/raid1/www/Hosts/bankrupt/TCREUR_Public/200717.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Friday, July 17, 2020, Vol. 21, No. 143
Headlines
A U S T R I A
AMS AG: Fitch Rates Senior Unsecured Notes BB-
G E O R G I A
GEORGIA GLOBAL: Fitch Rates Senior Unsecured Notes B+(EXP)
G E R M A N Y
LUFTHANSA AG: Accuses EC of Causing Damage to Business Model
PHOENIX PHARMAHANDEL: S&P Affirms BB+ Rating, Outlook Negative
WIRECARD AG: Ex-Chief Borrowed EUR35MM from Banking Arm in Jan.
G R E E C E
HELLENIC TELECOMM: Moody's Withdraws Ba2 CFR on Debt Repayment
I R E L A N D
ARBOUR CLO VIII: S&P Assigns Prelim BB- (sf) Rating to Cl. E Notes
FINSBURY SQUARE 2020-2: Fitch Gives CCCsf Rating to Class F Debt
MAN GLG V: Moody's Downgrades Class F Notes to B3
I T A L Y
GAMENET GROUP: Moody's Confirms B1 CFR, Alters Outlook to Neg.
L U X E M B O U R G
EUROPEAN MEDCO: Fitch Gives B Final LT IDR, Outlook Stable
N E T H E R L A N D S
BRASKEM NETHERLANDS: Fitch Rates Subordinated Notes BB-
PLT VII: Fitch Gives B Final LT IDR, Outlook Stable
N O R W A Y
PGS ASA: Moody's Cuts CFR to Caa1 & Alters Outlook to Negative
U K R A I N E
PROMINVESTBANK: Moody's Withdraws Caa2 LT Bank Deposit Ratings
U N I T E D K I N G D O M
ARDONAGH MIDCO: Moody's Withdraws B3 CFR for Business Reasons
CD&R ARTEMIS: Moody's Assigns B3 CFR, Outlook Stable
CINEWORLD GROUP: Fitch Affirms LT IDR at B-, Outlook Negative
FINSBURY SQUARE 2017-2: Fitch Withdraws CCCsf Class D Notes Rating
JOHNSONS SHOES: Bought Out of Administration by Newjohn
MARSTON'S ISSUER: S&P Lowers Rating on Class B Notes to B+(sf)
NMC HEALTH: Auditors Warn Over Bank Account Inconsistencies
PIZZAEXPRESS: Nears Debt-for-Equity Swap Deal, Likely to Seek CVA
TOGETHER ASSET 2020-1: Moody's Rates Class X Notes (P)B2
TOGETHER ASSET 2020-1: S&P Puts Prelim BB(sf) Rating on X-Dfrd Note
X X X X X X X X
[*] BOOK REVIEW: Hospitals, Health and People
- - - - -
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A U S T R I A
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AMS AG: Fitch Rates Senior Unsecured Notes BB-
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Fitch Ratings has assigned ams AG's (BB-/Stable) senior unsecured
notes a final rating of 'BB-'. The final rating is in line with the
expected rating assigned on June 23, 2020.
The notes, comprising a USD450 million and a EUR850 million
tranche, have a five-year maturity at a fixed coupon of 7% and 6%,
respectively. The proceeds are being used to finance the company's
acquisition of OSRAM AG.
KEY RATING DRIVERS
High Execution and Integration Risks: OSRAM is broadly twice the
size of ams by revenue and it is by far the biggest acquisition ams
has made. The operational integration between the two entities and
expected synergy benefits carry significant risks of delay. Lower
cash flows than Fitch's expectations in the two to three years
after the acquisition closes could lead to rating pressure.
High Leverage Likely to Decrease: The company's expected funds from
operations gross and net leverage will be high for the rating at
end-2020, at around 5x. Fitch expects that over the medium term,
ams' management will prioritise debt repayment from free cash flow
and broadly align the capital structure with the 'BB' category.
Fitch expects that by end-2023, gross and net leverage should
improve to under 3x and 2x, respectively.
Strengthening FCF: Fitch expects ams' FCF to be slightly positive
in 2020 and 2021, partly as a result of significant integration
costs that are likely to be incurred during the period. Beyond
2021, as these costs subside and synergy benefits begin to feed
through, Fitch expects FCF will strengthen to over 5% of revenue on
a sustained basis, which would be considered strong for the rating,
and allow for meaningful debt reduction.
Acquisition Improves Business Profile: The OSRAM acquisition will
significantly alter ams' business profile. It will give the company
greater scale, a broader product range, access to a wider variety
of end-markets and improved bargaining power with suppliers.
Part Ownership Could Limit Improvement: The rating factors in
Fitch's assumption that ams will acquire 100% of OSRAM shares by
end-2020. Failure to acquire all of OSRAM will lead to cash leakage
via dividends to minorities and therefore lower cash flow margins.
While the financial profile in this case will likely be
structurally weaker, Fitch does not believe that it will place
additional pressure on the rating. However, it may affect the
timing of any positive rating action.
DERIVATION SUMMARY
Post OSRAM acquisition, ams' credit profile is expected to be in
line with that of diversified industrial peers rated in the 'BB'
category, given the company's leading share in global automotive
and sensor solutions, reasonable geographic concentration and
strong profitability and cash flow generation. It compares
favourably with US technological 'BB' category peers in
profitability and cash flow margins, but has higher leverage and
customer concentration.
The closest peer in the diversified and manufacturing sector is
Borets International Limited (B+/Negative), which has more limited
geographic concentration. Borets' profitability is somewhat close
to ams' with margins at around towards 30%. However, in the short
term ams' leverage will be high for the 'BB' category, a key
constraint on the 'BB-' rating at present.
Microchip Technoloy Inc (BB+/Negative), performs better in
profitability, at 35%-40%, relative to ams' mid-20%, and stronger
FFO margins, supporting a higher tolerance in leverage metrics,
which are driven by acquisitions.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- 50% of OSRAM consolidation in 2020; 100% consolidation as of
2021.
- Revenue synergies in 2021 of EUR5 million, 2022 EUR70 million,
and 2023-2024 of EUR200 million.
- EBITDA margins improving to 25% post acquisition of OSRAM with
a gradual realisation of synergy benefits and stabilisation of
end-markets.
- Capex at 11% of sales until 2024 as per company guidance.
- Working capital flows stabilising over the next four years.
- Non-operating transaction and synergy costs at EUR199 million
at end-2020; EUR115 million end-2021, EUR16 million at end-2022 as
per management's guidance
- Revolving credit facility (RCF) undrawn up to 2024.
- No dividend in the medium term.
- No new acquisitions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FCF margin above 5%
- Divestment of OSRAM's digital division in 2020 with the
proceeds used to reduce net leverage
- Gross leverage below 3x
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Failure to integrate and restructure OSRAM with materially weak
cash flows after 2021; FCF margin below 1% after 2021
- Gross leverage above 4x after 2021
- Net leverage above 3x
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).
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
Satisfactory Liquidity: Fitch views ams' liquidity as comfortable,
given EUR750 million (December 2019: EUR460 million) available cash
on balance sheet as of end-March 2020 and a EUR450 million RCF,
currently undrawn. Fitch expects FFO margin to remain strong at
around 17% - 20%, but the company has historically generated
negative FCF due to high capex. After 2021, Fitch expects FCF to be
positive on a sustained basis.
SUMMARY OF FINANCIAL ADJUSTMENTS
There is historically no restricted cash on the balance sheet but
Fitch assumes EUR40 million restricted cash for historical years
and EUR100 million in future, mainly for working capital swings.
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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G E O R G I A
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GEORGIA GLOBAL: Fitch Rates Senior Unsecured Notes B+(EXP)
----------------------------------------------------------
Fitch Ratings has assigned Georgia Global Utilities JSC's proposed
senior unsecured notes an expected rating of 'B+(EXP)'/'RR4'. The
amount, coupon and final maturity will be determined at the time of
issuance. The senior unsecured rating is in line with GGU's
expected Long-Term Issuer Default Rating 'B+(EXP)', which has a
Stable Outlook, as the bonds will constitute direct, unconditional
and unsecured obligations of the company.
The notes' expected rating reflects the proposed guarantees and
covenants. The proceeds are to be largely used for refinancing
existing debt and funding eligible green projects. The assignment
of the final rating is contingent on the receipt of final documents
conforming to the information received to date.
The IDR of GGU reflects the consolidated credit profile of its
regulated water utility business (Georgian Water and Power LLC,
GWP), and its fairly higher-risk renewable electricity business,
which is nevertheless supported by long-term power purchase
agreements. Overall size, asset quality, forex (FX) risk, operating
and regulatory environment remain key rating constraints.
KEY RATING DRIVERS
Holding Company and Rating Scope: GGU is a holding company and
consolidates GWP, Rustavi Water LLC, Mtskheta Water LLC, Gardabani
Sewage Treatment LLC, Saguramo Energy LLC, Georgian Engineering and
Management Company LLC, Qartli Wind Farm LLC (QWF, 21MW (megawatt))
wind power plant, Svaneti Hydro JSC (Svaneti, 50MW) hydro power
plant, Hydrolea LLC (21MW HPPs) and Georgian Energy Trading Company
LLC (GETC, electricity trading arm of the group).
Leverage Temporarily above Sensitivity: Fitch estimates
post-refinancing pro-forma funds from operations net leverage
(adjusted for connection fees) at 5.9x for 2020 and to average
about 4.3x for 2020-2023, compared with its negative rating
sensitivity of 4.5x. External debt is to be located at GGU level
with upstream guarantees by key subsidiaries.
Ring-Fenced Structure: The restricted group consists of five
entities, GWP, QWF, Svaneti, Hydrolea and GETC, and under the trust
deed for the proposed bond, each entity is expected to jointly and
severally, irrevocably and unconditionally guarantee the noteholder
prompt payment of principal and interest. Hydrolea is the holding
company of Geoenergy LLC, Hydro Georgia LLC, and Kasleti 2 LLC,
also included in the restricted group. The restricted group is
expected to comprise 85% or more of GGU's consolidated EBITDA.
This, together with the refinancing of debt at the restricted
group, results in no structural subordination for GGU creditors.
Covenants Provide Protection: Noteholders benefit from tests for
restricted payments (including dividend distribution) and debt
incurrence. The restricted group may make restricted payments in an
aggregate amount of up to 50% of consolidated net income, provided
the issuer is able to incur additional under the debt incurrence
test, and subject to certain other conditions. The restricted group
may also make unlimited restricted payments if consolidated net
leverage does not exceed 3.0x (after giving pro forma effect to the
relevant restricted payment). The restricted group may incur
indebtedness if consolidated net leverage is less than (i) 5.0x in
year 1-2, (ii) 4.5x in years 3-4 and (iii) 4.0x thereafter.
GWP Significant for GGU: Fitch expects GWP to be the most
significant operating company for GGU at 72% of average revenue and
60% of average EBITDA per year for 2020-2024. GWP is a regulated
water utility, with a natural monopoly in Tbilsi, owns the water
infrastructure. The remaining business is electricity sales; it
operates hydro power plants with an installed capacity of 145MW
(linked to the water utility), with about 50% of electricity
generated for own consumption, with excess electricity sold
predominantly through bilateral agreements with direct customers.
Increasing Diversification, Lower Regulated Revenue: Fitch
estimates GGU's regulated water revenue at about 60% (adjusting for
connection income in the water segment) on average per year for
2020-2024. The remaining revenue is from power generation and sale,
which is exposed to volume and price risks in the merchant power
segment. This is offset by PPA-based power sales (estimated at
about 40% of the power segment per year until 2023) and
diversification supported by 96MW of installed renewable capacity.
While GGU is exposed to merchant activity, about 80% of revenue
generated through bilateral agreements is in August to April of
each year, when the electricity market is in deficit.
Price Visibility in PPAs: Fitch believes long-term cash-flow
visibility is enhanced by the price certainty within GGU's PPAs.
All electricity output from about 40% of its total installed
capacity is contracted with PPAs expiring between 2022 and 2034;
the weighted-average remaining life of the portfolio is around 11
years. The long-term PPAs provide some protection from price risk,
being based on fixed power tariff agreements, typically for eight
months of each year (QWF, 12-month PPA), from September to April.
Fitch views the PPAs with JSC Electricity System Commercial
Operator (ESCO, the market operator) as indirectly backed by the
Government of Georgia (BB/Negative).
Re-contracting Risk Present: The remaining electricity output is
exposed to market prices, albeit mitigated in the short-term
through 12-month, bilateral agreements, with large
industrial/commercial customers. GGU has a limited record of
re-contracting capacity, following the market liberalisation in May
2019.
Power Generation with Volume Risk: Production volume varies at both
the hydro and wind power plants, as it is based on resource
availability, which is affected by seasonal and climatic patterns.
If GGU cannot deliver volumes contracted in its short-term
bilateral agreements, the group's electricity trading arm, will
have to either buy the shortfall on the market, and re-sell at the
contracted price, or use electricity generated at Zhinvali (the
group's largest hydro power plant with an installed capacity of 130
MW, which has a water reservoir) to meet the shortfall.
Volume Risk Partly Mitigated: Volume risk is partly mitigated by
GGU's geographical diversification, with nine plants spread across
Georgia. The Qartli wind farm had an average capacity factor 47% at
end-2019. Volume risk is also not present in GGU's PPAs with ESCO,
as ESCO undertakes to purchase all electricity generated from the
relevant contracted capacity (which does not include Zhinvali),
irrespective of potential volume fluctuations.
Deregulation Improves Market Liquidity: The recent change in
electricity regulation calls for all large industrial/commercial
customers with monthly electricity consumption of 5GWh (gigawatt
hour), and above, to register as direct customers, as part of the
deregulation. Fitch expects this to increase liquidity in the
market as the deregulated market share of total electricity demand
increases notably.
Wholesale Market Price Offsets Lower Demand: The wholesale price
mainly consists of the weighted average of all imports and PPAs. In
2019, the weighted average price of PPAs averaged about 5.4
USc/kWh, while imports averaged about 4.8-5 USc/kWh. Assuming
demand decreases in 2020 due to the pandemic-driven economic shock,
the calculation of the market benchmark price will include a lower
share of imported price because all domestic generation comes
before imports in terms of merit order. This would increase the
weight of PPAs in the calculations, slightly increasing the market
prices. Fitch estimates market power prices to average 14.8
Tetri/kWh up to 2023.
COVID-19 Impact Manageable: 2020 results will be affected by the
coronavirus outbreak, via a sharp contraction of Georgia's economy
by an estimated 4.8% in 2020. Fitch expects GGU to breach its FFO
net leverage (excluding connection fees) negative sensitivity of
4.5x, before recovering to within the threshold by 2021.
Limited Currency Hedge, Refinancing Risk: GGU is expected to hold a
majority of its debt in foreign currency, resulting in exposure to
forex risk. However, this risk is partly mitigated by both PPA
sales and bilateral contracts being denominated in US dollars,
which is expected to be sufficient to cover coupon payment but not
principal. Fitch estimates GGU's EBITDA to average about 40% in US
dollars, with the remaining in Georgian lari.
KEY RECOVERY RATING ASSUMPTIONS
For issuers with IDRs of 'B+' and below, Fitch performs a recovery
analysis for each class of obligations of the issuer. The issue
rating is derived from the IDR and the relevant Recovery Rating and
notching, based on the going-concern enterprise value of the
company in a distressed scenario or its liquidation value.
The recovery analysis is based on liquidation value, as it is
higher than the going-concern value. Fitch has assumed a 10%
administrative claim.
Fitch's recovery analysis for GGU estimates a liquidation value of
about GEL475 million, and a going- concern value under a distressed
scenario of about GEL457 million based on a going-concern EBITDA of
about GEL114 million and a 4x multiple.
The liquidation value considers no value for cash due to the
assumption that cash is depleted during or before the bankruptcy.
Fitch applied a 75% discount to accounts receivable, and a 50%
discount to inventory and property, plant and equipment as a proxy
for the liquidation value of those assets.
The going-concern EBITDA estimate reflects Fitch's view of a
sustainable, post-reorganisation EBITDA level upon which it bases
the valuation of the company. The GEL114 million going-concern
EBITDA reflects a 10% discount from 2019 pro-forma EBITDA,
supported by the nature of its regulated and quasi-regulated
earning. The 4x multiple reflect the weakened business model and
high execution risks under challenging market conditions.
For the proposed senior unsecured notes, GGU's debt waterfall
results in a 55% recovery corresponding to a Recovery Rating of
'RR3'. However, according to Fitch's 'Country-Specific Treatment of
Recovery Ratings Criteria', published in February 2020, the
Recovery Rating for Georgia corporate issuers is capped at 'RR4',
constraining the upward notching of issue ratings in countries with
a less reliable legal environment. Therefore, the Recovery Rating
for GGU's expected senior unsecured notes is 'RR4'.
DERIVATION SUMMARY
Fitch views JSC Energo-Pro Georgia (EPG, BB-/Stable) as GGU's
closest peer, sharing the operating and regulatory environment and
also engaged in hydro power generation. Both companies generate a
large portion of regulated and quasi-regulated income with EPG
being the largest distribution system operator in Georgia and GGU
holding the water monopoly in the capital city of Georgia. However,
EPG's rating is aligned with that of its larger and more
diversified parent ENERGO PRO a.s. (BB-/Stable).
