2pp higher than its previous forecast),
supported by investment catch-up, a partial rebound in private
consumption, resumption of employment growth and a recovery in
external demand, partly offset by fiscal tightening. Over a longer
period, Serbia's average GDP growth has been below the 'BB' median
(3.1% versus 4.2% in 2015-2019) and unfavourable demographics and
weak total factor productivity growth weigh on Serbia's growth
potential.
An expected current account adjustment in 2020 helps mitigate
near-term balance of payments risks from highly stressed market
conditions. The deficit widened to 6.9% of GDP in 2019 as 18%
investment growth pushed up imports. Fitch forecasts the current
account deficit will narrow to 4.0% this year due to lower imports
from the sharp fall in domestic demand, moderating FDI inflows and
the lower oil price, with only a partial offset from weaker
exports, and then increases to 5.6% in 2021. A USD10 dollar decline
in the oil price improves the current account balance by an
estimated 0.4% of GDP, there are negligible net tourism exports
(0.05% of GDP in 2019), and there is a high capital and
export-oriented content of imports. Fitch expects a similar pattern
in net FDI inflows, falling to 4.6% of GDP this year, from 7.8% in
2019, and then rebounding to 7.4% in 2021, more than covering the
current account deficit in each year.
Serbia's foreign exchange reserves increased to EUR13.5 billion in
February, from EUR11.4 billion a year earlier, equivalent to 5.1
months of current external payments months, above the peer group
median of 4.5 months. Available data indicates only moderate
capital outflows so far this year and the exchange rate has been
stable between EUR/RSD117.5 and 118. There was a small net sale of
FX by National bank of Serbia in the first two months of 2020
totalling EUR50 million, and Fitch does not expect a sizeable
intervention this month. Fitch forecasts FX reserves fall to 4.5
months of current external payments at end-2020, increasing to 5.0
months at end-2021, and net external debt/GDP is broadly flat at
32% of GDP, which compares unfavourably with the current 'BB'
median of 19%.
The near balanced general government position, of -0.2% of GDP in
2019 (following a surplus of 0.6% in 2018, and below the current
'BB' median deficit of 2.8%) provides some fiscal space to respond
to the coronavirus shock. Fitch forecasts the general government
deficit will widen to 3.2% of GDP this year, 3.1pp higher than its
previous forecast, and that the fiscal response is largely
consistent with IMF PCI waivers to the current target for a 0.5% of
GDP deficit. In addition to new spending on health, pensions, and
infrastructure announced this month, there are proposals to reduce
payroll tax and advance payment of corporate tax, on top of which
Fitch anticipates more far-reaching support measures to the most
affected areas. The increase in the deficit is mitigated by likely
under-execution on capital projects and some reprioritisation of
non-essential spending.
Fitch forecasts a general government deficit of 0.3% of GDP in 2021
as GDP growth rebounds and temporary measures are unwound,
underpinned by the government's strong political commitment to its
medium-term fiscal deficit target of 0.5% of GDP. General
government debt has fallen steadily to 52.9% of GDP at end-2019
from 54.4% in 2018 (and 71.2% in 2015) but remains above the
current 'BB' median of 46.5%. Fitch projects an increase to 55.0%
this year, falling back to 50.8% at end-2021.
Only around 10% of this month's Eurobond redemption was rolled over
due to weak demand and there is now a greater focus on domestic
issuance targeting local banks. An increase in fiscal reserves to
8.3% of GDP at end-2019 mitigates funding risks The average
maturity of central government debt has lengthening to 6.3 years
from 5.1 years at end-2016 but the FX-share of public debt at 72.3%
remains well above the current 'BB' median of 56.0%. Under its
longer-term debt projections, which assume average GDP growth of
3.4% from 2020-2029 and a 1% of GDP deterioration in the primary
surplus between 2021-2026, general government debt declines to 38%
of GDP in 2029.
Fitch anticipates broad continuity in policy and governance, with
polls indicating that President Vucic's ruling coalition is strong
favourite to win elections that have been postponed from April due
to the coronavirus outbreak. Prior to the outbreak, the opposition
had threatened to boycott the elections citing concerns over media
freedom and electoral processes, and there is a possibility the
elections revive the widespread protests against the government
seen earlier last year but Fitch would not expect a significant
macroeconomic impact from this.
There has been only gradual progress in the EU accession process,
and a long delay to the 2025 target date is expected, with the
chapters on rule of law and Kosovo the most problematic. Relations
with Kosovo continue to be severely strained, with no dialogue,
little sign of compromise on a potential land swap agreement, and
tariffs applied by Kosovo to exports largely remaining in place.
Structural reform implementation has been relatively slow in recent
years, and will be further pushed back by the coronavirus state of
emergency. There has been steady progress in strengthening tax
administration and public financial management, but the
introduction of a new public wage system has again been delayed.
The next PCI review in May is expected to incorporate measures to
develop the domestic capital market, and extend fiscal rules, which
may help provide a fiscal anchor beyond next year's expiration of
the PCI. More broadly, Fitch does not anticipate a marked
quickening of structural reforms that would support an increase in
Serbia's potential GDP growth.
There has been a steady improvement in the credit fundamentals of
the banking sector, increasing the resilience to current market
stresses. The NPL ratio has continued to fall, to 4.1% at end-2019
from 5.7% at end-2018 (and 9.8% at end-2017) and the coverage ratio
has been broadly flat at 60.7% at end-2019. The sector is well
capitalised, with the CET1 ratio increasing to 23.6% at end-2019
from 22.3% a year earlier, providing a buffer to absorb the likely
weakening in asset quality in 2020. A lower net interest margin
contributed to the return on equity falling 1.5pp in 2019 to 9.8%
and Fitch expects a further reduction in profitability this year
partly due to credit growth slowing, from 10% currently. Progress
in addressing weaknesses in state-owned banks (which account for
16% of total banking sector assets) remains mixed, although the
sale of the government's 83% stake in Komercijalna Banka, Serbia's
third-largest bank, has been agreed, at around EUR400 million (0.8%
of GDP).
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Serbia a score equivalent to a
rating of 'BB+' on the Long-Term FC IDR scale, one-notch lower than
the 'BBB-' SRM score at its previous review (where it was at the
boundary of BB+).
Fitch's sovereign rating committee did not adjust the output from
the SRM to arrive at the final Long-Term Foreign-Currency IDR. The
removal of the -1 notch under Macroeconomics since the previous
review reflects stronger than expected (and more broad-based)
investment dynamics and outturns in 2019, contributing to a view
that Serbia's longer-term trend GDP growth is closer to the peer
group medium.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within its
criteria that are not fully quantifiable and/or not fully reflected
in the SRM.
RATING SENSITIVITIES
The following factors may, individually or collectively, result in
positive rating action:
- General government debt/GDP returning to a firm downward path
over the medium-term, for example due to a post-coronavirus-shock
fiscal consolidation.
- An improvement in medium-term growth prospects for example from
structural reforms, increasing the pace of convergence in GDP per
capita with higher rated peers.
- Marked reduction in net external debt/GDP.
The following factors may, individually or collectively, result in
negative rating action:
- A recurrence of external financing pressures leading to a fall
in reserves and a sharp rise in debt levels and interest burden, a
high share of which is denominated in foreign currency.
- A sustained increase in general government debt/GDP over the
medium-term, for example due to a structural fiscal loosening
and/or weaker GDP growth prospects.
- Worsening of external imbalances leading to increased external
liabilities.
KEY ASSUMPTIONS
Fitch assumes that EU accession talks will remain an important
policy anchor.
ESG CONSIDERATIONS
Serbia has an ESG Relevance Score of 5 for Political Stability and
Rights as World Bank Governance Indicators have the highest weight
in Fitch's SRM and are highly relevant to the rating and a key
rating driver with a high weight.
Serbia has an ESG Relevance Score of 5 for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight.
Serbia has an ESG Relevance Score of 4 for Human Rights and
Political Freedoms as strong social stability and voice and
accountability are reflected in the World Bank Governance
Indicators that have the highest weight in the SRM. They are
relevant to the rating and a rating driver.
Serbia has an ESG Relevance Score of 4 for Creditor Rights as
willingness to service and repay debt is relevant to the rating and
is a rating driver for Serbia, as for all sovereigns.
=========
S P A I N
=========
CATALONIA: Fitch Affirms BB LT IDR, Alters Outlook to Neg.
----------------------------------------------------------
Fitch Ratings has revised the Outlook on the Autonomous Community
of Catalonia' Long-Term Foreign- and Local-Currency Issuer Default
Ratings (IDRs) to Negative from Stable and affirmed the IDRs at
'BB'.
The rating action reflects Fitch's expectations that the COVID-19
pandemic will negatively impact Spanish local and regional
governments' (LRGs) finances, including the autonomous communities.
In Fitch's view, the crisis will weaken Catalonia's economic
liability burden to close to its rating sensitivity of 100% in the
medium term under its rating case.
While Spanish LRGs' most recently available data may not have
indicated performance impairment, material changes in central
government's debt, revenue and costs are occurring across the
sector and likely to worsen in the coming weeks and months as
economic activity suffers and government restrictions are
maintained or broadened. Fitch's ratings are forward-looking in
nature, and Fitch will monitor developments in the sector for their
severity and duration, and incorporate revised base- and
rating-case qualitative and quantitative inputs based on
performance expectations and assessment of key risks.
Autonomous communities are considered 'type A' LRGs by Fitch and as
such their primary debt sustainability is measured by the economic
liability burden, which is strongly related with general government
debt. In this respect, Fitch expects the general government debt to
increase due to the economic effect of the pandemic, leading to
deterioration in Catalonia's economic liability burden.
Catalonia is a Spanish autonomous community, whose main
responsibilities cover health, education and social spending. The
regional government operates under a tax-sharing system, and its
revenue is composed of taxes, including those over which it has
tax-setting power, and transfers from the central government.
Fitch introduced an investment-grade rating floor for Spanish
regions at 'BBB-' in February 2013, mainly based on fiscal and
financial discipline shared with the national government as well as
the availability of financial mechanisms from the national
governments, such as Fondo de Liquidez Autonomica, to fund debt
maturities. Fitch decided in November 2015 to suspend the rating
floor for Catalonia amid lack of cooperative relationship between
the regional and central governments. With upcoming national
elections on 10 November and a ruling on the Catalan independence
leaders' trial, tensions may flare up again, hence the floor
remains suspended. However, any change or reassessment of the
likelihood (ability and willingness) of central government support
to Catalonia could lead to an IDR uplift.
KEY RATING DRIVERS
The rating action reflects the following key rating drivers and
their relative weights:
HIGH
Debt sustainability: 'bbb' category
Under Fitch's rating case, Catalonia' debt sustainability is
assessed at the 'bbb' category. This reflects a higher economic
liability burden (net adjusted debt + a pro-rata share of central
government debt/regional GDP) - the primary metric of debt
sustainability - at slightly below 100% in 2023, versus the
previously expected 91% and 2018's 94%.
Fitch forecasts the secondary metric, the debt payback ratio (net
direct risk to operating balance), will remain at 55-60 years in
2023 and actual debt service coverage (operating balance/debt
servicing) to be weak at 0.1x in 2023. All these metrics underpin
the 'bbb' debt sustainability assessment.
Fitch expects the pandemic to hit Catalonia' revenue through taxes
that are linked to the economic cycle as well as the region's
expenditure. Catalonia, like other Spanish regions, have a large
share of moderately countercyclical expenditure items in health
spending (38% of spending without debt repayment).
Catalonia's net adjusted debt has been increasing since 2014 (to
EUR70.7 billion at end-2018 from EUR56.1 billion), notably due to
capital, financial and operating deficits. In its rating case,
overall adjusted debt is expected to increase to around EUR79
billion in 2023, driven by the shock in 2020 to operating balance
assumptions and only gradual improvement in the following years.
LOW
Risk Profile: 'Midrange'
Fitch continues to assess Catalonia's risk profile at 'Midrange',
reflecting a combination of 'Midrange' assessment on six key risk
factors.
Revenue Robustness Assessed as 'Midrange'
Catalonia's revenues are mostly made up of taxes and transfers from
the central government. Most taxes are collected by the central
government and transferred to autonomous communities on a
preliminary basis, with a final settlement two years later. This
often results in volatile revenue growth such as the 8% spike in
2017.
Around 90% of revenue, represented by personal income tax (PIT),
VAT, special and wealth-related taxes, is correlated with GDP,
which at EUR231 billion in 2018, or 101% above the EU's 2017 per
capita average, underpins Catalonia's revenue predictability.
Revenue Adjustability Assessed as 'Midrange'
The region has tax-setting powers on certain taxes, with PIT being
the most significant (38% of revenues), with no cap on the rates
from the state. The region has also used these tax-setting powers
to set fiscal benefits, the base of PIT calculation and its
corresponding tax rates. According to Fitch's calculations,
removing these fiscal benefits would allow the region to cover 100%
of the sharpest revenue declines since 2011, qualifying for a
'Midrange' assessment.
Expenditure Sustainability Assessed as 'Midrange'
Catalonia has demonstrated moderate control of expenditure,
underpinned by a high share of inflexible expenses such as
healthcare and education, at 60% of total spending excluding debt
repayment. However, the cyclically-sensitive social and
unemployment expenditure, which account for about 10% of total
spending, add some volatility, as in 2015-2016 when operating
spending grew 12%.
Fitch does not expect a major change in management policy should
early elections be called by the regional government. Conversely,
Fitch expects expenditure growth to be slightly below revenue
growth, constrained by the region's fiscal targets. Fitch expects
the operating margin to improve to 5% in 2023 after a worsening in
2020 and from 2.4% in 2018 under its rating case.
Expenditure Adjustability Assessed as 'Midrange'
Control of expenditure has improved since the introduction of the
Budget Stability Law in 2012, which sets targets of maximum
spending growth (at 2.4% for 2018) along with deficit limits.
Subsequently, deficits have progressively narrowed although
Catalonia failed to comply with these targets prior to 2018.
The region has limited flexibility in workforce spending (nearly
30% of total spending excluding debt repayment) in both the numbers
and salaries of civil servants. The share of committed expenditure
is close to 85% and the region has limited scope for reductions as
the level of existing services is below the national average.
Liability and Liquidity Robustness Assessed as 'Midrange'
Catalonia is subject to a solid national framework for debt and
liquidity management with prudential borrowing limits at 23.4% of
GDP for 2020. Additionally, the region has a conservative debt
structure, with a low proportion of short-term debt at about 2%,
almost all debt being euro-denominated (99.8%), low maturity
concentration and an average cost of debt at 1.13% in 2018.
However, refinancing risk is not negligible as Catalonia's average
life of debt is short at 4.19 years and debt service of EUR9.7
billion in 2019 was only 0.1x covered by the operating balance. The
region has limited off-balance sheet risks, consisting mainly of
debt and guarantees to companies in railway or general
infrastructure, and the finance institute.
Liability and Liquidity Framework (Flexibility) assessed as
'Midrange'
Fitch views about EUR1.5 billion as restricted for the payment of
payables in excess of receivables. Cash is also insufficient to
meet debt maturities in 2020, even after accounting for the
region's credit lines of about EUR734 million at end-2019, with
Spanish banks such as BBVA, highlighting a reliance on debt market
funding.
Catalonia has also utilised state support mechanisms for debt
financing since 2012 on favourable financial terms, which helps
mitigate liquidity risk and reduce the likelihood of default.
ESG Factors Influence
Catalonia has been assigned an ESG score of 4 for Political
Stability and Rights. Tensions with the central government have
affected its view of the potential central government support for
Catalonia to the extent that it may not be certain enough to
support Catalonia within the Rating Floor of 'BBB-' for the
autonomous communities.
DERIVATION SUMMARY
Catalonia's standalone credit profile (SCP) is assessed at the 'bb'
category, reflecting a combination of a 'Midrange' risk profile,
and the 'bbb' debt sustainability assessment. The 'bb' SCP also
factors in peer comparison. Since no other asymmetric risks affect
the ratings, Catalonia's IDRs are equal to the SCP.
