/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/201027.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 Tuesday, October 27, 2020, Vol. 21, No. 215 Headlines A U S T R I A NEURAXPHARM ARZNEIMITTEL: S&P Affirms 'B' ICR, Outlook Stable A Z E R B A I J A N AZERBAIJAN: S&P Alters Outlook to Negative & Affirms 'BB+/B' SCRs B O S N I A A N D H E R Z E G O V I N A HIDROGRADNJA: Assets Attract Three International Potential Buyers B U L G A R I A CORRECT PHARM: Sells 2 Million Petrol Shares to Petrol Bulgaria F R A N C E HOMEVI SAS: S&P Retains 'B' Rating on EUR1.17BB Term Loan OPTIMUS BIDCO: S&P Lowers ICR to 'B-', Outlook Stable G R E E C E GAMMA INFRASTRUCTURE: Moody's Affirms B3 CFR, Outlook Stable GREECE: S&P Affirms BB-/B Sovereign Credit Ratings, Outlook Stable I R E L A N D CARLYLE EURO 2018-2: Fitch Affirms B-sf Rating on Class E Notes CIFC EUROPEAN I: Fitch Affirms B-sf Rating on Class F Debt DELPHI TECHNOLOGIES: S&P Discontinues 'BB-' ICR on BorgWarner Deal ST. PAUL'S V: Fitch Affirms B-sf Rating on Class F-R Debt I T A L Y BPER BANCA: Fitch Affirms BB LongTerm IDR, Outlook Stable N E T H E R L A N D S OCI NV: Fitch Assigns Final BB Rating on EUR400MM Notes P O L A N D ZABRZE CITY: Fitch Affirms BB+ LongTerm IDR, Outlook Stable P O R T U G A L BANCO COMERCIAL: Fitch Affirms BB LongTerm IDR, Outlook Negative CAIXA GERAL: Fitch Affirms BB+ LongTerm IDR, Outlook Negative R O M A N I A TAROM: European Commission Approves EUR19.3MM Loan Guarantee R U S S I A ROSBUSINESSBANK PJSC: Bank of Russia Revokes Banking License VSK INSURANCE: Fitch Affirms BB Insurer Financial Strength Rating S L O V E N I A ADRIA AIRWAYS: Oki Air Expresses Interest to Acquire Brand Name S P A I N BANCO MONTEPIO: Fitch Affirms B- LongTerm IDR, Outlook Negative U K R A I N E KERNEL HOLDING SA: Fitch Rates New US$300MM Bond Due 2027 'BB-' U N I T E D K I N G D O M ARGENTUM 47: Mgmt. Says Substantial Going Concern Doubt Exists CEREBRO HOLDCO: Moody's Assigns B3 CFR, Outlook Stable CO-OP GROUP: S&P Affirms 'BB' ICR Amid COVID-19 Disruption DEBENHAMS PLC: Deadline Looms for Acquisition Bids SAGE AR 1: Moody's Assigns B3 Rating on GBP18.7MM Cl. F Notes - - - - - ============= A U S T R I A ============= NEURAXPHARM ARZNEIMITTEL: S&P Affirms 'B' ICR, Outlook Stable ------------------------------------------------------------- S&P Global Ratings affirmed its rating on NEURAXPHARM Arzneimittel GmbH at 'B'. S&P assigned a 'B' issue rating to Neuraxpharm's proposed EUR670 million term loan B (TLB), with a '3' recovery rating. Funds affiliated with Permira announced on Sept. 22 the acquisition of Neuraxpharm, from its existing financial sponsor, Apax Partners. Although S&P expects adjusted leverage will slightly increase post-transaction, following issuance of a new senior secured EUR670 million term loan B (TLB), S&P believes the group will continue to post sizable cash flows and to gradually deleverage thanks to its strong EBITDA growth. S&P's view of Neuraxpharm's business remains unchanged by this transaction. S&P said, "We expect adjusted debt to EBITDA above 7.0x in 2020, following acquisition by Permira, but decreasing to within 5.5x-6.0x in 2021 and 2022. Neuraxpharm's capital structure remains highly leveraged and we do not expect a material deterioration of its financial metrics following its debt-funded acquisition by funds advised by private-equity firm Permira. The transaction will be funded by a new proposed EUR670 million TLB alongside an equity contribution and includes a new proposed EUR115 million revolving credit facility (RCF). Adjusted leverage will likely increase in 2020 because of the increased debt in the capital structure. That said, we expect the group's growth momentum and stable EBITDA margins will drive a gradual deleveraging to a more stable level of 5.5x-6.0x in 2021 and 2022. Furthermore, we forecast S&P Global Ratings-adjusted free operating cash flow (FOCF) of about EUR40 million-EUR50 million in 2021 and 2022 since capital expenditure (capex) needs will stabilize and working capital requirements remain low. "We view Permira's acquisition of Neuraxpharm as a financial transaction and it does not alter our view of Neuraxpharm's competitive position or overall business risk. Our assessment of Neuraxpharm's business risk profile is underpinned by the group's established franchise in branded CNS products. In this branch of medicine, specialists make most prescriptions and once a drug works, both patients and doctors are unwilling to switch prescriptions as a different drug might not be effective. We believe that Neuraxpharm is a leader in a fragmented market within a niche specialization. The CNS segments in which Neuraxpharm is present are currently marginal to the new business development strategies of big multinational pharmaceutical companies. This reduces pressure from potential competitors, since the company develops also small molecules with a narrow addressable customer base that are too minor to attract big competitors but are highly margin accretive. We think Neuraxpharm's focus on a broad range of specialty CNS drugs allows the group to benefit from high barriers to entry and revenue visibility. The company benefits from more than 130 CNS molecules and 2,500 stock-keeping units. Furthermore, the combined group stands to benefit from the vertical integration of its constituent businesses, creating synergies over time through in-house research and development (R&D) and manufacturing. However, 85% of group sales are done by third-party contract manufacturing organizations. This presence along the value chain should allow Neuraxpharm to benefit from increasing operational flexibility and strengthen its technical capabilities and customer diversification. However, the company's concentrated reliance on a relatively narrow range of pharmaceutical products and markets weighs negatively on our assessment of its business risk profile, although we note that the company has improved its geographical and product diversification over the past four years. "We expect the group will continue pursuing bolt-on acquisitions to expand its business and consolidate its positions in the European generic CNS market. Over the years, the company has expanded its operations across Europe and recently, notably reinforced its European presence with the acquisition of the prescription brand Buccolam from Takeda, a drug used to treat seizures in children. Nonetheless, the group is still exposed to the competitive German market, which we see as limiting growth because of the country's reimbursement system, and notably competitive tenders. Tenders imply higher rebates to customers, or potential pricing reductions for its main products. "We do not rule out future debt-financed acquisitions or dividend recapitalizations that could put pressure on the rating. Any material increase in debt through acquisitions or dividend recapitalization could put pressure on the rating. Overall, the private-equity track record of extracting excess cash from the company coupled with the uncertainty as to whether the financial sponsor will sustainably support Neuraxpharm's deleveraging trajectory and FOCF generation weigh on our assessment. "The stable outlook reflects our view that Neuraxpharm will generate continued EBITDA and revenue growth, supported by the integration of new business, expansion into new markets, a strong pipeline, and the positive momentum of its core CNS franchise. This should allow the company to sustain adjusted debt to EBITDA below 7.0x over the next few years, while generating positive FOCF of EUR40 million-EUR50 million over the same period. "We could lower the ratings if the group's earnings came under pressure such that EBITDA declined or cash flow generation weakened substantially. In particular, we could consider a downgrade if EBITDA interest coverage fell to less than 2.0x and FOCF became negligible or negative on a permanent basis. We could also take a negative rating action if the company's financial policy became more aggressive, leading to adjusted leverage above 8.0x for a protracted period. "We could raise the ratings if Neuraxpharm committed to a tighter financial policy such that its adjusted debt to EBITDA remained below 5.0x for a protracted period, with a commitment from the financial sponsor to not releverage. We could also consider a positive rating action if Neuraxpharm materially increased the scale and diversity of its product offerings without hindering profitability." =================== A Z E R B A I J A N =================== AZERBAIJAN: S&P Alters Outlook to Negative & Affirms 'BB+/B' SCRs ----------------------------------------------------------------- S&P Global Ratings, on Oct. 23, 2020, revised its outlook on the long-term credit rating on Azerbaijan to negative from stable. At the same time, S&P affirmed its long- and short-term foreign and local currency sovereign credit ratings at 'BB+/B'. As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Azerbaijan are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar. Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a significant escalation of the long-standing conflict between Azerbaijan and Armenia over the Nagorno-Karabakh region. The next scheduled publication on the sovereign rating on Azerbaijan will be in January 2021. Outlook The negative outlook reflects rising risks to Azerbaijan's fiscal performance, external balance sheet, and macro-financial stability amid the significant recent military escalation of the Nagorno-Karabakh conflict, which may take quite some time to resolve. The outlook also reflects the possibility that the conflict could weigh on Azerbaijan's growth prospects and dampen foreign investor confidence. Downside scenario S&P could lower the ratings on Azerbaijan if protracted military confrontation led to a material deterioration of its fiscal position or external balance sheet, for instance as a result of higher fiscal expenses or accelerated dollarization and outflows of dollar deposits from the financial system. The rating could also come under pressure if Azerbaijan had to exit the managed exchange rate regime in a disorderly manner, like in 2015, with adverse effects on the financial sector and numerous state-owned enterprises. This is currently not its base case. Downward pressure could also build on the ratings if increased security risks had long-lasting effects on Azerbaijan's economic outlook, reducing its trend growth further below that of peers at similar levels of economic development. Upside scenario S&P could revise the outlook to stable if the conflict and lingering uncertainty subsided, averting negative repercussions for Azerbaijan's fiscal, balance-of-payments, and growth metrics. Rationale In late September, wide-scale fighting broke out between Azerbaijan and Armenia over the Nagorno-Karabakh region--a previously frozen conflict that has existed for many years. Both Azerbaijan and Armenia declared martial law and implemented military mobilization. This erupted after months of increased tension and a material escalation of the dispute in July this year. The current escalation appears the most significant since the war ended in 1994 with hundreds of casualties reported on both sides. A temporary ceasefire brokered by Russia was agreed on Oct. 9, but both sides have reported continuing strikes from the other side. Although military attacks remain largely limited to Nagorno-Karabakh and surrounding areas, rising tensions might expand to territories beyond the conflict zone. At this stage, we note numerous uncertainties regarding the development of the ongoing conflict and the extent to which it could affect Azerbaijan's credit profile. It is not clear to us whether a peaceful political solution could be brokered in the near term, with a protracted military conflict looking more likely. This could pose a number of economic and financial risks to Azerbaijan, the economy of which has already been adversely affected by COVID-19 and the collapse of oil prices this year. S&P said, "In our view, over the short term foreign-exchange liquidity in the banking system could tighten if residents' conversion of savings to foreign currency and potential withdrawals of dollar deposits accelerated. This could see external reserves deplete in a bid to meet rising demand for foreign currency and could weaken the external balance sheet, which we currently view as a core rating strength. This was what rapidly unfolded in 2015, following a previous oil-price collapse. We understand that so far there has not been any increased conversion of domestic residents' savings to foreign exchange or their outright withdrawal from the banking system." Given the level of loan dollarization, estimated at 32%, risks to financial sector stability could materially increase from potential challenges to Azerbaijan's exchange rate regime. S&P assumes Azerbaijan will retain the manat's de facto peg to the U.S. dollar. However, the exchange rate remains under pressure amid the volatile oil price environment and depreciation of the currencies of Azerbaijan's key trading partners. Disorderly adjustments to parity might destabilize the macroeconomic environment and increase credit risks in the banking sector. Amid intensified military confrontation, Azerbaijan's fiscal metrics could materially deteriorate as a result of increased budget spending on defense, social support to affected households, and the restoration of badly damaged civil infrastructure. Fiscal pressures are already arising from lower hydrocarbon revenues and the impact of the pandemic on non-oil tax collection. Subject to increased downside risks, S&P's base case is that Azerbaijan's fiscal general government balance will record a deficit of 6.5% of GDP and 1.5% of GDP in 2020 and 2021 compared with a large surplus of 11% in 2019. S&P said, "Apart from the immediate implications, we also consider that medium-term economic risks have increased. Azerbaijan did not fully recover from the sharp fall in hydrocarbon prices in 2015, and its growth performance has been weaker than peers'. Long-term questions have been raised over the sustainability of its hydrocarbon production. We expect Azerbaijan's real GDP will shrink by 6.9% in 2020 before rebounding to about 3.0% growth in 2021." Increased military tensions could compound pandemic- and oil-price-related downside risks to growth, weighing on business confidence and household consumption. Economic, external, and fiscal risks could be further exacerbated in the less likely event that Azerbaijan's hydrocarbon infrastructure is severely damaged and protracted military conflicts prevented the effective implementation of mitigation plans. Azerbaijan derives about 40% of its GDP, 50% of government revenues, and more than 90% of exports from the hydrocarbons sector. In accordance with S&P's relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable. At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action. Ratings List Ratings Affirmed Azerbaijan Transfer & Convertibility Assessment BB+ Ratings Affirmed; Outlook Action To From Azerbaijan Sovereign Credit Rating BB+/Negative/B BB+/Stable/B =========================================== B O S N I A A N D H E R Z E G O V I N A =========================================== HIDROGRADNJA: Assets Attract Three International Potential Buyers ----------------------------------------------------------------- Stefan Radulovikj at SeeNews reports that the assets of Bosnian bankrupt construction company Hidrogradnja have attracted three international potential buyers. According to SeeNews, news daily Nezavisne Novine quoted Hidrogradnja's bankruptcy trustee Zijad Fazlagic as saying the interested parties comprise a group of Libyan businessmen who founded a company in Western Europe, one Turkish company and Australia's Link Group. The assets of Hidrogradnja are offered for sale at BAM87 million (US$52.5 million/EUR44.5 million), down from the previously set price of BAM96.1 million, SeeNews discloses. The report reads the board of trustees has cut the asking price by 10% in order to attract a buyer, SeeNews notes. However, the sale does not include part of the company's assets worth some BAM3 million with a controversial status, SeeNews states. This includes property in southern Mostar, business offices and garages in Sarajevo, as well as a hotel and some 20,000 square metres of land in Vitkovci, some 80 km east of Banja Luka, SeeNews discloses. The municipal court in Sarajevo launched bankruptcy proceedings against Hidrogradnja in 2016, SeeNews recounts. There have been previous unsuccessful attempts to sell Hidrogradnja's assets, SeeNews relays. The government of Bosnia's Federation entity, which controls a 67% stake in Hidrogradnja, tried to sell the company back in 2013, but the sale failed to attract any buyers, SeeNews states. =============== B U L G A R I A =============== CORRECT PHARM: Sells 2 Million Petrol Shares to Petrol Bulgaria --------------------------------------------------------------- Mario Tanev at SeeNews reports that Bulgarian fuel trader Petrol said on Oct. 22 that insolvent Correct Pharm has sold 2 million Petrol shares, or a 7.32% stake in the company, to Petrol Bulgaria. According to SeeNews, Petrol said in a bourse filing following the transaction, Petrol Bulgaria owns 7.32% interest in Petrol, while Correct Pharm holds a 3.66% stake. The deal was registered with the central depository on Oct. 16, SeeNews discloses. =========== F R A N C E =========== HOMEVI SAS: S&P Retains 'B' Rating on EUR1.17BB Term Loan --------------------------------------------------------- S&P Global Ratings said it revised its recovery rating on France-based nursing home operator HomeVi SAS' EUR1.17 billion term loan to '4' from '3'. The '4' recovery rating indicated its expectation of average (30%-50%; rounded estimate: 45%) recovery in the event of a default. S&P's lower recovery expectations reflect the increase in the company's bilateral loans with its updated assumption of EUR375 million in the group's capital structure, compared with about EUR350 million previously. S&P's 'B' issue-level rating on the term loan is unchanged. S&P said, "HomeVi's total bilateral facilities (including its EUR40 million unsecured bilateral revolving credit facility) have increased to EUR381 million in first-half 2020, from EUR347 million before and above our previous assumptions for the group. The incremental bilateral facilities increase the amount of debt in the company's capital structure and raise its level of fixed charges (interest expense and maintenance capital expenditure) relative to our prior analysis. We assume an interest rate of close to 2% on average for these facilities. We understand that part of this debt is priority secured and asset backed at operating level. We consider the senior secured facilities (including the term loan and EUR130 million revolving credit facility) as subordinated to them in HomeVi's capital structure "Our issuer credit rating and stable outlook on HomeVi are unchanged because we expect the company to expand its EBITDA base through 2021, reflecting the ongoing ramp-up of occupancy rates supported by the restart of commercial activity, as well as the essential nature of services provided. We view the French state's support as favorable and assume that it will reimburse a large part of COVID-19 related costs by the end of this year through dedicated subsidies. We also assume that the group will better manage its cost base, reflecting availability of COVID-19 testing and better absorption of fixed costs as occupancy rates increase gradually toward optimal levels, leading to improvement in the company's EBITDA. Furthermore, we believe the proceeds from the incremental bilateral lines will further enhance the group's liquidity position by providing some leeway in case additional and more severe restrictions are imposed, or the recovery and ramp-up of care homes is weaker than we expect." ISSUE RATINGS--RECOVERY ANALYSIS Key analytical factors -- S&P revised its recovery rating on HomeVi's senior secured term loan to '4' from '3'. -- The '4' recovery rating indicates S&P's expectation for average (30%-50%; rounded estimate: 45%) recovery in the event of a default. S&P said, "Our estimate of the company's gross enterprise value at emergence is broadly unchanged, so the recovery rating revision reflects the company's higher quantum of bilateral facilities (EUR375 million from about EUR350 million) against that value. Simulated default assumptions "Our simulated default scenario considers a default in 2023, owing to HomeVi's inability to sustain cash flow at a level that covers fixed charges because of a radical change in the French or Spanish health care market reimbursement system and increased competition. We assume a reorganization following the default, given the company's established market position in France and Spain and use an emergence EBITDA multiple of 5.5x to value the company. This multiple is in line with the standard sector assumption for Health providers." S&P assumes HomeVi's EUR130 million revolver is 85% drawn at default. Simplified waterfall -- Emergence EBITDA: EUR181 million -- EBITDA multiple: 5.5x -- Gross recovery value: EUR993 million -- Net recovery value (after 5% administrative expenses): EUR944 million -- Estimated priority claims at default: EUR260 million -- Value available for senior secured claims at default: EUR683 million -- Estimated senior secured claims at default: EUR1.44 billion --Recovery expectation: 30%-50% (rounded estimate: 45%) All debt amounts include six months of prepetition interest. OPTIMUS BIDCO: S&P Lowers ICR to 'B-', Outlook Stable ----------------------------------------------------- S&P Global Ratings lowered its ratings on Optimus BidCo SAS and its debt to 'B-' from 'B'. The stable outlook reflects S&P's expectation that Optimus will slowly increase its revenue and gradually improve profitability, with adjusted EBITDA margins around 10% in 2020-2021, coupled with an adjusted debt to EBITDA of about 10x in the next two years. Optimus' 26% revenue contraction has weighed markedly on its 2020 performance, pushing its credit metrics below our previous expectations. The group's revenue dipped by EUR84 million to EUR245 million in the first half of the year, and it reported a loss before tax of EUR12 million. These setbacks have stemmed from COVID-19 economic fallout, including an expected 20% decrease in sales decrease, muted profitability, and a peak in leverage. As such, S&P now expects the group's debt to EBITDA to be around 11x, compared with 7.8x at end-2019, and a FFO cash interest coverage ratio at around 1.8x, below its previous downgrade trigger of 2.5x. That said, Optimus should have sufficient liquidity throughout this challenging period. The group repaid EUR45 million on the EUR70 million that it drew under its RCF in first-quarter 2020. Furthermore, the group has EUR37 million of total cash as at end-June 2020, and no debt maturities in the next two years (the term loan B only comes due in July 2025). S&P therefore believes Optimus has enough cash to weather the pandemic and right size the