/raid1/www/Hosts/bankrupt/TCREUR_Public/201103.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, November 3, 2020, Vol. 21, No. 220
Headlines
F R A N C E
TEREOS FINANCE: Fitch Assigns B+ Rating on EUR300MM Unsec. Bond
G R E E C E
HELLENIC REPUBLIC: DBRS Confirms BB(low) LongTerm Issuer Ratings
I R E L A N D
FAIR OAKS III: Moody's Assigns B3 Rating on EUR2.6MM Class F Notes
FAIR OAKS III: S&P Assigns B- Rating on Class F Notes
INA'S KITCHEN: Shareholder Files Examinership Petition
ST. MARY'S: Judge Seeks More Details on Liquidators' Fee Request
I T A L Y
PATRIMONIO UNO: S&P Lowers Class F Notes Rating to 'B+'
N E T H E R L A N D S
HEMA BV: S&P Lowers ICR to 'SD' on Distressed Debt Exchange
SELECTA GROUP: S&P Upgrades ICR to 'CCC+' on Distressed Exchange
R U S S I A
URALKALI PJSC: Moody's Affirms Ba2 CFR & Alters Outlook to Stable
S P A I N
FTA TDA 29: Fitch Affirms CCC Rating on Class 2-C Debt
IM BCC CAPITAL 1: Fitch Affirms BB+sf Rating on Class C Debt
U N I T E D K I N G D O M
ASTON MARTIN: S&P Affirms 'CCC' LongTerm ICR on Debt Refinancing
CASTELL PLC 2018-1: DBRS Hikes Rating on Class F Notes to BB
CONSORT HEALTHCARE: S&P Lowers Rating on Sr. Secured Debt to BB
DEBUSSY DTC: DBRS Confirms B Rating on Class A Fixed-Rate Notes
NEW LOOK: Landlords Challenge Company Voluntary Arrangement
NORD ANGLIA: Moody's Affirms B2 CFR, Outlook Negative
POUNDSTRETCHER: Confirms Plans to Open 50 New Branches Amid CVA
THG HOLDINGS: S&P Upgrades ICR to 'B' on IPO Completion
TRANSPORT FOR LONDON: Strikes GBP1.8BB Bailout Deal with UK Gov't.
TULLOW OIL: S&P Alters Outlook to Negative & Affirms 'CCC+' ICR
[*] UK: Number of Cos. in Significant Financial Distress Spikes
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F R A N C E
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TEREOS FINANCE: Fitch Assigns B+ Rating on EUR300MM Unsec. Bond
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Fitch Ratings has assigned Tereos Finance Groupe 1's (FinCo) EUR300
million five-year bond a final senior unsecured rating of 'B+'.
FinCo is a subsidiary of Tereos SCA, which has a Long-Term Issuer
Default Rating (IDR) of 'BB-' with Negative Outlook.
The terms of the bond documentation are in line with the draft
received by Fitch. The bond has been issued with an interest rate
of 7.5%, and at a discounted value at 97.962% of the original issue
amount. The proceeds are being used to repay debt.
The 'B+' instrument rating is in line with the rating of EUR600
million senior unsecured bonds outstanding at FinCo and is derived
from the consolidated Tereos' IDR of 'BB-'. Prior-ranking debt at
Tereos' operating entities constitutes more than 2.5x consolidated
EBITDA, which Fitch expects to remain largely unchanged for the
next four years. Under its criteria this indicates a high
likelihood of subordination and lower recoveries for unsecured debt
raised by FinCo, which Fitch reflects by notching down the bond's
rating once from Tereos' IDR. In the event of an IDR downgrade to
the 'B' category, weak recoveries could lead to a differential
between the IDR and the senior unsecured rating by up to two
notches.
Tereos' 'BB-' IDR reflects Fitch's expectations that, despite
weaker sugar price and volume prospects, the company's
strengthening operations, which include a more flexible cost
structure, should sufficiently mitigate market risks and allow
continued de-leveraging to levels that are consistent with the
rating by financial year to March 2023, at the latest. The bond
issue is neutral to leverage as proceeds are being used to repay
debt. The Negative Outlook reflects uncertainty around the pace of
both recovery and deleveraging.
KEY RATING DRIVERS
Mild Price Recovery: While international sugar prices remain close
to historical lows, Tereos' FY20 and 1QFY21 results show the
company has since September 2019 been able to lock in firmer
prices, which combined with cost-optimisation measures, allowed it
to achieve stronger EBITDA than the trough of FY19 (when it fell
50%). However, Fitch sees global supply-and-demand dynamics only
supporting a mild price recovery above current levels. Despite
improving farming yields, shrinking demand for sugar in the
developed world is only going to be compensated by growth in
emerging markets. Fitch now expects sugar prices to average
12cts/lb, one cent below its previous forecasts.
High Sugar Stocks: Stock-to-use ratios remain high after years of
abundant crops. Fitch believes that the lower production connected
to the decline of French farming yields is only compensating the
contraction in sugar and ethanol demand earlier in 2020 during the
pandemic lockdown.
FY19-FY21 Negative Cash Flow: Fitch expects free cash flow (FCF) to
remain negative at a cumulative post- dividend outflow of EUR170
million in FY21-FY22, as profitability sees slow growth while
planned capex and working capital outflows weaken cash flow
generation. Tereos' business profile requires continued maintenance
capex and the company is making de-bottlenecking investments in its
starch and sweeteners plants. The impact on its net debt position
should be manageable due to around EUR200 million divestment
proceeds in FY20.
Lengthy Deleveraging: Due to its assumptions of lower sugar prices,
combined with yield reduction in France for the 2020/2021 crop,
Fitch expects readily marketable inventories (RMI)-adjusted funds
from operations (FFO) net leverage to remain above 5.0x in FY21,
which is high for the current rating. Fitch forecasts it to
gradually decrease towards 5.0x by FY22 and below from FY23, a
level that is consistent with the current rating, and for FFO to
return to around EUR400 million. Its Negative Outlook reflects
uncertainty around the impact of French yields, and on the pace of
FFO recovery and deleveraging.
Conservative Financial Policy: Tereos has historically been able to
keep shareholder distributions to a minimum and has refrained from
M&A in times of challenging operating conditions. Additionally, its
EUR200 million asset disposal in FY20 demonstrated management's
willingness to support financial flexibility. Fitch believes that
Tereos will continue to have good access to debt capital markets
and adequate liquidity to fund its operations.
Strong Business Profile: Tereos has a business profile that is
commensurate with the mid- to-high end of the 'BB' category through
the cycle. This reflects its large operational scope and strong
position in a commodity market with moderate long-term growth
prospects. Tereos is the world's second-largest sugar company with
production in the EU and Brazil, and good product diversification
from starches to sweeteners, which its investment programme should
strengthen and allow it to reduce reliance on sugar operations.
Tereos also has flexibility to alternate between sugar- and
ethanol-processing, depending on market prices, as well as a
flexible pricing mechanism for beetroot procurement agreed with its
member farmers.
ESG - Exposure to Environmental Impacts: Tereos has an ESG
Relevance Score of '4' for Exposure to Environmental Impacts as the
volumes of its sugar production in France are affected by
regulation that restrains the use of nicotinoid-based insecticides
in beetroot farming.
The French authorities banned neonicotinoid-based treatments in
2018, causing sugar beet producers to stop using this product for
the 2020/2021 crop. As a result, jaundice has materially expanded
over sugar beet farms, affecting yields although the magnitude
remains unknown. Its forecasts include around a 10% reduction in
French production for the current crop. Fitch believes that
existing inventories and geographic sourcing diversification should
partly offset this impact, mitigating the effect on Tereos' sales
volumes for FY20 and FY21.
Both French Senate and National Assembly have approved the
re-introduction of neonicotinoid until 2023. The law should come
into force by mid-December 2020 providing additional time for
Tereos to finalise alternatives
DERIVATION SUMMARY
Tereos's 'BB-' IDR is three notches below larger and significantly
more diversified commodity trader and processor Bunge Limited's
(BBB-/Stable). Tereos enjoys a stronger business profile than
Biosev S.A. (B/Negative) and Corporacion Azucarera del Peru S.A.
(B/Stable), whose ratings reflect higher geographic and product
concentration. Tereos also enjoys lower refinancing risk and
greater financial flexibility than both Biosev S.A. and Corporacion
Azucarera del Peru S.A., which is, however, partly offset by
Tereos' higher leverage.
Tereos has comparable scale to but a weaker financial profile than
similarly rated Kernel Holding S.A.'s (BB-/Stable). This is
balanced by Kernel's dependence on a single source of supply,
Ukraine, compared with Tereos's ability to source raw materials
from Europe and Brazil. In addition, although Kernel is gradually
diversifying away from sunflower oil by growing its grain trading,
renewable energy production and infrastructure operations, Fitch
views Tereos as more diversified due to its production and trading
of sweeteners, ethanol and starches aside from sugar.
KEY ASSUMPTIONS
USD/EUR at 1.1 over the next four years and USD/BRL at 5.2 in FY21,
improving towards 4.8 by FY24
NY11 stabilising at around 12ct/lb, and European sugar price around
EUR400/ton
Fitch-adjusted EBITDA margin improvements towards 12% by FY24
Capex of around EUR360 million-EUR370 million per annum for the
next four years
Dividends paid to cooperative members of EUR25 million per annum
until FY24
Credit lines used to finance operations are renewed
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Strengthening of profitability (excluding price fluctuations),
as measured by RMI-adjusted EBITDAR/gross profit returning to above
30%, reflecting reasonable capacity utilisation in sugar beet and
overall increased efficiency.
- At least neutral FCF while maintaining strict financial
discipline.
- Consolidated FFO net leverage (RMI-adjusted) consistently below
4x, aided by debt repayments as opposed to cyclical profit
expansion.
Factors that could, individually or collectively, lead to an
Outlook revision to Stable
- Consolidated FFO of at least EUR400 million by FY21-FY22.
- FFO interest coverage (RMI-adjusted) above 2.5x on a sustained
basis, along with enhanced liquidity buffer and progress on
extending the debt maturity profile.
- FFO net leverage (RMI-adjusted) of 5.0x-5-5x by FY21 and
expected to fall below 5.0x by FY22.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Reduced financial flexibility as reflected in FFO interest
coverage (RMI-adjusted) falling permanently below 2.5x or inability
to maintain adequate availability under committed medium-term
credit lines.
- Inability to maintain cost savings derived from efficiency
programme or excessive idle capacity in different market segments,
leading to weak RMI-adjusted EBITDAR/gross profit on a sustained
basis.
- Inability to return consolidated FFO to approximately EUR400
million.
- Consolidated FFO net leverage (RMI-adjusted) above 5.0x on a
sustained basis, reflecting higher refinancing risks.
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Tereos had a fairly weak internal liquidity
score for the 'BB' rating category at 0.7x as of FYE20 (defined as
unrestricted cash plus RMI plus accounts receivables divided by
total current liabilities). In its view, this is offset by prudent
balance-sheet management, and access to external funding in Europe
and in Brazil.
With the proceeds of the new EUR300-million bond due 2025, Tereos
has improved its maturity headroom by fully repaying its EUR225
million revolving credit facility (RCF), and EUR75 million of a
EUR250 million term loan due 2022. Tereos has replaced its EUR225
million RCF due 2021 with a EUR200 million RCF maturing in October
2024, with an option to extend maturity to April 2025 subject to
lenders' consent, further enhancing the company's liquidity
position. In addition, in July 2020 it obtained a EUR230 million
term loan that is 80%- guaranteed by the French state with a
maturity of up to five years, aiding financial flexibility.
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
Tereos has an ESG credit relevance score of '4' for Exposure to
Environmental Impacts as the volumes of its sugar production in
France are affected by regulation that restrains the use of
nicotinoid-based insecticides in beetroot farming. This has a
negative impact on the credit profile and is relevant to the rating
in conjunction with other factors.
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.
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G R E E C E
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HELLENIC REPUBLIC: DBRS Confirms BB(low) LongTerm Issuer Ratings
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DBRS Ratings GmbH confirmed the Hellenic Republic's Long-Term
Foreign and Local Currency - Issuer Ratings at BB (low). At the
same time, DBRS Morningstar confirmed the Hellenic Republic's
Short-Term Foreign and Local Currency - Issuer Ratings at R-4. The
trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar's
view that Greece entered the Coronavirus Disease (COVID-19)
pandemic following years of solid fiscal performance and with the
accumulation of sizeable cash reserves. This provides the country
with some fiscal capacity to help weather the impact of the crisis.
Against this background the authorities have implemented
extraordinary fiscal measures to mitigate the impact of the
economic shock, preventing closures of businesses and major job
losses thus far. However, the COVID-19 outbreak has taken a heavy
toll on the Greek economy leading to a sharp gross domestic product
(GDP) contraction of 15.2% YOY in the second quarter of 2020,
following a milder contraction of 0.5% YOY in the first quarter.
The sharp decline in real GDP is due to the strict measures to
prevent the spread of the virus and the delayed reopening of the
tourism season. The tourism sector, which is an important
contributor to the economy and employment will be hit hard this
year and its rebound will depend on the evolution of the virus. In
response to the crisis, the government has engineered a swift
response that will lead to a substantially higher fiscal deficit
and public debt ratio.
The confirmation of the ratings is underpinned by Greece's
membership of the euro system. The majority government in place has
strong commitment and momentum in implementing its reform agenda in
co-operation with the European institutions. Over the past years
Greece has maintained a prudent fiscal stance resulting in five
years of primary surplus, overachieving its fiscal targets and
leading to additional debt relief. Despite the very high stock of
public debt, the inclusion of Greek bonds in the European Central
Bank's (ECB's) Pandemic Emergency Purchase Programme (PEPP)
safeguards Greece's ability to access the markets at historically
low funding costs. Furthermore, Greece is expected to receive a
substantial amount of grants from the Next Generation EU financial
instrument amounting to 8.9% of GDP that will likely support the
recovery and a more sustainable economic growth path over the
medium term.
RATING DRIVERS
Triggers for an upgrade include: (1) effective management of the
coronavirus crisis, returning the economy to sustained growth; (2)
compliance with EU institutions' post-programme monitoring,
co-operation on fiscal efforts and continuation with structural
reforms.
By contrast, triggers for a downgrade include: (1) persistent
negative economic performance; (2) a reversal or stalling in
structural reforms and longer term, lack of fiscal effort; (3)
renewed financial-sector instability.