KEY ASSUMPTIONS
Qualitative assumptions and Assessments:
Risk Profile: Midrange, Low weight
Revenue Robustness: Midrange, Low weight
Revenue Adjustability: Midrange, Low weight
Expenditure Sustainability: Midrange, Low weight
Expenditure Adjustability: Midrange, Low weight
Liabilities and Liquidity Robustness: Midrange, Low weight
Liabilities and Liquidity Flexibility: Midrange, Low weight
Debt sustainability: 'bbb' category, High weight
Support: none
Asymmetric Risk: none
Quantitative assumptions: issuer-specific
Fitch revised its rating-case assumptions to reflect the negative
economic impact of the pandemic on autonomous communities' debt
sustainability metrics.
Fitch's rating case is a 'through-the-cycle' scenario, which
incorporates a combination of revenue, cost and financial risk
stresses in case of economic slowdown but did not factor in such
exceptional events. It is based on 2014-2018 figures and 2019-2023
projected ratios.
It incorporates a combination of revenue, cost and financial risk
stresses in case of economic slowdown and takes into account the
recent lockdown of the Spanish economy.
The revised key assumptions for the rating case follows its
downward revision of Spain's real GDP growth, with an additional
fall of revenues in 2020 equivalent to 3% before a recovery in 2021
of the same magnitude, further operating spending increases of 0.7%
in 2020 and 0.35% in 2021 and a sharp rise of central government
debt in 2020 of 7.8% (versus 2.7% in previous projection). The key
assumptions for the scenario include:
- Nominal average growth of operating revenue at 4.8% in the next
five years
- Nominal average growth of operating expenditure at 4.3% in the
next five years
- Net capital balance at negative EUR1,354 million on average in
the next five years
- 1.4% average cost of debt in the next five years
Quantitative assumptions - sovereign related
Figures as per Fitch's sovereign actual for 2018 and forecast for
2021, respectively:
GDP per capita (US dollar, market exchange rate): 30,372; 31,237
Real GDP growth (%): 2.4; 2.4
Consumer prices (annual average % change): 1.2; 1.5
General government balance (% of GDP): -2.5; -1.8
General government debt (% of GDP): 97.6; 95
Current account balance plus net FDI (% of GDP): 3.2; 1.3
Net external debt (% of GDP): 77.8; 74.3
IMF Development Classification: DM
CDS Market Implied Rating: n/a
RATING SENSITIVITIES
Catalonia's IDRs could be downgraded on deterioration of the
economic liability burden to above 100%.
ESG CONSIDERATIONS
Catalonia has an ESG Relevance Score of 4 for Political Stability
and Rights. This reflects Catalonia's political tensions with the
central government.
Except for the matters discussed, the highest level of ESG credit
relevance, if present, is a score of 3 - ESG issues are credit
neutral or have only a minimal credit impact on the entity(ies),
either due to their nature or the way in which they are being
managed by the entity(ies).
CIRSA ENTERPRISES: Moody's Cuts CFR to B2, On Review for Downgrade
------------------------------------------------------------------
Moody's Investors Service has downgraded Cirsa Enterprises,
Sociedad Limitada corporate family rating to B2 from B1 and its
probability of default to B2-PD from B1-PD. In parallel, Moody's
placed on review for downgrade all Cirsa's ratings, including the
B2 instrument rating of the senior secured notes issued by Cirsa
Finance International S.a.r.l.
"Cirsa's downgrade reflects the rapid and widening spread of the
coronavirus outbreak, which has prompted the closure of the
company's distribution network and gaming venues across Europe and
Latin America. This is likely to cause Cirsa's revenues and EBITDA
to fall sharply in 2020 and lead to a drain on cash flow and
liquidity" said Florent Egonneau, Associate Vice President and
Moody's lead analyst for Cirsa. "The company's exposure to
countries in Central and Latin America, representing 49% of the
company's adjusted EBITDA in 2019, could lead to further negative
pressure on EBITDA due to adverse foreign exchange movements" added
Mr. Egonneau.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The gaming sector
is one of the sectors most significantly affected by the shock
given its sensitivity to consumer demand. More specifically, Its
action reflects the impact on Cirsa of the breadth and severity of
the shock, as well as the broad deterioration in earnings it has
triggered for an unknown period of time.
In contrast with the company's strong track record in terms of
earnings growth and cash flow generation in the last few years,
Moody's expects Cirsa's operating performance and credit metrics to
be negatively impacted by the closure of its operations in the
short-term and for an unknown period, especially in the absence of
material exposure to the online segment. Moody's also expects that
earnings and cash flow will be negatively affected by adverse
foreign exchange movements, given the company's exposure to
countries including Panama, Colombia and Mexico, and more
challenging economic conditions in the medium to longer-term. As a
result, Moody's expects that Cirsa's leverage, as measured by
Moody's-adjusted debt/EBITDA, will increase above 6.0x in 2020,
gradually declining back towards 5.0x by the end of 2021.
However, the uncertainty around the length of the lockdown period
and its long-term impact on economies increases the downside
risks.
In 2019, Cirsa's operating performance was strong with a 25%
year-on-year increase in adjusted EBITDA (before IFRS 16) to EUR417
million, partly attributable to the contribution from acquisitions
(i.e. Giga, Sportium and seven halls in Mexico). The company
continued to generate positive free cash flow ("FCF") of EUR78
million (excluding acquisitions).
The review will focus on Cirsa's ability to preserve its liquidity
during this period of significant earnings decline and the
resilience of the company's credit metrics following the disruption
of its operations. Moody's will also evaluate Cirsa's ability to
reduce expenses and take other actions to preserve cash, as well as
the effects of financial measures and policies that have been
announced by European governments.
Moody's also expects that once the lockdowns are lifted, there will
be a faster ramp-up of operations in Europe and Latin America than
in North America and Asia thanks to the reliance on local demand
rather than tourism and travel.
Downgrades:
Issuer: Cirsa Enterprises, Sociedad Limitada
Probability of Default Rating, Downgraded to B2-PD from B1-PD;
Placed Under Review for further Downgrade
Corporate Family Rating, Downgraded to B2 from B1; Placed Under
Review for further Downgrade
On Review for Downgrade:
Issuer: Cirsa Finance International S.a r.l.
Senior Secured Regular Bond/Debenture, Placed on Review for
Downgrade, currently B2 (LGD4)
Outlook Actions:
Issuer: Cirsa Enterprises, Sociedad Limitada
Outlook, Changed To Rating Under Review From Stable
Issuer: Cirsa Finance International S.a r.l.
Outlook, Changed To Rating Under Review From Stable
LIQUIDITY
Moody's considers Cirsa's liquidity to be adequate. As of 13th
March 2020, the company had a total of EUR350 million cash on
balance sheet, of which approximately EUR70 million was restricted.
This cash balance reflected Cirsa's full drawdown on its EUR200
million revolving credit facility ("RCF"). Moody's estimates that
Cirsa has enough liquidity to last five to six months if lockdown
restrictions continue over the longer-term.
As part of the documentation, the RCF contains a springing
financial covenant based on a senior secured net leverage set at
7.52x and tested on a quarterly basis only when the RCF is drawn by
more than 40%. Moody's expects Cirsa to breach this covenant in
September 2020 if operations remain closed until then, but it will
only trigger a draw-stop event and not an event of default.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the high uncertainty over the length of the lockdowns,
positive pressure on the rating is unlikely in the near-term but
could occur if: (i) the coronavirus outbreak is resolved quickly
and Cirsa is able to ramp-up its operations fast enough to limit
the negative impact on EBITDA level and related cash burn; (ii)
Moody's adjusted leverage declines back below 5.0x on a sustainable
basis; (iii) Moody's adjusted EBIT/interest ratio remains above
1.5x; and (iv) the company generates meaningful positive free cash
flow.
Negative pressure on the rating could occur if: (i) the company's
operational performance continue to deteriorate as a result of
prolonged lockdowns and the subsequent impact from an economic
crisis in Europe and Latin America; (ii) Moody's adjusted leverage
remains above 6.0x in the next 18-24 months; (iii) Moody's adjusted
EBIT/interest ratio declines below 1.5x; and (iv) free cash flow
generation deteriorates or becomes negative and liquidity concern
arises.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Founded in 1978 and headquartered in Terrassa (Spain), Cirsa is an
international gaming operator. The company is present in nine
countries where it has market leading positions: Spain and Italy in
Europe; Panama, Colombia, Mexico, Peru, Costa Rica and Dominican
Republic in Latin America; and Morocco in Africa. In 2019, the
company reported net revenue of EUR 1,615 million and adjusted
EBITDA of EUR 473 million post IFRS 16 (excluding the pro forma
effect of Giga, Sportium and 7 Mexican casinos acquired in 2019).
CODERE SA: Moody's Cuts CFR to Caa1 & Alters Outlook to Negative
----------------------------------------------------------------
Moody's Investors Service has downgraded Codere S.A.'s corporate
family rating to Caa1 from B3, its probability of default to
Caa1-PD from B3-PD and its senior secured notes, issued by Codere
Finance 2 (Luxembourg) S.A., instrument rating to Caa1 from B3. The
outlook was changed to negative from stable.
"Codere's downgrade reflects the rapid and widening spread of the
coronavirus outbreak, which has prompted the closure of the
company's distribution network and gaming venues across Europe and
Latin America. As a result, cash flows and liquidity are expected
to materially weaken and given the currently more challenging
market conditions, the refinancing risk associated with debt
maturities in 2021 has significantly increased" said Florent
Egonneau, Associate Vice President and Moody's lead analyst for
Codere.
Downgrades:
Issuer: Codere Finance 2 (Luxembourg) S.A.
Senior Secured Regular Bond/Debenture, Downgraded to Caa1 from B3
Issuer: Codere S.A.
Probability of Default Rating, Downgraded to Caa1-PD from B3-PD
Corporate Family Rating, Downgraded to Caa1 from B3
Outlook Actions:
Issuer: Codere Finance 2 (Luxembourg) S.A.
Outlook, Changed To Negative From Stable
Issuer: Codere S.A.
Outlook, Changed To Negative From Stable
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The gaming sector
is one of the sectors most significantly affected by the shock
given the closure of gaming venues and its sensitivity to consumer
demand. More specifically, its action reflects the impact on Codere
as a consequence of the breadth and severity of the shock, as well
as the broad deterioration in earnings it has triggered for an
unknown period of time.
In 2019, Codere's operating performance continued to deteriorate
with a 12% year-on-year decline in adjusted EBITDA (before IFRS 16)
to EUR249 million, mainly driven by the weakness, regulatory
changes, tax increases and adverse foreign exchange movements in
Latin America countries. The company was able to generate positive
free cash flow ("FCF") of EUR11 million (including growth capex),
above its previous expectations of continued negative FCF. However,
it is likely that this cash flow generation will come under
pressure in 2020, and turn negative given the effect of the
coronavirus outbreak. The company's exposure to emerging markets,
representing 76% of the company's adjusted EBITDA in 2019, is
likely to cause adverse foreign exchange movements, which could
weaken the company's EBITDA and cash flow generation further.
As a result of the company's deteriorating operating performance,
and very difficult market conditions, Moody's views the refinancing
of Codere's upcoming maturity as more challenging.
LIQUIDITY PROFILE
Moody's considers Codere's liquidity to be weak. As of 23rd March
2020, the company had a total of EUR142 million cash on balance
sheet, of which approximately EUR30 million was restricted. The
revolving credit facility ("RCF") was fully drawn at that date.
Given the cash burn related to the disruption of its operations,
Moody's estimates that Codere has enough liquidity to last four to
five months where all of its retail operations remain completely
closed for this time period, and where the company does not
generate any revenue other than online revenues. Moody's
understands from the company that it expects to resume operations
in a month or two, a period for which it has sufficient liquidity
and it is exploring additional financing alternatives to be
prepared for longer closures.
As part of the documentation, the RCF contains a springing
financial covenant based on a total net leverage set at 4.1x and
tested on a quarterly basis only when the RCF is drawn by more than
40%. At the current rate, Moody's expects Codere to breach this
covenant in June 2020 if operations remain closed until then, which
could trigger an event of default.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety.
OUTLOOK RATIONALE
The negative outlook reflects Moody's expectation that Codere's
operating performance and credit metrics will continue to
deteriorate in the next 12-18 months, such that liquidity will
weaken further and that the company may find it difficult to
refinance debt maturities in a timely manner.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the high uncertainty over the length of the lockdowns,
positive pressure on the rating is unlikely in the near-term, but
could occur if the coronavirus outbreak is resolved quickly and
Codere is able to ramp-up its operations fast enough and refinance
its November 2021 maturity.
Negative pressure on the rating could occur if the company's
operational performance continues to deteriorate as a result of
prolonged lockdowns or the subsequent impact from an economic
crisis in Europe and Latin America and it becomes evident that the
company has insufficient liquidity or that it is unlikely to
refinance the November 2021 maturity in a timely manner.
STRUCTURAL CONSIDERATION
Using Moody's Loss Given Default for Speculative-Grade Companies
Methodology, the PDR is Caa1-PD, in line with the CFR, reflecting
its assumption of a 50% recovery rate as is customary for capital
structures including notes and bank debt. The senior secured notes
are rated Caa1 in line with the CFR due to a limited amount of RCF
which has priority over the proceeds in an enforcement under the
Intercreditor Agreement.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Founded in 1980 and headquartered in Madrid (Spain), Codere is an
international gaming operator. The company is present in nine
countries where it has market leading positions: Spain and Italy in
Europe and Mexico, Argentina, Uruguay, Panama and Colombia in Latin
America. In 2019, the company reported operating revenue of EUR
1,389 million and adjusted EBITDA of EUR 319 million post IFRS 16.
LA RIOJA: Fitch Upgrades LT Issuer Default Rating to CC
-------------------------------------------------------
Fitch Ratings has upgraded Province of La Rioja's (PLR) Long-Term
Foreign and Local Currency Issuer Default Ratings (IDRs) to 'CC'
from 'C'. Fitch has also upgraded the Province's 9.75% senior
unsecured notes of USD300 million due 2025 to 'CC' from 'C'. The
bond is rated the same as PLR's IDR.
PLR's 'CC' ratings reflect that default of some kind appears
probable. The Standalone Credit Profile (SCP) of PLR is 'cc', Fitch
relied on its rating definitions to position the Province's
ratings.
KEY RATING DRIVERS
The upgrade in PLRs ratings follows the Province's interest payment
of its 9.75% senior unsecured notes within the grace period. The
interest payment of USD14.625 million was fully made in March 24,
2020 as confirmed in the official notice of payment published on
March 26, 2020 by the Province. While the Province intended to
initiate conversations with its creditors to reach an agreement
regarding the notes current terms, the grace period was coming to
an end and at the same time the Province faces important pressures
in public health as the coronavirus spreads, limiting its capacity
to address both topics.
The notes were issued for USD200 million in February 2017 and then
reopened in the same year for an additional USD100 million
issuance, forming a single series for USD300 million. The bond is
denominated in U.S. dollars and accrues a fixed interest rate of
9.75% payable on a semi-annual basis (Feb. 24 and Aug. 24 of each
year). The bond's maturity date is on Feb. 24, 2025 with equal
capital payments in the last four years (on Feb. 24, 2022, on Feb.
24, 2023, on Feb. 24, 2024 and on Feb. 24, 2025). The notes are a
senior unsecured obligation of PLR governed by the laws of the
state of New York and its rating is the same as PLR's IDR. The
proceeds were used for the development of Parque Arauco S.A.P.E.M's
clean energy projects and other public works.
La Rioja's ratings also consider the vulnerable macroeconomic
context, the uncertainty of the sovereign restructuring process,
and the track record of its recent near-default event. According to
preliminary figures, PLR's operating margin decreased to 1.6% in
2019 from an already weak 2.2% and Fitch expects additional fiscal
and liquidity pressures for 2020 considering provincial healthcare
responsibilities.
PLR has an ESG Relevance Score of 4 for Rule of Law, Institutional
& Regulatory Quality, Control of Corruption reflecting the negative
impact the weak regulatory framework and national policies of the
sovereign have over the Province.
The Province has an ESG Relevance Score of 4 for Creditor Rights,
which reflects the track record in the breach of legal
documentation stating the full debt service payments, reflecting
the low willingness to pay.
RATING SENSITIVITIES
La Rioja's ratings are constrained by Argentina's ratings. PLR's
ratings are subject to the continuance of timely debt service
payments. Moreover, a formal debt exchange proposal involving a
material reduction in terms and taken to avoid a traditional
payment default could negatively impact PLR ratings.
ESG CONSIDERATIONS
La Rioja, Province of: 4.2; Rule of Law, Institutional & Regulatory
Quality, Control of Corruption: 4, Creditor Rights: 4
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3, meaning that 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.
