/raid1/www/Hosts/bankrupt/TCREUR_Public/200506.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
Wednesday, May 6, 2020, Vol. 21, No. 91
Headlines
B E L A R U S
MIKRO LEASING: Fitch Places 'B-' LT IDR on Watch Negative
B O S N I A A N D H E R Z E G O V I N A
BOSNIA AND HERZEGOVINA: S&P Affirms 'B' SCR, Outlook Now Stable
F R A N C E
AIR FRANCE-KLM: European Commission Okays EUR7-Bil. Bailout
MOBILUX 2 SAS: S&P Alters Outlook to Negative & Affirms 'B' ICR
NOVARTEX SAS: Fitch Cuts LT IDR to C on Safeguard Process Filing
G E R M A N Y
SPRINGER NATURE: S&P Alters Outlook to Negative & Affirms 'B+' ICR
I R E L A N D
CIMPRESS PLC: S&P Ups Sr. Sec. Credit Facility Rating to BB
MADISON PARK XV: S&P Assigns B- (sf) Rating on Class F Notes
VESEY PARK: S&P Assigns B- (sf) Rating on Class E Notes
L U X E M B O U R G
SAMSONITE INT'L: Moody's Affirms B2 CFR, Outlook Negative
M O N T E N E G R O
MONTENEGRO: S&P Alters Outlook to Negative & Affirms 'B+/B' SCR
N E T H E R L A N D S
BME GROUP: S&P Alters Outlook to Negative & Affirms 'B' ICR
R U S S I A
CAPITAL ASSET: Bank of Russia Provides Update on Administration
PROMSVYAZBANK PJSC: S&P Affirms 'BB-/B' ICR, Outlook Positive
S E R B I A
SERBIA: S&P Alters Outlook to Stable & Affirms 'BB+/B' SCRs
S P A I N
ACI AIRPORT: S&P Cuts Debt Rating to 'CCC' on Liquidity Constraints
CODERE GROUP: S&P Downgrades ICR to 'CCC', Outlook Negative
MULHACEN PTE: S&P Affirms 'B-' Issuer Credit Rating, Outlook Neg.
S W E D E N
QUIMPER AB: S&P Alters Outlook to Negative & Affirms 'B' ICR
T U R K E Y
RONESANS GAYRIMENKUL: Fitch Cuts IDR to B+, On Watch Negative
U K R A I N E
[*] Fitch Alters Outlook on 7 Ukranian Banks to Stable
U N I T E D K I N G D O M
CAPITAL HOSPITALS: S&P Lowers Senior Secured Debt SPUR to 'BB+'
CINEWORLD GROUP: S&P Downgrades ICR to 'CCC+', On Watch Negative
COMMONWEALTH TRADE: Tycoon Opts to Close Loss-Making Business
DEBENHAMS PLC: Moody's Cuts Probability of Default Rating to D-PD
EG GROUP: S&P Lowers ICR to 'B-' on Expected Slower Deleveraging
LOIRE UK: Fitch Assigns 'B+' Final LT IDR, Outlook Stable
MARKETPLACE ORIG. 2019-1: Fitch Alters Outlook on 2 Notes to Neg.
NMC HEALTH: FRC Opens Investigation Into Ernst & Young's Audit
SECURESHIELD: Buyout Saves 51 Jobs and Life-saving Services
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B E L A R U S
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MIKRO LEASING: Fitch Places 'B-' LT IDR on Watch Negative
---------------------------------------------------------
Fitch Ratings has placed FLLC Mikro Leasing's Long-Term Issuer
Default Rating at 'B-' on Rating Watch Negative. The RWN reflects
expected pressure on the ML's financial and funding profile
stemming from coronavirus pandemic and the resulting economic
downturn in Belarus.
Fitch expects to resolve the RWN when the effects of the ongoing
economic stress on ML's financial profile are clearer. Key
considerations will include the effects on the company's solvency,
as well as the ability of the company to access funding and
additional liquidity, if needed.
KEY RATING DRIVERS
Unless noted, the key rating drivers for ML's IDRs are those
outlined in its Rating Action Commentary in January 2020.
The rating action reflects increasing uncertainties regarding ML's
funding profile and lease book performance amid the
pandemic-induced economic downturn.
Fitch expects macroeconomic volatility to squeeze funding
availability for ML, given its very concentrated funding profile.
Related-party borrowings were substantial at 41% of total loans at
end-1Q20. These are loans from its parent holding company, which in
turn are backed by bonds privately placed in the EU. Another 36%
was raised from a local Russian state-owned bank. Positively
related-party funding is less confidence-sensitive but is
susceptible to liquidity outflows at parent level.
Fitch expects decreased business activity and trade to affect ML's
core SME clientele. The weakening of the Belarusian rouble will add
to asset-quality pressure since a high 87% of the lease receivables
at end-2019 were in foreign currency. ML's customer base is
vulnerable to economic shocks but this is mitigated by a good
record of payment discipline in recent years. Peak credit losses
were a low 2% (in 2016) of total loans. Default probability is
considered high but collateral of reasonable liquidity (vehicles)
helps to limit final losses. The secondary car market in Belarus
correlates with rouble depreciation, which also underpins
collateral coverage and payment discipline on FC-denominated
leases.
The magnitude of credit losses in coming months will determine the
financial performance and effect on ML's solvency. Leverage,
defined as debt/tangible equity, was a high 8.6x at end-2019 (7.4x
net of back-to-back deposits) and is likely to have increased
further in 1Q20. Amortisation of the lease book amid shallow new
business origination could offset pressure on capital adequacy
stemming from credit losses and further FC balance-sheet
inflation.
ML has ESG Relevance Scores of 4 for Management Strategy,
Governance Structure, Group Structure and Financial Transparency as
Fitch believes the company has (i) an aggressive business strategy,
with a high risk appetite and rapid growth, (ii) an underdeveloped
corporate governance framework, with a high related-party exposure,
(iii) sizable intra-group cash flow and (iv) weak quality of
financial disclosure all of which constrain ML's rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a
downgrade:
- Signs of refinancing problems and/or inability to access
liquidity when needed;
- Deterioration of asset quality through an increase in assets
held for sale, restructured leases and other problematic
receivables;
- Shrinking revenue generation coupled with inability to control
costs, in turn affecting profitability;
- A hike in lease impairment charges and/or in residual-value
risks leading to net losses from fleet disposals; and
- Further deterioration in the operating environment.
Factors that could, individually or collectively, lead to a rating
affirmation:
- Easing refinancing risk would result in a rating affirmation
with a Negative Outlook being assigned; and
- Receding pandemic-related disruptions with the impact on ML's
funding and solvency being contained would lead to a rating
affirmation with a Stable Outlook being assigned.
ESG CONSIDERATIONS
ML has an ESG Relevance Score of 4 for Management Strategy,
Governance Structure and Financial Transparency.
Except for the matters discussed, 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 to the way in which they
are being managed by the entity(ies).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions
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.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
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B O S N I A A N D H E R Z E G O V I N A
===========================================
BOSNIA AND HERZEGOVINA: S&P Affirms 'B' SCR, Outlook Now Stable
---------------------------------------------------------------
On April 30, 2020, S&P Global Ratings revised its outlook on the
long-term ratings on Bosnia and Herzegovina to stable from
positive. S&P also affirmed its 'B/B' long- and short-term foreign
and local currency sovereign credit ratings on Bosnia and
Herzegovina (BiH).
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009
"EU CRA Regulation"), the ratings on Bosnia and Herzegovina are
subject to certain publication restrictions set out in Art 8a of
the EU CRA Regulation, including publication in accordance with a
pre-established calendar. Under the EU CRA Regulation, deviations
from the announced calendar are allowed only in limited
circumstances and must be accompanied by a detailed explanation of
the reasons for the deviation. In this case, the reason for the
deviation is a material deterioration in global economic and
financial conditions as a result of the coronavirus pandemic with a
direct impact on Bosnia and Herzegovina's growth, fiscal, and
external metrics. The next scheduled publication on the sovereign
ratings on Bosnia and Herzegovina will be on Aug. 28, 2020.
Outlook
The stable outlook balances the risks associated with the COVID-19
pandemic's effect on BiH's economy and fiscal and external metrics
against the upside potential from implementing structural reforms
and our expectation of stronger economic growth beyond 2020.
Downside scenario
S&P said, "We could lower the ratings on BiH over the next 12
months if the economic and budgetary cost of the COVID-19 pandemic
are materially higher than we currently project, putting the
sustainability of the public debt burden at risk, given the
country's fixed exchange rate regime and limited monetary policy
flexibility. Ratings may come under pressure if the stability of
the domestic financial system weakens substantially in a
hypothetical scenario of sustained deterioration in asset quality
and persistent deposit conversion to foreign currency. We may also
lower the ratings if Bosnia implements a debt payment moratorium
that affects the timely and full service of its commercial debt,
but this is not our baseline scenario."
Upside scenario
S&P said, "We could raise the ratings on BiH if domestic policy
settings improved, and we saw a move toward less-confrontational
and more consensus-based politics, oriented toward promoting
economic growth and structural reforms, possibly underpinned by a
full International Monetary Fund (IMF) program above the current
Rapid Financing Instrument (RFI) arrangement already agreed with
the IMF. We could also raise the ratings if economic growth
strengthened beyond 2020."
Rationale
The outlook revision is primarily based on the substantial
deterioration in global economic and financial conditions as a
result of the COVID-19 pandemic that has rapidly gathered pace over
the past two months. S&P said, "We now expect world GDP to contract
by 2.4% this year. Moreover, we now project a 7.3% recession in
2020 in the eurozone, where most of BiH's trade partners are. By
contrast, when we last published on BiH, in February 2020, we
expected eurozone growth to be 1%."
S&P said, "In our view, the COVID-19 pandemic will have a notable
effect on BiH, both directly (with pressures on the health sector
and the economy as the country implements measures to stop the
spread of the virus) and indirectly (via the foreign trade
channel). We have revised our growth forecasts down and now expect
the BiH economy to contract by 5% in 2020, followed by a partial
recovery of 4% next year. We anticipate that the recession will be
rather broad-based, with a sharp contraction in exports, but also
shrinking domestic consumption and investments.
"We forecast that BiH will take until 2022 to regain the real GDP
level it saw in 2019. That said, risks are tilted to the downside.
A second wave of the new virus, either in BiH or in Europe, could
worsen the outlook for recovery. At the same time, we have yet to
see whether activity will be resumed in full once the lockdowns
that have been implemented are lifted." Some companies might have
to be liquidated because of their weakened financial standing,
combined with still-subdued demand from cautious consumers.
Apart from its growth impact, the COVID-19 pandemic will also have
fiscal implications for BiH. On a consolidated general government
level, the country has historically been running fiscal surpluses.
In part, these reflect the government's frequent difficulties in
reaching consensus regarding spending priorities, but they also
demonstrate a degree of fiscal discipline. Thus, at an individual
entity level--the Federation of Bosnia and Herzegovina (FBiH), and
the Republika Srpska (RS)--recurrent surpluses have also been
recorded. As a result, BiH has approached the current downturn with
net general government debt of under 30% of GDP, leaving some
budgetary policy headroom.
S&P now forecasts that BiH will record a general government deficit
in 2020 of 4.5% of GDP; previously, it projected a 1% surplus. The
deficit stems from the cost of direct policy measures implemented
on the expenditure side, combined with revenue losses due to weaker
economic performance. To date, BiH has implemented a number of
measures to support the ailing economy, including deferring some
tax payments, covering the social security contributions, paying
minimum wages for employees in affected companies that have been
shut by government decree, and others. The implemented measures
have differed somewhat between RS and FBiH.
The shortfall will be funded largely by borrowing from
international financial institutions (IFIs). The government
estimates that its financing shortfall will be close to EUR900
million (4.2% of GDP), and has already secured a large part of this
amount. Specifically, the IMF has disbursed close to EUR330 million
under the RFI arrangement, and negotiations are ongoing with the EU
to provide a further EUR250 million. S&P expects the remaining
EUR300 million to be borrowed from a number of multilateral
institutions, including the European Bank for Reconstruction and
Development (EBRD) and the World Bank.
S&P said, "Consequently, we expect that net general government debt
will rise to 31% of GDP by the end of 2020, from 25% of GDP at the
end of 2019. Thereafter, debt should stabilize at close to 30% of
GDP through 2023. This compares with our previous forecast of net
general government debt stabilizing at around 23% of GDP over the
medium term. Although we don't consider the new projected debt
levels to be high, some fiscal space will be eroded permanently,
which is particularly relevant for a country that has no
independent monetary policy, given that Bosnia runs a currency
board to the euro.
"There have been some proposals to deploy the central bank's
foreign exchange reserves for fiscal needs and to implement an
external debt payment moratorium on official debt. We currently
consider those to be largely political statements, which will not
be implemented. We would generally not consider nonpayment of an
official debt obligation as a default because our ratings speak to
timely and full service of commercial debt. However, if an
implemented policy affected BiH's commercial debt obligations, such
that the investors in question would be worse off as a result of
the policy, compared to the original promise, we could classify
that as an event of default.
"Largely mirroring our fiscal projections, we expect BiH's current
account deficit to widen to 6.5% of GDP in 2020 from 3.5% of GDP
last year. The deficit will predominantly be funded by IFI
borrowing and should moderate over the medium term.
"In our view, risks to the stability of BiH's banking system have
increased. We anticipate an increase in the level of nonperforming
loans as households and corporates are affected by the pandemic.
Positively, BiH's banking system entered this crisis in a
relatively strong position, with capital levels higher than the
regulatory limits and ample liquidity. The system is dominated by
subsidiaries of foreign banking groups, similar to other West
Balkan states. The banks are largely domestic-deposit-funded and we
estimate that they remain in a net external creditor position. As
such, we do not think that the banks are exposed to foreign debt
rollover risks.
"So far, we have not observed any notable deposit flight or
conversion of domestic residents to foreign exchange. We expect
this to remain the case and forecast that BiH's existing currency
board arrangement to the euro will remain intact.
"We expect Bosnia's institutional settings will remain complex in
the foreseeable future. The two entities that in practice comprise
the country--FBiH and RS--have a large degree of autonomy, which
frequently makes policy coordination difficult. Each entity has its
own parliament, government, and banking regulator with an extensive
mandate. Positively, the authorities have managed to implement a
series of crisis-offsetting measures in recent weeks in a
relatively short timeframe, although disagreements still surfaced
on several occasions." For instance, disputes arose relating to the
distribution of IMF loan proceeds between the entities.
Environmental, social, and governance (ESG) credit factors for this
credit rating change:
-- Health and safety
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
Ratings Affirmed; Outlook Action
To From
Bosnia and Herzegovina
Sovereign Credit Rating B/Stable/B B/Positive/B
Ratings Affirmed
Bosnia and Herzegovina
Transfer & Convertibility Assessment BB-
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F R A N C E
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AIR FRANCE-KLM: European Commission Okays EUR7-Bil. Bailout
-----------------------------------------------------------
Simon Foy at The Telegraph reports that the European Commission has
approved the French government's EUR7 billion (GBP6.2 billion)
bailout of Air France-KLM.
The package includes a EUR4 billion state-backed bank loan and EUR3
billion in direct loans and is aimed at protecting the 350,000 jobs
sustained by the airline, The Telegraph discloses.
According to The Telegraph, Margrethe Vestager, the EU's
competition chief, said: "The aviation industry is important in
terms of jobs and connectivity.
"This EUR7 billion French guarantee and shareholder loan will
provide Air France with the liquidity that it urgently needs to
withstand the impact of the coronavirus outbreak."
The Commission added: "France has also demonstrated that all other
potential means to obtain liquidity on the markets have already
been explored and exhausted."
MOBILUX 2 SAS: S&P Alters Outlook to Negative & Affirms 'B' ICR
---------------------------------------------------------------
S&P Global Ratings revised its outlook on Mobilux 2 S.A.S.
(Mobilux) to negative from positive and affirmed the 'B' issuer
credit rating and 'BB-' and 'B' issue ratings on the company's
revolving credit facility (RCF) and EUR380 million senior secured
notes.
S&P said, "The negative outlook reflects our expectation for
significantly weaker credit metrics this year given our forecast of
a sharp decline in sales and cash flow due to the COVID-19
pandemic.
"French government restrictions to fight the spread of COVID-19
have meant the temporary closure of virtually all of the company's
stores since March 17. We understand stores will reopen from May
11, but we expect traffic to be severely hampered by ongoing
movement restrictions of varying degrees depending on the
geographic area that are likely to last until at least June. We
expect this to materially weigh on the group's last quarter of
trading from April to June 2020, which is frequently its weakest in
terms of earnings and cash flow generation. We believe this will
translate in a material deterioration of the group's credit metrics
for fiscal 2020 against our previous forecast. This is because a
lack of revenue and payments to suppliers coming due should turn
free operating cash flow (FOCF) negative, in spite of cost-saving
and cash-preserving initiatives including temporary staff
reductions, deferrals of rent and tax payments, and capital
expenditure (capex) cuts. In our view, this will prompt the group
to draw on its RCF. Therefore, we forecast that Mobilux's leverage
will deteriorate significantly to over 6x for fiscal 2020 (ending
June 30, 2020) from 4.5x in our previous base case.
"BUT's significant cash buffer limits short-term risks and provides
room to take advantage of opportunities amid the difficult trading
environment. With EUR268 million of cash on balance sheet as of
Dec. 31, 2019, and full availability of its EUR100 million RCF, we
view BUT's liquidity as sufficient to withstand a difficult trading
environment for an extended period. We believe that the group has
sufficient resources to cover its temporary working capital needs
and continue to pay its suppliers in a timely manner, while stores
remain shut.
"Further rating effects will depend on the length of the pandemic.
We expect BUT's store performance to remain pressured over the
coming quarters based on our forecast for a swift and severe drop
in discretionary consumer spending amid a macroeconomic slowdown in
France this year. Given the government mandates to avoid
nonessential activities, as well as consumers' heightened focus on
social distancing to prevent the spread of COVID-19, we expect the
company's store traffic to decline materially. In particular, we
assume that the first and second quarter of fiscal 2021 (from June
to December) will see a slow recovery in footfall. That said, we
note that Mobilux has demonstrated its ability to gain market share
in recent years, a trend we expect to continue as the company could
benefit from the difficulties of direct competitors with more
fragile balance sheets."
Environmental, social, and governance (ESG) credit factors for this
credit rating change:
-- Health and safety
The negative outlook reflects the heightened uncertainty regarding
the effects of COVID-19 and the impending recession on BUT's
trading environment. A prolonged pandemic that leads to an extended
slowdown in customer traffic and consumer spending may durably
affect its credit metrics and cash flow generation.
S&P could lower the ratings in the next 12 months if:
-- Mobilux posted two consecutive years of negative FOCF.
-- The company's cash buffer were to deplete rapidly.
-- Adjusted debt to EBITDA failed to return to a normalized level
of toward 5x.
S&P could affirm the ratings if:
-- The trading environment normalizes following the end of the
lockdown in France and Mobilux benefits from it.
-- S&P expects adjusted debt to EBITDA of toward 5x for fiscal
2021.
-- FOCF is positive in fiscal 2021.
NOVARTEX SAS: Fitch Cuts LT IDR to C on Safeguard Process Filing
----------------------------------------------------------------
Fitch Ratings has downgraded Novartex SAS' Long-Term Issuer Default
Rating to 'C' from 'CC'.
Novartex SAS directly owns Vivarte SAS, the French affordable
fashion retailer.
The downgrade reflects the public announcement of a safeguard
process filed by Vivarte for its subsidiary that manages the La
Halle retail chain with the aim to sell the business in a
court-administered process. Under Fitch's Distressed Debt Exchanged
Criteria, Fitch deems this as a DDE as the company has entered a
default-like process with the intention to avoid a payment
default.
The safeguard procedure will allow Vivarte to suspend all payments
by La Halle (Vivarte's largest business) towards landlords and
suppliers during the observation period and reduce cash leakage,
while the company works on a restructuring plan. If the safeguard
is successfully completed, Fitch will downgrade the IDR to 'RD'
(Restricted Default) before re-assessing Novartex's restructured
profile and assigning a rating consistent with its forward-looking
assessment of the company's credit profile. Alternatively, if the
safeguard procedure is unsuccessful, Fitch will downgrade the IDR
to 'D'.
KEY RATING DRIVERS
Announcement of a DDE: Fitch has downgraded the IDR to 'C'
following the announcement by Vivarte of a safeguard procedure for
its brand La Halle, which it treats as a DDE under Fitch's DDE
criteria. Its view that this represents a DDE is supported by the
application of the safeguard procedure to avoid a payment default
and the use of a court-sanctioned or court-supervised process for
the company's obligations, namely leases in Novartex's case, since
there is currently no financial debt on the balance sheet.
Success of Safeguard Uncertain: Fitch does not expect any
meaningful value to come from the sale of La Halle brand due to its
persistent operating issues and a difficult trading environment in
the non-food retail sector, which further aggravated by the
COVID-19 crisis. Fitch, therefore, considers a lease-based
restructuring a more likely option as opposed to a business sale,
which is currently being targeted by the company.