RATING RATIONALE
Greece's Economy Will Sharply Contract This Year, But EU Funds and
Extraordinary Measures Will Likely Support Recovery Over the Medium
Term
The Greek economy will experience a severe contraction this year,
as the pandemic has led to weaker global and domestic demand. The
strict containment measures imposed in March and the travel
restrictions, which remained in place until July resulted in a 7.9%
decline in real GDP in the first half of the year compared with the
same period in 2019. Private consumption accounted for almost half
of the drop in economic activity, followed by investment and net
exports. The tourism industry, which represents a major source of
income and employment for the Greek economy will suffer severe
losses this year. The European Commission projects the economy to
contract by 9% in 2020.
The swift response to the pandemic allowed for the gradual easing
of restrictive measures in May which together with the policy
measures, prevented material business closures and major job losses
thus far. High reliance on tourism poses additional challenges to
Greece's capacity to facilitate a swift economic recovery.
Nevertheless, significant progress has been made in strengthening
growth prospects by improving the business climate and reducing
bureaucracy that has in the past curtailed private investment.
Additionally, Greece will benefit substantially from the Next
Generation EU financial instrument, as Greece will likely receive
around 32 billion Euros (17% of 2019 GDP) in grants and loans, in
addition to 40 billion from the EU's Cohesion Fund. In DBRS
Morningstar's view, Greece's ability to improve its absorption
capacity, while maintaining its reform momentum will be key in
determining the pace of the economic recovery.
External Imbalances - Worsening in Tourism Partially Offset by
Likely EU Inflows
After years of large deficits, Greece's current account deficit as
a share of GDP narrowed substantially from -15% in 2008 to -1.4% in
2019. This is due to improvement in exports of goods and services,
which increased by more than seventeen percentage points from 2010
to 2019. The strong performance of the services balance, which is
mainly attributed to an improvement in the travel balance with
foreign arrivals increasing by almost 26% in the period 2016-2019,
is expected to be affected severely by the global health crisis
this year. However, it will be partially offset by EU funds flows
and the decline in tourism-related imports.
International arrivals declined by 80% and travel receipts by 86%
in January to July 2020 compared with the same period last year,
but are expected to have only partially recovered in August,
traditionally the strongest month in the tourism season. The
current account is expected to deteriorate this year to around -5%
of GDP. Furthermore, Greece's net external liabilities remain high
at 153% of GDP in 2019, up from 89% in 2011, mostly reflecting
public sector external debt. The level is expected to remain at
high levels because of the long-term horizon of foreign
official-sector loans to the public sector.
Extraordinary Measures Will Lead to a High Fiscal Deficit This
Year
After five consecutive years of fiscal surplus overperformance, the
fiscal balance will turn negative this year, as the coronavirus
outbreak takes its toll on the public sector accounts. In response
to the COVID-19 disease, the Greek government implemented a series
of fiscal measures aimed at supporting the economy and mitigating
the economic impact of the pandemic. The support packages announced
so far include (1) job retention schemes and financial support to
the self-employed; (2) increased expenditures to support the health
care system; (3) VAT reduction in goods related to addressing the
outbreak; and (4) liquidity support to businesses through loan
guarantees and deferred payments of taxes and social contributions.
The cost of the fiscal package is estimated at 8.3% of 2019 GDP. In
addition, payment of compensation to pensioners after the Council
of State's ruling on pensions will add to fiscal costs.
The IMF is estimating a headline fiscal deficit this year of 9% of
GDP compared with a small surplus of 0.6% in 2019. To support
fiscal measures dealing with the consequences of the coronavirus,
the European Commission agreed that the 3.5% of GDP primary surplus
fiscal target for 2021 is no longer a requirement for Greece and
new targets for 2022 onwards will be agreed with the EU
institutions. Given the uncertainties around the evolution of the
virus and possible need for additional fiscal support measures,
DBRS Morningstar has a negative qualitative assessment of the
"Fiscal Management and Policy" building block.
During its economic adjustment programmes Greece implemented
various reforms, that corrected the fiscal imbalances and improved
its fiscal management, resulting in primary surpluses of around 4%
of GDP on average since 2016. Despite the significant fiscal
adjustment, prolonged deviation from prudent fiscal policies could
pose a risk to Greece's debt sustainability.
The Debt Ratio is High, but Mitigating Factors are in Place
The debt ratio is set to increase amid policy response measures to
mitigate the economic impact of COVID-19, reaching 197.4% of GDP
this year before falling to 184.7% of GDP in 2021, according to the
Draft Budgetary Plan 2021. The debt stock remains at a very high
level, however, mitigants to this include the fact that the
official sector holds around 80% of government debt. Also, the debt
has a very long weighted-average maturity of 20.2 years as of June
2020, and most of debt is financed at very low interest rates, with
more than 90% of debt at fixed rates, mitigating the risks arising
from increased market volatility.
Moreover, Greece's participation in the ECB's PEPP contributes to
more favorable financing conditions as seen in recent bond
issuances at historically low yields. The sizeable liquidity buffer
that amounts to around Euro 37 billion in total, is supporting
Greece's efforts to strengthen confidence among market
participants. These reserves reduce repayment risks leading to a
positive qualitative assessment in the "Debt and Liquidity"
building block.
COVID-19 will Slow the Pace of NPEs Reduction But Supervisory
Measures Alleviate the Pressure
Driven mainly by sales and write-offs, the non-performing loans
(NPLs) of the Greek banking system continued to reduce during 2019,
standing at EUR 68.5 billion at the end of the year. Even though
NPLs have declined by EUR 38.7 billion since the March 2016 peak,
they accounted for a significant 40.6% of the loan books. Despite
the elevated uncertainty and the deteriorating macroeconomic
environment related to the COVID-19 crisis, banks made further
progress in reducing their non-performing loans (NPLs) in the first
half of 2020 by almost EUR 9 billion, with the NPL ratio reducing
further to 36.7%. This reduction primarily reflects the completion
of Eurobank's securitization transaction under the Hercules Asset
Protection Scheme (HAPS), for an amount of EUR 7.5 billion. The
other three systemic banks have also announced plans to utilize
HAPS, whilst also continuing to progress with the sale of NPL
portfolios. Should the bulk of the NPL securitizations currently
being executed materialize within 2020, the stock of non-performing
loans will have reduced by EUR 20 billion in total in 2020.
However, the uncertainty caused by the COVID-19 pandemic could
weigh negatively on the timely completion of the transactions (See
DBRS Morningstar's commentary "Greek Banks Contain COVID-19 Impact
to Date, but Downside Risks Loom"). Moreover, domestic loan
repayment moratoria granted by the four systemic banks in order to
alleviate the pressure of distressed corporate and households pose
additional risks to banks' asset quality, with the loans under
moratoria amounting to circa EUR 18.9 billion at end-May 2020.
Nonetheless, the ECB's decision to temporarily ease its collateral
rules and accept Greek government bonds as collateral has enhanced
the banks' liquidity position and their ability to support new
lending.
The Government's Response to the Crisis thus far and Continued
Commitment to and Momentum behind Reforms is Encouraging
In response to the COVID-19 crisis, the government has engineered a
swift response and prevented a severe health crisis thus far.
However, the rise in infections at 64 cases per 100,000 over the
last 14 days has led to the imposition of additional restrictions
and increases the economic uncertainty. Since its election in July
2019, the majority New Democracy government has made significant
progress in unblocking major investment projects and reducing
bureaucracy. DBRS Morningstar views the recent effort to improve
the functioning of the public administration by digitalizing a
significant number of processes as positive and if continued could
be an important step in improving the business environment in
Greece. DBRS Morningstar views that the improvement in Greece's
political environment warrants a positive qualitative assessment
for the "Political Environment" building block.
ESG CONSIDERATIONS
Human Capital and Human Rights (S) and Institutional Strength,
Governance and Transparency (G) were among key drivers behind this
rating action. Compared with its euro system peers, Greece's per
capita GDP is relatively low at $20k in 2019. According to World
Bank Governance Indicators 2019 Greece ranks in the 60th percentile
for Rule of Law and in the 67th percentile for Government
Effectiveness. However, DBRS Morningstar notes Greece's
institutional strengths associated with euro system membership and
recent improvements in these areas. These factors have been taken
into account within the following building blocks: Fiscal
Management and Policy, Economic Structure and Performance and
Political Environment.
EURO AREA RISK CATEGORY: LOW
DBRS Morningstar changed the euro area risk category of the
Hellenic Republic from MEDIUM to LOW. Despite the deterioration in
the macroeconomic environment due to the COVID-19 shock, the Greek
government has shown commitment in maintaining the reform effort
and promoting growth enhancing policies in co-operation with the EU
institutions. In DBRS Morningstar's view, the EU policy response is
likely to reduce the risk of deeper economic and public finance
disparities across the Union. As a consequence, Greece's high debt
stock is less likely to become a source of tension with its main
creditors.
Notes: All figures are in Euros unless otherwise noted. Public
finance statistics reported on a general government basis unless
specified.
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I R E L A N D
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FAIR OAKS III: Moody's Assigns B3 Rating on EUR2.6MM Class F Notes
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Moody's Investors Service announced that it has assigned the
following definitive ratings to the notes issued by Fair Oaks Loan
Funding III Designated Activity Company (the "Issuer"):
EUR2,000,000 Class X Senior Secured Floating Rate Notes due 2033,
Definitive Rating assigned Aaa (sf)
EUR213,500,000 Class A Senior Secured Floating Rate Notes due 2033,
Definitive Rating assigned Aaa (sf)
EUR28,000,000 Class B Senior Secured Floating Rate Notes due 2033,
Definitive Rating assigned Aa2 (sf)
EUR21,000,000 Class C Senior Secured Deferrable Floating Rate Notes
due 2033, Definitive Rating assigned A2 (sf)
EUR23,600,000 Class D Senior Secured Deferrable Floating Rate Notes
due 2033, Definitive Rating assigned Baa3 (sf)
EUR25,400,000 Class E Senior Secured Deferrable Floating Rate Notes
due 2033, Definitive Rating assigned Ba3 (sf)
EUR2,600,000 Class F Senior Secured Deferrable Floating Rate Notes
due 2033, Definitive Rating assigned B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in its methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and up to 10%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be close to fully ramped as of the closing
date and to comprise of predominantly corporate loans to obligors
domiciled in Western Europe. The remainder of the portfolio will be
acquired during the 8-month ramp-up period in compliance with the
portfolio guidelines.
Fair Oaks Capital Ltd will manage the CLO. It will direct the
selection, acquisition and disposition of collateral on behalf of
the Issuer and may engage in trading activity, including
discretionary trading, during the transaction's 3-year reinvestment
period. Thereafter, subject to certain restrictions, purchases are
permitted using principal proceeds from unscheduled principal
payments and proceeds from sales of credit risk obligations or
credit improved obligations.
Interest and principal amortisation amounts due to the Class X
Notes are paid pro rata with payments to the Class A Notes. The
Class X Notes amortise by 12.5% or EUR 250,000.00 over the first
eight payment dates starting from the first payment date.
In addition to the seven classes of notes rated by Moody's, the
Issuer will issue EUR 1,000,000.00 of Class M Notes due 2033, EUR
2,000,000.00 of Class Z Notes due 2033 and EUR 35,000,000.00 of
Subordinated Notes due 2033 which are not rated. The Class Z Notes
will accrue interest in an amount equivalent to a certain
proportion of the subordinated management fees and its notes'
payment will be junior to the payment in respect of the Notes rated
by Moody's. The Class M Notes will not accrue interest but instead
will receive residual interest and principal proceeds, pari passu
with distribution to the subordinated noteholders.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
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
corporate assets from the current weak European 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.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
August 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in August 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR 350,000,000s.00
Diversity Score: 45
Weighted Average Rating Factor (WARF): 3200
Weighted Average Spread (WAS): 3.40%
Weighted Average Coupon (WAC): 3.50%
Weighted Average Recovery Rate (WARR): 45%
Weighted Average Life (WAL): 7.5 years
Moody's has addressed the potential exposure to obligors domiciled
in countries with local currency ceiling (LCC) of A1 or below. As
per the portfolio constraints and eligibility criteria, exposures
to countries with LCC of A1 to A3 cannot exceed 10% and obligors
cannot be domiciled in countries with LCC below A3.
FAIR OAKS III: S&P Assigns B- Rating on Class F Notes
-----------------------------------------------------
S&P Global Ratings assigned credit ratings to Fair Oaks Loan
Funding III DAC's class X to F European cash flow CLO notes. At
closing, the issuer will issue unrated subordinated notes.
The ratings reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior-secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which S&P expects to be
bankruptcy remote.
-- The transaction's counterparty risks, which we expect to be in
line with its counterparty rating framework.
Portfolio Benchmarks
Current
S&P weighted-average rating factor 2,668.22
Default rate dispersion 586.23
Weighted-average life (years) 5.20
Obligor diversity measure 109.91
Industry diversity measure 18.45
Regional diversity measure 1.44
Transaction Key Metrics
Current
Portfolio weighted-average rating
derived from S&P's CDO evaluator 'B'
'CCC' category rated assets (%) 1.7
Covenanted 'AAA' weighted-average recovery (%) 37.14
Covenanted weighted-average spread (%) 3.40
Covenanted weighted-average coupon (%) 3.50
Unique Features
Loss mitigation loan mechanics
Loss mitigation loans allow the issuer to participate in potential
new financing initiatives by the borrower in default. This feature
aims to mitigate the risk of other market participants taking
advantage of CLO restrictions, which typically do not allow the CLO
to participate in a defaulted entity new financing request, and
hence increase the chance of increased recovery for the CLO. Whilst
the objective is positive, it can also lead to par erosion, as
additional funds will be placed with an entity that is under
distress or in default. This may cause greater volatility in our
ratings if the positive effect of such loans does not materialize.
In S&P's view, the restrictions on the use of proceeds and the
presence of a bucket for such loss mitigation loans helps to
mitigate the risk.
Under the transaction documents, the issuer can purchase loss
mitigation loans which are assets of an existing collateral
obligation held by the issuer offered in connection with
bankruptcy, workout, or restructuring of such obligation, to
improve the recovery value of such related collateral obligation.
The purchase of loss mitigation loans is not subject to the
reinvestment criteria or the eligibility criteria. It receives no
credit in the principal balance definition, although where the loss
mitigation loan meets the eligibility criteria with certain
exclusions, it is accorded defaulted treatment in the par coverage
tests. The cumulative exposure to loss mitigation loans is limited
to 10% of target par.