PLR has an ESG Relevance Score of 4 for Rule of Law, Institutional
& Regulatory Quality, Control of Corruption reflecting the negative
impact the weak regulatory framework and national policies of the
sovereign have over the Province.
The Province has an ESG Relevance Score of 4 for Creditor Rights,
which reflects the track record in the breach of legal
documentation stating the full debt service payments, reflecting
the low willingness to pay.
TENDAM BRANDS: Moody's Cuts CFR to B2, Outlook Negative
-------------------------------------------------------
Moody's Investors Service has downgraded the corporate family
rating of Spanish apparel retailer Tendam Brands S.A.U. to B2 from
B1, and its probability of default rating to B2-PD from B1-PD. At
the same time, Moody's has downgraded Tendam's senior secured notes
to B3 from B2. The outlook has been changed to negative from
stable.
"The decision to downgrade Tendam reflects Moody's expectations
that the spread of the coronavirus will negatively impact the
company's results and key credit metrics in the first half of 2020
and that the company is likely to have weaker credit metrics and
liquidity post the crisis." said Guillaume Leglise, Assistant Vice
President and Moody's lead analyst for Tendam.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The apparel retail
sector is one of the sectors most significantly affected by the
shock given its sensitivity to consumer demand and sentiment. More
specifically, Tendam's exposure to store-based discretionary
spending, have left it vulnerable to shifts in market sentiment in
these unprecedented operating conditions.
Its rating action reflects Moody's expectation that the nationwide
lockdown imposed by many European governments will materially and
negatively affect revenues with a consequent impact on future
EBITDA and cash flow generation in 2020. Moody's believes that
Tendam is particularly vulnerable considering its large store base
(2,036 stores at end-November 2019), which is mostly located in
Spain and across Europe and its modest, albeit growing online
presence.
Most governments in Europe, including Spain, have announced a
package of measures to support corporates, which will help smooth
out the negative effects during the lockdown period. Despite these
measures Moody's expects that Tendam will emerge with weaker credit
metrics and liquidity post the crisis. Moody's recognizes the
company's strong performance to date, relative to peers, including
its track record of good operational execution and solid free cash
flow generation in recent years. Also, Moody's understands that the
company is taking steps to conserve cash in the months ahead
including postponements of capital spending and reducing stock
purchasing. However, Moody's expects that there is likely to be
fierce competition and pricing pressure once stores reopen and
potentially weaker demand for discretionary products, notably
apparel products, in the medium-term.
More positively, Tendam currently has adequate liquidity, with a
cash balance of EUR90 million as at end February 2020. Tendam
announced that it drew down EUR198 million on its EUR200 million
RCF in March, as a precautionary measure.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Also, the structural shift towards e-commerce has
increased pressure on apparel retail companies to increase their
online sale capabilities. This risk is to some degree mitigated by
the fact that Tendam has strengthened its online channel
capabilities in recent years, with online sales representing around
9.2% of the group's revenue in the first 9 months to 30 November
2019.
Tendam is controlled by private equity firms CVC Capital Partners
and PAI Partners, which, as is often the case in private-equity
sponsored deals, can have shareholder-friendly financial policies.
While the company has made a dividend payment of EUR59 million to
shareholders in December 2019, this was balanced by a EUR65.9
million bond buy-back in February 2019.
NEGATIVE OULOOK
The negative outlook reflects the uncertainty regarding the losses,
demand and supply chain impact of the coronavirus outbreak, but
also the risk that demand and consumer sentiment may not recover to
levels prior to the crisis.
WHAT COULD CHANGE THE RATINGS UP/DOWN
The ratings are unlikely to be upgraded in the short term.
Positive rating pressure is unlikely to arise until the coronavirus
outbreak has been brought under control, store closure restrictions
have been lifted, and it is evident that consumer sentiment has not
materially affected demand for Tendam's products.
Overtime, positive pressure could emerge if the company develops
sustained like-for-like revenue growth, EBITDA and margin
improvement, and generates positive free cash flows.
Quantitatively, upward pressure on the rating could occur if
Moody's-adjusted gross debt/EBITDA is sustainably below 4.0x and
EBIT/interest expense rises above 2.0x.
Moody's could downgrade Tendam in case its liquidity deteriorates
such that the company's total liquidity sources fall below EUR100
million. Downward pressure on the rating could also occur if
earnings or margins decline significantly and Moody's-adjusted
(gross) leverage increases above 5.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
COMPANY PROFILE
Tendam Brands S.A.U. (Tendam), headquartered in Madrid, Spain, is
an international apparel retailer with presence in more than 80
countries worldwide, although with a predominant presence in Spain,
Portugal, France, Belgium, Hungary, Russia, Mexico and the Balkans.
The company designs, sources, markets, sells and distributes
fashionable premium apparel for men and women at affordable prices.
It operates through four different and complementary brands,
including (1) Women'secret; (2) Springfield; (3) Cortefiel; and (4)
Pedro del Hierro (PdH). In the 12 months to 30 November 2019. The
group reported revenue and EBITDA (pre-IFRS 16) of EUR1,165 million
and EUR157 million, respectively.
===========
S W E D E N
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STENA AB: S&P Alters Outlook to Negative & Affirms 'B+' LT Rating
-----------------------------------------------------------------
S&P Global Ratings revised the outlook on Stena AB to negative and
affirmed the 'B+' long-term rating.
Severe restrictions on movement imposed by governments will hamper
ferry operations. S&P expects that a sharp decline in travel and
ferry traffic due to the coronavirus outbreak will materially
impair demand for Stena's ferry operations, the company's largest
cash flow contributor (about 40% of revenue and EBITDA). Stena, one
of the largest ferry companies in Europe, has a comprehensive
network of 21 routes in total, predominantly in Northern Europe,
with exposure to some of the largest export economies in the EU
with high passenger traffic (Germany, Sweden, and Denmark).
The full impact of the restrictions on Stena's performance remains
uncertain because it is still unclear how long they will be in
place and how travelling habits will be affected. Freight volumes,
although decreased, should provide some support to operations,
however, since as much as 70% of Stena's ferry revenue stream is
from freight. Furthermore, S&P thinks some of Stena's lines are
important for trade, implying that operations should continue
despite the virus outbreak. Freight volumes are nevertheless likely
to fall, as several large industries' output ratios have been cut.
S&P sees a risk that EBITDA from ferry operations could decline by
as much as two-thirds from its previous base case of SEK3.5 billion
to SEK4.0 billion in 2020. This implies that Stena in 2020 will
benefit less from its diversification, which includes exposure also
to drilling, real estate, and shipping.
Other business areas, although also affected, should ease the
downside from ferry operations. Stena's other business lines
should provide some support to the credit ratios and mitigate the
downside risk somewhat. S&P said, "With more than 70% of the real
estate operations geared toward residential operations, we expect
the division to continue to deliver fairly stable EBITDA
contributions. The drilling division has a decent contract
structure for 2020, albeit at low levels, and we therefore expect
the division to contribute with SEK100 million-SEK200 million of
EBITDA this year, assuming no rig contracts are cancelled. Falling
oil prices could nevertheless harm drilling rates in 2021, leading
to a very limited or even a negative contribution. The shipping
division has a substantial portion of vessels on long-term
charters, but should still be able to capitalize somewhat on
improving charter rates. We expect the division to contribute about
SEK1.7 billion to SEK2 billion to 2020 EBITDA."
S&P said, "We have revised downward our base case for Stena's
credit ratios. We expect Stena's EBITDA to fall to about SEK7.0
billion-SEK7.5 billion in 2020, down from about SEK10 billion in
our previous forecast, causing credit ratios to weaken materially,
including adjusted leverage to around 8x. We estimate adjusted
leverage as of Dec. 31, 2019, was about 5.7x. Given the high degree
of uncertainty about how long the situation will last, we are
cautious about building in a quick recovery post 2020. For now, we
assume that credit ratios will remain well below our previous base
case, and assume only a gradual improvement in ratios in 2021, but
that debt to EBITDA will return below 7x in 2021."
Stena's strong liquidity position also supports the rating. In
February 2020, Stena issued a $650 million secured term loan and
senior secured notes, and used the proceeds for a very timely
refinancing of its term loan due 2021 and senior notes due 2020.
Although S&P now foresees lower cash flow streams, Stena's
liquidity position remains strong, in its view, which supports the
rating in current depressed environment.
S&P said, "The negative outlook reflects that we could lower the
rating on Stena if the group's performance deteriorates further
than we currently expect, or if the impact of the coronavirus leads
to extended depressed earnings from the ferry operations, with
forecast debt to EBITDA staying above 7.5x for an extended period.
"We would consider a negative rating action if we expected the
ferry operations to remain under pressure over 2020 and 2021 or if
any of the other business lines were to be harmed further than we
currently expect. As such, we could lower the rating if we forecast
debt to EBITDA would increase to above 7.5x for an extended period,
which could be the case if EBITDA from the ferries segment remain
below SEK2 billion annually.
"We would also consider a downgrade if Stena's liquidity
deteriorates, and this is not offset by improved credit metrics. We
note, however, that the liquidity headroom is currently ample."
Ratings upside is unlikely in the near term. However, a quick
resolution of the COVID-19 pandemic, leading to restored travel and
economic activity in Europe, would be positive for Stena.
[*] SWEDEN: Hotel & Restaurant Bankruptcies Rise in March 2020
--------------------------------------------------------------
Simon Johnson at Reuters reports that record numbers of hotels and
restaurants went bankrupt in March in Sweden as customers stayed at
home to avoid spreading the coronavirus, figures from credit
information firm UC showed on March 25.
According to Reuters, bankruptcies in the restaurant and hotel
sector shot up 123% in March compared with the previous year, with
the transport sector also seeing a big jump, up 105%.
UC said that 78 businesses in the hotel and restaurant sector went
bust in March, up from 35 last year, Reuters relates. In the
transport sector, there were 43 bankruptcies against 21 in March
2019, Reuters discloses.
=====================
S W I T Z E R L A N D
=====================
BREITLING HOLDINGS: Moody's Cuts CFR to B3, Outlook Negative
------------------------------------------------------------
Moody's Investors Service downgraded Breitling Holdings S.a.r.l.'s
corporate family rating to B3 from B2 and its probability of
default rating to B3-PD from B2-PD. Moody's has also downgraded the
instrument ratings of the EUR514 million term loan B and the CHF80
million revolving credit facility raised by Breitling Financing
S.a.r.l to B3 from B2. The outlook on both entities is negative.
RATINGS RATIONALE
The rapid and widening spread of the Coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. This shock will
significantly affect the luxury sector given its discretionary
nature and sensitivity to consumers' confidence.
Because of the Coronavirus outbreak, Breitling's leverage will
likely remain higher than the level commensurate with a B2 rating
for a prolonged period of time. Its credit quality weakened in 2019
following the payment of a CHF158 million dividend in November but
the rating agency assumed at the time that it would gradually
recover. Although consequences of the Coronavirus epidemics are
difficult to assess so far, Breitling's Moody's-adjusted
debt/EBITDA will likely deteriorate in fiscal 2021 and possibly
rise to about 7-8x, compared to about 6x in fiscal 2019.
On the positive side, Breitling's liquidity remains adequate for
the moment. On 23 March 2020, it had about CHF150 million of cash,
having drawn in full its CHF80 million RCF expiring in 2023 as a
precautionary measure - the RCF was undrawn on March 16, 2020.
Apart from the RCF, there is no significant term debt maturity
until July 2024, when the term loan will mature. However,
Moody's-adjusted free cash flows (FCF) could fall close to zero
over the next 12 months under the rating agency base case
scenario.
STRUCTURAL CONSIDERATIONS
Breitling's debt comprises a euro-denominated term loan B of EUR514
million equivalent maturing in 2024 and a CHF80 million RCF
maturing in 2023. These credit facilities are senior secured and
rank pari passu with each other.
The holding Breitling Financing S.a r.l. is the issuer of the RCF
and the term loans. These debt instruments are guaranteed by the
parent holding company Breitling Holdings S.a.r.l. along with
domestic and foreign subsidiaries, which together generate at least
80% of Breitling's reported EBITDA. The RCF and the term loans are
secured by share pledges, intellectual property rights, certain
hedging arrangements, and material intercompany receivables.
Moody's rates the RCF and the term loans B3, in line with the CFR,
reflecting their pari passu ranking and the absence of any
significant liabilities ranking ahead or behind. The B3-PD
probability of default rating (PDR) is in line with the B3 CFR
assuming a 50% recovery rate commensurate for a capital structure
comprising bank debt with loose covenants.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that the coronavirus
outbreak should significantly depress Breitling's leverage and FCF
in fiscal year 2020, although the magnitude of the deterioration
remains uncertain so far. Even though sales should pick up when the
epidemic will subside, the coronavirus could have long-lasting
negative effects on customer demand if consumer confidence falls
further or economic conditions worsen.
WHAT COULD CHANGE THE RATINGS UP/DOWN
The rating agency could downgrade Breitling if it is unable to
bring its Moody's-adjusted debt/EBITDA below 7x, if its
Moody's-adjusted FCF become significantly negative or if liquidity
weakens. Such a scenario could unfold if the disruption induced by
the coronavirus lasts several quarters or if the watch industry
contracts.
Although the probability of an upgrade is limited for the moment,
Moody's could upgrade Breitling if its Moody's-adjusted (gross)
debt/EBITDA falls below 6x on a sustainable basis and its FCF
generation becomes again significantly positive. This could occur
if Breitling's sales recover quickly and sustainably at the end of
the coronavirus epidemic, enabling it to grow its EBITDA more
quickly than Moody's currently forecasts.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Consumer
Durables Industry published in April 2017.
COMPANY PROFILE
Breitling is a Switzerland-based manufacturer of luxury watches. On
28 April 2017, CVC agreed to acquire an 80% stake in the company
from the Schneider family for an enterprise value of CHF823
million. Theodore Schneider, Breitling's former executive chairman,
subsequently sold the remaining 20% to CVC in 2018 for CHF87
million.
Most of Breitling's earnings come from sales to wholesalers in
developed markets. In fiscal 2019, revenues generated in Europe and
the Americas accounted respectively for 44% and 31%. By channel,
82% of sales were made wholesale, with remaining revenues split
between sales to retailers and directly-owned stores.
===========
T U R K E Y
===========
ARCELIK AS: S&P Cuts Rating to 'BB' on Less Demand Due to COVID-19
------------------------------------------------------------------
S&P Global Ratings lowered to 'BB' from 'BB+' its ratings on
Arcelik A.S. and on its senior unsecured.
A marked drop in consumer demand for Arcelik's goods in 2020 will
materially hurt the group's credit metrics. In line with S&P
Global Ratings' forecasts of a global recession emerging due to the
economic impact of COVID-19, consumers are likely to defer spending
on home appliances and electronics apart from the necessary
replacements. The resulting reduced volumes in all Arcelik's
geographies, alongside retailers' difficulties delivering goods to
end customers due to disruption in retail distribution, leads us to
anticipate a decrease of at least 5% in sales this year. Under this
scenario, the group's funds from operations (FFO) to debt could
near 10% and there's potential negative free cash flow of about
Turkish lira (TRY) 150 million. S&P said, "We note that the effect
is offset by high price inflation in Turkey and positive foreign
exchange translation effect (TRY/euro and TRY/the pound sterling)
on sales made in hard currencies (about 40% of total sales). We
anticipate lower profitability because of higher logistic costs and
lower capacity utilization in production plants." Lower prices for
key raw materials plastic, and steel, iron ore linked to weaker
global demand could partially abate cost inflation.
Arcelik's debt service metrics are likely to slide below 2x despite
lower borrowing costs in Turkey and the group's supportive
financial policy. The expected drop in EBITDA should translate
into weaker-than-anticipated credit metrics, notably EBITDA
interest coverage. The ratio will likely fall to around 1.5x-1.7x
in 2020 from about 2.1x in 2019. S&P said, "We now think the lower
borrowing rates in TRY-denominated debt will no longer be able to
offset the expected weak operating performance. Positively, we note
that the group's debt leverage, as adjusted by S&P Global Ratings,
remains at about 3.5x and in line with the current ratings for
2020. This is notably thanks to the supportive dividend policy (no
dividends to be paid in 2020), reflecting the longstanding
shareholder support from Koc Holding. We believe the current
refinancing risks are moderate for the 2021 bonds, since Arcelik
retains ample cash in hard currencies to repay the bond if it was
unable to raise sufficient hard currency new debt."