GGU is comparable to European water utilities such as
Severomoravske vodovody a kanalizace Ostrava a.s. (BB+/Stable) or
Aquanet SA (BBB+/Stable). Bulgarian Energy Holding EAD (BB/Stable)
is significantly larger and more diversified with strong sovereign
support benefiting its rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Water tariff to increase about 60% for households in 2021 and
to remain flat in 2022-2023
- Water losses dropping to below 35% of total water output in
2023 from around 40% in 2019
- GEL/USD average exchange rate of 3.1 in 2020 and 3 for 2021
- Average electricity volumes sold of about 480,000 MWh (megawatt
hour) per year for 2020-2023
- Average cost of debt of about 7% up to 2023
- Average annual dividends of about GEL21 million per year in
2020-2023
- Capex to average about GEL80 million per year in 2020-2023
- PPA price to average about Tetri18.3/kWh up to 2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Improved FFO net leverage (excluding connection fees) at below
3.5x on a sustained basis.
- Improved business risk due to a longer record of supportive
regulation or material improvement in the tenure of bilateral
agreements to more than 12 months, reducing the contract renewal
risk, without an increase in counterparty risk.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A sustained increase in FFO net leverage (excluding connection
fees) above 4.5x.
- Water tariff increase in regulatory period from 2021 to 2023
considerably below its current expectations.
- A sustained reduction in profitability and cash flow generation
through a failure to reduce water losses, higher-than-expected
exposure to electricity price and volume risks or deterioration in
cash collection rates.
- A more aggressive financial policy with increased dividends.
- A material increase in exposure to foreign-currency
fluctuations.
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
Tight Liquidity Dependent on Refinancing: At end-2019, cash and
cash equivalents stood about GEL47 million insufficient to cover
short-term debt of about GEL89 million. The expected negative free
cash flow in 2020 will add to funding requirements. The expected
rating assumes a successful refinancing of the group's debt at GGU
level during H220. Liquidity is expected to be supported by the
proceeds from the proposed notes.
SUMMARY OF FINANCIAL ADJUSTMENTS
Interest accrued was reclassified to cash interest paid from other
liabilities.
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
Georgia Global Utilities JSC: Water & Wastewater Management: 4
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, either
due to their nature or the way in which they are being managed by
the entity.
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G E R M A N Y
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LUFTHANSA AG: Accuses EC of Causing Damage to Business Model
------------------------------------------------------------
Joe Miller at The Financial Times reports that Lufthansa has
accused the European Commission of causing permanent damage to its
business model by forcing it to surrender slots at its Frankfurt
and Munich hubs in return for approval of a EUR9 billion bailout by
the German government.
Last month, Margrethe Vestager, the EU's competition chief, warned
there was a "high risk" of market distortion if Lufthansa's rescue
package did not include remedies such as the relinquishing of
take-off and landing slots, the FT recounts.
After prolonged negotiations, the airline's supervisory board
agreed to give up 24 slots in Germany to competitors, and the
bailout deal was subsequently voted through by shareholders, the FT
relays.
But in a briefing published on July 14, Lufthansa, as cited by the
FT, said it was "incomprehensible that the EU Commission should
intervene in this sensitive production structure during the worst
crisis in civil aviation".
Using Frankfurt and Munich as international transfer hubs is
crucial to the airline's competitiveness, the briefing said,
because no single German airport has the number of potential
customers living nearby that Heathrow does in London and Charles de
Gaulle in Paris, the FT notes.
Without carrying passengers from connecting flights, long-haul
flights from Germany "can no longer be operated economically", said
Lufthansa, adding: "In future, [the surrender of slots] will
directly or indirectly strengthen long-haul providers outside
Europe", the FT relates.
The Lufthansa bailout, which involved the German government taking
a stake in the carrier almost a quarter of a century after it was
first privatized, has been criticized by European rival Ryanair,
which has said it will launch a legal challenge, the FT discloses.
PHOENIX PHARMAHANDEL: S&P Affirms BB+ Rating, Outlook Negative
--------------------------------------------------------------
S&P Global Ratings affirmed its rating on Phoenix Pharmahandel GmbH
& Co (Phoenix) at 'BB+'.
Phoenix's revenue growth prospects remain solid, and its ability to
manage the surge in demand generated by the COVID-19-related
lockdowns demonstrates the reliability of the supply chain.
S&P said, "Despite fierce competition, we forecast revenue growth
for Phoenix of 1.8% in 2021 and 2.4% in 2022, supported by the
company's established network in 27 countries. Our forecast also
considers the economic slowdown across Europe, and our assumption
of fewer acquisitions. In first-quarter fiscal 2021 (fiscal year
ends Jan. 31, 2021), demand from both over-the counter and
prescription drugs boosted revenue and EBITDA, thanks to pharmacies
remaining open during lockdown and prescriptions being extended.
Revenue increased by EUR686 million, and EBITDA increased by EUR28
million compared with the previous year. EBITDA increased in most
countries, particularly in the retail segment, including in the
U.K. due to COVID-19-related remunerations. While this peak in
growth is temporary, it demonstrates, in our view, the resilient
nature of demand for Phoenix's high-medical-necessity products and
the company's reliability in terms of delivering materially higher
volumes across countries.
"Another challenge for Phoenix is to contain discretionary spending
and manage working capital in order to remain self-funded and to
reduce leverage. While we forecast S&P Global Ratings-adjusted
debt to EBITDA will remain at about 4x over the next two years,
this will depend on the company's ability to maintain profitability
and to remain self-funded. The S&P Global Ratings-adjusted debt
estimate as of Jan. 30, 2021 includes about EUR1,045 million of
reported debt, EUR419 million under trade receivables and
asset-backed securities (ABS) factoring facilities, about EUR850
million of lease liabilities, EUR170 million of pension
liabilities, and EUR70 million of financial guarantees; we also net
EUR90 million of cash on the balance sheet. We forecast modestly
positive free operating cash flow (FOCF) in the next two years,
assuming the company can limit working capital outflows to EUR50
million-EUR70 million and capital expenditure (capex) to EUR180
million. Investment requirements beyond our base will pressure cash
flow and weigh on financial leverage."
Funding cuts in the U.K. have reduced earnings prospects in the
country, but Phoenix's large geographical diversification should
mitigate this. In December 2015, the U.K. National Health Service
(NHS) and the department of health and social care (DHSC) announced
severe funding cuts that affect all pharmacist communities in
England. Following these cuts, Phoenix's earning prospects in the
U.K. reduced, despite its implementation of an optimization and
restructuring program. Pharmacy remuneration is agreed on a
five-year basis, with the last remuneration agreed in July 2019 at
guaranteed funding of GBP2.592 billion per year until fiscal 2024.
Phoenix benefits from a wide revenue base stemming from 27
countries across Europe, and has been expanding in Eastern Europe
where regulatory pressure is less. S&P also notes the relatively
stable earnings prospects in Northern Europe, which remains the
group's most profitable region.
Phoenix operates in a highly regulated business environment, which
limits profitability improvement. In Germany, where Phoenix only
operates in the wholesale business and which remains the largest
country in terms of revenue contribution, profitability improvement
is extremely limited because of very strict regulations. Since an
adverse regulatory change in 2012, the margin allowed in wholesale
business is 3.15%+70cts of the fixed fee, with a cap at EUR 37.8.
Reducing rebates or negotiating better purchasing conditions can
impact profitability, but only to a limited extent given stiff
market competition.
S&P said, "Nevertheless, Phoenix achieved progress in terms of
operating efficiency and we believe there is room for additional
improvement. Phoenix's management is continuously working on
initiatives to optimize the operational processes of the company's
logistics network. In fiscal 2020, the group increased its focus on
digitalization. We believe this should translate into an improved
costs structure and at least partly offset any negative impact from
competition.
"The negative outlook reflects our view of uncertainty surrounding
Phoenix's ability to maintain S&P Global Ratings-adjusted debt to
EBITDA of about 4x.
"We believe fierce competition, combined with strict regulation,
limits profitability growth prospects. Furthermore, large
investment requirements, notably in terms of working capital, could
weigh on the company's cash flow.
"In our base case, we expect S&P Global Ratings-adjusted debt to
EBITDA will remain at about 4x, leaving no headroom for any
unforeseen setbacks."
S&P could lower the rating if the group's credit metrics weaken
beyond its base case, including one or a combination of the
following:
-- S&P Global Ratings-adjusted debt to EBITDA increases above 4x
due to lower than expected EBITDA or a lower invested return on
capital, leading to higher debt.
-- FOCF generation comes under pressure due to
larger-than-expected investments, notably in terms of working
capital requirements.
-- Higher-than-anticipated spending on acquisitions or returns to
share holders.
S&P could revise the outlook on Phoenix to stable if the company
continues to increase its revenue progressively while maintaining
profitability and positive cash generation, such that its S&P
Global Ratings-adjusted debt to EBITDA stabilizes at about 4x on a
sustainable basis.
WIRECARD AG: Ex-Chief Borrowed EUR35MM from Banking Arm in Jan.
---------------------------------------------------------------
Olaf Storbeck at The Financial Times reports that Wirecard's former
chief executive Markus Braun borrowed EUR35 million from the
payment group's banking arm in January, triggering a clash with
board members and an ongoing review from German financial watchdog
Bafin.
Most of the parent group's supervisory board, including chairman
Thomas Eichelmann, only learned about the loan after the money was
paid out to Mr. Braun, the FT relays, citing people with first-hand
knowledge of the matter, who said those directors were "furious".
"There was a shouting match between Mr. Eichelmann and Mr. Braun,"
one of the people, as cited by the FT, said, adding that Mr. Braun
initially argued that the parent group's supervisory board had no
formal oversight over lending decisions at the bank it owns.
However, the CEO was eventually persuaded to repay the loan, which
he did in mid-March, the FT notes.
At the time, Mr. Braun was the chief executive of Wirecard and the
group's single largest shareholder, holding a 7% stake worth close
to EUR1 billion at the time, the FT states.
Mr. Braun resigned last month after the company announced that
EUR1.9 billion of cash on its balance sheet probably did "not
exist", the FT recounts. He was later arrested on suspicion of
false accounting and market manipulation and released on EUR5
million bail, the FT relates.
Bafin, the FT says, found out about the loan only after it
installed a special representative at Wirecard Bank in late June to
monitor the bank management's decisions and ensure it complied with
regulations.
Germany's financial watchdog is currently examining whether the
lender had been required to notify the regulator about the loan and
whether the lending decision infringed any rules, the FT relays,
citing a person familiar with the matter.
As reported by the Troubled Company Reporter-Europe on June 26,
2020, The Financial Times reported that Wirecard filed for
insolvency after the once high-flying payments group revealed a
multiyear fraud that led to the arrest of its former chief
executive. In a remarkable collapse of a company once regarded as
a European tech champion, Wirecard said in a statement on June 25
that it faced "impending insolvency and over-indebtedness", the FT
related. According to the FT, EY on June 25 said there were "clear
indications that this was an elaborate and sophisticated fraud,
involving multiple parties around the world in different
institutions, with a deliberate aim of deception", adding that
"even the most robust and extended audit procedures may not uncover
a collusive fraud". Wirecard's admission that EUR1.9 billion of
cash was missing was the catalyst for the company's unravelling,
the FT noted.
===========
G R E E C E
===========
HELLENIC TELECOMM: Moody's Withdraws Ba2 CFR on Debt Repayment
--------------------------------------------------------------
Moody's Investors Service has withdrawn the Ba2 corporate family
rating and the Ba2-PD probability of default rating of Greece's
leading telecommunications provider Hellenic Telecommunications
Organization S.A. Concurrently, Moody's has withdrawn the (P)Ba2
senior unsecured rating of the global medium-term note program
issued by OTE PLC as well as the stable outlook on the ratings. The
rating action follows the full repayment of the company's senior
unsecured notes on July 9, 2020, which were the only outstanding
OTE PLC's notes rated by Moody's.
RATINGS RATIONALE
Moody's has decided to withdraw the ratings because OTE's debt
previously rated by Moody's has been fully repaid.
COMPANY PROFILE
Headquartered in Athens, Hellenic Telecommunications Organization
S.A. is the leading telecommunications operator in Greece,
servicing 2.6 million retail fixed access lines, 2 million retail
fixed-line broadband connections, 0.6 million TV subscribers and
7.4 million mobile customers as of December 2019. In addition to
the operations in its domestic market, OTE also operates in
Romania. OTE's revenue and Adj. EBITDA for 2019 amounted to EUR3.9
billion and EUR1.4 billion, respectively.
OTE's major shareholders are Deutsche Telekom and the Hellenic
Republic, with equity stakes of 46.91% and 5.58%, respectively.
=============
I R E L A N D
=============
ARBOUR CLO VIII: S&P Assigns Prelim BB- (sf) Rating to Cl. E Notes
------------------------------------------------------------------
S&P Global Ratings assigned its preliminary credit ratings to
Arbour CLO VIII DAC's class X, A, B-1, B-2, C, D, and E notes. At
closing, the issuer will also issue unrated subordinated notes.
Under the transaction documents, the rated notes will 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 three
years after closing.
The preliminary 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 weighted-average rating factor 2809.72
Default rate dispersion 615.20
Weighted-average life (years) 5.50
Obligor diversity measure 132.23
Industry diversity measure 18.41
Regional diversity measure 1.28
Transaction Key Metrics
Current
Total par amount (mil. EUR) 300
Defaulted assets (mil. EUR) 0
Number of performing obligors 161
Portfolio weighted-average rating
derived from S&P's CDO evaluator 'B'
'CCC' category rated assets (%) 5.92
Covenanted 'AAA' weighted-average recovery (%) 34.48
Covenanted weighted-average spread (%) 3.70
Covenanted weighted-average coupon (%) 4.00
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary 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 target par amount, the
covenanted weighted-average spread, the covenanted weighted-average
coupon, 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.
"We expect that the transaction's documented counterparty
replacement and remedy mechanisms will adequately mitigate its
exposure to counterparty risk under our current counterparty
criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned preliminary ratings, as the exposure to
individual sovereigns does not exceed the diversification
thresholds outlined in our criteria.
"At closing, we consider that the transaction's legal structure
will be bankruptcy remote, in line with our legal criteria.
"Our cash flow analysis considers scenarios where the underlying
pool comprises 100% of floating-rate assets (i.e., the fixed-rate
bucket is 0%) and where the fixed-rate bucket is fully utilized (in
this case 15%). In both scenarios, the class X to E notes achieve
break-even default rates that exceed their respective scenario
default rates, so all classes of notes have positive cushions.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B-1 to E notes could withstand
stresses commensurate with higher rating levels than those we have
assigned. However, as the CLO is 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. As such, we have not
applied any additional scenario and sensitivity analyses when
assigning ratings on any classes of notes in this transaction.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our preliminary
ratings are commensurate with the available credit enhancement for
the class X, A, B-1, B-2, C, D, and E 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 preliminary ratings on the class A
to E notes to five of the 10 hypothetical scenarios we looked at in
our recent publication.
S&P Global Ratings acknowledges a high degree of uncertainty about
the evolution of the coronavirus pandemic. The consensus among
health experts is that the pandemic may now be at, or near, its
peak in some regions, but will remain a threat until a vaccine or
effective treatment is widely available, which may not occur until
the second half of 2021. S&P said, "We are using this assumption in
assessing the economic and credit implications associated with the
pandemic. As the situation evolves, we will update our assumptions
and estimates accordingly."
Ratings List
Class Preliminary rating Preliminary amount (mil. EUR)
X AAA (sf) 2.00
A AAA (sf) 174.70
B-1 AA (sf) 20.00
B-2 AA (sf) 10.80
C A (sf) 21.50
D BBB (sf) 17.80
E BB- (sf) 15.30
Subordinated NR 33.70
NR--Not rated.
FINSBURY SQUARE 2020-2: Fitch Gives CCCsf Rating to Class F Debt
----------------------------------------------------------------
Fitch Ratings has assigned Finsbury Square 2020-2 plc's notes final
ratings.
Finsbury Square 2020-2 PLC
- Class A XS2190195649; LT AAAsf New Rating
- Class B XS2190195722; LT AAsf New Rating
- Class C XS2190195995; LT A+sf New Rating
- Class D XS2190196027; LT A-sf New Rating
- Class E XS2190196290; LT BB+sf New Rating
- Class F XS2190196373; LT CCCsf New Rating
- Class X XS2190196456; LT Bsf New Rating
- Class Z XS2190196530; LT NRsf New Rating
TRANSACTION SUMMARY
FSQ2020-2 is a securitisation of owner-occupied and buy-to-let
mortgages originated by Kensington Mortgage Company and backed by
properties in the UK. The transaction features recent originations
of both OO and BTL loans originated up to April 2020 and the
residual origination of the Finsbury Square 2017-2 PLC
transaction.
KEY RATING DRIVERS
Recent and Seasoned Prime OO and BTL Originations: The pool
comprises a mix of recent and more seasoned OO and BTL loans. The
most recent portion includes loans originated in March and April
2020 representing about 41.1% of the pool. All loans come from
offers that have been issued in the period pre-lockdown. About
35.4% of the pool is more seasoned and corresponds to the residual
origination of FSQ2017-2.
Coronavirus-related Alternative Assumptions: Fitch expects a
generalised weakening in borrowers' ability to keep up with
mortgage payments due to the economic impact of the coronavirus
pandemic and the related containment measures. As a result, Fitch
applied updated criteria assumptions to FSQ2020-2's mortgage
portfolio (see EMEA RMBS: Criteria Assumptions Updated due to
Impact of the Coronavirus Pandemic).
The combined application of revised 'Bsf' representative pool
weighted average foreclosure frequency, revised rating multiples
and arrears adjustment for both the OO and the BTL sub-pools,
resulted in a multiple to the current FF assumptions of 1.4x at
'Bsf' and of about 1.1x at 'AAAsf'. The updated assumptions are
more modest for higher rating levels as the corresponding rating
assumptions are already meant to withstand more severe shocks.