The issuer may purchase loss mitigation loans using either interest
proceeds, principal proceeds, or amounts standing to the credit of
the supplemental reserve account. The use of interest proceeds to
purchase loss mitigation loans are subject to (1) all the interest
and par coverage tests passing following the purchase, and (2) the
manager determining there are sufficient interest proceeds to pay
interest on all the rated notes on the upcoming payment date. The
usage of principal proceeds is subject to (1) passing par coverage
tests and the manager having built sufficient excess par in the
transaction so that, (2) the principal collateral amount is equal
to or exceeding the portfolio's target par balance after the
reinvestment.
To protect the transaction from par erosion, any distributions
received from loss mitigation loans which are either (1) purchased
with the use of principal, or (2) purchased with interest or
amounts in the supplemental account, but which have been afforded
credit in the coverage test, will irrevocably form part of the
issuer's principal account proceeds and cannot be recharacterized
as interest.
Reverse collateral allocation mechanism
If a defaulted euro-denominated obligation becomes the subject of a
mandatory exchange for U.S.-denominated obligation following a
collateral allocation mechanism (CAM) trigger event, the portfolio
manager may sell the CAM obligation and invest the sale proceeds in
the same obligor (a CAM euro obligation), provided the obligation:
-- Is denominated in euros;
-- Ranks as the same or more senior level of priority as the CAM
obligation; and
-- Is issued under the same facility as the CAM obligation by the
obligor.
To ensure that the CLO's original or adjusted collateral par amount
is not adversely affected following a CAM exchange, a CAM
obligation may only be acquired if, following the reinvestment, the
numerator of the CLO's par value test, referred to as the adjusted
collateral principal amount, is either:
-- Greater than the reinvestment target par balance;
-- Maintained or improved when compared to the same balance
immediately after the collateral obligation became a defaulted
obligation; or
-- Maintained or improved compared to the same balance immediately
after the mandatory exchange which resulted in the issuer holding
the CAM exchange. Solely for the purpose of this condition, the CAM
obligation's principal balance is carried at the lowest of its
market value and recovery rate, adjusted for foreign currency risk
and foreign exchange rates.
Finally, a CAM euro exchanged obligation that is also a
restructured obligation may not be purchased with sale proceeds
from a CAM exchanged obligation.
The portfolio manager may only sell a CAM obligation and reinvest
the sale proceeds in a CAM euro obligation if, in the judgment of
the portfolio manager, the sale and subsequent reinvestment is
expected to result in a higher level of ultimate recovery when
compared to the expected ultimate recovery from the CAM
obligation.
Bankruptcy exchange
Bankruptcy exchange allows the exchange of a defaulted obligation
for any other defaulted obligation issued by another obligor. This
feature aims to allow the manager to increase the likelihood in the
value of recoveries. The collateral manager may only pursue a
bankruptcy exchange when:
-- The received obligation has a better likelihood of recovery or
is of better value or quality than the exchanged obligation;
The received obligation is a loan, and is no less senior in right
of payment than the exchanged obligation;
-- The coverage tests are satisfied;
-- The aggregate principal balance of the obligations received in
bankruptcy exchanges since the issue date does not exceed 7.5% of
the target par amount;
-- The aggregate principal balance of the obligations received in
bankruptcy exchanges held by the issuer at such time does not
exceed 3.0% of the target par amount;
-- The bankruptcy exchange test is satisfied, i.e., the projected
internal rate of return of a received obligation obtained as a
result of a bankruptcy exchange exceeds the projected internal rate
of return of the related exchanged obligation in a bankruptcy
exchange; and
-- At the time of exchange, the exchanged obligation satisfies the
CLO's eligibility criteria, except certain provisions such as, for
example, a defaulted security, credit risk or long-dated
obligation.
To protect the transaction from par erosion, any payment required
from the issuer connected with bankruptcy exchanges will be limited
to customary transfer costs and payable only from amounts on
deposit in the collateral enhancement account and/or any interest
proceeds. Otherwise, interest proceeds may not be used to acquire a
received obligation in a bankruptcy exchange if it would likely
result in a failure to pay interest on the class X, A, or B notes
on the next succeeding payment date.
The bankruptcy exchange feature is only applicable during the
transaction's reinvestment period.
Under the transaction documents, the rated notes will pay quarterly
interest unless a frequency switch event occurs. Following this,
the notes will switch to semiannual payments. The portfolio's
reinvestment period will end approximately three years after
closing.
S&P said, "We understand that at closing the portfolio will be
well-diversified, primarily comprising broadly syndicated
speculative-grade senior-secured term loans and senior-secured
bonds. Therefore, we have conducted our credit and cash flow
analysis by applying our criteria for corporate cash flow CDOs.
"In our cash flow analysis, we used the EUR350 million target par
amount, the covenanted weighted-average spread (3.50%), the
reference weighted-average coupon (3.40%), and the target minimum
weighted-average recovery rate as indicated by the collateral
manager. We applied various cash flow stress scenarios, using four
different default patterns, in conjunction with different interest
rate stress scenarios for each liability rating category.
"Under our structured finance sovereign risk criteria, we consider
that the transaction's exposure to country risk is sufficiently
mitigated at the assigned ratings."
Until the end of the reinvestment period on October 15, 2023, the
collateral manager may substitute assets in the portfolio for so
long as our CDO Monitor test is maintained or improved in relation
to the initial ratings on the notes. This test looks at the total
amount of losses that the transaction can sustain as established by
the initial cash flows for each rating, and it compares that with
the current portfolio's default potential plus par losses to date.
As a result, until the end of the reinvestment period, the
collateral manager may through trading deteriorate the
transaction's current risk profile, as long as the initial ratings
are maintained.
S&P said, "At closing, we expect that the transaction's documented
counterparty replacement and remedy mechanisms will adequately
mitigate its exposure to counterparty risk under our current
counterparty criteria.
"We expect the transaction's legal structure and framework to be
bankruptcy remote, in line with our legal criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe our ratings are
commensurate with the available credit enhancement for the class X
to F notes. Our credit and cash flow analysis indicates that the
available credit enhancement could withstand stresses commensurate
with the same or higher rating levels than those we have assigned.
However, as the CLO will be in its reinvestment phase starting from
closing, during which the transaction's credit risk profile could
deteriorate, we have capped our ratings assigned to the notes.
"Taking the above factors into account and following our analysis
of the credit, cash flow, counterparty, operational, and legal
risks, we believe that our ratings are commensurate with the
available credit enhancement for all of the rated classes of
notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class X to E notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication."
S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. Some
government authorities estimate the pandemic will peak about
midyear, and we are using this assumption in assessing the economic
and credit implications. S&P said, "We believe the measures adopted
to contain COVID-19 have pushed the global economy into recession.
As the situation evolves, we will update our assumptions and
estimates accordingly."
The transaction securitizes a portfolio of primarily senior-secured
leveraged loans and bonds, and it will be managed by Fair Oaks
Capital Ltd.
Ratings List
Class Rating Amount Interest Credit
(mil. EUR) rate (%) enhancement (%)
X AAA (sf) 2.00 3mE + 0.70 N/A
A AAA (sf) 213.50 3mE + 1.25 39.00
B AA (sf) 28.00 3mE + 1.85 31.00
C A (sf) 21.00 3mE + 2.70 25.00
D BBB (sf) 23.60 3mE + 3.80 18.26
E BB- (sf) 25.40 3mE + 5.82 11.00
F B- (sf) 2.60 3mE + 7.51 10.26
Z NR 2.00 N/A N/A
M NR 1.00 N/A N/A
Subordinated NR 35.00 N/A N/A
NR--Not rated.
N/A--Not applicable.
3mE--Three-month Euro Interbank Offered Rate.
INA'S KITCHEN: Shareholder Files Examinership Petition
------------------------------------------------------
Mary Carolan at The Irish Times reports that a shareholder in a
Dublin-based producer of mainly chocolate food products, employing
107 people, says it is to bring a petition before the High Court
seeking examinership.
The application concerns Ina's Kitchen Desserts Ltd, based in
Whitestown, Tallaght, whose registered business names are Ina's
Kitchen Desserts, Broderick's, Ina's Handmade Foods and Broderick's
Handmade, The Irish Times discloses.
The matter came before Mr. Justice Michael Quinn on Oct. 30 via an
application for directions concerning the bringing of the petition,
The Irish Times notes.
On the application of John O'Donnell SC, representing Barry
Broderick, a director and 10% shareholder, supported by his brother
Bernard and parents Ina and Michael Bernard, also shareholders, the
judge fixed Nov. 10 as the return date for the petition, The Irish
Times relates.
According to The Irish Times, Mr. O'Donnell said the company,
despite obtaining investment and additional loans, has had
financial problems for a number of years and the conclusion has
been reached it is insolvent. It had incurred losses of some
EUR5.5 million so far this year and is expected to incur more, The
Irish Times states.
Meetings in recent weeks had not produced a satisfactory response
to concerns, including Mr. Broderick's concern whether the company
is entitled to utilize the temporary wage subsidy scheme, The Irish
Times notes.
According to The Irish Times, an independent expert has provided a
report expressing the view the company has a reasonable prospect of
survival provided certain conditions are met, including securing
investment, counsel outlined.
The expert noted the company has a loyal and willing workforce, a
very positive cash flow in the coming months, many blue-chip
customers and has traded profitably in the past, if not the more
recent past, The Irish Times states.
The Broderick family between them own 25% of the shareholding and
Starkane Ltd. owns the remainder.
Counsel said the petition is being presented by Mr. Broderick and
an issue may arise about a prior undertaking not to seek court
protection without the prior consent of Starkane, The Irish Times
relays.
There was an issue whether that undertaking was fully and freely
given and Mr. Broderick had obtained no independent legal advice in
that regard, The Irish Times states. He added it may be that
Starkane will also take the view the company is insolvent and,
notwithstanding the undertaking, court protection is necessary, The
Irish Times relates.
Mr. Justice Quinn, who was told Ulster Bank is a secured creditor,
agreed to make the directions sought and returned the matter to
Nov. 10, The Irish Times discloses.
ST. MARY'S: Judge Seeks More Details on Liquidators' Fee Request
----------------------------------------------------------------
Ann O'Loughlin at Irish Examiner reports that a High Court judge
has asked for more details concerning fees of EUR314,000 being
sought by the liquidators of a company operating a south Dublin
care facility and a nursing home.
Mr. Justice Michael Quinn said on Oct. 30 he would also like to
know the position of the Department of Employment Affairs and
Social Protection, owed more than EUR1 million -- relating to
employee entitlements -- on the fees application by the liquidators
of St. Mary's Centre (Telford), Irish Examiner relates.
To allow for receipt of such information, the judge deferred to
this week the hearing of an application by Neil Hughes and Dessie
Morrow, insolvency practitioners, of Baker Tilly, for payment of
EUR313,918, plus VAT, out of the assets of the company as the costs
of their remuneration from the period of their appointment in July
to October, Irish Examiner discloses.
According to Irish Examiner, Sally O'Neill BL, for the Revenue
Commissioners, owed some EUR200,000, said, following extensive
communications and a small fee reduction, Revenue was not objecting
to the liquidator's application.
The counsel said the liquidation was "incredibly hands-on" given
the nature of the company's business, Irish Examiner notes.
She added it did not seem there would be much left for creditors
after the fees of the liquidators and legal fees are paid, Irish
Examiner relays.
Mr. Justice Quinn, as cited by Irish Examiner, said, while he knew
it was not common for the department to participate in such
hearings, he would like to know its position on the fees
application given the sum owed to it.
Ross Gorman BL, for the liquidators, said they had been in
correspondence with the department, it had received all the
relevant paperwork and he was not aware of any reaction to that,
Irish Examiner relates.
The judge asked that further contact be made with the department in
relation to its position, Irish Examiner notes.
He also wanted information concerning to what extent the
liquidator's remuneration is attributable to getting in assets and
preserving them and how much is attributable to other matters,
Irish Examiner discloses.
He further asked that matters be clarified concerning whether
substantial donated monies were free company monies, Irish Examiner
states. Mr. Gorman, as cited by Irish Examiner, said he understood
the liquidators have been advised the monies at issue are free
company monies and that had been confirmed by the relevant donor
but he would take further instructions.
The judge adjourned the matter to Tuesday, Nov. 3, to allow the
matters to be addressed, Irish Examiner discloses.
The company has for many years operated a disability care facility
for legally blind persons as well as a nursing home on a campus
beside St Vincent's Hospital on Merrion Road, Irish Examiner
notes.
It applied last July for an order winding up the facility, owned by
the Sisters of Charity, because it would be unable to meet
redundancy payments in excess of EUR950,000 arising from the
liquidation, Irish Examiner recounts. It also cited regulatory
difficulties, concerns over future funding from the HSE and an
inability to comply with HIQA recommendations to modernize its
facilities, Irish Examiner notes.
In late September, the judge refused an application to discharge
the liquidators and instead appoint an examiner to the company
after finding there was insufficient evidence before the court to
conclude the company had a reasonable prospect of survival, Irish
Examiner relays.
The examinership application was brought on behalf of some of the
centre's residents and some current and former employees, Irish
Examiner states.
The judge noted all of the nursing home's residents had left and 18
of the care centre's residents remained and the HSE said the
liquidators were in discussions about the HSE taking over the care
facility for a transitional period, which could take up to 18
months to complete, Irish Examiner recounts.
=========
I T A L Y
=========
PATRIMONIO UNO: S&P Lowers Class F Notes Rating to 'B+'
-------------------------------------------------------
S&P Global Ratings has lowered its ratings on all classes of notes
from Patrimonio Uno CMBS S.r.l. S&P has lowered to 'B+ (sf)' from
'BB+ (sf)' its ratings on its class B, C, D, and E notes, and
lowered its rating on the class F notes to 'B+ (sf)' from 'BB
(sf)'.
The rating actions follow the application of S&P's "General
Criteria: Credit Stability Criteria," published May 3, 2010.
S&P said, "Our ratings address timely payment of interest and the
full repayment of the notes on or before their legal final maturity
date on Dec. 31, 2021. The loan maturity date is on Dec. 31, 2020,
but over the past three years, the borrower has only sold six
properties. The loan maturity date cannot be further extended as
the tail period is now only one year. If the loan fails to repay at
loan maturity, any repayments will be applied sequentially to the
notes.
"We believe that there is a risk that the issuer will be unable to
repay the principal amount outstanding under these classes of notes
by the legal final maturity date given that the loan has been
extended, which resulted in a shorter tail period of one year.
Considering that there are only approximately 1.25 years to the
legal final maturity date on Dec. 31, 2021, the borrower may not be
able to refinance the loan or sell enough of the properties to
fully repay the notes on time. Under this scenario, we would
downgrade the notes to 'D' on their legal final maturity.