Arcelik's main competitive advantage remains its low operating cost
base. S&P thinks the company should be able to somewhat absorb the
decline in demand given the nature of the industry allows it to
manage high operating leverage. The operating cost base benefits
group production facilities located in countries that have low
labor costs (Turkey, Romania, South Africa, Bangladesh, and
Pakistan) and are close to consumer end markets. S&P also believes
main raw materials costs (plastics and steel) are declining, which
should help the operating cost base in a few months. That said,
there could be disruption in the supply-chain, notably from China.
S&P said, "Arcelik still has access to ample liquidity, allowing us
to rate it two notches above the foreign currency rating of Turkey.
The company enjoys a large share of earnings in hard currency
thanks to its large presence in Western Europe. Arcelik also
maintains at all times very large cash balances (TRY7 billion at
end-December 2019) mostly held in U.S. dollars and euros. In our
hypothetical sovereign default stress test, we assume, among other
factors, a 50% devaluation of the lira against hard currencies and
a 15%-20% decline in Arcelik's organic EBITDA. We believe the
company can withstand a hypothetical sovereign default because, in
the event of further depreciation of the lira, the appreciation of
deposits abroad would offset the increase in Arcelik's short-term
foreign currency debt-service. Failure to pass this test would lead
us to equalize our rating on Arcelik with the foreign currency
sovereign ratings on Turkey (unsolicited; B+/Stable/B), which would
imply a two-notch downgrade.
"The negative outlook reflects the risks to our base-case financial
projections despite a supportive financial policy. We see
debilitated consumer demand in main markets in 2020 and uncertainty
on the timing of a rebound in 2021. Our base case for 2020 assumes
a 20% decline in EBITDA due to weaker sales volume and higher
operational costs stemming from the COVID-19 disruption.
"We could lower our ratings on Arcelik over the next 12-18 months
if we see a sharper-than-expected decline in sales and EBITDA due
to sustained, diluted demand and high disruption of production and
distribution in 2020 with very delayed demand recovery in 2021.
Ratings downside would therefore stem from the EBITDA interest
coverage remaining below 2x, funds from operations (FFO) to debt
close to 12%, and potentially significant negative free cash flow.
"We could revise the outlook to stable if, for example, Arcelik
demonstrates resilient operating performance amid adverse market
conditions over the next 12-18 months. Lower financing costs in
Turkey would support ratings upside. We would also need to see
interest coverage comfortably above 2x and FFO to debt close to
20%."
===========================
U N I T E D K I N G D O M
===========================
ATLANTICA YIELD: Fitch Affirms BB LongTerm IDR, Outlook Stable
--------------------------------------------------------------
Fitch Ratings has affirmed the Long-term Issuer Default Rating
(IDR) of Atlantica Yield plc (AY) at 'BB' with a Stable Rating
Outlook. Fitch has also affirmed the senior secured debt at
'BBB-'/'RR1' and senior unsecured debt at 'BB+'/'RR2'.
AY's ratings reflect the relatively stable and predictable nature
of contracted cash flows generated at its non-recourse project
subsidiaries that are well diversified with respect to geographical
exposure and asset class. All of AY's assets are either long-term
contracted or regulated (in the case of the Spanish solar assets
and a transmission line in Chile) with minimal commodity risk. The
Stable Outlook assumes cash distribution from the Mojave solar
plant resumes later this year. Fitch also assumes the company
exercises its option to buy the tax equity investors' interest in
Solana solar plant and completes its investment into PTS natural
gas transmission project in 2020. Fitch projects the Holdco
leverage to increase after the Solana and PTS purchase, yet remain
below Fitch's 4.0x negative sensitivity trigger. Over time Fitch
expects the gross Holdco leverage to decline to mid-3.0x range.
Management remains committed to its goal of managing the net Holdco
leverage to less than 3.0x.
Due to asset diversity and structure of contracts Fitch does not
expect a significant impact from coronavirus on AY's financial
performance. Spain and U.S. are two of AY's largest markets and
both are seeing a high incidence of coronavirus infection that
would likely result in an extended period of lockdown measures to
contain the pandemic. In Spain, AY, similar to other renewable
generators, sells its production to the pool and receives regulated
payments. Renewable energy has priority dispatch in Spain, so there
will not be a decline in volume. For its U.S. renewable projects,
Fitch expects the counterparties, Pacific Gas & Electric Co. (PG&E,
Not rated) and Arizona Public Service Co. (A-/Negative Outlook) to
continue to honor their long-term power purchase agreements (PPA).
Finally, Fitch believes the company should be able to secure debt
financing for its Solana and PTS investments and does not need to
access equity capital markets this year.
KEY RATING DRIVERS
Strategic Review Completed: In February 2019, the board of AY
created a Strategic Review Committee comprised of independent board
members that was tasked to evaluate strategic alternatives for AY
in order to optimize the value of the company. The review was
recently completed with no change in the ownership/ strategy.
Current market volatility did not provide the company with the
opportunity to maximize shareholder value through a corporate
transaction. Strategic Committee has been terminated.
Increase in Holdco Leverage: Fitch has assumed that AY exercises
its option to buy tax equity investor's interest in Solana solar
plant. Fitch has also assumed that AY completes the investment in
the PTS project. Total investment is projected to be around $300
million and $100 million, respectively, for Solana and PTS and
would likely be financed with available liquidity, bridge financing
and potential project debt refinancing. Fitch projects the gross
Holdco leverage to increase to high 3.0x after the Solana and PTS
purchase and decline to mid-3.0x over time. Fitch's projections
assume Solana will be able to achieve minimal levels of productions
required for distributions to the Holdco.
Positive Resolution of Spanish Regulation: AY has a portfolio of
solar assets in Spain that represent approximately 35% of cashflow
available for distribution (CAFD). Fitch views Spain's regulatory
framework for solar plants as relatively supportive since a
majority of project revenues come from a return on investment
component or capacity payments, with the remaining components being
a regulated return on operations and sale of electricity at market
prices. The framework limits a power provider's volumetric and
commodity risks and provides cash flow visibility. In November
2019, the Spanish government approved Royal Decree-law 17/2019
setting a 7.1% RRR applicable from Jan. 1, 2020 for a period of six
years. For assets operational before 2013 and with no arbitration,
the RRR was set at 7.4% for a period of 12 years. The order was
quite favorable compared to Fitch's prior expectations and results
in only a modest impact to AY's projected distributions from the
Spanish portfolio.
PG&E Bankruptcy Risk Diminishing: PG&E, the sole offtaker for
Mojave, has continued to perform under the PPA during its
bankruptcy proceedings. PG&E is expected to exit the bankruptcy by
the end of June 2020 and the current Plan of Reorganisation filed
with the Bankruptcy Court and supported by the Governor does not
contemplate any changes to the PPA. The management expects to
receive the dividends from the project in the second half of the
year. The cash distribution from Mojave comprised approximately
13.5% of AY's gross CAFD in 2018. The project carries a
non-recourse financing from the U.S. Department of Energy (DOE).
Technical event of default has been triggered under the Mojave
project finance agreement; however, the DOE has not declared
acceleration of the debt. AY has minimized the impact of the loss
of CAFD through capitalization of $14 million per year of interest
payment under the 2019 NIF. AY has also been able to release
certain project restricted cash accounts with the first ESG-linked
financial guarantee line, with a limit of approximately $39
million.
Decline in Offtaker Creditworthiness: In the past year, two of the
offtakes were downgraded either by Fitch or other rating agencies.
For its ACT natural-gas fired plant, the credit rating of the
offtaker, Pemex (BB+/Negative), has weakened. There are no
collateral posting provisions in place if another rating agency
downgrades Pemex to below investment grade. For the Kaxu solar
plant in South Africa, the credit rating of the offtaker, Eskom,
(BB-/Negative) has also weakened. However, Eskom's payments are
guaranteed by the South African Department of Energy and political
risk insurance provides AY protection for breach of contract up to
$98.6 million.
Operating Issues Mostly Resolved: AY has faced technical issues
with Kaxu and Solana solar projects; however, these seem to be
mostly resolved. Kaxu had a reduced production during 2017 due to
technical problems with water pumps. In addition, Solana and Kaxu
have experienced issues in the heat exchangers within their storage
system. Repairs have been carried out in both assets. Kaxu has
operated well in 2018 and 2019. In 2018 distributions were delayed,
but in 2019, Kaxu made distributions after obtaining bank
approvals. Additional repairs were made at Solana in 2019 and the
projected has been operating well.
Flexibility to Grow Distributions: The recently completed and
announced potential acquisitions provide visibility to AY's growth
strategy. In addition, 2019 optimization of some of its O&M expense
by reducing dependence on external O&M contractors is projected to
be accretive to CAFD. Other levers to drive distribution growth
include pricing indexation built in contractual agreements and
refinancing of debt at lower interest rates such as the one
executed for 2019 Note Issuance, and the Green Bond issuance
expected to be completed this April. Corporate cash on hand of $66
million as of Dec. 31, 2019 and expanded revolver capacity provide
additional cushion. In addition, $100 million equity commitment
from Algonquin provides financial flexibility to AY to finance
potential asset acquisitions without the need to issue significant
amounts of equity in the public market.
Recovery Ratings: Fitch does not undertake a bespoke recovery
analysis for issuers with IDRs in the 'BB' rating category.
Nevertheless, Fitch's 'RR1' Recovery Rating for the senior secured
debt and 'RR2' recovery rating for the senior unsecured debt uses
market transaction multiples of 9.0x-11.0x Enterprise value to
EBITDA or a CAFD yield of 7%-9% for contracted renewable assets.
The recovery valuation also considers Fitch's expectation that
management will over time move toward an unsecured capital
structure. The 'RR1' Recovery Rating denotes outstanding recovery
(90%-100%) and 'RR2' denotes superior recovery (70%-90%) in the
event of default.
Stable Cashflow and Asset Diversity: AY's existing portfolio of
assets produces stable and predictable cash flows underpinned by
long-term contracts (weighted average contract life of 18 years
remaining as of Dec. 31, 2019). A majority of the counterparties
have strong investment-grade ratings, based on Fitch's and other
publically available ratings though there are some pockets of
concern as highlighted. The contracts are typically fixed price
with annual escalation mechanisms. AY's portfolio does not bear
material resource availability risk or commodity risk.
The forecast cash distributions to the Holdco from the project
subsidiaries are split as approximately 69% from renewable assets,
15% from natural gas plants, 13% from transmission lines and the
remaining 3% from water assets, based upon projections over
2020-2024 and including acquisitions that have been announced.
Geographically, the split is 45% from North America (USA and
Mexico), 35% from Europe (Spain), 12% from South America and 8%
from the rest of the world. Approximately 66% of project
distributions are generated from solar projects; solar resource
availability has typically been strong and predictable.
Conservative Financial Policy: A majority of debt at AY consists of
non-recourse project debt held at ring-fenced project subsidiaries.
The distribution test in project finance agreements is typically
set at a debt service coverage ratio (DSCR) of 1.10x-1.25x. As of
Dec. 31, 2019, all the projects were performing in excess of their
required DSCRs (except for a 50 MW plant in Uruguay, which
represents less than 1% of CAFD). The project debt is typically
long-term and self-amortizing with a term that is shorter than the
duration of the contracts. More than 90% of the long-term interest
exposure is either fixed or hedged mitigating any impact in a
rising interest rate environment. Approximately 90% of the CAFD is
in U.S. dollars or Euros and AY typically hedges its Euro exposure
on a rolling basis. At the Holdco level, the net leverage ratio
(set corporate debt/CAFD pre corporate debt service) stood at 2.9x
as of Dec. 31, 2019.
DERIVATION SUMMARY
Fitch views AY's portfolio of assets as favorably positioned due to
the asset type compared to those of NextEra Energy Partners (NEP,
BB+/Stable) and Terraform Power (TERP; BB-/Stable), owing to AY's
large concentration of solar generation assets (approximately 68%
of power generation capacity and 89% of renewable generation) that
exhibit less resource variability. In comparison, NEP's portfolio
consists of a large proportion of wind projects (approximately 84%
of total MWs). NEP's high concentration in wind is mitigated to a
certain extent by its diverse geographic footprint in the U.S.
TERP's portfolio consists of 41% solar and 59% wind projects.
Fitch views NEP's geographic exposure in the U.S. (100% of MWs)
favorably as compared to TERP's (68%) and AY's (30%). Both AY and
TERP have exposure to Spanish regulatory framework for renewable
assets, but the current construct provides clarity of return for
next six or twelve years. In terms of total MWs, approximately 33%
of AY's power generation portfolio is in Spain compared to 24% for
TERP. AY's long-term contracted fleet has a remaining contracted
life of 18 years, higher than NEP's 16 years and TERP's 13 years.
AY's credit metrics are significantly stronger than those of TERP
and NEP. AY's willingness to maintain its creditworthiness was
demonstrated in 2016 when it suspended distributions for two
consecutive quarters following the financial restructuring of its
prior parent, Abengoa. Fitch forecasts AY's gross leverage ratio
(Holdco debt to CAFD) to increase to high 3.0x after completing
Solana and PTS investment and decline to mid-3.0x over time
compared with high 4.0x for NEP and mid to high 5.0x for TERP.
TERP's distribution per unit growth target is more conservative at
5% to 8% while NEP and AY are targeting 12%-15% and 8%-10%
respectively.
All three have strong parent support. Fitch considers NEP best
positioned owing to NEP's association with NextEra Energy Inc.
(A-/Stable), which is the largest renewable developer in the world.
TERP benefits from having Brookfield Asset Management (BAM) as a
sponsor. BAM, which owns 62% of shares outstanding, recently
entered into a definitive merger agreement to acquire the remaining
shares of TERP. Algonquin Power & Utilities Corp. (BBB/Stable) has
44.2% ownership interest in AY. Algonquin has demonstrated sponsor
support by working with AY on project development opportunities
through AAGES and newly formed AYES Canada. In addition, Algonquin
has agreed to invest USD100 million of incremental equity in AY for
the acquisition of new assets and could participate in future
equity offerings, potentially increasing its ownership interest in
AY up to 48.5%.
Fitch rates AY, NEP and TERP on a deconsolidated approach, because
their portfolio comprises assets financed using non-recourse
project debt or with tax equity. Fitch's Renewable Energy Project
Rating Criteria uses one-year P90 as the starting point to
determine its rating case production assumption. However, Fitch has
used P50 to determine its rating case production assumption for AY,
NEP and TERP, because they own a diversified portfolio of
operational wind and solar generation assets. Fitch believes asset
and geographic diversity reduces the impact that a poor wind or
solar resource could have on the distribution from a single
project. Fitch has used P90 to determine its stress case production
assumption. If volatility of natural resources and uncertainty in
the production forecast is high based on operational history and
observable factors, a more conservative probability of exceedance
scenario may be applied in the future.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer
- Mojave distribution restarted in 2020 assuming PG&E exits
bankruptcy in June 2020;
- Solana purchase completed in April 2020 at high-single-digit
CAFD yield versus management's double-digit CAFD yield
expectation using cash on hand and debt financing;
- Green Bond issued in April 2020 reducing interest expense by
$10 million on annual basis;
- Acquisitions beyond 2020 generate 8%-9% CAFD yield;
- Future acquisition beyond 2020 financed using a combination
of debt and equity;
- All projects operating as expected and being able to make
regular distribution to the Holdco;
- Dividend payout ratio of 80%.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Longer-term visibility on acquisitions and distribution per
share growth;
- Holding company leverage below 3.0x for several quarters and
payout ratio at or below 80%.
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Lower than expected performance at Solana, Mojave and Kaxu and
absence of mitigating measures to replace the lost CAFD;
- Growth strategy underpinned by aggressive acquisitions or
addition of assets in the portfolio that bear material
volumetric, commodity, counterparty or interest rate risks;
- Material underperformance in the underlying assets that lends
variability or shortfall to expected project;
- Lack of access to equity markets to fund growth that may
lead AY to deviate from its target capital structure;
- Holding company leverage ratio exceeding 4.0x and payout
ratio exceeding 80% for several quarters.