Safeguard Outcome Key to Rating: Upon a successful completion of
the safeguard procedure, which can last up to 18 months and would
lead to a whole or partial sale or restructuring of La Halle,
including the restructuring of its rent obligations, Fitch will
downgrade the IDR to 'RD' and re-rate the company on the basis of
its post-restructuring operating and financial position. In the
event of an unsuccessful completion of the safeguard procedure
leading to its conversion into a receivership or liquidation
through a court decision, Fitch will downgrade the IDR to 'D'.
DERIVATION SUMMARY
Compared with New Look Bonds Limited which is in the middle of a
turnaround process, Fitch regards Vivarte as a weaker credit due to
its disrupted business model, uncertain recovery prospects,
irreversible free cash flow losses and absence of alternative
funding options. The filing by Vivarte for a safeguard procedure
reflects its fragile credit profile. This makes Vivarte less likely
to manage the crisis and remain a going-concern in the near term.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer:
Once the safeguard procedure completes Fitch will establish new
assumptions in support of its long-term forecasts for the company.
This will happen once Fitch has discussed the company's revised
business plan with management and assessed its reasonableness.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A direct upgrade to 'CC' is unlikely at this point. The
following sensitivity applies after the successful completion of
the safeguard procedure:
- Improved liquidity position enabling a stabilisation of the
operating profile.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Successful completion of the safeguard procedure leading to the
execution of the DDE with restructuring of a material portion of
its liabilities such as leases, which would lead to a downgrade to
'RD';
- Unsuccessful completion of the safeguard procedure leading to a
payment default, bankruptcy filings, administration, receivership,
liquidation or other formal winding-up procedure, which would lead
to a downgrade to 'D'.
BEST/WORST CASE RATING SCENARIO
International scale credit 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
Liquidity Reserves Sufficient for Short-Term: Fitch estimates that
Vivarte had approximately EUR75 million cash on balance sheet in
mid-April 2020. The La Halle safeguard procedure will allow Vivarte
to reduce the cash drain during the next few months, as debt
towards suppliers and landlords contracted prior to the safeguard
will not have to be serviced. However, inability to restructure La
Halle during the safeguard procedure with the absence of other
liquidity and financing sources through loans, equity injections or
asset disposals, would lead to Vivarte exhausting its liquidity
resources and becoming insolvent in the next few months. Vivarte
has no undrawn liquidity lines.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
ESG CONSIDERATIONS
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 to the way in which they are being managed by the
entity(ies).
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G E R M A N Y
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SPRINGER NATURE: S&P Alters Outlook to Negative & Affirms 'B+' ICR
------------------------------------------------------------------
S&P Global Ratings revised the outlook to negative from stable, and
affirmed its 'B+' long-term issuer credit rating on Springer Nature
AG & KGaA and issue rating on its senior facilities.
Springer's revenue, earnings, and cash flows will drop in 2020 due
to the impact of the COVID-19 pandemic and the recessionary
macroeconomic environment.
The COVID-19 pandemic has caused economic recession globally, which
will depress the group's transactional operations within its
research division. These include author solutions (such as editing,
translation, other related services), healthcare publishing-related
operations, newsstands business, and anticipated decline of its
nonsubscription part of Professional (about 77% of segment's
revenues, with remaining from subscriptions, which are less
cyclical due to their contractual nature) and Education divisions
in 2020. These operations are more cyclical and more correlated
with economic activity than Springer's subscription revenue. As a
result, S&P estimates that the group's revenue will decline by up
to 10% in 2020 versus 2019. Despite anticipated cost-cutting
measures and lower restructuring costs, it expects that Springer's
profitability (measured by reported EBITDA) will decline to EUR490
million-EUR510 million from about EUR575 million in 2019. The
group's FOCF will be impaired by revenue decline and weakened
profitability in 2020 and will likely decline to EUR40
million-EUR70 million, after EUR215 million in 2019. FOCF will be
also be affected by expected higher working capital related
outflows due to slower cash collection (on the accounts receivables
side) while benefitting from some flexibility to reduce capital
expenditure (capex).
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, "The group's credit metrics will weaken in 2020 on
anticipated revenue and earnings declines, but we expect them to
gradually improve from 2021. We forecast that Springer's S&P
Global Ratings-adjusted leverage in 2020 will spike at 9.7x-10.2x
(7.0x-7.5x excluding shareholder loans [SHLs]) from about 8.0x
(5.8x excluding SHLs) in 2019, and versus our previous expectation
of 7.7x-8.0x(5.5x-5.8x excluding SHLs) for 2020. We also forecast
that Springer's S&P Global Ratings-adjusted FOCF to debt will
decline to 1.0%-1.5% in 2020 from 4.9% in 2019 and versus our 4%
expectation in our previous base case. Our current base case
assumes the group's operations will start rebounding from mid-2020.
We expect Springer's operations to grow on the group level again in
2021, leading to FOCF exceeding EUR140 million and translating into
S&P Global Ratings-adjusted FOCF to debt of 3.0%-3.5% (and
4.7%-5.2% excluding SHLs). We forecast that leverage will benefit
from improving FOCF and will decline to 9.0x-9.5x (6.3x-6.8x
excluding SHLs) by 2021."
A more severe impact of the COVID-19 pandemic on Springer's
operations, and management's inability to offset this pressure on
trading would further erode its credit quality, resulting in a
downgrade. S&P said, "We currently view Springer's business
profile as well positioned versus other rated media peers. Our view
is underpinned by the group's global leading market position as an
English books publisher, being also one of the largest academic
publishers globally with about 46% of revenue from subscription (in
the research and professional divisions) and its above-average
profitability margins compared with the media sector (measured by
EBITDA margins exceeding 30%). We expect that Springer's
subscription-based journal and e-books operations(representing
about 60% of the research division's revenue and roughly 43% of the
group's revenue in 2019)will remain resilient and less affected
than the group's other businesses during the economic downturn in
2020. This business benefits from multiyear contracts with its
long-standing clients and predictable revenue streams. Although not
in our current base case, a more prolonged and severe impact from
the COVID-19 pandemic on the group's operations, including the
research division, and management's inability to offset this
negative pressure could result in an extended weakness of credit
metrics at levels that are not commensurate with a 'B+' rating.
This would be reflected in S&P Global Ratings-adjusted debt to
EBITDA of above 9x (above 6.5x excluding SHLs) and inability to
generate material positive reported FOCF in absolute terms,
translating in adjusted FOCF to debt of below 4% (below 5% when
excluding SHLs) in 2020-2021. In addition such a scenario could
also put pressure on our assessment of the strength of the
company's business model."
S&P said, "We continue to view Springer's liquidity position as
adequate and we don't expect its liquidity will deteriorate over
the next 12 months. The group's liquidity position benefits from
Springer's strong cash collection in the first quarter 2020 (about
EUR300 million on the balance sheet) and full availability of the
group's EUR250 million revolving credit facility (RCF) as of
end-March 2020. At the same time we view its liquidity uses over
the next 12 months as manageable, despite an anticipated increase
in the group's working capital-related requirements, due to
expected delays in cash collection and increased intrayear working
capital swings."
Environmental, social, and governance (ESG) credit factors for this
credit rating change:
-- Health and safety
S&P said, "The negative outlook reflects our view that Springer's
S&P Global Ratings-adjusted leverage will increase to elevated
levels of 9.7x-10.2x (7.0x-7.5x excluding SHLs) in 2020, amid
rising uncertainty around the impact from the COVID-19 pandemic.
This is based on our current assumption that the virus will reach
its peak at midyear 2020 and will be followed by a gradual recovery
thereafter, while maintaining adequate liquidity at all times.
"We could lower the ratings over the next six to 12 months if
Springer Nature underperformed our base-case scenario (as described
above) in 2020 due to a more negative financial impact from
COVID-19 and more pronounced decline in economic activity globally
than we currently anticipate." This would result in a higher
decline in revenue and profitability during 2020 leading to:
-- Inability to reduce S&P Global Ratings-adjusted leverage to
close or below 9.0x (and to below 7.0x excluding SHLs) in 2020 and
below 6.5x excluding SHLs in 2021;
-- A significant decline or even negative FOCF, leading to S&P
Global Ratings-adjusted FOCF to debt not improving toward 4% (or
close to 5% when excluding SHLs);
-- Weakening liquidity.
S&P could revise the outlook to stable if the effect of weakened
economic conditions amid the COVID-19 pandemic on revenue,
profitability, cash flows, and credit metrics is lower than
expected and Springer Nature managed the situation in order to
achieve the following:
-- Reduced leverage to close to or below 9x (below 6.5x excluding
SHLs);
-- Material positive reported FOCF in absolute terms, leading to
adjusted FOCF to debt increasing toward 4% (and above 5% when
excluding SHLs);
-- At least adequate liquidity.
A stable outlook would also hinge on S&P's perception that the
group's financial policy would remain moderate and supportive of
higher ratings.
=============
I R E L A N D
=============
CIMPRESS PLC: S&P Ups Sr. Sec. Credit Facility Rating to BB
-----------------------------------------------------------
S&P Global Ratings raised its issue-level rating on Cimpress PLC's
senior secured first-lien credit facility to 'BB' from 'BB-' and
revised its recovery rating on the debt to '1' from '2'. These
changes follow a proposed reduction in the size of the company's
revolving credit facility and partial repayment of its first-lien
term loan A with proceeds from a new issuance of 12% secured
second-lien notes (unrated). The '1' recovery rating indicates
S&P's expectation for very high recovery (90%-100%; rounded
estimate: 95%) of principal in a hypothetical payment default.
Additionally, Cimpress will improve its financial flexibility to
withstand the expected pandemic-related decline in its EBITDA
through a proposed amendment to its senior secured credit agreement
to suspend its total and senior secured leverage covenants and
interest coverage ratio covenant until the quarter ending Dec. 31,
2021. During this period, Cimpress is required to maintain minimum
liquidity, defined as cash on hand plus revolver availability, of
$50 million and must report positive EBITDA for the quarters ending
June 30 and Sept. 30, 2021. The covenant suspension period could
end earlier than Dec. 31, 2021, at the company's election, if
Cimpress' total leverage is equal or lower than 4.75x for two
consecutive quarters.
S&P's negative outlook on Cimpress reflects the uncertainty
surrounding the duration and severity of the coronavirus pandemic's
effects on the company and the risk that its operating performance
will continue to decline for the rest of the calendar year,
increasing its leverage above 5.25x for an extended period.
ISSUE RATINGS--RECOVERY ANALYSIS
Key analytical factors
-- S&P's simulated default scenario contemplates a default
occurring in 2024. Risk factors include a deterioration in economic
conditions that causes small and micro businesses to postpone their
marketing spending and financial stress from a mistimed
debt-financed acquisition.
-- S&P contemplates that Cimpress would reorganize in a default
scenario and that its lenders would benefit from its diverse
customer base, brand presence, and operational and marketing
capabilities.
-- Cimpress' debt capitalization pro forma for the proposed
transaction comprises $1 billion of a pari passu $850 million
revolving credit facility due in 2025 and a $150 million term loan
A due in 2025, $300 million of second-lien secured notes (unrated)
due 2025, and $600 million of senior unsecured notes due in 2026.
-- Cimpress PLC, Vistaprint Ltd., Cimpress Schweiz GmbH,
Vistaprint B.V., and Cimpress USA Inc. are co-borrowers under the
senior secured credit facility. Cimpress PLC is the issuer of the
senior unsecured notes. The borrowers and guarantors accounted for
over 90% of the company's EBITDA as of December 2019.
-- The senior secured credit facility and second-lien notes are
secured by a lien on substantially all of the co-borrowers' and
guarantors' capital stock and tangible and intangible property
(subject to 65% of the voting stock of first-tier foreign
subsidiaries of the U.S. co-borrower and guarantors and other
excluded assets). The credit facility benefits from a
first-priority claim on the collateral and the second-lien notes
will benefit from a second-priority claim on the same collateral.
-- In S&P's default scenario, it assumes 85% of the company's
revolving credit facility, which it uses to support its cash flow
and growth initiatives, is drawn.
-- S&P uses a 6x EBITDA multiple in its default assumptions due to
Cimpress' broad business platform, including its web-to-print
business.
Simulated default assumptions
-- Simulated year of default: 2024
-- EBITDA at emergence: About $210 million
-- EBITDA multiple: 6x
-- The revolving credit facility is 85% drawn at default.
-- Estimated non-guarantor EBITDA contribution at default: 5%
Simplified waterfall
-- Net enterprise value (after administrative costs): About $1.2
billion
-- Value available to first-lien debt claims: $1.14 billion
-- Secured first-lien debt claims: About $870 million
--Recovery expectations: 90%-100% (rounded estimate: 95%)
-- Value available to second-lien debt claims: $270 million
-- Second-lien debt claims: $318 million
-- Value available to unsecured debt claims: $60 million
-- Total unsecured claims(including approximately $46 million of
deficiency secured claims and about $10 million of non-debt
claims): About $680 million
--Recovery expectations: 0%-10% (rounded estimate: 5%)
Note: All debt amounts include six months of prepetition interest.
MADISON PARK XV: S&P Assigns B- (sf) Rating on Class F Notes
------------------------------------------------------------
S&P Global Ratings has assigned credit ratings to Madison Park Euro
Funding XV DAC's class A-1, A-2, B, C, D, E, and F notes. At
closing, the issuer also issued unrated subordinated notes.
This is a European cash flow CLO transaction, securitizing a pool
of primarily syndicated senior secured loans or bonds. Credit
Suisse Asset Management Ltd. manages the transaction. The
portfolio's reinvestment period will end approximately four and a
half years after closing, and the portfolio's maximum average
maturity date will be eight and a half years after closing. Under
the transaction documents, the rated notes pay quarterly interest
unless there is a frequency switch event. Following this, the notes
will permanently switch to semiannual payment.
As of the closing date, the issuer owns approximately 93.5% of the
target effective date portfolio. We consider that the portfolio on
the effective date will be well-diversified, primarily comprising
broadly syndicated speculative-grade senior secured term loans and
senior secured bonds. Therefore, we have conducted our credit and
cash flow analysis by applying our criteria for corporate cash flow
collateralized debt obligations.
Table 1
Portfolio Benchmarks
S&P weighted-average rating factor 2,776
Default rate dispersion 735
Weighted-average life (years) 5.56
Obligor diversity measure 110.5
Industry diversity measure 21.4
Regional diversity measure 1.2
Weighted-average rating 'B'
'CCC' category rated assets (%) 7.0
'AAA' weighted-average recovery rate 36.93
Floating-rate assets (%) 95.37
Weighted-average spread (net of floors; %) 3.66
In S&P's cash flow analysis, it has modelled the target par amount
of EUR400 million, the weighted-average spread of the expected
effective date portfolio (3.66%), and the covenanted
weighted-average coupon (5.00%). S&P's cash flow analysis considers
scenarios where the underlying pool comprises 100% of floating-rate
assets (and where the fixed-rate bucket is fully utilized
[12.5%]).
The transaction also benefits from a EUR10 million interest cap
with a strike rate of 2.75% from October 2022 until April 2026,
reducing interest rate mismatch between assets and liabilities in a
scenario where interest rates exceed 2.75%
S&P said, "In light of the rapidly shifting credit dynamics within
CLO portfolios due to continuing rating actions (downgrades,
CreditWatch placements, and outlook changes) on speculative-grade
corporate loan issuers, and in line with paragraph 15 of our global
corporate CLO criteria, we have considered a minimum break-even
default rate (BDR) and scenario default rate (SDR) cushion of 1.5%.
Our application of a 1.5% cushion was informed by the amount of
assets rated 'B-' and below, and by the proportion of ratings that
are on CreditWatch negative or have a negative outlook.
"Following our credit and cash flow analysis, and the application
of our minimum BDR-SDR cushion, the class B to E notes could
withstand higher rating levels than those we have assigned.
However, as the CLO is still in its reinvestment phase, during
which the transaction's credit risk profile could deteriorate, we
have capped our assigned ratings on the notes.
"Our model-based analysis shows that the BDR-SDR cushion for the
class F notes in a 'B-' scenario falls below 1.5%. However,
following the application of our criteria for assigning 'CCC'
category ratings, we have assigned a 'B- (sf)' rating to the class
F notes. In particular, we considered the notes' level of credit
enhancement (8.28%), the portfolio used in our analysis, which
contained 100% of identified assets, and the European long-term
subinvestment grade default rate of 3.1%, which would bring our
expected portfolio default rate lower than our model result."
The Bank of New York Mellon (London Branch) is the bank account
provider and custodian. The documented downgrade remedies are in
line with our current counterparty criteria.
The issuer is bankruptcy remote, in accordance with S&P legal
criteria.
S&P said, "Following our analysis of the credit, cash flow,
counterparty, operational, and legal risks, we believe our ratings
are commensurate with the available credit enhancement for each
class of notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class A1 to E notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication.
"We intend this scenario analysis to be broadly representative of
how our ratings may move in a variety of downturn scenarios.
However, the estimation approach we have used includes some
simplifying assumptions and limitations.
"As our rating analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes.
"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."
Ratings List
Class Rating Amount Sub (%) Interest rate*
(mil. EUR)
A-1 AAA (sf) 193.00 41.25 Three/six-month EURIBOR
plus 1.20%
A-2 AAA (sf) 42.00 41.25 Three/six-month EURIBOR
plus 1.35%§
B AA (sf) 48.75 29.06 Three/six-month EURIBOR
plus 1.85%
C A (sf) 27.00 22.31 Three/six-month EURIBOR
plus 3.00%
D BBB (sf) 22.65 16.65 Three/six-month EURIBOR
plus 5.00%
E BB- (sf) 22.25 11.09 Three/six-month EURIBOR
plus 7.50%
F B- (sf) 11.25 8.28 Three/six-month EURIBOR
plus 9.50%
Sub. notes NR 35.35 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
§EURIBOR component capped at 1.50%.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A--Not applicable.
VESEY PARK: S&P Assigns B- (sf) Rating on Class E Notes
-------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Vesey Park CLO
DAC's class X, A1, A2-A, A2B, B, C, D, and E notes. At closing, the
issuer also issued unrated subordinated notes.
Under the transaction documents, the rated notes pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will switch to semiannual payment.
The portfolio's reinvestment period will end approximately 4.5
years after closing, and the portfolio's maximum average maturity
date is approximately 8.5 years after closing.
The ratings assigned to the notes reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
Portfolio Benchmarks
Current
S&P Global Ratings weighted-average rating factor 2,806.20
Default rate dispersion 571.02
Weighted-average life (years) 5.66
Obligor diversity measure 137.64
Industry diversity measure 19.24
Regional diversity measure 1.26
Transaction Key Metrics
Current
Total par amount (mil. EUR) 400.00
Defaulted assets (mil. EUR) 0.00
Number of performing obligors 166
Portfolio weighted-average rating derived
from S&P's CDO evaluator 'B'
'CCC' category rated assets (%) 5.95
Covenanted 'AAA' weighted-average recovery (%) 36.25
Covenanted weighted-average spread (%) 3.65
Covenanted weighted-average coupon (%) 4.75
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. We consider that the portfolio will be well-diversified on the
effective date, primarily comprising broadly syndicated
speculative-grade senior secured term loans and senior secured
bonds. Therefore, we conducted our credit and cash flow analysis by
applying our criteria for corporate cash flow collateralized debt
obligations.
"In our cash flow analysis, we used the EUR400 million par amount,
the covenanted weighted-average spread of 3.65%, the covenanted
weighted-average coupon of 4.75%, and the covenanted
weighted-average recovery rates for all rating levels. We applied
various cash flow stress scenarios, using four different default
patterns, in conjunction with different interest rate stress
scenarios for each liability rating category."
The transaction documentation requires the collateral manager to
meet certain par maintenance conditions during the reinvestment
period, unless the manager has built sufficient excess par in the
transaction so that the principal collateral amount is equal to or
exceeds the portfolio's reinvestment target par balance after
reinvestment. Typically the definition of reinvestment target par
balance refers to the initial target par amount after accounting
for any additional issuance and reduction from principal payments
made on the notes. In this transaction, the reinvestment target par
balance may be reduced by a predetermined amount starting from the
November payment date in 2021, capped at EUR3 million. This feature
may allow for greater erosion of the aggregate collateral par
amount through trading. It may also allow for the principal
proceeds to be characterized as interest proceeds when the
collateral par exceeds this amount, subject to a limit. Therefore,
in its cash flow analysis, S&P has considered scenarios in which
the target par amount decreases by EUR3 million.
The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under S&P's current counterparty criteria.
Following the application of our structured finance sovereign risk
criteria, S&P considers the transaction's exposure to country risk
to be limited at the assigned ratings, as the exposure to
individual sovereigns does not exceed the diversification
thresholds outlined in its criteria.
At closing, S&P considered that the transaction's legal structure
is bankruptcy remote, in line with its legal criteria.