Fitch also applied a payment holiday stress for the first 12 months
of projections, assuming up to half of interest collections will be
lost, and related principal receipts will be delayed.
Self-employed Borrowers: Kensington may lend to self-employed
individuals with only one year's income verification completed or
the latest year's income if profit is rising. Fitch believes this
practice is less conservative than other prime lenders. An increase
of 1.3x to the FF for self-employed borrowers with verified income
was applied instead of 1.2x, as per criteria.
Impact of Payment Holidays: 28.7% of the portfolio's loans were on
payment holidays as at end-May. In line with Financial Conduct
Authority guidance, Kensington granted payment holidays based on a
borrower's self-certification. Fitch expects providing borrowers
with a payment holiday of up to six months to have a temporary
positive impact on loan performance. However, the transaction may
face some liquidity constraints if a large number of borrowers opt
for a payment holiday.
Fitch has tested the ability of the liquidity reserves to cover
senior fees, net swap payments and class A and B note interest, and
found that payment interruption risk would be mitigated.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
The broader global economy remains under stress due to the
coronavirus pandemic, with surging unemployment and pressure on
businesses stemming from social-distancing guidelines. Recent
government measures related to the coronavirus pandemic introduced
a suspension on tenant evictions for three months and mortgage
payment holidays, also for up to three months. Fitch acknowledges
the uncertainty of the path of coronavirus-related containment
measures and has therefore considered more severe economic
scenarios.
As outlined in "Fitch Ratings Coronavirus Scenarios: Baseline and
Downside Cases", Fitch considers a more severe downside coronavirus
scenario for sensitivity purposes whereby a more severe and
prolonged period of stress is assumed with a halting recovery from
2Q21. Under this scenario, Fitch assumed a 15% increase in WAFF and
a 15% decrease in WARR. The results indicate a four-notch adverse
rating impact on the class E notes, a three-notch impact on the
class C notes and a one to two notch impact on the class A, B, and
D notes.
The transaction's performance may be affected by changes in market
conditions and economic environment. Weakening asset performance is
strongly correlated to increasing levels of delinquencies and
defaults that could reduce credit enhancement (CE) available to the
notes.
Additionally, unanticipated declines in recoveries could also
result in lower net proceeds, which may make certain note ratings
susceptible to potential negative rating actions depending on the
extent of the decline in recoveries. Fitch conducts sensitivity
analyses by stressing both a transaction's base-case FF and RR
assumptions, and examining the rating implications on all classes
of issued notes.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Stable to improved asset performance driven by stable delinquencies
and defaults would lead to increasing CE levels and potential
upgrades. Fitch tested an additional rating sensitivity scenario by
applying a decrease in the FF of 15% and an increase in the RR of
15%. The ratings for the subordinated notes could be upgraded by up
to three notches.
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.
CRITERIA VARIATION
Kensington may choose to lend to self-employed individuals with
only one year's income verification completed. Fitch believes this
practice is less conservative than that at other prime lenders'.
For OO mortgages, Fitch applied an increase of 1.3x to the FF for
self-employed borrowers with verified income instead of the 1.2x
increase, as per its criteria.
Applying current assumptions, but excluding the criteria variation,
results in one-category higher rating for the class X notes. There
is no rating impact on the other classes.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with Form ABS Due Diligence-15E as prepared by
Deloitte LLP. The third-party due diligence described in Form 15E
focused on comparison and re-computation of certain characteristics
with respect to the mortgage loans and related mortgaged properties
in the data file. Fitch considered this information in its analysis
and it did not have an effect on Fitch's analysis or conclusions.
DATA ADEQUACY
Fitch reviewed the results of a third-party assessment conducted on
the asset portfolio information and concluded that there were no
findings that affected the rating analysis.
Fitch conducted a review of a small targeted sample of Kensington's
origination files during the Finsbury Square 2020-1 PLC rating
process and found the information contained in the reviewed files
to be adequately consistent with the originator's policies and
practices, and the other information provided to the agency about
the asset portfolio.
Overall, Fitch's assessment of the asset pool information relied
upon for the agency's rating analysis according to its applicable
rating methodologies indicates that it is adequately reliable.
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).
MAN GLG V: Moody's Downgrades Class F Notes to B3
-------------------------------------------------
Moody's Investors Service has downgraded the rating on the
following note issued by Man GLG Euro CLO V Designated Activity
Company:
EUR12,000,000 Class F Deferrable Junior Floating Rate Notes due
2031, Downgraded to B3 (sf); previously on Nov 5, 2018 Definitive
Rating Assigned B2 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR234,000,000 Class A-1 Senior Secured Floating Rate Notes due
2031, Affirmed Aaa (sf); previously on Nov 5, 2018 Definitive
Rating Assigned Aaa (sf)
EUR14,000,000 Class A-2 Senior Secured Floating Rate Notes due
2031, Affirmed Aaa (sf); previously on Nov 5, 2018 Definitive
Rating Assigned Aaa (sf)
EUR8,000,000 Class B-1 Senior Secured Floating Rate Notes due 2031,
Affirmed Aa2 (sf); previously on Nov 5, 2018 Definitive Rating
Assigned Aa2 (sf)
EUR20,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2031,
Affirmed Aa2 (sf); previously on Nov 5, 2018 Definitive Rating
Assigned Aa2 (sf)
EUR10,000,000 Class B-3 Senior Secured Floating Rate Notes due
2031, Affirmed Aa2 (sf); previously on Nov 5, 2018 Assigned Aa2
(sf)
EUR4,250,000 Class C-1 Deferrable Mezzanine Floating Rate Notes due
2031, Affirmed A2 (sf); previously on Nov 5, 2018 Definitive Rating
Assigned A2 (sf)
EUR8,000,000 Class C-2 Deferrable Mezzanine Fixed Rate Notes due
2031, Affirmed A2 (sf); previously on Nov 5, 2018 Assigned A2 (sf)
EUR15,750,000 Class C-3 Deferrable Mezzanine Floating Rate Notes
due 2031, Affirmed A2 (sf); previously on Nov 5, 2018 Assigned A2
(sf)
EUR18,000,000 Class D-1 Deferrable Mezzanine Floating Rate Notes
due 2031, Affirmed Baa2 (sf); previously on Nov 5, 2018 Definitive
Rating Assigned Baa2 (sf)
EUR2,000,000 Class D-2 Deferrable Mezzanine Fixed Rate Notes due
2031, Affirmed Baa2 (sf); previously on Nov 5, 2018 Assigned Baa2
(sf)
EUR26,000,000 Class E Deferrable Junior Floating Rate Notes due
2031, Affirmed Ba2 (sf); previously on Nov 5, 2018 Definitive
Rating Assigned Ba2 (sf)
Man GLG Euro CLO V Designated Activity Company, issued in November
2018, is a collateralised loan obligation (CLO) backed by a
portfolio of mostly high-yield senior secured European loans. The
portfolio is managed by GLG Partners LP. The transaction's
reinvestment period will end in December 2022.
RATINGS RATIONALE
The rating downgrade on the Class F note is primarily a result of
the deterioration in the credit quality of the underlying
collateral pool since March 2020 and the exposure of this class to
potential defaults or restructurings of securities rated Caa1 or
below.
Since the coronavirus outbreak widened in March, the decline in
corporate credit has resulted in a significant number of
downgrades, other negative rating actions, or defaults on the
assets collateralising the CLO. The deterioration in credit quality
of the portfolio is reflected in an increase in Weighted Average
Rating Factor and of the proportion of securities from issuers with
ratings of Caa1 or lower. According to the trustee report dated
June 2020 [1], the WARF was 3460 compared to a value of 3034 as of
March 2020 [2], which is significantly over the covenant level of
3050. Securities with ratings of Caa1 or lower currently make up
approximately 4.65% of the underlying portfolio according to
Trustee calculations [1], whereas Moody's calculates that
securities with default probability ratings of Caa1 or lower
currently make up approximately 20.81%% of the underlying
portfolio. Nonetheless, over-collateralisation levels have been
maintained across the capital structure. According to the trustee
report of June 2020 [1] the Class A/B, Class C, Class D , Class E
and Class F OC ratios are reported at 140.06%, 127.57%, 119.93%,
111.27% and 107.68% compared to January 2020 [3] levels of 140.26%,
127.75%, 120.10%, 111.43% and 107.83% respectively. Moody's notes
that none of the OC tests are currently in breach and the
transaction remains in compliance with the following collateral
quality tests: Diversity Score, Weighted Average Recovery Rate,
Weighted Average Spread and Weighted Average Life.
Moody's analysed the CLO's latest portfolio and took into account
the recent trading activities as well as the full set of structural
features of the transaction and concluded that the current ratings
on the Class A-1, A-2, B-1, B-2, B-3, C-1, C-2, C-3, D-1, D-2 and E
notes continue to reflect the expected losses of the notes.
The rapid spread of the coronavirus outbreak, the government
measures put in place to contain it and the deteriorating global
economic outlook, have created a severe and extensive credit shock
across sectors, regions and markets. Its analysis has considered
the effect on the performance of corporate assets from the collapse
in global economic activity in the second quarter and a gradual
recovery in the second half of the year. However, that outcome
depends on whether governments can reopen their economies while
also safeguarding public health and avoiding a further surge in
infections. As a result, the degree of uncertainty around its
forecasts is unusually high. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the
substantial implications for public health and safety.
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers. In its base case,
Moody's analysed the underlying collateral pool as having a
performing par and principal proceeds balance of EUR400.4 million,
defaulted par of EUR1.0 million, a weighted average default
probability of 28.93% (consistent with a WARF of 3505), a weighted
average recovery rate upon default of 45.42% for a Aaa liability
target rating, a diversity score of 56 and a weighted average
spread of 3.72%.
The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.
In consideration of the current high uncertainties around the
global economy and the ultimate performance of the CLO portfolio,
Moody's conducted a number of additional sensitivity analyses
representing a range of outcomes that could diverge, both to the
downside and the upside, from its base case. Some of the additional
scenarios that Moody's considered in its analysis of the
transaction include, among others: additional near-term defaults of
companies facing liquidity pressure; additional OC par haircuts to
account for potential future downgrades and defaults resulting in
an increased likelihood of cash flow diversion to senior notes; and
some improvement in WARF as the global economy gradually recovers
in the second half of the year and future corporate credit
conditions generally stabilize.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
March 2019.
Counterparty Exposure:
Its rating action took into consideration the notes' exposure to
relevant counterparties, such as the account bank, using the
methodology "Moody's Approach to Assessing Counterparty Risks in
Structured Finance" published in June 2020. Moody's concluded the
ratings of the notes are not constrained by these risks.
Factors that would lead to an upgrade or downgrade of the ratings:
This transaction is subject to a high level of macroeconomic
uncertainty, which could negatively affect the ratings on the
notes, in light of uncertainty about credit conditions in the
general economy. In particular, the length and severity of the
economic and credit shock precipitated by the global coronavirus
pandemic will have a significant impact on the performance of the
securities. CLO notes' performance may also be impacted either
positively or negatively by: (1) the manager's investment strategy
and behaviour; and (2) divergence in the legal interpretation of
CDO documentation by different transactional parties because of
embedded ambiguities.
Additional uncertainty about performance is due to the following:
- Weighted average life: The notes' ratings are sensitive to the
weighted average life assumption of the portfolio, which could
lengthen as a result of the manager's decision to reinvest in new
issue loans or other loans with longer maturities, or participate
in amend-to-extend offerings. The effect on the ratings of
extending the portfolio's weighted average life can be positive or
negative depending on the notes' seniority.
- Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes have
defaulted can result in volatility in the deal's
over-collateralisation levels. Further, the timing of recoveries
and the manager's decision whether to work out or sell defaulted
assets can also result in additional uncertainty. Recoveries higher
than Moody's expectations would have a positive impact on the
notes' ratings.
- Other collateral quality metrics: Because the deal can
reinvest, the manager can erode the collateral quality metrics'
buffers against the covenant levels.
In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
market environment, the legal environment, specific documentation
features, the collateral manager's track record and the potential
for selection bias in the portfolio. All information available to
rating committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors, and judgments
regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.
=========
I T A L Y
=========
GAMENET GROUP: Moody's Confirms B1 CFR, Alters Outlook to Neg.
--------------------------------------------------------------
Moody's Investors Service has confirmed the ratings of Gamenet
Group S.p.A., an Italian-based gaming operator, including the B1
corporate family rating, the B1-PD probability of default rating
and the B1 senior secured notes rating. Concurrently, Moody's
assigned a B1 instrument rating to the new EUR300 million senior
secured notes and EUR340 million floating rate notes due 2025 to be
raised by Gamma Bidco S.p.A. [1]. At the same time, Moody's has
changed the outlook of Gamenet to negative from ratings under
review and assigned a negative outlook to Gamma Bidco S.p.A. This
concludes the review process initiated on March 27, 2020.
In February 2020, Apollo closed the acquisition of Gamenet. The
transaction was funded by a combination of cash equity and debt.
Proceeds from the aggregate EUR640 million senior secured notes
along with EUR48 million of cash on balance sheet will be used to
repay the existing EUR431.5 million secured notes, the EUR215.9
million Gamma Bidco loan [2] and to pay for transaction fees and
expenses. The company will also enter into a new EUR100 million
Revolving Credit Facility agreement, upsized from the existing
EUR85 million RCF, that will remain super senior to the senior
secured notes. Moody's will withdraw the instrument ratings on the
EUR431.5 million secured notes upon repayment.
RATINGS RATIONALE
Its rating action reflects Gamenet's success in having preserved
its liquidity during the three-month lockdown and the rating
agency's expectations that the company's operations are on course
to recover to pre-corona levels. Gamenet's land-based network
re-opened on the 15th June 2020 and the major European football
leagues restarted in May and June, which will support the company's
retail and sports betting operations. The online division remained
active throughout the lockdown, which allowed the company to
generate revenue during the crisis and partly cover its fixed
costs.
Moody's expects Gamenet's EBITDA to grow in 2021 compared to 2019,
underpinned by continued strong growth in its online segment, which
is likely to offset a weaker earnings trajectory in the company's
gaming machines division, which may suffer from social distancing
measures and a decline in consumer spending.
In Q1 2020, Gamenet reported a 13.1% rise in EBITDA despite the
negative impact from the coronavirus outbreak in March. This strong
performance was primarily driven by the online segment and the cost
synergies linked to the acquisition of Goldbet, which more than
mitigated the decline in the earnings generated by the company's
gaming machines. The weaker earnings in this segment was caused by
higher taxation and the introduction of the card reader feature.
However, the financing of Apollo's acquisition and its refinancing
of existing debt is credit negative because this will lead to an
increase in total debt and will weaken the company's credit
metrics. Pro forma Moody's adjusted leverage will deteriorate by
1.1x to 3.7x from 2.6x based on a structuring EBITDA of EUR191
million. Moody's calculates that free cash flow generation will be
negatively impacted by the increase in annual interest. It is also
uncertain what the company's future financial policy will be over
the longer-term and if this will lead to any changes in the capital
structure. Moody's expects Moody's adjusted leverage to return
towards 4.0x in 2021, after increasing close to 6.5x in 2020.
Moody's assumes that the company will not engage in any major
debt-funded acquisitions or shareholder distributions.
RATING OUTLOOK
The negative outlook reflects the company's increase in leverage
and some uncertainty as to the company's performance given the
coronavirus outbreak, though to date it has performed well relative
to peers amid this crisis. It also reflects the change of ownership
from a publicly listed company with a clearly defined financial
policy to a sponsor-led shareholding structure, which Moody's
expects will likely have more appetite for leverage and risk.
LIQUIDITY PROFILE
Gamenet has good liquidity supported by EUR83 million of cash on
balance sheet pro forma the transaction, a EUR100 million undrawn
RCF and Moody's expectations of positive free cash flow in the
second semester of 2020.
The super senior RCF documentation contains a springing financial
covenant based on net leverage set at 8.3x and tested when the RCF
is drawn by more than 40%. Moody's expects that Gamenet will
maintain good headroom under this covenant if it is tested.
STRUCTURAL CONSIDERATIONS
Using Moody's Loss Given Default for Speculative-Grade Companies
methodology, Gamenet's PDR and the rating of the senior secured
notes remain in line with the CFR. This is based on a 50% recovery
rate, as is typical for a debt capital structure that consists of
super senior bank debt and senior secured notes. The RCF and the
notes share the same security -share pledges, intercompany loans
and material bank accounts- and they rank pari passu. Nonetheless,
the RCF has priority over the proceeds in an enforcement under the
Intercreditor Agreement.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive pressure on the rating could occur if: (i) the company
materially diversifies its product offering beyond the gaming
market or geographical presence outside of Italy; (ii)
Moody's-adjusted leverage decreases sustainably below 2.5x while
achieving meaningful positive free cash flow, as well as good
liquidity; (iii) Moody's has greater clarity over the company's
financial policy.
Negative pressure on the rating could occur if: (i) the company's
performance weakens or is hurt by a changing regulatory and fiscal
regime; (ii) Moody's-adjusted leverage remains above 4.0x for an
extended period; (iii) free cash flow deteriorates and liquidity
weakens.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Gaming Industry
published in December 2017.
COMPANY PROFILE
Founded in 2006 and headquartered in Rome (Italy), Gamenet is one
of the largest operators in the Italian gaming market through a
network of 7,964 points of sales as of March 2020, of which 64 are
directly managed. The company operates in five operating segments:
(i) Retail betting consisting of sports betting and gaming through
the retail network; (ii) Online consisting of sports betting and
gaming; (iii) Amusement with prize machines; (iv) Video lottery
terminals; and (v) Retail & street operations consisting of the
management of owned gaming halls and AWPs. In 2019, the company
reported net revenue of EUR738 million and EBITDA of EUR165 million
post IFRS 16.