"The servicer has failed to provide us with information for the
June 30, 2020, interest payment date. The servicer has informed us
that the borrower is concentrating on the refinance or disposal of
the properties in order to repay the loan by the loan maturity date
on Dec. 31, 2020. As a result, the borrower has not provided the
servicer with all the information to prepare the investor report.
We have received the cash manager report, and there were no
available funds to repay any of the notes at the June 30, 2020,
interest payment date. From this, we can conclude that no property
sales have occurred since we received the last investor report for
the Dec. 31, 2020, interest payment date.
"We have lowered our ratings on all classes of notes to 'B+ (sf)'
to reflect the timing risk that the issuer may not fully repay the
notes by the legal final maturity date on Dec. 31, 2021.
Furthermore, we may withdraw the ratings if we do not receive
sufficient information to perform our ongoing surveillance for this
transaction because we may not be able to adequately assess the
transaction's creditworthiness following the anticipated loan
default on Dec. 31, 2020."
Patrimonio Uno CMBS is a true-sale European CMBS transaction that
closed in 2006, with notes totaling EUR397.8 million. The sole
loan, which matures on Dec. 31, 2020, was originally secured by 75
commercial properties in Italy. Of those, 28 properties remain,
with a current securitized loan balance of EUR35.9 million.
=====================
N E T H E R L A N D S
=====================
HEMA BV: S&P Lowers ICR to 'SD' on Distressed Debt Exchange
-----------------------------------------------------------
S&P Global Ratings downgraded Hema B.V to 'SD' from 'CC', and
lowered its ratings on its EUR80 million revolving credit facility
(RCF), EUR600 million senior secured notes, and EUR150 senior
unsecured notes to 'D' (default) from 'CCC', 'CC', and 'C',
respectively.
At the same time, S&P assigned its 'B' issue and '1' recovery
ratings to a new EUR42 million private placement notes, 'CCC+'
issue and '3' recovery ratings to the amended EUR300 million senior
secured notes, and 'CCC-' issue and '6' recovery ratings to the new
EUR120 million payment-in-kind (PIK) notes.
Hema has completed its debt restructuring transaction as announced.
S&P downgraded Hema to 'SD' (selective default) because the group
has completed its debt restructuring transaction on Oct. 19, 2020,
which it views as a tantamount to a default since lenders received
less than originally promised. The amount of the senior secured
notes is half of the original EUR600 million, and the senior
unsecured noteholders have not received any of the EUR150 million
they invested. The transaction comprised:
-- A debt-for-equity swap, whereby holders of the outstanding
EUR600 million senior secured notes became shareholders of the Hema
group; the instruments were converted into EUR300 million senior
secured notes due in 2025 and EUR120 million of new PIK notes due
in 2026. The PIK notes were stapled to the equity of the new
holding structure, owned by the current senior secured noteholders.
The PIK notes were issued by Hema's new holding company and are not
within Hema's restricted group.
-- Reinstatement and extension of the RCF, with a total commitment
of EUR80 million due in 2024.
-- The issuance of new private placement notes of EUR42 million
due in 2025 to support Hema's liquidity.
S&P said, "Our ratings on the new debt reflect our view on Hema's
likely credit quality after the completed debt restructuring and
the relative ranking of debt instruments. We will formally review
Hema's business and financial prospects under the new capital
structure, as well as its liquidity position over the next few
days, and will likely revise the issuer credit rating." The ratings
on the reinstated instruments point to an issuer credit rating post
default of 'CCC+'.
Hema's shareholder structure might change as a result of the
company's current shareholders entering into a lock-up and
exclusivity agreement with a consortium of two investors. Hema's
senior secured bondholders, currently shareholders, reached an
agreement with a 50/50 consortium comprising investment firm Parcom
and investment vehicle Mississippi Ventures, which is the investing
arm of the owners of Dutch supermarket chain Jumbo. The agreement
values Hema at about EUR470 million. The final signing of the sale
and purchase agreement is subject to several conditions including a
due diligence by the consortium, and a new bank loan financing,
obtained by the consortium. Should the agreement go ahead, Hema
will refinance its recently established capital structure by:
-- Replacing the EUR80 million RCF with a new EUR100 million RCF;
-- Fully repaying its newly issued EUR42 million private placement
notes (PPNs);
-- Refinancing its newly issued EUR300 million senior secured
notes; and
-- Partly repaying the new EUR120 million PIK loan while the
residual amount will be discharged according to Hema's statement.
If the signing conditions are met and required approvals received
(work council, antitrust approvals, and approval of the sale by the
Netherlands Authority for Financial Markets), the completion of the
Hema sale could happen in early 2021. S&P will evaluate the
company's updated business plan and its financial policy under the
new ownership structure once more information is available.
SELECTA GROUP: S&P Upgrades ICR to 'CCC+' on Distressed Exchange
----------------------------------------------------------------
S&P Global Ratings raised its issuer credit rating on Pan-European
vending machine operator Selecta Group B.V. to 'CCC+' from 'SD'
(selective default). S&P raised its issue-level rating on the
group's EUR150 million super senior revolving credit facility (RCF)
to 'B' from 'CCC'. In addition, S&P assigned its 'CCC+' issue
rating to the EUR693 million first-lien notes and its 'CCC-' issue
rating to the EUR240 million second-lien notes.
The recovery rating on the super senior RCF remains unchanged at
'1', indicating very high recovery prospects (rounded estimate:
95%). The recovery rating on the first-lien debt is '3', which
indicates meaningful recovery prospects on the senior secured notes
(rounded estimate: 55%). The recovery rating on the second-lien
debt is '6', reflecting our expectation of negligible (0%-10%)
recovery prospects in the event of a payment default.
The stable outlook indicates that Selecta's negative free operating
cash flow (FOCF) in the next 12 months will be counterbalanced by
sufficient liquidity and a reduced cash interest burden (as a
result of this restructuring).
Even after the restructuring, leverage is likely to remain high for
the next two years. Selecta exchanged around EUR1.5 billion in
senior secured notes, denominated in euros and Swiss francs, for
new senior secured notes and preferred shares. Under the revised
pro forma capital structure, S&P Global Ratings-adjusted debt
figure now comprises:
-- A fully drawn EUR150 million RCF;
-- EUR693 million first-lien notes;
-- EUR240 million second-lien notes;
-- EUR126 million operating leases;
-- EUR39 million finance leases; and
-- EUR416 million new preferred shares held by financial sponsor
KKR and the senior secured noteholders, which S&P treats as debt,
per its criteria.
S&P said, "We expect that adjusted EBITDA margins will be negative
in 2020, and will recover in 2021 to 8.4%, a level significantly
below that in 2019. This will result in an elevated adjusted
leverage ratio of about 16.9x (6.5x when considering only
first-lien debt that pays cash interest in the next two years) in
2021.
"As a part of the recapitalization, we expect Selecta to take steps
to enhance its operational efficiency. Historically,
inefficiencies have negatively affected Selecta's cash flow
generation. However, management is working to reduce the vending
fees paid to counterparties, by negotiating with its suppliers and,
ultimately, centralizing its procurement policies across different
markets through a new IT system. The new strategy will also see a
significant reduction in the number of outstanding machines and
points-of-sale, to 347,405 in 2022 from around 399,760 in 2019.
This change is intended to improve profitability in the upcoming
years and reduce capital expenditure (capex). We forecast that
capex will be about EUR84 million in 2021 and EUR125 million in
2022. That said, in the near term, reducing the number of
points-of-sale will contribute to a reduced revenue base. Although
we consider management's strategy to be positive, execution risk
and cost slippage remain likely given the firm's track record.
"Despite bolstering the liquidity position and reducing cash
interest, we forecast that FOCF will remain negative over
2021-2022. As part of this restructuring, KKR injected EUR125
million to support the group's liquidity position. We expect the
group to hold around EUR138 million in cash after the transaction."
Nevertheless, its liquidity position could come under pressure
again if the group significantly underperforms on its plan to
generate positive free cash flow generation from 2022 onward. The
problem would be exacerbated as cash pay interest increases in the
later years of the forecast. For instance, from Jan. 2, 2023, the
first-lien cash interest is slated to increase to 8% from 3.5% per
year.
S&P Global Ratings acknowledges a high degree of uncertainty about
the evolution of the coronavirus pandemic. S&P said, "We believe
that another round of lockdowns and restrictions to prevent the
spread of COVID-19 in European countries could hamper the expected
rebound in revenue. 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.
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 indicates that we expect Selecta's
negative FOCF in the next 12 months to be counterbalanced by
sufficient liquidity and a reduced cash interest burden (as a
result of this restructuring). We consider the group is still
dependent upon favorable business, financial, and economic
conditions to meet its financial commitments over the longer term.
"We could lower the rating if the group underperforms our base
case, which carries a heightened risk of a default and future
distressed exchange. This could happen if the macroeconomic
recovery is weaker than expected, leading to subdued profitability
and a deteriorating liquidity position that stresses Selecta's
ability to service its debt.
"We could raise the rating should the management successfully
implement its turnaround strategy, such that we expected adjusted
debt to EBITDA to fall below 10x (including preference shares). We
would also take a positive action should the group record positive
FOCF generation."
===========
R U S S I A
===========
URALKALI PJSC: Moody's Affirms Ba2 CFR & Alters Outlook to Stable
-----------------------------------------------------------------
Moody's Investors Service affirmed the Ba2 corporate family rating
and Ba2-PD probability of default rating (PDR) of Uralkali PJSC,
one of the few largest potash producers globally. Concurrently,
Moody's has affirmed the Ba2 senior unsecured bond rating of
Uralkali Finance Designated Activity Company. The outlook on both
entities has been changed to stable from positive.
RATINGS RATIONALE
The rating action reflects the reversed trend for improvement in
Uralkali's credit metrics with the company's adjusted debt/EBITDA
going back up to 4.2x as of the 12 months that ended June 2020 from
3.5x in 2019 mostly as a result of weaker revenue and EBITDA
generation driven by the trough in the potash market in the first
half of 2020, but also the company's intention to proceed with a
sizeable investment programme and shareholder distributions.
Following the strong 2018, the potash pricing environment started
to soften again in 2019 on the back of suppressed demand as a
result of severe floods in North America and weak palm oil prices
in Southeast Asia. Despite the recovery in potash consumption amid
more favourable weather conditions and improved farmers' economics,
coupled with limited impact of the coronavirus pandemic on the
fertiliser industry given its strategic importance and stable food
demand, a major downward price correction continued into H1 2020
driven by the material oversupply built up in the previous year.
Although strong demand across the key sales regions allowed
Uralkali to raise its sales volume by around 14% in H1 2020, it
only partly offset a 25% drop in the average potash sales price and
the respective increase in sales and distribution costs further
pressured the company's profitability. One of the lowest cost bases
in the industry, tight cost control, and the weaker rouble,
however, helped the company to preserve its adjusted EBITDA margin
at a fairly healthy 43%.
While improving market fundamentals, underpinned by the sound
demand and gradual reduction in global inventories, should support
marginally higher potash prices in H2 2020 and through 2021,
subject to normal weather conditions, their recovery pace will
likely remain subdued due to the lack of strict supply discipline
among the leading producers. Therefore, although Uralkali's
adjusted profitability will remain comfortably above 40% in
2020-21, it will stay materially below 56% posted in 2019, when it
benefited from favourable potash pricing.
As a result of weaker earnings, which will unlikely recover to the
levels of 2018-19, Moody's expects the company's adjusted
debt/EBITDA to stay at around 4.0x in 2020 with limited prospects
for deleveraging in the next 12-18 months to below 3.0x and within
its recently announced internal medium term comfortable leverage
target of between 2.0x and 2.5x unadjusted net debt/EBITDA.
Uralkali's capacity to reduce the absolute debt level will also be
constrained by rising investments into strategically important
expansion projects. The company, however, retains flexibility to
adjust its capital spending, in case a material pressure on its
financial profile starts to evolve. In addition, there remain
persisting risks related to shareholder distributions in various
forms. In particular, substantial loans that Uralkali will likely
continue to provide to its shareholders (or their affiliates) will
further curb its capacity to reduce debt. At the same time, Moody's
expects the company to pursue a fairly balanced approach to any
potential payouts, to be largely covered by its positive free cash
flow.
Along with Uralkali's strong cash flow generation, its liquidity
will remain supported by the company's established access to
long-term funding. While in 2020 Uralkali's leverage will stay
above the threshold of 3.5x reported net debt/EBITDA embedded in
its $500 million eurobond (3.6x as of the 12 months that ended June
2020), it is an incurrence covenant thus will not limit the
company's ability to procure new debt for refinancing purposes.
Moody's also expects Uralkali to comply with maintenance covenants
set at 4.0x reported net debt/EBITDA under most of its bank loans
(comprise around 70% of the company's total debt as of September
30, 2020), although the headroom will be somewhat limited in 2020.
The company's strong relationship with lenders provides additional
comfort that it will receive all the necessary waivers, if needed.
Uralkali's Ba2 rating continues to positively reflect its
sustainable position as one of the leading low-cost potash
producers globally with strong profitability and cash flow
generation. At the same time, Uralkali's rating remains constrained
by its (1) susceptibility to the cyclical global fertilizer market;
(2) single commodity (potash) concentration, with exposure to
potash price volatility, along with the inherent environmental and
mining risks; and (3) concentrated ownership structure, which
elevates corporate governance risks.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
As an owner and operator of mines, Uralkali remains exposed to the
inherent environmental, social, and mining risks, which could
involve additional costs and investments and decrease production
capacity. Thus, flooding forced the company to close its
Berezniki-1 mine in 2006, while a brine inflow accident at
Solikamsk-2 in 2014 triggered gradual reduction in the company's
production capacity of the mine and development of the liquidation
plan with the related repairs and remediation expenses to be
completed in 2028. Uralkali is also required to backfill cavities
that result from mining activities to liquidate the adverse effect
of its operations and accidents. Overall, as of June 2020, the
company's total provisions for filling cavities and mine flooding
were at around $339.3 million and $9.9 million, respectively.
Uralkali's fairly concentrated ownership structure involves higher
corporate governance risks and lower visibility into the company's
corporate actions in the longer term, which might negatively affect
its credit profile. In particular, the share buybacks in 2015-17,
which adversely coincided with falling potash prices, increased
Uralkali's leverage to far above its at that time internal target
of 2.0x unadjusted net debt/EBITDA, signaling the company's shift
towards a more aggressive financial policy. While Uralkali's focus
on deleveraging thereafter was reconfirmed by its new financial
policy announced in 2019, there is no track record of the company
consistently adhering to its conservative leverage target. The
company also continues to issue substantial shareholder loans
(around $743 million was outstanding as of June 30, 2020). The risk
of concentrated ownership is, however, partly mitigated through the
oversight of four independent directors out of the total ten in the
board of directors as well as leverage covenants in the debt
documentation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Uralkali's
strong market position and high cost competitiveness will allow it
to preserve its adjusted debt/EBITDA at or below 4.0x and support
liquidity in the next 12-18 months.