S&P said, "Our credit and cash flow analysis indicates that the
available credit enhancement for the class A2-A to C notes could
withstand stresses commensurate with higher rating levels than
those we have assigned. However, as the CLO is still in its
reinvestment phase, during which the transaction's credit risk
profile could deteriorate, we have capped our assigned ratings on
the notes. In our view, the portfolio is granular in nature, and
well-diversified across obligors, industries, and asset
characteristics when compared to other CLO transactions we have
rated recently.
"The class E notes' cushion is -1.13% based on the covenanted
assumptions we have been provided. Based on the portfolio's actual
characteristics and additional overlaying factors, including our
long-term corporate default rates and the class E notes' credit
enhancement (7.00%), this class is able to sustain a steady-state
scenario, in accordance with our criteria. Specifically, our credit
and cash flow analysis indicates that the available credit
enhancement could withstand stresses that are commensurate with a
'CCC+' rating. However, following the application of our 'CCC'
rating criteria, we have assigned a 'B- (sf)' rating to this class
of notes."
The one-notch uplift (to 'B-') from the model-generated results (of
'CCC+'), reflects several key factors, including:
-- The class E notes' available credit enhancement is in the same
range as that of other CLOs we have rated and that have recently
been issued in Europe.
- S&P's model-generated portfolio default risk is at the 'B-'
rating level at 28.92% (for a portfolio with a weighted-average
life of 5.6 years) versus 16.7% if it was to consider a long-term
sustainable default rate of 3.1% for 5.6 years, which would result
in a target default rate of 17.36%.
-- The actual portfolio is generating higher spreads and
recoveries compared with the covenanted thresholds that S&P has
modeled in its cash flow analysis.
Consequently, S&P has assigned itsr 'B- (sf)' rating to the class E
notes.
In light of the rapidly shifting credit dynamics within CLO
portfolios due to continuing rating actions (downgrades,
CreditWatch placements, and outlook changes) on speculative-grade
corporate loan issuers, S&P is making qualitative adjustments to
its analysis when rating CLO tranches. These adjustments reflect
the likelihood that changes to the credit profile of the underlying
assets may affect a portfolio's credit quality in the near term.
This is consistent with paragraph 15 of our criteria for analyzing
CLOs.
To do this, S&P reviews the likelihood of near-term changes to the
portfolio's credit profile by evaluating the transaction's specific
risk factors, including, but not limited to, the percentage of the
underlying portfolio comprising obligors that:
-- Have ratings in the 'CCC' range;
-- Have ratings currently on CreditWatch with negative
implications;
-- Have ratings currently with a negative outlook; or
-- Sit within a static portfolio CLO transaction.
Based S&P's review of these factors, it believes that the minimum
cushion between this CLO's tranches' break-even default rates and
scenario default rates should be 1% (from a possible range of
1%-5%). The reason for this is that the portfolio appears to be in
line with others in terms of industry composition and assets rated
'B-', and it is relatively well-diversified with few large obligor
concentrations. The transaction has fewer assets on CreditWatch
with negative implications and is a reinvesting portfolio.
As noted above, the purpose of this analysis is to take a
forward-looking approach for potential near-term changes to the
credit profile of the underlying portfolio.
S&P said, "Considering the above factors and following our analysis
of the credit, cash flow, counterparty, operational, and legal
risks, we believe that our ratings are commensurate with the
available credit enhancement for all of the rated classes of
notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class X to E notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication. The results are shown in the chart below.
"As our rating analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class E notes."
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."
Vesey Park CLO DAC is a European cash flow CLO securitization of a
revolving pool, comprising senior secured loans and bonds issued
mainly by speculative-grade borrowers. Blackstone/GSO Debt Funds
Management Europe Ltd. will manage the transaction.
Ratings List
Class Rating Amount Sub (%) Interest rate*
(mil. EUR)
X AAA (sf) 2.0 N/A Three/six-month EURIBOR
plus 0.50%
A1 AAA (sf) 243.00 39.25 Three/six-month EURIBOR
plus 0.95%
A2-A AA (sf) 30.00 28.00 Three/six-month EURIBOR
plus 1.70%
A2-B AA (sf) 15.00 28.00 2.05%
B A (sf) 30.00 20.50 Three/six-month EURIBOR
plus 2.30%
C BBB (sf) 23.00 14.75 Three/six-month EURIBOR
plus 4.45%
D BB- (sf) 21.00 9.50 Three/six-month EURIBOR
plus 7.16%
E B- (sf) 10.00 7.00 Three/six-month EURIBOR
plus 9.88%
Sub notes NR 30.50 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event
occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A—-Not applicable.
===================
L U X E M B O U R G
===================
SAMSONITE INT'L: Moody's Affirms B2 CFR, Outlook Negative
---------------------------------------------------------
Moody's Investors Service affirmed Samsonite International S.A.'s
Ba2 Corporate Family Rating, Ba2-PD Probability of Default Rating,
and B1 rating on the company's senior unsecured notes. Moody's also
assigned a Ba2 to Samsonite IP Holdings S.ar.l's proposed $500
million 1st lien term loan B add-on. At the same time, Moody's
downgraded the ratings on the company's existing bank credit
facility to Ba2 from Ba1. Samsonite's Speculative Grade Liquidity
rating was upgraded to SGL-1 from SGL-2. The outlook remains
negative.
Proceeds from the term loan B add-on will be used to further
enhance Samsonite's liquidity and financial stability in the face
of unprecedented travel disruption and decline in discretionary
consumer spending related to the coronavirus pandemic. Pro forma
for the offering, the company's cash balance will increase to about
$1.7 billion. This compares to the company's pro forma funded debt
of $3.1 billion.
Downgrades:
Issuer: Samsonite International S.A.
Senior Secured Bank Credit Facility, Downgraded to Ba2 (LGD3) from
Ba1 (LGD3)
Issuer: Samsonite IP Holdings S.ar.l
Senior Secured Bank Credit Facility, Downgraded to Ba2 (LGD3) from
Ba1 (LGD3)
Upgrades:
Issuer: Samsonite International S.A.
Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2
Assignments:
Issuer: Samsonite IP Holdings S.ar.l
Senior Secured Bank Credit Facility, Assigned Ba2 (LGD3)
Affirmations:
Issuer: Samsonite Finco S.ar.l
Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD6 from
LGD5)
Issuer: Samsonite International S.A.
Probability of Default Rating, Affirmed Ba2-PD
Corporate Family Rating, Affirmed Ba2
Outlook Actions:
Issuer: Samsonite Finco S.ar.l
Outlook, Remains Negative
Issuer: Samsonite International S.A.
Outlook, Remains Negative
Issuer: Samsonite IP Holdings S.ar.l
Outlook, Remains Negative
The downgrade of Samsonite's senior secured bank loan rating, along
with the assignment of a Ba2 to the company's proposed senior
secured term loan B add-on reflects two key factors. First, on a
pro forma basis for the new offering along with the company's March
16 refinancing that expanded the revolver limit to $850 million
from $650 million, 1st lien senior secured debt as a percent of
total funded debt accounts for a more significant portion of the
company's total funded debt, with the proportion increasing to
87.3% from 77.5%. This reduces the relative amount of loss
absorption protection provided by the company's existing senior
unsecured notes enough to result in a one-notch downgrade. Second,
the proposed term loan B add-on will rank pari passu with
Samsonite's existing 1st lien bank revolver and term loans and will
be secured and guaranteed on the same basis.
The upgrade of Samsonite's Speculative Grade Liquidity rating to
SGL-1 from SGL-2 acknowledges the increase in Samsonite's cash to
about $1.7 billion from $1.2 billion, and considerable easing of
the financial covenants.
According to modifications in Samsonite's 1st lien covenants, the
company's requirement to test maximum total net leverage ratio and
minimum interest coverage ratio under its financial covenants will
be suspended from the second quarter of 2020 through the second
quarter of 2021. Instead, during this period, Samsonite will be
required to comply with a minimum liquidity covenant of $400
million (increasing to $500 million if Samsonite completes the $500
million term B add-on) and will be subject to additional
restrictions on its ability to incur indebtedness and make
restricted payments and investments. Once that period expires,
Samsonite may use a revised EBITDA definition that includes the
first two quarters of 2019 and fourth quarter of 2019 instead of
actual EBITDA from the fourth quarter of 2020 and the first two
quarters of 2021 to calculate the maximum total net leverage ratio
and minimum interest coverage ratio. Additionally, as long as
Samsonites uses historic EBITDA to calculate the covenants, the
minimum liquidity covenant will remain in effect.
RATINGS RATIONALE
Samsonite's Ba2 CFR reflects expected earnings pressure related to
the coronavirus as well as the company's inherent vulnerability to
the discretionary nature of its product that are exposed to
cyclical consumer spending and travel fluctuations. Tariffs imposed
in June 2019 also increased product costs and were incremental to
the 10% tariff that was enacted in September 2018 on travel goods
including imports by Samsonite's US business from China.
Samsonite's credit profile benefits from its solid credit metrics
heading into the downturn with debt to EBITDA around 3.0x. Positive
credit consideration also includes Samsonite's good brand strength
and market position, its strong geographic diversification, and the
company's characteristically high historic gross margins, at
between 52.6% and 56.5% during the 2015-2019 period.
Samsonite mostly sells exclusively its own luggage and products
(Samsonite, Tumi, and American Tourister) in its retail stores;
Samsonite, Tumi and American Tourister are also sold through other
retailers. This distinguishes Samsonite from other luggage
retailers that sell various brands. Samsonite also distributes its
products through third party retail and online channels. By
offering retail as well as wholesale, Samsonite can mitigate some
of the inventory risks of other retailers. This gives Samsonite
stronger gross margins than the more traditional luggage
manufacturing companies.
Samsonite has prudent financial policies with measured shareholder
returns and solid controls over its related party transactions. The
company has built a substantial cash balance, loosened financial
maintenance covenants, and elected not to pay a shareholder
distribution in 2020 to provide considerable flexibility to manage
in the coronavirus downturn.
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. Travel related
sector's will be one of the sectors most significantly affected by
the shock given the sector's inherent sensitivity to consumer
demand and sentiment. Continued exposure to travel disruptions and
discretionary consumer spending, have left it vulnerable to shifts
in market sentiment in these unprecedented operating conditions
makes it vulnerable to the outbreak continuing to spread.
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 Samsonite of the
breadth and severity of the shock, and the broad deterioration in
credit quality it has triggered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if Moody's anticipates that any
earnings decline or liquidity deterioration will be deeper or more
prolonged because of actions to contain the spread of the virus or
reductions in discretionary consumer spending. Debt-to-EBITDA
sustained above 4.0x could also lead to a downgrade.
A ratings upgrade is unlikely given the anticipated weak operating
environment and continuing uncertainty related to the coronavirus.
An upgrade would require a high degree of confidence on Moody's
part that the travel sector has returned to a period of long-term
stability, and that Samsonite demonstrate the ability to generate
positive free cash flow, maintain good liquidity, and continue to
operate with a debt/EBITDA level at 3.0x or lower.
Samsonite is a publicly-traded designer, manufacturer and
distributor of travel luggage and bags worldwide. It offers
luggage, business, computer, outdoor, and casual bags, as well as
travel accessories and slim protective device cases. Major brands
include Samsonite, American Tourister and Tumi. Consolidated net
sales for the fiscal year-ended December 2019 was $3.64 billion.
===================
M O N T E N E G R O
===================
MONTENEGRO: S&P Alters Outlook to Negative & Affirms 'B+/B' SCR
---------------------------------------------------------------
On May 1, 2020, S&P Global Ratings revised its outlook on
Montenegro to negative from stable. At the same time, S&P affirmed
its long- and short-term foreign and local currency sovereign
credit ratings at 'B+/B'.
As "sovereign ratings" (as defined in EU CRA Regulation 1060/2009
"EU CRA Regulation"), the ratings on Montenegro are subject to
certain publication restrictions set out in Art. 8a of the EU CRA
Regulation, including publication in accordance with a
pre-established calendar. Under the EU CRA Regulation, deviations
from the announced calendar are allowed only in limited
circumstances and must be accompanied by a detailed explanation of
the reasons for the deviation. In this case, the reason for the
deviation is the rising risk of a protracted standstill in the
domestic economy due to the direct and indirect effects from the
SARS-CoV-2/COVID-19 pandemic and the adverse impact it could have
on productive capacity, fiscal revenue intake, and banking sector
stability.
Outlook
The outlook is negative because S&P sees risks that a standstill in
Montenegro's tourism sector and the wider economy, should it become
protracted, could erode the country's already weak fiscal position,
reduce its growth potential, and/or negatively affect the banking
sector, for example, due to deterioration in asset quality.
Downside scenario
S&P could lower its ratings on Montenegro within the next 12 months
if the economic fallout of the COVID-19 pandemic becomes more
severe than we currently expect, leading to an erosion of fiscal
performance, or resulting in a material deterioration in asset
quality or heightened liquidity constraints in Montenegro's banking
sector.
Upside scenario
S&P could revise the outlook to stable if Montenegro's economic and
fiscal prospects stabilize, putting its fiscal debt trajectory back
on a downward path.
Rationale
S&P said, "We note that Montenegro remains particularly exposed to
a protracted lockdown and travel restrictions, given that its
tourism sector plays a key role in domestic economic activity. A
protracted recovery from COVID-19 risks eroding Montenegro's
already weak fiscal position. We estimate that the net general
government debt at year-end 2019 amounted to 62% of GDP, which we
consider elevated for a country with no monetary policy flexibility
(given the unilateral euro adoption). We also consider that the
COVID-19 pandemic could pose risks for the country's banks, for
instance, if asset quality were to deteriorate notably."
The ratings are supported by government's cash reserves accumulated
during previous pre-funding exercises alongside established
arrangements with the IFI community, which ease the public sector's
short-term financing needs.
S&P Global Ratings believes the global spread of COVID-19 will have
significant implications for tourism-dependent sovereigns globally.
In addition to the human costs, S&P expects the pandemic, together
with travel restrictions both within Montenegro and in other
tourist source markets, will have a significant impact on GDP,
fiscal accounts, and foreign exchange inflows in 2020. While the
timing of the peak of the pandemic will differ across sovereigns,
the global peak will inform governments' decisions regarding travel
restrictions and border closings, as well as tourists' propensity
to travel.
Institutional and economic profile: Near-term economic contraction
driven by dependence on tourism
-- Montenegro's tourism-dependent economy is vulnerable to a
protracted global lockdown in response to COVID-19.
-- S&P expects it will contract by 7.8% in 2020 as domestic and
external demand weaken because of the pandemic.
-- Political uncertainty also remains high as the country gears
for general elections later this year and underlying tensions
remain.
S&P said, "We expect that, similar to most other countries, the
COVID-19 pandemic will have notable negative repercussions for
Montenegro's economy. We expect the lockdown measures the
government implemented on March 30, which currently extend to
mid-May, will have a material negative impact on domestic demand.
Furthermore, with the tourism sector accounting for about 30% of
GDP and being a source of 40% of current account receipts,
Montenegro's economy is highly vulnerable to external developments,
as well. We believe that European economic activity is unlikely to
stabilize by the end of the second quarter, and individual
countries' borders might not fully reopen in time for the summer
tourist season."
S&P's forecasts that Montenegro's economy will contract by 7.8% in
2020 is based on the following assumptions:
-- Domestic consumption will suffer from two full months of
lockdown measures, including closed borders. Over this period, S&P
anticipates that service industry-related activity will be
substantially diminished, and that May and June will be lost as
tourism months.
-- S&P expects that there will be a gradual resumption of economic
activity in the second half of 2020 as border restrictions and
broader containment measures are lifted.
-- S&P foresees that a large part of private investment will be
put on hold, given that much of it relates to the tourism sector.
S&P understands that some public sector investments are ongoing,
albeit at a subdued pace.
-- The falloff in recorded economic activity will similarly hit
the purchasing power of the unofficial economy, further dampening
activity.
Montenegro's tourism receipts are highly seasonal, with July and
August accounting for almost 80% of tourist activity and suggesting
there is still time for things to improve. S&P said, "Furthermore,
we note that tourists from Russia and Serbia combined account for
roughly two-thirds of tourist arrivals in Montenegro. Given the
geographic proximity, tourism from Serbia could prove more
accessible if borders open soon. We believe, however, that even if
travel restrictions are removed, an important component will relate
to the behavioral effects the pandemic will have on the propensity
to travel. As such, we consider that substantial parts of
Montenegro's 2020 tourist season could be lost, with a more solid
recovery only commencing in 2021."
S&P said, "In our view, Montenegro has only limited policy headroom
to offset the short-term economic impact of COVID-19. The country
has no monetary flexibility because it has unilaterally adopted the
euro, while the fiscal space has been eroding in recent years,
partly due to the ongoing debt-financed construction of a highway
to link the coastal port of Bar with the Serbian border. Although
the completed portion of the road has boosted growth in recent
years, the cost of the first section also added about 20% of GDP to
debt over the past three years. The timeframe and financing
arrangements for the additional sections of the highway in the
current environment are even more uncertain as the fiscal space
further narrows in 2020.
"We consider Montenegro's institutional settings to be
comparatively strong in a regional context. The country remains an
EU candidate with upside potential from implementation of reforms
that will align it with the EU's Acquis Communautaire (although we
consider the announced possible accession in 2025 optimistic).
Further progress could be hampered both by domestic developments
and rising euroskepticism among the existing member states,
which--under EU rules--will ultimately have to unanimously approve
Montenegro's membership bid. Nevertheless, the ongoing EU accession
negotiations strengthen the country's policy frameworks. The
country is gearing up for general elections later this year and we
expect the political uncertainty to remain elevated in the
run-up."
Flexibility and performance profile: Montenegro's unilateral euro
adoption and limited fiscal space constrain the country's ability
to absorb shocks
-- S&P expects the fiscal deficit to reach 8% of GDP in 2020.
-- Previously accumulated cash and established relationships with
IFIs mitigate short-term refinancing risks.
-- The banking sector will likely face challenges from a ramp-up
in nonperforming loans (NPLs).
S&P said, "We forecast that Montenegro's general government deficit
will reach 8% of GDP in 2020 with pressures predominantly coming
from an expected reduction of fiscal revenue. We understand that
the government aims to prepare a revised state budget in May to
address the expected revenue shortfall. The budget will likely also
include further, as yet unspecific, support measures for the
private sector. Already, the government has announced two support
packages to secure 70% of the minimum wage for all registered
employees in sectors that had to close due to the pandemic-related
lockdown. Further measures include a commitment to pay 50% of the
gross minimum wage to workers in companies, whose work is at risk
due to the lockdown and to people that have to stay home and take
care of children under 11 or otherwise have been subject to
quarantine measures.
"In line with our budgetary forecasts, Montenegro's financing needs
for 2020 are set to markedly increase. Positively, the government's
previous proactive debt management--including buyback arrangements
and prefunding initiatives--mitigate imminent financing risks. The
government closed 2019 with deposits at 15% of GDP following a
September 2019 Eurobond placement. These deposits were used to pay
a remaining EUR320 million Eurobond redemption in March. On March
30, 2020, we estimate that government cash reserves and accounts in
the central bank and with commercial banks amounted to 7.5% GDP. A
recently contracted policy-based guarantee with the World Bank also
supports short-term financing requirements. The EU's decision on
April 22 to allocate EUR60 million to Montenegro within its
regional EUR3 billion macro-financial assistance package supports
our base-case scenario of forthcoming donor and IFI community
support."
S&P now forecasts Montenegro's net general government debt will
reach 75% of GDP in 2020, up from 62% in 2019, adding further
pressure to its already constrained fiscal position. Montenegro's
external debt is primarily owed to foreign creditors with only a
limited amount of domestic securities issuance. About 40% of
government external debt is to official lenders under generally
favorable conditions. The debt-redemption profile remains rather
lumpy, however, which is a function of the size of the economy.
Authorities issue benchmark-size instruments that are comparatively
large as a percentage of GDP, meaning repayments are high for those
years with Eurobond maturities. The next Eurobond redemption is due
in March 2021.
As a response to COVID-19, the Central Bank of Montenegro extended
a 90-day loan payment moratorium to borrowers affected by liquidity
issues from the containment measures. Montenegro's unilateral
adoption of the euro, however, prevents its central bank from
setting interest rates and controlling the money supply, and
restricts its ability to act as a lender of last resort. Although
the central bank has some options to provide liquidity support to
domestic banks, in S&P's view, its inability to create the currency
changes needed in a stress scenario effectively prevents it from
fulfilling the function of lender of last resort.
Risks to the stability of Montenegro's banking system have
increased. S&P said, "We anticipate an increase in the level of
NPLs as households and corporates are affected by the economic
fallout of the pandemic. Positively, Montenegro's banking system
enters this crisis in a relatively strong position with solid
capital levels, NPLs at a low 5%, and ample liquidity. The system
is dominated by subsidiaries of foreign banking groups, and is
largely funded by domestic deposits. We have so far observed no
notable deposit flight, and in our base-case scenario we expect
this situation to remain stable." That said, given the central
bank's limited possibilities to stabilize the banking system, it
remains vulnerable to stress should NPLs rise sharply or liquidity
dry up.