BEST/WORST CASE RATING SCENARIO
Ratings of Non-Financial Corporate issuers have a best-case rating
upgrade scenario (defined as the 99th percentile of rating
transitions, measured in a positive direction) of three notches
over a three-year rating horizon; and a worst-case rating downgrade
scenario (defined as the 99th percentile of rating transitions,
measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings
for all rating categories ranges from 'AAA' to 'D'. Best- and
worst-case scenario credit ratings are based on historical
performance.
LIQUIDITY AND DEBT STRUCTURE
As of December 31, 2019, corporate cash on hand was USD66.0 million
and availability under the revolver stood at $341 million. In
August 2019, the revolver limit was increased to USD425 million
from USD300 million. The revolver maturity was also extended to
Dec. 31, 2022 for USD387.5 million while the remaining USD37.5
million matures on Dec. 31, 2021. An expanded revolver provides
financial flexibility to AY to finance acquisitions of assets
before permanent financing is put in place. AY also has a 2017
credit facility for up to EUR10 million, which matures on Dec. 13,
2021, and a euro commercial paper program that allows AY to issue
short term notes over the next twelve months for up to EUR50
million. As of March 1, 2020 they have issued EUR25 million under
the program.
On Feb. 6, 2020, AY completed the pricing of a total amount of
EUR290 million (approximately USD320 million), senior secured notes
maturing in 2026. Interest rate is expected to be set at 1.96%.
Closing of the transactions is expected to occur on or about April
1, 2020. The company expects to use the net proceeds from the
issuance to repay in full all series of notes issued under the 2017
Note Issuance Facility.
CANTERBURY FINANCE 1: Fitch Affirms BBsf Rating on Class F Debt
---------------------------------------------------------------
Fitch Ratings has affirmed Canterbury Finance No.1 Plc's notes
ratings as follows.
RATING ACTIONS
Canterbury Finance No.1 PLC
Class A1 XS1876157048; LT AAAsf Affirmed; previously at AAAsf
Class A2 XS2020619230; LT AAAsf Affirmed; previously at AAAsf
Class B XS1876157394; LT AAsf Affirmed; previously at AAsf
Class C XS1876157477; LT Asf Affirmed; previously at Asf
Class D XS1876157634; LT BBBs fAffirmed; previously at BBBsf
Class E XS1876157717; LT BBsf Affirmed; previously at BBsf
Class F XS1876157980; LT BBsf Affirmed; previously at BBsf
Class X XS1876158012; LT B+sf Affirmed; previously at B+sf
TRANSACTION SUMMARY
This transaction is a static securitisation of buy-to-let (BTL)
mortgages originated by OneSavings Bank PLC (OSB), trading under
its Kent Reliance brand, in England and Wales.
KEY RATING DRIVERS
New UK RMBS Rating Criteria
This rating action takes into account the new UK RMBS Rating
Criteria dated October 4, 2019. The note ratings are no longer
Under Criteria Observation. The portfolio is composed of 100% BTL
loans. The affirmations are driven by the application of the
sector-level assumptions for UK BTL deals under Fitch's latest
criteria.
Fitch has applied an originator adjustment of 1.2x to its sector
specific foreclosure frequency (FF) matrix for this pool, in line
with its analysis at closing. The adjustment reflects the
performance of the originator's BTL book, which has been weaker
than peers'. The pool also contains a high proportion of loans
secured against house in multiple occupation (HMO) properties
(around 42%) a subset that may also include first-time landlords,
which is viewed as a possible weakness compared to peers.
Increased Credit Enhancement, Low Prepayments
The transaction has built up credit enhancement from 17% for the
class A notes at closing in July 2019 to 18.4% at present as a
result of the sequential note pay down and the non-amortising
reserve fund established at closing. This has resulted in increased
credit support available to the notes, contributing to the
affirmations.
The transaction is expected to have low prepayment rates over the
following years, which would result in a slower increase in credit
enhancement. The majority of the loans in the portfolio are
five-year fixed rate loans reverting to OSB's standard variable
rate (SVR) between 2022 and 2023. This would result is a more
moderate portfolio amortisation before higher levels of prepayments
are observed when fixed loans will revert to floating. The
transaction does not allow for product switches and OSB will need
to buy loans back to retain borrowers willing to refinance their
debt.
Adequate Liquidity Coverage
Due to the spread of the coronavirus, Fitch expects the transaction
to face some liquidity constraints as a large proportion of
borrowers may take up the three-month payment holiday option. Fitch
has tested the ability of the reserve fund (RF) to cover senior
fees, net swap payments and class A-F interest under various
interest-rate scenarios and found that payment interruption risk is
mitigated for this transaction.
Class X Note: Robust Against Performance Deterioration
Prior to the optional redemption date, all excess spread will be
used to make payments of interest and principal on the class X
notes. The class X note has been repaid to about 65% of its
original balance since closing. The model-implied rating of the
excess spread notes is highly sensitive to cash flow modelling
assumptions, especially prepayment rates and asset yield profile.
Fitch has conducted additional analysis to test the resilience of
the notes ratings against asset underperformance in the short-to
medium term. This analysis has resulted in Fitch affirming the
rating of the class X notes at 'B+sf'.
RATING SENSITIVITIES
The transaction performance may be affected by changes in market
conditions and economic environment. Fitch acknowledges the
uncertainty of the path of coronavirus-related containment
measures, and has therefore considered more severe economic
scenarios. Fitch has applied an additional rating sensitivity
scenario based on model-implied ratings. This scenario involves an
increase in the foreclosure frequency, a lengthening of the
foreclosure timing, and reduced recovery rates.
While the impact resulting from the coronavirus outbreak is still
uncertain, Fitch considered that the current ratings were
sufficiently robust to withstand its expectations of deterioration
in asset performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. There were no findings that 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.
Prior to the transactions' closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Prior to the transactions' closing, Fitch conducted a review of a
small targeted sample of Paragon's origination files and found the
information contained in the reviewed files to be adequately
consistent with the originator's policies and practices and the
other information provided to the agency about the asset
portfolios.
Overall, Fitch's assessment of the information relied upon for the
agency's rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
ESG CONSIDERATIONS
ESG issues are credit neutral or have only a minimal credit impact
on the entity(ies), either due to their nature or the way in which
they are being managed by the entity(ies).
CANTERBURY FINANCE 2: Fitch Assigns BB+sf Rating on Class F Debt
----------------------------------------------------------------
Fitch Ratings has assigned final ratings to Canterbury Finance No.2
plc.
Canterbury Finance No.2 PLC
Class A1 XS2133480199; LT AAAsf; previously at New Rating
Class A2 XS2133481080; LT AAAsf; previously at New Rating
Class B XS2133483458; LT AAsf; previously at New Rating
Class C XS2133483706; LT Asf; previously at New Rating
Class D XS2133483888; LT BBBsf; previously at New Rating
Class E XS2133483961; LT BB+sf; previously at New Rating
Class F XS2133484001; LT BB+sf; previously at New Rating
Class X XS2133484340; LT Bsf; previously at New Rating
TRANSACTION SUMMARY
Canterbury Finance No.2 PLC is a static securitisation of
buy-to-let (BTL) mortgages originated by OneSavings Bank PLC (OSB),
trading under its Kent Reliance brand, in England and Wales. The
loans are serviced by OSB via is UK-based staff and offshore team.
This transaction is OSB's second securitisation of its Kent
Reliance originations.
KEY RATING DRIVERS
Positive Selection: The pool consists of UK BTL mortgage loans
advanced to borrowers with no adverse credit history. This is more
stringent than the adverse credit history generally accepted by
OSB. All loans have full rental income certification, a full
property valuation and are underwritten by a robust lending policy.
The pool contains Kent Reliance's post-2017 origination.
Specialist Products: The pool includes a high proportion of OSB's
"specialist" BTL products (77%). About 40% of the pool contains
loans secured against house in multiple occupation (HMO)
properties, which may also include first-time landlords. OSB's BTL
book performance has also been weaker than peers'. Although there
are elements of positive selection, Fitch Ratings believes that the
performance of the wider book may be indicative of future
transaction performance.
The combination of these factors has resulted in Fitch applying an
originator adjustment of 1.2x.
Liquidity Coverage: Due to the coronavirus-related disruptions,
Fitch expects the transaction to face some liquidity constraints as
a large proportion of borrowers may take up the three-month payment
holiday option. Fitch has tested the ability of the reserve fund
(RF) to cover senior fees, net swap payments and class A to-F note
interest under various interest-rate scenarios and found that
payment interruption risk would be mitigated for this transaction.
Class X Note: Prior to the optional redemption date, all excess
spread will be used to make payments of interest and principal on
the class X notes. The model-implied rating of the excess spread
notes is highly sensitive to cash flow modelling assumptions,
especially prepayment rates and asset yield profile. Fitch has
conducted additional analysis to test the resilience of the notes
ratings against asset underperformance in the short-to medium term.
This has resulted in Fitch assigning the rating of the class X
notes below the model-implied-ratings in its cash flow analysis.
Borrower Affordability: The majority of the pool contains loans
advanced with an initial fixed period reverting to OSB's BTL
standard variable rate (SVR). OSB's standard variable rate is
higher than peers'. Fitch's interest coverage ratio (ICR)
calculation assesses the post-reversion interest payments using a
stressed interest rate based on OSB's SVR. This pool has a weighted
average (WA) ICR of 83.1% than other Fitch-rated BTL transactions
due to the higher SVR.
Fixed Hedging Schedule: The manager entered a swap at closing to
mitigate the interest rate risk arising from the fixed-rate
mortgages in the pool. The swap features a defined notional balance
that was derived to reflect the interest rate reset dates of the
mortgage pool. Fitch has assessed the impact of any over or
under-hedging due to prepayments and defaults not envisaged by the
swap notional.
RATING SENSITIVITIES
The transaction performance may be affected by changes in market
conditions and in the economic environment. Fitch acknowledges the
uncertainty of the path of coronavirus-related containment
measures, and has therefore considered more severe economic
scenarios. Fitch has applied an additional rating sensitivity
scenario based on model-implied ratings. This scenario involved an
increase in the foreclosure frequency, a lengthening of the
foreclosure timing and reduced recovery rates.
While the impact resulting from the spread of the coronavirus is
still uncertain, Fitch considers the assigned ratings to be
sufficiently robust to withstand its expectations for deterioration
in asset performance
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch reviewed the results of a third-party assessment conducted on
the asset portfolio information, and concluded that there were no
findings that affected the rating analysis.
Fitch also reviewed a small targeted sample of OSB's origination
files and found the information contained in the reviewed files to
be adequately consistent with the originator's policies and
practices and the other information provided to the agency about
the asset portfolio.
Overall, Fitch's assessment of the asset pool information relied
upon for the agency's rating analysis according to its applicable
rating methodologies indicates that it is adequately reliable.
ESG CONSIDERATIONS
ESG issues are credit neutral or have only a minimal credit impact
on the entity(ies), either due to their nature or the way in which
they are being managed by the entity(ies).
CANTERBURY FINANCE 2: Moody's Gives B3 Rating to Class F Notes
--------------------------------------------------------------
Moody's Investors Service has assigned definitive credit ratings to
the following Notes issued by Canterbury Finance No. 2 PLC:
GBP 414,640,000 Class A1 Mortgage Backed Floating Rate Notes due
December 2056, Assigned Aaa (sf)
GBP 445,730,000 Class A2 Mortgage Backed Floating Rate Notes due
December 2056, Assigned Aaa (sf)
GBP 51,830,000 Class B Mortgage Backed Floating Rate Notes due
December 2056, Assigned Aa1 (sf)
GBP 51,830,000 Class C Mortgage Backed Floating Rate Notes due
December 2056, Assigned Aa3 (sf)
GBP 25,910,000 Class D Mortgage Backed Floating Rate Notes due
December 2056, Assigned Baa1 (sf)
GBP 25,910,000 Class E Mortgage Backed Floating Rate Notes due
December 2056, Assigned Baa3 (sf)
GBP 20,742,000 Class F Mortgage Backed Fixed Rate Notes due
December 2056, Assigned B3 (sf)
GBP 41,460,000 Class X Mortgage Backed Floating Rate Notes due
December 2056, Assigned Caa3 (sf)
The RC1 Residual Certificates, the RC2 Residual Certificates and
the ERC Certificates have not been rated by Moody's.
The Notes are backed by a pool of UK buy-to-let mortgage loans
originated by OneSavings Bank PLC. The securitised portfolio
consists of 4,212 mortgage loans with a current balance of GBP
1,036.6 million as of February 29, 2020.
RATINGS RATIONALE
The ratings of the Notes are based on an analysis of the
characteristics and credit quality of the underlying mortgage pool,
sector wide and originator specific performance data, protection
provided by credit enhancement, the roles of external
counterparties and the structural features of the transaction.
MILAN CE for this pool is 14.0% and the expected loss is 1.9%.
The portfolio's expected loss is 1.9%, which is in line with other
UK BTL RMBS transactions owing to: (i) the weighted average current
LTV for the pool of 74.1%, which is in line with comparable
transactions; (ii) the performance of comparable originators; (iii)
the current macroeconomic environment in the UK; (iv) some
historical track record, evidencing good performance; and (v)
benchmarking with similar UK BTL transactions.
MILAN CE for this pool is 14.0%, which is in line with other UK BTL
RMBS transactions, owing to: (i) the weighted average current LTV
for the pool of 74.1%; (ii) static nature of the pool; (iii) the
fact that 96.5% of the pool are interest-only loans or part and
part mortgages; (iv) the share of self-employed borrowers of 30.8%
and legal entities of 52.5%; (v) the presence of 52.3% of HMO and
MUB loans in the pool; and (vi) benchmarking with similar UK BTL
transactions.
At closing, the transaction benefits from a fully funded,
non-amortising general reserve fund that equals 1.5% of the Class A
to F Notes balance. In addition, the structure benefits from a
liquidity reserve fund that equals 1.5% of the outstanding balance
of the Class A1, A2 and B Notes and that will be funded from
principal receipts upon the general reserve fund balance falling
below 1.25% of the outstanding Class A to F Notes balance. The
liquidity reserve fund is amortising and covers senior expenses and
Class A1, A2 and B Notes interest. Amortisation amounts from the
liquidity reserve fund will be released to the principal
waterfall.
Operational Risk Analysis: OSB is the servicer in the transaction
whilst Citibank N.A., London Branch (Aa3/(P)P-1, Aa3(cr)/P-1(cr)),
will be acting as the cash manager. In order to mitigate the
operational risk, CSC Capital Markets UK Limited (NR) will act as
back-up servicer facilitator. To ensure payment continuity over the
transaction's lifetime, the transaction documentation incorporates
estimation language whereby the cash manager can use the three most
recent servicer reports available to determine the cash allocation
in case no servicer report is available. The transaction also
benefits from approx. 2 quarters of liquidity based on Moody's
calculations. Finally, there is principal to pay interest as an
additional source of liquidity for the Classes A to F (subject to
being the most senior Class of Notes outstanding).
Interest Rate Risk Analysis: 87.4% of the loans in the pool are
fixed rate loans reverting to OSB's discretionary SVR with the
remaining portion being SVR loans. The Notes are floating rate
securities with reference to daily SONIA. To mitigate the
fixed-floating mismatch between fixed-rate assets and floating
liabilities, there will be a scheduled notional fixed-floating
interest rate swap provided by Royal Bank of Canada (Aa2/P-1,
Aa2(cr)/P-1(cr)). The basis risk mismatch between the SVR loans and
the floating rate Notes will be unhedged. Moody's has considered
hedging risk adjusted yield analyses in determining the yield
vector for the transaction.
Its analysis has considered the increased uncertainty relating to
the effect of the coronavirus outbreak on the UK economy as well as
the effects that the announced government measures, put in place to
contain the virus, will have on the performance of consumer assets.
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. It is a global health shock, which makes it extremely
difficult to provide an economic assessment. The degree of
uncertainty around its forecasts is unusually high.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
July 2019.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
Factors that would lead to an upgrade or downgrade of the ratings:
Significantly different loss assumptions compared with its
expectations at close due to either a change in economic conditions
from its central scenario forecast or idiosyncratic performance
factors would lead to rating actions. For instance, should economic
conditions be worse than forecast, the higher defaults and loss
severities resulting from a greater unemployment, worsening
household affordability and a weaker housing market could result in
a downgrade of the ratings. Deleveraging of the capital structure
or conversely a deterioration in the Notes available credit
enhancement could result in an upgrade or a downgrade of the
ratings, respectively.