The rating could be upgraded if Uralkali were to (1) improve and
sustain its adjusted debt/EBITDA below 3.0x and retained cash
flow/debt above 15% across various price scenarios for potash; (2)
continue reducing its absolute debt level, as planned; (3) preserve
good liquidity; and (4) maintain a balanced approach to investment
strategy and build a track record of prudent and predictable
shareholder distributions.
Moody's could downgrade the rating if potash prices weakened
materially or Uralkali's increased tolerance to higher leverage led
to a substantial deterioration in its liquidity and financial
performance, with debt/EBITDA materially exceeding 4.0x and
retained cash flow/debt falling below 10%, on a sustained basis.
Any exposure to potential event risk will be assessed by us
separately.
The principal methodology used in these ratings was Chemical
Industry published in March 2019.
Headquartered in the Berezniki Perm region of Russia, Uralkali is
one of the few largest potash producers by capacity globally.
Around 80% of Uralkali's sales in terms of value is exported,
mainly to Latin America, Southeast Asia, China, and India and
Europe. For the 12 months that ended June 2020, Uralkali generated
revenue and adjusted EBITDA of around $2.6 billion and $1.2
billion, respectively. Following the cancellation of quasi-treasury
shares, representing around 56% of the company's issued capital, in
June 2020, 46.37% is held by Uralchem JSC and 53.6% by Rinsoco
Trading Co. Limited, which are ultimately controlled by Dmitry
Mazepin and Dmitry Lobiak, respectively.
=========
S P A I N
=========
FTA TDA 29: Fitch Affirms CCC Rating on Class 2-C Debt
------------------------------------------------------
Fitch Ratings has affirmed three TDA Spanish RMBS transactions. The
Outlook on TDA 29's class C notes has been revised to Negative from
Stable. All other Outlooks are Stable.
RATING ACTIONS
TDA 30, FTA
Serie A ES0377844008; LT AAsf Affirmed; previously at AAsf
TDA 29, FTA
Class A2 ES0377931011; LT A+sf Affirmed; previously at A+sf
Class B ES0377931029; LT BBB+sf Affirmed; previously at BBB+sf
Class C ES0377931037; LT BB-sf Affirmed; previously at BB-sf
Class D ES0377931045; LT CCCsf Affirmed; previously at CCCsf
TDA 26-Mixto, FTA - Series 2
Class 2-A ES0377953056; LT A+sf Affirmed; previously at A+sf
Class 2-B ES0377953064; LT A-sf Affirmed; previously at A-sf
Class 2-C ES0377953072; LT CCCsf Affirmed; previously at CCCsf
TRANSACTION SUMMARY
The transactions comprise fully amortising Spanish residential
mortgages originated and serviced by Banco de Sabadell, SA
(BBB-/Stable/F3) and Banca March (not rated) for TDA 26 Mixto
Series 2 (TDA 26-2) and TDA 29, and by Banca March only for TDA 30.
Credit enhancement (CE) consists of overcollateralisation from the
assets and cash reserves.
KEY RATING DRIVERS
Payment Interruption Risk Constrains TDA 26-2 and 29
TDA 26-2 and TDA 29 remain exposed to payment interruption risk in
the event of a servicer disruption, as the available structural
mitigants (i.e. cash reserve funds that can be depleted by losses)
are deemed insufficient to cover stressed senior fees, net swap
payments and senior note interest due amounts should an alternative
servicer arrangement need to be implemented. As a result, Fitch
continues to cap the notes' ratings at 'A+sf'. Although one of the
collection accounts banks, Banca March, is not rated by Fitch, the
rating cap of 'A+sf' acknowledges the bank's established retail
franchise, the availability of bank ratings by other
internationally recognised agencies, and robust banking sector
supervision in Spain.
Resilient to COVID-19 Additional Stresses
In its analysis of the transactions, Fitch has applied additional
stresses in conjunction with its European RMBS Rating Criteria in
response to the coronavirus outbreak and the recent legislative
developments in Catalonia. Fitch anticipates a generalised
weakening in Spanish borrowers' ability to keep up with mortgage
payments due to a spike in unemployment and vulnerable
self-employed borrowers.
Performance indicators such as the level of three months plus
arrears excluding defaults (standing at 0.5% and 0.9% for TDA 26-2
and TDA 29 as of August 2020 and at 1.3% for TDA 30 as of September
2020) could deteriorate in the following months and therefore Fitch
has also incorporated a 10% increase to the weighted average
foreclosure frequency (WAFF) of the portfolios.
As outlined in "Fitch Ratings Coronavirus Scenarios: Baseline and
Downside Cases", Fitch also considers a downside coronavirus
scenario for sensitivity purposes whereby a more severe and
prolonged period of stress is assumed. Under this scenario, Fitch's
analysis accommodates a 15% increase to the portfolio weighted
average foreclosure frequency (WAFF) and a 15% decrease to the WA
recovery rates. The notes could be downgraded by up to three
notches in this scenario.
Fitch's analysis of TDA 26-2 is subject to the portfolio loss floor
and TDA 29 analysis is subject to a performance adjustment factor
floor of 100%, which reflects the repurchase of some defaulted
loans in the past by the originator as per the agency's criteria.
Sufficient Credit Enhancement
The affirmations reflect its view that CE protection is sufficient
to mitigate the risks associated with its base-case coronavirus
scenario. For TDA 29 and TDA 30, the note amortisation switched
back to sequential on the latest interest payment date due to the
slight under funding of the reserve fund in the case of TDA 29 and
the breach of the three months plus arrears (excluding defaults)
trigger level in the case of TDA 30.
The revision of the Outlook on TDA 29's class C notes reflects
their greater susceptibility to the increased risk of collateral
underperformance, given their junior ranking in the revenue and
principal funds allocation and their limited CE.
No Credit to TDA 30 Swap
Fitch has not given credit to the interest rate swap arrangement in
TDA 30, as the ratings of the hedge provider Banco Santander SA
(A-/Negative/F2) is not in line with the contractually defined
applicable minimum eligibility triggers of 'A' and 'F1', and
transaction parties have confirmed no restructuring or remedial
actions will be implemented. The swap is a total return swap that
guarantees an excess margin of 55bp. Not modelling it leaves the
transaction exposed to excess spread reduction.
Low Take-up Rates on Payment Holidays
Fitch does not expect the COVID-19 emergency support measures
introduced by the Spanish government for borrowers in vulnerability
to negatively impact the SPV's liquidity positions, given the low
take-up rate of payment holidays in the transactions, ranging
between 3.2%, 4.3% and 4.4% of the outstanding portfolio balances
for TDA 26-2, 29 and 30, respectively, as of September 2020 (versus
the Spanish national average of around 9%). Additionally, the high
portfolio seasoning of around 14-15 years and the large share of
floating-rate loans with low interest rates are strong mitigating
factors against macroeconomic uncertainty.
ESG Considerations - Governance
TDA 30 has an Environmental, Social and Governance (ESG) Relevance
Score of 5 for Transaction Parties & Operational Risk as the hedge
provider is not in line with the contractually defined minimum
eligibility triggers and transaction parties have confirmed no
restructuring or remedial actions will be implemented, which has a
negative impact on the credit profile and is highly relevant to the
rating resulting in a change to the rating of one category.
TDA 26-2 and 29 have an Environmental, Social and Governance (ESG)
Relevance Score of 5 for Transaction & Collateral Structure due to
payment interruption risk, which has a negative impact on the
credit profile, and is highly relevant to the rating, resulting in
a change to the rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- CE ratios increase as the transactions deleverage, able to
fully compensate the credit losses and cash flow stresses
commensurate with higher rating scenarios. The ratings could be
upgraded by three notches if the likelihood of a downside scenario
trajectory reduces.
- For the senior notes in TDA 26-2 and TDA 29, improved liquidity
protection against a servicer disruption event. This because the
ratings are capped at 'A+sf' because of unmitigated payment
interruption risk.
- For TDA 30's class A notes' rating, an enhanced counterparty
arrangement with respect to the hedging agreement in line with
Fitch's Structured Finance and Covered Bonds Counterparty Rating
Criteria.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A longer-than-expected coronavirus crisis that deteriorates
macroeconomic fundamentals and the mortgage market in Spain beyond
Fitch's current base case. CE ratios cannot fully compensate the
credit losses and cash flow stresses associated with the current
ratings scenarios, all else being equal. To approximate this
scenario, a rating sensitivity has been conducted by increasing
default rates by 15% and cutting recovery expectations by 15%,
which would imply downgrades of up to one category for the notes.
- For TDA 30's class A notes' rating, the transaction's liquidity
position weakens due to large take ups on mortgage payment
moratoriums and new defaults as a consequence of the coronavirus
crisis.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. Fitch has not reviewed the results of
any third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring. Fitch did not undertake a review of the information
provided about the underlying asset pool ahead of the transactions'
initial closing. The subsequent performance of the transaction over
the years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable. Overall, Fitch's assessment of the
information relied upon for the agency's rating analysis according
to its applicable rating methodologies indicates that it is
adequately reliable.
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
TDA 26-Mixto, FTA - Series 2: Transaction & Collateral Structure:
5
TDA 29, FTA: Transaction & Collateral Structure: 5
TDA 30, FTA: Transaction Parties & Operational Risk: 5
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.
IM BCC CAPITAL 1: Fitch Affirms BB+sf Rating on Class C Debt
------------------------------------------------------------
Fitch Ratings has affirmed IM BCC Capital 1 (IM BCC) with Stable
Outlooks.
RATING ACTIONS
IM BCC Capital 1, FT
Class A ES0305386007; LT AAAsf Affirmed; previously at AAAsf
Class B ES0305386015; LT BBB+sf Affirmed; previously at BBB+sf
Class C ES0305386023; LT BB+sf Affirmed; previously at BB+sf
Class D ES0305386031; LT CCCsf Affirmed; previously at CCCsf
TRANSACTION SUMMARY
The transaction is a securitisation of Spanish SME and
self-employed loans originated by Cajamar Caja Rural, Sociedad
Cooperativa de Crédito (BB-/Negative/B).
KEY RATING DRIVERS
COVID-19 Additional Stresses: In its analysis of IM BCC, Fitch has
applied additional stresses in response to the macroeconomic impact
of the coronavirus outbreak in Spain. To approximate the potential
impact to transaction performance, Fitch has increased the
base-case rating default rate (RDR) by 30% and applied a 20%
haircut to commercial collateral property value in addition to the
commercial property haircut outlined in its "SME Balance Sheet
Securitisation Rating Criteria". Fitch expects a generalised
weakening of companies' ability to keep up with payments once
government support measures are phased out in January 2021,
especially in sectors like tourism, restaurants & lodging, and
self-employed workers, which are the most vulnerable groups in
business lockdowns.
Fitch also considered a downside coronavirus scenario for
sensitivity purposes whereby a more severe and prolonged period of
stress is assumed. Under this scenario, Fitch's analysis
accommodates an increase of 50% to the base-case RDR of the
portfolios in conjunction with a 15% decrease to recoveries, as
well as a 20% commercial property haircut. The sensitivity of the
ratings to scenarios more severe than currently expected is
provided in Rating Sensitivities.
The affirmation and Stable Outlooks reflect the resilience of the
notes to COVID-19 stress scenarios.
Pro-Rata Amortisation: Prior to the occurrence of a sequential
trigger event, the class A to D notes will continue to amortise
pro-rata. Fitch's rating analysis is linked to the weakest pool
composition permitted by the sequential trigger events. These
include principal deficiency ledger (PDL) plus reserve fund (RF)
shortfall up to 4.5% of outstanding portfolio balance, the top 10
obligors' exposure up to 10% of the outstanding portfolio balance,
and the mandatory switch to sequential amortisation after portfolio
represents 10% of the initial balance.
Strong Portfolio Quality: Fitch has maintained its initial rating
default assumptions for each subgroup of obligors, with an annual
probability of default (PD) expectation of 1.2%, 1.4%, 2.4% and
3.4%, respectively, for self-employees unsecured and secured and
SMEs unsecured and secured, which on average is lower than the
Fitch-defined Spanish PD country benchmark of 3.5%. This is
supported by the strong performance during the first two years
since closing, with less than 0.1% of cumulative defaults as a
percentage of initial loan balance.
The portfolio PD expectation reflects seller historical data
analysis, and the positive loan selection criteria that relates to
the best internal ratings assigned by Cajamar. The pool is highly
granular with only five obligors representing more than 50bp of the
total portfolio balance, and the top 10 obligors 3.1% of the
portfolio balance at closing.
Large Credit Enhancement (CE): In Fitch's view, CE ratios mitigate
the credit and cash flow stresses commensurate with the notes'
ratings, including the portfolio migration to the riskiest
composition permitted by the sequential trigger events. During the
pro-rata amortisation period, CE ratios will remain equal to those
as of closing date until the RF reaches its absolute floor within
the next year. Fitch expects a subsequent progressive increase in
CE for the class A to D notes.
Concentration Risks: The portfolio is exposed to industry
concentration as 53.5% of its balance is linked to agriculture,
compared with 49.3% as of closing. Under Fitch's asset analysis,
this concentration increases the default correlation parameter and
in turn the default rate expectation.
Migration to Secured Portfolio: Fitch expects the portfolio will
gradually migrate towards a majority secured loan portfolio, as
most of the unsecured loans mature by 2025. Currently 31.8% of
portfolio balance is secured by first-lien residential, commercial
or productive land properties compared with 25.5% at closing. For
its weakest stress composition, Fitch assumed the concentration
towards SME and unsecured borrowers increases. Fitch assumed the
majority of prepayments (using a prepayment rate of 15%) come from
self-employed secured borrowers
RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to
positive rating action/upgrade are:
- Transaction liquidity sources are resilient to
coronavirus-associated stresses such as payment moratoriums and new
loan defaults, all else being equal.
- CE ratios increase as the transaction deleverages, able to
fully compensate the credit losses and cash flow stresses
commensurate with higher rating scenarios, all else being equal.
The main factors that could, individually or collectively, lead to
negative rating action/downgrade are:
- The transaction's liquidity position weakens due to large take
ups of loan payment moratoriums and new defaults as a consequence
of the coronavirus crisis.