Montenegro also remains vulnerable to balance-of-payment risks,
with a large net external liability position and persistent current
account deficits. Historically, the economy has relied
substantially on net inflows of foreign direct investment (FDI)
into tourism and associated real estate. S&P said, "We believe that
the FDI tap will be largely shut in 2020, reflecting the stress on
tourism. Still, even as FDI partially dries up, we expect the
current account deficit to narrow. As investments and consumption
reduce, we forecast that Montenegro's current account deficit will
largely mirror the government's fiscal deficit, closing to 8% of
GDP in 2020 compared with 15% in 2019 when FDI was higher."
S&P said, "In our base-case scenario, we expect the FDI tap to once
again open in 2021 and support the resumption of several ongoing
hospitality projects. We expect FDI will gear up to 10% of GDP
annually in 2021-2023, broadly in line with historical trends, and
fuel rising imports and widen the country's current account deficit
again to 10% or more of GDP."
Environmental, social, and governance (ESG) factors relevant to the
rating action:
-- Health and safety
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating action.
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
Montenegro
Sovereign Credit Rating B+/Negative/B B+/Stable/B
Ratings Affirmed
Montenegro
Senior Unsecured B+
Transfer & Convertibility Assessment AAA
=====================
N E T H E R L A N D S
=====================
BME GROUP: S&P Alters Outlook to Negative & Affirms 'B' ICR
-----------------------------------------------------------
S&P Global Ratings revised its outlook on European material
distributor BME Group to negative from stable and affirmed its 'B'
issuer credit rating.
The economic recession in many parts of the world, including
Europe, will weaken BME's EBITDA and credit metrics in 2020. S&P
said, "We believe that the economic effects of COVID-19 will lead
to a reduction in BME's 2020 EBITDA and weaker credit measures. The
group operates across the eurozone, including Germany, the
Netherlands, Switzerland, France, Belgium, and Austria, where we
anticipate economies will contract by 7.3% in 2020 before
rebounding by 5.6% in 2021. BME is mostly exposed to residential
repair, maintenance, and improvement markets (RMI) which account
about 60% of total revenue. Although we view the RMI markets as
more stable than new building in general, they will still be
subject to consumer spending. As unemployment continues to rise
significantly, we expect consumer spending for home maintenance and
repairs to decline, resulting in lower sales for BME. We forecast a
decline in revenue in the mid-teens as a percentage in 2020 before
recovering to high-single-digit percentage growth in 2021 as
economic growth rebounds. As a result, we forecast the reported
EBITDA (pre-IFRS 16) margin will fall to 4.0%-4.5% in 2020 (from
4.8% in 2019, based on preliminary results) before improving to
5.5%-6.0% in 2021, reflecting the rebound in key end markets and
positive effects from the company's key efficiency initiatives. In
our base case, we expect BME's adjusted debt to EBITDA will weaken
above 7.0x this year from about 6.6x in 2019 (based on preliminary
results). Although we expect BME's leverage to recover swiftly to
slightly below 6.0x by year-end 2021, the rating headroom is
minimal compared with 6.5x we view as commensurate with the
rating."
S&P said, "We expect neutral reported free operating cash flow
(FOCF) for the next 12 months. We understand from the company
that it expects to implement several strategic measures to preserve
BME's cash flow generation. These include reducing operating costs,
postponing discretionary capital expenditure (capex), and working
capital management. We also expect the group will benefit from
government aid packages, such as short-term work schemes and tax
relief in order to support cash flow generation. Taking these into
consideration, we expect the company to generate neutral to slight
positive reported FOCF by year-end 2020, despite the potential
significant decline in EBITDA.
BME's liquidity remains adequate for the next 12 months, supported
by a fully undrawn committed line. With about EUR240 million of
available cash on the balance sheet (unaudited) at the end of March
2020, supported by the cash received from the sale of its 21% stake
in SAMSE, and expected positive funds from operations (FFO), S&P
thinks the company will have a sufficient liquidity cushion over
the next 12 months. At the same time, the company has a EUR195
million committed revolving credit facility (RCF) that is fully
undrawn. The company has limited capex requirements, at about 1% of
sales, which is common for materials distributors and reflects its
asset-light business model. Most of capex is linked to growth
projects that can be postponed. The absence of debt repayments also
supports our liquidity assessment.
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."
The negative outlook reflects the possibility that S&P could lower
the rating if BME failed to report positive FOCF and if the
weakening in market demand and decline in EBITDA this year were
more severe than S&P's base case.
S&P said, "We could lower the rating if BME's FOCF turned negative,
its liquidity weakened significantly, or if it could not swiftly
deleverage below 6.0x adjusted debt to EBITDA by 2021. This could
occur as a result of a prolonged weakening of BME's EBITDA due to a
severe downturn across its main markets, a loss of key customers
due to price competition, or significant unexpected operational
issues.
"We could revise the outlook to stable if we observed a swift
recovery in BME's performance and continuous positive FOCF in the
next 12 months. A stable outlook would require BME to maintain at
least adequate liquidity and adequate headroom under the springing
covenant on its RCF. We would also expect BME's financial policy,
especially on shareholder distributions, acquisitions, and capex,
to remain supportive of the current rating."
===========
R U S S I A
===========
CAPITAL ASSET: Bank of Russia Provides Update on Administration
---------------------------------------------------------------
The provisional administration to manage management company LLC
Capital Asset Management (hereinafter, the "Management Company")
appointed by virtue of Bank of Russia Order No. OD-2663, dated
November 21, 2019, following the cancellation of the Management
Company's license to manage investment funds, unit investment funds
and non-governmental pension funds, established that the Management
Company's officials had performed actions causing damage to
investment unit owners. In addition, the provisional
administration established signs of withdrawing real estate
property items from the mortgage collateral pool.
The provisional administration also encountered obstruction to its
operations -- the Management Company's officials had failed to pass
over to the provisional administration its accounting and other
documents, including its foundation and entitling documents,
material and other valuables owned by, and entrusted to the
Management Company, as well as necessary information and documents
on its assets and liabilities.
As the Bank of Russia had a reasonable assumption that the
Management Company's officials had performed financial transactions
suspected of being criminal offences, the Bank of Russia submitted
this information 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.
PROMSVYAZBANK PJSC: S&P Affirms 'BB-/B' ICR, Outlook Positive
-------------------------------------------------------------
S&P Global Ratings affirmed its 'BB-/B' long- and short-term issuer
credit ratings on Promsvyazbank PJSC. The outlook is positive.
The ratings affirmation reflects our S&P's expectation that
Promsvyazbank will be able to maintain its financial profile in the
current more difficult operating environment in the Russian banking
sector and that the bank's role for the Russian government will
continue strengthening under its recently legislated mandate as a
dedicated financial institution for the country's defense sector.
The law governing Promsvyazbank's special status as a dedicated
bank for defense sector enterprises was enacted at the end of 2019.
Under this law, the bank receives some preferential treatment,
notably it is the bank of first choice for state defense
procurement contractors--selecting another eligible bank would
require them to receive separate approval from government bodies.
S&P said, "We expect that Promsvyazbank's share in servicing the
state defense sector will increase gradually to about 70% in the
next two years, from close to zero two years ago. As a result, we
believe that Promsvyazbank's public policy role could strengthen,
which might increase the likelihood that the bank would receive
extraordinary government support, if needed, thereby enhancing the
bank's credit quality."
S&P said, "We continue to consider the bank's link with the
government as very strong because it is owned directly by the
Russian government through the Federal Agency for State Property
Management (Rosimuschestvo). The recently adopted law stipulates
that the bank's ownership should stay fully with the government.
The bank's management team consists of high-profile executives with
extensive experience of working at government-related institutions.
We also note that the bank has received significant government
support over the past two years. In particular, the government
provided approximately Russian ruble (RUB) 243 billion of capital
as part of the bank's financial rehabilitation in 2018. In
addition, the bank's capital increased by about RUB33 billion in
2019 and about RUB25 billion in 2018. Also, the bank transferred a
sizable portion of its problem assets off its balance sheet to the
state's Banking Sector Consolidation Fund.
"We assess Promsvyazbank's stand-alone credit profile (SACP) at
'b'. To arrive at the rating, we add two notches to reflect the
likelihood of extraordinary state support if the bank faced
financial distress. Our SACP assessment reflects the bank's high
and increasing concentration in the defense sector, which remains
highly burdened by debt leverage. This aspect restrains our ratings
compared with other large Russian banks, owing to the concentrated
nature of revenue and consequent sensitivity to economic cycles.
"Promsvyazbank's capital and earnings are neutral to our ratings on
the bank. We expect that fast loan book growth will slow to about
5% in 2020 because of COVID-19 containment measures and oil price
volatility, before resuming at about 15%-20% in the next two years.
Credit losses are likely to remain on par with the Russian banking
system average of 2.5% over this year and next. We forecast our
risk-adjusted capital (RAC) ratio will decrease to about 5.4%-5.6%
by the end of 2022, from about 6.2% at year-end 2019. Our forecast
also takes into account government capital injections of RUB20
billion in 2020 and RUB15 billion in 2021. We also anticipate
capital inflow from banks that will transfer their defense-sector
loans to Promsvyazbank. That said we consider that the planned
capital inflow won't be sufficient to fully compensate for the
expected loan portfolio expansion, leading to a RAC ratio decline
in the next two years.
"We expect that Promsvyazbank will continue benefitting from a
stable client base that now includes defense sector enterprises and
contains a large portion of current accounts in its total
liabilities, leading to lower funding costs than average for other
commercial banks in Russia. We also expect that the bank will
maintain an ample liquidity cushion. Its liquid assets calculated
under Russian accounting standards accounted for about 37% of total
assets on April 1, 2020.
"The positive outlook indicates that we may raise the long-term
rating on the bank in the next 12 months if the bank's role for the
Russian government strengthens, which would evidence a higher
probability of extraordinary government support, and if the bank's
stand-alone creditworthiness remained resilient in the current
challenging economic environment.
"We would upgrade Promsvyazbank in the next 12 months if the bank's
share in servicing the defense sector continued to increase and the
bank demonstrated its ability to maintain sound financial
performance and stable asset quality despite a more difficult
operating environment for Russian banks.
"We could revise the outlook on Promsvyazbank to stable in the next
12 months if the bank's public policy role did not evolve as we
expect currently. We could also revise the outlook to stable if we
observed pressure on Promsvyazbank's stand-alone credit profile."
===========
S E R B I A
===========
SERBIA: S&P Alters Outlook to Stable & Affirms 'BB+/B' SCRs
-----------------------------------------------------------
On May 1, 2020, S&P Global Ratings revised its outlook on Serbia to
stable from positive. At the same time, S&P affirmed its 'BB+'
long-term and 'B' short-term sovereign credit ratings on Serbia.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009
"EU CRA Regulation"), the ratings on Serbia are subject to certain
publication restrictions set out in Art 8a of the EU CRA
Regulation, including publication in accordance with a
pre-established calendar. Under the EU CRA Regulation, deviations
from the announced calendar are allowed only in limited
circumstances and must be accompanied by a detailed explanation of
the reasons for the deviation. In this case, the reason for the
deviation is a significantly weaker domestic and external growth
outlook. The next scheduled publication on the sovereign rating on
Serbia is on June 12, 2020.
Outlook
The stable outlook balances the economic fallout from the COVID-19
pandemic--in the form of a more-adverse external finacing
environment and deterioration in Serbia's growth and fiscal
metrics--against the macroeconomic buffers the Serbian authorities
have built up over the past half-decade, including higher foreign
exchange (FX) reserves and more fiscal space.
Downward pressure could build on the ratings over the next 12
months if, contrary to S&P's current expectations:
-- S&P anticipated a far more significant weakening of Serbia's
government finances. This could occur for instance if the growth
outlook remained subdued for longer.
-- Serbia became increasingly reliant on debt-creating foreign
inflows to finance its external deficit.
-- Upward ratings pressure could build if foreign direct
investment inflows continue into Serbia, supporting an improvement
in its balance of payments resilience via rising export receipts
and higher FX reserves.
Rationale
S&P projects that Serbia's real GDP will contract by 3.5% in 2020
as a result of lockdown measures imposed to cope with the COVID-19
pandemic. There is a higher degree of uncertainty than usual
attached to its forecasts.
Serbia has been in a state of emergency since mid-March with strict
constraints on the movement of people and the closure of its
international borders. A little over a month later, the authorities
have started to lift some restrictions and reopen parts of the
economy--for instance certain services, some retail avenues, and
the construction sector--subject to social distancing norms.
Even with restrictions continuing to be gradually lifted over the
next weeks, the ongoing need for individuals to maintain physical
distance implies that economic output will not reach the level S&P
previously forecasts for 2021.
Moreover, Serbia's recovery will ultimately be tied to the fortunes
of its key trading partners by virtue of the economy being more
open than it was heading into the global financial crisis, more
than a decade ago. Exports now constitute about half of overall
economic output, compared to less than a third in 2007.
Foreign direct investment--predominantly in tradeables--has fully
financed Serbia's wider current account deficits in recent years
and lowered its reliance on debt-creating inflows. Arguably, these
inflows have also aided the National Bank of Serbia's (NBS's)
efforts to augment its FX reserves. Moreover, over the past decade
foreign investment into Serbia's manufacturing sector has resulted
in a strengthening of receipts from and diversification of the
export basket. However, the nearer term outlook for foreign
investment flows is fairly uncertain.
The government and the NBS have put together a package to contain
the pandemic's economic fallout. The NBS cut the key policy rate by
75 basis points to 1.5% and increased the provision of liquidity to
the banking sector via swap lines and repos. Of the measures
announced by the government, the following will widen the fiscal
deficit to nearly 7.0% of GDP in 2020 from 0.2% the year before:
-- Deferrals of three months of labor taxes and social security
contributions until 2021 (2.6% of GDP; this should largely reverse
by 2022 given that Serbia's fiscal accounts are presented on a cash
basis);
-- Wage subsidies for private sector employees (1.8% of GDP);
-- Cash transfers to adult citizens (1.3% of GDP);
-- Wage increases for public healthcare workers, higher healthcare
spending, and one-off payments to pensioners (0.6% of GDP); and
-- A dividend moratorium until the end of the year (0.3% of GDP).
Other measures that will not immediately contribute to the deficit
include state guarantees of about 5% of GDP for small and midsize
enterprise loans via banks and Serbia's development fund. S&P has
recorded these separately as guarantees and not included them in
its projections for government debt, unlike guarantees extended to
state-owned enterprises which are included in reported government
debt.
S&P said, "Net general government debt-to-GDP, which has been on a
declining trajectory since 2015, will rise to over 50% in 2020,
from 45% in 2019, in line with our projections for the deficit. We
flag that about 70% of Serbia's government debt is FX-denominated,
making it vulnerable to exchange-rate volatility. We project that
public finances will begin to consolidate in 2021 following a
rebound in economic activity."
Nevertheless, Serbia is entering this crisis with significantly
lower imbalances than it faced a decade ago. This is evidenced by
its diminished reliance on temperamental portfolio inflows compared
to the era after the global financial crisis when these flows were
the dominant source of financing for its large twin deficits.
Moreover, FX reserves reached a record high in January. The NBS has
managed to curb inflation to under 2% over the past six years, well
below the 10% average over 2003-2012. However, the restructuring of
state-owned enterprises has yielded only modest success so far.
The stability of the majority foreign-owned banking sector has
improved, although the euroization of deposits and loans remains
high. The system's reported average capital adequacy ratio was
23.4% as of December 2019. Last year the sector was profitable and
supportive of economic growth. Nonperforming loans declined to 4%
of total loans from a peak of 22% in 2015, though some asset
quality deterioration is likely this year. The sale of Serbia's
third-largest lender, the state-owned Komercijalna Banka, to
Slovenia's Nova Ljubljanska Banka is expected to be concluded by
the end of this year.
Parliamentary elections, originally slated for April 2020, have
been delayed until the state of emergency is lifted. Even though
S&P expects macroeconomic policy continuity after the elections, it
thinks the ongoing centralization of the institutional setup could
undermine longer term policy predictability. This could in turn
lead to flagging investor confidence. Another repercussion could be
accelerated emigration of the most educated and skilled.
S&P's ratings on Serbia are supported by still-moderate public
debt--yielding some fiscal space for the government to implement
countercyclical policies--and a credible monetary policy framework.
The ratings are constrained by Serbia's relatively weak
institutional settings, comparatively low income and wealth levels,
sizable net external liability position, and the banking sector's
extensive euroization.
Environmental, social, and governance (ESG) factors relevant to the
rating action:
-- Health and safety
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
Ratings Affirmed; Outlook Action
To From
Serbia
Sovereign Credit Rating BB+/Stable/B BB+/Positive/B
Senior Unsecured BB+ BB+
Transfer & Convertibility Assessment BBB- BBB-
=========
S P A I N
=========
ACI AIRPORT: S&P Cuts Debt Rating to 'CCC' on Liquidity Constraints
-------------------------------------------------------------------
On April 30, 2020, S&P Global Ratings lowered its debt rating on
ACI Airport Sudamerica S.A.'s (ACI) $200 million 2032 notes (series
2015) to 'CCC' from 'BB' and kept the rating on CreditWatch with
negative implications, where S&P placed it on March 27, 2020.
S&P said, "The downgrade of ACI reflects our expectations of a
dramatic erosion of its cash flows in the upcoming 12 months
stemming from a collapse in travel caused by COVID-19. We revised
our base-case scenario in light of the new circumstances that
include several measures taken by governments such as air travel
and movement restrictions, and overall deteriorating macroeconomic
conditions. We're now contemplating a reduction of around 55% in
passenger volume at the Carrasco International Airport this year,
compared with our previous forecast of a 30% drop. Moreover, we
expect traffic to normalize only by late 2022 or early 2023.
"As a result, we don't expect Puerta del Sur, the airport
concessionaire, to upstream cash to ACI to service its debt, given
that its financial structure includes a lock-up test measured on a
rolling 12-month basis – originally at 1.7x - that we do not
forecast they will meet by late 2020. Absent this cash upstream, we
believe ACI would need to use its debt service reserve, which could
be depleted prior to the November 2020 or May 2021 payment dates.
This points to a rising refinancing risk, which we believe is
consistent with the 'CCC' rating level.
"The exchange offer includes issuing new notes (series 2020) for an
equal amount of $200 million, same maturity date (2032), same
coupon (at 6.785%) as the existing notes, but incorporates a PIK
option on three coupons that, if exercised, would capitalize at
7.785%. In addition, there's an early participation premium in cash
of $10 for each $1,000 of outstanding principal amount of the
existing notes if validly tendered until May 7, 2020. We believe
the bondholders would be compensated for the coupon deferrals with
these features. Therefore, we don't believe the tender is
tantamount to a default."
CODERE GROUP: S&P Downgrades ICR to 'CCC', Outlook Negative
-----------------------------------------------------------
S&P Global Ratings lowered to 'CCC' from 'CCC+' its issuer credit
rating on Spanish gaming company Codere Group as well as the issue
ratings on its EUR500 million and $300 million senior secured
notes.
S&P believes that Codere faces increased default risk as a result
of continued challenging conditions resulting from COVID-19.
On March 17, 2020, S&P downgraded Codere to 'CCC+' on heightened
uncertainty regarding its ability to refinance its EUR500 million
and $300 million senior secured facilities, which mature on Nov. 1,
2021.
Since that date, Codere has closed all its remaining gaming stores
and there is still uncertainty regarding when they will reopen.
Some countries such as Italy, Uruguay, Panama, and Spain have
provided indicative guidance for the reopening of gaming halls and
bars in May-June, however, the exact timings and conditions will
depend on the evolution of the COVID-19 spread. S&P's base case
assumes that all countries will lift the mandatory site closures by
July. If and when they are reopened, it remains unclear what
restrictions will be imposed by the governments in each of its
countries of operation and whether its operating performance can
rebound to steady-state. For each month that the stores remain
closed, we estimate Codere burns about EUR25 million cash
(excluding interest payments), but S&P notes that the company is
working on reducing this to EUR20 million thanks to its contingency
plan.
As the effects of the pandemic roll on, and operational and
consumer-demand uncertainties persist, the risk of a default event
occurring increases. In the next 12 months, S&P believes there is
increasing risk that Codere will encounter declining liquidity if
it cannot secure additional sources, as well as the potential for a
breach of covenant.
The company currently has about EUR130 million of available cash
and experiences about EUR20 million-EUR25 million of cash burn per
month. If the stores remain shut for longer than we currently
anticipate (end-June 2020) or if the recovery of cash flow
generation is slower than we expect, Codere could run out of cash
by July-August. Although its usual minimum operating cost is about
EUR40 million, it expects that EUR15 million-EUR20 million would be
sufficient to restart operations once the lockdown is over,
progressively increasing as activity recovers. S&P understands the
company is looking for EUR100 million of additional funding options
to improve its liquidity position, but at this stage there is no
certainty as to whether it will be able to obtain funding and how
it would be structured.