CHESTER B1: S&P Assigns Prelim CCC+ (sf) Rating to X-Dfrd Notes
---------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to Chester
B1 Issuer PLC's class A, B-Dfrd, C-Dfrd, D-Dfrd, E-Dfrd, and X-Dfrd
U.K. residential mortgage-backed securities (RMBS) notes. At
closing, Chester B1 Issuer will also issue unrated class Z-Dfrd
notes, as well as class S1, S2, and Y certificates, and VRR loan
notes.
S&P said, "We base our credit analysis on the underlying pool of
GBP1,708.6 million (as of Dec. 31, 2019). The pool comprises
first-lien U.K. residential mortgage loans that Northern Rock PLC
predominantly originated between 2006 and 2009. The underlying
residential properties are in England, Wales, Northern Ireland, and
Scotland. Some of the mortgage loans were originated together with
an unsecured personal loan, an account, and a credit card. None of
the unsecured products are included in the securitized pool. We
rely on the representation provided by the seller that the mortgage
loans are free of any lien, set-off, or counterclaim between the
borrower and the legal titleholder and the originator."
Approximately 79% of the pool comprises loans originated for loan
purchase. All loans were owner-occupied at origination, however
currently 5.6% of the pool are consent-to-let. Approximately 44% of
the pool comprises interest-only loans. The largest geographical
concentrations are North West England (15.8%), Scotland (14.5%),
and South East England (13.1%). Loans with either the primary or
the secondary borrower having county court judgement records
comprise 17.7% of the pool. Loans in arrears represent 11.0% of the
pool, including 5.4% of loans in arrears for more than 90 days.
Standard variable rate (SVR) loans make up 99.9% of the pool. Based
on S&P's legal analysis and the conditions outlined in the various
servicing agreements, it has applied a SVR floor rate to the SVR
loans.
The legal titleholder of the pool is Topaz Finance Ltd. (Topaz), a
subsidiary of Computershare. Topaz took over this role from
Northern Rock in November 2019. After closing, Topaz will retain
the legal title of the pool and will perform as the pool servicer.
Given the presence of the connected unsecured loans, upon servicer
replacement its successor would have to manage both secured and
unsecured loans to assure servicing consistency. A back-up servicer
facilitator will be appointed at closing to assist in finding a
suitable replacement. S&P said, "Still, in our view, identifying a
successor servicer could take a longer time than for a conventional
mortgage pool. We therefore stress two months of commingling
liquidity stress in our cash flow model."
The transaction will be exposed to the counterparty risk of
Citibank N.A., London branch as a transaction account provider and
HSBC Bank PLC as a collection account bank. S&P expects the
replacement provisions set by the transaction documentation to meet
its counterparty criteria.
During the transaction's life, the issuer will be obligated to
honor any flexible features, which are included in the underlying
mortgage contracts, subject to the borrower meeting the relevant
conditions, the application complying with the applicable law, and
the servicer's approval. The flexible features include payment
holidays, flexible drawings, porting, product switches, and further
advances. In S&P's current cash flow analysis, it stressed the
impact of payment holidays and flexible redraws on the transaction
flows. S&P will monitor the effect of other flexible features
during our surveillance.
S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. S&P said,
"Some government authorities estimate the pandemic will peak around
midyear, and we are using this assumption in assessing the economic
and credit implications. In our view, the measures adopted to
contain COVID-19 have pushed the global economy into recession.
Policy measures aimed at dampening the economic impact include
forbearance measures for households and small and mid-size
corporates. In particular, the Italian government has indicated
that it may allow mortgage borrowers across the country to suspend
their debt payments. Similarly, banks in various
countries--including Italy, the U.K., and France--have announced
support measures for households and small business customers
affected by the coronavirus, which could also include the
suspension of scheduled mortgage payments. Given the temporary
nature of such measures and the recourse to the issuer, we believe
that our current credit and cash-flow assumptions are still
appropriate. As the situation evolves, we may update our
assumptions and estimates accordingly."
S&P said, "Our preliminary rating on the class A notes addresses
the timely payment of interest and the ultimate payment of
principal. Our preliminary ratings on the class B-Dfrd to E-Dfrd
and X-Dfrd notes reflect the ultimate payment of interest and
principal. Our rating definitions are in line with the terms and
conditions of the notes.
"Our preliminary ratings reflect our assessment of the
transaction's payment structure, cash flow mechanics, and the
results of our cash flow analysis to assess whether the notes would
be repaid under stress test scenarios. Subordination and excess
spread (there will be no loss-absorbing reserve fund in this
transaction) will provide credit enhancement to the rated notes. We
also factored in sensitivity scenarios related to potential
repercussions of the coronavirus outbreak, namely an increase in
payment holidays, longer recovery timing, and an elevated default
rate in speculative-grade rating scenarios. "Considering these
factors, we believe that the available credit enhancement for the
class A to E-Dfrd notes is commensurate with the preliminary
ratings assigned."
The timely payment of interest on the class A notes is supported by
the principal borrowing mechanism, the initial liquidity reserve,
and cash collected in January and February 2020, which is expected
to build up the liquidity reserve to its required level of 2% of
the class A notes' balance on the first interest payment date in
July 2020. The liquidity reserve can thereafter cover more than one
year of senior costs and class A interest.
S&P said, "Our rating on the class X-Dfrd notes reflects the
application of our 'CCC' criteria. Considering its junior position
in the payment structure, this class is currently vulnerable to
nonpayment, and it is dependent upon favorable business, financial,
and economic conditions to repay the ultimate interest and
principal. The risk of nonpayment is exacerbated by the current
uncertainty about the rate of spread and peak of the coronavirus
outbreak. This is commensurate with a 'CCC' rating category as per
our criteria. Given that the class fails a 'B' stress in one of
eight scenarios, we have assigned a 'CCC+ (sf)' rating to the class
X-Dfrd notes."
Ratings Assigned
Class Prelim. rating* Amount (GBP)
A AAA (sf) TBD
B-Dfrd AA (sf) TBD
C-Dfrd A (sf) TBD
D-Dfrd BBB (sf) TBD
E-Dfrd BB (sf) TBD
Z-Dfrd NR TBD
X-Dfrd CCC+ (sf) TBD
S1 certs NR N/A
S2 certs NR N/A
Y certs NR N/A
VRR loan notes NR TBD
NR--Not rated.
TBD--To be determined.
N/A--Not applicable.
DIGNITY FINANCE: Fitch Affirms BB+ Rating on Class B Notes
----------------------------------------------------------
Fitch Ratings has affirmed Dignity Finance Plc's class A notes at
'A-' and class B notes at 'BB+'. The Outlooks are Negative.
RATING RATIONALE
The affirmation reflects its current expectation that Dignity's
long term credit profile and metrics will not be significantly
affected by the economic impact of the coronavirus pandemic. The
liquidity position is comfortable throughout 2020 and Dignity has
some financial flexibility to partially offset any potential short
term revenue decrease.
Fitch currently assumes the 2020 shock will be progressively
recovered by 2021 but if the severity and duration of the outbreak
is longer than expected Fitch will revise the rating case
accordingly.
KEY RATING DRIVERS
Potential Impact of Coronavirus Outbreak on Pricing
Fitch highlighted Dignity's increased exposure to discretionary
spending in its most recent review and therefore sees an increased
risk of downward pressure on pricing from the economic impact of
COVID-19. This may also be exacerbated by further price reductions
due to government limits on large gatherings resulting in lower
average income per funeral.
Fitch Rating Case - Limited Long-term Impact
Under the updated Fitch Rating Case (FRC), Fitch has applied an
abrupt revenue decline in 2020 of 5.6% and a drop in fixed
operational expenses at 25% of the drop in revenue of 1.4%. Capital
expenditure has also been reduced to be in line with the covenanted
minimum in 2020 before a recovery of all of these parameters to its
previously modelled levels of 2019 in 2021.
This leads to noticeably lower rent-adjusted free cash flow (FCFR)
debt service cover ratios (DSCR) in 2020 and 2021 before recovering
back in line with previous levels, leading to an average FCFR DSCR
of 1.34x for class B and 2.04x for class A. This compares with its
previous 2019 rating case averages of 1.37x and 2.06x for class B
and A, respectively.
Fitch is closely monitoring developments in the sector and will
revise the FRC should its assessment of the impact of the COVID-19
outbreak change.
Solid Liquidity Position
Dignity has around GBP18 million of cash available as of March 2020
and committed revolving credit facility of GBP55 million. This
liquidity alone covers Dignity's principal and interest payments
throughout 2020.
Sensitivity Case
Fitch has also run a sensitivity case where Dignity's revenue falls
by 10% 2020 and then recovers to 2019 levels by 2021. Mitigation
measures are unchanged compared with the FRC. The sensitivity shows
that under this scenario average FCFR DSCRs are maintained at 1.34x
for the class B notes and drop to 2.02x for the class A notes,
highlighting the long-term resilience to a short-term shock in
2020.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Negative Rating Action:
- Further reduction in pricing flexibility over the medium term
in a potentially weaker post-Brexit and post-coronavirus UK
economy
- Projected FCFR DSCR metrics declining below 1.8x and 1.3x for
the class A and B notes, respectively.
Developments That May, Individually or Collectively, Lead to
Positive Rating Action:
- Projected FCFR DSCR metrics sustainably above 2.3x and 1.6x.
However, an upgrade of the class A and B notes is unlikely as long
as regulatory uncertainty persists.
TRANSACTION SUMMARY
Dignity is a securitisation comprising 750 funeral homes and 40
crematoria as at June 2019. The Dignity group is the second-largest
provider of funeral services in the UK and the largest provider of
crematoria services.
The recent outbreak of coronavirus and related government
containment measures worldwide creates an uncertain global
environment in the near term. While Dignity Finance Plc's most
recent performance data may not have indicated impairment due to
the outbreak, material changes in revenue and cost profile are
occurring across the region and likely to worsen in the coming
weeks and months as economic activity suffers and government
restrictions are maintained or expanded. Fitch's ratings are
forward-looking in nature, and Fitch will monitor developments in
the sector as a result of the virus outbreak as it relates to
severity and duration, and incorporate revised base and rating case
qualitative and quantitative inputs based on expectations for
future performance and assessment of key risks.
E-CARAT 11: DBRS Finalizes BB Rating on Class F Notes
-----------------------------------------------------
DBRS Ratings Limited finalized its provisional ratings on the
following classes of notes issued by E-CARAT 11 plc (the Issuer):
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at BB (sf)
-- Class G Notes at B (low) (sf)
DBRS Morningstar does not rate the Class H Notes issued in this
transaction.
The rating of the Class A Notes addresses the timely payment of
interest and the ultimate repayment of principal by the legal
maturity date. The ratings on Class B, Class C, Class D, Class E,
Class F, and Class G Notes address the ultimate payment of interest
and ultimate repayment of principal by the legal maturity date
while junior to other outstanding classes of notes, but the timely
payment of interest when they are the senior-most tranche.
The ratings are based on DBRS Morningstar's review of the following
analytical considerations:
-- The transaction capital structure, including form and
sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS
Morningstar's projected expected defaults, recoveries, and residual
value (RV) losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow
assumptions and repay investors according to the terms of the
notes.
-- The seller, originator, and servicer's capabilities with
respect to originations, underwriting, servicing, and financial
strength.
-- DBRS Morningstar's operational risk review of Vauxhall Finance
plc (Vauxhall Finance), which it deemed to be an acceptable
servicer.
-- The transaction parties' financial strength with regard to
their respective roles.
-- The credit quality, diversification of the collateral, and
historical and projected performance of the seller's portfolio.
-- DBRS Morningstar's sovereign rating of the United Kingdom of
Great Britain and Northern Ireland at AAA with a Stable trend.
-- The consistency of the transaction's legal structure with DBRS
Morningstar's "Legal Criteria for European Structured Finance
Transactions" methodology.
The notes are backed by a portfolio of approximately GBP 500
million of fixed-rate receivables related to auto loan contracts
granted by Vauxhall Finance to borrowers in England, Wales,
Scotland, and Northern Ireland. The underlying motor vehicles
related to the finance contracts consist of both new and used
passenger vehicles and light commercial vehicles. Vauxhall Finance
services the receivables.
The underlying receivables consist of both conditional sale and
personal contract purchase (PCP) auto loan agreements with
guaranteed future values (GFV). The GFV affords the borrower the
option to hand back the underlying vehicle at contract maturity as
an alternative to repaying or refinancing the final balloon
payment; this feature directly exposes the Issuer to RV risk.
The transaction includes a one-year revolving period during which
time the originator may offer additional receivables that the
Issuer will purchase provided that eligibility criteria and
concentration limits set out in the transaction documents are
satisfied. The revolving period may end earlier than scheduled if
certain events occur, such as a breach of performance triggers, an
insolvency of the seller, or default of the servicer.
TRANSACTION STRUCTURE
The transaction allocates payments through separate interest and
principal priorities of payment and incorporates an amortizing
liquidity reserve funded by Vauxhall Finance through a subordinated
loan. The liquidity reserve is available to the Issuer only in a
restricted scenario where the principal collections are not
sufficient to cover the shortfalls in senior costs (servicer fees
and operating expenses), swap payments, and Class A interest and,
if not deferred, Class B, Class C, and Class D interest payments.
During the revolving period and the normal redemption period, all
amounts in excess of the target amount will be returned directly to
the subordinated lender and will not become available to the
transaction. The target amount of the liquidity reserve after the
Class D Notes have been redeemed is zero.
Following the revolving period, if no sequential redemption event
has occurred, principal funds are allocated on a pro rata basis to
all notes. A sequential redemption event considers net loss
performance, the debit balance of the principal deficiency ledger,
and whether the clean-up call option has been exercised. Following
a sequential redemption event, the principal redemption of the
notes becomes fully sequential and non-reversible.
The Class A, Class B, Class C, Class D, Class E, Class F, and Class
G Notes pay interest indexed to the compounded daily Sterling
Overnight Index Average, whereas the portfolio pays a fixed
interest rate. The interest rate risk arising from the mismatch
between the Issuer's liabilities and the portfolio is hedged
through a swap agreement with BNP Paribas SA (BNP Paribas; rated AA
(low) with a Stable trend by DBRS Morningstar).
COUNTERPARTIES
HSBC Bank plc (HSBC) has been appointed as the Issuer's account
bank for the transaction. Based on the DBRS Morningstar private
rating of HSBC, the downgrade provisions outlined in the
transaction documents, and structural mitigants, DBRS Morningstar
considers the risk arising from the exposure to HSBC to be
consistent with the rating assigned to the rated notes, as
described in DBRS Morningstar's "Legal Criteria for European
Structured Finance Transactions" methodology.
BNP Paribas acts as the swap counterparty for the transaction. DBRS
Morningstar's Long-Term Senior Debt Rating of AA (low) and Long
Term Critical Obligations Rating of AA (high) for BNP Paribas is
consistent with the First Rating Threshold as described in DBRS
Morningstar's "Derivative Criteria for European Structured Finance
Transactions" methodology.
Notes: All figures are in British pounds sterling unless otherwise
noted.
FINABLR: Ernst & Young Steps Down as Auditor
--------------------------------------------
Daniel Thomas and Simeon Kerr at The Financial Times report that EY
has resigned as the auditor for Travelex owner Finablr, the
troubled FTSE 250 financial services group that recently warned it
was in danger of going out of business given a mounting accounting
scandal and the impact of the coronavirus pandemic.
Finablr said on March 30 that EY had tendered its resignation,
citing "concerns arising out of recent events at the company and
NMC Health", the Middle East-focused hospital operator whose shares
were suspended after the discovery of a potential fraud, the FT
relates.
Finablr and NMC Health were founded by United Arab Emirates-based
billionaire BR Shetty and also share other investors, but both have
been hit by a series of damaging revelations over their accounting,
management and ownership, the FT discloses.
Earlier this month, Finablr said it had discovered US$100 million
of cheques kept secret from its board that had been made by group
companies before its initial public offering in London in 2019, the
FT recounts. This meant that it had doubts over its ability to
continue as a going concern, the FT notes. Kroll has been
appointed to carry out an independent investigation, according to
the FT.
Before its resignation EY had asked the company for a number of
changes to be made to the board as a condition for it to continue
acting as auditor, but Finablr, as cited by the FT, said it was
"unable to accommodate EY's requirements in full in time".