business. Optimus' recovery will likely be supported by the pick-up in order intakes observed from June 2020. S&P said, "We believe that, following the end of lockdown in France, Germany, and Benelux, the gradual increase of order intakes will partially offset this year's subdued revenue. However, we expect most of the impact will come after year-end. The group's performance should also strengthen thanks to an order backlog of about EUR258 million at end-June. Order intakes were at a low EUR31 million in April-May, and we estimate that it improved to about EUR50 million in September." By end-2020 order intakes should reach levels similar to those in fourth-quarter 2019. This would highlight a slight recovery of the market overall. S&P said, "We don't believe the pandemic has prompted the group to rethink its strategy of focusing on STOW. The transformation will incur supplemental costs and weigh on Optimus' S&P Global Ratings-adjusted EBITDA margin in 2020, as well as slow deleveraging. We expect the restructuring costs will be between EUR10 million and EUR15 million for the full 2020. "Our ratings on Optimus remain constrained by the group's high leverage and private-equity ownership. We forecast that Optimus' adjusted leverage around 9x-11x over 2020-2021. This stems from our expectation of weaker profitability in 2020, with adjusted EBITDA margins of about 10% in the coming 12 months. We also factor into our assessment the group's ownership by private equity firm Blackstone and the firm's potentially aggressive strategy of using debt and debt-like instruments to maximize shareholder returns or undertake acquisitions." S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-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." Environmental, social, and governance (ESG) credit factors for this credit rating change: -- Health and safety S&P said, "The stable outlook reflects our expectation that Optimus will gradually improve its profitability, with adjusted EBITDA margins around 10% in 2020-2021. We expect that, alongside the stabilizing of its end-markets and promising sales pipeline, the group will generate funds from operations (FFO) cash interest coverage of more than 1.5x and that it will deleverage to about 9.0x in 2021." Downside scenario S&P said, "We could lower the rating if Optimus fails to generate at least neutral free operating cash flow (FOCF) over the next 12-18 months or if FFO cash interest coverage ratio falls below 1.5x. This could occur if we observe higher-than-expected restructuring charges, including integration costs, or if its end-markets don't recover and operational performance doesn't strengthen as anticipated, jeopardizing the sustainability of its capital structure. We could also lower the rating if we observe a breach of covenants or a higher-than-expected cash outflow, for example, related to additional restructuring measures, or if deteriorating operating and financial performance raised liquidity concerns." Upside scenario S&P said, "In our view, prospects for an upgrade over the next 12 months are limited because of the increase debt-to-EBITDA ratio of nearly 11x in 2020 and about 9x in 2021. We could consider raising the rating if Optimus' profitability and credit metrics materially strengthened and were on a clear trend to sustainably reduce debt to EBITDA to 6.5x while maintaining positive FOCF and FFO cash interest coverage of about 2.5x. An upgrade would also hinge on, in our opinion, a more conservative financial policy that supports a sustainable improvement in the aforementioned metrics." =========== G R E E C E =========== GAMMA INFRASTRUCTURE: Moody's Affirms B3 CFR, Outlook Stable ------------------------------------------------------------ Moody's Investors Service affirmed the B3 corporate family rating (CFR) and the B3-PD probability of default rating (PDR) of Gamma Infrastructure II B.V., a cable operator in the Netherlands. Concurrently, Moody's has affirmed the B3 ratings of the EUR595 million guaranteed senior secured term loan B3 due 2024, the EUR30 million guaranteed senior secured revolving credit facility (RCF) and the EUR120 million guaranteed senior secured capital expenditure (capex) facility, both due in 2023 and borrowed by Gamma Infrastructure III B.V., a 100% owned subsidiary of Gamma Infrastructure II B.V. The outlook on all ratings is stable. "DeltaFiber's rating is well positioned in the B3 category, reflecting its healthy operating performance momentum with revenue growth and margin expansion supported by the success of its network expansion plans. In addition, we expect the company to reduce leverage to around 6.5x in 2020 and 6.1x in 2021 from 7.1x in 2019, following the EUR100 million equity injection received in April 2020 and the expected EUR150 million shareholder loan to be received in 2020/2021," says Agustin Alberti, a Moody's Vice President -- Senior Analyst, and lead analyst for DeltaFiber. RATINGS RATIONALE The company has increased its capital spending plan for 2022-23 due to the expansion of its FTTH roll-out target to an additional 250k homes in suburban areas. In addition, in April 2020, the owner, EQT Infrastructure III fund (EQT), injected EUR100 million of equity and has committed to provide a further EUR150 million in the form of a shareholder loan in 2020/21. Both actions reflect a balanced approach for the funding of the expansion plan and the company's effort to reduce leverage to levels commensurate with its rating. For the first nine months of 2020, the company has passed 91k homes and connected 39k customers, slightly below its initial targets due to delays related to the coronavirus outbreak. Moody's estimates strong organic revenue and EBITDA growth of 8% and 15%, respectively, in 2020 as the company benefits from ARPU increases and subscriber gains, mainly in new expansion areas. The rating agency expects double digit revenue growth over the next 3 years as the company continues to expand its network footprint and to increase its customer base. Moody's also expects EBITDA margins to improve to above 50% as the company benefits from scale efficiencies. DeltaFiber's gross leverage (Moody's adjusted) stood at 7.1x in 2019. Moody's expects leverage to reduce towards 6.5x in 2020 and 6.1x in 2021. This leverage reduction is supported by strong EBITDA growth as well as the EUR100 million equity injection received in April 2020 and the EUR150 million shareholder loan to be received in two tranches, EUR50 million in Q4 2020 and EUR100 million in Q1 2021. The shareholder loan, which will receive equity treatment under Moody's methodologies, will be provided by Gamma Infrastructure II Holdco BV, an entity outside the restricted group that has recently borrowed a EUR150 million subordinated PIK loan. The company's EBITDA minus capex will remain materially negative in the coming years due to the network expansion related capex. Moody's projects the company's capex to be exceptionally high at around EUR275 million in 2020 and EUR350 million in 2021, and to gradually decline thereafter, although to remain at high levels. This implies that free cash flow (FCF) generation will also remain significantly substantially negative for, at least, the next 2 years, even after considering the EUR150 million shareholder loan to be received in 2020/21. While this heavy capex plan should translate into future growth, the company will need to address the funding of an annual shortfall of around EUR120 million - EUR150 million in 2021 and 2022, with internal or external sources. The rating continues to reflect (1) the solid market positions of DeltaFiber within its network coverage areas; (2) the company's good operating performance; (3) no significant network overlap with VodafoneZiggo Group B.V. (VodafoneZiggo, B1 negative) and superior network than Koninklijke KPN N.V.'s (KPN, Baa3 stable) in common coverage areas; (4) good future growth potential fueled by the company's planned network expansion program; (5) the fact that for network expansion, DeltaFiber is pursuing a demand aggregation model, with deployment only starting once it reaches a 50% committed sign-up in the rural areas and 25%-35% in suburban areas, reducing demand risk; and (6) the support from its owner EQT, which has injected EUR100 million of equity in 2020 and has committed to provide EUR150 million in 2020/21 in the form of a shareholder loan. The rating also reflects (1) the company's small scale in terms of revenue and network coverage compared with KPN and VodafoneZiggo; (2) its aggressive financial policy and high Moody's-adjusted gross leverage (7.1x as of year-end 2019), with limited deleveraging in the near future; (3) the execution risks associated with the successful rollout of its network expansion plan (such as further potential delays or increased competition in the suburban areas); and (4) its high capital spending requirements, which will lead to negative FCF generation and constrain deleveraging. LIQUIDITY The agency views the group's liquidity profile as adequate. However, Moody's does not expect the company's EUR8.5 million of cash on balance sheet, the EUR88 million available under its EUR120 million capital spending facility and EUR30 million RCF as of year-end 2019, the EUR100 million equity injection received in April 2020 and the expected EUR150 million shareholder loan to be sufficient to cover its upcoming financing needs over the next 18 months. Moody's estimates that under the current investment program, if the company is unable to secure additional internal or external liquidity sources, liquidity will be very tight towards Q2/Q3 2021. However, Moody's recognizes the track record of the shareholder in following a balanced approach between equity and debt for funding the annual cash deficits, and the fact that the expansion plan-related capital spending is largely discretionary and can be curtailed if liquidity comes under pressure. Additionally, the company's RCF and capital spending facility have a springing leverage covenant, set at 9.0x net debt/EBITDA, which is required to be tested only when the RCF and capital spending facility are collectively 40% drawn. Capacity is expected to remain comfortable in the near future. STRUCTURAL CONSIDERATIONS The rating of the senior secured term loan facility, the EUR30 million senior secured RCF, and the EUR120 million capex facility is B3, in line with the CFR, reflecting that all instruments rank pari passu and benefit from upstream guarantees from the operating companies, which account for 80% of the company's assets and EBITDA, as well as from a first-ranking asset security package (excluding real estate). The B3-PD probability of default rating is at the same level as its CFR, reflecting its covenant-lite structure and a family recovery rate of 50%. RATIONALE FOR STABLE OUTLOOK The stable outlook on the rating reflects Moody's expectation that: (1) the company's existing business will continue to see steady healthy operating momentum; (2) it will continue to successfully expand its network in line with its business plan; and (3) it will continue to reduce leverage to a level more commensurate for its rating category by 2021. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Upward pressure on the rating is unlikely in the near future, but could develop over the long term if: (1) the network expansion is executed in line with its business plan, translating into strong organic revenue and EBITDA growth; (2) FCF generation turns positive when network expansion nears completion, and (3) Moody's-adjusted gross debt/EBITDA (based on proportionate consolidation — in line with audited results) remains below 5.5x on a sustained basis. However, the PIK loan present outside of the restricted group represents an overhang for DeltaFiber, as it could be refinanced within the restricted group once sufficient financial flexibility develops. Therefore, the PIK instrument could be a constraint to upward rating pressure in the future. Downward rating pressure could arise if (1) the company fails to deliver on its business plan, especially if it is not able to gain market share in the expansion areas and therefore monetize the significant network investments; (2) Moody's-adjusted gross debt/EBITDA (based on proportionate consolidation — in line with audited results) remains materially above 6.5x on a sustained basis; and/or (3) the company is not able to address its liquidity needs timely. LIST OF AFFECTED RATINGS Issuer: Gamma Infrastructure II B.V. Affirmations: Probability of Default Rating, Affirmed B3-PD Corporate Family Rating, Affirmed B3 Outlook Action: Outlook, Remains Stable Issuer: Gamma Infrastructure III B.V. Affirmation: Backed Senior Secured Bank Credit Facilities, Affirmed B3 Outlook Action: Outlook, Remains Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Pay TV published in December 2018. COMPANY PROFILE Gamma Infrastructure II B.V. (DeltaFiber), headquartered in the Netherlands, is owned by EQT Infrastructure III fund (EQT). DeltaFiber comprises DELTA (a leading owner and operator of telecom infrastructure), which was acquired by EQT in 2017, and CAIW (the second-largest fiber infrastructure owner and a fully integrated triple-play provider in the Netherlands), acquired in 2018. In 2019, the company generated EUR283 million and EUR118 million in revenue and EBITDA (on a 50% proportionately consolidated basis for the joint-venture entities at CAIW, in line with the audited results under Dutch GAAP), respectively. GREECE: S&P Affirms BB-/B Sovereign Credit Ratings, Outlook Stable ------------------------------------------------------------------ S&P Global Ratings, on Oct. 23, 2020, affirmed its 'BB-/B' long- and short-term sovereign credit ratings on Greece. The outlook is stable. Outlook The stable outlook reflects S&P's view that Greece's substantial fiscal policy buffers offset risks to its creditworthiness emanating from the pandemic's adverse economic and budgetary implications. Downside scenario S&P could lower the ratings if economic growth is significantly weaker than it expects, eroding the government's fiscal buffers and resulting in significant deviation from its current budgetary projections. Upside scenario S&P said, "We could raise our ratings on Greece if the impact of the pandemic on Greece's economic performance subsides and the associated erosion in budgetary performance is reversed. We could also raise the ratings in the context of continuous policy implementation oriented toward economic stability to address the remaining structural challenges in the economy. In this scenario, nonperforming exposures (NPEs) in Greece's impaired banking system would shrink significantly, which would, in our view, benefit the monetary transmission." Rationale S&P's current assumption with respect to the evolution of the pandemic is that a vaccine or an effective treatment will be widely available by mid-2021. In its current forecast, Greece's economy rebounds in 2021, accompanied by steady budgetary consolidation and government debt-to-GDP reduction over its forecast horizon through 2022. Greece's creditworthiness benefits from the government's significant fiscal buffers built over the past several years, thanks to: -- Its very strong budgetary performance; -- Preservation of substantial liquidity reserves on the government's balance sheet; and -- A favorable government debt structure. S&P believes that the sovereign's funding position has been significantly reinforced during 2020 due to: -- In March, the European Central Bank's (ECB's) announcement of a waiver to include Greek government bonds in its Pandemic Emergency Purchase Program (PEPP) and as collateral in the ECB's repurchase operations; and -- The July "Next Generation EU" (NGEU) agreement on the basis of which Greece is expected to receive EUR32 billion (17% of 2019 GDP), of which EUR19.3 billion (10% of 2019 GDP) in grants. While the former has resulted in significantly easier market access for government borrowing at relatively low costs, the latter will in our view support and accelerate the economic recovery and, if used efficiently, act as a catalyst for further structural economic improvements in the Greek economy. In terms of maturity and average interest costs, Greece has one of the most advantageous debt profiles of all the sovereigns S&P rates. The commercial portion of Greece's central government debt represents less than 20% of total debt, or less than 40% of GDP. After a sharp increase in 2020, we project that Greece's general government gross and net debt-to-GDP ratios will decline from 2021, aided by a recovery in nominal GDP growth and budgetary consolidation. The ratings are constrained by the country's high external and government debt and challenged monetary transmission, given the large NPEs in the banking sector. Institutional and economic profile: Greece is countering the recession with sizable fiscal buffers and monetary policy measures The pandemic and its implications for economic activity will, in S&P's view, lead to a sharp downturn this year, with GDP contracting by about 9% before rebounding in 2021. Downside risk emanating from the evolution of the pandemic remains, especially in Greece's large tourism sector, hence threatening the pace of economic recovery. To counter the adverse economic effects of the pandemic, the government announced a sizable fiscal package, helped by its substantial liquidity buffer, the NGEU agreement, as well as by the ECB's waiver to include Greek government bonds in its PEPP. S&P forecasts the pandemic and its implications for economic activity will lead to GDP contracting by about 9% this year. The pandemic has constrained consumer spending and economic activity more generally, despite early success in limiting contagion during the first wave. A U-shaped recovery of activity started, following withdrawal of lockdown restrictions, with industrial production recovering in July 2020 to its 2019 level, while construction activity was up by 21.5% in first-half 2020 compared with first-half 2019. However, downside risks to the pace of recovery persist, given the emergence of a second wave of infections in Greece and its main trading partners and potential further government restrictions. The recession in Greece has been spurred by contraction in all components of aggregate demand, given the pandemic's simultaneous effect on external and domestic demand. In S&P's forecast, it projects that investment and exports in particular will contract significantly this year, with a particularly adverse effect on the country's important tourism sector. Current account travel receipts in 2019 represented almost 10% of GDP and about 22% of the economy's total current account receipts. Given the major disruptions in international travel, international arrivals at Greek airports fell by 74% year on year during January-August 2020, with current account travel receipts contracting by 86% year on year between January and July 2020. In S&P's forecast, it projects that investment and especially exports will plummet this year, while increased government consumption will not be able to offset the fall in private consumption, which shrunk in particular during the second quarter because of lockdown measures. To counter the adverse economic effects of the pandemic, and shield viable businesses and employees from a temporary-but-severe liquidity shock, the government has announced a sizable fiscal package. It includes: -- Increased health-care spending related to the pandemic, including hiring of personnel and medical supplies; -- Wage and loan subsidies and full coverage of social security contributions for employees and the self-employed affected, as well as social transfers to vulnerable individuals; -- Interest payment subsidies, a corporate tax cut (to 20% from 24%), loan guarantees and grants for companies, a tax and social security contributions holiday for businesses, and rent payment support for businesses; and -- Value-added tax (VAT) cuts in tourism and transportation, as well as for products related to COVID-19 protection. The government- and EU-funded package of measures, to tackle the impact of the pandemic, as well as the retroactive payment of pensions following the State Council ruling, and spending on the migration crisis and natural disasters (fires), is currently estimated at about EUR24 billion (about 12.8% of 2019 GDP). The government is considering additional temporary measures, subject to the evolution of the pandemic. In the absence of such a fiscal response, Greece's GDP would fall considerably further, and solvent businesses would be forced to liquidate, eroding the economy's productive base. In support of the eurozone's forceful fiscal response to the pandemic, the ECB has pushed back against rate divergence within the monetary union by launching the PEPP. Since S&P's most recent report on Greece on April 24, 2020, the ECB has ramped up its response by increasing its pandemic emergency purchase program to EUR1.35 trillion from EUR750 billion, or 11.3% of euro area GDP. It has also extended the purchases until June 2021 and will reinvest them at least until the end of 2022, on top of asset purchase program purchases this year of an estimated EUR360 billion, or 3.0% of GDP. Given the increase in government borrowing needs, S&P believes that the ongoing expansion of the ECB's balance sheet is appropriately oriented toward absorbing those needs at relatively low borrowing costs. In this context, the ECB's decision to grant a waiver of the eligibility requirements for securities issued by the Greek government was key for Greece. This indicates the ECB's direct participation in purchases of Greek government debt for the first time since 2011 when the purchases of Greek bonds took place under the ECB's Securities Markets Program. Moreover, since March, the ECB has been accepting Greek government bonds as collateral in its repurchase operations, further boosting liquidity support to the banking system. S&P believes that the Greek economy will benefit substantially in the coming years from the available facilities under the NGEU recovery and resilience fund. Under the agreement, Greece is set to receive grants of EUR19.3 billion by 2026 and is eligible for loans of up to EUR12.7 billion, without taking into consideration loans available via the SURE fund for employment support or the European Stability Mechanism's (ESM's) pandemic credit line. S&P believes that if used efficiently, these funds could accelerate the structural shift in the economy and will contribute to higher economic growth during our forecast horizon. S&P said, "In 2021, we expect an economic rebound, the magnitude of which will hinge principally on the restoration of tourism activity. Over the next three years, we expect Greece's economic growth will surpass the eurozone average, including in real GDP per capita terms. We also expect economic performance will remain balanced, fueled mainly by domestic demand and exports, although we do not expect 2021 tourism receipts will recover to 2019 levels. In this context, we expect a steady rise in private consumption amid higher employment, following the decline in 2020." The