Codere has only one flat net leverage covenant of below 4.1x
(covenant reported basis) if its revolving credit facility (RCF) is
drawn at 40% or more--and this is currently the case given that the
RCF is indeed fully drawn. Although, as of Dec. 31, 2019, the
company's reported net leverage was 3.2x, S&P believes that Codere
could breach the covenant by September 2020 if stores remain closed
for longer than currently anticipated.
S&P said, "In the more medium term, if conditions were to persist
we also see growing risk of other actions, which could be
tantamount to a default, such as restructurings. We would consider
a default any action, such as a restructuring or share buyback
below par, whereby lenders are offered less value than original
promised, without adequate offsetting compensation."
Environmental, social, and governance (ESG) credit factors for this
credit rating change.
--- Health and safety
S&P said, "The negative outlook reflects our view that the risk of
specific default in the next 12 months has increased as the
COVID-19 pandemic continues. In the near term, we believe that
liquidity and covenant-breach risks are increasing and, in the
medium term--depending on how macroeconomic uncertainty plays
out--the possibility of restructuring events may increase.
"We could lower the ratings if we believe a default event may occur
sooner, say in the next six months rather than the next 12
months."
S&P could also lower the ratings if a default event occurred in the
next 12 months. This could include:
-- The company announcing or pursuing a restructuring or a debt
exchange that S&P viewed as distressed.
-- The company exhausting its liquidity or breaching its covenant
and not obtaining a waiver from its lenders.
-- Codere missing an interest payment when due and not making a
payment within contractual grace periods, or triggering any other
potential selective default event including but not limited to
purchase of debt below par.
S&P view an upgrade as unlikely at this time while operations
remain materially affected by the pandemic. S&P could raise the
rating if it no longer saw a risk of default within the next 12
months. This would likely stem from:
-- No risk of a distressed exchange, or any other form of debt
restructuring.
-- No imminent liquidity risk or risk of covenant breach without
waivers.
-- The majority of Codere's operations restarting and the company
generating free cash flows by July 2020.
-- An increased ability to refinance its 2021 maturing term debt
at par.
MULHACEN PTE: S&P Affirms 'B-' Issuer Credit Rating, Outlook Neg.
-----------------------------------------------------------------
S&P Global Ratings took various rating actions on Spanish banks.
-- S&P affirmed all its long- and short-term ratings.
-- S&P revised to negative from stable its outlook on Banco
Santander S.A. and its highly strategic subsidiary Santander
Consumer Finance S.A; on Banco de Sabadell S.A.; on Abanca
Corporación Bancaria S.A; and on Ibercaja Banco S.A.
-- S&P maintained its negative outlooks on Banco Bilbao Vizcaya
Argentaria S.A. and its core subsidiary BBVA Global Markets S.A.,
Bankinter S.A. and Mulhacen Pte Ltd.
-- S&P maintained its stable outlooks on Caixabank S.A., Bankia
S.A. and its holding company BFA Tenedora de Acciones S.A.U,
Cecabank S.A. and Caja Laboral Popular Cooperativa de Credito.
-- In a related action, S&P revised to negative from stable the
outlook on U.S-based Santander Bank NA, strategic subsidiary of
Banco Santander S.A., and its holding company Santander Holdings
USA, and on German Santander Consumer Bank AG, core subsidiary of
Santander Consumer Finance S.A. S&P affirmed the ratings on these
entities.
Kutxabank was the only Spanish bank not included in this review,
because S&P reviewed it separately on April 7, 2020. At that time
S&P affirmed its ratings on it and revised the outlook to stable
from positive.
Rationale
S&P's rating actions take into account the much more challenging
economic environment that Spanish banks will face over the next
couple of years, which has led us to revise our economic risk trend
to negative from stable.
Until the start of March, Spanish banks were fully engaged with the
same two key themes that have been paramount in recent
years--strengthening balance sheets and focusing on improving
returns amid relatively benign economic conditions, and identifying
how to refine business and operating models in the face of the
looming risks and opportunities of the digital era. For the short
term at least, the COVID-19 pandemic has changed (almost)
everything. In addition to the human cost, large parts of economic
activity in Spain have ground to a halt. With isolation strategies
still very much in force (Spain is heading for a two-month
lockdown) S&P's economists expect a sharp economic contraction in
the second quarter of 2020, followed by a rebound starting in the
third quarter. However, they are now more cautious on the strength
of recovery through end-2020 and into 2021, envisaging that GDP in
Spain will contract by 8.8% in 2020 and expand by 5.1% in 2021. It
will take time for some sectors that are relevant for the Spanish
economy, such as tourism, to recover, while the comparatively
higher share of temporary workers in Spain will probably lead to a
higher increase in numbers of unemployed compared to other
countries. Indeed, S&P is forecasting unemployment to increase to
16.4% by end-2020, up from 14.1% in 2019, and barely changing in
2021.
Authorities have delivered unprecedented policy responses in the
form of monetary, fiscal, and regulatory support to their
economies, and their measures will help to contain the damage, but
not to fully avoid it.
The Spanish private sector faces this economic shock with
significantly lower debt levels than in the past, the real estate
market shows no sign of imbalances, and banks have largely worked
out their legacy problematic assets from the previous recession,
although their remaining NPAs are still higher than those of other
European countries. S&P said, "Spanish banks are, in our view, well
positioned to play an instrumental role in channelling low cost
credit to affected households and businesses. However, while we
expect banks in Spain to remain fairly resilient in the face of
this cyclical shock, we expect that it will have a meaningful
impact on asset quality, revenues, profitability, and, potentially,
capitalization. We expect very few of these negative trends to be
strongly evident in Spanish banks' first-quarter results, but
consider that they would become increasingly evident through the
course of 2020 and persist into 2021. Bank asset quality will be
key to this outcome."
S&P said, "We are acutely mindful that this base case remains
subject to downside risks. Even under our economic base case, the
policy responses taken in Spain may be less than totally successful
in avoiding permanent economic damage later. And the situation may
indeed require additional fiscal measures to foster the recovery.
We note also that a significant component of the fiscal support
package comprises additional indebtedness--for the sovereign, some
households, and many businesses. At best, the easing of physical
isolation will not start for some weeks, is likely to be slow, and
could be subject to setbacks. The longer the delay in the recovery
of economic activity, the less sustainable this extra debt will be.
We have therefore revised to negative from stable the economic risk
trend that we see the Spanish banking system facing.
"Across the Spanish banking sector, we have affirmed our ratings on
banks in view of the resilience that we expect them to demonstrate
in the face of this cyclical event. But we have revised to negative
our outlooks on several banks, leaving only a minority on stable
outlook. Those that were already on negative outlook due to their
own bank-specific reasons remain on negative outlook, but the now
more difficult economic environment will certainly exacerbate their
pre-existing challenges.
"Negative outlooks tend to reflect the significant downside risks
that we see, and our expectation that we could lower our ratings on
one or several banks if the economic rebound is delayed or fiscal
countermeasures prove ineffective. We overlay this broad assessment
with our view of the idiosyncratic features of individual banks,
variously reflecting factors such as pre-existing positive and
negative rating pressures, their asset and funding profiles, and
our view of their potential to absorb setbacks within earnings and
so avoid significant capital depletion."
The minority of banks that remain on stable outlook generally have
stronger capital cushions to absorb the shock and should face a
more contained asset quality deterioration given their focus on
low-risk mortgage lending. In one specific case, progress in the
build-up of bail-inable debt helped stabilize the outlook despite
the downward pressure we see on the bank's stand-alone
creditworthiness.
Banco Santander S.A.
S&P said, "We affirmed our ratings on the bank because we think
that its strong earnings will allow it to cope with the likely
substantial increase of credit provisions ahead and remain
profitable. Capital erosion should therefore be limited,
particularly if earnings are retained as recommended by the
authorities. We, however, revised the outlook to negative to
reflect the unprecedented challenge the bank faces given that all
the markets where it operates are simultaneously entering into a
deep recession. This will test the value of its wide geographic
diversification and therefore its resilience. Furthermore, the
negative outlook factors in the uncertainty weighing on the global
macroeconomic environment, and the possibility of the evolution of
this crisis being even worse than currently expected.
"Santander Consumer Finance S.A. and Santander Consumer Bank AG
Similar to the rating action on its ultimate parent, Banco
Santander S.A., we affirmed the ratings on both and revised the
outlook to negative, indicating that the ratings on these two
subsidiaries, which incorporate group support, will move in tandem
with those on its parent."
Santander Bank NA and Santander Holdings USA
S&P said, "We affirmed our ratings on Santander Bank NA,
strategically important subsidiary of Banco Santander S.A., and its
holding company Santander Holdings USA and revised the outlook to
negative. Given the strategic importance for the group, the US
operations issuer credit ratings incorporate three notches of
uplift over its 'bbb-' group SACP. If we were to lower Banco
Santander's ratings, we would also lower Santander Bank NA and
SHUSA's ratings in tandem. The outlook also reflects the
possibility that we could lower SHUSA and Santander Bank NA's
ratings if we lowered the group SACP. We could do that if asset
quality worsens significantly, particularly in its large portfolio
of subprime auto loans, or if its funding profile, which is already
somewhat weaker than regional bank peers due to the consumer arm's
regular utilization of securitization markets to fund its loans,
becomes strained."
Banco Bilbao Vizcaya Argentaria S.A.
S&P said, "We affirmed our ratings on Banco Bilbao Vizcaya
Argentaria and maintained the negative outlook. With its key
markets of operations--Spain, Mexico, Turkey and the U.S.--facing
far more challenging economic conditions, downside risks to our
ratings on BBVA are growing. The bank's geographic diversification
will be less advantageous this time as a global downturn
approaches. We therefore expect to see a material decline in BBVA's
returns, stemming from much higher credit provisions and, to a
lesser extent, lower earnings. Its capital should remain
adequate--hence our affirmation--but there is little room to absorb
additional pressure if the bank underperforms compared to our
expectations or the economic environment becomes even more
challenging." Given the high uncertainty, this scenario cannot be
discounted. The emergence of meaningful findings from the ongoing
investigations into the alleged tapping of private communications,
which could bring into question BBVA's corporate governance, would
add to the downward ratings pressure.
Caixabank S.A.
S&P said, "We affirmed our ratings on Caixabank because we expect
the bank to preserve adequate capitalization, despite reporting
much weaker profits. Its large book of mortgages will help it to
somewhat weather asset quality pressures, but we still expect
credit provisions to jump significantly. Coupled with earnings
pressure, this will take a toll on bottom-line results. The outlook
is stable, but mainly because we see potential for the bank
benefiting of ALAC uplift as it progresses the build-up of its MREL
(minimum required eligible liabilities) buffer. This would balance
the negative pressure we see on its stand-alone creditworthiness,
as its capital position has little room to absorb a weaker
performance than the one we are contemplating, or a harsher
economic outlook (a more severe downturn in 2020, or a weaker or
delayed economic recovery in 2021)--plausible given the high degree
of uncertainty."
Cecabank S.A.
S&P said, "We affirmed our ratings on Cecabank and maintained the
stable outlook. While Cecabank's earnings will not be immune to the
sudden stop of economic activity in Spain and the financial markets
slump, its role as service provider rather than credit risk taker
makes its performance less exposed to the higher credit impairments
we expect for the Spanish banking industry as a whole. Cecabank's
bottom-line will remain subdued in 2020 and 2021, but we expect its
capitalization nevertheless to remain robust."
Bankinter S.A.
S&P said, "We affirmed our ratings on Bankinter S.A. and maintained
the negative outlook we assigned on Dec. 23, 2019 after the bank
announced the spin-off of its profitable, non-life insurance
company. The challenging economic environment ahead in Spain and
Portugal will render more difficult Bankinter's efforts to maintain
above-average profitability post the spin-off of Linea Directa
Aseguradora, which would help compensate for its lower scale and
more limited business and geographic diversification than peers. We
anticipate its capital will remain resilient, though."
Bankia S.A. and BFA Tenedora de Acciones S.A.U.
S&P said, "We affirmed our ratings on Bankia and its holding
company BFA Tenedora de Acciones S.A.U. and maintained the stable
outlook, because we believe that Bankia's current capital position
is large enough to ensure it remains adequately capitalized after
absorbing the negative effects of this economic shock. We expect,
however, in 2020 a meaningful reduction of Bankia's already feeble
bottom-line profitability, and only a mild recovery afterward. This
is even considering that the bank's higher mortgage bias, an asset
class that should prove more resilient, will protect it from a more
severe asset-quality deterioration."
Banco de Sabadell S.A.
S&P said, "We affirmed our ratings on Sabadell because our base
case is that, despite its profitability likely halving this year
due to weaker earnings and much higher credit costs, given its
higher weighting in lending to small and midsize companies, the
bank will generate enough profits to cope with new lending growth
and preserve its current capitalization. However, we revised our
outlook to negative because Sabadell's current capital position has
limited room to absorb a worse performance than the one we are
contemplating or a harsher downturn, or a weaker or further-delayed
economic recovery in either of the two main markets where it
operates--Spain and the U.K.--which is plausible given the high
degree of uncertainty."
Caja Laboral
S&P said, "We affirmed our ratings on Caja Laboral and maintained
the stable outlook. This is primarily because, despite the likely
hit to profits during this crisis, its capital should remain
strong. Given its primary focus on mortgage lending, we expect
Laboral's asset quality to remain more resilient than that of
others during the difficult times ahead. Still, credit provisions
will increase, which, combined with lower earnings, will push down
returns. The difficult economic environment will also slow the pace
of reduction of the remaining legacy stock of problematic assets
left over from the previous downturn."
Abanca Corporación Bancaria
S&P said, "We affirmed our ratings on Abanca because, despite
expecting a meaningful fall in recurrent bottom-line results this
year (we think it may decline by more than 50% and only recover
partially in 2021), its current capital base (factoring in the
ongoing acquisition of Portuguese Eurobic that the bank announced
in February this year) has some room to absorb this shock. We have,
however, revised our outlook to negative because the bank's
capitalization could be at risk if its performance proved weaker
than we expect, given that the bank does not have a strong earnings
base to cushion potentially higher credit losses. Capitalization
could also experience pressure if the economic environment worsens
further (if this year's shock is even more severe than expected or
the 2021 recovery is milder or delayed). The tougher environment
could also make more difficult the integration of Eurobic into the
group and the extraction of the economic value foreseen when the
acquisition was announced, as well as the synergies related to its
other two recent acquisitions."
Ibercaja Banco S.A.
S&P said, "We affirmed our ratings on Ibercaja because we expect
its capitalization not to weaken below our current moderate
assessment, despite the bank likely reporting minimal profits this
year and next amid very tough economic conditions. We have,
however, revised our outlook to negative because we anticipate that
the economic shock will exacerbate the bank's pre-exiting challenge
of ensuring that its smaller scale business model is sustainably
profitable over the medium term in an increasingly competitive and
digitally-transformed banking environment."
Mulhacen Pte. Ltd.
S&P said, "We affirmed our ratings on Mulhacen Pte. Ltd., the
holding company of credit card provider WiZink, S.A.U., and
maintained the negative outlook assigned on March 13, 2020, when we
also lowered the rating by two notches. The weaker environment
ahead meaningfully increases the existing pressures on Wizink's
business and financial profile, and, as result, its ability to
upstream dividends to its holding company. Wizink will not only
have to deal with the repricing down of its revolving credit card
portfolio and the potential increase of customer claims following
early March's unfavorable Spanish Supreme Court ruling on a
specific customer usury claim. Additionally, in this environment,
it will also face much higher credit costs and likely more-limited
new business, all of which could well lead the bank to post losses
this year. The bank's capacity to build-up capital will therefore
be constrained, although we still foresee its capital remaining
adequate. If Wizink's financial profile becomes more impaired than
we expect, or the 2020 economic downturn in Spain proves more
severe or the 2021 recovery milder or delayed, or the bank faces
funding challenges, our ratings on its parent company, Mulhacen,
will be under pressure."
BICRA Score Snapshot
To From
BICRA group 4 4
Economic risk 4 4
Economic resilience Intermediate risk Intermediate risk
Economic imbalances Intermediate risk Intermediate risk
Credit risk in the economy Intermediate risk Intermediate risk
Trend Negative Stable
Industry risk 4 4
Institutional framework Intermediate risk Intermediate risk
Competitive dynamics Intermediate risk Intermediate risk
Systemwide funding Intermediate risk Intermediate risk
Trend Stable Stable
Banking Industry Country Risk Assessment (BICRA) economic risk and
industry risk scores are on a scale from 1 (lowest risk) to 10
(highest risk).
Ratings List
Abanca Corporacion Bancaria S.A
Ratings Affirmed; Outlook Action
To From
Abanca Corporacion Bancaria S.A
Issuer Credit Rating BB+/Negative/B BB+/Stable/B
BFA Tenedora de Acciones, S.A.U.
Ratings Affirmed
BFA Tenedora de Acciones, S.A.U.
Issuer Credit Rating BBB-/Stable/A-3
Bankia S.A.
Issuer Credit Rating BBB/Stable/A-2
Banco Bilbao Vizcaya Argentaria S.A.
Ratings Affirmed
Banco Bilbao Vizcaya Argentaria S.A.
BBVA Global Markets B.V.
Issuer Credit Rating A-/Negative/A-2
Banco Santander S.A.
Ratings Affirmed; Outlook Action
To From
Banco Santander S.A.
Issuer Credit Rating A/Negative/A-1 A/Stable/A-1
Santander Consumer Bank AG
Santander Bank, N.A.
Santander Consumer Finance S.A.
Issuer Credit Rating A-/Negative/A-2 A-/Stable/A-2
Santander Holdings U.S.A Inc.
Issuer Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2
Banco de Sabadell S.A.
Ratings Affirmed; Outlook Action
To From
Banco de Sabadell S.A.
Issuer Credit Rating BBB/Negative/A-2 BBB/Stable/A-2
Bankinter S.A.
Ratings Affirmed
Bankinter S.A.
Issuer Credit Rating BBB+/Negative/A-2
CaixaBank S.A.
Ratings Affirmed
CaixaBank S.A.
Issuer Credit Rating BBB+/Stable/A-2
Caja Laboral Popular Cooperativa de Credito
Ratings Affirmed
Caja Laboral Popular Cooperativa de Credito
Issuer Credit Rating BBB/Stable/A-2
Caja de Ahorros y Monte de Piedad de Zaragoza Aragon y Rioja
IBERCAJA)
Ratings Affirmed; Outlook Action
To From
Ibercaja Banco S.A.
Issuer Credit Rating BB+/Negative/B BB+/Stable/B
Cecabank S.A.
Ratings Affirmed
Cecabank S.A.
Issuer Credit Rating BBB+/Stable/A-2
Mulhacen Pte. Ltd.
Ratings Affirmed
Mulhacen Pte. Ltd.
Issuer Credit Rating B-/Negative/B
===========
S W E D E N
===========
QUIMPER AB: S&P Alters Outlook to Negative & Affirms 'B' ICR
------------------------------------------------------------
S&P Global Ratings revised its outlook on Quimper AB, Ahlsell's
intermediate parent, to negative from stable, and affirmed its 'B'
long-term issuer credit rating.
S&P said, "Macroeconomic data indicates a GDP contraction in the
Nordic region. We expect GDP in the eurozone to shrink by 7.3% this
year before rebounding by 5.6%. More specifically for the Nordic
region, we expect GDP to decline in 2020 by 6.4%, 6.2%, and 6.0% in
Sweden, Norway, and Finland, respectively. We also anticipate
consumer price inflation growth to slow in the region.
"We expect lower demand in Ahlsell's end-markets due to the
pandemic's impact in the next 12 months. Lockdowns have been less
severe in the Nordics than in continental Europe and have had a
limited immediate impact on Ahlsell's operations so far. That said,
we believe Ahlsell will face weaker demand for materials products
and services in the coming quarters as business confidence
deteriorates. The latest results already indicate a slowdown in
sales, especially in Norway where Ahlsell's operations are affected
by the lower oil price. In our base case, we assume the contraction
in sales will not exceed mid-to-high single digits for this year.
"Rating headroom was limited in 2019. Our adjusted debt-to-EBITDA
ratio for Ahlsell was about 6.8x at end-2019, which is higher than
for most 'B' rated peers in the building materials sector. This
compares with our trigger for a downgrade of 7.0x. Early this year,
Ahlsell communicated a potential debt repayment, but we understand
that this has been postponed as a result of the COVID-19 pandemic.
We believe leverage could temporarily exceed 7.0x in 2020.
"We anticipate operating margins will remain at 10%-11%. The
majority of costs comprise personnel expenses, which the company
has been able to adapt in the past. Although the company
implemented a cost savings program in 2019, we believe the benefits
could be partly offset by the impact of the pandemic. For the first
quarter of 2020, our adjusted margin for Ahlsell was slightly lower
than last year, owing to increased transport costs and exchange
rate losses on accounts payables.
"Likely solid free operating cash flow (FOCF) should mitigate the
high leverage to some extent. We still forecast robust and positive
FOCF in 2020 of over SEK300 million after lease payments. Ahlsell
has implemented measures to protect cash flows, such as reducing
capital expenditure (capex), and postponing payment of value-added
tax and social security costs. Solid FOCF remains a positive rating
factor for Ahlsell.