===================
L U X E M B O U R G
===================
EUROPEAN MEDCO: Fitch Gives B Final LT IDR, Outlook Stable
----------------------------------------------------------
Fitch Ratings has assigned European Medco Development 3 S.a.r.l a
final Long-Term Issuer Default Rating of 'B' with Stable Outlook.
Fitch has also assigned a final senior secured rating of 'B+'/'RR3'
to the EUR290 million term loan B borrowed by European Medco
Development 4 S.a.r.l. The debt is being used to acquire
PharmaZell, the Luxembourg-based manufacturer of active
pharmaceutical ingredients.
The assignment of the final ratings is following its review of the
financing documentation, which was materially in line with Fitch's
expectations.
The 'B' IDR reflects PharmaZell's small scale with portfolio and
customer concentration risks mitigated by well-entrenched market
positions in specialty API, long-standing customer relationships
and an adequate financial risk profile. The Stable Outlook
encapsulates Fitch's expectations of strong organic growth with
sustained positive free cash flow and organic deleveraging
prospects towards 5.0x on a FFO gross leverage basis by 2024.
KEY RATING DRIVERS
Niche Player with High Entry Barriers: The rating reflects
PharmaZell's small scale with product and customer concentrations a
rating constraint. This is mitigated by a focus on a
technologically complex niche in API, supported by its proprietary
process knowledge and strong client relationships with a large
number of generics drug manufacturers, where product quality,
supply reliability and cost efficiency play a key role. Tight
regulation is an additional barrier to entry, limiting
competition.
Stable Margins Mitigate Revenue Volatility: Revenue is subject to
volatility driven by the commercial success of the target drugs,
but the rating is supported by steadily expanding EBITDA and stable
margins of around 30%, reflecting PharmaZell's value proposition
and proven ability to improve profitability on a product portfolio
basis.
Asset-Heavy Operations: As a supplier of specialty API to generic
drug manufacturers, PharmaZell's business model is akin to that of
a contract manufacturing organisation, albeit with greater
operational flexibility reinforced by proprietary production
knowledge. It also requires high capex in maintenance, optimisation
and expansion, which Fitch estimates on average at 9% of sales in
the next four years. Although this capital intensity consumes a
large part of its cash flows from operations, these investments are
critical for its medium- and long-term growth and productivity.
Self-funded Capex: Fitch believes that PharmaZell will be able to
fund its extensive capex programme entirely from internal cash
flow, which supports its ratings. Inability to adequately support
the asset production base could undermine revenues, earnings and
cash flow expectations and put the ratings under pressure.
Cash-Generative Operations: Fitch projects PharmaZell's FCF margins
at mid-single digit rates, following completion of the
restructuring in connection with a production site closure in
Switzerland. The positive FCF differentiates the company's credit
profile from that of lower rated peers lacking sustained cash
generation.
Deleveraging Capacity: Fitch expects funds from operations gross
leverage to peak at 7.0x in financial year to March 2021,
post-buyout. However, Fitch projects deleveraging towards 5.0x by
FY24 on the back of revenue growth following construction of new
plants and capacity expansion across all of PharmaZell's production
facilities. This pace of deleveraging and financial risk is
adequate for the ratings, and in combination with expected FCF
margins, are the main drivers of the company's credit quality.
Latent M&A Risk: Fitch understands from management that while the
business plan assumes organic growth, the company may engage in
selective bolt-on M&A, including raw material suppliers. Fitch
regards the possibility of large-scale M&A as low, and would
consider this as event risk.
Supportive Market Fundamentals: PharmaZell's credit profile
benefits from a supportive sector environment in the broader
pharmaceuticals market due to growing and ageing populations and
increasing access to medical care, with generics drugs receiving
government support as a means to contain rising healthcare costs.
In the API market, which is projected to grow at high single digits
in percentage terms, PharmaZell is well-placed to capitalise on the
continuing trend for outsourcing by pharmaceutical companies of
non-core and technologically complex processes and to leverage on
its proprietary knowledge, product pipeline and well-established
client relationships.
DERIVATION SUMMARY
Fitch rates PharmaZell according to its global Ratings Navigator
for Pharmaceutical Companies. Under this framework, PharmaZell's
small-scale operations constrain the rating to the 'B' category
with certain product portfolio and customer concentration risks,
which are mitigated by the company's well-entrenched niche position
in specialty API, strong customer relationships and a highly
regulated environment supporting stable operating margins.
PharmaZell's leverage metrics are adequate and the company is able
to self-finance organic business growth, resulting in only moderate
execution risks.
Fitch regards capital- and asset-intensive businesses such as the
French animal health company Financiere Top Mendel (Ceva Sante,
B/Stable) and privately rated CMOs as the closest peers in their
operating risk profile, which relies on large ongoing investments
in manufacturing assets to grow at or above market of 10% and to
maintain operating margins. However, Ceva Sante's larger business
scale allows a higher leverage tolerance with at least a 1.0x
higher target FFO gross leverage than that of PharmaZell.
In contrast, asset-light pharmaceutical companies outsourcing
capital- and asset-intensive activities such as IWH UK Finco
Limited (Theramex; B/Stable), Cheplapharm Arzneimittel GmbH
(B+/Stale) and Antigua Bidco Limited (Atnahs, B+/Stable) reflect
different operating risks with emphasis on drug IP rights
management, or marketing and distribution capabilities, resulting
in overall stronger FCF margins than PharmaZell's. While all three
companies have certain product concentrations, higher-rated
Cheplapharm and Atnahs show considerably higher FCF and more
conservative financial policies than Theramex.
KEY ASSUMPTIONS
- Revenue growth of 7% driven by core product portfolio (4%-5%
increase) plus contribution from growth products (e.g. UDCA, I-18,
Cysteine) over the next four years
- Fitch-adjusted EBITDA margin stable around 29%-30% up to FY24
- Cash working capital outflows of EUR4 million-EUR6 million per
year for the next four years
- Capex at around 7%-11% of sales up to FY24
- No acquisitions for the next four years
- No dividends paid over the next four years.
KEY RECOVERY ASSUMPTIONS
- Its recovery analysis assumes that PharmaZell would be
restructured as a going concern rather than liquidated in a default
scenario.
- Given some product and customer concentration risks a
contraction in EBITDA at the point of distress could be
significant. Fitch estimates a post-distress EBITDA of EUR45
million, which would be required for the business to remain a going
concern assuming cash debt service, maintenance and optimisation
capex, along with trade working capital and tax payments. A fall in
earnings of that magnitude would most likely be the result of a
significant loss of sales of one of PharmaZell's products in the
concentrated portfolio (e.g. top three steroids contribute an
estimated 15% to sales; 5-ASA product comprises 21% of sales) due
to some severe manufacturing disruption, regulatory issues,
market-share loss from a superior competitive product or
unsuccessful drug commercialisation by one of PharmaZell's
customers.
- PharmaZell has developed substantial technical know-how and
proprietary technologies over the past 20+ years. It also has a
sticky (15+ years) blue-chip customer base. These are factored into
the distressed valuation as are the attractive pharma market
fundamentals that support overall growth of 6%-8% in core product
lines (steroids, 5-ASA and amino acids).
- In its recovery analysis, Fitch estimates that around EUR20
million of asset-backed financing comprising receivables factoring
facilities of approximately EUR15 million, together with export
advance financing facilities of some EUR5 million, will be
available to the business post-distress.
- After deducting 10% for administrative claims, its principal
waterfall analysis generated a ranked recovery in the 'RR3' band
for the all-senior secured capital structure, comprising the TLB of
EUR290 million and the EUR75 million revolving credit facility
(RCF), which Fitch assumes to be fully drawn prior to distress, and
ranking equally among themselves.
- This indicates a 'B+'/'RR3' instrument rating for the senior
secured debt with an output percentage based on current metrics and
assumptions at 55%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Increasing business scale and product diversification
supporting EBITDA margins expansion toward 35%;
- FCF margins sustained at high single digits; and
- FFO gross leverage sustained at below 5.0x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Declining revenues due to product, or production issues or as a
result of customer losses leading to EBITDA margin declining
towards 25%;
- FFO gross leverage remaining at or above 7.0x after FY21; and
- FFO interest cover tightening to below 2.5x.
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
Satisfactory Liquidity: Fitch projects satisfactory liquidity with
cash from operations averaging EUR35 million, which will be
sufficient to self-fund annual capex of EUR15 million-EUR22
million. After a deduction of EUR6 million deemed as restricted
cash to support intra-year trade working capital, Fitch estimates
sufficient year-end cash balances of EUR40 million-EUR60 million,
in addition to the committed revolving credit facility of EUR75
million, which Fitch expects to remain undrawn.
PharmaZell has a concentrated debt structure with a TLB due in 2027
translating into manageable refinancing risks given long-dated debt
maturities, underlying positive FCF and supportive industry
dynamics.
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).
=====================
N E T H E R L A N D S
=====================
BRASKEM NETHERLANDS: Fitch Rates Subordinated Notes BB-
-------------------------------------------------------
Fitch Ratings has assigned a 'BB-' rating to the benchmark sized
subordinated notes of Braskem Netherlands Finance B.V., which is a
private company with limited liability incorporated under the laws
of the Netherlands. The notes will be fully, unconditionally and
irrevocably guaranteed by Braskem S.A. Proceeds of the issuance
will be used mainly to refinance current indebtedness and for
general corporate purposes. Fitch currently rates Braskem's
Long-Term Foreign and Local Currency Issuer Default Ratings
'BB+'/Stable Outlook.
The proposed securities qualify for 50% equity credit as they meet
Fitch's criteria with regard to subordination, cross defaults, no
material covenants, effective maturity of at least five years,
ability to defer coupons for at least five years, and no look-back
provisions. As a result of these features, the 'BB-' rating is two
notches below Braskem's Issuer Default Rating as they reflect the
deep subordination and consequently, the higher loss severity and
heightened risk of non-performance relative to senior obligations
of the issuer and guarantor. This approach is in accordance with
Fitch's criteria, "Corporate Hybrids Treatment and Notching
Criteria" dated Nov. 11, 2019.
The hybrid notes are expected to be deeply subordinated and rank
senior only to Braskem's share capital, coupons payments can be
deferred at the discretion of the issuer, and there are limited
events of default and absence of material covenants and look back
provisions. The notes have maturity over 20 years, and the issuer
has a call option to redeem them after 5.5 years of the issue date.
There will be a coupon step-up of 25bp after 10.5 years (the
initial step up date) and additional step-up of 25bp after 20.5
years or 25.5 (the second step up date). The first and the second
coupon step-up date are not treated as effective maturity dates
under Fitch's criteria due to the cumulative amount of the step-ups
being lower or equal to 1% throughout the life of the instruments.
Deferrals of coupon payments are cumulative, and the company will
be obliged to make a mandatory settlement of deferred interest
payments under certain circumstances, including a declaration or
payment of a dividend above minimum required.
Braskem's ratings reflect its leading position in the Americas
petrochemical sector, strong business profile due to geographic and
raw material diversification and a record of consistent FCF
generation. The company's current high leverage ratio has pressured
its ratings and is a weakness compared with investment-grade peers
in Latin America. Factored into the company's ratings are its
commitment to maintain a strong liquidity position and a manageable
debt amortization schedule, with no refinancing risk in the medium
term.
The recent downgrade to 'BB+' from 'BBB-' reflects Fitch's view
that the deep global recession caused by the coronavirus pandemic
and sharp economic contraction in Brazil, Mexico, the U.S. and
Europe have elevated the challenges faced by Braskem as it seeks to
deleverage through organic and inorganic measures. The weak
macroeconomic backdrop has also increased uncertainty about the
duration of the downturn in the petrochemical cycle that started in
2019 and the return to a balanced market for polyethylene and
improved demand for polypropylene. The timing of the pandemic was
inopportune for Braskem because it coincided with additional
liabilities of around BRL4.8 billion (including most recent
announcements) related to a geological event in Alagoas.
Fitch's base case, excluding the operations in Mexico, forecasts
Braskem's net debt/EBITDA ratio at 4.5x-3.6x during 2020-2021; if
including the Mexican operations, which hold non-recourse debt,
Fitch's base-case net leverage ratio is 4.9x in 2020 and 3.9x in
2021. This leverage calculation includes the 50% equity-credit for
the hybrid issuance.
Braskem's ratings are not constrained by Brazil's 'BB' Country
Ceiling, in accordance with Fitch's Non-Financial Corporates
Exceeding the Country Ceiling Rating Criteria. Braskem has strong
operating cash flow generation from assets in the U.S., Germany and
Mexico, which contribute around 45% of its EBITDA. The company's
ratings are also supported by cash generated abroad by exports,
cash held abroad and a record of retaining undrawn standby credit
lines.
KEY RATING DRIVERS
Weak Operating Results: Fitch is projecting that Braskem's EBITDA,
excluding Mexico, will remain depressed in 2020 and 2021 at BRL5.7
billion and BRL6.5 billion, respectively, due to lower volume in
Brazil, the U.S. and Europe and still weak petrochemical spreads,
despite improvements related to lower raw material prices. These
figures compare with BRL4.3 billion in 2019 and BRL9.5 billion in
2018 and 2017. Braskem is attempting to limit the impact of the
global downturn on its operating cash flow and FCF by reducing
fixed costs, lowering capex and eliminating dividends
distributions.
Fitch's base-case forecasts Braskem's consolidated recurring EBITDA
cash flow from operation and FCF for 2020 at approximately BRL7.2
billion, BRL2.6 billion and negative BRL356 million, respectively.
For 2021, Fitch projects BRL8.1 billion of recurring EBITDA, BRL3.8
billion of CFFO and BRL1.6 billion of positive FCF. This compares
with BRL11.3 billion of EBITDA, BRL9.5 billion of CFFO and BRL5.3
billion of positive FCF, after BRL1.5 billion of dividends, in
2018.
High Leverage: The combination of weaker spreads, lower volume and
legal contingencies has pressured Braskem's leverage. Fitch
estimates consolidated net leverage will reach 4.9x in 2020; or
4.4x when excluding the operations in Mexico. For 2021, these
ratios should be 4.0x and 3.6x, respectively. The geological event
in Alagoas have led to BRL4.8 billion of commitments (including
most recent announcements; around BRL1.7 billion is already
excluded from its cash position and the remainder will be amortized
over four years, per Fitch's estimates.
Solid Business Diversification: Braskem's ratings are underpinned
by its strong geographic and feedstock diversification, and leading
market positions in PE and PP. The company's operations in the
U.S., Germany and Mexico represent around 35%-45% of its
consolidated EBITDA, while its Brazilian operation accounts for the
balance. Braskem's feedstock is mainly balanced between naptha 38%,
34% propeno and 22% ethane following the ramp-up of its joint
venture in Mexico, Braskem Idesa SAPI (BB-/Negative). The company's
strategy of diversifying its feedstock matrix has reduced its
exposure to one feedstock while decreasing its production cost and
improving its long-term competitiveness.
Exposure to PEMEX: Fitch's base case does not incorporate any
material cash flow from the Mexican operation - where Braskem Idesa
has a long-term raw-material supply agreement with Petroleos
Mexicanos (BB-/Stable) - until 2022. The agreement includes a
supply of 66,000 barrels per day (bpd) of ethane, which PEMEX has
been unable to deliver due to a drop in production caused by a lack
of investment: it is able to only provide about 49,000 bpd. During
February 2020, Braskem Idesa commenced it fast-track project to
import ethane from the U.S., with capex of USD3.5 million, which
should result in the importation of up to 16,000 bpd of ethane by
2022, out of a capacity of 25,000 bpd; this equates to 24% of total
needs. Fitch has not incorporated the construction of a new import
terminal for ethane into its analysis.
Change in Control: Braskem is owned by Odebrecht Group, which owns
38.3% of its total capital and 50.1% of its voting capital, and
Petroleo Brasileiro S.A. (Petrobras) (BB-/Negative), which owns
36.1% of its total capital and 47.0% of its voting capital.
Odebrecht has offered its Braskem shares as collateral for some of
its debt to a group of Brazilian banks. These shares are under the
control of Odebrecht's creditors, given the default by Odebrecht on
its financial obligations, which could trigger a change of control
at Braskem. Fitch rates Braskem on a standalone basis and thus, a
change in control event would not automatically lead to a rating
action.
DERIVATION SUMMARY
Braskem's leading position in the Americas in its core products, PE
and PP, is a key credit strength, mitigating the commodity nature
of its products, which are characterized by volatile raw material
prices and price-driven competition. Braskem has a medium-size
scale compared with global chemical peers, such as Dow Chemical
Company (BBB+/Negative), yet is well positioned relative to Latin
America peers, such as Orbia Advance Corporation, S.A.B de C.V.
(BBB/Negative) and Alpek, S.A.B. de C.V. (BBB-/Stable), in terms of
scale, profitability and geographic diversification.
Around 35%-45% of Braskem's EBITDA is generated outside of Brazil.
Its thermoplastic resin operations in Brazil are integrated, which
reduces cash flow volatility, while in Mexico, Fitch expects its
profitability to remain above industry average due to its long-term
raw-material supply agreement with PEMEX. The company's strong
60%-65% market share in Brazil is also a competitive advantage, as
it allows Braskem to better withstand higher raw material prices
and pass-through strategies.