- A longer-than-expected coronavirus crisis that deteriorates
macroeconomic fundamentals and the lending market in Spain beyond
Fitch's current base case. CE ratios cannot fully compensate the
credit losses and cash flow stresses associated with the current
rating scenarios, all else being equal.
- A downgrade of Spain's Long-Term Issuer Default Rating (IDR)
that could reduce the maximum achievable rating for Spanish
structured finance transactions. This would affect the class A
notes, which are rated at the maximum achievable rating, six
notches above the sovereign IDR.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. There were no findings that affected
the rating analysis. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Overall, Fitch's assessment of the information relied upon for the
agency's rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
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
===========================
ASTON MARTIN: S&P Affirms 'CCC' LongTerm ICR on Debt Refinancing
----------------------------------------------------------------
S&P Global Ratings affirmed its long-term issuer credit rating of
'CCC' on Aston Martin Holdings (UK) Ltd. At the same time, S&P
assigned a 'CCC' issue rating to the proposed new first-lien notes,
with a recovery rating of '4' (rounded recovery prospects: 45%),
and a 'CC' issue rating to the new equivalent GBP259 million
second-lien notes, with a recovery rating of '6' (rounded recovery
prospects: 0%).
The negative outlook reflects the uncertainty over the potential
economic impact of the COVID-19 pandemic and a no-deal Brexit on
the group's operations and sales, as well as its weak profitability
and continued very high cash burn.
Despite the proposed refinancing and equity raise, weak
profitability, coupled with continued very high cash burn and
challenging operating conditions, will continue to pressure AML's
liquidity. AML is proposing to refinance its first-lien notes,
issue GBP259 million-equivalent of second-lien notes, and raise
GBP125 million in new equity. The new equity will be provided by
Zelon Holdings, Permian Investment Partners, the Yew tree
consortium, and other investors with smaller shares. In refinancing
its first-lien debt, AML plans to repay GBP78 million, including a
GBP20 million loan from the U.K. government, reducing the
outstanding amount to GBP838 million from GBP907.5 million. It also
plans to extend the maturity date to 2025. In addition, AML has
increased the size of its revolving credit facility (RCF) to GBP87
million from GBP80 million. S&P understands that the refinancing is
fully underwritten by JPMorgan Chase and a bank syndicate. As a
result, AML's S&P Global Ratings-adjusted debt will rise to over
GBP1,450 million in 2020.
AML's improved liquidity position will remain under pressure due to
its very high cash burn rate. S&P said, "In our base case, we
forecast significant negative free operating cash flow (FOCF) in
2020, and negative FOCF of about GBP200 million-GBP300 million in
2021. At this stage, our base case does not include possible
additional cash flows from a potential no-deal Brexit, nor have we
applied material haircuts to our assumptions for production or
sales volumes in light of rapidly increasing COVID-19 infections
and governments' increasing containment measures."
AML continues to invest heavily to support the rollout of new
models in the coming years, including the Valkyrie and the
Valhalla, as well as to develop new technologies and vehicle
architecture to underpin these newer models. The company aims to
produce an increased line of electrified vehicles in the future.
S&P expects AML's capital expenditure (capex) to stand at around
GBP260 million in 2020, with a slight increase to around GBP270
million in 2021. At the same time, working capital is also a drag
on cash. The trend of high working capital outflows of GBP86
million in the first half of 2020--largely due to outflows related
to payables--will continue throughout the second half of the year.
This results in our forecast of outflows of close to GBP150 million
for the full year.
Gross debt will increase as a result of the refinancing, and S&P
views AML's deleveraging prospects as limited until it can turn
FOCF positive again.
A new strategic partnership with Mercedes-Benz AG should support
AML's drive to incorporate sophisticated technologies into its
vehicles, as well as the shift to more electrified vehicles. AML
has signed an expanded and enhanced agreement with Mercedes-Benz
that will provide AML with access to new and advanced vehicle
architecture technologies to underpin all its product launches
through to 2027. In S&P's view, the agreement is credit positive in
the medium term, as it should support AML's competitive position,
and at the same time help to curtail research and development (R&D)
costs. It should also help AML to develop hybrid and electrified
models in the near future to compete with its peers.
AML will gain access to powertrain architecture for conventional,
hybrid, and electric vehicles, as well as further hardware and
software relating to the technologies. In return for this
technological support, AML will issue shares to Mercedes-Benz
incrementally up to a total equity stake of 20%. Furthermore,
Mercedes-Benz will receive the right to nominate one nonexecutive
director to AML's board once its stake reaches 7.5%, and another
nonexecutive director once its stake reaches 15%. The ordinary
shares that AML will issue to Mercedes-Benz will have a total value
of approximately GBP286 million, with the first shares, amounting
to GBP140 million, issued by the end of 2020, and all shares due to
be issued by early 2023. With a 20% equity stake in AML,
Mercedes-Benz will be the second largest shareholder after Lawrence
Stroll.
After the pandemic affected AML's operations in the second and
third quarters of 2020, we see some recovery in 2021. This is
absent a further lockdown in the U.K. because of the pandemic, or a
potential no-deal Brexit. As a result of the closures of U.K.
manufacturing facilities and global dealerships throughout the
second quarter of 2020, as well as AML's strategic reduction of
dealership stocks, S&P forecasts that the group's sales volumes
will reach around 3,500 vehicles in 2020, a decrease of around 40%
compared to 2019, before recovering to more than 5,500 vehicles in
2021. However, a second wave of COVID-19 infections or related
lockdowns in AML's core markets could pressure this forecast. This
leaves our revenue expectations at about GBP575 million-GBP625
million in 2020 and above GBP850 million in 2021.
Taking its place on the Formula One Racing Grid in 2021, for the
first time since 1960, should support AML's future marketing
ambitions. Our expectations include a full racing season in 2021.
The group is also aiming to develop strategic technology
partnerships in order to develop market-leading vehicle
architecture. This could position the group ahead of its peers in
the sports car market.
S&P said, "The negative outlook reflects our view that the economic
uncertainty caused by the pandemic is still affecting AML, and that
a potential increase in governments' pandemic-related restrictions
in the group's manufacturing locations or key end markets could
hamper its sales again. A no-deal Brexit could also adversely
affect AML, as its manufacturing is solely based in the U.K.
Liquidity remains strained, as cash burn has remained high
throughout 2020 and we do not expect it to decline materially in
2021.
"We could lower the ratings on AML if we expect a near-term
liquidity crunch or consider a default inevitable within the next
six months. This could be the case if the recovery in sales is
slower than we forecast, or if R&D or capex are higher than we
expect. A downgrade could also follow further material outflows in
working capital. Furthermore, unforeseen effects from the pandemic
or a no-deal Brexit could lead us to revise our forecasts and
increase the risk of a downgrade. Although we do not expect it in
light of the recent strong shareholder support, we could also lower
the ratings if we expected a distressed exchange offer, or if AML
undertook a balance sheet restructuring.
"We could revise the outlook to stable if AML's revenues recovered
strongly in the fourth quarter of 2020 and into 2021, or if its
cash burn was lower than we forecast, such that its liquidity
position stabilized. We could also consider an upgrade if the
economic impact of the pandemic or Brexit on the group was
materially lower than we expected, so we view ratings upside as
partly reliant on supportive macroeconomic conditions."
CASTELL PLC 2018-1: DBRS Hikes Rating on Class F Notes to BB
------------------------------------------------------------
DBRS Ratings Limited confirmed and upgraded the following ratings
on the notes issued by Castell 2018-1 PLC (the Issuer):
-- Class A confirmed at AAA (sf)
-- Class B upgraded to AAA (sf) from AA (low) (sf)
-- Class C upgraded to AA (sf) from A (low) (sf)
-- Class D upgraded to A (sf) from BBB (high) (sf)
-- Class E upgraded to BBB (sf) from BB (high) (sf)
-- Class F upgraded to BB (sf) from B (low) (sf)
The ratings on the notes address the timely payment of interest and
ultimate payment of principal on or before the legal final maturity
date in January 2046.
The rating actions follow an annual review of the transaction and
are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and
losses.
-- Portfolio default rate (PD), loss given default (LGD), and
expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the
expected losses at their respective rating levels.
-- Current economic environment and an assessment of sustainable
performance, as a result of the Coronavirus Disease (COVID-19)
pandemic.
Castell 2018-1 PLC is a securitization of second-lien mortgage
loans originated in the UK by Optimum Credit Limited (OCL).
PORTFOLIO PERFORMANCE
As of July 2020, loans that were two- to three-months in arrears
represented 0.4% of the outstanding portfolio balance, the 90+
delinquency ratio was 1.4%, and the cumulative loss ratio was
0.2%.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining
pool of receivables and has updated its base case PD and LGD
assumptions to 9.3% and 40.6% respectively.
CREDIT ENHANCEMENT
As of the July 2020 payment date, credit enhancement to the Class
A, Class B, Class C, Class D, Class E, and Class F notes was 48.7%,
34.9%, 25.1%, 18.4%, 13.5%, and 8.0%, up from 35.0%, 27.2%, 20.0%,
15.1%, 11.5%, and 7.5% in July 2019, respectively.
The transaction benefits from a general reserve fund of GBP 7.7
million and a liquidity reserve fund of GBP 2.3 million. The
general reserve fund covers senior fees as well as interest and
principal (via the principal deficiency ledgers) on the rated
notes. The liquidity reserve fund covers senior fees and interest
on the Class A notes and Class B notes.
Citibank N.A., London Branch acts as the account bank for the
transaction. Based on the DBRS Morningstar private rating of
Citibank N.A., London Branch, the downgrade provisions outlined in
the transaction documents, and other mitigating factors inherent in
the transaction structure, DBRS Morningstar considers the risk
arising from the exposure to the account bank to be consistent with
the rating assigned to the Class A notes, as described in DBRS
Morningstar's "Legal Criteria for European Structured Finance
Transactions" methodology.
NatWest Markets Plc acts as the swap counterparty for the
transaction. DBRS Morningstar's public Long-Term Critical
Obligations Rating of NatWest Markets Plc at "A" is above the First
Rating Threshold as described in DBRS Morningstar's "Derivative
Criteria for European Structured Finance Transactions"
methodology.
DBRS Morningstar analyzed the transaction structure in Intex
DealMaker.
The Coronavirus Disease (COVID-19) and the resulting isolation
measures have caused an economic contraction, leading to sharp
increases in unemployment rates and income reductions for many
borrowers. DBRS Morningstar anticipates that delinquencies may
arise in the coming months for many RMBS transactions, some
meaningfully. The ratings are based on additional analysis and
adjustments to expected performance as a result of the global
efforts to contain the spread of the coronavirus.
For this transaction, DBRS Morningstar increased the expected
default rate for self-employed borrowers, assessed a potential
reduction in portfolio prepayment rates, incorporated a moderate
reduction in residential property values, and considered reported
payment holidays in its cash flow analysis.
Notes: All figures are in British pound sterling unless otherwise
noted.
CONSORT HEALTHCARE: S&P Lowers Rating on Sr. Secured Debt to BB
---------------------------------------------------------------
S&P Global Ratings lowered its S&P Underlying Rating (SPUR) on the
senior secured debt issued by Consort Healthcare (Birmingham)
Funding PLC (Consort or ProjectCo) to 'BB' from 'BB+'.
S&P said, "The negative outlook indicates that we could lower the
SPUR if cash held within the project were insufficient to cover
rectification of the latent defects. We would also lower the SPUR
by one or more notches if Consort's financial profile weakened such
that we were expecting a minimum average debt service coverage
ratio (ADSCR) below 1.10x or if the trusts attempted to take other
steps that demonstrate a more adversarial approach that increases
the risk that it may ultimately terminate the project."
ProjectCo used the proceeds of the senior debt issuance to finance
the construction and refurbishment of a mental health facility and
an acute inpatient facility at the existing Queen Elizabeth
Hospital in Birmingham. Balfour Beatty Construction Ltd. and Haden
Young Ltd. (both part of the Balfour Beatty group [BB]) completed
construction of the two facilities in 2008 and 2012, respectively.
ProjectCo operates under a 40-year agreement expiring in 2046. It
subcontracts hard FM services to Engie. The trusts retain soft FM
services.
Strengths
ProjectCo benefits from an availability-based payment mechanism,
which supports cash flow stability.
Risks
If BB fails to rectify the latent defects, and the costs of
rectification could not be recovered from BB, Consort would have to
bear material costs fixing them. The comparatively large levels of
cash trapped in the project largely mitigate potential exposure to
the latent defects' rectification costs.
If the trust declared SPFs for the open works order, ProjectCo
could exceed SFP termination thresholds under the project
agreement, which increases the risk of the trusts taking adverse
steps against ProjectCo. Exceeding termination thresholds in the
project agreement could also lead to an event of default under the
financing documents, potentially giving the majority creditors the
right to accelerate the senior debt.
While Engie's improved facilities management performance has led to
a fall in SFPs, having dropped below warning notice thresholds,
Engie's performance in delivering major maintenance (lifecycle)
works and variations continues to lag expectations.
The downgrade primarily reflects Consort's potential exposure to
costs of rectification of latent defects, which are material, if BB
were to fail to cover them. It also reflects continued elevated
operating and financial risks if the trusts were to declare SFPs
for non-completed facilities management works, and trigger
contractual provisions. These could range from the termination of
the contract with Engie to termination of the project agreement and
debt acceleration.
S&P said, "Consort would be liable for costs of rectification of
latent defects associated with PFPs, which are in our view
significant, if BB failed to remedy them. Although the
construction contractor's obligations are covered by the parent
company guarantee from BB, Consort could be ultimately liable if BB
were unable or unwilling to cover the costs. We expect the costs to
be material, as works will involve rectification of deficiencies in
the construction of the hospitals' walls and floors that allow
smoke to pass between various fire protective compartments." The
works are expected to last about two years, during which BB will be
liable to bear unavailability deductions for wards that will be
closed due to the works.
The trusts, who are increasingly frustrated that defects which
raise safety concerns are still outstanding 10 years into the
hospitals' operations, may start imposing SFPs or applying
unavailability deductions in relation to these defects after the
expiration of the standstill agreement in December 2020.
The project currently maintains sufficient liquidity to mitigate
the potential exposure to the latent defects' rectification costs.
However, liquidity could become insufficient if the project
restarted distributions before the defects are addressed. Consort
has been in a distribution lockup since 2017, when the majority
creditor did not approve a standstill agreement that Consort
entered with the trusts for not applying unavailability deductions
related to the PFP defects. The majority creditor has withheld
rights from approving the financial model, and continues to not
approve it, therefore distributions cannot be made. Majority
creditor's consent is required for Consort restarting
distributions.