"We acknowledge 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 indicates risks that the economic impact from
COVID-19 could be more pronounced than in our base case, leading to
a further weakening of Ahlsell's credit metrics and cash flows.
"We could lower the rating if Ahlsell's EBITDA and margin decline
in the next 12 months were more severe than our forecasts, or if
FOCF deteriorated significantly. Under this scenario, adjusted debt
to EBITDA would remain above 7.0x. We could also consider a
downgrade if the company's liquidity were to weaken.
"We could revise the outlook to stable if we observed a very
limited impact from COVID-19 on Ahlsell's performance, and the
company continued to generate solid FOCF in the next 12 months,
alongside adequate liquidity."
===========
T U R K E Y
===========
RONESANS GAYRIMENKUL: Fitch Cuts IDR to B+, On Watch Negative
-------------------------------------------------------------
Fitch Ratings has downgraded Turkish property company Ronesans
Gayrimenkul Yatirim A.S.'s Long-Term Issuer Default Rating and
senior unsecured rating to 'B+' from 'BB-'. The ratings have been
put on Rating Watch Negative.
The downgrade reflects the revenue impact from the closure of RGY's
shopping centres to help contain the coronavirus, combined with
material foreign-currency risk. Nearly all company debt is
denominated in euros or the US dollar, but a government decree
currently prohibits RGY from indexing leases to foreign currencies.
Despite hedging about one quarter of its debt, exposure to the
volatile Turkish lira remains material. These factors are
significant obstacles to the company's plans to reduce leverage.
RGY's liquidity is sufficient to cover short-term financial
obligations, even with a Fitch-assumed three-month lockdown.
Fitch expects to resolve the RWN when Fitch has more visibility on
the length and financial effects of the lockdown. The impact of the
continuing lira depreciation on RGY's debt will also be important.
Fitch will focus on the speed that tenant sales and rents recover,
compliance with upcoming secured debt covenants (measured in
September 2020), as well as measures taken to refinance debt in
2021.
KEY RATING DRIVERS
Coronavirus Mall Closures: Since 20 March 2020, shopping centres
across Turkey were closed to help slow the spread of coronavirus.
RGY has since collected no rent, apart from a small office
portfolio that generates around 9% of rent, as well as essential
businesses such as grocery stores and pharmacies. Retail markets in
2019 had already been affected by a weak economy and volatile lira
in 2018 and 2019, which compelled RGY to increase incentives to
help alleviate the financial stress on its tenants. The ability of
shopping centres to bounce back once the lockdown is eased is
unclear, but favourable demographics - including a young, growing,
urban population - and e-commerce penetration of under 5% will
help.
Significant Foreign-Exchange Risk: The Turkish lira has been highly
volatile over the past few years. Consequently, in October 2018,
the government temporarily banned domestic companies from indexing
or denominating contracts in foreign currencies. This forced RGY to
delink its leases from the euro, eliminating its hedge against the
falling lira. The decree is scheduled to end in October 2020, but
given the negative economic effects of the coronavirus, the decree
may be extended. The lira has depreciated more than 12% against the
euro so far in 2020
Deleveraging Plans Delayed: Lira depreciation, as well as a fall in
rental income due to COVID-19, will hinder RGY's plans to reduce
leverage, which was high owing to significant development spend.
Fitch calculated proportionally consolidated net debt/EBITDA was
11.3x at end-2019, which it forecasts to increase to 12.9x in 2020
then de-leveraging towards 11x by 2022. Although RGY has liquidity
to service its short-term debt, continued lira deterioration will
put pressure on cash-flow leverage, even after rental income
recovers.
Refinancing Risk: RGY faces refinancing risk in 2021, when around
TRY1.8 billion of debt matures. Nevertheless, 33% of this comprises
secured debt with Optimum Adana SPV, a performing asset with a
long-term partner, while 41% is related to a loan in a JV with GIC
that owns 21% of RGY. The refinancing risk of these loans is viewed
by Fitch as low.
Challenged Tenant Base: With a focus on destination shopping
centres, RGY has a good cross-section of domestic and international
tenants across multiple retail sectors. Retail tenants, however,
were already under pressure owing to a weak economy and lira, but
the cessation of most sales will exacerbate many tenants' financial
troubles. The ability of weakened tenants to pay rent once malls
re-open will vary, but vacancies from failed tenants may be hard to
fill or will require significant discounts and incentives,
hindering a return to normal rent levels.
Developments and Acquisitions Complete: RGY has completed its
significant development pipeline. In October 2019, RGY opened its
63,000 sqm Karsiyaka Hilltown shopping centre (with a value of
TRY1.89 billion/EUR252 million) in Izmir, Turkey's third-largest
city. Opening occupancy was 95% with strong footfall. No new
developments are planned. Fitch also does not expect any
acquisitions as RGY completed buying out its JVs in 2019, apart
from those with its part-shareholder GIC, which are expected to
remain in place. The lack of committed capex, acquisitions, as well
as no planned dividends, will help RGY sustain cash flows through
the difficult 2020.
Growing, but Concentrated Portfolio: RGY's portfolio now comprises
12, mostly destination, shopping centres and two offices totaling
EUR2.2 billion in value (end-December 2019, at share). Although the
assets are located across the largest urban areas of Turkey, with a
focus on Istanbul (the largest city with a population of more than
14 million) the low asset number means suggests asset
concentration. There is, however, no single key asset and occupancy
is healthy at more than 95%.
Shareholder Agreement Limits Parent Influence: Group holding
company Ronesans Emlak Gelistirme Holding and Singapore's GIC have
entered into a shareholder agreement that sufficiently ring-fences
RGY from its parent companies to allow Fitch to assess RGY on a
standalone basis. Both key shareholders must provide consent for
all major decisions, including dividends. RGY retains separate
financing with no cross-defaults or guarantees to the wider holding
group.
DERIVATION SUMMARY
RGY's portfolio, valued at EUR2.2 billion at share, is of similar
size to that of IGD SIIQ S.p.A. (BBB-/RWN) based in Italy, and of
Atrium European Real Estate Limited (BBB/Stable) based in Poland
and the Czech Republic. All three companies mainly operate retail
portfolios, with Atrium's encompassing a range of countries across
eastern Europe. RGY and IGD almost entirely operate in their home
countries.
IGD's business model is based on non-prime, convenience-led
shopping malls, while Atrium and RGY primarily operate destination
malls. This has meant IGD, which has a high percentage of
"essential" retailers that remain open during the coronavirus
lockdowns, continues to receive a higher percentage of rent than
most rated EMEA retail property companies. Most of RGY's and
Atrium's assets remain closed with RGY's rent from "essential"
grocery stores and pharmacies comprising only around 10%.
The key differentiation between RGY and IGD and Atrium is
jurisdiction. RGY operates entirely within Turkey, which has seen
high economic and political volatility over the past few years,
including a coup attempt in June 2017. While this has negatively
affected retail markets, the related lira currency volatility has
been onerous for RGY as nearly all of its debt is denominated in
foreign currencies. Most of the real estate companies based in
eastern European index their leases to euros or dollars to match
their capital structure, which RGY also previously did until the
Turkish government decree. The decree in October 2018 prohibits RGY
(and other companies based in Turkey) from linking contracts to
foreign currencies. The decree is intended to last two years, but
may be extended, particularly given the poor state of the
COVID-19-affected economy. This exposure to a volatile currency and
economy is the key differentiation between the ratings of developed
market and CEE peers.
KEY ASSUMPTIONS
2020 Rental Income: For retail property companies, Fitch is
modelling a standard 25% loss of rental income, representing April
to June 2020. It reduced this to 22% for RGY to reflect its
exposures to office and to essential services (supermarkets,
pharmacies).
In subsequent years, rental income may be lower because of several
factors including (i) the weak resilience of the tenant mix - those
who may recover some or have permanently lost sales; (ii) retailers
that are vulnerable to insolvency; (iii) property companies with
high exposure to lease expires in 2021 and 2022 may see lower rents
reflecting weaker market conditions; and (iv) retail portfolios
with a high occupation cost ratio and high rents that are more
vulnerable to the weaker retailer environment.
For RGY, Fitch has assumed around 5.5% lower rents in 2021 compared
with its unaffected 2019 rent. For forecasting purposes, Fitch
assumes that RGY is able to pass on the effect of lira depreciation
on to its tenants in 2021.
Dividends: Many companies have announced the cancellation of the
latest (quarterly) dividend payment. These conserves cash. Fitch
does not expect RGY to pay a dividend from 2020-2023.
Capex: For liquidity and practical purposes, most property
companies' capex has been, or will be, curtailed and development
projects deferred. RGY has completed all of its developments and
Fitch therefore expects minimal capex from 2020-2023, mainly for
maintenance.
Disposals/Acquisitions: Fitch expects the disposal of RGY's land
bank to generate around TRY370 million from 2021-203. No
acquisitions are expected
Recovery Assumptions
Fitch uses a liquidation approach as Fitch believes creditors are
likely to maximise their recoveries by selling RGY's investment
properties. These assets have been haircut by 45% to reflect its
expectation of the declines in value under liquidation. Fitch has
excluded the group's secured debt and related pledged assets from
this senior unsecured debt recovery analysis to reflect the control
that secured creditors have (i) to capture the assets' cashflows;
and (ii) over the potential monetisation process; and its
assumption that secured creditors will recover their debt principal
from the sale of their bespoke secured assets.
Although this recovery estimate generates above-average recoveries
for unsecured creditors, recoveries for corporate entities in
Turkey are capped at 'RR4' under Fitch's Country-Specific Recovery
Criteria.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Greater visibility over, and improvement in, RGY's liquidity
position as well as headroom against secured debt covenants given
the adverse effects of lower rental income receipts due to COVID-19
and a further depreciation of the Turkish lira
- Fitch does not expect to upgrade RGY's ratings until economic
conditions in Turkey have stabilised and the company has addressed
the lack of an effective and sustainable means of hedging the
Turkish lira relative to its euro-denominated debt
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Further weakening of Turkish economic conditions and/or a
significant short-term depreciation in the Turkish lira
- Loan-to-value (Fitch defined, proportionally consolidated)
greater than 60% over a sustained period and reduced headroom in
secured debt financing covenants leading to a breach of covenants
- Net debt/EBITDA over 12x over a sustained period
- Failure to address 2021 refinancing risk at least 12 months
ahead of these debt maturities, including clarifying the expected
currency, interest rate and tenor of refinanced debt
BEST/WORST CASE RATING SCENARIO
International scale credit 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
Sufficient Liquidity: At end-2019, RGY had available cash of TRY332
million (EUR49.8 million). This has been further supported by a
recent seven-year TRY270 million (EUR40.5 million) loan. As at
end-February 2020, RGY had available cash of EUR112million. This is
sufficient to cover its EUR50 million loan amortisations in 2020.
The company has no committed capex, and will finance the remaining
EUR5 million of capex on Karsiyaka Hilltown with the asset's
related project-finance debt. All euros-to- Turkish lira
translations have used the end-2019 TRY/EUR exchange rate of
6.665.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
ESG CONSIDERATIONS
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 to the way in which they are being managed by the
entity(ies).
=============
U K R A I N E
=============
[*] Fitch Alters Outlook on 7 Ukranian Banks to Stable
------------------------------------------------------
Fitch Ratings has revised the Outlooks on seven Ukrainian banks to
Stable from Positive and affirmed their Long-Term Issuer Default
Ratings.
The affected banks are:
- JSC State Savings Bank of Ukraine (Oschad);
- JSC The State Export-Import Bank of Ukraine (Ukrexim);
- JSC CB Privatbank (Privat);
- Public Joint-Stock Company Joint Stock Bank Ukrgasbank (UGB);
- PJSC Credit Agricole Bank (CAB);
- Procredit Bank (Ukraine) (PCBU);
- Pravex-Bank JSC (Pravex).
Fitch has also revised the Outlook on Joint Stock Company First
Ukrainian International Bank's Long-Term IDR to Negative from
Stable and affirmed the IDR at 'B'.
The rating actions follow Fitch's revision of the Outlook on
Ukraine's sovereign rating to Stable from Positive in light of the
anticipated adverse impacts of the COVID-19 pandemic. Fitch expects
the Ukrainian economy to contract by 6.5% GDP in 2020, compared
with 3.2% growth in 2019, before recovering by 3.5% in 2021. The
economic policy response, including increased social spending and
the formation of a coronavirus fund (1.6% of GDP), could help to
soften the economic shock. However, there are material downside
risks to its baseline forecasts, given the uncertainty around the
extent and duration of the coronavirus crisis.
Fitch has revised the sector outlook for Ukrainian banks to
negative from stable as Fitch expects that the economic downturn,
weaker client activity, lower household incomes (due to higher
unemployment and lower remittances) and exchange-rate pressures
(the hryvnia has depreciated by 11% since the beginning of March,
while Fitch forecasts depreciation of 25% for FY20) will increase
performance pressures for banks. Fitch expects that provision of
additional liquidity to banks, as announced by the central bank,
and temporary regulatory forbearance should help banks manage
problem loans and solvency ratios in local accounts, reducing the
risk of capital breaches. However, Fitch believes that the risks to
banks' credit profiles have significantly increased.
The Stable Outlooks on the IDRs of seven banks are in line with
that on Ukraine's sovereign and capture the potential support from
their respective state (Oschad, Ukrexim, Privat, UGB) or foreign
shareholders (CAB, PCBU, Pravex) and Fitch's perception of
Ukraine's country risks. FUIB's IDR is driven by its standalone
creditworthiness, as reflected by its 'b' Viability Rating, and the
Negative Outlook reflects Fitch's expectation of the near-term
pressures on the bank's financial profile due to the economic
shock.
KEY RATING DRIVERS
State-Owned Banks
IDRS, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The affirmations of the Long-Term IDRs, Support Ratings and Support
Rating Floors of Oschad, Ukrexim, Privat and UGB reflect Fitch's
view of potential support these banks could receive from the
sovereign, if required. The revision of the Outlooks to Stable
mirrors the Outlook on the sovereign. Privat's IDRs remain driven
by potential sovereign support, although these are also in line
with the bank's 'b' VR.
The propensity of the Ukrainian authorities to provide support to
the state-owned banks remains high, in Fitch's view, taking into
account their 100%-state ownership (95% for UGB), high systemic
importance (greater for Privat and Oschad, given their 33% and 19%
market shares in retail deposits, respectively), the record of
capital support provided under different governments (Oschad,
Ukrexim), post-nationalisation equity support to Privat, and the
small cost of potential support to UGB due its moderate size.
However, the ability of the authorities to provide support is
limited, in particular in foreign currency, as indicated by
Ukraine's 'B' Long-Term Foreign-Currency IDR.
Fitch views Privat's state ownership as non-strategic as it
resulted from a state-led rescue, rather than policy objectives,
and the authorities plan to dispose of a controlling stake in the
bank, potentially via an IPO, in the medium term. However, Privat's
very high systemic importance would still result in a strong
incentive to provide support, even after the planned privatisation,
in its view.
The senior unsecured debt ratings of Oschad and Ukrexim, issued by
UK-registered SSB No.1 PLC and BIZ Finance PLC, respectively, are
aligned with the banks' Long-Term Foreign-Currency IDRs due to
average recovery expectations as captured by the Recovery Ratings
at 'RR4'.
The affirmation of all four banks' National Ratings at 'AA(ukr)'
with the Stable Outlooks reflects their unchanged creditworthiness
relative to peers within Ukraine.
Foreign-Owned Banks
IDRS, SUPPORT RATINGS AND NATIONAL RATINGS
CAB, PCBU and Pravex's Long-Term Foreign-Currency IDRs of 'B' and
Support Ratings of '4' reflect the limited extent to which
institutional support from their foreign shareholders can be
factored into the ratings, as captured by Ukraine's Country Ceiling
of 'B'. The Country Ceiling reflects Fitch's view of transfer and
convertibility risks in Ukraine.
The 'B+' Long-Term Local-Currency IDRs of CAB, PCBU and Pravex, one
notch above their Long-Term Foreign-Currency IDRs and the sovereign
rating, take into account the slightly lower potential impact of
Ukrainian country risks on the issuers' ability to service senior
unsecured obligations in the local currency, hryvnia, than in
foreign currency.
The Stable Outlooks on all three banks' IDRs are in line with that
on the Ukraine sovereign.
CAB is fully owned by Credit Agricole S.A. (A+/Negative). PCBU is
fully owned by Germany's ProCredit Holding AG & Co. KGaA
(BBB/Stable). Pravex is fully owned by Intesa Sanpaolo S.p.A.
(BBB/Negative).
The 'AAA(ukr)' National Ratings of CAB and PCBU are driven by
potential shareholder support and reflect the banks' status as two
of the highest rated local issuers. The 'AA+(ukr)' National Rating
of Pravex reflects its unchanged creditworthiness relative to
peers.
FUIB
IDRS, VR, NATIONAL RATING, SUPPORT RATING AND SUPPORT RATING FLOOR
Unless noted below, the key rating drivers for FUIB are those
outlined in its Rating Action Commentary published in November 2019
('Fitch Rates First Ukrainian International Bank 'B'; Outlook
Stable').
FUIB's Long-Term IDRs are driven by its 'b' VR, and the Negative
Outlook reflects its expectation of increased pressure on the
bank's financial profile in the currently challenging operating
environment. FUIB's asset quality is a rating weakness and Fitch
expects Ukrainian borrower profiles to deteriorate, adding to
FUIB's already high level of impairment (21% of loans at end-2019).
Fitch expects FUIB's currently solid profitability (operating
profit/risk-weighted assets ratio of 7.8% in 2019) to weaken due to
slow growth, reduced client activity and higher impairment charges.
While the bank built-up capital buffers in 2018-2019 (the Fitch
Core Capital ratio was a solid 22% at end-2019), Fitch expects
these to come under pressure due to weaker internal capital
generation and the currency depreciation-driven rise in
risk-weighted assets.
Fitch assesses that the bank can sustain moderate liquidity
pressures, given its reasonable cushion of highly liquid assets.
Cash and short-term interbank placements were equal to 23% of
deposits at end-2019, with government securities eligible for
refinancing for hryvnia with the central bank equal to another 21%.
Customer accounts, which accounted for 92% of liabilities, have
been sticky to date.
The revision of the Outlook on FUIB's 'AA-(ukr)' National Rating to
Negative from Stable mirrors the rating action on the bank's IDR
and reflects FUIB's creditworthiness relative to Ukrainian peers.
FUIB's Support Rating of '5' and Support Rating Floor (SRF) of 'No
Floor' reflect the bank's limited market shares and systemic
importance, as a result of which extraordinary support from the
Ukrainian authorities cannot be relied upon, in Fitch's view.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- The IDRs, National Ratings, debt ratings and SRFs of Oschad,
Ukrexim, Privat and UGB are primarily sensitive to changes in the
sovereign ratings. A downgrade of the sovereign could result in a
downgrade of the banks' ratings.
- The IDRs of CAB, PCBU and Pravex are likely to be downgraded if
Ukraine's sovereign ratings are downgraded and the Country Ceiling
is revised down.
- FUIB's ratings are most sensitive to the severity and duration
of Ukraine's economic downturn that results from the coronavirus
pandemic. The Negative Outlook on FUIB indicates that Fitch would
likely downgrade the bank's ratings if the sharp economic
adjustment and a delayed recovery in Ukraine's economy results in
sustained deterioration of asset quality and earnings, resulting in
weaker solvency.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- The IDRs, National Ratings, debt ratings and SRFs of Oschad,
Ukrexim, Privat and UGB could be upgraded in case of a sovereign
upgrade.
- The IDRs of CAB, PCBU and Pravex could be upgraded if the
sovereign ratings are upgraded and the Country Ceiling is revised
upwards.
- The Negative Outlook on FUIB could be revised back to Stable if
the coronavirus pandemic is short-lived, Ukraine's economy recovers
as expected and the bank is able to maintain reasonable financial
metrics.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions
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.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings of Oschad, Ukrexim, Privat and UGB are driven by
potential support from the sovereign. The ratings of CAB, PCBU and
Pravex are driven by potential support from their foreign
shareholders.
ESG CONSIDERATIONS
Oschad's and Ukrexim's ESG Governance Structure scores are at '4'
due to their significant linkages with the state authorities based
on ownership, large holdings of sovereign bonds and lending to
public sector entities.
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).