Braskem's leverage compares negatively with the around 2.5x of
Orbia and Alpek and is much higher than the 2.0x leverage of Dow
Chemical Company (BBB+/Negative).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
-- Volume to decline in 2020 as result of the pandemic and
gradually recover to 2019 levels by 2022;
-- Spreads to remain pressured due to weaker demand, despite
lower raw material prices;
-- Annual capex of around USD600 million in 2020 and 2021;
-- 50% Equity-Credit for the Hybrid Issuance with proceeds being
used to repay debt;
-- No dividends from Braskem Idesa in 2020-2022;
-- No dividends payments during 2020-2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Consolidated net debt/EBITDA at 3.0x, excluding Braskem Idesa
at 2.5x on average through the cycle;
-- Positive FCF generation across the cycle;
-- Maintenance of a strong liquidity position with no exposure to
refinancing risk.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Consolidated net debt/EBITDA at 4.0x, excluding Braskem Idesa
at 3.5x on average through the cycle;
-- Higher than expected request of dividends by the shareholder;
-- A change in Braskem's management strategy that alters its
adequate financial profile with a robust liquidity position and
long-term debt schedule.
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
Robust Liquidity: Braskem adopts a conservative and proactive
financial strategy to limit the risks associated with exposure to
the cyclical and capital-intensive nature of its business. The
company has a strong cash position, with BRL7.2 billion of readily
available cash and marketable securities as of March 31, 2020,
excluding Braskem Idesa (BRL1.1 billion) and BRL1.7 billion of
restricted cash related to Alagoas.
Braskem's readily available cash was sufficient to cover debt
amortization until mid-2023. On April 1, 2020, the company drew
down the standby credit facility by USD1 billion. Braskem has a
record of strong access to local and international debt markets. As
of March 31 2020, Braskem had BRL53.3 billion of total debt and
BRL3.9 billion of short-term debt, or BRL40.4 billion and BRL2.8
billion, respectively, excluding Braskem Idesa.
ESG CONSIDERATIONS
Braskem has an ESG Relevance Score of 4 for governance structure
due to a still-recent record of corruption scandals and
shareholders' financial stress. Positively, during May 2020, the
company announced that the U.S. Department of Justice, Securities
Exchange Commission and local authorities in Brazil (Ministerio
Publico Federal) confirmed the conclusion of the independent
compliance monitoring of Braskem. The authorities certified that
the company had implemented all the recommendations regarding the
structure and execution of its compliance program meeting the
standards set out in the DoJ plea agreement and the SEC consent.
The company also has a Score of 4 for ecological impact due to the
geological event in Alagoas that affected its salt mining
operations.
These have a negative impact on its credit profile and are relevant
to the rating in conjunction with other factors.
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).
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.
PLT VII: Fitch Gives B Final LT IDR, Outlook Stable
---------------------------------------------------
Fitch Ratings has assigned PLT VII Finance B.V. a final Long-Term
Issuer Default Rating of 'B' after the issuer placed EUR650 million
of new debt intended to refinance its capital structure. The
Outlook is Stable. The senior secured notes issued by PLT VII
Finance S.a r.l. and benefiting from guarantees from Bite's key
operating subsidiaries have been assigned a 'B+'/'RR3' rating.
Bite is a mobile-centric operator in Latvia and Lithuania with
growing broadband/pay-TV segments and substantial advertised-based
free-to-air TV revenues across the Baltics. The company's funds
from operations gross leverage is high at above 6x at end-2020 and
is likely to be maintained in the 5x-6x range with no expected debt
prepayments. There is some deleveraging capacity driven by
continuing single-digit EBITDA and FFO growth but this may be
temporarily stalled by the impact of COVID-19. Pre-dividend free
cash flow (FCF) generation is strong on the back of sustainably low
capex, with the pre-dividend FCF margin close to double-digits.
KEY RATING DRIVERS
Sustainable Market Positions: Bite has been able to successfully
defend its service revenue share in Lativa and Lithuania when the
market was in both decline and growth phases, and Fitch expects it
to retain its strong market positions. Bite's mobile service
revenue market share was stable at around 33% in Lithuania and 25%
in Latvia in 2017-2019, by the company's estimates. Bite operates
in three-player markets with the same set of mobile competitors in
Latvia and Lithuania.
Rational Competition: The lack of any significant mobile virtual
network operators and clear brand positioning of each of the
network operators helps sustain a degree of service
differentiation, reducing direct price competition. Bite positions
itself as an innovative operator with an emphasis on a higher
average revenue per user customer base, while Tele2 pursues a
strategy of perceived price leadership and Telia-controlled
operators focus on exploiting their status of an established
incumbent with superior network quality.
Full Bundling Capabilities: The acquisition of cable-centric
Baltcom in February 2020 made Bite fully bundled-enabled in Latvia,
while in Lithuania the company can rely on regulated access to the
incumbent's fixed network to complement its mobile and pay-TV
propositions. Both markets have been spared aggressive fixed-mobile
bundling competition so far, but Fitch views an ability to offer
bundled services as a strategic advantage that can help maintain
Bite's competitive position.
A wide array of offered services also provides significant
cross-selling opportunities, including between mobile and pay-TV
customers.
COVID-19 Impact: Fitch expects Bite to retain substantial
deleveraging capacity that may allow it to keep leverage under
control, even if there are temporary GDP pressures in its markets
and low growth or modest revenue/EBITDA decline. Fitch projects the
COVID-19 impact will be disruptive across the region, leading to
(-7.9%) yoy GDP decline in Latvia and (-7.6%) in Lithuania in 2020
but followed by a 5.2% yoy and 3.2% GDP recovery respectively in
2021.
Telecoms and digital revenues are likely to be reasonably resilient
but not totally immune to the disposable income pressures that are
likely to accompany a GDP contraction. The impact is likely to be
much more negative in the media segment, with free-to-air TV
revenues being the most vulnerable. The decline in this sub-segment
is likely to exceed the GDP dip. However, this segment accounted
for only 20% of total service revenues, and its negative
contribution is likely to be manageable.
Stagnant FTA TV: Fitch believes Bite's advertising revenue from FTA
TV channels will be supported by its leading market share (at
around 60% of TV advertising revenue across the Baltics area in
2019, according to the company's estimates) and its focus on local
language content, as there is only limited competition in local
language content production. However, Fitch believes traditional
advertising is in structural decline globally, and Fitch expects
ad-based revenues to trail GDP growth over the medium term, and be
more susceptible to the negative COVID-19-related impact.
Pay-TV Diversification: Fitch views Bite's pay-TV segment as
complimentary to the existing mobile/broadband franchise enabling
cross-selling, bundling and churn reduction opportunities. The
company's existing franchise and continuing expansion in the pay-TV
segment also provides it with a degree of business diversification,
allows it to better monetise its content library and spread new
content acquisition costs between FTA and pay-TV platforms.
Sustainably Low Capex: Fitch expects Bite to remain sustainably
capex efficient, with a capex/revenue ratio at around 10% on
average in the medium term. The key contributors to capex
efficiency are comfortable spectrum portfolio in Latvia and
Lithuania, with overall spectrum per head of population over twice
the EU average in both countries and benign geographic topology in
its area of operations, with no extremely densely populated cities
and no wide white spots.
Network JV Improves Efficiency: The company's network sharing joint
venture with Tele2 covering Latvia and Lithuania should help
further rationalise capex allocation and protect against an
excessive capex spike from a 5G roll-out. Joint network management
should mitigate network quality-based competition with Tele2, but
also improve competitive standing compared with the fixed-line
incumbent's networks as the JV is seeking to achieve superior
network coverage and quality across both countries.
5G Cost Likely Manageable. Retrospectively low spectrum costs
compared with the EU average, and a long extension period for 4G
spectrum instalment payments suggest that the forthcoming 5G
auctions for 700MHz spectrum in Lithuania and Latvia and 3.5 GHz in
Lithuania may lead to only a moderate spike in capex. Bite already
holds a significant 150MHz of spectrum in the 3.5 GHz band in
Latvia, which if allowed to be used for 5G may also reduce
additional investment requirements.
Strong FCF Generation. Fitch projects Bite to sustain high
pre-dividend FCF generation in the high single-digit percentage of
reported revenue supported by above 30% EBITDA margin on service
revenues, low taxes typical for the Baltics area, which Fitch
projects to remain below 3% of service revenues on average, and
moderate capex, at around 10% of revenue on average.
Inflated Leverage. Fitch expects Bite's leverage to remain high,
estimated at 6.4x on a FFO gross basis in 2020, with a reduction to
5.8x-5.4x in 2021-2023 and low-to-mid single digit EBITDA and FFO
growth (all metrics pro-forma for the Baltcom acquisition in
February 2020). Fitch assumes that most of the company's
pre-dividend FCF will be paid as dividends as there are few
significant restrictions on shareholder distributions. Only the
minimum amounts necessary for operations will be retained on the
company's balance sheet.
Deleveraging may be stalled by bolt-on acquisitions in the
company's current geographic franchise. Any significant
acquisitions will be treated as event risk, but Fitch would expect
dividends to be curtailed to allow for deleveraging to below 5x
reported gross debt/EBITDA (on an IFRS16 basis) within a reasonable
timeframe, in line with the company's internal financial policy.
Fitch does not analytically reverse the sale of customer equipment
receivables, as equipment sales are viewed as a non-core segment
that would not have any impact on service revenue from the existing
subscriber base, while the company has significant flexibility to
mitigate any negative impact on its working capital, in its view.
DERIVATION SUMMARY
Bite has significantly smaller absolute scale than most equally
rated mobile and telecoms peers but is larger than Melita Bidco
Limited (B/Stable) that operates in a small but highly consolidated
domestic market of Malta. Bite benefits from operating in less
congested three-player mobile markets with no significant MVNO
presence, similar to Wind Hellas in Greece (its B/Negative reflects
weak FCF generation).
Bite is highly cash flow generative, with its pre-dividend FCF
margin in the high single-digit territory, which is potentially
consistent with a higher rating category, but it is more leveraged
than most of its higher-rated peers, such as Telenet Group Holdings
N.V. (BB-/Stable) or eircom Holdings (Ireland) Limited (B+/Stable).
It is less leveraged than Tele Columbus AG (B-/Stable) but the
latter benefits from higher margins and more stable and longer-term
customer relationships typical for the cable industry.
KEY ASSUMPTIONS
- Low single-digit mobile service revenue growth in 2021-2023;
- FTA TV advertising revenue growth trailing expected GDP growth
across the Baltics region, with 2020 contraction in the mid-teen
percentage territory yoy;
- EBITDA margin modestly improving to around 33% of service
revenues (from the existing operating franchise) in 2022-2023;
- Taxes at below 3% of service revenue on average;
- Capex at around 10% of revenue on average in 2021-2023;
- Around EUR10 million of cash on the balance sheet to cover
operating needs, with all extra cash up-streamed as dividends.
KEY RECOVERY RATING ASSUMPTIONS
- The recovery analysis assumes that Bite would be considered a
going concern in bankruptcy and that the company would be
reorganised rather than liquidated.
- Fitch has assumed a 10% administrative claim.
- Post-restructuring going concern EBITDA is estimated at EUR92
million, which is approximately 20% lower than its 2020 EBITDA
forecast, pro-forma for the acquisition of Baltcom.
- An enterprise value multiple of 5.0x is used to calculate a
post-reorganisation valuation.
Fitch calculates the recovery prospects for the senior secured
instruments at 56%, assuming the super senior secured revolving
credit facility of EUR50 million is fully drawn, which implies a
one-notch uplift of the ratings relative to the company's IDR to
arrive at 'B+' with a Recovery Rating of 'RR3' for the company's
EUR650 million of senior secured debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FFO gross leverage sustainably below 5x
- Continued strong pre-dividend FCF generation with competitive
positions in Latvia and Lithuania maintained
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO gross leverage above 6x on a sustained basis
- A significant reduction in pre-dividend FCF generation driven
by competitive or regulatory challenges
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
Fitch views Bite's liquidity as satisfactory. It is primarily in
the form of its EUR50 million RCF. This is likely to be sufficient
to address operating needs and cover small bolt-on acquisitions but
a larger acquisition may require more advanced liquidity management
that would take into account lower shareholder distributions.
Refinancing risk is limited over the next few years as all debt
instruments including both floating and fixed rate senior secured
notes mature in January 2026.
ESG Commentary
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3. ESG issues are credit-neutral
or have only a minimal credit impact on the entity, either due to
their nature or to the way in which they are being managed by the
entity.
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.
===========
N O R W A Y
===========
PGS ASA: Moody's Cuts CFR to Caa1 & Alters Outlook to Negative
--------------------------------------------------------------
Moody's Investors Service downgraded PGS ASA's corporate family
rating to Caa1 from B3, its probability of default rating to
Caa2-PD from B3-PD and the ratings assigned to its senior secured
term loan B and revolving credit facility to Caa1 from B3. The
outlook on all ratings was changed to negative from ratings under
review.
This concludes the review for downgrade initiated by Moody's on
April 15, 2020.
RATINGS RATIONALE
The rating downgrade reflects the increased pressure weighing on
the group's liquidity profile as well as its highly leveraged
capital structure, which may prove unsustainable in the absence of
any material recovery in operating profitability amid continuing
weak seismic market conditions.
At the end of Q1 2020, PGS had fully drawn its $350 million RCF (up
from $180 million drawn on December 31, 2019) and held unrestricted
cash balances of $267 million compared to $41 million at year-end
2019. However, the reduction in the size of its RCF to $215 million
scheduled in September 2020, will trigger the obligation for the
group to repay drawings of $135 million. Also, while the senior
secured TLB is covenant-lite and has no financial maintenance
covenants, the RCF is subject to a net total leverage and minimum
liquidity covenant, under which headroom may significantly reduce
should the group's cash flow generation sharply deteriorate in
coming months.
PGS's ability to secure an extension of the scheduled $135 million
reduction of the RCF in September 2020 and amortisation holidays
under its export credit financing due 2025 and 2027 would be
positive from a liquidity management's standpoint. However, Moody's
considers that PGS will, in any case, be left with a capital
structure that may prove unsustainable given the sharp decline in
revenue and cash flow generation it is expected to experience in
coming quarters.
Moody's acknowledges the significant improvement in cost structure
achieved by PGS since the 2015-2016 downcycle and further
reductions it is currently implementing with a view to lowering its
annual gross cash cost run-rate to approximately $400 million
(based on operating five 3D vessels). However, demand for seismic
services has significantly weakened amid ongoing downward revisions
of 2020 capital expenditure budgets by oil and gas majors and
independent E&P (exploration and production) companies. This will
put significant pressure on PGS's operating profitability and cash
flow generation.
In 2020, Moody's expects adjusted EBITDA to decrease by more than
40% to around $330-350 million from $596 million in 2019, even
though reduced capex should help keep PGS broadly free cash flow
neutral. While the NOK850 million rights issue completed in Q1 2020
together with the balance of $24 million in proceeds from the sale
of Ramform Sterling should help PGS reduce debt by around $120
million in 2020, leverage will materially increase with
Moody's-adjusted total debt to EBITDA (after deducting multiclient
capital spending) above 7x at year-end 2020.
In addition, Moody's cautions that the ongoing discussions PGS is
currently holding with its banks in order to secure an extension of
the $135 million tranche of the RCF maturing in September 2020 and
deferral of scheduled export credit financing amortisations would
lead to some amendments to the terms of the facilities that may
potentially be construed as a distressed exchange, which is a
default under Moody's definition.
ESG CONSIDERATIONS
The recent spread of the coronavirus outbreak, deteriorating global
economic outlook, falling oil prices, and asset price declines
resulted in a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects of these
developments are unprecedented. The oilfield services sector has
been one of the sectors most significantly affected by the shock
given its sensitivity to oil prices and investment activity within
the oil and gas sector. Moody's regards the coronavirus outbreak as
a social risk under its ESG framework, given the substantial
implications for public health and safety, as well as the
associated economic impact.
STRUCTURAL CONSIDERATIONS
The senior secured TLB and RCF are rated Caa1 in line with the
corporate family rating and one notch above the PDR, which reflects
Moody's expectation of the potential degree of recovery secured
lenders would achieve in the event of a default. The senior secured
facilities are guaranteed by the material subsidiaries of the group
representing at least 80% of group EBITDA and assets. In addition,
they benefit from a first security interest in substantially all
the assets of the borrowers and guarantors, with the exception of
Titan-class vessels, in which lenders hold an indirect second
priority security interest.
RATINGS OUTLOOK
The negative outlook reflects Moody's concern that a prolonged
downturn in the seismic market would lead to significantly lower
operating profitability and cash flow generation placing increasing
pressure on PGS's liquidity and leaving the group with an
unsustainable capital structure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While unlikely at this juncture, a rating upgrade is predicated on
a sustainable market recovery leading to an improved financial
profile reflected in a Moody's-adjusted EBIT margin in mid-single
digits and adjusted total debt to EBITDA (excluding multiclient
capital spending) keeping below 6x on a sustained basis. An upgrade
would require the group to be consistently FCF positive and
maintain healthy liquidity.
The Caa1 rating could be downgraded should the group fail to shore
up its liquidity profile or Moody's expectations be for a
potentially lower range of recoveries. A rating downgrade would
also be considered should pronounced market weakness keep the
group's EBIT margin negative and Moody's-adjusted total debt to
EBITDA (excluding multiclient capital spending) above 7.0x for an
extended period.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Oilfield
Services Industry Rating Methodology published in May 2017.
COMPANY PROFILE
PGS ASA is one of the leading offshore seismic acquisition
companies with worldwide operations. PGS headquarters are located
at Oslo, Norway. The company is a technologically leading oilfield
services company specializing in reservoir and geophysical
services, including seismic data acquisition, processing and
interpretation, and field evaluation. PGS maintains an extensive
multi-client seismic data library. For the year ended December 31,
2019, PGS reported Segment EBITDA of $556 million on Segment
revenues of $880 million. PGS is a public limited company
incorporated in the Kingdom of Norway and is listed on the Oslo
Stock Exchange.