S&P said, "We expect the majority creditor will not allow
distributions until at least Consort and BB sign a settlement
agreement with the trusts setting the terms of remediation of PFP
defects. After signing the agreement, Consort will remain exposed
to BB for as long as the rectification works are completed.
Therefore, we expect that if the project were to restart
distributions, we may lower our rating unless Consort maintains
sufficient cash to mitigate the potential exposure to latent defect
costs."
If declared, the SFPs for the open and not closed FM works could
trigger the project's event of default and give the majority
creditor right to accelerate debt. Some of the backlog of about
3,000 jobs that were logged and closed in 2019, but due to the
change in reporting were not reported as closed on the help desk
(open works order), are still outstanding. If SFPs associated with
these works were to be declared, they would exceed the contractor
and project termination thresholds under the FM contract and the
project agreement respectively. If not remedied or waived, this
could lead to termination of the project, which would allow the
majority creditor to accelerate Consort's outstanding senior debt.
However, the trusts have not invoked any of their rights under the
project agreement, the first of which would be additional
monitoring. Since 2020, Engie's performance has improved thanks to
a management change and workforce restructuring.
The settlement agreement that would clear the accrued SFP and
compensate the trusts was set to be reached by the end of 2020 but,
due to the COVID-19 pandemic, has been delayed to the first half of
2021.
Delaying lifecycle expenditure could pressure credit metrics. The
project continues to underspend on lifecycle compared with its
budget. The project holds the unspent amounts within major
maintenance reserve account and continues to assume that the
underspent amount to date will be disbursed over the remaining
course of the concession.
S&P said, "In our view, changes to the timing of expenditure could
pressure financial metrics in periods of reserving for increased
spending. We are now expecting minimum ADSCR of 1.11x in September
2027 and March 2028, down from the 1.15x we expected previously.
This coincides with increased contractually required reserving
ahead of peak lifecycle spending in 2028-2031.
"The negative outlook reflects the project's potential exposure to
material latent defect rectification costs. It also factors in our
view that Consort faces uncertainty following a potential breach of
contractual thresholds in the project agreement.
"We would take a negative rating action if in our view, operating
risk increased, or if ProjectCo's financial profile weakened such
that we were expecting minimum ADSCR below 1.10x.
"We could lower the rating by one or more notches if the project's
potential exposure to latent defect costs were not mitigated by
sufficient liquidity. Specifically, we could lower the ratings if
Consort's cash balances (excluding the reserve accounts) were to
fall below our estimate of the cost of remediating or compensating
defects in the buildings. We could also lower the rating if the
trusts attempted to take other steps that demonstrate elevated risk
that the project could be terminated.
"We could also lower the rating if the project's financial profile
weakened due to changing timing or amounts of lifecycle costs, or
if Consort were to incur higher operating costs because it had to
replace Engie or if it were to share settlement costs for the open
works order with Engie.
"We could revise the outlook to stable following a period of
operational stability that demonstrates the subcontractor's ability
to remain well within contractual thresholds, the settlement
agreement for open works orders is reached, and there is good
progress in rectifying latent defects."
DEBUSSY DTC: DBRS Confirms B Rating on Class A Fixed-Rate Notes
---------------------------------------------------------------
DBRS Ratings Limited confirmed its B (sf) rating on the Class A
Commercial Real Estate Loan Backed Fixed-Rate Notes issued by
Debussy DTC plc (the issuer) and assigned a Negative trend to the
rating.
With this, the rating has been removed from the Under Review with
Negative Implications (UR-Neg.) status, where it was placed on July
27, 2020 after DBRS Morningstar's analysis of the overall risk
exposure of the CMBS sector to the Coronavirus Disease (COVID-19)
and the resulting conclusion that certain asset classes were more
at risk and likely to be affected by the fallout of the pandemic on
the economy.
Debussy DTC PLC is a securitization of one fixed-rate loan split
into three tranches with a combined balance of GBP 178.1 million
(GBP 263.1 million at inception). Since the insolvency of the sole
tenant previously occupying the properties, Toys R Us (TRU), the
loan defaulted and the special servicer, CBRE, set out a business
plan to sell the properties, whilst it lets out vacant space and
carries out capital expenditures in the interim. Following the
completion of three asset sales in Q2 2020, there are currently 11
properties left in the portfolio, which brings the total number of
disposals to 21 properties and the total principal repayment amount
of Tranche A to GBP 85 million.
The market value of the 11 remaining assets is GBP 130.4 million
based on a revaluation carried out by Colliers in June 2018, which
implies a loan-to-value (LTV) of 136.5%. DBRS Morningstar would
expect a full repayment of the GBP 99.2 million Class A principal
amount upon the successful execution of the business plan by the
special servicer and based on DBRS Morningstar's stressed value of
the portfolio of GBP 98.8 million (or 24% haircut to the latest
available valuation) plus the presence of GBP 17.2 million of cash
currently held on different accounts under the control of the
special servicer. Such funds are expected to be used for a variety
of purposes, including capital and operational expenses and future
quarterly payments to noteholders and issuer costs.
According to the July 2020 special servicer report, whilst no sales
have been lost so far due to coronavirus, some lease negotiations
have been affected. One prospective tenant has demanded a longer
rent-free period, and the proposed letting of the final unit at
Nottingham to a gym operator has been aborted. Tenants are also
requesting pandemic clauses in new leases to provide for future
lockdown scenarios. Due to the level of uncertainty caused by
coronavirus, DBRS Morningstar will continue to assess the execution
of the business plan whilst maintaining the Negative trend on the
rating. In particular, a delay of planned sales or sales below DBRS
Morningstar's stressed portfolio value could affect the rating
negatively.
COVID-19 CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation
measures have caused an economic contraction, leading to sharp
increases in unemployment rates and income reductions for many
tenants and borrowers. DBRS Morningstar anticipates that vacancy
rate increases and cash flow reductions may arise for many CMBS
borrowers, some meaningfully. In addition, commercial real estate
values will be negatively affected, at least in the short-term,
impacting refinancing prospects for maturing loans and expected
recoveries for defaulted loans. The ratings are based on additional
analysis as a result of the global efforts to contain the spread of
the coronavirus.
Notes: All figures are in British pound sterling unless otherwise
noted.
NEW LOOK: Landlords Challenge Company Voluntary Arrangement
-----------------------------------------------------------
Jonathan Eley at The Financial Times reports that British Land and
Land Securities are among the landlords that have challenged New
Look's company voluntary arrangement, casting renewed doubt over
the survival of the fashion chain.
The CVA, a type of insolvency process that usually results in
landlords agreeing hefty rent cuts, was approved by creditors in
September but the statutory challenge period ran until the middle
of October, the FT notes.
According to the FT, three people with knowledge of the process
said that there had been four separate challenges.
One of the people said the challenges were meritless and
constituted a only small proportion of the company's 350 or so
landlords, the FT relates. Many of them were irritated by the
challenge, he added, because it would hold up the repayment of
service charge arrears that accrued during the UK's lockdown of
non-essential retailers, the FT discloses. New Look, the FT says,
also now has to contend with a new national lockdown in England.
The successful passage of the CVA is a condition for the broader
financial restructuring of the company, which has almost 500 stores
and employs more than 12,000 people, the FT states. Any material
delay to that recapitalization, which entails bondholders taking
heavy losses on their investments, could leave the company facing
elevated finance costs and hold up the injection of an additional
GBP40 million of equity, according to the FT.
New Look has been hit hard in the pandemic because its sales are
heavily biased towards a large store estate concentrated in market
towns, the FT relays.
The company went through a significant restructuring, closing down
overseas operations and overhauling its product offering as well as
closing more than 130 stores through an earlier CVA process in
2018, the FT recounts.
According to the FT, it did not seek to close more shops through
its latest CVA, but asked landlords to agree to rents based on a
percentage of sales at more than 400 outlets. In return, it
offered them enhanced rights to take back stores to re-let to other
tenants and pledged to settle service charge arrears built up
during 2020, the FT states.
NORD ANGLIA: Moody's Affirms B2 CFR, Outlook Negative
-----------------------------------------------------
Moody's Investors Service affirmed Nord Anglia Education, Inc's B2
corporate family rating (CFR) and the B1 senior secured rating on
the term loan B facility at Fugue Finance B.V. At the same time,
the rating agency has assigned a B2-PD probability of default
rating to Nord Anglia. The outlook of both Nord Anglia and Fugue
Finance B.V. remains negative.
The rating actions reflect the following drivers:
- Leverage, as measured by Moody's adjusted debt / EBITDA, is
around 9x for the fiscal year ended August 31, 2020 ("fiscal
2020"), largely driven by the impact of the coronavirus outbreak on
the group's EBITDA.
- Although timing of any recovery is uncertain, Moody's expects
enrolment levels and fees to stabilize during fiscal 2021,
resulting in some de-leveraging at Nord Anglia over the next 12-18
months. Moody's expectation is that the primary & secondary private
education sector will not return to growth in line with historical
level until fiscal 2022 at the earliest.
- Good liquidity with over $820 million in available cash
balances (excluding overdrafts) and $315 million availability under
the recently upsized $345 million revolving credit facility
("RCF").
- Solid operating cash flow which Moody's expects will be
sufficient to cover capital expenditure requirements, resulting in
modest free cash flow generation that could increase over time.
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.
Although an economic recovery is underway, it is tenuous and its
continuation will be closely tied to the containment of the virus.
As a result, the degree of uncertainty around Moody's 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.
RATINGS RATIONALE
Nord Anglia's ratings continue to reflect the company's (1) strong
premium position as one of the larger operators in the fragmented
private-pay education industry; (2) predictable and stable cash
flow and strong margins, underpinned by robust demand; (3) high
degree of geographic diversification; and (4) good liquidity. These
strengths are counterbalanced by (1) the company's high financial
leverage; (2) modest free cash flow generation driven by capacity
expansion strategy; and (3) exposure to evolving regulatory and
economic environments in emerging markets.
Social and governance factors are important elements of Nord
Anglia's credit profile. Nord Anglia's ratings factor in its
partial private-equity ownership, reflected in its financial policy
of tolerance for high leverage and its pursuit of debt-funded
growth. That said, this risk is partly offset by the well-defined
acquisition strategy and the shareholders' track record of equity
support.
Education is one of the sectors identified by Moody's as facing
high social risk. The rising demand for quality education in
emerging markets is supported by rising disposable income amongst
middle class, as well as persistent supply/demand imbalances in the
public education system as demand for highly rated schools
ordinarily outstrips supply. Compliance with local regulations is
critical in the sector and Moody's is not aware of any issues
related to Nord Anglia's schools.
LIQUIDITY PROFILE
Nord Anglia's liquidity is good. Moody's forecasts liquidity as at
August 31, 2020 to comprise over $820 million in available cash
balances (excluding overdrafts) and $315 million availability under
the recently upsized $345 million RCF maturing in 2022. The RCF
contains one springing First Lien Net Leverage covenant which is
set at 7x and tested quarterly only when the RCF is 35% drawn,
under which adequate headroom is expected to be maintained.
STRUCTURAL CONSIDERATIONS
The senior secured first-lien Term Loan B is rated one notch higher
than Nord Anglia's CFR, reflecting the cushion provided by the
second-lien loans and unsecured claims.
RATING OUTLOOK
The rating outlook is negative, mainly reflecting Moody's
expectation that Nord Anglia's financial leverage will remain
elevated over the next 12-18 months, despite gradual deleveraging.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely over the next 12-18 months, given the
negative outlook. Nevertheless, the outlook could return to stable
if the company (1) maintains stable business conditions; (2)
pursues acquisitions in a prudent manner; (3) reduces leverage,
such that adjusted debt/EBITDA remains below 7.5x on a sustained
basis; and (4) maintains free cash flow (FCF)/debt in the low
single digits in percentage terms.
The rating could be downgraded if (1) Nord Anglia's business
conditions deteriorate; (2) adjusted debt/EBITDA remains
substantially above 7.5x on a sustained basis; or (3) its liquidity
deteriorates; or (4) and free cash flow generation falls towards
zero.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
CORPORATE PROFILE
Nord Anglia Education, Inc is headquartered in London and operates
69 international premium schools in Asia, Europe, the Middle East,
and North and South America, with around 65,000 students ranging in
level from preschool through secondary school. Nord Anglia also
provides outsourced education and training contracts with
governments and curriculum products through its Learning Services
division. For the 12 months ended August 31st 2020, Nord Anglia
generated revenue of $1.4 billion. Nord Anglia is owned by a
consortium led by the Canada Pension Plan Investment Board and
funds affiliated with Baring Private Equity Asia Group, Inc.
POUNDSTRETCHER: Confirms Plans to Open 50 New Branches Amid CVA
---------------------------------------------------------------
Tom Pegden at BusinessLive reports that Poundstretcher, the
troubled discount store chain, has confirmed that it wants to open
50 new branches, even as dozens of others are closing.
Business-Live revealed in early October that the company was on the
look-out for potential landlords and agents to support the plans to
regain a foothold in 2021.
Now, Poundstretcher and KPMG, which is handling a company voluntary
arrangement (CVA) for the business, have confirmed the plans,
BusinessLive notes.
The initial report was based on a poster seen by Business-Live
saying the chain was looking for potential units to take on,
ranging from existing shops to development sites in town centres
and out-of-town retail parks.
The poster said the business was looking for freehold or leasehold
properties, with A1 planning consent "preferred but not essential"
and "temporary and flexible arrangements considered", BusinessLive
relates.
That came after creditors of the Leicestershire-headquartered
business agreed to the terms of the CVA to help it offload
underperforming outlets, realign its head office and pave the way
for investment in its estate, BusinessLive states.
Despite speculation that half its 450 stores could go, one retail
industry expert told Business-Live at the time that such wholesale
closures could make a business the size of Poundstretcher
unsustainable.
He also warned things could get difficult for the chain when the
pause in business rates ended in the spring, BusinessLive relays.
According to BusinessLive, a spokesman for Poundstretcher said:
"Confirmed closed stores by the end of the year will be 57 since
the CVA date of July 3.
"We are working on replacing these loss-making stores with more
profitable stores in the locations by reaching agreements with
landlords reflecting the current market conditions."
THG HOLDINGS: S&P Upgrades ICR to 'B' on IPO Completion
-------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit rating on
U.K.-Based THG Holdings to 'B' from 'B-'.
The stable outlook reflects S&P's expectation that high capex and
cost inflation will constrain the company's profitability and cash
generation, offsetting its robust growth in market share and
revenue.
Debt was reduced following the IPO, but the increase of
International Financial Reporting Standards (IFRS) 16 liabilities
will weigh on the group's credit metrics.