PJSC Credit Agricole Bank
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B+ Affirmed
- LC ST IDR B Affirmed
- Natl LT AAA(ukr) Affirmed
- Support 4 Affirmed
ProCredit Bank (Ukraine)
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B+ Affirmed
- LC ST IDR B Affirmed
- Natl LT AAA(ukr) Affirmed
- Support 4 Affirmed
JSC State Savings Bank of Ukraine (Oschadbank)
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B Affirmed
- Natl LT AA(ukr) Affirmed
- Support 4 Affirmed
- Support Floor B Affirmed
JSC CB PRIVATBANK
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B Affirmed
- Natl LT AA(ukr) Affirmed
- Support 4 Affirmed
- Support Floor B Affirmed
PRAVEX-BANK JSC
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B+ Affirmed
- Natl LT AA+(ukr) Affirmed
- Support 4 Affirmed
SSB No.1 PLC
- Senior unsecured; LT B Affirmed
JOINT STOCK COMPANY FIRST UKRAINIAN INTERNATIONAL BANK
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B Affirmed
- LC ST IDR B Affirmed
- Natl LT AA-(ukr) Affirmed
- Viability b Affirmed
- Support 5 Affirmed
- Support Floor NF Affirmed
Public Joint-Stock Company Joint Stock Bank Ukrgasbank
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B Affirmed
- LC ST IDR B Affirmed
- Natl LT AA(ukr) Affirmed
- Support 4 Affirmed
- Support Floor B Affirmed
Biz Finance PLC
- Senior unsecured; LT B Affirmed
JSC The State Export-Import Bank of Ukraine (Ukreximbank)
- LT IDR B Affirmed
- ST IDR B Affirmed
- LC LT IDR B Affirmed
- Natl LT AA(ukr) Affirmed
- Support 4 Affirmed
- Support Floor B Affirmed
===========================
U N I T E D K I N G D O M
===========================
CAPITAL HOSPITALS: S&P Lowers Senior Secured Debt SPUR to 'BB+'
---------------------------------------------------------------
S&P Global Ratings lowered the S&P Underlying Ratings (SPURs) on
the senior secured debt issued by Capital Hospitals (Issuer) PLC to
'BB+' from 'BBB-'. The outlook on the SPURs is stable and reflects
operational performance and improved interaction between the
project's parties.
The insured 'AA' ratings on the A1 loan and A2 bonds continue to
reflect the rating on the monoline insurer, Assured Guaranty
(Europe) PLC (AGE; AA/Stable/--), while the ratings on the B1 loan
and B2 bonds insured by monoline insurer Ambac Assurance U.K. Ltd.
(not rated) continue to reflect the SPUR.
S&P is assigning a recovery rating of '2' to the B1 loan and B2
bonds, indicating its expectation of substantial recovery (70%)
post default.
Capital Hospitals (Issuer) PLC is a special-purpose vehicle that
issued GBP1.27 billion of senior secured debt and on-lent the
proceeds to Capital Hospitals Ltd. (CHL or ProjectCo) in 2006. CHL
used the funds to design, construct, and refurbish two inner-London
hospitals: the 956-bed Royal London Hospital (RLH) and the 372-bed
St. Bartholomew's Hospital (Barts). With construction capital
expenditure (capex) of GBP1.1 billion, this is the largest-ever
health care private finance initiative (PFI) project in the U.K.
CHL operates under a 42-year availability-based project agreement
with Barts Health NHS Trust (the Trust), which expires in April
2048.
Skanska JV (comprising Skanska Major Projects Ltd. and Skanska
Rashleigh Weatherfoil Ltd.) completed construction in March 2016.
The project has been receiving availability-based revenues from the
Trust. The project subcontracts hard facilities management (FM)
services, which are provided to Skanska Facilities Services (SFS).
STRENGTHS
The availability-based payment mechanism underpins stable and
predictable cash flows.
Other than the recent increase in the lifecycle costs, the
project's operational history has been stable, with low
performance- or unavailability-related deductions and a
constructive relationship with the Trust.
RISKS
The project is exposed to capital-replacement cost uncertainty
associated with the retained estate over a 30-year period.
The project has relatively higher operating risks compared with
other PFI hospitals, due to the specialized nature of the services
provided by the Trust (trauma and A&E in RLH, cancer and cardiac in
Barts), and the large size and high occupancy of the hospitals
given their location in densely populated central London.
Following a review of its asset base, Capital Hospitals (Issuer)
PLC now expects to spend more on major maintenance (lifecycle) over
the term of the rated debt than it assumed following the previous
lifecycle review in 2015.
S&P assesses the retention of lifecycle risk to be a key risk
factor in hospital PFI projects, because these projects are
generally highly leveraged and have limited scope for cost
increases without eroding their credit metrics. In most cases,
where rated projects have revised their long-term lifecycle
budgets, the projections generally show an overall decrease in
costs over the term of the concession. This is often the result of
initial estimates having been conservative to begin with, or the
assets holding up better than expected over time. This project is
an unusual case, because an upward revision of this magnitude
occurs infrequently.
From March 2020 to March 2048, the revision has caused an increase
in expected expenditure of about 9% compared with previous
forecasts. It reflects validations surveys carried out to ensure
that assets built and brought up to condition by the Trust, prior
to being transferred to the project, were appropriately reflected
in the project's long-term budgets.
S&P said, “We have reflected the revised lifecycle projection in
our base case and now assess the preliminary stand-alone credit
profile (SACP) as 'b+'. We make a two-notch positive adjustment for
the resilience of the project under our downside scenario and a
one-notch positive adjustment for the average annual debt service
coverage ratio (ADSCR), resulting in an operations phase SACP of
'bb+'.
"Due to prior errors in the application of our Project Finance
Framework Methodology, we included in our assessment of cash flow
available for debt service (CFADS) releases from the project's
change in law reserve and major maintenance reserve without
assuming associated costs in certain periods. According to our
methodology, CFADS is calculated strictly as operating revenues
less operating and maintenance expenses, and excludes any cash
balances that a project could draw on to service debt. We have now
corrected these errors."
The stable outlook on the long-term issue ratings on the A1 and A2
debt reflects the outlook on the rating of the monoline insurer,
AGE, and will follow the outlook and rating on AGE.
The stable outlooks on the SPUR and the issue ratings on the B1 and
B2 debt reflect that we expect CHL's focused operational
performance and improved relationships between the project's
parties to support stable cash flows, maintaining the average ADSCR
above 1.10x under our base-case scenario.
S&P said, "While we expect the current lifecycle budget to
adequately cover the project's needs, we could lower the SPUR if we
expected materially higher costs that would lead the average ADSCR
under our base case to fall below 1.10x. We could also lower the
SPUR if, under our downside scenario, we expected operating cash
flow, in combination with the contractually required liquidity
reserves, to be unable to support debt service payments for at
least five years if needed, without being depleted.
"We could also take a negative rating action if the Trust applies
increased levels of deductions, awards warning notices, or takes
any steps under the project agreement that demonstrate a higher
risk of termination.
"We consider a positive rating action to be unlikely at present, as
this would require a material improvement in our projected ADSCRs.
We do not expect to revise our assumptions to lead to such an
increase."
CINEWORLD GROUP: S&P Downgrades ICR to 'CCC+', On Watch Negative
----------------------------------------------------------------
S&P Global Ratings lowered its long-term issuer credit rating on
U.K.-based Cineworld Group PLC and the issue ratings on its debt to
'CCC+' from 'B'. The ratings remain on CreditWatch with negative
implications.
S&P assesses Cineworld's liquidity as weak.
Cineworld's cinemas globally have remained shut since mid-March
2020 due to the COVID-19 pandemic, and we believe they might start
reopening only around the middle of summer 2020. The extent to
which the cinemas reopen will depend on the pace of the lockdown
restrictions and social-distancing measures lifting in the
different countries where Cineworld operates, as well as on the
schedule of film releases by major studios. Until the cinemas
reopen, Cineworld's EBITDA and free operating cash flow (FOCF) will
be negative, as the group will not generate revenue, but will
continue to burn cash as it will cover minimum operating costs and
fixed charges, including interest and amortization of its senior
secured debt.
S&P said, "Even incorporating the significant cost savings that
Cineworld has achieved over the past two months by reducing its
payroll, rent, and capital spending, we expect that its current
available liquidity sources will only last to the middle of summer
2020. We estimate that while cinemas are closed, the group has a
cash-burn rate of around $50 million per month. We also estimate
that as of the end of April 2020, Cineworld has $150 million-$200
million of available liquidity, including cash on the balance sheet
and the undrawn portion of its $463 million senior secured
revolving credit facility (RCF).
"The springing covenant on the RCF, tested semiannually when 35% of
the RCF is utilized, is now in effect, and we estimate that
Cineworld's net leverage will significantly exceed the maximum 5.5x
covenant ratio at the next test in June 2020 and the following test
in December 2020. In our base case, we continue to assume that
Cineworld could succeed in negotiating a waiver and/or a reset of
the covenant thresholds, at least for the rest of 2020, due to the
extraordinary nature of the COVID-19 pandemic and the group's
previous good standing in the credit markets and its good
relationships with its lenders. We also think that Cineworld could
pursue additional liquidity financing from its lenders or seek
government support, but the timing and extent of such support
remain unclear.
"In our base case, we do not expect Cineworld to face a near-term
liquidity crisis. However, if Cineworld's cinemas remain closed for
longer that we expect, or if, in the third and fourth quarters of
2020, the group operates at significantly reduced capacity compared
with our base case, its liquidity position could remain very
vulnerable even if it secured additional financing and obtained a
covenant waiver.
"There is a high level of uncertainty around Cineworld's business
conditions and the recovery of its operations beyond the middle of
summer 2020. Our base case is for the COVID-19 pandemic to peak
in June–August 2020, in line with some government authorities'
estimates. Based on this, we assume that the lockdowns could last
for about eight weeks in total, on average, and will be gradually
lifted thereafter, but the pace of lifting will differ between
countries and regions and will depend on decisions by national and
local governments. We also assume that social-distancing measures
will stay in place until a vaccine or effective treatment is found,
perhaps by mid-2021. Therefore we think that Cineworld will start
reopening its cinemas in around July 2020, but at reduced capacity,
despite the pent-up demand for out-of-home entertainment and a
strong slate of film releases. We also think health and safety
concerns might affect consumers' willingness to attend cinemas,
despite the social-distancing measures and enhanced sanitary
measures that we think cinemas will implement."
Whether cinemas can resume operations will also depend on the
availability and timing of film releases that are largely under the
control of major film studios. Since March 2020, studios have
pushed numerous blockbuster releases to the second half of 2020 and
to 2021 due to the closure of cinemas globally. The first major
films due to premiere this summer are Christopher Nolan's "Tenet"
by Warner Bros. Entertainment Inc. and "Mulan" by The Walt Disney
Co., currently scheduled for release on July 17, and July 24,
respectively. S&P thinks that in the coming months, the studios
will evaluate the potential for cinemas to reopen at scale in July
2020, and we see a risk they could choose to delay the releases
further. The film slate for the rest of 2020 and early 2021 looks
very strong and includes "Wonder Woman 1984" due out in August
2020, and "Black Widow" and a new film in the Bond franchise, "No
Time To Die", in November 2020, which should support cinema
admissions.
S&P said, "We forecast only a gradual ramp-up in attendance after
cinemas reopen in the middle of summer 2020 and over the next
several quarters. As a result, we believe that Cineworld's total
admissions in 2020 will be down by about 55% versus 2019 levels,
and by about 15% in 2021 versus 2019.
"We forecast that Cineworld's leverage will reduce slowly and could
exceed 6.5x in 2021. We estimate that in 2020, Cineworld's
revenue will decline by about 50%-60% compared with 2019,
translating into an even more significant drop in S&P Global
Ratings-adjusted EBITDA, and with adjusted debt to EBITDA spiking
above 10x from 5.2x at the end of 2019. We also forecast that
Cineworld's FOCF will turn negative in 2020, despite the group's
efforts to significantly reduce operating costs and capital
expenditure (capex) during the cinema closures. For the second
quarter of 2020, while cinemas are shut, Cineworld has reduced a
significant portion of its payroll costs by reducing the number of
employees on flexible contracts, furloughing other staff, accessing
government support programs in different countries, reducing and
deferring rent payments, and cutting or delaying discretionary
spending and capex. Cineworld has also announced that it will
suspend the dividend payment for the fourth quarter of 2019 and the
upcoming quarterly dividends in 2020.
"In 2021, we expect that cinema admissions will gradually recover
and that Cineworld's EBITDA and cash flow generation will improve,
albeit dented by expenses that the group deferred while cinemas
were closed, mainly rent payments and capex. Therefore we expect
that free cash flow will remain subdued in 2021, and that the
group's adjusted leverage and RCF utilization will fall only
gradually through 2021. We forecast that adjusted debt to EBITDA
could exceed 6.5x in 2021. If the group took on additional
borrowing in 2020, we would view it as positive for near-term
liquidity, but it would also translate into higher interest costs
and leverage remaining elevated in 2021.
"We will reassess Cineworld's pending acquisition of Cineplex and
its implications for the combined group's credit quality.
Cineworld is in the process of acquiring 100% of Canada-based
cinema operator Cineplex Inc. for approximately $2.2 billion in
cash. The transaction was announced in December 2019, has received
approval from Cineplex's and Cineworld's shareholders, and is under
review by the Canadian government. Cineworld has arranged the
issuance of about $2.2 billion of new debt to finance the
acquisition in January 2020.
"Given the increased uncertainty and significant impact of the
COVID-19 pandemic on the operations of both groups, in our view, it
is increasingly unlikely that the deal will progress as initially
planned. We also think that Cineplex might not be able to satisfy
the conditions precedent for the transaction, in particular, the
debt condition that assumes that on the closing date, Cineplex
shall have no more than $725 million outstanding under its credit
agreement. Cineworld's guidance remains that the transaction will
close in the first half of 2020. We will continue to monitor the
progress of the transaction, and if it proceeds, we will reassess
the combined entity's pro forma leverage and capital structure."
Environmental, social, and governance (ESG) factors relevant to the
rating action:
-- Health and safety.
S&P said, "We intend to resolve the CreditWatch placement once we
get more information on the timing and scale of Cineworld's cinemas
reopening, and more clarity on whether the group will succeed in
obtaining additional liquidity and a covenant waiver from its
lenders ahead of the covenant test on June 30, 2020. The resolution
of the CreditWatch is also contingent on the progress of the
Cineplex acquisition and our reassessment of the combined group's
pro forma leverage and capital structure."
S&P could lower the ratings if it saw an increased probability that
Cineworld could default within the next six-12 months, for example
if:
-- Cineworld fails to obtain a waiver and/or a reset of the
thresholds on its covenant that will be tested in June and December
2020;
-- S&P expects Cineworld to run out of liquidity if cinemas either
remain shut beyond the middle of summer 2020, or operate at
significantly reduced capacity in 2020 compared with S&P's base
case, such that the group is unable to make the interest payments
on its senior secured debt; or
-- If S&P believes that the group could announce a debt
restructuring or exchange offer that it would view as distressed
and therefore as tantamount to a default.
S&P could remove the ratings from CreditWatch and affirm them once
it gets more clarity on the progress of the Cineplex acquisition
and if it believes that Cineworld is not facing a credit or
liquidity crisis within the next 12 months.
COMMONWEALTH TRADE: Tycoon Opts to Close Loss-Making Business
-------------------------------------------------------------
Eric Onstad at Reuters reports that British commodities tycoon
Sanjeev Gupta's family business has decided to close its
loss-making Commonwealth Trade Bank Ltd after failing to revive the
business, it said on May 1.
According to Reuters, a GFG Alliance spokesman said Mr. Gupta
bought the British-based bank, previously named Diamond Bank, about
a year ago, hoping to use it for trade finance within the
Commonwealth group of countries with close links to Britain.
The spokesman, as cited by Reuters, said but business was difficult
and it was unable to raise finance to continue its activities amid
the COVID-19 pandemic.
GFG added no lenders or bondholders will lose money, but there will
be 35 job losses and its wholesale banking license is being
returned to the authorities, Reuters notes.
GFG did not disclose any financial details, but results filed for a
16-month period to the end of April 2019 showed a pretax loss of
GBP4.2 million (US$5.3 million) compared with a loss of GBP1.1
million in full-year 2017, Reuters discloses.
The remaining assets of the bank will be transferred to Mr. Gupta's
other financial institution, London-based Wyelands Bank, which also
focuses on global trade, Reuters states.
Commonwealth Trade Bank Ltd was a niche trade finance bank,
providing finance and services to help facilitate trade deals.
DEBENHAMS PLC: Moody's Cuts Probability of Default Rating to D-PD
-----------------------------------------------------------------
Moody's Investors Service downgraded the Probability of Default
Rating of Debenhams plc to D-PD from Ca-PD. The company's corporate
family rating and the rating on the GBP200 million senior notes
remain Ca and the outlook negative. Moody's will subsequently
withdraw all of the company's ratings.
RATINGS RATIONALE
Its downgrade of the PDR to D-PD and the rating agency's decision
to subsequently withdraw all ratings reflects the appointment
earlier this month of administrators to the Debenhams business.
The principal methodology used in this rating was Retail Industry
published in May 2018.
EG GROUP: S&P Lowers ICR to 'B-' on Expected Slower Deleveraging
----------------------------------------------------------------
S&P Global Ratings lowered its long-term issuer credit rating on EG
Group Ltd. to 'B-' from 'B'.
S&P said, "We expect the deterioration in EG Group's performance
due to the COVID-19 pandemic will be significant but short-term,
with a rebound in the second half of the year. U.K.-based EG Group
is one of the world's largest independent petrol station and
convenience store operators. We expect the group to report about
EUR760 million EBITDA (adjusted EBITDA of about EUR870 million) at
the end of 2019, with about EUR8.4 billion in reported debt
(adjusted debt of about EUR11 billion)."
As the COVID-19 pandemic has spread, worldwide government-imposed
shutdowns have not affected most of the group's network: it has
only closed its FTG sites. S&P said, "However, we expect continuous
social distancing and self-isolation measures will significantly
reduce traffic at EG Group's stations and suppress both fuel and
nonfuel sales. Notably, we forecast fuel volumes will drop by
50%-60% year-on-year in Europe and by 40%-50% in Australia and the
U.S. in the months between March and May, 2020. We expect
merchandise earnings--which account for about 40% of the group's
gross profit and comprise both the currently operating convenience
stores and the closed FTG sites--to be more resilient and stay
largely flat thanks to the contributions of entities acquired in
2019. That said, since demand for EG Group products is mostly
nondiscretionary, we think sales will gradually return to normal
levels once governments lift restrictions."
S&P said, "Despite the drop in fuel volumes, we anticipate the
group's revenue will increase by up to 5% in 2020 compared to 2019,
thanks to very high fuel margins and the full consolidation of the
businesses acquired in 2019. However, we think the prolonged
closure of EG Group's high-margin FTG sites and subdued trading at
its convenience stores will dilute the profitability of the group's
nonfuel activities. We estimate that EG Group will show adjusted
EBITDA of EUR0.9 billion-EUR1.1 billion in 2020, exceeding 2019's
figure. However, these forecasts compare unfavorably to the EUR1.3
billion in our previous base case, and to the EUR1.1 billion-EUR1.2
billion we estimate the group would have generated on a pro forma
basis, accounting for the full-year contribution of the acquired
businesses in 2019.
"We think adjusted debt to EBITDA will remain elevated through 2021
due to EG Group's substantial debt burden and soft macroeconomic
prospects. We estimate the group had about EUR8.5 billion in
financial debt as of March 31, 2020, about EUR120 million more than
at end-2019, reflecting additional debt raised to fund an
acquisition. We expect this, in combination with the slowdown in
earnings expansion, will push EG Group's adjusted debt to EBITDA to
at least 10x at end-2020. Our adjusted debt includes shareholder
loans issued outside the restricted group, operating lease
liabilities, and asset retirement obligations. Although this
leverage level is likely to be a one-off peak, primarily stemming
from COVID-19 lockdowns and social distancing, we think the group's
debt to EBITDA will be remain elevated postcrisis, and it will take
the group about a year longer than we had previously expected to
reduce its adjusted debt to EBITDA below 8x. We assume most of the
group's FTG sites will reopen in June 2020, and monthly fuel
volumes will return to normal by the fourth quarter of the year."
However, over the medium term, earnings will likely expand slower
than the group initially planned, owing to a recessionary economy
and high unemployment worldwide.
EG Group's global footprint, key role for financially strong
suppliers, and ability to tap into multiple government programs
support its adequate liquidity. S&P said, "We think the group has
sufficient liquidity resources to weather the next 12 months of
operations in a disrupted environment. Its position is underpinned
by more than EUR400 million in cash coupled with residual revolving
credit facility (RCF) availability of about EUR100 million. We
understand the group is also in talks with lenders in different
regions to secure additional sources of funding, through
government-backed loans and financing schemes. In addition, EG
Group was able to take advantage of its size and scale to negotiate
more favorable payment terms and stock management with fuel
suppliers, supporting working capital in the short term. As a
result, we expect EG Group to report positive free operating cash
flow (FOCF) in excess of EUR100 million in 2020 and 2021. This
should allow the group to comfortably cover its lease payments and
meet other cash charges, such as mandatory debt amortization, in
full. However, if anemic trading were to persist for an extended
period, we think this could curtail the group's internal cash
generation and liquidity buffer."
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 between June and August, 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. We consider that the measures imposed by many
governments on social distancing and the shutdown of economic
activities leave EG Group susceptible to further downside risks to
earnings and cash flows, especially if the pandemic is not
contained by mid-2020. As the situation evolves, we will update our
assumptions and estimates accordingly. The risks reflect high
uncertainty stemming from COVID-19-related trading disruption and
oil price volatility, and the timeframe and shape of economic
recovery thereafter."