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U K R A I N E
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PROMINVESTBANK: Moody's Withdraws Caa2 LT Bank Deposit Ratings
--------------------------------------------------------------
Moody's Investors Service has withdrawn the following ratings of
Prominvestbank:
- Long-term Bank Deposit Ratings of Caa2
- Short-term Bank Deposit Ratings of Not Prime
- Long-term Counterparty Risk Ratings of Caa1
- Short-term Counterparty Risk Ratings of Not Prime
- Long-term Counterparty Risk Assessment of Caa1(cr)
- Short-term Counterparty Risk Assessment of Not Prime(cr)
- Baseline Credit Assessment (BCA) of caa3
- Adjusted BCA of caa2
- National Scale Long-term Bank Deposit Rating of B1.ua
- National Scale Long-term Counterparty Risk Rating of Baa3.ua
At the time of the withdrawal, the bank's long-term deposit ratings
carried a positive outlook.
RATINGS RATIONALE
Moody's has decided to withdraw the ratings for its own business
reasons.
LIST OF AFFECTED RATINGS
Issuer: Prominvestbank
Withdrawals:
Adjusted Baseline Credit Assessment, Withdrawn, previously rated
caa2
Baseline Credit Assessment, Withdrawn, previously rated caa3
Short-term Counterparty Risk Assessment, Withdrawn, previously
rated NP(cr)
Long-term Counterparty Risk Assessment, Withdrawn, previously rated
Caa1(cr)
Short-term Counterparty Risk Rating, Withdrawn, previously rated
NP
Long-term Counterparty Risk Rating, Withdrawn, previously rated
Caa1
National Scale Long-term Counterparty Risk Rating, Withdrawn,
previously rated Baa3.ua
Short-term Bank Deposits, Withdrawn, previously rated NP
Long-term Bank Deposits, Withdrawn, previously rated Caa2, Outlook
Changed to Rating Withdrawn from Positive
National Scale Long-term Bank Deposits, Withdrawn, previously rated
B1.ua
Outlook Actions:
Outlook, Changed to Rating Withdrawn from Positive
===========================
U N I T E D K I N G D O M
===========================
ARDONAGH MIDCO: Moody's Withdraws B3 CFR for Business Reasons
-------------------------------------------------------------
Moody's Investors Service has withdrawn the B3 corporate family
rating and the B3-PD probability of default rating of Ardonagh
Midco 3 plc. Prior to the withdrawal the outlook on the ratings was
stable.
RATINGS RATIONALE
Moody's has decided to withdraw the ratings for its own business
reasons.
CD&R ARTEMIS: Moody's Assigns B3 CFR, Outlook Stable
----------------------------------------------------
Moody's Investors Service has assigned a B3 corporate family rating
and a B3-PD probability of default rating to CD&R Artemis Holdco 3
Limited, a provider of medical communications, market access and
marketing services to Pharma and Biotech clients. Concurrently,
Moody's has assigned B2 ratings to the $300 million senior secured
first lien term loan and pari passu ranking GBP45 million senior
secured revolving credit facility, maturing in 2027 and 2026
respectively and for which CD&R Artemis UK Bidco Limited and CD&R
Artemis Bidco Inc. are the co-borrowers. The outlook is stable.
The proceeds from the facilities now being syndicated served to
finance the group's acquisition by financial sponsor Clayton,
Dubilier and Rice and pay for the transaction fees and expenses.
Its new rating assignments principally reflect the following
factors:
-- High Moody's adjusted leverage of around 7.0x in 2020
-- Good organic growth prospects in healthcare divisions offering
deleveraging potential
-- Inherent risk of contract losses coupled with modest size
-- Positive cash flow generation, to be used to service deferred
acquisition considerations
RATINGS RATIONALE
Huntsworth's credit profile is supported by growing innovation
levels and product complexity in the pharmaceutical industry, which
drive growth in the group's medical and commercial communication
market in the mid-to-high single digits in percentage terms.
Moody's expects that these structural trends will continue to
support demand for Huntsworth services given their low correlation
to economic cycles, with the group recording consistent organic
growth in its healthcare business over the past few years.
Huntsworth also exhibits a cash generative business profile and
Moody's expects that it will continue to record positive free cash
flow under the new capital structure despite the significantly
increased interest burden.
However, Huntsworth's credit quality is constrained by the risk of
customer or project loss inherent to its sector as a result of
multiple factors including (i) the displacement of its customers'
products by competing drugs, (ii) clinical trial failures or
cancellations, (iii) customer consolidation or procurement
efficiency projects and (iv) the highly competitive market in which
Huntsworth operates (albeit moderated by Huntsworth's long standing
client relationships). These risks are relevant in light of the
company's degree of customer concentration with the largest
accounting for 9% of revenue and the three largest representing
18%. This risk is somewhat offset by the multiple buying points and
the many projects involving the largest customers. Nevertheless,
the company's modest size leaves it exposed to such one-off shocks
as customer losses.
In addition, the group operates with a highly levered capital
structure characterised by Moody's adjusted gross debt/EBITDA
remaining around 7.0x in 2020. Nevertheless, Moody's believes that
beyond 2020 Huntsworth has the potential to delever toward 6.0x.
Governance risks that Moody's incorporates in Huntsworth's credit
profile primarily include financial policies in the context of its
private equity ownership, particularly the rating agency expects
that the group will maintain its acquisitive stance which, should
it resort to debt funding, would likely limit its deleveraging
trajectory.
Moody's views Huntsworth's liquidity profile as adequate. At
completion of syndication of the debt facilities, the rating agency
expects that the group will have a positive cash balance and
Moody's expects liquidity will further benefit from the company
generating positive free cash flow in the next 12-18 months (after
interest but before acquisitions and related earnouts) and access
to the GBP45 million RCF due 2026. The RCF has a net senior
leverage springing covenant, under which the company will retain
ample capacity should it be tested.
The B2 ratings on the GBP45 million senior secured first lien RCF
and $300 million senior secured first lien term loan, one notch
above the CFR, reflect their priority ranking ahead of the GBP75
million senior secured second lien facility in the event of
security enforcement and GBP45 million of lease obligations.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the group will
offset any customer or project losses by new wins and therefore
grow EBITDA on a like-for-like basis, leading to gradual
deleveraging. Moody's also expects that the group's levered free
cash flow generation will remain positive and Huntsworth will
maintain adequate liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Huntsworth's ratings could experience positive pressure should the
group (1) reduce customer concentration and build a longer and
successful track record of profitable growth, and (2) reduce
Moody's adjusted gross debt/EBITDA sustainably below 6.0x, and (3)
consistently generate positive Moody's adjusted FCF after
addressing redemption liabilities and earnout payments, while not
making any debt-funded acquisitions or shareholder distributions.
Conversely, Huntsworth's ratings could come under downward pressure
if (1) a significant deterioration in operating performance, for
example as a result of major customer losses, or more aggressive
financial policy led to a sustained increase in Moody's adjusted
leverage, or (2) FCF generation turned negative or the liquidity
position deteriorated.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry, published in October 2016.
CORPORATE PROFILE
Headquartered in London, UK, Huntsworth is a global provider of
medical communications, market access and marketing services to
Pharma and Biotech clients. In 2019, Huntsworth reported revenue of
GBP265 million and EBITDA of GBP56.5 million (before exceptional
items and post-IFRS16 impact). Huntsworth is owned by funds advised
and managed by financial sponsor CD&R following a take-private in
May 2020.
CINEWORLD GROUP: Fitch Affirms LT IDR at B-, Outlook Negative
-------------------------------------------------------------
Fitch Ratings has affirmed Cineworld Group plc's Long-Term Issuer
Default Rating at 'B-' and assigned wholly owned subsidiary Crown
Finance a final senior secured debt rating of 'B'/'RR3'/55%. Both
IDR and instrument rating has been removed from Rating Watch
Negative. The Outlook on the IDR is Negative.
The removal of RWN follows Cineworld's improved liquidity position
and cancellation of the company's intended acquisition of Cineplex.
The issue of a USD250 million secured debt facility and a USD110
million increase in its revolving credit facility have alleviated
short-term cash risks. The Negative Outlook reflects low visibility
on the pace of Cineworld's recovery from the impact of the
coronavirus pandemic, which creates uncertainty on free cash flow
generation and leverage while potentially necessitating continued
flexibility from lenders on legal covenants.
The pace of Cineworld's recovery is highly dependent on cinema
attendance levels and new film releases. Both factors are not in
Cineworld's control and they remain susceptible to a potential
second infection wave. Cineworld's scale and cash-generative
business model are supportive of a rapid recovery if cinema
attendance levels return to normal.
The 'B(EXP) rating on Crown Finance's USD1.9 billion term loan B
has been withdrawn following the cancellation of the Cineplex
transaction.
KEY RATING DRIVERS
Cancellation of Cineplex Transaction: Cineworld terminated its
agreement to acquire Canadian cinema chain Cineplex for USD2.3
billion as a result of certain contractual breaches by Cineplex.
While the transaction had strong industrial logic, its debt-funded
nature would have exacerbated Cineworld's financial risks due to
the coronavirus pandemic. Cineworld's rating does not incorporate
any liabilities from potential litigation initiated by Cineplex.
These could constitute a downside risk to the rating.
COVID-19 Cash Burn: Lockdowns in the US, UK and Europe have
necessitated the closure of Cineworld's cinemas. Its base case
forecasts negative cash flow of about USD35 million-USD40 million
per month while its cinemas remain closed. It factors in deferrals
of a majority of its rental obligations and minimal staffing costs.
These two factors account for the majority of Cineworld's
fixed-cost base, which amounted to about 25% of revenues at
end-2019. Cineworld has suspended dividend payments and will also
be able to make sizeable reductions in capex, both of which are
included in its cash-flow forecasts.
Short-Term Liquidity Crisis Averted: Cineworld has increased its
liquidity through an additional USD250 million of senior secured
debt and increasing its RCF by USD110 million to USD573 million. It
has also arranged with its RCF lenders for a waiver of its leverage
covenants for June 2020 and an increase in its net debt-to-EBITDA
covenant to 9.0x for the December testing date. The increase in
liquidity modestly eases Cineworld's financial risks and provides
an additional nine-to-10-month cash-burn capacity based on Fitch's
estimates. This adds to the five-to-six months of liquidity that
Cineworld retained when cinemas closed in mid- to late-March.
Uncertain Recovery Path: Cinemas are within the final phase of
businesses that are likely to reopen as lockdown restrictions are
being eased. The pace at which cinema attendance returns to
normality will depend on a number of factors that are difficult to
predict. These include the impact of continued social-distancing
measures, risk concerns among certain segments of the market,
impact of economic downturn on incremental spending in cinemas,
risk of a second wave infection and any lasting changes in the way
movies are distributed and consumed from home via VOD OTT services.
Positively, the release of potential blockbuster movies could
encourage higher overall attendance.
Mid-Case Gradual Return to Normality: Fitch's base case, which
models a mid-case pandemic impact, factors in a full reopening of
cinemas from August 2020 but with sizeably reduced attendance
figures. The scenario envisages that it will take at least until
4Q21 before normality of cinema attendance returns. As a result,
Fitch believes Cineworld's financial performance will remain
significantly below 2019 levels before only recovering in 2022. Its
base case forecasts assume minimal EBITDA in 2020 and about 40% to
45% of 2019 levels in 2021.
Sizeable Spike In Leverage: As a result of the cash burn in 2020
and the gradual return to normality envisaged in its base case,
Fitch sees Cineworld's funds from operations (FFO) gross leverage
rising to about 10.0x at end-2021 from 5.0x at end-2019. The figure
is unlikely to be meaningful in 2020 due to low EBITDA generation.
The gradual return to normality by 4Q21 should enable Cineworld to
reduce leverage down to 5.0x by end-2022. A second pandemic wave
and further lockdowns would be the main downside risk to its base
case.
Covenant Breach Likely: Cineworld's 2019 results indicate that the
company had US dollar and euro term loans totalling USD3.6 billion
and a RCF of USD462.5 million. The RCF is subject to net
debt-to-EBITDA covenants, which are triggered at above 35%
utilisation, and the term loans also have cross default provisions
in respect of the covenant. However, its base case forecasts that
the leverage covenant increase to 9.0x for the December 2020
testing may not be sufficient and may require further flexibility
from Cineworld's lenders. This flexibility may also be required in
2021 depending on the level of cinema attendance.
Capacity to Rapidly Recover: Cineworld has one of the largest
cinema portfolios in the world and a strongly cash-generative
business model. This provides it with the ability to start reducing
debt within 12 months of returning to normality. However, this is
dependent on film releases and attendance returning to normal
levels. Its portfolio scale and leading operational execution
capability are also likely to be key in obtaining continued support
from landlords, film studios and lenders.
Long-term Sectorial Shifts: The increased use and penetration of
SVOD services such as Netflix and the launch of similar platforms
by other major movie studios create uncertainty on long-term
attendance patterns and the duration of the 'theatrical window'
currently enjoyed by cinema operators. These trends could be offset
by the symbiotic relationship between cinema operators and film
studios, the segmented nature of the customer base and the
potential for higher retained ticket revenues in the event the
theatrical window narrows.
DERIVATION SUMMARY
The ratings of Cineworld reflect its strong position in its core
markets, its large scale and cash-generative business model.
Potential financial volatility within the sector from the
dependency on the success of film releases, changing secular trends
and exposure to discretionary consumer spend drive more
conservative leverage thresholds for the rating.
Cineworld has greater scale, diversification and lower emerging
market exposure than its peer Cinemark Holdings Inc. (B+/Negative).
Cineworld's lower rating primarily reflects higher leverage. The
rating, when adjusted for lower leverage, is broadly in line with
that of other discretionary spending and consumer media peers in
Fitch's credit opinion portfolio and publicly rated peers such as
Pinnacle Bidco Plc (Pure Gym; B-/Negative).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for Cineworld
- A cash burn of USD35 million-USD40 million per month while
cinemas are closed.
- A gradual re-opening of cinemas from late July 2020 with
attendance figures impacted by social-distancing measures and
ongoing concern of the pandemic. Normality of attendance and
guest-spend commences from 4Q21.
- Fitch-defined EBITDA of USD48 million in 2020 and USD353
million in 2021.
- Other cash items (comprising tax rebates, studio and advertiser
support) of USD20 million in 2020 and USD70 million in 2021.
- Capex of around USD150 million in 2020 and around USD100
million in 2021.
- Cash dividend of USD51 million in 2020 and no dividend payments
in 2021.
- No significant litigation liabilities as a result of the
terminated Cineplex transaction.
KEY RECOVERY RATING ASSUMPTIONS
- The expected recovery prospects of Cineworld's secured debt
have reduced to 55% from 67% but remain within the bounds of an
'RR3' rating. The reduction reflects a combination of increased
debt and lower EBITDA assumptions excluding the Cineplex
transaction.
- The recovery analysis assumes that Cineworld would be
considered as a going-concern in bankruptcy and that the company
would be reorganised rather than liquidated. Fitch has assumed a
10% administrative claim in the recovery analysis.
- The analysis assumes a post-restructuring EBITDA of around
USD570 million, assuming normalised post-crisis operating
conditions, which is 34% lower than 2019 Fitch-adjusted EBITDA.
This equates to approximately 30% lower attendance levels, 10%
lower average revenue per customer and 1pp improvement in margin as
a result of cost optimisation in the event of stress and potential
gross margin improvement that may occur with a narrowed theatrical
window.
- For its recovery analysis, Fitch applies a post restructuring
enterprise value (EV)-to-EBITDA multiple of 5.0x.
- Fitch calculates a recovery value of USD2.5 billion,
representing approximately 55% of total senior secured debt.
- USD573 million RCF fully drawn.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- The rating would be upgraded to 'B' on visibility on attendance
levels, ticket prices, per-guest concession spending and FCF
generation trending towards pre-coronavirus pandemic levels,
supported by a stronger liquidity profile; and
- FFO gross leverage trends below 7.0x on a sustained basis.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Higher-than-expected monthly cash burn rate while cinemas are
closed, or deterioration of liquidity and a more severe impact from
the coronavirus pandemic (including a second wave and return to
cinema closures);
- Larger-than-expected declines in attendance and or per-guest
concession spending or ticket prices leading to a sharper decline
in EBITDA or contraction in pre-dividend FCF; and
- Sustained negative FCF or FFO interest cover below 1.0x from
2021.
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
Bolstered Liquidity: As at end-2019, Cineworld reported
unrestricted cash and cash equivalents of USD140.6 million and an
RCF of USD463 million, after a drawdown of USD95 million. The RCF
has since been increased by USD110 million and the company has
contracted a further USD250 million of term loans. This provides a
comfortable buffer in its base case but would come under pressure
if cinema attendance fails to normalise or a second pandemic wave
forces the closure of theatres again. Cineworld has no immediate
refinancing risk with its current RCF maturing in 2023 and its
first term loan maturing in 2025.
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).
FINSBURY SQUARE 2017-2: Fitch Withdraws CCCsf Class D Notes Rating
------------------------------------------------------------------
Fitch Ratings has withdrawn Finsbury Square 2017-2 plc's class D
notes' rating. The notes, rated 'CCCsf' prior to withdrawal, have
been surrendered by noteholders and cancellation and delisting has
been completed.
Finsbury Square 2017-2 plc
- Class D XS1646273224; LT WDsf; Withdrawn; previosuly at CCCsf
Fitch has withdrawn FSQ2017-2's class D notes' ratings as the notes
were cancelled.