On Sept. 16, 2020, THG Holdings (formerly The Hut Group Ltd.) began
trading on the London Stock Exchange, following the successful
completion of its IPO. The company raised net proceeds (after fees)
of about GBP890 million, part of which was used to repay the
balance under the RCF and overdraft.
S&P said, "However, despite the repayment, we believe leverage will
increase in 2020. We note that the demerger of the group's former
real estate subsidiary, Kingsmead Holdco Ltd. (PropCo), executed
just before the IPO, had a net negative impact on the group's
adjusted debt. On the one hand, the company deconsolidated all
PropCo-related financial debt (about GBP85 million in 2019) from
its balance sheet. At the same time, it capitalized the IFRS 16
liability arising from the operating lease agreements with the
PropCo--now outside the group. This liability was reported at about
GBP184 million, as of June 30, 2020, and we expect it will
substantially increase as THG rents real estate assets currently
under construction over the rest of 2020 and 2021. We therefore
estimate that the group's adjusted debt will increase to about
GBP750 million-GBP800 million by the end of 2020, harming leverage
metrics."
Persistent cost inflation and growth investments will offset the
robust growth of the top line, taking their toll on near-term
profitability and cash generation. S&P forecasts the group will
deliver more than 25% revenue growth in 2020, supported by a
sustainable increase in e-commerce penetration. The top line
expanded by more than 30% in the first nine months of the year, in
both its Beauty and Nutrition segments.
In contrast to many bricks-and-mortar retailers, THG traded
throughout the entire lockdown period and attracted many new
customers, at a time when some of its competitors were reducing the
scale of their operations. It was also able to capitalize on the
acceleration in online sales, which increased the appeal of its
Ingenuity e-commerce platform. In fact, the group signed several
new long-term license agreements with consumer goods companies
aiming to digitalize their brands and develop direct-to-customer
operations. As a result, S&P forecasts THG will generate revenue of
about GBP1,400 million-GBP1,500 million in 2020.
S&P said, "However, we note that COVID-19 had a negative impact on
profitability, as transportation and logistics costs increased
substantially in the first half of the year, due to a general
decline in commercial flight traffic. We expect this trend to
persist until at least mid-2021, although THG's management took
steps to contain the negative impact. Earnings could be further
constrained by the ongoing integration costs and advisory fees
arising from the repeated acquisitions, in our view. We therefore
forecast S&P Global Ratings-adjusted EBITDA margin at about
5.0%-5.5% in fiscal year (FY) ending Dec. 31, 2020, compared with
7.6% in FY2019.
"This, combined with the abovementioned increase in IFRS 16
liability, will cause leverage to spike to about 10x in 2020, in
our view, before quickly deleveraging toward 5.5x in 2021, on the
back of earnings expansion.
"THG's free operating cash flow (FOCF) generation is still burdened
by large capex. We expect THG to invest close to GBP200 million
cumulatively in capital investments in 2020 and 2021, mostly to
expand the functionalities of its Ingenuity e-commerce platform.
Most of these investments (about 60%) are discretionary by nature,
so the company retains a certain level of flexibility to defer or
cancel them if needed. However, THG will likely have to bear an
elevated level of capex since it has to outfit the new facilities
it will be renting from PropCo. Therefore, we forecast THG will
report FOCF after all lease-related payments of negative GBP150
million-GBP170 million in 2020 and as low as negative GBP50 million
in 2021."
Following its recent IPO, THG shored up its liquidity and updated
its governance framework, but the financial and governance policy
poses some risks. The group will likely use the recently raised
capital to fund future capital investments and acquisitions, in
line with past trends. For example, the group recently announced
the acquisition of Perricone MD, a U.S.-based skincare brand, for a
consideration of about GBP47 million-equivalent. This adds to more
than GBP45 million already spent on capex in the first half of
2020. As a public company, THG's board of directors includes six
members, of whom four are nonexecutives, and covers a breadth of
experience across the consumer goods, tech, and retail industries.
Currently, only two directors are independent, with plans of adding
another within 12 months following the IPO. The group also outlined
clear leverage targets for the medium term and ruled out dividend
payments.
S&P said, "In our analysis of the governance risks, we note that
Mr. Moulding--THG's founder and the largest individual shareholder
prior to the IPO--retained control over the group and holds both
CEO and chairman positions. Mr. Moulding is also the ultimate owner
of the PropCo--the owner of the majority of the group's operating
assets. We therefore see higher risk to the consistency of THG's
financial and governance policy compared with other listed
companies, and we will monitor the execution of THG's medium-term
strategy.
"The stable outlook reflects our expectations of a rapid top-line
expansion of about 20%-25% annually, while modest improvement in
underlying profitability and phasing out of the one-off costs will
underpin drastic reduction in leverage over the next 12-18 months.
We forecast that the adjusted EBITDA margin will grow toward 8.0%
in 2021, from 5.0%-5.5% in 2020, and debt to EBITDA will fall
toward 5.5x in 2021, after peaking at more than 9.0x in 2020. At
the same time, we anticipate that cash generation will remain weak,
with elevated growth capex and rising lease payments consuming more
GBP130 million per year, including commitments to the PropCo. We
also expect the funds raised through the recent IPO will likely be
spent on future organic growth projects and acquisitions, rather
than debt repayment or shareholder remuneration."
S&P could downgrade THG if in the next 12-18 months the group's
operating performance or credit metrics were weaker than its base
case, including:
-- Slowdown in revenues growth to substantially less than 20% per
year;
-- Adjusted EBITDA margin falling short of 7.5%;
-- Inability to consistently reduce leverage; and
-- Persistently negative FOCF after all lease payments and
exceptional operational items.
S&P could also downgrade THG if it considered the group's financial
and governance policy as more aggressive.
Although unlikely over the next 12-18 months, due to S&P's forecast
already incorporating substantial improvement in the group's
profitability and credit metrics, it could raise its ratings on THG
if its earnings and free cash flow generation exceeded our
expectations such that the group consistently posted:
-- Adjusted debt to EBITDA of less than 5.0x;
-- Meaningful and positive FOCF after all lease payments; and
-- A track record of adhering to prudent financial and governance
policy.
TRANSPORT FOR LONDON: Strikes GBP1.8BB Bailout Deal with UK Gov't.
------------------------------------------------------------------
James Cook at The Telegraph reports that Transport for London (TfL)
has struck an eleventh-hour bailout deal with the Government worth
about GBP1.8 billion.
The agreement, reached before a final deadline on Oct. 31, gives
London's transport regulator enough funding for it to continue to
operate until the end of March 2021, The Telegraph relates.
According to The Telegraph, changes to the Congestion Charge which
were introduced in June as part of a previous bailout, including a
30% increase in the charge as well as longer operating hours, will
remain in place under the new deal.
Sadiq Khan, the London mayor who is also chairman of TfL, said
negotiations with the Government over the deal had been "an
appalling and totally unnecessary distraction" as the coronavirus
pandemic continues, The Telegraph notes.
TfL, as cited by The Telegraph, said it would receive a "core
amount of GBP1 billion" including a GBP905 million grant and GBP95
million of borrowing.
Mr. Khan clashed with Boris Johnson over demands from Westminster
for "punitive" charges on Londoners, The Telegraph recounts.
Westminster had lobbied Mr. Khan to agree to a slew of concessions,
including council tax rises, fare increases and an extension to the
congestion charging zone in return for billions in financial
support over the next 18 months, The Telegraph relays.
Last month, Boris Johnson said that TfL had been "effectively
bankrupted" and said the need to increase fares was "entirely the
responsibility" of London's mayor, The Telegraph notes.
The deal comes after ministers were urged to set aside their
differences with Mr. Khan to reach an agreement over TfL's funding
before the introduction of a second lockdown, according to The
Telegraph.
TULLOW OIL: S&P Alters Outlook to Negative & Affirms 'CCC+' ICR
---------------------------------------------------------------
S&P Global Ratings revised its outlook on U.K.-based oil and gas
exploration and production company Tullow Oil PLC (Tullow) to
stable from negative and affirmed its 'CCC+' long-term issuer
credit rating on Tullow and its 'CCC+' issue ratings on its debt.
The stable outlook reflects S&P's view of Tullow's high leverage
and uncertain ability to address the $650 million debt maturity in
April 2022.
The $575 million divestment reduces the risk of a default in the
coming months, but Tullow's liquidity will remain under pressure
until the debt maturities in 2021 and 2022 have been addressed.
S&P said, "The combination of a sharp reduction in production
volumes and low oil prices in 2020 has resulted in a deterioration
in Tullow's liquidity position and a capital structure that we view
as unsustainable. The company's immediate challenges include tight
covenant headroom and significant debt maturities of $300 million
in July 2021 and $650 million in April 2022. To protect its
liquidity, Tullow has announced a $1 billion divestment program.
The $575 million sale of Tullow's assets in Uganda is the first
step of the program, and the company is working on further asset
sales. Under our base-case scenario, the proceeds from the sale of
the Ugandan assets will allow Tullow to repay its debt maturity in
July 2021, but will not be sufficient to address the other
liquidity milestones in full."
In S&P's view, the completion of the full $1 billion divestment
program would help to improve Tullow's overall liquidity, providing
sufficient funds to cover the $650 million notes and restoring
covenant headroom. Completion of the full program would lift some
of the uncertainty about the company's ability to maintain
availability of its reserve-based loan (RBL).
Aside from the liquidity pressure, Tullow's capital structure
remains unsustainable. S&P said, "Following the divestment, we
expect Tullow's reported net debt to be about $2.4 billion at the
end of 2020, compared to about $3.0 billion on June 30, 2020. With
no additional divestments and limited free cash flow, we forecast
no material change in Tullow's net debt position by the end of
2021. As a result, we continue to calculate Tullow's S&P Global
Ratings-adjusted debt to EBITDA at close to 6x in the coming two
years, which we view as unsustainable."
The evolution of the ratings will depend on Tullow's ability to
reposition the business. S&P said, "We expect production of
73,000–77,000 barrels of oil equivalent per day (boepd) in 2020,
with a 5%-10% reduction in 2021, and breakeven free cash flow of
about $50-$55 per barrel (/bbl). In our view, the combination of
weak cash flow, the divestment of promising projects, and the
capital market's low appetite to finance new oil and gas projects
may constrain Tullow's business growth. With limited ability to
increase production in the short term, we expect that the company
will continue to optimize its costs--operating expenditure and
capital expenditure (capex)--improving its resilience while oil
prices are low. At the same time, we believe that in the absence of
higher oil prices, the growth of the business will likely be
limited."
Under our calculations, a change of $10/bbl in oil prices would
translate into about $150 million of free cash flow after hedges,
assuming operating costs remain at the current level (current oil
prices are around $40/bbl, compared to our working assumption of
$50/bbl in 2021). S&P said, "In 2020, we expect the company's
operational costs to be $11-$12/bbl, and a 10% reduction in these
costs would increase free cash flow by about $25 million. In our
view, once Tullow has secured sufficient liquidity sources to
address its upcoming debt maturities, it may direct more funds into
capex, above the level of $300 million (including exploration
expenses) that it guided for 2020."
S&P said, "The stable outlook reflects our expectation that Tullow
will have sufficient cash to cover its liquidity needs in 2021, and
will remain proactive about managing its upcoming debt maturities,
which it will likely fund with the proceeds from asset sales.
"Under our base case, we assume adjusted EBITDA of $740
million-$780 million in 2020 and $720 million-$780 million in 2021.
This translates into adjusted debt to EBITDA of close to 6x, which
we view as unsustainable. In our view, the completion of the full
divestment program is unlikely to change Tullow's credit metrics
materially, unless we also see a quick recovery of oil prices above
$55/bbl.
"We believe the key risk for Tullow is an inability to fund the
$650 million unsecured notes due April 2022. In our base case, we
do not expect Tullow to generate enough cash from its operations to
cover this maturity. The ability to repay this debt will therefore
remain subject to more asset sales that are yet to be announced.
"While we believe that a default is remote in the months following
the divestment of the Ugandan assets, we could envisage such a
scenario if oil prices remained very weak and the company could not
maintain availability under its RBL facility or complete its $1
billion divestment program. In our view, if this was the case, the
company could default on its RBL or consider a distressed exchange
offer."
A higher rating would be contingent on the following:
-- Securing the necessary funds to meet the maturity of the $650
million unsecured notes in April 2022.
-- Maintaining a fair amount of headroom under the RBL's financial
covenants.
-- Adjusted funds from operations (FFO) to debt trending to 12%
and above, and debt to EBITDA improving to 5x and below.
[*] UK: Number of Cos. in Significant Financial Distress Spikes
---------------------------------------------------------------
Daniel Thomas at The Financial Times reports that the number of
companies in significant financial distress has risen at the
fastest rate for three years as businesses face increasing
difficulties given the end of many government Covid-19 business
support schemes.
More than half a million companies were in "significant distress"
in the three months to September, based on data from court orders
to pay off debts, the FT relays, citing corporate restructuring
firm Begbies Traynor. This was an increase of about 6% compared to
the previous three months, the FT notes.
According to the FT, Begbies said the rise comes in spite of a
backlog of court actions that have prevented legal orders being
issued against companies to pay their debts and the ban on winding
up petitions for Covid-related debts.
Significant distress is defined as those businesses with minor
county court judgment of less than GBP5,000 filed against them, or
which have been identified as such by Begbies' credit risk scoring
system.
In recent months companies have also been supported by relaxations
of rules around insolvency and closing down, while being helped to
continue trading by the tens of billions of pounds in
government-backed loans and support for jobs through the furlough
scheme, the FT relates.
However, many of these schemes are coming to an end this year,
sparking warnings of a wave of corporate failures in 2021, the FT
states.
Data from the Office for National Statistics found that nearly half
of businesses had a decrease in turnover, the FT says. Its survey
on the business impact of coronavirus showed 43% of businesses that
had not permanently stopped trading had less than six months cash
reserves, and 64% had a low to severe risk of insolvency, the FT
discloses.
Begbies, the FT says, said 557,000 UK businesses were in
significant distress -- 9% higher than in March when the
coronavirus lockdown started.
The sectors that reported the highest degree of distress included
property -- where cases rose almost a fifth since March -- and
those hardest hit in the Covid-19 lockdown such as retail, bars and
restaurants, the FT relays.
In the last quarter, for example, almost 4,500 more construction
businesses have fallen into significant distress, according to
Begbies, taking the overall number to 72,402, the FT notes. Almost
20,000 businesses in hospitality were in distress, from nearer
18,000 in March, the FT states.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2020. All rights reserved. ISSN 1529-2754.
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