government's fiscal measures included in the 2020 budget, such as the reduction of personal income tax for low-income earners, lowering of property tax, and revised schedule for paying tax arrears, should support households' disposable income. Investment activity declined in 2020, driven by the pandemic and countermeasures and their impact on demand and companies' profits, but is set to improve in 2021 alongside increasing net foreign direct investment (FDI). Despite the economic recession, the government is sticking to its privatization program, facilitating planned private-sector-led projects, such as redevelopment of the site where Athens International Airport formerly stood. Assets to be privatized include a 30% stake of Athens International Airport, a stake in Hellenic Petroleum, DEPA (the public gas corporation), concessions on the Egnatia motorway, and regional ports. Given the pandemic, progress on the privatization agenda has slowed, but S&P expects it will accelerate in the coming months and in 2021. S&P said, "In our opinion, one of the keys to a faster economic recovery is a drop in banks' NPEs, which would spur private-sector credit. We believe the positive impact of previous reforms, such as in product and services markets, are unlikely to be displayed in recessionary or low-growth conditions. Without access to working capital, the small and midsize enterprise sector--the economy's largest employer--remains in varying degrees of distress. Private-sector default is still widespread, including on tax debt." The onset of recession will further complicate efforts to reduce the large stock of NPEs, given its impact on corporate balance sheets. In this context, the recently announced proposal on a new NPE-reduction facility by the Bank of Greece is a step in the right direction and is expected to be deployed in 2021. Greece still compares poorly with its peers, due to impediments to competition in its product and professional services markets, relatively weak property rights, inefficient judiciary, and low predictability of contract enforcement. Positively, labor reform by the previous administration, which could have reintroduced national collective wage negotiations, was reversed last year and the government has recently overhauled the insolvency framework. S&P views the government's recent reforms as geared toward improving the economy's resilience with the recently adopted fiscal measures appropriately shielding employment from the severe impact of the pandemic. The government has been reforming the business environment, by reducing undue administrative burdens (especially to speed up investment) and anticompetitive behavior, particularly in the services sector, as well as by advancing digital transformation. S&P believes successful business-friendly reforms would likely enhance macroeconomic outcomes and the sovereign's debt-servicing ability in the medium to long term. The funds available under the NGEU agreement could act as a catalyst for such reforms. Following the end of the ESM program, Greece is subject to quarterly reviews under the European Commission's "enhanced surveillance framework". Ongoing debt relief and the return of so-called ANFA/SMP profits on Greek bonds held by the ECB and the eurozone's national central banks is subject to ongoing compliance with the program's objectives. Given the extraordinary circumstances of 2020 and the temporary suspension of the EU Stability and Growth Pact fiscal framework, the requirement for Greece to meet its 3.5% of GDP primary balance in 2020 has been suspended. S&P also believes that, based on current assumptions on financing needs, the Greek authorities may not need to draw on the corresponding part of the ESM's cash buffer. Flexibility and performance profile: Strong budgetary performance interrupted by the pandemic -- S&P now forecasts a budget deficit of about 8.8% of GDP in 2020 and 3.8% of GDP in 2021. -- S&P projects that already large general government debt will temporarily increase in 2020, but the government is facing the pandemic with a large cash buffer and a wide array of funding options that don't jeopardize public finance sustainability. -- The pandemic complicates banks' NPE reduction plans, although the recent framework proposed by the Bank of Greece could support further improvements in NPE disposals. The pandemic has interrupted Greece's recently established strong track record of exceeding budgetary targets, after a large budgetary adjustment since the 2010 economic and financial crisis. As a result of the government's discretionary budgetary measures and the impact of the recession on government revenue and spending, S&P currently estimates a budget deficit in 2020 of 8.8% of GDP, compared with a surplus of 1.5% in 2019. This implies a primary deficit of nearly 6% of GDP. Greece's official creditors have waived the previous agreed target of a 3.5% of GDP surplus for 2020. Besides measures to mitigate the impact of COVID-19, the 2020 budget included a series of measures to reduce the tax burden on the economy. In addition to a reduction in the property tax rate, the budget decreased the basic personal income tax rate to 9% from 22%, corporate income tax rate to 24% from 28%, and dividend tax rate to 5% from 10%. It also suspended VAT on new buildings and the tax on property capital gains for three years, and cut social security contributions by 5 percentage points by 2023, among other measures. The government expects this tax relief will be offset by revenue and spending measures, including combatting tax evasion via the enhancement of electronic transactions and revaluation of the property tax base. S&P said, "We expect 2021 budgetary performance will continue to be affected by the economic and budgetary consequences of the pandemic, although the majority of the government's measures is planned to be withdrawn, subject to the evolution of the pandemic. We expect the 2021 budget deficit will decline to about 3.8%, with the primary budget deficit forecast at 1.2% of GDP. "Sharp deterioration in the general government balance this year will lead to an increase in gross general government debt to about 198% of GDP in 2020, from about 177% last year, before falling again in 2021. Net of cash buffers, we project net general government debt will increase in 2020 to about 183% of GDP--the highest among all sovereigns we rate--from about 157% of GDP in 2019, before declining thereafter." Despite the significant worsening in budget balance and government debt in 2020, Greece entered the pandemic with substantial fiscal buffers. This is evident in not only its underlying structural budget position, estimated at a surplus of about 2% of GDP in 2019, but also in that Greece has at its disposal a substantial liquidity reserve (estimated at about 20% of 2019 GDP), which dramatically reduces its borrowing needs. Moreover, S&P expects the transfers of SMP/ANFA returns from the Eurosystem will continue, despite a substantial deterioration in budgetary performance. In addition, the ECB's decisions on eligibility of Greek government bonds for PEPP and as collateral in repurchase operations, are, in its view, key for Greece's access to funding at affordable rates. Eased access to funding options in the context of the recent EU agreements on i) a credit line from the ESM, ii) credit support from the European Investment Bank, iii) reinsurance for national unemployment schemes, and iv) most importantly, grants and loans under the NGEU represent substantial additional resources. S&P said, "Despite the large size of Greece's debt, we estimate its debt-servicing costs averaged about 1.5% at year-end 2019, significantly lower than the average refinancing costs for the majority of sovereigns we rate in the 'BB' category. The weighted average residual maturity of central government debt stood at 20.2 years as of June 30, 2020. We expect this will result in further decline in the government's interest burden in the future, despite the sizable increase in government debt due to the economic and budgetary impact of the pandemic." Greek banks have made progress in reducing their NPEs, totaling EUR59.7 billion in June 2020, down from about EUR68 billion at the end of 2019 (excluding off-balance-sheet items) and almost halved from EUR107.2 billion in March 2016. The Greek authorities have launched an asset-protection scheme called Hercules, which entails granting sovereign guarantees for senior tranches of proposed NPE securitizations to reduce NPEs in the banking system. S&P said, "We believe such measures will help repair the monetary transmission mechanism and hasten the economic recovery. However, as a result of the pandemic, we expect a reversal in the positive trend on new NPE formation. We also believe that, in this environment, the recent implementation of Hercules is also unlikely to speed up the expected pace of problematic asset disposal." Nevertheless, the Single Supervisory Mechanism's decision to give banks more flexibility for NPE classification should lead to less stress on reported asset quality metrics. Similarly, the ECB's extraordinary measures to provide temporary capital and operational relief to European banks, as well as liquidity support in case of need, to an extent alleviate risks to the overall financial risk profiles of Greek banks. Furthermore, S&P believes the recently announced proposal by the Bank of Greece for an additional NPE-reducing facility is a step in the right direction. Liquidity in the banking system has improved over the past few years. Greek financial institutions retain access to the ECB's long-term refinancing lines, while those Greek small and midsize enterprises most exposed to the pandemic, particularly in tourism, have access to dedicated targeted longer-term refinancing operations (TLTRO III) lines on highly accommodative terms. This should shield the Greek economy from intense external liquidity pressures. Importantly, following the ECB's March 2020 decision, banks can access regular ECB financing using Greek government bonds as collateral. S&P said, "We project Greece's current account deficit will widen in 2020 to about 4.3% of GDP, due to lower tourism and other export receipts, while the fall in imports, including due to the fall in oil prices, will cushion this impact. Structural economic changes over recent years have put Greece's export sector into a position to benefit from its increased competitiveness, which is in our view displayed in solid export performance of goods." For example, in second-quarter 2020, exports of goods fell by only 3% with respect to the same period in 2019. In a broader perspective, labor cost competitiveness has improved to the level before 2000, and external demand has risen. Consequently, the share of exported goods and services (excluding shipping services) has almost doubled, compared with 19% of GDP in 2009. Once the threat of COVID-19 has abated, Greece's market shares in global trade could grow further in the medium term. Moreover, despite the pandemic, FDI inflows have been solid so far this year, representing half of 2019 inflows in first-half 2020. S&P believes that the large grants emanating from the NGEU agreement will benefit balance of payments developments during 2021-2026. In accordance with S&P's relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable. At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action. Ratings List Ratings Affirmed Greece Sovereign Credit Rating BB-/Stable/B Transfer & Convertibility Assessment AAA Senior Unsecured BB- Commercial Paper B ============= I R E L A N D ============= CARLYLE EURO 2018-2: Fitch Affirms B-sf Rating on Class E Notes --------------------------------------------------------------- Fitch Ratings has affirmed Carlyle Euro CLO 2018-2 DAC and removed the class D and E notes from Rating Watch Negative (RWN). RATING ACTIONS Carlyle Euro CLO 2018-2 DAC Class A-1A XS1852487393; LT AAAsf Affirmed; previously AAAsf Class A-1B XS1852487633; LT AAAsf Affirmed; previously AAAsf Class A-2A XS1852487989; LT AAsf Affirmed; previously AAsf Class A-2B XS1852488284; LT AAsf Affirmed; previously AAsf Class A-2C XS1856085656; LT AAsf Affirmed; previously AAsf Class B-1 XS1852488524; LT Asf Affirmed; previously Asf Class B-2 XS1856094567; LT Asf Affirmed; previously Asf Class C XS1852488953; LT BBBsf Affirmed; previously BBBsf Class D XS1852486742; LT BBsf Affirmed; previously BBsf Class E XS1852486312; LT B-sf Affirmed; previously B-sf TRANSACTION SUMMARY Carlyle Euro CLO 2018-2 DAC is a cash flow collateralised loan obligation (CLO) mostly comprising senior secured obligations. The transaction is in its reinvestment period, which is scheduled to end in November 2022, and the portfolio is actively managed by CELF Advisors LLP KEY RATING DRIVERS Portfolio Performance As per the trustee report dated September 15, 2020, the transaction is below target par by 119bp on account of two defaulted assets in the portfolio. The Fitch-calculated weighted average rating factor (WARF) of the portfolio increased to 38.28 at October 21, 2020 compared with the trustee-reported WARF of 36.69. The Fitch-calculated 'CCC' or below category assets (including non-rated assets) represent 12.10% of the portfolio compared with the 7.50% limit. As per the trustee report, all other portfolio profile tests, coverage tests and Fitch related collateral quality tests are passing except for the Fitch WARF test and the CCC limit test. Coronavirus Sensitivity Analysis Fitch carried out a sensitivity analysis on the target portfolio to determine the coronavirus baseline scenario. The agency notched down the ratings for all assets with corporate issuers on Negative Outlook regardless of sector. These assets represent 28.28% of the portfolio. This scenario demonstrates the resilience of the ratings. However, the cushions are marginal and remain volatile for the class C, D and E notes. The agency expects that the portfolio's negative rating migration is likely to slow down and any downgrades are less likely in the short term. As a result, the junior notes have been removed from RWN and affirmed with Negative Outlooks. The Negative Outlooks on the three junior tranches reflect the risk of credit deterioration over the longer term, due to the economic fallout from the pandemic. 'B'/'B-' Category Portfolio Credit Quality Fitch assesses the average credit quality of obligors in the 'B'/'B-' category. High Recovery Expectations Senior secured obligations comprise almost 97% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch weighted average recovery rate (WARR) of the current portfolio is 64.13%. Portfolio Composition The top 10 obligors' concentration is 14.13% and no obligor represents more than 1.59% of the portfolio balance. As per Fitch's calculation, the largest industry is business services at 17.72% of the portfolio balance and the top three largest industries account for 36.06% against limits of 17.50% and 40.00%, respectively. As of September 15, semi-annual obligations represent 36.55% of the portfolio balance. An increase in semi-annual obligations greater or equal to 20% of the aggregate collateral balance in a due period and breach of modified class A and B interest coverage ratio threshold of 120% could trigger a frequency switch event. Cash Flow Analysis Fitch used a customised proprietary cash flow model to replicate the principal and interest waterfalls and the various structural features of the transaction, as well as to assess their effectiveness, including the structural protection provided by excess spread diverted through the par value and interest coverage tests. The transaction was modelled using the current portfolio based on both the stable and rising interest-rate scenarios and the front-, mid- and back-loaded default timing scenarios as outlined in Fitch's criteria. Fitch also tested the current portfolio with a coronavirus sensitivity analysis to estimate the resilience of the notes' ratings. Fitch's coronavirus sensitivity analysis was only based on the stable interest-rate scenario including all default timing scenarios. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: At closing, Fitch used a standardised stress portfolio (Fitch's Stressed Portfolio) that was customised to the portfolio limits as specified in the transaction documents. Even if the actual portfolio shows lower defaults and smaller losses (at all rating levels) than Fitch's Stressed Portfolio assumed at closing, an upgrade of the notes during the reinvestment period is unlikely. This is because the portfolio credit quality may still deteriorate, not only by natural credit migration, but also because of reinvestment. After the end of the reinvestment period, upgrades may occur in the event of a better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement and excess spread available to cover for losses on the remaining portfolio. Factors that could, individually or collectively, lead to negative rating action/downgrade: Downgrades may occur if the build-up of credit enhancement following amortisation does not compensate for a larger loss expectation than initially assumed due to an unexpected high level of default and portfolio deterioration. As the disruptions to supply and demand due to the coronavirus become apparent for other vulnerable sectors, loan ratings in those sectors would also come under pressure. Fitch will update the sensitivity scenarios in line with the view of its Leveraged Finance team. Coronavirus Downside Scenario Fitch has added a sensitivity analysis that contemplates a more severe and prolonged economic stress caused by a re-emergence of infections in the major economies, before halting recovery begins in 2Q21. The downside sensitivity incorporates applying a notch downgrade to all Fitch-derived ratings in the 'B' rating category and applying a 0.85 recovery rate multiplier to all other assets in the portfolio. For typical European CLOs, this scenario results in a rating category change for all ratings. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY The majority of the underlying assets have ratings or credit opinions from Fitch and/or other nationally recognised statistical rating organisations and/or European Securities and Markets Authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information. 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. CIFC EUROPEAN I: Fitch Affirms B-sf Rating on Class F Debt ---------------------------------------------------------- Fitch Ratings has affirmed CIFC European Funding CLO I DAC. RATING ACTIONS CIFC European Funding CLO I DAC Class A XS2020690884; LT AAAsf Affirmed; previously AAAsf Class B-1 XS2020691429; LT AAsf Affirmed; previously AAsf Class B-2 XS2020692153; LT AAsf Affirmed; previously AAsf Class C XS2020692740; LT Asf Affirmed; previously Asf Class D XS2020693557; LT BBB-sf Affirmed; previously BBB-sf Class E XS2020693987; LT BB-sf Affirmed; previously BB-sf Class F XS2020694100; LT B-sf Affirmed; previously B-sf Class X XS2020690454; LT AAAsf Affirmed; previously AAAsf TRANSACTION SUMMARY CIFC European Funding CLO I DAC is a securitisation of mainly senior secured loans (at least 95%) with a component of senior unsecured, mezzanine and second-lien loans. The portfolio is managed by CIFC CLO Management II, LLC. The reinvestment period ends in January 2024. KEY RATING DRIVERS Coronavirus Baseline Sensitivity Analysis The rating actions are a result of a sensitivity analysis Fitch ran in light of the coronavirus pandemic. For the sensitivity analysis, Fitch notched down the ratings for all assets with corporate issuers on Negative Outlook regardless of sector. Under this scenario, the class D notes exhibit a small cushion while the class E and F notes experience shortfalls. Fitch views that the portfolio's negative rating migration is likely to slow down, making a category-rating downgrade on the class E and F notes less likely in the short term, due to stabilising portfolio performance. As a result, both tranches have been affirmed and removed from RWN. The Negative Outlook on the class D to F notes reflects the risk of credit deterioration over the longer term, due to the economic fallout from the pandemic. The Stable Outlooks on the remaining tranches reflect the resilience of their ratings under the coronavirus baseline sensitivity analysis. Portfolio Performance Stabilises As of the latest investor report dated October 2, 2020, the transaction was only 0.82% below par and all portfolio profile tests, coverage tests and Fitch collateral quality tests were passing. As of the same report, the transaction had no defaulted assets. Exposure to assets with a Fitch-derived rating (FDR) of 'CCC+' and below was 4.6%. Assets with an FDR on Negative Outlook were 12.23% of the portfolio balance. 'B'/'B-' Portfolio Credit Quality Fitch assesses the average credit quality of the obligors in the 'B'/'B-' category. The Fitch weighted average rating factor (WARF) of the current portfolio is 33.9 (assuming unrated assets are 'CCC') - slightly above the maximum covenant of 33, while the trustee-reported Fitch WARF was 33.52. After applying the coronavirus stress, the Fitch WARF would increase by 2.55. High Recovery Expectations Senior secured obligations are 99.4% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. Diversified Portfolio The portfolio is well-diversified across obligors, countries and industries. The top 10 obligors represent 16.3% of the portfolio balance with no obligor accounting for more than 2%. Around 31% of the portfolio consists of semi-annual obligations but a frequency switch has not occurred due to the transaction's high interest coverage ratios. Cash Flow Analysis Fitch used a customised proprietary cash flow model to replicate the principal and interest waterfalls and the various structural features of the transaction, as well as to assess their effectiveness, including the structural protection provided by excess spread diverted through the par value and interest coverage tests. The transaction was modelled using the current portfolio based on both the stable and rising interest-rate scenarios and the front-, mid- and back-loaded default timing scenarios as outlined in Fitch's criteria. In addition, Fitch tested the current portfolio with a coronavirus sensitivity analysis to estimate the resilience of the notes' ratings. The coronavirus sensitivity analysis was only based on the stable interest-rate scenario but included all default timing scenarios. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: Upgrades may occur in case of a better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement (CE) and excess spread available to cover for losses in the remaining portfolio except for the class A-R notes, which are already at the highest 'AAAsf' rating. If asset prepayment is faster than expected and outweighs the negative pressure of the portfolio migration, this may increase CE and, potentially, add upgrade pressure on the rated notes. Factors that could, individually or collectively, lead to negative rating action/downgrade: Downgrades may occur if the build-up of CE following amortisation does not compensate for a larger loss than initially assumed due to unexpectedly high levels of defaults and portfolio deterioration. As disruptions to supply and demand due to the pandemic become apparent, loan ratings in those vulnerable sectors will also come under pressure. Fitch will update the sensitivity scenarios in line with the view of its leveraged finance team. Coronavirus Downside Sensitivity Fitch has added a sensitivity analysis that contemplates a more severe and prolonged economic stress caused by a re-emergence of infections in the major economies, before halting recovery begins in 2Q21. The downside sensitivity incorporates a single-notch downgrade to all FDRs in the 'B' rating category and a 0.85 recovery rate multiplier to all other assets in the portfolio. For typical European CLOs, this scenario results in a rating-category change for all ratings. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY The majority of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information. 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. DELPHI TECHNOLOGIES: S&P Discontinues 'BB-' ICR on BorgWarner Deal ------------------------------------------------------------------ S&P Global Ratings discontinued its 'BB-' long-term issuer credit rating on Delphi Technologies PLC. S&P placed the rating on CreditWatch with positive implications on Jan. 29, 2020, on the announcement that the company would be acquired by BorgWarner Inc. S&P is discontinuing the rating because BorgWarner has completed its acquisition of Delphi. In the process, Delphi's $800 million senior notes went through an obligor exchange and were reissued under BorgWarner. Delphi develops, designs, and manufactures vehicle propulsion systems that optimize engine performance, increase vehicle efficiency, reduce emissions, improve driving performance, and support increasing electrification of vehicles. BorgWarner offers technology solutions for combustion, hybrid, and electric vehicles that improve vehicle performance, propulsion efficiency, stability, and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers of light vehicles (passenger cars, sport-utility vehicles, vans, and light trucks). ST. PAUL'S V: Fitch Affirms B-sf Rating on Class F-R Debt --------------------------------------------------------- Fitch Ratings has affirmed St. Paul's CLO V DAC, and removed two tranches from Rating Watch Negative (RWN). RATING ACTIONS St. Paul's CLO V DAC Class A-R XS1648272919; LT AAAsf Affirmed; previously AAAsf Class B-1-R XS1648273560; LT AAsf Affirmed; previously AAsf Class B-2-R XS1648274618; LT AAsf Affirmed; previously AAsf Class C-1-R XS1648274964; LT Asf Affirmed; previously Asf Class C-2-R XS1648275938; LT Asf Affirmed; previously Asf Class D-R XS1648276233; LT BBBsf Affirmed; previously BBBsf Class E-R XS1648277710; LT BB-sf Affirmed; previously BB-sf Class F-R XS1648277983; LT B-sf Affirmed; previously B-sf TRANSACTION SUMMARY St. Paul's CLO V DAC is a cash flow collateralised loan obligation (CLO) of mostly European leveraged loans and bonds. The transaction is in its reinvestment period and the portfolio is actively managed by Intermediate Capital Managers Limited. KEY RATING DRIVERS Weakening Portfolio Performance As per the trustee report dated September 17, 2020, the aggregate collateral balance was below par by 131bp. The trustee-reported Fitch weighted average rating factor (WARF), Fitch weighted average recovery rate (WARR) and Fitch 'CCC' concentration limit (%) were not in compliance with their tests. Assets with a Fitch-derived rating (FDR) of 'CCC' category or below represented 10.16% of the portfolio (no unrated assets in the portfolio), as per Fitch's calculation on October 17, 2020. Assets with a FDR on Negative Outlook represented 27.7% of the portfolio balance. Coronavirus Baseline Scenario Impact Fitch carried out a sensitivity analysis on the current portfolio for its coronavirus baseline scenario. The agency notched down the ratings for all assets with corporate issuers on Negative Outlook regardless of sector. This scenario demonstrates the resilience of the ratings of the class A-R, B-1-R, B-2-R, C-1-R and C-2-R notes with cushions, which resulted in their affirmation. The class D-R notes has marginal cushion while the class E-R and F-R notes have marginal shortfall in this scenario. Fitch believes that the portfolio's negative rating migration is likely to slow and downgrades of these tranches are less likely in the short term. As a result, the class E-R and F-R notes have been removed from RWN. The Negative Outlook on the class D-R notes, E-R and F-R notes, reflects the risk of credit deterioration over the longer term, due to the economic fallout from the pandemic. 'B'/'B-' Portfolio Credit Quality Fitch assesses the average credit quality of obligors in the 'B'/'B-' category. The Fitch WARF of the current portfolio was 35.56, as per Fitch's calculation, on October 17, 2020. High Recovery Expectations Approximately 99% of the portfolio comprises senior secured obligations. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch WARR of the current portfolio was 64.77%, as per Fitch's calculation, on October 17, 2020. Diversified Portfolio The portfolio is reasonably diversified across obligors, countries and industries. Exposure to the top-10 obligors and the largest obligor is 17.1% and 2.1%, respectively. The top three industry exposures accounted for about 38.7%, as per Fitch's calculation. Assets paying semi-annually account for 38% of the portfolio but as of September 17, 2020, no frequency switch event had occurred. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: At closing, Fitch used a standardised stress portfolio (Fitch's stressed portfolio) that was customised to the portfolio limits as specified in the transaction documents. Even if the actual portfolio shows lower defaults and smaller losses (at all rating levels) than Fitch's stressed portfolio assumed at closing, an upgrade of the notes during the reinvestment period is unlikely as the portfolio credit quality may still deteriorate, not only through natural credit migration, but also through reinvestments. Upgrades may occur after the end of the reinvestment period on better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement and excess spread available to cover for losses in the remaining portfolio. Factors that could, individually or collectively, lead to negative rating action/downgrade: Downgrades may occur if the build-up of credit enhancement following amortisation does not compensate for a larger loss expectation than initially assumed due to unexpected high levels of defaults and portfolio deterioration. As the disruptions to supply and demand due to COVID-19 become apparent for other sectors, loan ratings in those sectors would also come under pressure. Fitch will update the sensitivity scenarios in line with the view of its leveraged finance team. Coronavirus Downside Sensitivity Fitch has added a sensitivity analysis that contemplates a more severe and prolonged economic stress caused by a re-emergence of infections in the major economies, before halting recovery begins in 2Q21. The downside sensitivity incorporates a single-notch downgrade to all FDRs in the 'B' rating category and a 0.85 recovery rate multiplier to all other assets in the portfolio. For typical European CLOs this scenario results in a rating-category change for all ratings. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Most of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other nationally recognised statistical rating organisations and/or European Securities and Markets Authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information. Overall, Fitch's assessment of the asset pool information relied on for its 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. ========= I T A L Y ========= BPER BANCA: Fitch Affirms BB LongTerm IDR, Outlook Stable --------------------------------------------------------- Fitch Ratings has affirmed BPER Banca S.p.A.'s (BPER) Long-Term Issuer Default Rating (IDR) at 'BB' and Viability Rating (VR) at 'bb', and removed them from Rating Watch Negative (RWN). The Outlook on the Long-Term IDR is Stable. The affirmation reflects recent progress in improving asset quality following the deconsolidation of EUR1.2 billion legacy impaired loans. The affirmation also follows the completion of a EUR802 million capital increase to finance the acquisition of 532 branches from Intesa SanPaolo S.p.A. (IntesaSP, BBB-/Stable) which, due to the significant growth in scale, should support profitability in the coming years. Fitch expects both transactions to help offset external pressures stemming from the economic downturn. The Stable Outlook reflects that, under various possible downside scenarios to its baseline, Fitch expects BPER's capitalisation to remain satisfactory for the rating and be able to absorb the expected asset-quality and profitability deterioration. KEY RATING DRIVERS IDRS, VR AND DEBT PROGRAMME RATINGS BPER's ratings are underpinned by the bank's capitalisation, owing to adequate buffers over regulatory requirements and reduced capital encumbrance by unreserved impaired loans. The ratings also reflect a sound second-tier multi-regional domestic franchise benefiting from its acquisitive growth strategy in the past few years and stable funding and liquidity. Despite recent progress in reducing impaired loans, asset quality and profitability are rating weaknesses and are expected to deteriorate during the economic downturn. By end-June 2021 BPER will acquire 532 branches, and related assets and liabilities. Fitch views this transaction as transformational for BPER as it will increase its assets by around 40% and reinforce its market share in several territories. Capitalisation (14.1% regulatory CET1 ratio at end-1H20) underpins BPER's ratings with moderate buffers over regulatory requirements. In its assessment Fitch also considers that the acquisition of Intesa SP's branches has been accompanied with a EUR802 million capital increase completed on October 23, 2020. Capital encumbrance by unreserved impaired loans also improved to below 60% at end-June 2020 from 69% at end-2019, but remains higher than stronger domestic peers' and high by international standards. Fitch believes that capital encumbrance by unreserved impaired loans could increase in the short-to-medium term as a result of the economic downturn, although BPER has expressed commitment to continue managing its impaired loan stock through additional disposals. Fitch also considers management's medium-term CET 1 ratio target of around 13%. During 1H20, BPER's impaired loans fell below 10%, due mainly to the completion of an impaired loan securitisation. The acquisition of Intesa SP's assets will further improve BPER's impaired loan ratio by nearly 1% to just above 8%. However, Fitch sees downside risks to the positive asset quality trends as a result of the economic downturn, although the bank's improved risk discipline, the government's support measures for borrowers and further progress in BPER's impaired disposal plan should provide some mitigation. Operating profitability in 1H20 was negatively affected by EUR90 million extraordinary loan impairment charges (LICs) for IFRS9 macroeconomic deterioration (1H20 total LICs EUR297 million, equivalent to 109bp LICs/average gross loans) while operating margins remained under pressure from low interest rates and, to a lesser extent, from competition. Fitch expects profitability to remain weak in 2020 and 2021 as the economic downturn will likely result in subdued business volumes and rising LICs. However, Fitch believes that BPER is better positioned than similarly-rated domestic peers to benefit from a potential rebound of the Italian economy in 2021 and beyond, due to a more diverse business model and the cost synergies to be realised on the acquired assets from Intesa SP. Fitch views BPER's funding as generally stable due to a large base of customer deposits, despite it being less diversified towards wholesale channels than larger domestic banks'. Access to wholesale market is mainly through secured issuance. Liquidity is adequate, with available unencumbered eligible assets and sound regulatory ratios. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor reflect Fitch's view that, although external support is possible, it cannot be relied upon. Senior creditors can no longer expect to receive full extraordinary support from the sovereign if the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. DEPOSIT RATING BPER's Long-Term Deposit Rating is rated one notch above the Long-Term IDR to reflect the protection that will accrue to this debt from less preferred bank resolution debt and equity buffers. This is because Fitch expects the bank will comply with minimum requirement for own funds and eligible liabilities (MREL). Fitch BPER's 'B' Short-Term Deposit Rating is in line with its rating correspondence table for banks with a 'BB+' Long-Term Deposit Rating. SUBORDINATED DEBT BPER's subordinated debt is notched down twice from the VR for loss severity to reflect poor recovery prospects relative to senior unsecured debt, given its subordinated status. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: BPER's ratings are likely to be downgraded if the depth and duration of the economic crisis caused by the pandemic results in significant deterioration of the bank's financial profile. This weakening could be the result of sustained deterioration in asset quality and earnings, which could ultimately put pressure on capital, including from higher capital encumbrance by unreserved impaired loans. Ratings are likely to be downgraded if the non-performing loan (NPL) ratio grows above 10%, resulting in a significant increase in capital encumbrance by unreserved impaired loans, without prospects of a recovery in the short term. Factors that could, individually or collectively, lead to positive rating action/upgrade: Fitch sees no rating upside until the economic environment improves. For BPER's ratings to be upgraded the pressure on risk appetite, asset quality and earnings that has arisen from the economic fallout from the coronavirus pandemic would need to ease. This would need to be accompanied by further reductions in impaired loans, lower capital encumbrance by unreserved impaired loans and improved operating profitability. An upgrade would also require evidence that the acquisition and integration of Intesa SP's branches progresses as planned. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible. DEPOSIT RATING The deposit ratings are primarily sensitive to changes in the bank's IDRs, from which they are notched. The Long-Term Deposit Rating Is also sensitive to a reduction in the size of the senior and junior debt buffers, although Fitch views this unlikely in light of the bank's current and future MREL requirements. SUBORDINATED DEBT The subordinated debt rating is primarily sensitive to changes in the bank's VR, from which it is notched. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ===================== N E T H E R L A N D S ===================== OCI NV: Fitch Assigns Final BB Rating on EUR400MM Notes ------------------------------------------------------- Fitch Ratings has assigned OCI N.V.'s USD400 million and EUR400 million notes due 2025 a final rating of 'BB'. The proceeds of the issue and USD290 million drawings on the company's revolving credit facility were used to redeem the USD650 million and EUR400 million notes due 2023. Fitch views the transaction as positive as it extends the company's debt maturity profile and is expected to result in USD20 million-25 million of interest savings annually. By partially refinancing using availability under the revolving credit facility (RCF), OCI increased the amount of debt it can readily repay with internally generated cash. Fitch expects the company to be able to fully repay the drawn RCF over the next 24 months. Prior-ranking secured debt at operating subsidiaries declined to USD2 billion in 2019 from USD2.6 billion in 2018 and Fitch expects it to decline to USD1.8 billion by end-2020, further reducing structural subordination risk for debt holders at the OCI (holdco) level. The average recovery prospects for the noteholders underpin the alignment of the senior secured rating with the IDR. KEY RATING DRIVERS Delayed Deleveraging: Fitch forecasts funds from operations (FFO) net leverage to reduce to 6.1x in 2020 and below 4.0x by end-2022 on higher volumes (a 25% capacity increase compared with 2019) and improved free cash flow (FCF) generation (exceeding USD100 million in 2020 versus USD9 million in 2019). However, the pace of deleveraging could be hampered by the global economic slowdown, should this negatively affect demand for fertilisers in 2021 and farmers' ability to secure credit. At the current leverage level, the group has no headroom under the 'BB' rating to face unexpected operational challenges or a protracted lower-than-expected price environment. Coronavirus Impact on Prices: Fertilisers have been classified as essential products and OCI's plants have operated without interruption. However, the company estimates USD120 million lower EBITDA in 2Q20 due to the low-price environment. Prices of both nitrogen fertiliser and methanol reached troughs in May-June but have partially recovered since. High demand for urea from India led to more than 30% increase in price from May to September. The methanol price more than doubled from June to October thanks to demand increases, with countries easing lockdowns, plant idling and logistic concerns due to the US hurricane season. 1H20 In Line with Expectations: Higher operating rates and contribution from the two Fertil plants resulted in an 26% increase in total sales volumes during 1H20 compared to 1H19 (7% excluding Fertil plants) and a 13% increase in Fitch adjusted EBITDA. Fitch expects stronger results in 2H20 following a rebound in prices and healthy demand. Fitch also expects OCI's turnaround schedule to be lighter in the second half of the year compared to the first half, resulting in higher utilisation and production volumes, and lower capex. Dividend Assumptions: After 2020 Fitch expects deleveraging to accelerate as prices recover, capex stabilises, and dividends from NatGasoline - an equity-accounted joint venture (JV) with Consolidated Energy Limited - partly offset cash outflows to non-controlling interests. Dividends to minorities are included in Fitch's calculation of FFO; should these outflows be higher than expected, the forecast deleveraging may be impaired. OCI has indicated that it will only consider paying external dividends when the company is on track to reach its internal leverage target of 2.0x net debt/EBITDA through the cycle. Expansionary Capex Completed: OCI completed its USD5 billion expansionary capex programme in 2019, doubling its volumes sold since 2015 and improving its asset base. As of end-2019, 34% of producing assets were younger than five years and 56% younger than 10 years. Fitch assumes USD250 million of maintenance and up to USD30 million of expansion capex in 2020-2021, as the lower number of turnarounds will be partially offset by higher-cost maintenance work and the addition of capex related to Fertil's. JV with ADNOC Rating Neutral: The deal, which closed in September 2019, combines the two companies' fertiliser assets in the Middle East and North Africa (MENA) region into a JV called Fertiglobe, owned 58% by OCI and 42% by Abu Dhabi National Oil Company (ADNOC; AA/Stable) and fully consolidated by OCI. The deal improves OCI's position in the nitrogen fertiliser sector and its geographical diversification by creating the world's largest seaborne exporter of nitrogen fertilisers (with capacity of 5 million tonnes of urea and 1.5 million tonnes of sellable ammonia) and the largest producer in MENA. The company has identified synergies of up to USD95 million from the transaction, which are not included in Fitch's base case. Diversified Business Profile: OCI is a diversified chemical group with a portfolio of products split 68%/32% between fertilisers (i.e. ammonia, urea, urea ammonium nitrate and calcium ammonium nitrate) and industrial chemicals (i.e. methanol, melamine and diesel-exhaust fuel). The group is among the top five companies (by capacity) in nitrogen fertilisers and methanol globally. OCI's business profile is supported by the proximity of its assets to end-customers and cost-effective sources of natural gas, allowing the group to produce and distribute at a competitive cost compared with its global peers. Methanol Strategic Review: OCI is considering options including a minority sale or sale of the whole business. Due to the higher uncertainty resulting from the coronavirus pandemic, OCI decided to postpone this process to 1H21. Fitch treats this review as an event risk, and will weigh the potential weakening in OCI's diversification and scale against the group's financial profile. The management has said it intends to use the full proceeds for debt reduction. DERIVATION SUMMARY OCI's peers include CF Industries Holdings, Inc (BB+/Positive), EuroChem Group AG (BB/Stable), Methanex Corp. (BB/Negative) and ICL Group Ltd. (ICL; BBB-/Stable). OCI is smaller than EuroChem, ICL and CF Industries. Unlike CF Industries (100% fertilisers) and Methanex (100% methanol) but similar to ICL, OCI benefits from product and end-market diversification with revenues derived from nitrogen fertilisers and industrial chemicals such as methanol, melamine and diesel-exhaust fluid. EuroChem's concentrated exposure to the fertiliser market is mitigated by its presence across all nutrients and by its strong cost position, although the company's geographical footprint is less diversified than that of OCI, with assets located predominantly in Russia and Europe. OCI's nitrogen fertiliser JV with ADNOC improves its geographical reach and market access. The OCI group's production assets (OCI and the JV) in the US and MENA are positioned in the first quartile of the respective products' cost curves, and projected margins are comparable with those of peers that also benefit from favourable feedstock prices. OCI's rating incorporates a weak financial profile, with the highest leverage of the peer group, as a result of an extensive capex programme that increased the total amount of debt and due to weather-related decrease in fertiliser demand, and planned and unplanned shutdowns in 2019. With OCI's growth capex completed and plants operating at high utilisation rates, the company is well positioned to deleverage to below 4.5x FFO net leverage by 2022. KEY ASSUMPTIONS - Volumes sold (including third parties) increasing by 25% in 2020, reflecting lower turnarounds, higher utilisation rates, a full-year contribution of the FERTIL assets from ADNOC and of OCI Beaumont; 3% in 2021 and 2022 - Fertiliser prices following Fitch's price deck; methanol at USD347/tonne US Gulf and at EUR286/tonne Rotterdam in 2020 - Neutral-to-positive working-capital changes - Maintenance capex of USD250 million and expansion capex of up to USD30 million in 2020-2021; total capex of USD210 million thereafter - Dividends from associates less dividends paid to minorities resulting in outflows of USD120 million on average in 2020 and 2021, increasing to USD200 million on average in 2022 and 2023 - No dividends to shareholders in 2020-2023 RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - The Negative Outlook means positive rating action is unlikely in the short term. However, a reduction in FFO net leverage below 4.5x on a sustained basis would support a revision of the Outlook to Stable. - An increase in volumes and continuation of high utilisation rates, resulting in debt reduction and FFO net leverage approaching 3.5x - Sustained positive FCF Factors that could, individually or collectively, lead to negative rating action/downgrade: - Pricing pressure, significant capex or minority dividends resulting in FFO net leverage remaining above 4.5x on a sustained basis LIQUIDITY AND DEBT STRUCTURE Satisfactory Liquidity: As of end-June 2020, OCI had USD645 million of cash and around USD580 million of undrawn committed facilities to cover USD160 million of mandatory debt amortisation. Fitch expects OCI to be able to repay debt due in the next three years from internally generated cash as Fitch forecasts FCF generation to increase to more than USD400 million in 2023 from USD9 million in 2019. The refinancing of the 2023 notes OCI completed in October 2020, alongside USD385 million refinancing at FertiGlobe following refinancing for USD1.4 billion of debt in October 2019 shows a proactive approach by the company to managing its maturity profile and improving its liquidity. SUMMARY OF FINANCIAL ADJUSTMENTS USD285.3 million of leases reclassified as other non-current liabilities; a USD5.8 million interest expense related to leases reclassified as lease expense; depreciation and amortisation of right-of-use assets of USD30.8 million reclassified as lease expense USD130.4 million of factoring added to short-term debt and trade receivables; the difference between end-2019 factoring and end-2018 factoring reclassified from working capital to cash flow from financing USD1.9 million excluded from cash as held as collateral against letters of credit and letters of guarantees issued 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =========== P O L A N D =========== ZABRZE CITY: Fitch Affirms BB+ LongTerm IDR, Outlook Stable ----------------------------------------------------------- Fitch Ratings has affirmed the Polish City of Zabrze's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlooks are Stable. The affirmation reflects Fitch's opinion that the city's debt payback, after weakening in 2020-2021 due to a contraction in the operating balance, should recover from 2022 and remain compatible with the city's current ratings. The city's Standalone Credit Profile (SCP) is 'bb+'. While Polish local and regional governments' (LRG) most recently available data may not have indicated performance impairment, material changes in revenue and cost profiles are occurring across the sector and likely to worsen in the coming weeks and months as economic activity suffers and government restrictions are maintained or broadened due to the coronavirus pandemic. Fitch's ratings are forward-looking in nature, and Fitch will monitor developments in the sector for their severity and duration, and incorporate revised base-and rating-case qualitative and quantitative inputs based on performance expectations and assessment of key risks. KEY RATING DRIVERS Risk Profile: 'Midrange' Zabrze's 'Midrange' risk profile is in line with the majority of other Fitch-rated Polish cities'. It combines a 'Weaker' assessment of revenue adjustability and a 'Midrange' assessment of the remaining factors (revenue robustness, expenditure sustainability and adjustability, as well as liabilities and liquidity framework). Revenue Robustness: 'Midrange' Zabrze's revenue sources are stable as current transfers accounted for almost 49% of operating revenue in 2019, with the majority of transfers from the Polish state budget (A-/Stable). Tax revenue accounted for almost 38% of Zabrze's operating revenue, of which more than 90% was not dependent on economic cycles. Zabrze's tax base is diversified but weaker than other Polish cities. The city shows a record of operating revenue growth (CAGR of 5.3% in 2015-2019), below nominal national GDP growth (5.7%). Revenue Adjustability: 'Weaker' Fitch assesses Zabrze's ability to generate additional revenue in response to possible economic downturns as limited, in line with the majority of Polish cities. Income tax rates are set by the central government, as are the majority of current transfers. Zabrze has low flexibility on local taxes as their rates are constrained by ceilings set in national tax regulations. In its view, additional revenue using discretionary tax leeway would cover less than 50% of a reasonable expected decline of revenue in a downturn. With tax revenue per capita below the average for Polish cities, Zabrze is entitled to equalisation subsidies, which however are low in relation to the city's budget (PLN20 million or 2% of total revenue in 2019). The city could increase its revenue with asset sales (PLN35 million annually in 2015-2019, ie. 4% of total revenue), but this source of revenue may prove unsustainable in an economic downturn. Expenditure Sustainability: 'Midrange' The city's expenditure sustainability is underpinned by non-cyclical responsibilities such as education, public transport, municipal services, administration and others. However, due to a higher share of inflexible costs than in other cities, Zabrze's operating results are more prone to volatility following the central government's decisions to cut personal income taxes from November 2019 and increase teachers' salaries from September 2019. Zabrze aims to keep operating spending growth broadly in line with operating revenue growth over the long term to secure a positive operating balance (on average of 5%-6% of operating revenue in 2015-2019), which together with asset sales and EU grants, would be used to finance investments. However, Fitch expects Zabrze's capex to be also debt-financed, in view of Fitch-projected average budget deficit of 3% of total revenue in 2020-2024. Expenditure Adjustability: 'Midrange' The city can scale back more than 25% of its capex and more than 10% of its operating expenditure, if needed. The share of inflexible costs is 70%-90% of total expenditure and results mainly from mandatory responsibilities in education, family benefits, social care, administration and public safety. The city's capex may total PLN720 million in 2020-2024 and average 13% of total expenditure and is almost equally split between investments co-financed from own sources (being the most flexible), investments co-financed by EU and contributions to the city's companies, which have the lowest spending flexibility. Liabilities and Liquidity Robustness: 'Midrange' Zabrze's debt is dominated by bonds (60% of total with final maturity up to 2027 years), followed by loans from European Investment Bank (EIB; AAA/Stable) (32%) and preferential loans and loans from local banks (8%). The EIB loans will remain the main source of financing for the city's capex in the medium term, thus supporting a long and smooth repayment schedule until 2042. Zabrze's debt is in Polish zloty and at floating rates, which exposes the city to interest-rate risk as Polish cities are not allowed to use derivatives. Zabrze partially mitigates this risk by budgeting higher amounts than necessary for debt service. Fitch includes the debt of the city's football stadium company in other Fitch-classified debt. This is because the company's debt was raised to build a facility on behalf of Zabrze and is effectively the city's obligation. Fitch also includes liabilities stemming from a sell-and-buy back transaction of the football club company. However, the transactions are modest (PLN149 million at end-2019) in relation to the city's budget and are included in the city's long-term projections for capex. Liabilities and Liquidity Framework Flexibility: 'Midrange' Fitch assesses the city's liquidity framework as 'Midrange' given the absence of emergency liquidity support from upper government tiers and the lack of banks rated above 'A+' in the Polish market. Zabrze frequently uses its committed low-cost liquidity lines (with a limit of PLN50 million) provided by ING Bank Slaski S.A. (A+/Negative) to manage liquidity during the year. This policy results in low levels of cash at year-end, which covered about 15% of annual debt service in 2017-2019. Fitch assumes this will continue in the following years. Liquidity is not additionally strained by the economic downturn triggered by the pandemic. Debt Sustainability: 'bbb' category Under its Rating Criteria for LRGs Fitch classifies Zabrze - like all other Polish LRGs - as type B as it covers debt service from its cash flows on an annual basis. Fitch's rating-case assumptions factor in the economic downturn triggered by the pandemic. With a weaker operating balance projected under its revised rating case, the city's debt payback will weaken to 18 years in 2020-2021 before improving to 13 years in 2023-2024 (13.8 years in 2019), thus remaining compatible with a 'bbb' debt sustainability. Fitch expects the city's adjusted net debt to reach almost PLN800 million at end-2024 (from PLN650 million in 2019) in view of planned capex. However, in relation to operating revenue, it will remain stable at 70%, which is compatible with a 'aa' debt sustainability. The latter will counterbalance the city's weak synthetic coverage ratio of 1x. All these metrics result in an overall debt sustainability of 'bbb'. In Fitch view Zabrze's operating balance will deteriorate to about PLN35 million in 2020 from about PLN50 million in 2018-2019 and account for about 3.5% of operating revenue due to the economic downturn triggered by the pandemic, as well as the central government's decisions to cut PIT rates and to increase teachers' salaries, both of which are fully affecting the city's budget in 2020. The contraction in the operating balance will weaken the city's debt payback in 2020-2021, but the latter should recover from 2022 to about 13 years, a level that is compatible with the city's current ratings. Zabrze is a medium-sized city by Polish standards, located in the Slaskie region and is part of the Silesia Metropolis (more than two million inhabitants). It benefits from being located at a crossroads of the main Polish rail and road corridors. Zabrze's tax base is diversified but weaker than other Polish cities'. GDP per capita in 2017 for the Gliwicki sub-region, where Zabrze is located, was 119% of the national average but Fitch believes this may be an over-estimate of Zabrze's performance. Zabrze's local economy is dominated by industry and construction (46% of the sub-region's gross value added in 2017), above the Polish average of 34%. DERIVATION SUMMARY Zabrze's 'bb+' SCP reflects a 'Midrange' risk profile and a 'bbb' debt sustainability assessment. It also factors in Zabrze's comparison with peers. The city's IDRs are not affected by any asymmetric risk or extraordinary support from the Polish state. KEY ASSUMPTIONS Qualitative Assumptions and Assessments: Risk Profile: 'Midrange' Revenue Robustness: 'Midrange' Revenue Adjustability: 'Weaker' Expenditure Sustainability: 'Midrange' Expenditure Adjustability: 'Midrange' Liabilities and Liquidity Robustness: 'Midrange' Liabilities and Liquidity Flexibility: 'Midrange' Debt sustainability: 'bbb' category Support: n/a Asymmetric Risk: n/a Sovereign Cap or Floor: No Quantitative Assumptions - Issuer-Specific Fitch's rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2015-2019 figures and 2020-2024 projected ratios. The key assumptions for the scenario include: - Operating revenue CAGR of 4.1% over 2019-2024 - Operating expenditure CAGR of 4% over 2019-2024 - Net capital deficit on average of PLN75 million annually in 2020-2024 - Cost of debt rising to 4.3% in 2024 from 2.8% in 2019 and final maturity of new debt in 2042 - Other Fitch-classified debt declining in line with the repayment schedule (no new debt-financed investments undertaken by government-related entities as envisaged by the city). RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -Debt payback equal to or below 13x on a sustained basis under Fitch's rating case. Factors that could, individually or collectively, lead to negative rating action/downgrade: -Debt payback above 15x on a sustained basis under Fitch's rating case. - A prolonged COVID-19 impact and much slower economic recovery lasting until 2025 would put pressure on net revenues. Inability to proactively reduce expenditure or supplement weaker receipts from increased central government transfers could lead to a downgrade. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =============== P O R T U G A L =============== BANCO COMERCIAL: Fitch Affirms BB LongTerm IDR, Outlook Negative ---------------------------------------------------------------- Fitch Ratings has affirmed Banco Comercial Portugues, S.A.'s (BCP) Long-Term Issuer Default Rating (IDR) at 'BB' and Viability Rating (VR) at 'bb'. The Outlook on the Long-Term IDR remains Negative. The affirmation reflects its view that BCP's ratings are not immediately at risk of a downgrade. This is driven by BCP's significantly improved asset quality compared with 2016 and a fairly resilient pre-impairment profitability. This in turn provides the bank with some rating headroom to absorb an expected material increase in impaired loan inflows and loan impairment charges (LICs) that will arise from the economic downturn in Portugal and Poland, its main markets of operations. However, the Negative Outlook on BCP's Long-Term IDR reflects its opinion that risks remain skewed to the downside in the medium term, especially if the recession in Portugal proves materially deeper or the recovery weaker than its expectations. In this case, BCP's ratings would come under pressure from higher inflows of new impaired loans leading to larger credit losses, and weaker revenue generation than currently expected in 2021. The crisis creates material downside risks to its assessment of BCP's strategic execution capabilities, asset quality, profitability and capitalisation. KEY RATING DRIVERS IDRS AND VR BCP's ratings primarily reflect the bank's still weaker asset quality metrics than higher-rated domestic peers' and international averages. They also reflect its view that the bank's capitalisation remains vulnerable to severe asset-quality shocks, despite meaningful improvements since 2016 through capital increases and issuance of subordinated instruments. This vulnerability comes from the large legacy holdings of unreserved problem assets that BCP continues to hold on its balance sheet even after a significant reduction in 2018-2019 and further progress in 1H20. The ratings also factor in BCP's resilient underlying pre-impairment profitability due to a leading franchise in Portugal, which provides the bank with some pricing power, and sound cost efficiency compared with peers. BCP entered the coronavirus crisis after a significant improvement in its asset quality over the past four years. But its asset quality remains weaker than higher-rated domestic and other mid-sized southern European peers'. BCP's impaired loans (IFRS 9 Stage 3 loans) ratio was about 7% at end-June 2020 (-70bp year to date) and Fitch expects asset quality to deteriorate more markedly from 2021. Loan loss allowance coverage of impaired loans also improved to satisfactory levels of close to 60% at end-June 2020, reducing reliance on collateral and guarantees. When including BCP's foreclosed real estate assets and investment properties, Fitch estimates that the bank's problem asset ratio was about 8.9% at end-June 2020, which is higher than at most domestic and international peers. Fitch expects BCP's asset quality to start deteriorating amid a challenging operating environment. Given the nature and size of the Portuguese economy, BCP is exposed to borrowers in sectors that are most affected by the pandemic, such as tourism, hotels or non-food retail (totalling about 7% of BCP's exposure at default at end-June 2020). Fitch expects inflows of new impaired loans to increase towards end-2020 and more significantly in 2021 as government measures to support borrowers expire, notably the extensive loan moratoria schemes adopted in Portugal (about 19% of BCP's consolidated gross loans at end-June 2020). Fitch estimates that BCP's impaired loan ratio could peak moderately above 10% by end-2021 without mitigating actions to more proactively manage the stock of impaired loans. This would be above levels Fitch expects for higher-rated Portuguese banks. But this expectation is highly sensitive to assumptions on the extent of migration of loans under moratoria to Stage 3 over time as well as proactive measures that could limit the build-up of impaired loans, including portfolio sales or cures of legacy impaired loans. BCP has a sound record of executing strategies to reduce impaired loans rand Fitch expects the bank will continue to do so in 2020-2021. BCP's earnings have been volatile over the last economic and interest-rate cycle. However, profitability had gradually been recovering when BCP entered the coronavirus crisis due to sound cost efficiency and a gradual decline in impairment charges in Portugal since 2016. The bank's four-year average operating profit/risk-weighted assets (RWA) was about 1% (2016-2019) but the improving trend stalled in 1H20, leading to a still acceptable operating profit/RWA of 0.8%. The weaker performance in 1H20 was mainly driven by revenue pressure (including one-off revaluation losses on holdings of restructuring funds), higher costs (mainly integration costs in Poland, while costs in Portugal declined 5% yoy) and a sharp rebound in LICs (about 45% yoy) in anticipation of the coronavirus impact. Fitch expects that BCP's operating profit generation will remain challenged in 2020-2021 before a gradual recovery from 2022. BCP's Polish subsidiary, Bank Millennium (BBB-/Stable/bbb-), has material exposure to foreign currency-denominated mortgage loans in Poland (about PLN14 billion at end-June 2020 equivalent to roughly 54% of BCP's common equity Tier 1 (CET1) capital). These could lead to material provisioning for legal costs over the next coming years, which would add to the existing profitability challenges. BCP's capital buffers are moderate and Fitch views its capitalisation profile as highly vulnerable to severe asset-quality shocks. The fully loaded CET1 and total capital ratios were, respectively, 12% (excluding a 10bp benefit from the transitional implementation of IFRS9 provisions) and 15.4% at end-June 2020, and are towards the low end of mid-sized southern European peers. These ratios provide a moderate buffer relative to BCP's 2020 Supervisory Review and Evaluation Process requirements of 8.8% for the CET1 ratio and 13.3% for the total capital ratio. Fitch expects that BCP's CET1 ratio will remain close to 12% in 2020 and 2021. Its assessment of capitalisation also considers BCP's exposure to risks arising from problem assets, including unreserved Stage 3 loans, holdings of foreclosed real estate assets and corporate restructuring funds. Fitch estimates BCP's unreserved problem assets were still high at about 63% of CET1 capital at end-June 2020, leaving the capital base highly vulnerable to severe asset-quality shocks. BCP's funding structure has generally been stable and the bank's liquidity position has benefited from substantial loan deleveraging over the past four years. Customer deposits are BCP's main funding source, at about 82% of total funding. BCP's gross loans/customer deposits ratio decline to about 85%, a level that compares well with most southern European peers. The bank's reliance on wholesale funding is therefore limited and mostly in the form of senior, covered bonds and ECB funding through targeted longer-term refinancing operations, which the bank has recently increased to take advantage of favourable funding conditions and to protect its margins. BCP's liquidity profile is adequate but sensitive to investor confidence, as with most other Portuguese peers. SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT Fitch rates BCP's senior preferred debt in line with the bank's IDRs because Fitch expects that the bank will meet its minimum requirement for own funds and eligible liabilities (MREL) with a combination of senior preferred and more junior instruments. In addition, Fitch does not expect the buffer of hybrid, subordinated and senior non-preferred instruments to exceed 10% of RWAs of the resolution group headed by BCP. As a result, BCP's senior non-preferred notes are rated 'BB-' or one notch below the bank's Long-Term IDR as Fitch sees a heightened risk of below-average recoveries for this debt class in a resolution. DEPOSIT RATINGS Fitch rates BCP's deposits at 'BB+'/'B', one notch above the bank's Long-Term IDR, reflecting Fitch's view that depositors would be protected by the bank's senior preferred instruments, junior debt and equity buffers in case of a resolution. This is because Fitch expects BCP to comply with MREL and that Portugal is a country where full depositor preference is enacted as law since 2019. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and other hybrid capital issued by BCP are notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Fitch rates BCP's Tier 2 securities 'B+', two notches below the 'bb' VR. This reflects the baseline notching for loss-severity of two notches from the VR as per its Bank Rating Criteria. The notching reflects the expected loss severity and poor recovery prospects for those instruments. Fitch rates BCP's additional Tier 1 (AT1) instruments at 'B-', four notches below the bank's 'bb' VR. This notching reflects the instruments' higher expected loss severity relative to the bank's VR due to the notes' deep subordination (two notches). In addition, the notching also reflects higher non-performance risk relative to the VR given fully discretionary coupon payments and mandatory coupon restriction features (another two notches). The notching reflects its expectations that BCP will maintain moderate capital buffers above regulatory requirements. BCP had buffers of about 220bp above its total capital requirement and of about 330bp above the CET1 requirement at end-June 2020, representing a buffer of about EUR1 billion above mandatory coupon restriction points. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank cannot rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of - or ahead of - a bank receiving sovereign support. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: The most immediate downside rating sensitivity for BCP's IDRs and VR and consequently its deposit and debt ratings is the impact from the economic fallout of the coronavirus crisis on the Portuguese operating environment. BCP's ratings would likely be downgraded on a pronounced and sustained deterioration beyond its baseline economic forecast for the Portuguese operating environment. Such deterioration would result in more permanent damage to the economy and lead to an increase of BCP's stage 3 impaired loans ratio to levels materially above 10% or an operating profit/RWA materially below 0.5% over the next 18 to 24 months with no credible plan to restore these metrics to pre-coronavirus crisis levels. An unexpected and material drop in BCP's capitalisation to levels that would no longer be commensurate with asset-quality risks could also lead to a downgrade. Large legal costs from Bank Millennium's legacy foreign-currency mortgage loans in Poland could also lead to a downgrade of BCP's ratings if this results in a material erosion of the group's capital position beyond its baseline expectation of moderate earnings pressure from those legal costs. BCP's senior preferred and senior non-preferred debt ratings could be downgraded if the bank's Long-Term IDR is downgraded. BCP's Tier 2 ratings could be downgraded if the bank's VR is downgraded. The rating of BCP's AT1 instruments would be downgraded only if the VR is downgraded by more than one notch because of a tighter notching for those instruments for 'bb-' rated banks. Fitch could also downgrade the AT1 instrument's rating if Fitch no longer expects BCP will maintain moderate buffers above its capital requirements (typically at least 100bp) leading to higher non-performance risk. BCP's deposit ratings are sensitive to changes in BCP's IDRs and could be downgraded if the latter are downgraded. Fitch could also downgrade BCP's deposit ratings if Fitch expects that the bank will use potentially eligible deposits to comply with its MREL requirement. Factors that could, individually or collectively, lead to positive rating action/upgrade: The Negative Outlook on BCP's Long-Term IDR signals that an upgrade is unlikely in the short term. The ratings could be affirmed and the Outlook revised to Stable if the expected pressure on the Portuguese operating environment is more moderate than Fitch anticipates as this would improve prospects for BCP's asset quality and operating profitability over the medium term. BCP has some headroom to emerge with its ratings intact due to the relative strength of its company profile and business model, which provides it with resilient pre-impairment profitability and a generally stable funding and liquidity profile. If BCP is able to withstand current rating pressure, an upgrade of its ratings would be contingent on further material reduction in the bank's stock of problem assets, including harder-to-reduce restructuring funds and real-estate assets. This would result in lower impairment charges over time and would, ultimately, reduce capital vulnerability to asset-quality shocks. Stronger capital ratios, which are comparatively low at BCP, would also be rating positive as they would further increase BCP's headroom relative to total capital requirements. The senior non-preferred and senior preferred debt ratings could be upgraded if BCP's IDRs are upgraded. They could also be upgraded if Fitch expects that BCP will either meet its MREL without recourse to senior preferred debt or if the buffer of AT1, Tier 2 and senior non-preferred debt will sustainably exceed 10% of the Portuguese resolution group's RWAs. BCP's deposit ratings could be upgraded if BCP's IDRs are upgraded. BCP's AT1 and Tier 2 ratings could be upgraded if the bank's VR is upgraded. An upgrade of the bank's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. While not impossible, this is highly unlikely, in Fitch's view. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. CAIXA GERAL: Fitch Affirms BB+ LongTerm IDR, Outlook Negative ------------------------------------------------------------- Fitch Ratings has affirmed Caixa Geral de Depositos, S.A.'s (CGD) Long-Term Issuer Default Rating (IDR) at 'BB+' and Viability Rating (VR) at 'bb+'. The Rating Outlook on the Long-Term IDR is Negative. The affirmations reflect Fitch's view that CGD's ratings are not immediately at risk, as its significantly improved capitalization, operating efficiency and asset quality provide the bank with some rating headroom to absorb the likely reduction of profitability and higher credit risks due to the economic downturn in Portugal. However, the Negative Outlook reflects Fitch's view that risks remain skewed to the downside in the medium term, especially if the recession proves deeper, or the recovery weaker than Fitch's expectations. In this case, CGD's ratings would come under pressure from higher inflows of new impaired loans generating larger credit losses and weaker revenue generation than currently expected. Fitch has withdrawn the EUR10 billion Commercial Paper short-term programme rating and attached Certificate of Deposit short-term rating because CGD is no longer issuing debt under that programme, and there is no Fitch-rated debt outstanding under that programme. KEY RATING DRIVERS IDRs AND VR CGD's ratings reflect asset quality that, despite improvements, remains weaker than the European banks' average, and moderate operating profitability. However, both have improved significantly since 2016, owing to strong delivery on CGD's 2017-2020 restructuring plan, helped by the recovery in the Portuguese operating environment and good strategic execution over the last three years. The ratings also consider CGD's relative strengths of its regulatory capitalisation with ample buffers above requirements and a generally stable funding. CGD is a leading retail and commercial bank on its local market. Fitch views positively the fact that CGD's management has demonstrated its ability to execute on its stated targets. It successfully improved asset quality and has built up capital to levels beating the targets outlined in its restructuring plan agreed with the European authorities in 2017. The bank has also tightened underwriting standards and improved risk controls to levels closer to global industry practices, which Fitch expects will help limit asset quality deterioration in the more difficult operating environment expected for Portuguese banks over Fitch's rating horizon. CGD's asset quality remains weaker than global industry averages but is now in line with other mid-sized southern European banks. CGD's impaired loans ratio (IFRS9 stage 3) was down to a moderate 5% at end-June 2020, a level below the average for the major Portuguese banks. Fitch estimates that CGD's problem asset ratio (when including legacy real estate assets owned) was about 6% at end-June 2020, a level broadly in line with other mid-sized southern European peers. Asset quality improvements continued in 1H20 through sales, cures and recoveries, as did the loan loss allowance coverage of impaired loans, which at about 88% at end-June 2020 is very high compared with European averages. Given the nature and size of the Portuguese economy, CGD is exposed to potentially vulnerable borrowers, such as small businesses and SMEs (a fifth of gross loans at end-June 2020) or the tourism industry. The wide-ranging moratoria schemes in Portugal should limit the number of loans becoming impaired in 2020, but the relatively large stock of loans under moratorium (around 17% of gross loans at end-July 2020, below domestic peers) also leaves room for a material asset quality deterioration in 2021. Consequently, Fitch expects the weaker operating environment in Portugal amid a sharp economic contraction and a material increase in the unemployment rate from the coronavirus outbreak, to lead to a manageable increase in CGD's stage 3 loan ratio. Fitch expects that the bank's stage 3 loan ratio will remain materially below 8% by YE 2021. Fitch views the quality of residential mortgage loans (half of the loan book) and loans to the Portuguese public sector as resilient and supportive of CGD's overall loan quality. CGD's profitability improved in 2019--operating profit/risk-weighted assets (RWA) of 2.4% in 2019--thanks to reversals of credit provisions and good cost control (mainly staff and branch reduction). The bank reached a sound cost to income ratio of 53% in 2019. However, profitability is dependent on economic conditions in Portugal. The bank had made good progress towards its 2020 profitability targets, but further execution will be challenged by the coronavirus impact. Fitch expects that CGD will miss those targets. Fitch expects CGD's earnings to be burdened over the next two years as a result of higher loan impairment charges (LICs), subdued business volumes and possibly higher funding costs in case of renewed capital markets stress and weaker investor confidence. In 1H20, CGD booked additional provisions related to the coronavirus crisis, bringing the annualised LICs/gross loans ratio to around 31bp (compared with net reversals in 2019). Nevertheless, thanks to strict cost discipline, CGD managed to limit profitability deterioration in 1H20 (operating profit/RWA ratio of about 1.7%). This supports Fitch's assessment that earnings will start to gradually recover to pre-coronavirus crisis levels from 2022 onwards. CGD has continued to increase its capital buffers in 2019, and the fully loaded common equity Tier 1 (CET1) and total capital ratios were largely stable in 1H20, reaching 16.8% and 19.3%, respectively at end-June 2020. Fitch expects the bank's capital ratios will remain resilient and at least moderately above capital requirements (above 9% for the CET1 ratio) despite the difficult economic environment. Capital encumbrance from unreserved problem assets (net stage 3 loans, holdings of foreclosed real estate, investment properties and restructuring funds) continued to improve materially in 1H20 and reached a relatively low level of 20% of fully-loaded CET1 at end-June 2020. This level compares well with most domestic and other southern European peers, reducing the bank's capital base vulnerability to severe asset quality shocks under. CGD's funding is supported by retail deposits gathered, thanks to its leading deposit franchise in Portugal. Customer deposits accounted for above 90% of total funding at end-June 2020 and the loans-to-deposits ratio was around 80%. The bank reported a net stable funding ratio of about 165% and liquidity coverage ratio of 402% at end-June 2020, well in excess of regulatory requirements. Fitch views the bank's liquidity position at end-June 2020, which is supported by a recent drawing of ECB funding (TLTRO), as comfortable. This is thanks to a large liquidity buffer in comparison to low wholesale maturities in coming years, despite some sensitivity to confidence shocks in Portugal as for other domestic peers. SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT Fitch rates CGD's senior preferred debt in line with the bank's IDRs because the agency expects that the bank will meet its minimum requirement for own funds and eligible liabilities (MREL) with a combination of senior preferred and more junior instruments. In addition, Fitch does not expect the buffer of hybrid, subordinated and senior non-preferred instruments to exceed 10% of RWAs of the resolution group headed by the Portuguese parent company. As a result, CGD's senior non-preferred notes are rated one notch below the bank's Long-Term IDR as Fitch sees a heightened risk of below-average recoveries for this debt class in resolution. DEPOSIT RATINGS CGD's deposits ratings of 'BBB-'/'F3' is one notch above the bank's Long-Term IDR, reflecting Fitch's view that depositors would be protected by buffers of senior preferred and junior debt and equity buffers in case of a resolution scenario, as full depositor preference is in force in Portugal, and because Fitch expects that CGD will meet its MREL requirement. SUBORDINATED AND HYBRID INSTRUMENTS Subordinated debt and other hybrid instruments issued by CGD are notched down from its VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Fitch rates CGD's Tier 2 debt two notches below the VR in line with the baseline notching for subordinated Tier 2 debt as per the Bank Rating Criteria. The notching reflects the expected loss severity and poor recovery prospects for those instruments. Fitch rates CGD's additional Tier 1 (AT1) instruments four notches below the bank's VR. The notes have fully discretionary interest payments and are subject to partial or full write-down if CGD's consolidated or unconsolidated CET1 ratio falls below 5.125%. The notching reflects Fitch's expectations that CGD will continue to operate with capital ratios comfortably above coupon-omission points (equivalent to EUR2.5 billion at end-June 2020 relative to CET1 capital requirement including the Tier 1 and Tier 2 gaps). It also reflects satisfactory distributable reserves (about EUR2.4 billion at end-June 2020). SUPPORT RATING AND SUPPORT RATING FLOOR CGD's '4' Support Rating (SR) and 'B' Support Rating Floor (SRF) reflect Fitch's view that there remains a limited probability of extraordinary support being provided to CGD by the Portuguese state, under the provisions and limitation of the Bank Recovery and Resolution Directive and the Single Resolution Mechanism, without the bail-in of senior creditors. This potential support is based on full and willing state ownership and CGD's market leading position in the Portuguese market. SUBSIDIARY Caixa -BI's IDRs are equalised with those of its parent, driven by the full ownership, its integration within its parent and the offering of investment banking products to CGD's customer base. Fitch does not assign a VR to the institution as the agency does not view it as an independent entity that can be analysed meaningfully in its own right. The Negative Outlook on Caixa - BI's Long-Term IDR mirrors that on CGD's Long-Term IDR. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: The ratings are primarily sensitive to the extent and the duration of the weakening of the bank's financial profile as a result of the pandemic shock to the economy. Fitch would likely downgrade CGD's Long-Term IDR and VR if there were a more substantial and prolonged deterioration in asset quality and profitability than currently envisage. These circumstances could stem, for example, from more permanent damage from the crisis on the Portuguese economy, which would lead to an increase of CGD's stage 3 impaired loans ratio to levels above 8% and an operating profit/RWA that would fall to levels below 0.5% with no credible plan to restore these ratios to pre-coronavirus crisis levels. An unexpected and material drop in CGD's capitalization to levels that would no longer be above domestic peers' could also lead to a negative rating action if the bank's capitalisation become less commensurate with the risks its faces from a deteriorated operating environment. CGD's senior preferred and senior non-preferred debt ratings could be downgraded if the bank's Long-Term IDR is downgraded. CGD's subordinated Tier 2 ratings are sensitive to changes in the bank's VR. The rating of CGD's AT1 instruments could be downgraded if the bank's VR is downgraded or if Fitch no longer expects CGD will maintain moderate buffers above its capital requirements (typically at least 100bp) leading to higher non-performance risk. CGD's deposit ratings are sensitive to changes in CGD's IDRs and could be downgraded if the latter are downgraded. Fitch could also downgrade CGD's deposit ratings if it expects that the bank will use potentially eligible deposits to comply with its MREL requirement. CGD's SR would be downgraded and the SRF revised downwards if Fitch concludes that the sovereign's propensity to support CGD has reduced, or if there are plans to privatise the bank, which the agency currently does not expect over the foreseeable future. Caixa-BI's ratings could be downgraded if CGD's IDRs are downgraded. The ratings are also sensitive to a change in CGD's propensity to support its subsidiary, which is currently not expected. Factors that could, individually or collectively, lead to positive rating action/upgrade: The Outlook could be revised to Stable if risks to the Portuguese operating environment reduce and CGD successfully manages the challenges arising from the economic downturn by limiting downside risks to its asset quality and profitability. Upside to the ratings is currently limited and contingent upon CGD further improving its financial profile, in particular its asset quality and operating profitability metrics to levels in line with global industry averages while maintaining an unchanged risk appetite in Portugal and abroad. Sustained improvements in CGD's cost-efficiency and increased business model diversification towards activities generating recurring non-interest income would also be positive for the bank's ratings. CGD's senior preferred and senior non-preferred debt ratings could be upgraded by one notch, if Fitch expects CGD to comply with its total MREL requirement without using senior preferred debt, or if the group explicitly targets a capital and funding structure, where the buffer of senior non-preferred and subordinated instruments would sustainably exceed 10% of RWAs of the resolution group headed by the Portuguese parent. CGD's deposit ratings could be upgraded if CGD's IDRs are upgraded. CGD's AT1 and Tier 2 ratings could be upgraded if the bank's VR is upgraded. An upgrade of the bank's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. While not impossible, this is highly unlikely, in Fitch's view. Caixa-BI's ratings could be upgraded if CGD's IDRs are upgraded. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Caixa -BI's IDRs are equalised with those of its parent, driven by the full ownership, its integration within its parent and the offering of investment banking products to CGD's customer base. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ============= R O M A N I A ============= TAROM: European Commission Approves EUR19.3MM Loan Guarantee ------------------------------------------------------------ Nicoleta Banila at SeeNews reports that the European Commission said on Oct. 5 it approved a loan guarantee of up to EUR19.3 million (US$22.6 million) to help Romanian flag carrier Tarom overcome financial difficulties caused by the COVID-19 pandemic. The Commission said in a statement the measure aims at compensating the airline for losses directly caused by the coronavirus outbreak and the travel restrictions introduced by Romania and other destination countries to limit the spread of the coronavirus during March 16-June 30, SeeNews relates. The EU's executive body noted the situation forced Tarom to cancel most of its scheduled flights and caused major losses in turnover, SeeNews discloses. The Commission concluded that the Romanian measure is in line with EU State aid rules, SeeNews states. An independent external audit firm will verify that the aid does not exceed the amount of damage suffered during March 16 - June 30, SeeNews notes. Following the audit, any public support received by Tarom in excess of the actual damage suffered will have to be returned to Romania, SeeNews says. In August, the Commission said that approved a EUR62 million loan guarantee to help Romanian low-cost carrier Blue Air avoid bankruptcy due to the COVID-19 pandemic, SeeNews recounts. According to SeeNews, the measure aimed at compensating the airline for the damages suffered due to the coronavirus outbreak, as well as providing it with urgent liquidity support. =========== R U S S I A =========== ROSBUSINESSBANK PJSC: Bank of Russia Revokes Banking License ------------------------------------------------------------ The Bank of Russia, by virtue of its Order No. OD-1713, dated October 23, 2020, revoked the banking license of Moscow-based credit institution Joint-Stock Russian Commercial Bank "Rosbusinessbank" (Public Joint-Stock Company), or Rosbusinessbank (Registration No. 1405). The credit institution ranked 338th by assets in the Russian banking system. The Bank of Russia made this decision in accordance with Clauses 6 and 6.1 of Part 1 of Article 20 of the Federal Law "On Banks and Banking Activities", based on the facts that Rosbusinessbank: -- violated federal banking laws and Bank of Russia regulations, which included the understatement of the value of required loss provisions to be formed, due to which the regulator repeatedly applied supervisory measures against it over the last 12 months, including restrictions on attracting funds of individuals; and -- failed to comply with the anti-money laundering and counter-terrorist financing laws. The credit institution failed to timely submit to the authorized body information about operations subject to obligatory control. Bad loans comprise over 50% of the loan portfolio of Rosbusinessbank. Moreover, over the course of the last year, the bank repeatedly overstated the amount of its equity capital and submitted incorrect values to the Bank of Russia. In this circumstances, Rosbusinessbank actively conducted non-transparent deals with an affiliated entity. These deals were of a non-market nature and were aimed at transforming the bank's loan portfolio in order to conceal the real size of credit risks assumed. The compliance with the Bank of Russia's requirements to create additional provisions for possible losses and adjust Rosbusinessbank's capital established grounds for measures to be enacted to prevent insolvency (bankruptcy) which resulted in a real threat to its creditors' and depositors' interests. The Bank of Russia appointed a provisional administration to Rosbusinessbank for the period until the appointment of a receiver or a liquidator. In accordance with federal laws, the powers of the credit institution's executive bodies were suspended. Information for depositors: Rosbusinessbank is a participant in the deposit insurance system, therefore depositors will be compensated for their deposits6 in the amount of 100% of the balance of funds but no more than a total of RUR1.4 million per depositor (including interest accrued), excluding the cases stipulated in Chapter 2.1 of the Federal Law "On the Insurance of Deposits with Russian Banks". Deposits are to be repaid by the State Corporation Deposit Insurance Agency (hereinafter, the Agency). Depositors may obtain detailed information regarding the repayment procedure 24/7 at the Agency's hotline (8 800 200-08-05) and on its website (https://www.asv.org.ru/) in the Deposit Insurance/Insurance Events section. VSK INSURANCE: Fitch Affirms BB Insurer Financial Strength Rating ----------------------------------------------------------------- Fitch Ratings has affirmed Russia-based VSK Insurance Joint Stock Company's (VSK) Insurer Financial Strength (IFS) Rating at 'BB'. The Outlook is Negative. KEY RATING DRIVERS The ratings reflect VSK's weak risk-adjusted capitalisation, strong, albeit potentially volatile, profitability, favourable business profile and investment risk commensurate with the rating category. The Negative Outlook reflects its expectation that the insurer's capitalisation and the financial performance metrics in 2020 will be affected, albeit moderately, by the adverse business and volatile capital-market conditions related to the coronavirus pandemic. VSK's risk-adjusted capital position, as measured by Fitch's Prism factor-based capital model (FBM) score, remained below 'Somewhat Weak', albeit slightly strengthened, in 2019. Significant profit generation in 2019 underpinned available capital, but was insufficient to compensate the high growth of net business volumes. In 1H20 VSK continued to generate profits, reflected in a 27% annualised return on equity (ROE) based on standalone regulatory reporting. However, Fitch expects that capital generation will be insufficient to offset business growth and potential challenges from the pandemic on business and financial risks. Fitch therefore expects VSK's risk-adjusted capital position to remain weak in 2020. From a regulatory capital perspective, VSK's solvency was a strong 178.5% at end-2019 and 178.9% at end-1H20. However, the regulatory capital calculation does not take into account asset risks. Fitch assesses VSK's profitability as strong but potentially volatile. In 1H20, VSK reported net income of RUB3.8 billion (1H19: RUB2.8 billion), based on standalone regulatory reporting. The pandemic-related negative economic implications resulted in rouble depreciation, which supported bottom-line performance, because VSK held 25% of its invested assets at end-1H20 denominated in foreign currencies. As a result, its reported net income was boosted by RUB1 billion FX gains (1H19: FX losses of RUB508 million). However, VSK's underlying profitability slightly worsened, with a combined ratio at 96%, versus 93% in 2019 and 92% in 2018. VSK's gross written premiums (GWP) were affected by lockdown, which resulted in flat growth relative to 1H19, with a more pronounced impact on motor damage and accident and health insurance. Fitch expects VSK's earning to be susceptible to the negative economic implications of the coronavirus pandemic, albeit the bottom-line performance can be offset by FX gains. Fitch believes that VSK has a favourable business profile in the domestic non-life insurance sector. The company's non-life portfolio is adequately diversified in many aspects, including business mix, presence in the retail and commercial segments and distribution capabilities. VSK underwrites both commercial and retail risks, with the business mix being slightly skewed to motor lines. The latter accounted for 53% of GWP in 2019 versus the peak three-year average of 64% in 2015-2017. Fitch views the credit and liquidity quality of VSK's investment portfolio as adequate. However, VSK has some concentrated equity holdings in related-party companies and a notable exposure to non-investment-grade securities (mainly domestic bonds), which result in a fairly high risky assets-to-equity ratio. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- A material adverse change in Fitch's rating assumptions with respect to the coronavirus impact. -- A significant weakening in VSK's capitalisation, as measured by Prism FBM. -- A significant deterioration in VSK's operating profitability with the combined ratio deteriorating to above 105% on a sustained basis. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profiles of both the Russian insurance sector and VSK. -- A strengthening of VSK's capitalisation, as measured by Prism FBM, provided that the company maintains strong financial performance and a diversified business profile. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =============== S L O V E N I A =============== ADRIA AIRWAYS: Oki Air Expresses Interest to Acquire Brand Name --------------------------------------------------------------- Iskra Pavlova at SeeNews reports that Montenegrin air transport and tour operator Oki Air is interested in acquiring the brand name of the collapsed Slovenian flag carrier Adria Airways. Oki Air has expressed its interest in a letter to the bankruptcy trustee of Slovenia's former national carrier, SeeNews relays, citing news provider EX-YU Aviation News. According to the news provider's Oct. 14 report, Oki Air acts as a general sales agent of several airlines in Slovenia, Montenegro and Croatia and used to provide such services to Adria Airways as well, SeeNews notes. In August, the bankruptcy trustee of Adria Airways launched a second tender to sell its brand name, cutting the original ask price in half to EUR50,000 (US$58,400), SeeNews states. EX-YU Aviation News said similar to the previous tender, the second attempt also failed to draw any bids, SeeNews relates. In January, local media reported that Air Adriatic, a Slovenian company owned by local businessman Izet Rastoder, has bought Adria Airways' operating license at an auction in which the starting price was set at EUR45,000, SeeNews discloses. Bankruptcy proceedings against Adria Airways opened in October 2019 after the troubled air carrier suspended flights a month earlier over lack of funds to run its daily operations, SeeNews recounts. ========= S P A I N ========= BANCO MONTEPIO: Fitch Affirms B- LongTerm IDR, Outlook Negative --------------------------------------------------------------- Fitch Ratings has affirmed Caixa Economica Montepio Geral, Caixa economica bancaria, S.A.'s (Banco Montepio) Long-Term Issuer Default Rating (IDR) at 'B-' and Viability Rating (VR) at 'b-'. The Outlook on the Long-Term IDR is Negative. The affirmation of the ratings reflects its view that Banco Montepio's ratings are not immediately at risk from the impact of the economic downturn from the pandemic. Banco Montepio's rating has some limited headroom to absorb a reduction in profitability, higher asset-quality risks and potentially a modest erosion of the bank's already weak capitalisation that Fitch expects under its updated baseline economic forecast. The Negative Outlook on Banco Montepio's Long-Term IDR reflects its view that risks remain skewed to the downside in the medium term. In addition to its low capital buffers, the bank has only limited capacity to generate capital organically given its high level of problem assets compared with Portuguese and international peers and low operating profitability. The bank therefore entered the downturn from a weak position, leaving it with very limited strategic options as it will have to prioritise capital- remediation measures and a deep restructuring of its commercial network to improve operational efficiency. KEY RATING DRIVERS IDRS AND VR Banco Montepio's ratings reflect a weaker record in improving asset quality compared with peers, resulting in higher levels of problem assets and vulnerable capitalisation given the bank's high capital encumbrance from unreserved problem assets. The ratings also reflect weak prospects for profitability and downside risks to the bank's asset quality and capitalisation. Banco Montepio's capital buffers are low compared with domestic and international peers. Its end-June 2020 total capital ratio was below its 2020 Supervisory Review and Evaluation Process requirements of 13.9% (including the 2.69% combined buffer requirement which was temporarily waived by the Bank of Portugal), after erosion from an IFRS9 phasing-in, widening sovereign spreads, adverse foreign-currency movements and an operating loss in 1H20. At end-June 2020, the bank's phased-in common equity Tier 1 (CET1) and total capital ratios were 11.5% and 13.5%, respectively, and Fitch expects further pressure this year from additional losses. Banco Montepio's phased-in total capital ratio at end-June 2020 means that the bank is already consuming about 0.4% of its 2.5% capital conservation buffer allowance. This is still an early stage of the economic downturn, when the full impact of the crisis on the bank's loan portfolios has yet to materialise. The total capital ratio has been supported by the issue of EUR50 million Tier 2 debt placed with its majority shareholder, Montepio Geral Associacao Mutualista (MGAM), in June 2020. Fitch believes that capital levels are not commensurate with risks. Banco Montepio's capitalisation remains highly vulnerable to a high proportion of unreserved problem assets, which makes it sensitive to asset-quality shocks. Fitch estimates unreserved problem assets (including net impaired loans, net foreclosed assets, investment properties and holdings of corporate restructuring and real estate funds) were about 1.4x the bank's fully loaded CET1 capital at end-June 2020. This level is the highest among major Portuguese banks and remains a key risk to Banco Montepio's credit profile. If Banco Montepio fails to deliver on its planned de-risking plan, its asset quality will likely deteriorate and lead to an increase in capital encumbrance. The bank's capacity to generate capital internally is weakened by the current economic environment, making capital ratios vulnerable to potential losses generated by higher impairment charges, which could ultimately weaken the longer-term viability of the bank's business model. Corporate governance dynamics at Banco Montepio and its majority shareholder, MGAM, have led to significant risks for the bank's creditors, in its view. This is why Banco Montepio has an ESG Relevance Score of '4' for governance structure, as laid out in the ESG Considerations section below. These less effective corporate governance dynamics resulted in a weaker and slower execution record than domestic peers and recurring challenges to appoint and then stabilise the bank's senior management since 2015. Fitch does not believe that the bank's de-leveraging in recent years has been sufficient to stabilise solvency ratios at levels that are more commensurate with the risk profile, which has left the bank with limited options available to it. Following recent progress, a longer record of more effective corporate governance would be positive for its assessment of the bank's management and strategy. Banco Montepio's impaired loan ratio (IFRS 9 stage 3) was high at about 11.9% at end-June 2020, 30bp lower than at end-2019. Fitch estimates a problem asset ratio of about 16% at the same date when including real estate assets. The ratio is the highest among rated Portuguese banks' and is higher than many Italian and Spanish peers. Prior to the coronavirus crisis, the stock of problem assets had gradually declined on asset sales, slower inflows of new impaired loans and larger recoveries driven by an improved economic environment in Portugal. However, Fitch expects asset quality to deteriorate from current levels following a severe economic contraction in 2020 and a material increase in the unemployment rate in Portugal. Migration to IFRS 9 stage 3 loans will be mitigated in the short term by the government's generous loan moratoria available to borrowers in Portugal. Fitch also expects Banco Montepio will act to mitigate the impact from inflows of impaired loans over the next 18-24 months, which Fitch believes, if executed well, may prevent a sharp increase in the impaired loans ratio. Fitch expects that in the downturn Banco Montepio's exposure to small-and-medium-sized businesses in the most affected sectors such as tourism, transportation or non-food retail will deteriorate more markedly than residential mortgage loans, which performed adequately in the last crisis. Its view is also supported by a high share of loans under moratorium (about a quarter of total gross loans at end-June 2020), indicating some weakness in loan quality. However, Fitch does not expect Banco Montepio's impaired loan ratio to increase materially above 15% by end-2021. This is because Fitch expects Banco Montepio will actively manage its still large legacy stock of impaired loans given its already weak capital position, which leaves it with little flexibility. The bank's operating profitability is well below European peers' and highly sensitive to the level of interest rates and to economic cycles. Banco Montepio reported a net loss of about EUR51 million in 1H20, due to a material increase in loan impairment charges (LICs). Fitch expects the bank to be loss- making for 2020 and 2021. Fitch expects profitability to be dependent on economic conditions in Portugal and under pressure from the low interest-rate environment and limited loan demand. Management's ability to deliver on the bank's operating efficiency plan (branch closure and staff reduction) will be key to restoring profitability via a lower cost-to-income ratio. Customer deposits from its retail operations are Banco Montepio's main funding source. Its liquidity profile remains sensitive to changes in creditor sentiment and to the Portuguese operating environment, despite having been fairly stable throughout the last financial crisis. Access to wholesale markets is less established and more price-sensitive than peers', but it will be pivotal to helping the bank meet its minimum requirement for own funds and eligible liabilities (MREL) in coming years. The bank's liquidity position at end-June 2020 was acceptable given modest upcoming maturities and fairly large holdings of sovereign debt. SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT The senior preferred debt and senior non-preferred debt ratings are notched down twice from the bank's IDR at 'CCC' and carry 'RR6' Recovery Ratings. This is because of full depositor preference in Portugal and the bank's very thin senior and subordinated debt buffers relative to net problem assets. This means that losses for senior creditors would likely be very large in a default. The short-term senior preferred debt rating of 'B' is in line with Banco Montepio's Short-Term IDR because short-term bank issue ratings incorporate only an assessment of the default risk on the instrument and do not factor in recovery prospects. DEPOSIT RATINGS Banco Montepio's deposit ratings (B/B) are one notch above the Long-Term IDR, reflecting the deposits' lower vulnerability to default than senior debt given full depositor preference in Portugal and its expectation that the bank would be resolved in a manner that protects depositors if it fails. Banco Montepio will be subject to MREL although its final requirements have not yet been made public. SUBORDINATED DEBT The 'CCC' long-term ratings of Banco Montepio's subordinated notes are notched twice from the VR in line with the baseline notching for subordinated Tier 2 debt. The notching reflects the notes' poor recovery prospects ('RR6' Recovery Rating) if the bank becomes non-viable. Fitch does not apply additional notching for incremental non-performance risk relative to the VR since there is no coupon flexibility included in the notes' terms and conditions. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' for Banco Montepio reflect Fitch's belief that senior creditors of the bank cannot rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of - or ahead of - a bank receiving sovereign support. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: Banco Montepio's ratings are likely to be downgraded if it fails to deliver continuous progress on restoring its capitalisation to levels that Fitch considers commensurate with the bank's risk profile. This could result from a more substantial and prolonged deterioration in asset quality and profitability than Fitch currently envisages, and the ratings would likely be downgraded if the fully-loaded CET1 ratio falls materially below 9% or if capital encumbrance by unreserved problem assets rises above 200% without credible prospects to bring these ratios down to at least current levels. Fitch would also likely downgrade the ratings in the event of a material increase in impaired loans inflows or in restructured loan exposures to levels that would drive the impaired loans ratio above 20%. A materially weaker funding and liquidity profile, for example in case of large and unexpected customer deposit outflows would also put pressure on ratings. Banco Montepio's senior preferred and senior non-preferred debt ratings could be downgraded if the bank's Long-Term IDR is downgraded. The bank's subordinated Tier 2 ratings are sensitive to changes in the bank's VR. Banco Montepio's deposit ratings are sensitive to changes in the bank's IDRs and would be downgraded if the latter are downgraded. Fitch could also downgrade Banco Montepio's deposit ratings if Fitch expects the bank to use potentially eligible deposits to comply with its MREL requirement. Factors that could, individually or collectively, lead to positive rating action/upgrade: The Outlook could be revised to Stable if the operating environment in Portugal stabilises and Banco Montepio successfully manages to execute its restructuring and capital-remediation plan. A replenishment of Banco Montepio's total capital buffers to levels moderately above regulatory requirements, including the capital conservation buffer, coupled with a stabilisation or contained deterioration of asset quality and improvement of operating profit metrics would support an affirmation of the ratings and a revision of the Outlook to Stable. In the event Banco Montepio is able to withstand rating pressure, upside to the rating would be limited by a still large stock of problem assets and structurally weak core operating profitability. An upgrade would be contingent on the bank substantially improving its operating profitability and asset-quality metrics and materially reducing capital encumbrance from unreserved problem assets. Evidence of more effective and developed corporate governance would, in combination with positive developments in the bank's financial profile, be positive for ratings. The long-term senior preferred and non-preferred debt ratings could be upgraded if Banco Montepio's Long-Term IDR is upgraded or if the amount of senior non-preferred and subordinated liabilities issued and maintained by Banco Montepio increases. This is because in a resolution, losses could be spread over a larger debt layer resulting in smaller losses and higher recoveries for senior bondholders, which may lead to higher long-term senior preferred and non-preferred debt ratings. Banco Montepio's deposit ratings could be upgraded if the IDRs are upgraded. Tier 2 ratings could be upgraded if the bank's VR is upgraded. An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support it. This is highly unlikely, in Fitch's view. 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 Banco Montepio has an ESG Relevance Score of '4' for governance structure. Alleged disagreements between Banco Montepio's previous management team and the bank's majority shareholder, MGAM, led to the nomination and appointment of a new management team, within a new governance framework, since March 2018. The stabilisation of the bank's management and board of directors has taken longer than expected and Fitch believes this has weighed on the bank's strategic execution over the past two years. This reflects a weaker corporate governance culture than those of its domestic peers, although the bank has been making progress. Banco Montepio's governance structure is relevant to the bank's ratings in conjunction with other factors. Except for the matters discussed, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). ============= U K R A I N E ============= KERNEL HOLDING SA: Fitch Rates New US$300MM Bond Due 2027 'BB-' --------------------------------------------------------------- Fitch Ratings has assigned Kernel Holding S.A.'s new USD300 million bond due 2027 a final senior unsecured rating of 'BB-' with a Recovery Rating of 'RR4' (50%). The final rating is in line with the expected rating that Fitch assigned to this debt issue on October 5, 2020 and follows the pricing and receipt of the final documentation of the new issue, which conform to the information already received. KEY RATING DRIVERS Rating Aligned with Outstanding Bonds: The bond's 'BB-' rating is in line with the outstanding senior unsecured bonds'. The new instrument is guaranteed on a senior basis by the group's major operating subsidiaries, which represent 96.8% of group EBITDA. Part of Kernel's remaining debt, amounting to USD223 million at FYE20 (ending June 2020), is senior secured and includes part of working capital facility and capex lines. Nevertheless, there is no material subordination for unsecured debt, given that the amount of secured debt does not exceed 2.0x-2.5x EBITDA (Fitch-estimated FY20 EBITDA: USD436 million). New Bond Improves Maturity Profile: The proceeds from the new issuance will be used to prepay up to USD300 million of the USD500 million Eurobond maturing in January 2022. By extending the debt maturity profile, the new bond placement will ensure sufficiently strong hard-currency debt service ratio of above 1.5x over the next 12 to 18 months, underpinning Kernel's 'BB-' Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR). Strong Access to Funding: Kernel's overall operating environment score also benefits from the group's access to diversified funding sources, not limited to Ukraine's banking system, with the majority of credit facilities represented by Eurobonds, pre-export finance facilities provided by international banks and loans provided by multilateral lending institutions, confirming good access to external sources of liquidity. Rating above Country Ceiling: Kernel's FC IDR is two notches above Ukraine's Country Ceiling of 'B' and the same level as the group's Long-Term Local-Currency (LC) IDR. The uplift reflects its expectation that the group will maintain substantial offshore cash balances, a comfortable schedule of FC debt repayments and refinance upcoming material debt maturities well in advance, to ensure a hard-currency debt service ratio above 1.5x over FY21-FY22 with sufficient headroom (FY20: 5.1x). Record FY20 Profits to Normalise: Kernel posted a record Fitch-estimated EBITDA in FY20 of USD436 million, driven by a record sunflower seeds harvest in Ukraine and higher average sunflower oil prices in the year. This resulted in USD100 EBITDA per ton in FY20 in the core oil segment versus USD67 in FY19. Profits were supported by the strong contribution of Avere trading and healthy margins in farming. Fitch expects profitability in the core oil segment to normalise towards USD60-75 per ton in FY21-FY23, resulting in lower segment EBITDA. Nonetheless, profits should grow in FY22-FY23, supported by new capacity launches and efficiency initiatives. DERIVATION SUMMARY Kernel's 'BB-' IDR is in line with the France-based sugar trader of comparable scale, Tereos SCA (BB-/Negative), and multiple notches below global diversified traders, such as Cargill Incorporated (A/Stable), Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB-/Stable). Compared with Tereos, Kernel has a stronger financial profile. This is balanced by Kernel's dependence on a single sourcing region, Ukraine, compared with Tereos's ability to source from two regions, Europe and Brazil. Kernel's rating is also two notches above Aragvi Holding International Limited (B/Stable), Moldova's sunflower seed crusher, which has significantly smaller scale and higher leverage metrics. Kernel's rating is higher than Ukrainian poultry producer MHP SE (B+/Stable), which is more exposed to the domestic market than Kernel, although it operates in a less volatile sector. KEY ASSUMPTIONS Revenue increasing to USD4.7 billion by FY23 (FY19: USD4 billion), due to additional volume of traded commodities derived from the new infrastructures Kernel is building in Ukraine Fitch-adjusted EBITDA margin reducing to 7.4% in FY21 (FY20: 8.9%) and trending towards 8.1% by FY23 Capex of about USD250 million in FY21, which include investments on the new port terminal capacity, an oilseed processing plant in western Ukraine and for cogeneration heat and power plants. Capex at about USD70 million-80 million per year up to FY23 Annual dividends of USD40 million in FY21-FY23 RATING SENSITIVITIES Factors that could, individually or collectively, lead to a positive rating action/upgrade: - Improved scale and diversification, reflected in Fitch-adjusted EBITDAR trending towards USD500 million and increasing EBITDA contribution from commodities/services not related to sunflower oil - Maintain readily marketable inventories (RMI) FFO net leverage 2.5x-3.0x on a sustained basis - Maintain RMI-adjusted FFO interest cover above 5.0x on a sustained basis - Neutral to positive free cash flow margin - Upgrade of the LC IDR in conjunction with an upgrade of the Ukrainian Country Ceiling or a hard-currency debt service ratio strongly above minimum conditions for a sustained period, as per Fitch's methodology Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria, would lead to an upgrade of the Long-Term FC IDR Factors that could, individually or collectively, lead to a negative rating action/downgrade: - Internal liquidity score below 0.8x due to operating underperformance or shift in debt structure towards short-term debt or inability to procure sufficient working capital facilities to cover operational activity - RMI FFO net leverage above 3.5x on a sustained basis - RMI-adjusted FFO interest cover below 4.0x on a sustained basis - Failure to refinance the upcoming debt maturities of FY22 by December 2020, resulting in hard-currency debt service ratio falling below 1.5x over 18 months as calculated in accordance with Fitch's methodology Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria, and removing the two-notch differential above Ukraine's Country Ceiling would result in a downgrade of the Long-Term FC IDR - Downgrade of Ukraine's Country Ceiling to 'B-' would also result in a downgrade of the Long-Term FC IDR LIQUIDITY AND DEBT STRUCTURE Satisfactory Liquidity: Kernel had USD322 million of Fitch-defined readily available cash as of end-June 2020, which is more than sufficient to cover short-term financial liabilities of USD52 million. The liquidity is also strengthened by the newly placed USD300 million Eurobond, which reduces refinancing risk for the USD500 million Eurobond maturing in January 2022. The strong available liquidity will be partly used to finance the USD250 million capex commitments expected in FY21, and working capital investments in FY22. In addition, Kernel has access to USD300 million of sunflower oil pre-export credit facilities and a grain pre-export facility of USD300 million. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =========================== U N I T E D K I N G D O M =========================== ARGENTUM 47: Mgmt. Says Substantial Going Concern Doubt Exists -------------------------------------------------------------- Argentum 47, Inc. filed its quarterly report on Form 10-Q, disclosing a net income of $489,974 on $22,694 of revenue for the three months ended June 30, 2020, compared to a net loss of $567,913 on $28,844 of revenue for the same period in 2019. At June 30, 2020, the Company had total assets of $1,337,060, total liabilities of $2,183,521, and $846,461 in total stockholders' deficit. Argentum 47 said, "The Company had a net income of $247,493 and net cash used in operations of $227,347 for the six months ended June 30, 2020; working capital deficit, stockholder's deficit and accumulated deficit of $260,033, $846,461 and $12,975,695, respectively as of June 30, 2020. It is management's opinion that these factors raise substantial doubt about the Company's ability to continue as a going concern for twelve months from the issuance date of this report." A copy of the Form 10-Q is available at: https://is.gd/7TQGlt Argentum 47, Inc. provides corporate advisory services worldwide. It operates through two segments, Consultancy and Insurance Brokerage. The company offers general business consulting and fund administration, as well as exchange listings and quotations on OTC markets quotation boards. It also provides services, such as corporate restructuring, exchange listings and development for corporate marketing, investor and public relations, regulatory compliance, and introductions to financiers. In addition, the company offers computerized investment management services that include advising on investments in unit trusts, investment bonds, shares, investment trusts, government bonds, and individual savings accounts, as well as advices investors on pension contracts that include personal pensions, executive pensions, small self-administered plans, pension mortgages, and others. Further, it provides brokerage services for lump sum or single premium insurance policies and regular premium investment insurance policies. The company was formerly known as Global Equity International, Inc. and changed its name to Argentum 47, Inc. in March 2018. Argentum 47, Inc. was founded in 2009 and is based in Hedon, the United Kingdom. CEREBRO HOLDCO: Moody's Assigns B3 CFR, Outlook Stable ------------------------------------------------------ Moody's Investors Service assigned a B3 corporate family rating and B3-PD probability of default rating to Cerebro Holdco GmbH, the new holding company and reporting entity for the pan-European central nervous system pharmaceutical company, Neuraxpharm. Concurrently, Moody's has assigned B3 instrument ratings to the EUR670 million senior secured term loan B (TLB) and the EUR115 million senior secured multi-currency revolving credit facility (RCF) made available to Cerebro BidCo GmbH. The outlook on both entities is stable. Permira has acquired Neuraxpharm from incumbent Apax Partners for an undisclosed amount. Moody's will withdraw the instrument ratings on the EUR541 million existing TLB, the EUR35 million acquisition and capex facility upon their repayment, and the EUR60 million existing RCF upon its cancellation. The ratings assigned to the new senior secured term loan B and senior secured multi-currency RCF assume that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and that these agreements are legally valid, binding and enforceable. RATINGS RATIONALE The rating action is primarily driven by the agency's expectations that Neuraxpharm's new ownership will not materially change the company's business strategy, management or financial profile. It reflects Moody's expectation that Neuraxpharm's earnings will continue to grow and generate good free cash flow (FCF) of around EUR20 million in 2020, that will improve towards EUR35 million annually from 2022. The stable outlook assumes that the company will continue to have a strong operating performance over the next 12 to 18 months that will allow deleveraging over time. The rating agency expects that the Moody's adjusted gross leverage will close at 6.6x in 2020 and decrease towards 6.4x in the next 12 to 18 months, pro-forma of the new debt structure. The rating factors the company's high leverage that is largely mitigated by the agency's expectation of strong Moody's-adjusted EBIT/interest cover of 2.9x in 2020 and expectations of good FCF generation that will support a good liquidity over the next 12 to 18 months. The company's strong operating performance despite the coronavirus pandemic is driven by good organic growth since 2018, thanks to a resilient existing portfolio of over 260 products, new product launches made over the past three years, and its leading presence in its core markets. CNS has been one of the most resilient therapeutic areas throughout the coronavirus pandemic. Neuraxpharm's future organic growth will be supported by the expected growth of the CNS industry, the company's robust existing product portfolio, and an attractive pipeline of 39 projects, half of which have already been submitted for approval, which reduces materially development risk. Also, recent drug acquisitions, especially Buccolam, will allow the company to enter new geographies and consolidate its position within the CNS segment in Europe. Buccolam is a branded product used for the emergency treatment of epileptic children with prolonged acute convulsive seizures. However, the rating agency also expects higher competition and lower profitability on this drug because it will lose its market exclusivity for the indication of epilepsy in children on September 2021. The assignment of the company's B3 CFR also considers Neuraxpharm's high business concentration in the CNS therapeutic area, representing around 82% of the company's revenues. Social risks are lower for Neuraxpharm than for the remainder of the industry, but its product portfolio is arguably riskier than that of some of its European generic peers. There are execution and integration risks related to recent and future acquisitions, especially if the company pursues growth opportunities by entering new geographies, although Neuraxpharm has a good integration track-record and high know-how in the CNS segment. Its overall modest size when compared to the wider pharmaceutical industry, with expected net sales of EUR340 million in 2020 is also factored into the rating. The company's B3 rating takes into consideration Moody's expectations that the company's financial policy will not materially change. The rating agency understands that Neuraxpharm is committed to maintain leverage below its opening level. LIQUIDITY PROFILE Moody's considers Neuraxpharm's liquidity to be good and supported by: (i) the agency's expectations of strong free cash flow generation after capital expenditure of around EUR20 million in 2020 that should increase to EUR45-50 million during 2021 driven by earnings growth and an expected decrease in inventory levels; (ii) access to an undrawn EUR115 million senior secured multi-currency RCF following the closing of the transaction; (iii) and substantial headroom to its springing financial covenant based on net leverage set at 10.44x and tested only when RCF is drawn by more than 40%. STRUCTURAL CONSIDERATIONS The B3-PD PDR, in line with the CFR, reflects Moody's assumption of a 50% family recovery rate, typical for covenant lite secured loan structures. The B3 rating assigned to the EUR670 million senior secured term loan B and EUR115 million senior secured multi-currency RCF reflects their pari passu ranking, with upstream guarantees from material subsidiaries and collateral comprising share, financial securities account, bank accounts and intra-group receivables pledges. OUTLOOK RATIONALE The stable outlook includes its expectation that Moody's adjusted gross leverage will remain above 6x at least until 2022. The stable outlook also incorporates Moody's expectations that Neuraxpharm will continue to have a strong operating performance over the next 12 to 18 months that will allow earnings growth and good FCF generation. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Upward pressure could develop if Neuraxpharm's strong operating performance continues, successfully rolls out its new pipeline products, allowing its Moody's adjusted gross leverage to move below 5.5x on a sustainable basis, and if its Moody's adjusted FCF to debt ratio increases above 5% on a sustained basis. Negative pressure on the rating could occur if (i) Neuraxpharm's Moody's adjusted gross debt/EBITDA increments above 7x on a sustained basis; (ii) Neuraxpharm generates negative free cash flows leading to a deterioration of the company's good liquidity profile; or (iii) the company undertakes large debt-financed acquisitions or shareholder distributions. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017. COMPANY PROFILE Cerebro Holdco GmbH is the new consolidating entity for all operating companies of Neuraxpharm, following the acquisition of the company by Permira announced on September 22. Neuraxpharm was founded in 2016 from the combination of two pharmaceutical groups, Invent Farma and Neuraxpharm. Since then, the company has transformed into a pan-European specialist in CNS disorders with presence in over 17 countries. Neuraxpharm's net sales stood at around EUR280 million and adjusted EBITDA at EUR90 million for the last twelve months to June 30, 2020. CO-OP GROUP: S&P Affirms 'BB' ICR Amid COVID-19 Disruption ---------------------------------------------------------- S&P Global Ratings affirmed its 'BB' ratings on U.K.-based convenience store and funeral care operator Co-operative Group Ltd. (Co-op) and its senior unsecured notes due 2024 and 2026, and its 'BB-' issue rating on Co-op's subordinated notes due 2025. The stable outlook indicates S&P's view that the group's performance will stay resilient amid COVID-19-related volatility and Co-op will contain its adjusted credit metrics close to the 2019 level, with debt to EBITDA about 3.8x-4.2x and positive FOCF largely sufficient to cover operating lease payments. Co-op has performed robustly since COVID-19-related social distancing measures were introduced in the U.K. in March 2020, but volatile conditions and cost pressure in H2 2020 will likely reverse some of the exceptional gains. During H1 2020, which encompassed the pandemic-related lockdown, Co-op benefited from its status as an essential retailer and funeral service provider. The group reported robust top line performance in that period. For example, food revenue reached GBP3.9 billion, 5.2% higher than in H1 2019 (8.8% like-for-like growth), while the underlying segment profit was GBP175 million, 46% higher year-over-year. The funeral care division also saw a steep rise in volumes, with customers opting for simpler, lower budget services limiting the uplift in revenues to 3.5% in H1 2020. S&P said, "We anticipate that the group's overall revenue expansion will decelerate in H2 2020, as already indicated by Co-op's grocery market share falling to 6.6% in the 12 weeks to Oct. 4, 2020 from a record high 7.2% in July 2020, according to Kantar Worldpanel. We forecast 5%-6% revenue growth in full-year 2020, slowing to about 3%-4% in 2021-2022 as like-for-like sales decelerate." S&P said, "Although not part of our base case, proceeds from the CISGIL disposal expected in fourth-quarter 2020 will further boost Co-op's liquidity and give the group more room to invest in growth or cover unexpected outlays. Following the repayment of GBP176 million senior notes in July 2020, we estimate Co-op's cash position to be about GBP144 million. We also understand that the GBP400 million revolving credit facility is fully undrawn and available until September 2023, with an option to extend for another year. Over the next 12 months, we forecast cash funds from operations (FFO) will reach about GBP400 million-GBP420 million through resilient earnings and cost control measures. We estimate that preparation for Brexit at end-2020, and slowing food sales growth, will lead working capital to normalize over the next 12 months. At the same time, capex will remain high to cover ongoing new store openings and IT investment required for strategic expansion of the group's online services and robust systems. Co-op's lease-related cash outlays will likely stay relatively stable at GBP180 million-GBP195 million annually. We anticipate, therefore, that FOCF after full lease payments will remain weak over the forecast period--up to only GBP15 million in 2020--and turn negative in 2021. In its interim results report, Co-op indicated that the immediate cash proceeds from the CISGIL sale will total GBP117 million. Although not part of our base case, this will further boost the group's liquidity when completed. Over the medium term, Co-op's credit metrics, free cash flow generation, and liquidity will depend on the group's financial policy after the pandemic. "Social and regulatory risks have increased in the funeral care sector and could pose a risk to the group over and above the level incorporated in our base case. We view the group's board opting to forego the auditor's opinion on the representation of funeral plans accounting as somewhat aggressive from a risk management and financial policy viewpoint. We calculate our credit metrics in line with the reported accounts, and therefore note the risk of potential pressure on margins and credit metrics if, over time, the accounting treatment were to change. Likewise, regulatory supervision of funeral care services by the Competition and Markets Authority and the Financial Conduct Authority could also pose a risk to the group's profit margin and cash flows, if drastic changes were required to currently adopted processes and systems. Our current forecast does not assume this scenario. "The stable outlook reflects our view that stiff price competition in food and funeral care segments, lower-margin wholesale operations, and COVID-19-related overheads will largely offset the spike in revenues earlier this year. We forecast stable profitability with adjusted EBITDA of about 4.5%-5.0% over the next 12 months. We forecast adjusted leverage to remain about 3.8x-4.2x, FFO to debt of 15%-20%, and EBITDAR cash interest plus rents cover at 2.1x-2.2x. We likewise anticipate that adjusted FOCF will remain positive and largely cover operating lease payments." S&P could lower the rating if it adopts a less favorable view of business risk because of sustained unfavorable industry trends, reduced execution capabilities, or if: -- S&P forecasts S&P Global Ratings-adjusted debt to EBITDA will substantially exceed 4x. -- Adjusted EBITDA margin remains less than 5%. -- Cash generation weakens such that adjusted FOCF consistently falls short of covering the full lease payments. Although unlikely in the next 12 months, given the current uncertain trading environment, S&P could raise the rating on Co-op if top line growth, profitability, and cash generation exceeded our expectations such that the group consistently posted: -- Adjusted EBITDA meaningfully over 5%. -- EBITDAR cover of 2.5x or more. -- An adjusted FOCF-to-debt ratio above 10%. -- Meaningfully positive FOCF after lease payments. DEBENHAMS PLC: Deadline Looms for Acquisition Bids -------------------------------------------------- Hugh Radojev at Retail Week reports that potential suitors to buy struggling department store chain Debenhams have been given until the middle of this week to make a GBP300 million to rescue the retailer. According to Retail Week, prospective buyers for the firm include the Mike Ashley-owned Frasers Group but there are growing fears about the future of Debenhams and its 12,000 staff. About Debenhams Debenhams is the UK's largest department store group by number of stores (166 in fiscal 2017), and operates internationally through 11 stores in the Republic of Ireland, six owned stores in Denmark (which trade as Magasin du Nord), 63 franchise stores in more than 20 countries that are owned and operated by local partners, and international online sales. The company is listed on the London Stock Exchange has a market capitalization of approximately GBP140 million. The Company went into administration on April 9, 2019. Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting LLP were appointed as administrators. The administrators sold the parent's entire holding of the group's operating subsidiaries to a company controlled by its lenders in a pre-packaged sale. S&P Global Ratings lowered its long-term issuer credit rating on Debenhams to 'D' from 'SD' (selective default), following the administration filing. SAGE AR 1: Moody's Assigns B3 Rating on GBP18.7MM Cl. F Notes ------------------------------------------------------------- Moody's Investors Service assigned the following definitive ratings to the debt issuance of Sage AR Funding No. 1 PLC: GBP89.1M Class A Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned Aaa (sf) GBP17.6M Class B Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned Aa3 (sf) GBP17.6M Class C Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned A3 (sf) GBP24.2M Class D Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned Baa3 (sf) GBP41.8M Class E Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned Ba3 (sf) GBP18.7M Class F Social Housing Rental Secured Notes due 2030, Definitive Rating Assigned B3 (sf) Moody's has not assigned a rating to the GBP11M Class R Social Housing Rental Secured Notes due 2030 of the Issuer. Sage AR Funding No. 1 PLC is a CMBS issuance backed by a single floating rate loan secured by 1,609 social housing units across 113 residential estates spread across the UK. The Issuer will on lend the proceeds from the Notes to the borrower. The borrower will use the loan proceeds to extend a loan to the parent company, a registered social housing provider. RATINGS RATIONALE The rating actions are based on (i) Moody's assessment of the real estate quality and characteristics of the collateral, (ii) analysis of the loan terms and (iii) the expected legal and structural features of the transaction. The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Its analysis has considered the effect on the performance of commercial real estate from the current weak UK economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. 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 parameters in Moody's analysis are the default probability of the underlying loan (both during the term and at maturity) as well as Moody's value assessment of the collateral. Moody's derives from these parameters a loss expectation for the underlying loan. Moody's default risk assumption is medium/high; however, the expected loss is low for the loan. In Moody's view the key strengths of the transaction include (i) high quality collateral portfolio, (ii) granular cashflow from a broad tenant base and (iii) high demand for social housing in the UK. Challenges in the transaction include (i) high Moody's loan to value (LTV), (ii) lack of amortization, (iii) high default risk, (iv) sponsor with limited track record in the social housing sector, (v) risks arising from a housing administration and (vi) negative macroeconomic impact of the coronavirus pandemic. The Moody's LTV of the underlying loan at origination is 92.0%. Moody's has assigned a property grade of 1.5 to the underlying property portfolio (on a scale of 1 to 5, 1 being best and 5 being worst). PRINCIPAL METHODOLOGY The principal methodology used in these ratings was "Moody's Approach to Rating EMEA CMBS Transactions" published in October 2020. Factors that would lead to an upgrade or downgrade of the ratings: Main factors or circumstances that could lead to an upgrade of the rating are generally (i) an increase in the property values backing the underlying loan or (ii) a decrease in default risk assessment. Main factors or circumstances that could lead to a downgrade of the rating are generally (i) a decline in the property values backing the underlying loan or (ii) an increase in default risk assessment. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2020. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. 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