Environmental, social, and governance (ESG) factors relevant to the
rating action:
-- Health and safety related to COVID-19
S&P said, "The stable outlook reflects our view that EG Group's
globally diversified operations and management's cost-saving and
cash preservation initiatives will prevent the adjusted debt to
EBITDA from increasing significantly beyond 10x over 2020.
Nevertheless, we think the group's credit metrics will remain
elevated in 2020 amid a slowdown in earning expansion and increased
uncertainty around the effect of the COVID-19 pandemic and oil
price trajectory on the company's performance and leverage
reduction. However, based on our current assumption that the
pandemic will peak between June and August 2020, we expect the
group will reduce its adjusted debt to EBITDA toward 8.0x in 2021
after a temporary spike of at least 10x in 2020. We also expect the
company will generate sufficient cash flow to cover mandatory debt
amortization and cash interest payments while maintaining adequate
liquidity.
"We could lower our rating on EG Group over the next 12 months if
its operating performance were to weaken further amid persistent
pandemic-related disruption, bringing into question the group's
ability to reduce leverage or maintain its liquidity cushion. This
could happen if free cash flow turned negative, eroding liquidity
headroom; if the group's adjusted debt to EBITDA remained
consistently above 10x, with diminishing prospects of meaningful
debt reduction; or if the group were to pursue further debt-funded
acquisitions.
"We could raise our ratings on EG Group if it resumed normal
operations and earnings recovered such that adjusted debt to EBITDA
fell to below 8.0x (about 7.0x excluding preferred shares). Any
upgrade would depend on the group generating materially positive
and growing FOCF, and on its commitment to a more conservative
financial policy in relation to further acquisitions and capex. We
expect that the ability to restore earnings and cash flows would
require a sustained improvement in trading conditions."
LOIRE UK: Fitch Assigns 'B+' Final LT IDR, Outlook Stable
---------------------------------------------------------
Fitch Ratings has assigned UK-based global life science tools and
services provider 'Loire UK Midco 3' Limited a final Long-Term
Issuer Default Rating of 'B+ with a Stable Outlook.
Fitch has also assigned the senior secured debt issued by Loire
Finco S.a.r.l a final rating of 'B+'/'RR4'/49%, following a review
of the final documents conforming to information already received.
The 'B+' IDR reflects high leverage and a modest scale that are
balanced by a defensive business risk profile. Significant
financial leverage and its assumption that LGC Group will continue
to be an active consolidator in the fragmented global life sciences
tools markets are likely to prevent material deleveraging until
March 2024. The rating is underpinned by structural organic growth
prospects for the life-science and healthcare industries, high
barriers-to-entry, as well as strong profitability and free cash
flow generation.
The Stable Outlook reflects its expectation of steady underlying
operations, driven by sustainably organic revenue growth stemming
from the launch of new product lines; acquired revenues; cash
flow-based deleveraging, and certain resilience to the business
disruptions caused by the coronavirus pandemic.
KEY RATING DRIVERS
Defensive Business Risk Profile: Its rating recognises LGC Group's
strong position in the structurally growing routine and specialist
life-science and health care-testing markets, which are
characterised by long-standing and embedded customer relationships.
Fitch views these strong and diverse customer relationships, the
critical contribution of LGC Group products to its client workflow,
and the group's focus on and reputation for quality as significant
barriers to entry that underpin its robust business model.
Low Exposure to Coronavirus-related Risks: Fitch expects LGC
Group's financial profile to remain broadly resilient to the
business disruptions caused by the pandemic. LGC Group is firmly
positioned in its main markets in Europe and U.S to generate
additional revenue from measurement, reference tools and testing
projects required to support public health policies on coronavirus
diagnosis. This will offset any temporary underperformance in
certain business activities adversely affected by government
restrictions due to the pandemic.
Strong Profitable Growth and FCF: The strong traits of LGC Group's
business profile have translated into sector-leading organic
revenue growth of close to 10%, stemming from both positive volume
and price effects. Its rating case forecasts EBITDA margins
trending towards 33.5%, which will translate into a FCF margin
towards 15% by 2023, despite high capex assumed at around 6.5% of
sales for growth and product quality. Fitch expects its revenue and
EBITDA forecasts for financial year to March 2020 to be met despite
the business disruptions caused by the pandemic.
Leverage and Size a Constraint: Despite its growth LGC Group
remains small, particularly relative to US sector peers. Fitch
estimates funds from operations adjusted gross leverage of 7.9x in
2020, which in isolation would point towards a lower rating in the
'B' rating category. Its high financial leverage and limited rating
headroom are, however, mitigated by the defensive business profile
and satisfactory FCF generation with expected deleveraging to 6.3x
by end-2022. Its projected improvement in FCF margins provides some
financial flexibility for the group's acquisition growth strategy
and deleveraging capacity. Its rating case assumes FFO adjusted
gross leverage to fall to 5.7x by 2023, which anchors its Stable
Outlook.
Moderate Execution Risks: Fitch believes that LGC Group will
continue its acquisitive strategy as this is central to value
creation, particularly from the sponsors' perspective. Its view of
moderate execution risks reflects the broad scope of potential
acquisitions, and subsequent integration, and reflects LGC Group's
positive record as a consolidator in the fragmented industry.
High Recurring Revenue Streams: LGC Group has exhibited a long-term
sticky customer base, as reflected in recurring revenue of around
95% and is supported by its reputation for premium quality and
strong scientific credentials. High barriers to entry in core niche
markets, due to regulatory approvals and the critical
non-discretionary nature of its products contribute to visibility
over customer retention and revenue.
Positive Sector Fundamentals: LGC Group is firmly positioned to
capture favourable growth in life-science, healthcare, and
measurement sciences, driven by rising volumes and innovation, and
supported by stricter regulatory requirements on testing in a
growing number of applications. In the short term additional
revenue is expected from supporting government and industry
projects on global coronavirus testing and diagnosis.
DERIVATION SUMMARY
Fitch rates LGC Group using its medical products navigator
framework. Its rating is constrained by the group's modest size and
high financial leverage, particularly relative to that of larger US
peers in the life sciences and diagnostics sectors. These US peers
are generally rated within the 'BBB' rating category, including
Bio-Rad Laboratories Inc. (BBB/Stable), Thermo Fisher Scientific
Inc. (BBB/ Stable), PerkinElmer Inc. (BBB/Stable) and Agilent
Technologies Inc. (BBB+/Stable). In its peer analysis, LGC Group
demonstrates a similar EBITDAR margin in the high 20% range to some
of the larger peers with similar FCF generation, reflecting its
strong business model rooted in niche positions that are
underpinned by scientific excellence. In addition, LGC Group
demonstrates still good organic growth, supplemented by
consolidation opportunities in the fragmented global life-sciences
tools market.
LGC Group's defensive business risk attributes are offset by
smaller scale and higher leverage versus the abovementioned peers',
which places the group's rating in the 'B' category. Its financial
risk profile is more comparable with that of European healthcare
leveraged finance issuers such as Synlab Unsecured Bondco PLC
(B/Stable) and Curium Bidco S.a.r.l (B+/Stable). All three issuers
share a defensive business risk profile and deploy financial
leverage to accelerate growth in a consolidating European market.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer:
- Revenue growth at 13% CAGR for 2019-2024, driven by organic and
acquired revenues. Organic growth at 10% CAGR for the same period,
in line with historical trends.
- EBITDA margin to increase 370bp to 33.5% by 2024, driven by
gross margin improvement, greater cost efficiency and
earnings-accretive bolt-on acquisitions.
- Working capital to remain stable at 2% of sales p.a. up to
2024.
- Capex on average 6.5% of sales p.a., of which maintenance capex
is to remain stable at 1.5% of sales p.a. up to 2024, in line with
historical trends. Acquisition capex assumed at GBP240 million in
2021 with bolt-on acquisitions of GBP60 million p.a. after 2021.
Recovery Assumptions:
Fitch estimates under its bespoke recovery analysis that a
going-concern approach will lead to higher recoveries for creditors
relative to liquidation, given the group's long-term proven robust
business model, long-term relationship with customers and
suppliers, and existing barriers to entry in the market. Its
going-concern value is estimated at around GBP662 million, assuming
a post-reorganisation EBITDA of about GBP113 million, implying a
25% discount to its expected EBITDA for 2020, with a distressed
enterprise value (EV)/EBITDA multiple of 6.5x. The multiple
reflects its premium market position and sound reputation.
Fitch assumes LGC Group's multi-currency revolving credit facility
would be fully drawn in a restructuring, ranking pari passu with
the rest of the senior secured debt.
Its principal waterfall analysis generates a ranked recovery for
senior secured creditors in the 'RR4' band after including the
upsized term loan B under a revised capital structure, indicating a
'B+' instrument rating, which is in line with the IDR.
The waterfall analysis output percentage based on current metrics
and assumptions is 49%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FFO-adjusted gross leverage below 5x on sustained basis.
- FFO fixed charge coverage above 3x on sustained basis.
- Superior EBITDA margins remaining above 30% and successful
integration of accretive M&A.
- Greater global scale and higher diversification without
adversely impacting brand reputation.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO-adjusted gross leverage above 7x on sustained basis from
2021.
- FFO fixed charge cover below 2.5x.
- Lower organic growth due to market deterioration or
reputational issues resulting in market-share loss.
- EBITDA margins trending towards 25%.
- Aggressive M&A hampering profitability, deleveraging and
liquidity profile.
BEST/WORST CASE RATING SCENARIO
International scale credit 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
Adequate Liquidity: LGC Group has a comfortable liquidity profile
under its rating case based on its capacity for building up
cash-on-balance sheet to GBP100 million over the next four years
after assuming moderate M&A activity. It has a fully available RCF
of GBP265 million for general corporate purposes, which Fitch
assumes undrawn under its rating-case projections.
FFO fixed charge cover under its rating-case projections is
estimated at 2.4x in 2020, trending towards 3.1x by 2022 and 3.9x
by 2024. Its liquidity buffer remains healthy for ongoing business
operations, including intra-year working capital swings of around
GBP20 million.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch restricts GBP13 million of cash as not being available for
debt service due to ongoing operating needs.
Fitch adjusts operating leases by applying an 8x capitalisation
multiple to annual rents.
ESG Considerations
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 to the way in which they are being managed by the
entity(ies).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
MARKETPLACE ORIG. 2019-1: Fitch Alters Outlook on 2 Notes to Neg.
-----------------------------------------------------------------
Fitch Ratings has revised the Outlook on Marketplace Originated
Consumer Assets 2019-1 plc's class E and class F notes to Negative
from Stable and affirmed all classes of notes.
Marketplace Originated Consumer Assets 2019-1 Plc
- Class A1 XS2083973466; LT AAAsf; Affirmed
- Class A2 XS2083974274; LT AAAsf; Affirmed
- Class B XS2083974431; LT AA-sf; Affirmed
- Class C XS2083974514; LT A-sf; Affirmed
- Class D XS2083974860; LT BBBsf; Affirmed
- Class E XS2083975081; LT BB+sf; Affirmed
- Class F XS2083975164; LT BB-sf; Affirmed
Fitch has made assumptions about the spread of coronavirus and the
economic impact of the related containment measures. As a base-case
(most likely) scenario, Fitch assumes a global recession in 1H20
driven by sharp economic contractions in major economies with a
rapid spike in unemployment, followed by a solid recovery that
begins in 3Q20 as the health crisis subsides. As a downside
(sensitivity) scenario provided in the Rating Sensitivities
section, Fitch considers a more severe and prolonged period of
stress with a slow recovery beginning in 2Q21.
TRANSACTION SUMMARY
Marketplace Originated Consumer Assets 2019-1 Plc is a true-sale
securitisation of a static pool of UK unsecured consumer loans,
originated through the marketplace lending platform of Zopa Limited
(servicer, not rated) and sold by London Bay Loans Warehouse 1
Limited. This transaction is the second issuance from this platform
to be rated by Fitch, and the third overall.
KEY RATING DRIVERS
The social and market disruption caused by the coronavirus and the
related containment measures did not negatively affect the ratings,
because there is sufficient credit enhancement to cover higher
defaults projected after more severe assumptions were applied.
However, the Negative Outlook on class E and class F reflects that
ratings could be negatively affected in the event of a severe and
prolonged economic stress caused by the coronavirus pandemic. Fitch
also views liquidity protection as sufficient to support the
current ratings. The sensitivity of the ratings to scenarios more
severe than currently expected is provided in Rating Sensitivities
below.
Updated Assumptions for Coronavirus Impact
The transaction has had a solid performance since closing in
December 2019. Cumulative defaults are 0.5% of the initial
portfolio balance, as of the April payment date. Fitch has revised
a number of asset assumptions for the transaction following the
spread of coronavirus and the expectation of a spike in
unemployment. The base case lifetime defaults have been revised to
9.2% from 7.1% since closing. The 'AAAsf' default multiple has been
revised to 3.84x from 5.0x at closing as a result of the higher
base case combined with the fact that it comes from a period of
macroeconomic stress.
The recoveries base case is unchanged at 22.0% given the high
buffer between the assumptions and historical performance.
Fitch revised the base case prepayments to 14% from 20% at closing.
This is based on the expectation that there will be lower
prepayments in this stressful macroeconomic period.
Liquidity Risk Mitigated
The transaction includes a liquidity reserve available to cover
shortfalls of senior fees, class A and class B interest. This
includes shortfalls due to poor performance, lower payments as a
result of payment holidays, and other payment disruptions. The
reserve provides about 12 months of coverage of senior fees, class
A and class B. Fitch therefore believes the structure to be
sufficiently covered in the event of high take-up of payment
holidays by borrowers. In addition, interest can be deferred for
all notes except the most senior at each given payment date.
The transaction also includes a cash reserve, which is replenished
at a junior position in the waterfall and can cure interest
shortfalls as well as clear principal deficiency ledgers.
Sensitivity to Pro Rata Period
The transaction has pro rata amortisation of the rated notes until
the breach of a sequential trigger. Note repayments are more
sensitive to all aspects of realised asset performance than in
comparable sequential structures. The timing of default recognition
is key to the cumulative default and reserve triggers that switch
amortisation from pro rata to sequential, if breached. A material
delay in defaults' provisioning due to payment deferrals could
prove detrimental to the notes, by allowing a longer pro rata
period compared with an earlier breach of those triggers.
Loans under payment holiday will not flow through arrears buckets
for the duration of deferral. This may reduce the effectiveness of
triggers depending on the uptake of such option and the total
duration, which Fitch has assumed to be about three months in line
with the FCA guidance as of 9 April. Zopa will report the total
balance under payment deferral, which will give greater visibility
into the transaction performance. Fitch ran sensitivities on a
three-month deferral and found no impact on the ratings of the
notes.
Servicing Continuity under COVID-19
All Zopa employees are working from home and all services are
continuing to operate as normal following the lockdown imposed due
to the coronavirus pandemic. Customer services staff are
cross-trained to work in the collections team dealing with less
complex activities, freeing up the experienced collections staff to
work on more complicated cases. Collections continue to operate as
normal both from in-house and with third-party collection
agencies.
The transaction also has a back-up servicer in the event of
servicing termination.
RATING SENSITIVITIES
This section provides insight into the model-implied sensitivities
the transaction faces when one assumption is modified, while
holding others equal. The modelling process uses the modification
of these variables to reflect asset performance in upside and
downside environments. The results below should only be considered
as one potential outcome, as the transaction is exposed to multiple
dynamic risk factors. It should not be used as an indicator of
possible future performance.
Factors that could individually, or collectively lead to a negative
rating action/downgrade
Expected impact on the note rating of increased defaults (class
A/B/C/D/E/F)
Increase default rate by 10%: AA+sf/A+sf/A-sf/BBBsf/BB+sf/BB-sf
Increase default rate by 25%: AA-sf/Asf/BBB+sf/BBB-sf/BB+sf/B+sf
Increase default rate by 50%: A+sf/BBB+sf/BBB-sf/BB+sf/BBsf/NR
Expected impact on the note rating of decreased recoveries (class
A/B/C/D/E/F)
Reduce recovery rates by 10%: AA+sf/AA-sf/A-sf/BBBsf/BB+sf/BB-sf
Reduce recovery rates by 25%: AA+sf/AA-sf/A-sf/BBBsf/BB+sf/BB-sf
Reduce recovery rates by 50%: AA+sf/A+sf/A-sf/BBBsf/BB+sf/BBs-sf
Expected impact on the note rating of increased defaults and
decreased recoveries (class A/B/C/D/E/F)
Increase default rates by 10% and decrease recovery rates by 10%:
AAsf/A+sf/A-sf/BBBsf/BB+sf/BB-sf
Increase default rates by 25% and decrease recovery rates by 25%:
AA-sf/Asf/BBB+sf/BBB-sf/BBsf/B-sf
Increase default rates by 50% and decrease recovery rates by 50%:
Asf/BBBsf/BBB-sf/BBsf/CCCsf/NR
In addition, a significant extension of the payment deferral period
beyond currently announced measures, combined with a high uptake
from the borrowers of the securitised loans, could reduce the
effectiveness of the cumulative default trigger and the ability of
notes to pass stresses in line with their current ratings.
Coronavirus Downside Scenario Sensitivity
Fitch has added a coronavirus downside sensitivity analysis that
contemplates a more severe and prolonged economic stress caused by
a re-emergence of infections in major economies, before a slow
recovery begins in 2Q21. Under this severe scenario, Fitch modelled
an increased default base case of 11.7% compared with 9.2%. The
'AAAsf' default multiple is 3.8x. The rating impact on each tranche
is as follows:
Class A/B/C/D/E/F
AA-sf/Asf/BBB+sf/BBB-sf/BB+sf/B+sf
Factors that could, individually or collectively, lead to positive
Rating action/upgrade:
Class Z1 does not amortise pro rata, leading to a deleveraging of
the rated notes meaning that they could withstand higher stresses.
In addition, a breach of a sequential amortisation trigger leading
to irreversible sequential amortisation could provide more cushion
to the notes relative to their assigned ratings.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven 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 seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical 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.
Before the transactions closed 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.
Overall, Fitch's assessment of the information relied on for the
agency's rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
ESG CONSIDERATIONS
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 to the way in which they are being managed by the
entity(ies).
NMC HEALTH: FRC Opens Investigation Into Ernst & Young's Audit
--------------------------------------------------------------
Julia Kollewe at The Guardian reports that Britain's accountancy
watchdog has opened an investigation into Ernst & Young's audit of
the scandal-ridden private hospital operator NMC Health, which
collapsed into administration last month.
The Financial Reporting Council said on May 4 it began its
investigation into the audit of NMC's 2018 accounts in mid-April,
The Guardian relates.
The Abu Dhabi-based company runs private hospitals in the Middle
East and also owns the Aspen Healthcare chain in the UK. It called
in administrators on April 9 after a board-commissioned
investigation uncovered US$2.7 billion more debt than the board was
aware of, The Guardian recounts. The hospitals and medical centres
are not included in the administration and continue to operate, The
Guardian notes.
According to The Guardian, EY, which is one of the big four
auditing firms, said it would be "fully cooperating with the FRC
during their inquiries". The FRC investigation is piling further
pressure on EY, which is also being investigated by the watchdog
for an audit of Thomas Cook's accounts before the travel firm
collapsed, The Guardian states.
The FRC aims to complete its investigations within two years, The
Guardian relays. If it finds evidence of wrongdoing, it will
transfer the case to a tribunal, which could decide on any
penalties including fines, reprimands or ordering EY to review its
procedures, The Guardian discloses.
The main City regulator, the Financial Conduct Authority, launched
an investigation into NMC in late February, after shares were
suspended from trading following the deepening accounting scandal
at the hospital operator, The Guardian relates.
SECURESHIELD: Buyout Saves 51 Jobs and Life-saving Services
-----------------------------------------------------------
Sue Souter at BDaily News reports that a funding deal to support
the management buyout of a Scottish based provider of fire
detection, security systems and TECS (Technology Enabled Care
Systems) from a business in administration has helped save 51 jobs
and life-saving services for vulnerable individuals across Scotland
and the North of England.
The Scottish and North of England management team from
Lanarkshire-based Secureshield negotiated the acquisition of their
region using specialist brokerage services from Reach Commercial
Finance and funding from Aldermore Bank, BDaily News relates.
Reach Commercial Finance is part of the Leonard Curtis Business
Solutions Group, which specializes in business rescue and
recovery.
With a full understanding of the process and requirements of
purchasing from an administrator, the Reach team, led by Shaun
Hyland, negotiated on areas like facility costs and personal
guarantee liabilities for Secureshield's senior management team,
while helping to ensure that funding was available in time to
support the MBO and subsequent trading, BDaily News discloses.
They also ensured that a proper understanding of the business and
its services would drive the correct approach by the lender, BDaily
News notes. A GBP750,000 invoice finance facility from Aldermore
Bank was secured to enable the purchase to go ahead, BDaily News
states.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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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.
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