KEY RATING DRIVERS
Not applicable as the rating has been withdrawn.
RATING SENSITIVITIES
Not applicable as the rating has been withdrawn.
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.
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.
JOHNSONS SHOES: Bought Out of Administration by Newjohn
-------------------------------------------------------
Business Sale reports that Johnsons Shoes Company has been acquired
out of administration by Newjohn Limited, with half of its stores
set to continue trading.
Johnsons Shoes Company, which trades as Johnsons Shoes and Bowleys
Fine Shoes, originally filed for administration in May, citing
online competition and the impact of the COVID-19 pandemic,
Business Sale relates. Ian Defty and Richard Toone of CVR Global
were appointed as joint administrators, Business Sale discloses.
Johnsons, a family-owned business, has been trading for over 50
years and stocks 27 premium shoe brands including Timberland,
Hotter, Barbour, Loake, Clarks, Gabor, Ugg, Ecco and Converse.
MARSTON'S ISSUER: S&P Lowers Rating on Class B Notes to B+(sf)
---------------------------------------------------------------
S&P Global Ratings lowered to 'B+ (sf)' from 'BB- (sf)' its credit
rating on Marston's Issuer PLC's class B notes. At the same time,
S&P has affirmed its 'BB+ (sf)' ratings on the class A1 notes.
Furthermore, S&P has removed from CreditWatch negative its rating
on the class A1 notes, while its ratings on the class A2, A3, A4,
and class B notes remain on CreditWatch negative, reflecting the
continuing significant uncertainty surrounding the timing and
robustness of the COVID-19 recovery and their available liquidity.
The class A1 notes are scheduled to be redeemed in July 2020.
On April 17, 2020, S&P placed on CreditWatch negative its ratings
in this transaction to reflect the potential effect that the U.K.
government's measures to contain the spread of COVID-19 could have
on both the U.K. economy and the restaurant and public houses (pub)
sectors.
Marston's Issuer PLC is a corporate securitization of the U.K.
operating business of the managed pub estate operator Marston's
Pubs Ltd. (Marston's Pubs) or the borrower. Marston's Pubs operates
an estate of tenanted and managed pubs. It originally closed in
August 2005, and was subsequently tapped in November 2007. The
borrower's ability to withstand the loss of turnover will come down
to their current level of headroom over their financial covenants
and readily available sources of liquidity.
The transaction features two classes of notes (class A and class
B), the proceeds of which have been on-lent to Marston's Pubs, via
issuer-borrower loans. The operating cash flows generated by
Marston's Pubs are available to repay its borrowings from the
issuer that, in turn, uses those proceeds to service the notes.
Each class of notes is fully amortizing and its ratings address the
timely payment of interest and principal due on the notes,
excluding any subordinated step-up interest.
S&P Global Ratings acknowledges a high degree of uncertainty about
the evolution of the coronavirus pandemic. The consensus among
health experts is that the pandemic may now be at, or near, its
peak in some regions, but will remain a threat until a vaccine or
effective treatment is widely available, which may not occur until
the second half of 2021. S&P said, "We are using this assumption in
assessing the economic and credit implications associated with the
pandemic. As the situation evolves, we will update our assumptions
and estimates accordingly."
Business risk profile
S&P said, "We have applied our corporate securitization criteria as
part of our rating analysis on the notes in this transaction. As
part of our analysis, we assess whether the operating cash flows
generated by the borrower are sufficient to make the payments
required under the notes' loan agreements by using a debt service
coverage ratio (DSCR) analysis under a base-case and a downside
scenario. Our view of the borrowing group's potential to generate
cash flows is informed by our base-case operating cash flow
projection and our assessment of its business risk profile (BRP),
which we derive using our corporate methodology.
"We expect the COVID-19 outbreak will have a severe impact on the
pub and casual dining industry in the U.K. and more generally on
the broader macroeconomic environment over the course of 2020 and,
to a lower extent, in 2021. We anticipate reduced consumer spending
and confidence, muted inflation, and the potential for further
weakening in the pound sterling as headwinds for pubs and
restaurants over the next 12-18 months."
Recent performance and events
-- Reported revenue in the year ended in September 2019 (FY2019)
was GBP409.4 million, which slightly exceeded our expectation of
GBP403.3 million, while reported earnings before interest taxes
depreciation and amortization (EBITDA) was GBP111.4 million, which
was marginally lower than our expectations of about GBP115
million.
-- Reported revenue for half year ended in March 2020 (FY 2020)
was GBP178.5 million while EBITDA was GBP42.9 million.
-- Marston's Issuer had net disposals of 154 pubs in from its
securitized portfolio in first half FY2020.
-- Ongoing investments on the existing estate, including
conversions and re-modelings, led to a relatively high capital
expenditure for the year. In FY2019, the Group's capex was GBP49.5
million (FY2018: GBP36.5 million).
On May 29, 2020, Marston's Issuer, the issuer, announced that it
and the borrower agreed a number of amendments and waivers with the
secured class A notes. Most notably: a temporary waiver of, and
amendment to, the 30-day suspension of business provision; waivers
of the six-month debt service coverage ratio (DSCR) test, and of
the 12-month DSCR test through October 2020; a waiver of the
requirement to appoint an independent consultant which would
otherwise have arisen for the same period in respect of which full
compliance with the DSCR test is waived; a waiver of the restricted
payments condition, following which the borrower will not make such
payments till end of FY2021; a reduction in the required amount of
the minimum capex by the borrower through the end of FY2021 arising
from temporary suspension of business; and a waiver of the failure
by the borrower to pay the debt service required under the
issuer/borrower facility agreement over the next three quarters,
provided that the resulting liquidity shortfalls do not cause the
issuer to make drawings of more than GBP18 million, in total, under
the issuer's liquidity facility. Furthermore, those drawings must
be repaid, in full, by the end of October 2021, ultimately covered
by the borrower.
S&P said, "At this time, we view those waivers as tactical
responses to the current liquidity pressures resulting from the
mandatory closures under the U.K. government's response to the
COVID-19 pandemic, rather than a reflection of a long-term
deterioration of the creditworthiness of the borrower. That said,
under our methodology, we expect a borrower to make a broad range
of covenants intended to ensure that cash is trapped and control is
given to the noteholders before debt service under the notes is
jeopardized. We will continue to monitor both the effect of these
waivers and any long-term weakening of the creditor protections
they provide to the noteholders and may re-evaluate whether they
result in any weakening of the creditor protections."
Rating Rationale
Marston's Issuer's primary sources of funds for principal and
interest payments due on the outstanding notes are the loan
interest and principal payments from the borrower, which are
ultimately backed by future cash flows generated by the operating
assets.
S&P's ratings address the timely payment of interest, excluding any
subordinated step-up coupons, and principal due on the notes.
In S&P's view, the credit quality of the transaction has declined
due to health and safety fears related to COVID-19. S&P believes
this will negatively affect the cash flows available to the
issuer.
DSCR analysis
S&P's cash flow analysis serves to both assess whether cash flows
will be sufficient to service debt through the transaction's life
and to project minimum DSCRs in our base-case and downside
scenarios.
Application of paragraph 46
In the face of the liquidity stress resulting from the COVID-19
pandemic on those sectors directly affected by the U.K.
government's response, our current view is that the duration of the
maximum liquidity stress will be contained within the second and
third quarters of 2020 (calendar year) and be followed by a
recovery period that may last through 2022. Importantly, S&P
believes that the pandemic will not have a lasting effect on the
industries and companies themselves, meaning that the long-term
creditworthiness of the underlying companies will not fundamentally
or materially deteriorate over the long term.
S&P said, "Our downside analysis provides unique insight into a
transaction's ability to withstand the liquidity stress
precipitated by the closure of pubs in the U.K. Given those
circumstances, the outcome of our downside analysis alone
determines the resilience-adjusted anchor. As a result, our
analysis begins with the construction of a base-case projection
from which we derive a downside case. However, our anchor, which
does not reflect the liquidity support at the issuer level which we
see as a mitigating factor to the liquidity stress we expect to
result from the U.K. government's response to the COVID-19
pandemic. Rather, we developed the downside scenario from the base
case to assess whether the COVID-19 liquidity stress would have a
negative effect on level of the resilience-adjusted anchor for each
class of notes.
"That said, we performed the base-case analysis to assess whether,
post-pandemic, the anchor would be adversely affected given the
long-term prospects currently assumed under our base-case
forecast."
Base-case forecast
S&P typically does not give credit to growth after the first two
years, however in this review it considers the growth period to
continue through FY2023 in order to accommodate both the duration
of the COVID-19 stress and the subsequent recovery.
The issuer's earnings depend mostly on general economic activity
and discretionary consumer demand. S&P said, "Given the lack of
updated guidance from the current management team and the nature of
the COVID-19 pandemic, our base-case assumptions remain very
uncertain. As a result of the virus' steep escalation, we have
revised our previous macroeconomic forecasts to reflect the likely
contraction in global output and reduction of consumer spending."
After considering the likely effect of COVID-19, its current
assumptions are:
-- S&P said, "U.K. real GDP contracting by 6.5% in 2020 amid a
COVID-19-induced slowdown, and rebounding by 6.0% in 2021. We
assume real private consumption growth in the U.K. will also
decline, especially in the first half of 2020, limiting demand for
discretionary items."
-- S&P said, "We anticipate revenues to sharply decline in FY2020,
resulting from a prolonged lockdown period of about three months,
which we anticipate to be followed by a period of severe
restrictions on in-site capacity due to social distancing measures.
We therefore anticipate FY2020 revenues to fall by over 30%."
-- S&P said, "We anticipate topline to recover somewhat over the
course of FY2021, although remaining below FY2019 levels due to the
weakened macroeconomic picture, as well as some level of social
distancing measures until the COVID-19 pandemic is definitely
resolved. Thereafter, we anticipate trading levels to recover
towards FY2019 levels in FY2022."
-- S&P said, "We are also anticipating some deterioration of
profitability margins. While most operating costs were put on hold
over the lockdown period, as the group benefitted from the
government's furlough scheme and business rate relief, we
anticipate some level of net cost over the same period (as some
head functions and rent were still due). Over the course of the
reopening of the group's operations, we also anticipate restricted
capacity to lead to lower economies of scale and a higher impact
from fixed costs. As a result, we anticipate the reported EBITDA
margin to deteriorate below 25% FY2020, recovering somewhat toward
26%-27% in FY2021 (versus 27.9% in FY2019)."
-- S&P said, "We also expect Marston's to control capex to
preserve cash. We anticipate Marston's Pubs to dedicate about GBP25
million-GBP30 million to capex in FY2020, compared to GBP49.5
million in FY2019. Capex levels are likely to normalize somewhat
over the course of FY2021 and thereafter, although remaining below
historical levels at about GBP30 million-GBP35 million."
- Weakened earnings and tax relief will likely result in reduced
tax payments in FY2020 and FY2021.
Downside DSCR analysis
S&P said, "Our downside DSCR analysis tests whether the
issuer-level structural enhancements improve the transaction's
resilience under a moderate stress scenario. The issuer falls
within the pubs, restaurants, and retail industry. Considering U.K.
pubs' historical performance during the financial crisis of
2007-2008, in our view, a 15% and 25% decline in EBITDA from our
base case is appropriate for the managed pub and leased and
tenanted subsector.
"Our current expectations are that the COVID-19 liquidity stress
will result in a reduction in EBITDA that is far greater than the
approximate 20% decline we would normally assume under our downside
stress. Hence, our downside scenario comprises both our short- to
medium-term EBITDA projections during the liquidity stress period
and our long-term forecast but with the level of ultimate recovery
limited to about 20% lower than what we would assume for a
base-case forecast over the long term. For example, our downside
scenario forecast of EBITDA reflects our base-case assumptions for
recovery into FY2021 until the level of EBITDA is within
approximately 80% of our projected long-term EBITDA.
"Our downside DSCR analysis resulted in a resilience score of
satisfactory for the class A notes. This reflects the headroom
above a 1.30:1 DSCR threshold that is required under our criteria
to achieve a satisfactory resilience score after giving
consideration for the level of liquidity support available to each
class."
The class B notes have limits on the quantum of the liquidity
facility they may utilize to cover liquidity shortfalls. Moreover,
any senior classes may draw on those same amounts, which makes the
exercise of determining the amount of the liquidity support
available to the class B notes a dynamic process. For example, it
is possible that the full GBP17 million that the class B notes may
access is available and undrawn at the start of a rolling 12-month
period but is fully used to cover shortfall on the class A notes
over that period. In effect, the class B notes were not able to
draw on any of the GBP13 million. S&P projects that the class B
notes will experience interest shortfalls under its downside DSCR
analysis, with the class B notes surviving seven years. The
resulting resilience score is weak for the class B notes.
Each class' resilience score corresponds to rating categories from
excellent at 'AAA' through vulnerable at 'B'. Within each category,
the recommended resilience-adjusted anchor reflect notching based
on where the downside DSCR falls within a range (class A) or the
length of time the notes will survive before we project shortfalls
(class B). As a result, the resilience-adjusted anchors for the
class A and class B notes would not be adversely affected under our
downside scenario.
Liquidity facility adjustment
Given that S&P has given full credit to the liquidity facility
available amount to each class of notes, a further one-notch
increase to any of the resilience-adjusted anchors is not
warranted.
Comparable rating analysis
S&P said, "As mentioned, we performed a base-case analysis to
assess whether, post-COVID-19, the anchor would be adversely
affected given the long-term prospects currently assumed in our
base-case forecast.
"As highlighted in our prior review, we could also lower our
ratings on the notes if the operating performance deteriorated, for
example, due to a material decline in cash flows, or a tightening
of covenant headroom, or reduced access to the overall group's
committed liquidity facilities. As a result, base case anchor for
the class B notes is adversely affected under our base-case
analysis, moving to 'b-' from 'b', leading to a one-notch downgrade
of the class B notes."
Counterparty risk
S&P said, "We do not consider the liquidity facility or bank
account agreements to be in line with our counterparty criteria
(see "Counterparty Risk Framework: Methodology And Assumptions,"
published on March 8, 2019). Therefore, in the case of Marston's
Issuer's non-derivative counterparty exposures, the maximum
supported rating is constrained by our long-term issuer credit
rating (ICR) on the lowest rated bank account provider.
"We have assessed the strength of the collateral framework as weak
under the criteria based on our review of the following items in
the collateral support annex: (a) a lack of volatility buffers; (b)
we do not consider some types of collateral eligible under our
criteria; and (c) currency haircuts are not specified."
In the case of a collateralized hedge provider that is a U.K. bank,
it is the resolution counterparty rating (RCR) that is the
applicable counterparty rating under our counterparty risk
criteria. As a result, the maximum supported rating for the
issuer's derivative exposures is limited to a counterparty's
resolution counterparty rating (RCR).
However, S&P's ratings are not currently constrained by its ICRs on
any of the counterparties, including the liquidity facility,
derivatives, and bank account providers.
Outlook
S&P said, "Over the next 12 to 24 months, we expect Marston's Pubs'
operating performance will remain under pressure resulting from the
current economic shock stemming from the COVID-19 pandemic and the
U.K. government's response. As we receive more issuer-specific and
industry-level data, and learn more about what actions issuers will
be taking to mitigate the impact on turnover, we will assess these
transactions to determine whether rating actions are warranted."
Downside scenario
S&P said, "We may consider lowering our ratings on the class A
notes if their minimum projected DSCRs in our downside scenario
have a material-adverse effect on each class' resilience-adjusted
anchor.
"We could also lower our rating on the class B notes if their
minimum projected DSCR in our base-case scenario falls below a
1.00x coverage, if there were a further deterioration in our
assessment of the borrower's overall creditworthiness, a reflection
of its financial and operational strength over the short-to-medium
term. This could be brought about if we thought Marston's Pubs'
liquidity position had weakened, for example, due to a material
decline in cash flows, a tightening of covenant headroom, or
reduced access to the overall group's committed liquidity
facilities."
Upside scenario
Due to the current economic shock stemming from the COVID-19
pandemic and the U.K. government's response, S&P does not
anticipate raising its assessment of Marston's Pubs' BRP_ within
the next two years.
CreditWatch resolutions
S&P said, "As we develop better clarity on the expected size and
duration of reductions in the transactions' securitized net cash
flows, we will evaluate whether adjustments to our base-case and
downside projections are appropriate. Changes in our projections
could adversely affect our DSCR estimates, which, in turn, could
put pressure on our ratings on the notes. If longer-term effects
emerge that reshape the economy or industry, we may revise our
assessment of a company's BRP, which could also result in rating
changes. We expect to resolve the CreditWatch placements within the
next 90 days when we have a clearer guidance on the overall effect
on each company's liquidity during the shutdown, our evolving view
of the severity and duration of the COVID-19 driven stress, the
prospects for recovery, and the long-term effects on the U.K
economy and the pub industry."
Environmental, social, and governance (ESG) factors relevant to the
rating action:
-- Health and safety
NMC HEALTH: Auditors Warn Over Bank Account Inconsistencies
-----------------------------------------------------------
Cynthia O'Murchu, Tabby Kinder and Simeon Kerr at The Financial
Times report that auditors at NMC Health warned of serious problems
in the verification of bank balances a year before the hospital
operator collapsed in a suspected fraud involving more than US$4
billion in undeclared debt.
A review by NMC's auditors at EY found that Bank of Baroda, one of
India's largest banks, had confused accounts belonging to the FTSE
100 company with those held by its founder BR Shetty, according to
documents seen by the FT and people familiar with the matter.
Initially, EY feared that almost Dh1bn (US$272 million) of loans
and overdraft balances had been omitted from NMC Health's accounts
before the Bank of Baroda clarified that the debt was owed by Mr.