Also on March 30, Finablr said Abdulrahman Basaddiq and Bassam Hage
had resigned as directors, the FT relays.
In a statement, EY said its resignation followed "a number of
concerns raised in relation to the composition of the company's
board, adequacy of corporate governance and recent issues that
resulted in an independent review of the company's financial
arrangements, including of related-party transactions and on and
off-balance-sheet debt", the FT notes.
However, EY will continue to audit Travelex which has also
appointed an independent team of advisers, including PwC, the FT
states. On March 27 the forex company said all Finablr
representatives, including Mr. Shetty, had resigned from the
Travelex board, the FT recounts.
FINSBURY SQUARE 2019-1: DBRS Confirms CC Rating on Class X Notes
----------------------------------------------------------------
DBRS Ratings Limited confirmed the following ratings on the notes
issued by Finsbury Square 2019-1 plc (the Issuer):
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (high) (sf)
-- Class X Notes at CC (sf)
The ratings on the Class A Notes, Class B Notes, Class C Notes,
Class D Notes, and Class E Notes address the timely payment of
interest and ultimate payment of principal on or before the legal
final maturity date, on the payment date in June 2069. The rating
on the Class X Notes addresses the ultimate payment of interest and
principal on or before the legal final maturity date, on the
payment date in June 2069.
The confirmations follow an annual review of the transaction and
are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and
losses, as of the February 2020 monthly report and December 2019
payment date.
-- Portfolio default rate (PD), loss given default (LGD) and
expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the
expected losses at their respective rating levels.
The transaction is a securitization collateralized by a portfolio
of residential mortgage loans granted by Kensington Mortgage
Company Limited (KMC) in England, Wales, and Scotland. Notable
features of the portfolio are Help-to-Buy (HTB), Right-to-Buy (RTB)
mortgages, Buy-to-Let (BTL) properties, borrowers with adverse
borrower features including self-employed borrowers and borrowers
with prior county court judgments and the presence of arrears at
closing, albeit in limited proportions. The outstanding portfolio
balance increased to GBP 515,688,018 from GBP 375,649,014 between
closing and the first payment date falling in September 2019 as
additional loans were purchased during that period. The portfolio
has been amortizing since.
PORTFOLIO PERFORMANCE
Delinquencies have been volatile since closing. As of the February
2020 monthly report, current two-to-three months arrears
represented 0.4% of the outstanding portfolio balance, up from 0.2%
at closing and the 90+ delinquency ratio was 1.23% up from 0.9% at
closing. As of the February 2020 monthly report, total arrears are
4.6% of the outstanding portfolio balance, up from 2.3% of at
closing. As of the February 2020 monthly report, cumulative net
losses are immaterial, representing 0.0% of the portfolio initial
balance. To date, only one property has been repossessed.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining
pool of receivables and has marginally adjusted its base case PD
and LGD assumptions to 7.4% and 17.0%, respectively, from 7.5% and
17.2%. DBRS Morningstar's analysis factors the presence of HTB
mortgages (6.0% of the outstanding portfolio balance) and BTL
mortgages (24.4% of the outstanding portfolio balance) as well as a
high proportion of self-employed borrowers (46.0% of the
outstanding portfolio balance).
The DBRS Morningstar base case PD and LGD of the current pool of
receivables are 7.4% and 17.0%, respectively.
CREDIT ENHANCEMENT
As of the December 2019 payment date, the credit enhancement (CE)
increased as follows since the DBRS Morningstar initial rating:
-- CE to the Class A Notes increased to 19.1%, up from 17.5%
-- CE to the Class B Notes increased to 13.8%, up from 12.6%
-- CE to the Class C Notes increased to 9.0%, up from 8.2%
-- CE to the Class D Notes increased to 6.4%, up from 5.7%
-- CE to the Class E Notes increased to 5.3%, up from 4.7%
-- CE to the Class X Notes remained at 0.0%
The CE for the Class A to E Notes consists of the subordination of
the junior notes and a General Reserve Fund (GRF).
The GRF is non-amortizing and is available to cover senior fees,
senior swap payments, interest on the Class A to E Notes and
principal losses via the principal deficiency ledgers (PDLs) on the
Class A to F Notes. The GRF was funded at GBP 11,502,500 at closing
and reduced to GBP 10,700,000 at the first payment date. As of the
December 2019 payment date, the GRF was its target level of GBP
10,700,000, equal to 2% of the initial Class A to F Notes. Once the
Class E Notes are fully redeemed, the target balance of the GRF
becomes zero. As of the December 2019 payment date, all PDLs were
clear.
A Liquidity Reserve Fund (LRF) provides additional liquidity
support to the transaction to cover senior fees, senior swap
payments, and interest on the Class A and Class B Notes. The LRF is
funded through available principal funds if the GRF balance falls
below 1.5% of the outstanding Class A to F Notes. In this event,
the LRF is funded to 2% of the outstanding Class A and Class B
Notes balances and is replenished at each payment date.
The transaction is exposed to interest rate risk as 85.8% of the
outstanding portfolio balance pays a (short-term) fixed rate of
interest while the rated notes are indexed to three-month Libor. In
addition, loans can be subject to a variation in the length of the
fixed-rate period, the applicable interest rate, and maturity date
through a "Product Switch" up to 20% of Class A to F original
balance. As of December 2019, Product Switch loans were marginal
(0.2% of Class A to F original balance).
Citibank N.A./London Branch acts as the account bank for the
transaction. Based on the DBRS Morningstar private rating of
Citibank N.A./London Branch, the downgrade provisions outlined in
the transaction documents, and other mitigating factors inherent in
the transaction structure, DBRS Morningstar considers the risk
arising from the exposure to the account bank to be consistent with
the rating assigned to the Class A Notes, as described in DBRS
Morningstar's "Legal Criteria for European Structured Finance
Transactions" methodology.
BNP Paribas London Branch acts as the swap counterparty for the
transaction. DBRS Morningstar's private rating of BNP Paribas
London Branch is above the First Rating Threshold as described in
DBRS Morningstar's "Derivative Criteria for European Structured
Finance Transactions" methodology.
Notes: All figures are in British pound sterling unless otherwise
noted.
HNVR MIDCO: S&P Cuts Rating to CCC+ on COVID-19 Impact, Outlook Neg
-------------------------------------------------------------------
S&P Global Ratings downgraded the ratings on Hotelbeds' parent,
HNVR Midco Ltd., by one notch, to 'CCC+' from 'B-', and revised the
outlook to negative from stable.
S&P said, "We believe that the coronavirus outbreak will
significantly affect Hotelbeds' earnings, cash flow, and metrics in
2020. In our base case, we assume substantially subdued trading
volumes until September 2020, fuelling a decline in topline in the
range of 50%-60% for the full FY2020, and reported EBITDA that
could be up to 80% down from 2019 levels. We do not envision
Hotelbeds' trading levels will recover in line with FY2019 levels
until FY2022. In FY2021, our base case assumes some recovery in
total trading volumes and revenue, albeit remaining about 20% lower
than those shown in FY2019. We also assume that a reduction in
exceptional integrating costs and higher levels of synergy releases
from past acquisitions will lead to FY2021 reported EBITDA
surpassing FY2019 levels at about EUR180 million-EUR190 million.
"As a result, we estimate that Hotelbeds' working capital profile
will lead to a rapid deterioration in the company's liquidity
position. As of September 2019, Hotelbeds showed cash balances of
close to EUR500 million, as well as full availability under the
existing EUR247 million revolving credit facility (RCF). However,
under usual circumstances, Hotelbeds typically shows significant
working capital outflows over the first two quarters of the fiscal
year, substantially reducing its cash balances by the end of March.
Given the significant decrease in trading as a result of the
COVID-19 pandemic, we estimate that the group's working capital
requirements will increase above historical levels, due to
unwinding from previous quarters and negligible bookings for
upcoming quarters of 2020, resulting in the liquidity position
deteriorating materially over the coming months."
To address the liquidity issues, Hotelbeds has started the process
to launch an additional cash pay EUR400 million term loan facility
D, subscribed by its private equity sponsors, Cinven, EQT, and
CPPIB. The proposed facility is expected to rank pari passu with
the existing EUR1.0 billion term loan B and GBP400 million term
loan C facilities, maturing at the same time as these on Sept. 12,
2025. As part of the transaction, the group is also looking to
introduce a EUR200 million debt basket to the current EUR247
million RCF, further increasing the group's liquidity headroom over
the coming months.
S&P said, "We believe that, subject to successful completion, the
proposed refinancing transaction will address Hotelbeds' imminent
liquidity risk, which we view positively. However, while the
company expects to recoup this increased leverage with very
substantial working capital inflows when trading levels are
restored, we think that the increased debt burden will result in
leverage levels that we regard as unsustainable, particularly in
the context of significant uncertainty related to the duration and
severity of the COVID-19 pandemic.
"In our base case, we assume significantly subdued activity in the
group's operations until September 2020, and a modest pickup in
activity throughout the remainder of the year. We think the
proposed debt issuance will cover the group's short-term liquidity
needs during the first part of 2020. However, were the travel
industry to remain subdued for longer, we cannot rule out the
company needing further liquidity. We will update our expectations
and forecasts in the light of the company's trading levels and
other information related to the outbreak's spread.
"We could lower our long-term issuer credit rating on HNVR Midco
Ltd. if the proposed refinancing transaction was not successfully
executed, leading to a high risk of liquidity shortfalls in the
near term. A negative rating action could also arise if we believed
a default event would likely take place over the next 12 months.
"We could revise the outlook back to stable if the group
successfully completed the proposed debt issuance, reducing
liquidity risk over the near term. A stabilization of our ratings
would also be contingent on a recovery of the travel industry
during the third quarter of 2020. A higher rating would require
that the company's trading levels were restored to levels
commensurate with its capital structure, resulting in S&P Global
Ratings-adjusted leverage below 8.0x."
MB AEROSPACE: S&P Cuts Issuer Rating to 'CCC+' on Weak Liquidity
----------------------------------------------------------------
S&P Global Ratings lowered its long-term issuer rating on
U.K.-based aerospace part supplier MB Aerospace Holdings II Corp.
(MB) to 'CCC+' from 'B' and placed the rating on CreditWatch with
negative implications.
S&P is also lowering its 'CCC+' issue rating on MB's first–lien
facilities, which comprise a $255 million term loan B and $50
million revolving credit facility. The recovery rating is unchanged
at '3'.
S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. S&P said,
"Some government authorities estimate the pandemic will peak about
midyear, and we are using this assumption in assessing the economic
and credit implications. We believe the measures adopted to contain
COVID-19 have pushed the global economy into recession. As the
situation evolves, we will update our assumptions and estimates
accordingly."
Weak liquidity and tight covenant headroom represent an immediate
risk to the ratings and MB Aerospace Holdings II Corp.'s (MB's)
ability to service its debt. As of March 2020, MB's available
liquidity in the form of cash and committed revolving credit lines
was $23 million. This leaves limited headroom for further
operational setbacks, growth-related working capital needs, or
acquisitions, absent a refinancing or a capital injection from the
financial sponsor Blackstone Capital Partners LLP Fund VI
(Blackstone). In addition, MB has limited EBITDA headroom under the
covenant on its revolving credit facility (RCF), given the likely
headwinds in the demand for maintenance, repairs, and overhauls and
civil aviation parts due to the coronavirus.
As airlines delay taking delivery of new aircraft, aircraft
manufacturers and aero-engine original equipment manufacturers
(OEMs) could lower their production rates. Component manufacture
is the single largest contributor to MB's revenues, accounting for
72% of its revenues, with repairs accounting for 21% of its
revenues in 2019. American aerospace engine manufacturer Pratt &
Whitney, a subsidiary of United Technologies, is MB's largest
customer, contributing 44% of its revenues, and MB's second-largest
customer is multinational engineering company Rolls-Royce, which
has now suspended production for its U.K. civil aerospace business.
S&P therefore believes that a drop in OEMs' production rates would
put pressure on MB's production volumes, top-line, and absolute
EBITDA, which could in turn weaken its S&P Global Ratings-adjusted
credit metrics.
S&P said, "We note the COVID-19 pandemic is not currently affecting
MB's exposure to military, defence, and industrial gas turbine
markets, given both the U.K. and the U.S. have deemed these
industries as essential.
"However, as governments attempt to halt the spread of the COVID-19
pandemic, with restrictions on most global and regional air travel,
the majority of airlines have grounded most or all of their fleets.
We expect a likely fall of about 30% in airline flying hours in
2019. We expect many airlines to push hard to delay taking delivery
of new planes until at least the end of the summer 2020, which in
turn will affect delivery and therefore production rates and the
supply chain.
"We expect that the demand for maintenance, repairs, and overhauls
may decline if airline fleets remain grounded. As a result, we now
expect MB's adjusted debt to EBITDA to decline to about 8.5x in
2019 and about 8.45x in 2020, compared to 6.7x in our previous
forecast.
"The CreditWatch negative placement reflects our view that absent
additional liquidity through either material positive free
operating cash flow or an equity injection from financial sponsor
Blackstone, MB could face a liquidity crunch. We plan to resolve
the CreditWatch as soon as we can further assess and quantify the
impact of the COVID-19 pandemic on MB's financial performance and
liquidity position."
MB is a U.S. incorporated--and jointly U.S.- and
U.K.-headquartered--manufacturer and supplier of metal engine parts
to major aerospace engine manufacturers. These include General
Electric, Rolls-Royce, and Pratt & Whitney, as well as other key
aerospace and defense manufacturers such as United Technologies and
Solar Turbines. MB's manufacturing facilities are spread across the
U.S., the U.K., Poland, and Taiwan.
MB's product suite includes a wide variety of engine components,
including complex machine components, fabricated assemblies, and
rotating components for more than 85 different aero-engines. MB
supplies parts for all four core engine stages: intake,
compression, combustion, and exhaust. MB also provides aftermarket
component repair services. ACTS, an acquired Taiwanese facility,
has increased MB's exposure to the expanding aftermarket segment.
MB has expanded primarily via acquisitions in recent years, and it
has had several private equity owners. Blackstone acquired MB in
December 2015.
MISSOURI TOPCO: Moody's Cuts CFR to Caa1 & Alters Outlook to Neg.
-----------------------------------------------------------------
Moody's Investors Service has downgraded the corporate family
rating and probability of default rating of UK value apparel
retailer Missouri TopCo Limited to Caa1 from B3 and to Caa1-PD from
B3-PD, respectively. Concurrently, the rating agency has downgraded
the rating of Matalan's GBP350 million first lien senior secured
notes due 2023 and GBP130 million second lien senior secured notes
due 2024 to B3 and Caa3 from B2 and Caa2, respectively, both issued
by Matalan Finance plc and guaranteed by the parent company
Missouri TopCo Limited. The outlook on all ratings was changed to
negative from stable.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook and falling retail sales are
creating a severe and extensive credit shock across many sectors,
regions and markets. The combined credit effects of these
developments are unprecedented. Moody's expects the UK clothing
retail sector will be one of the sectors to be significantly
affected by the shock given its exposure to increasing restrictions
on movement and sensitivity to consumer demand and sentiment. Its
action reflects the expected impact on Matalan of the breadth and
severity of the shock, and the broad deterioration in credit
quality Moody's expects it will trigger.
Most of the company's products are imported from Asia and whilst
China is an important supplier country, it is only one of several
supplier countries. Whilst supply chain issues may cause some minor
disruption, demand represents by far the biggest challenge for
non-food retailers, both physical stores and, to a lesser extent,
online. Whilst Matalan's e-commerce business does not yet represent
a significant portion of its operating results, Moody's understands
that management is currently focusing on its development.
The rating action was prompted by Moody's expectation of a sharp
decline in retail sales, both offline and online, over the course
of fiscal year 2021, ending February 2021, which will result in a
significant decline in EBITDA, a weakening liquidity profile and a
significantly higher leverage.
LIQUIDITY
At the end of November 2019 (end of Q3 fiscal 2020), Matalan had
limited levels of liquidity of GBP113 million, comprising cash of
GBP73 million and GBP40 million available under a committed GBP50
million revolving credit facility. The availability of the undrawn
portion of the revolver is subject to a springing covenant
(leverage below 5.5x) once drawings are above 35%. Moody's
considers Matalan's current liquidity capable of supporting the
company through Q1 and Q2 of fiscal 2021 under the base case
assumptions. However, a more severe or extended downside with
severely depressed sales into Q3 would likely put pressure on the
company's current liquidity. Matalan's coupon interest payments of
around GBP20 million fall due in July and January each year.
In this context, Moody's expects Matalan to take further actions to
strengthen its liquidity, including any available funding support
from the UK Government in the form of delayed value added tax
payments, salary contributions and business rates relief. Like many
other retailers, some financial support may potentially also
materialize from ongoing discussions with landlords in the form of
rent deferrals. In terms of freehold properties, Moody's
understands that the group owns a 999 year lease on the head office
at Knowsley, which was acquired in November 2017 for GBP32.6
million including stamp duty and legal fees.
STRUCTURAL CONSIDERATIONS
The revolving credit facility ranks ahead of the other senior debt
instruments in the company's debt structure. Both the revolver and
the first lien senior secured notes are guaranteed by the holding
company and certain material subsidiary guarantors, which,
collectively, represent the bulk of the assets of the group and are
secured on a first-ranking basis by fixed and floating charges on
substantially all of the assets and property of the issuer and
guarantors. The second lien senior notes are contractually
subordinated to the first lien senior-secured debt instruments.
RATING OUTLOOK
The negative outlook reflects the uncertainties related to the
length and severity of the spread, which in a more challenging
downside scenario, could further deteriorate Matalan's liquidity
profile and lead to an unsustainable capital structure.
WHAT COULD CHANGE THE RATING UP / DOWN
The ratings are unlikely to be upgraded in the short term. Positive
rating pressure would not arise until the coronavirus outbreak is
brought under control, the risks associated with movement
restrictions lowered, and footfall returns to more normal levels.
At this point Moody's would evaluate the balance sheet and
liquidity strength of the company and positive rating pressure
would require evidence that the company is capable of substantially
recovering its financial metrics and restoring liquidity headroom
within a 1-2 year time horizon.
Downward pressure could develop if the pandemic results in a more
severe impact on the operating performance, which could further
deteriorate Matalan's liquidity profile and lead to an
unsustainable capital structure.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Matalan is committed to minimise environmental impact and to comply
with all regulatory requirements on environmental policy. Moody's
also understands the company has maintained an ethical sourcing
policy over the last decades and has enhanced the transparency of
its supply chain. From a governance perspective the main risks are
the highly leveraged capital structure and the lower reporting
requirements typical of private companies compared with listed
ones.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018.
LIST OF AFFECTED RATINGS:
Downgrades:
Issuer: Missouri TopCo Limited
LT Corporate Family Rating, Downgraded to Caa1 from B3
Probability of Default Rating, Downgraded to Caa1-PD from B3-PD
Issuer: Matalan Finance plc
Backed Senior Secured Regular Bond/Debenture, Downgraded to B3 from
B2
Backed Senior Secured Regular Bond/Debenture, Downgraded to Caa3
from Caa2
Outlook Actions:
Issuer: Missouri TopCo Limited
Outlook, Changed To Negative From Stable
Issuer: Matalan Finance plc
Outlook, Changed To Negative From Stable
COMPANY PROFILE
Headquartered in Liverpool, Matalan is one of the leading value
clothing retailers in the UK, with revenues of around GBP877.2
million in the 40 weeks ended November 30, 2019. The company
operates through 230 stores across the country, primarily in
out-of-town retail parks, as well as online and through franchise
stores in the Middle East and Europe.
TRONOX HOLDINGS: Moody's Assigns B1 Rating, Outlook Now Stable
--------------------------------------------------------------
Moody's Investors Service affirmed the ratings on existing Tronox
Holdings Plc's subsidiaries ratings and changed the outlook to
stable from positive. The Ba3 ratings on the senior secured bank
debt and B3 ratings on the senior unsecured notes are also affirmed
and the outlook changed to stable from positive. Ratings on Tronox
Limited are being WR at this time and replaced with ratings
assigned to Tronox Holdings PLC associated with the company's
re-domicile to the UK. The change in outlook reflects what is now
more likely to be a flatter or negative growth trendline for the
TiO2 markets this year as the important end markets of coatings and
plastics are also likely to be flatter or negative given the
backdrop of uncertainty and actions related to Covid 19. The
Speculative Grade Liquidity Rating is SGL-2.
"The previous positive outlook had anticipated sustained favorable
conditions in TiO2 that would have allowed for EBITDA and free cash
growth and further debt reduction for Tronox," according to Joseph
Princiotta, SVP at Moody's. "This scenario is now viewed as less
likely, and the more likely scenario would probably not allow for
meaningful debt reduction this year, which underpinned the previous
positive outlook and was needed to support consideration for a
higher rating."
Assignments:
Issuer: Tronox Holdings Plc
Probability of Default Rating, Assigned B1-PD
Speculative Grade Liquidity Rating, Assigned SGL-2
Corporate Family Rating, Assigned B1
Affirmations:
Issuer: Tronox Finance LLC
Senior Secured Term Loan, Affirmed Ba3 (LGD3)
Issuer: Tronox Incorporated
Senior Unsecured Notes, Affirmed B3 (LGD5)
Issuer: Tronox UK Holdings Ltd.
Senior Unsecured Notes, Affirmed B3 (LGD5)
Outlook Actions:
Issuer: Tronox Blocked Borrower LLC
Outlook, Changed To Rating Withdrawn From Positive
Issuer: Tronox Finance LLC
Outlook, Changed To Stable From Positive
Issuer: Tronox Incorporated
Outlook, Changed To Stable From Positive
Issuer: Tronox Limited
Outlook, Changed To Rating Withdrawn From Positive
Issuer: Tronox UK Holdings Ltd.
Outlook, Changed To Stable From Positive
Issuer: Tronox Holdings Plc
Outlook, Assigned Stable
Withdrawals:
Issuer: Tronox Limited
Probability of Default Rating, Withdrawn , previously rated B1-PD
Speculative Grade Liquidity Rating, Withdrawn , previously rated
SGL-2
Corporate Family Rating (Local Currency), Withdrawn , previously
rated B1
RATINGS RATIONALE
Tronox's credit profile and current ratings (B1 CFR) reflect the
benefits from the company's market position as one of the world's
largest titanium dioxide producers, industry leading vertical
integration and co-product production, actual and prospective
benefits from acquisition synergies, and good liquidity. The credit
profile also reflects heavy exposure to the cyclical titanium
dioxide industry, expectations for significant weakening in credit
metrics outside the normal boundaries for the rating category
during a cyclical trough, concerns about free cash flow in the
trough, and integration risk associated with the acquisition of
Cristal.
Underlying demand is key to the outlook for prices and volume in
TiO2 in 2020. Notwithstanding the company's favorable 1Q guidance
versus consenus estimates, it's not clear what the global impact on
TiO2 demand might be from Covid 19 for the balance of the year,
particularly as the impact comes during the seasonally stronger
second quarter and possibly the third quarter as well. Also, at the
time of this writing there are price increases announced and
pending by competitors in Europe and NA. The outcome of these
proposed price hikes, which wont be known until June or July when
current commitments expire, is uncertain but would likely fail if
demand trends turn out negative and more than offset the favorable
impact of supply outages over the next few months.
On the positive side, inventories in the industry have corrected
and new global supply is limited, while Tronox' earnings will
benefit from Cristal acquisition synergies. Supply outages in
certain regions due to supply chain and worker challenges, or due
to government closure mandates, could help fundamentals in the
short run but might not be significant enough to offset any demand
declines. Also, Tronox is the most back integrated into TiO2 raw
materials and the impact of rising feedstocks will be muted
relative to peers.
The SGL-2 rating reflects good liquidity including $302 million
cash balances and $346 million available under the revolver as of
December 31, 2019. On March 26, 2020 the company announced that it
provided notice to draw down $200M under the revolver as a
precautionary measure to increase liquidity and preserve financial
flexibility. In March 2019, the company voluntarily reduced its
$550 million asset-based revolving credit facility to $350 million
due September 2022. Around the same time, through its South African
subsidiaries -- Tronox KZN Sands Proprietary Limited and Tronox
Mineral Sands Proprietary Limited -- Tronox established R1 billion
(approximately $72 million at December 31, 2019 exchange rate)
revolver due March 2022 and R2.6 billion term loan (approximately
$186 million at December 31, 2019 exchange rate) facility due March
2024. Moody's expects Tronox to generate free cash flow in 2020.
There are no financial maintenance covenants for the ABL and term
loan, but the ABL has a springing financial covenant which will
trigger if availability falls below $40 million. The South African
revolver contains net leverage and coverage tests, which would not
trigger events of default and allow for cure periods.
The stable outlook assumes TiO2 prices and volumes don't
deteriorate substantially from the impact of Covid 19, allowing
flatish or only modest declines YOY in EBITDA, helped by
acquisition synergies and sustaining some level of positive free
cash flow for the year. The stable outlook also assumes that the
Cristal transaction continues to generate target synergies and good
liquidity is maintained through the medium term.
An upgrade would require that the favorable trends in acquisition
synergies continue, and that the company maintains a commitment to
deleveraging and reducing balance sheet debt to $2.5 billion or
less ahead of the next trough and on a sustainable basis. An
upgrade would also require confidence that the company will
maintain at least $300 million of available liquidity.
Moody's would consider a downgrade if expectations or actual
results show substantive fundamental weakening resulting in
negative free cash flow anytime this year. It would also consider a
downgrade if the cycle in TiO2 turns down before the company is
able to meaningfully reduce debt, or if the company fails to
realize a meaningful portion of anticipated operating synergies, or
if adjusted financial leverage remains above 5.0x, or if available
liquidity falls below $250 million.
ESG Considerations
ESG risks and exposures do not have an impact on the company's
ratings at this time. Environmental exposure and costs for
commodity companies can be meaningful, and even more so for TiO2
players. Approximately 87% of Tronox's Tio2 production use the
chloride process; the balance of 13% uses the sulphate process. The
chloride process is continuous, has lower energy requirements,
produces less waste and is less environmentally harmful than the
sulfate-based production process.
Tronox assumed additional environmental exposure and costs as part
of the Cristal acquisition. Tronox has booked a $56 million
provision for environmental costs related to the remediation of
residual waste mud and sulfuric waste deposited in a former Tio2
manufacturing site operated by Cristal from 1954 to 2011. The
provision is significant but related expenditures are likely to
spread over many years.
Social risks are moderate but potentially increasing as the ongoing
hearings between the EU Commission and the industry may result in
tighter regulation for TiO2, the scope of which is not yet clear as
there is still debate over the carcinogenicity of TiO2. As a public
company, governance issues are viewed as modest and supported by
what has thus far been communication of reasonable financial
policies for the ratings category.
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. Moody's expects
that credit quality around the world will continue to deteriorate,
especially for those companies in the most vulnerable sectors that
are most affected by prospectively reduced revenues, margins and
disrupted supply chains. At this time, the sectors most exposed to
the shock are those that are most sensitive to consumer demand and
sentiment, including global passenger airlines, lodging and cruise,
autos, as well as those in the oil & gas sector most negatively
affected by the oil price shock. Lower-rated issuers are most
vulnerable to these unprecedented operating conditions and to
shifts in market sentiment that curtail credit availability.
Moody's will take rating actions as warranted to reflect the
breadth and severity of the shock, and the broad deterioration in
credit quality that it has triggered.
For more information on research on and ratings affected by the
coronavirus outbreak, please see moodys.com/coronavirus.
Tronox Limited, re-domiciled in United Kingdom in March, 2019.
Including the acquisition of Cristal, Tronox is the world's second
largest producer of titanium dioxide (TiO2) and is the most
backward integrated among the leading western pigment producers
into the production of titanium ore feedstocks. It also co-produces
zircon, pig iron and other products. The company operates nine
pigment plants and eight mineral sands facilities globally. Tronox
acquired the Exxaro mineral sands business (predominantly titanium
ore feedstocks) in a mostly equity-financed transaction in June
2012. Pursuant to the terms of the share repurchase agreement with
Exxaro in 2018, Tronox purchased roughly 14 million Tronox shares
held by Exxaro in 2019 for approximately $200 million and lowering
Exxaro's stake in Tronox from roughly 23% to 10.4%, as of December
31, 2019. Under the agreement, Exxaro has the right to sell its
ownership in Tronox at any time. Tronox's revenues were $2.6
billion for the twelve months ended December 31, 2019.
The principal methodology used in these ratings was Chemical
Industry published in March 2019.
===============
X X X X X X X X
===============
[*] BOOK REVIEW: BOARD GAMES - Changing Shape of Corporate Power
----------------------------------------------------------------
Authors: Arthur Fleischer, Jr.,
Geoffrey C. Hazard, Jr., and
Miriam Z. Klipper
Publisher: Beard Books
Softcover: 248 pages
List Price: $34.95
Order your personal copy today at
http://www.amazon.com/exec/obidos/ASIN/1587981629/internetbankrupt
A ruling by the Delaware Supreme Court on January 29, 1985 was a
wake-up call to directors of U. S. corporations. On this date,
overruling a lower court decision, the Delaware Supreme Court ruled
that the nine board members of Chicago company Trans Union
Corporation were "guilty of breaching their duty to the company's
shareholders." What the board members had done was agree to sell
Trans Union without a satisfactory review of its value. The guilty
board members were ordered by the Court to pay "the difference
between the per share selling price and the 'real' market value of
the company's shares."
Needless to say, the nine Trans Union directors were shocked at the
guilt verdict and the punishment. The chairman of the board, Jerome
Van Gorkom, was a lawyer and a CPA who was also a board member of
other large, respected corporations. For the most part, it was he
who had put together the terms of the potential sale, including
setting value of the company's stock at $55.00 even though it was
trading at about $38.00 per share. News of the possible sale
immediately drove the stock up to $51.50 per share, and was
commented on favorably in a "New York Times" business article.
Still, Van Gorkom and the other directors were found guilty of
breaching their duty, and ordered by Delaware's highest court to
pay a sum to injured parties that would be financially ruinous.
This was clearly more than board members of the Trans Union
Corporation or any other corporation had ever bargained for. It was
more than board members had ever conceived was possible without
evidence of fraud or graft.
The three authors are all attorneys who have worked at the highest
levels of the legal field, business, and government. Fleischer is
the senior partner of the law firm Fried, Frank, Harris, Schriver &
Jacobson at the head of its mergers and acquisitions department.
He's also the author of the textbook "Takeover Defenses" which is
in its 6th edition. Hazard is a Professor of Law and former
reporter for the American Bar Association's special committee on
the lawyers' ethics code; while Klipper has been a New York
assistant district attorney prosecuting corporate and financial
fraud, and also a corporate attorney on Wall Street. Using the
Trans Union Corporation case as a watershed event for members of
boards of directors, the highly-experienced legal professionals lay
out the new ground rules for board members. In laying out the
circumstances and facts of a number of cases; keen, concise
analyses of these; and finding where and how board members went
wrong, the authors provide guidance for corporate directors, top
executives, and corporate and private business attorneys on issues,
processes, and decisions of critical importance to them. Household
International, Union Carbide, Gelco Corp., Revlon, SCM, and
Freuhauf are other major corporations whose merger-and-acquisitions
activities resulted in court cases that the authors study to the
benefit of readers. The Boards of Directors of these as well as
Trans Union and their positions with other companies are listed in
the appendix. Many other corporations and their board members are
also referred to in the text. With respect to each of the cases it
deals with, BOARD GAMES outlines the business environment,
identifies important individuals, analyzes decisions, and discusses
considerations regarding laws, government regulations, and
corporate practice. In all of this, however, given the exceptional
legal background of the three authors, the book recurringly brings
into the picture the legalities applying to the activities and
decisions of board members and in many instances, court rulings on
these. Passages from court transcripts are occasionally recorded
and commented on. Elsewhere, legal terms and concepts -- e. g.,
"gross nonattendance" -- are defined as much as they can be. In one
place, the authors discuss six levels of responsibility for board
members from "assure proper result" through negligence up to fraud.
Without being overly technical, the authors' legal experience and
guidance is continually in the forefront. Needless to say, with
this, BOARD GAMES is a work of importance to board members and
others with the responsibility of overseeing and running
corporations in the present-day, post-Enron business environment
where shareholders and government officials are scrutinizing their
behavior and decisions.
*********
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
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Information contained herein is obtained from sources believed to
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or balance thereof are US$25 each. For subscription information,
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