Shetty, the FT relays, citing an audit memo.
The discrepancy--which was raised ahead of an NMC audit committee
meeting in March 2019--pointed to serious internal control issues
in the company's dealings with banks, the FT states.
The bank accounts were reconciled and EY signed off NMC's accounts
after alerting the company's audit committee to control
deficiencies in respect of bank balances that needed to be
addressed as a "high priority", the FT recounts.
Just days before EY signed off the accounts, Bank of Baroda
scrambled to disentangle inconsistencies in bank balance
certificates for NMC Healthcare LLC, NMC's operating subsidiary in
its main market of the UAE, according to emails reviewed by the
FT.
In discussions with NMC management, representatives of the bank and
the company's audit committee, EY was told that the discrepancy was
due to the bank having "incorrectly tagged" a number of bank
accounts, the FT discloses. The memo said those accounts, EY was
informed, were held by NMC's founder BR Shetty in his personal
capacity, but had been erroneously tagged under the name of NMC
Healthcare LLC, the FT notes.
The head of audit at a rival firm to EY said the documents showed
that "an opportunity was missed" to uncover far larger undisclosed
debts a year before the collapse, the FT relays. "The relationship
with the bank and Shetty was so close that the bank couldn't tell
the difference between the accounts of the company and his private
accounts, which is a huge red flag," the FT quotes the person as
saying.
NMC's rapid implosion was sparked by a highly critical report from
short seller Muddy Waters which questioned the veracity of NMC's
accounts in December 2019, the FT states. NMC in late February
this year fired its chief executive Prasanth Manghat, while founder
BR Shetty stepped down from the board of directors as the company
revealed undeclared pledges and billions in off-balance sheet debt,
the FT recounts.
PIZZAEXPRESS: Nears Debt-for-Equity Swap Deal, Likely to Seek CVA
-----------------------------------------------------------------
Daniel Thomas at The Financial Times reports that PizzaExpress is
heading for a takeover by its lenders as early as this month in a
debt-for-equity swap with Chinese owner Hony Capital that is also
likely to involve closing some of its high street restaurants hard
hit in the pandemic.
Investors in the GBP465 million of senior secured bonds that back
the company are in advanced talks over a restructuring deal, the FT
relays, citing two people familiar with the discussions. According
to the FT, they said these are likely to result in control of the
UK business being handed to the debt holders.
The terms of the deal are still being discussed, with Hony
potentially taking ownership of the Chinese operations as a result
of the restructuring, the FT notes. This would leave the larger UK
business in the hands of its bondholders. The chain has about 450
restaurants in the UK and roughly 600 globally, the FT states.
In a further blow to the UK's struggling high street, PizzaExpress
is also likely to seek a company voluntary arrangement as part of
the restructuring, the FT discloses. This would allow it to shed
some outlets and renegotiate rents with its landlords, according to
the FT.
PizzaExpress was acquired by Hony in a debt-laden GBP900 million
deal in 2014. The company now carries about GBP1.1 billion in net
borrowing--far exceeding estimates of its equity value--with more
than half owned by investors in its bonds.
TOGETHER ASSET 2020-1: Moody's Rates Class X Notes (P)B2
--------------------------------------------------------
Moody's Investors Service has assigned provisional long-term credit
ratings to notes to be issued by Together Asset Backed
Securitisation 2020-1 PLC:
GBP []M Class A Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)Aaa (sf)
GBP []M Class B Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)Aa3 (sf)
GBP []M Class C Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)A3 (sf)
GBP []M Class D Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)Baa3 (sf)
GBP []M Class E Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)Ba2(sf)
GBP []M Class X Mortgage Backed Floating Rate Notes due [December
2061], Assigned (P)B2 (sf)
Moody's has not assigned ratings to the GBP []M Class R Fixed Rate
Notes due [December 2061], the GBP []M Class Z Mortgage Backed
Fixed Rate Notes due [December 2061] and the Residual
Certificates.
The portfolio backing this transaction consists of first lien and
second lien UK non-conforming residential loans originated by
Together Personal Finance Limited (not rated) and Together
Commercial Finance Limited (not rated).
On the closing date, TPFL and TCFL will sell the portfolio to
Together Asset Backed Securitisation 2020-1 PLC.
RATINGS RATIONALE
The ratings take into account the credit quality of the underlying
mortgage loan pool, from which Moody's determined the MILAN Credit
Enhancement and the portfolio expected loss, as well as the
transaction structure and legal considerations. The expected
portfolio loss of 7.0% and the MILAN CE of 24.0% serve as input
parameters for Moody's cash flow model, which is based on a
probabilistic lognormal distribution.
The rapid spread of the coronavirus outbreak, the government
measures put in place to contain it and the deteriorating global
economic outlook, have created a severe and extensive credit shock
across sectors, regions and markets. Its analysis has considered
the effect on the performance of consumer assets from the collapse
in the UK economic activity in the second quarter and a gradual
recovery in the second half of the year. However, that outcome
depends on whether governments can reopen their economies while
also safeguarding public health and avoiding a further surge in
infections. As a result, the degree of uncertainty around its
forecasts is unusually high. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the
substantial implications for public health and safety.
MILAN CE for this pool is 24.0% and the expected loss is 7.0%.
The portfolio expected loss of 7.0%: this is higher than other
recent UK non-conforming securitisations and is based on Moody's
assessment of the lifetime loss expectation taking into account:
(i) 28.3% of the pool consists of second lien mortgages; (ii) 47.2%
of the loans in the pool are secured by non-owner occupied
properties; (iii) 52.1% of the loans are interest-only mortgages;
(iv) the current macroeconomic environment and in particular the
fact that at closing 23.9% of the pool has suspended its payment
according to coronavirus-related payment holidays; and (v)
benchmarking with similar transactions in the UK non-conforming
sector.
The MILAN CE for this pool is 24.0%: this is higher than other
recent UK non-conforming transactions and follows Moody's
assessment of the loan-by-loan information taking into account the
historical performance and the following key drivers: (i) the
relatively low weighted-average current LTV of 57.5%; (ii) the
presence of 56.5% loans where the borrower is self-employed; (iii)
borrowers with bad credit history with 8.3% of the pool containing
borrowers with CCJ's; (iv) the presence of 52.1% of interest-only
loans in the pool; (v) the low weighted-average seasoning of the
pool of 1 year; and (vi) benchmarking with similar transactions in
the UK non-conforming sector.
At closing the mortgage pool balance consists of up to GBP 372.3
million of loans. At closing a non-amortising general reserve fund
will be funded with the proceeds of the Class R Notes. The general
reserve fund will be equal to 3.16% of the initial balances of
Class A to E Notes (3% of the total collateral balance) and will be
the aggregate of the Standard Reserve Fund Required Amount (2.5%)
and the COVID-19 Reserve Fund Required Amount (0.66%). The general
reserve fund will be split into two components, a credit component
and a liquidity component. The latter will form the amortizing
Liquidity Reserve Fund, equal to 1.5% of the principal outstanding
of Class A Notes and will be floored at 1.0%. Any release amount
from the Liquidity Reserve Fund will form part of the credit
component of the General Reserve Fund. The Liquidity Reserve Fund
will stop amortizing if cumulative defaults are higher than 5.0% or
if the Notes are not called on the step-up date falling in June
2024. The credit component of the General Reserve Fund will be used
to cover shortfalls on PDLs and also interest shortfalls and other
senior fees. The liquidity component of the Reserve Fund is
replenished after interest on Class A Notes while the General
Reserve Fund will be replenished junior to the PDL of Class E
Notes.
Operational Risk Analysis: TPFL and TCFL are acting as servicers
and are not rated by Moody's. In order to mitigate the operational
risk, the transaction has a back-up servicer, Link Mortgage
Services Limited (not rated). CSC Capital Markets UK Limited (not
rated) will be acting as back-up cash manager facilitator and will
find a replacement cash manager in case the cash manager, Together
Financial Services Limited (not rated), stops performing its duties
under this role. To ensure payment continuity over the
transaction's lifetime the transaction documents incorporate
estimation language whereby the cash manager can use the most
recent servicer reports to determine the cash allocation in case no
servicer report is available. At closing Class A Notes benefit from
approximately 12 months of liquidity. Also, the most senior Notes
outstanding benefit from principal to pay interest mechanism.
Interest Rate Risk Analysis: At closing, 59.6% of the pool balance
is linked to SVR, the remaining portion of the pool pays a fixed
rate. The SVR-linked loans will not be swapped and there is the
risk of spread compression. 40.4% of the pool pays a fixed rate. To
mitigate the mismatch between the fixed-rate assets and the
variable-rate liabilities the Issuer will enter into a
fixed-floating interest rate swap.
Moody's issues provisional ratings in advance of the final sale of
securities, but these ratings represent only Moody's preliminary
credit opinions. Upon a conclusive review of the transaction and
associated documentation, Moody's will endeavour to assign
definitive ratings to the Notes. A definitive rating may differ
from a provisional rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in May
2020.
The analysis undertaken by Moody's at the initial assignment of a
rating for an RMBS security may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage. Please see "Moody's Approach to Rating RMBS Using the MILAN
Framework" for further information on Moody's analysis at the
initial rating assignment and the on-going surveillance in RMBS.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors that may cause an upgrade of the ratings of the Notes
include significantly better than expected performance of the pool
together with an increase in credit enhancement of Notes.
Factors that may lead to a downgrade of the Notes include,
significantly higher losses compared to its expectations at
closing, due to either, performance factors related to the
originator and servicer, or a significant, unexpected deterioration
of the housing market and the economy, including the negative
effects of a prolonged coronavirus outbreak.
TOGETHER ASSET 2020-1: S&P Puts Prelim BB(sf) Rating on X-Dfrd Note
-------------------------------------------------------------------
S&P Global Ratings has assigned preliminary credit ratings to
Together Asset Backed Securitisation 2020-1 PLC's class A notes and
to the interest deferrable class B-Dfrd to X-Dfrd notes.
S&P said, "Our cash flow analysis results for the class C-Dfrd,
D-Dfrd, and X-Dfrd notes indicated higher ratings than those we
have assigned. However, we have not given full benefit to the
modeling results in our rating decision because of the ongoing
macroeconomic uncertainty surrounding COVID-19 and also the
potential for prepayments to increase due to the presence of
fixed-float loans in the portfolio. These are a relatively new
product for the originator, and historical prepayment rates do not
take these loans into account.
"Similarly, our cash flow analysis on the class B-Dfrd notes also
indicated a higher rating than that assigned, but we do not
consider deferrable notes to be commensurate with our 'AAA'
rating."
The transaction is a static RMBS transaction, which securitizes a
provisional portfolio of up to GBP372.3 million first- and
second-lien mortgage loans, both owner-occupied and buy-to-let
(BTL), secured on properties in the U.K. Further advances, product
switches, and loan substitution are permitted under the transaction
documents. Of the preliminary pool, 23.9% (by current balance) of
the mortgage loans have been granted payment holidays due to
COVID-19.
The loans in the pool were originated by Together Personal Finance
Ltd. and Together Commercial Finance Ltd. between 2017 and 2020.
S&P considers the collateral to be nonconforming based on the
prevalence of loans to borrowers with adverse credit history, such
as prior County Court Judgments (CCJs).
Credit enhancement for the rated notes consists of subordination, a
non-amortizing reserve fund, and overcollateralization following
the step-up date, which will result from the release of the excess
spread amounts from the revenue priority of payments to the
principal priority of payments.
Liquidity support for the class A notes is in the form of an
amortizing liquidity reserve fund. The nonamortizing reserve fund
can provide liquidity support to the class A to E notes. Principal
can also be used to pay interest on the most-senior class
outstanding (for the class A to E-Dfrd notes only).
There are no rating constraints in the transaction under our
counterparty, operational risk, or structured finance sovereign
risk criteria. S&P considers the issuer to be bankruptcy remote.
S&P Global Ratings acknowledges a high degree of uncertainty about
the evolution of the coronavirus pandemic. The consensus among
health experts is that the pandemic may now be at, or near, its
peak in some regions, but will remain a threat until a vaccine or
effective treatment is widely available, which may not occur until
the second half of 2021. S&P said, "We are using this assumption in
assessing the economic and credit implications associated with the
pandemic. As the situation evolves, we will update our assumptions
and estimates accordingly."
Ratings Assigned
Class Prelim. rating* Amount (GBP)
A AAA (sf) TBD
B-Dfrd AA+ (sf) TBD
C-Dfrd AA (sf) TBD
D-Dfrd A+ (sf) TBD
E-Dfrd A (sf) TBD
X-Dfrd BB (sf) TBD
R NR TBD
Z NR TBD
NR--Not rated.
TBD--To be determined.
===============
X X X X X X X X
===============
[*] BOOK REVIEW: Hospitals, Health and People
---------------------------------------------
Author: Albert W. Snoke, M.D.
Publisher: Beard Books
Softcover: 232 pages
List Price: $34.95
Order your personal copy today at
http://www.beardbooks.com/beardbooks/hospitals_health_and_people.html
Hospitals, Health and People is an interesting and very readable
account of the career of a hospital administrator and physician
from the 1930's through the 1980's, the formative years of today's
health care system. Although much has changed in hospital
administration and health care since the book was first published
in 1987, Dr. Snoke's discussion of the evolution of the modern
hospital provides a unique and very valuable perspective for
readers who wish to better understand the forces at work in our
current health care system.
The first half of Hospitals, Health and People is devoted to the
functional parts of the hospital system, as observed by Dr. Snoke
between the late 1930's through 1969, when he served first as
assistant director of the Strong Memorial Hospital in Rochester,
New York, and then as the director of the Grace-New Haven Hospital
in Connecticut. In these first chapters, Dr. Snoke examines the
evolution and institutionalization of a number of aspects of the
hospital system, including the financial and community
responsibilities of the hospital administrator, education and
training in hospital administration, the role of the governing
board of a hospital, the dynamics between the hospital
administrator and the medical staff, and the unique role of the
teaching hospital.
The importance of Hospitals, Health and People for today's readers
is due in large part to the author's pivotal role in creating the
modern-day hospital. Dr. Snoke and others in similar positions
played a large part in advocating or forcing change in our hospital
system, particularly in recognizing the importance of the nursing
profession and the contributions of non-physician professionals,
such as psychologists, hearing and speech specialists, and social
workers, to the overall care of the patient. Throughout the first
chapters, there are also many observations on the factors that are
contributing to today's cost of care. Malpractice is just one
example. According to Dr. Snoke, "malpractice premiums were
negligible in the 1950's and 1960's. In 1970, Yale-New Haven's
annual malpractice premiums had mounted to about $150,000." By the
time of the first publication of the book, the hospital's premiums
were costing about $10 million a year.
In the second half of Hospitals, Health and People, Dr. Snoke
addresses the national health care system as we've come to know it,
including insurance and cost containment; the role of the
government in health care; health care for the elderly; home health
care; and the changing role of ethics in health care. It is
particularly interesting to note the role that Senator Wilbur Mills
from Arkansas played in the allocation of costs of hospital-based
specialty components under Part B rather than Part A of the
Medicare bill. Dr. Snoke comments: "This was considered a great
victory by the hospital-based specialists. I was disappointed
because I knew it would cause confusion in working relationships
between hospitals and specialists and among patients covered by
Medicare. I was also concerned about potential cost increases. My
fears were realized. Not only have health costs increased in
certain areas more than anticipated, but confusion is rampant among
the elderly patients and their families, as well as in hospital
business offices and among physicians' secretaries." This aspect of
Medicare caused such confusion that Congress amended Medicare in
1967 to provide that the professional components of radiological
and pathological in-hospital services be reimbursed as if they were
hospital services under Part A rather than part of the co-payment
provisions of Part B.
At the start of his book, Dr. Snoke refers to a small statue,
Discharged Cured, which was given to him in the late 1940's by a
fellow physician, Dr. Jack Masur. Dr. Snoke explains the
significance the statue held for him throughout his professional
career by quoting from an article by Dr. Masur: "The whole question
of the responsibility of the physician, of the hospital, of the
health agency, brings vividly to mind a small statue which I saw a
great many years ago.it is a pathetic little figure of a man, coat
collar turned up and shoulders hunched against the chill winds,
clutching his belongings in a paper bag-shaking, tremulous,
discouraged. He's clearly unfit for work-no employer would dare to
take a chance on hiring him. You know that he will need much more
help before he can face the world with shoulders back and
confidence in himself. The statuette epitomizes the task of medical
rehabilitation: to bridge the gap between the sick and a job."
It is clear that Dr. Snoke devoted his life to exactly that
purpose. Although there is much to criticize in our current
healthcare system, the wellness concept that we expect and accept
today as part of our medical care was almost nonexistent when Dr.
Snoke began his career in the 1930's. Throughout his 50 years in
hospital administration, Dr. Snoke frequently had to focus on the
big picture and the bottom line. He never forgot the importance of
Discharged Cured, however, and his book provides us with a great
appreciation of how compassionate administrators such as Dr. Snoke
have contributed to the state of patient care today. Albert Waldo
Snoke was director of the Grace-New Haven Hospital in New Haven,
Connecticut from 1946 until 1969. In New Haven, Dr. Snoke also
taught hospital administration at Yale University and oversaw the
development of the Yale-New Haven Hospital, serving as its
executive director from 1965-1968. From 1969-1973, Dr. Snoke worked
in Illinois as coordinator of health services in the Office of the
Governor and later as acting executive director of the Illinois
Comprehensive State Health Planning Agency. Dr. Snoke died in April
1988.
*********
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.
This material is copyrighted and any commercial use, resale or
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Information contained herein is obtained from sources believed to
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