/raid1/www/Hosts/bankrupt/TCREUR_Public/201124.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 24, 2020, Vol. 21, No. 235
Headlines
B E L A R U S
BELARUSIAN NATIONAL: Fitch Affirms B IFS Rating, Outlook Now Neg.
BELARUSIAN REPUBLICAN: Fitch Affirms B IFS Rating, Outlook Now Neg.
EXPORT-IMPORT INSURANCE: Fitch Affirms B IFS Rating, Outlook Neg.
C Y P R U S
AXION HOLDING: S&P Affirms B Long-Term Rating on Improved Liquidity
C Z E C H R E P U B L I C
AVAST HOLDING: S&P Hikes ICR to BB+ on Voluntary Debt Repayments
G E R M A N Y
SC GERMANY: Fitch Assigns BBsf Rating to Class F Debt
G R E E C E
ALPHA BANK: S&P Withdraws CCC+ Rating on Series 3 Notes
I R E L A N D
BAIN CAPITAL 2020-1: S&P Puts Prelim B-(sf) Rating on Class F Notes
BRIDGEPOINT CLO 1: S&P Assigns Prelim B-(sf) Rating to Cl. F Notes
K A Z A K H S T A N
FREEDOM FINANCE: S&P Affirms 'B' ICR on Strong Market Position
L U X E M B O U R G
DIAVERUM HOLDING: S&P Places 'B-' ICR on CreditWatch Positive
NETS TOPCO 3: Fitch Puts B+ LT IDR on Rating Watch Positive
R U S S I A
KRASNOYARSK KRAI: S&P Affirms 'BB' Long-Term ICR, Outlook Negative
POLYUS PJSC: Fitch Affirms BB IDR; Alters Outlook to Positive
S P A I N
CODERE SA: Fitch Assigns CCC+ Rating to EUR250MM Sr. Notes
ID FINANCE: Fitch Publishes B- LT IDR, Outlook Negative
NH HOTEL: Fitch Affirms B- LT IDR, Outlook Negative
VALENCIA: S&P Affirms 'BB/B' Issuer Credit Ratings, Outlook Stable
U N I T E D K I N G D O M
CINEWORLD: Secures GBP336-Mil. Debt Lifeline Amid Pandemic
GOODWIN'S CONSTRUCTION: Enters Administration, 30 Jobs Affected
ONEWEB: Exits Chapter 11 Bankruptcy Protection
SB ENERGY: Fitch Withdraws BB-(EXP) Rating on New $600 MM Notes
SEADRILL LTD: Debt Restructuring Talks with Creditors Ongoing
SYNLAB UNSECURED: Fitch Affirms B LT IDR, Alters Outlook to Pos.
[*] UK: 34% of Hospitality Sector Firms Fear Economic Survival
[*] UK: Nightclub Operators to Meet Business Secretary Today
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B E L A R U S
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BELARUSIAN NATIONAL: Fitch Affirms B IFS Rating, Outlook Now Neg.
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Fitch Ratings has revised Belarusian National Reinsurance
Organisation's (Belarus Re) Outlook to Negative from Stable and
affirmed the reinsurer's Insurer Financial Strength (IFS) Rating at
'B'.
KEY RATING DRIVERS
The revision of the Outlook follows a similar action on Belarus's
sovereign Long-Term Local Currency Issuer Default Rating (IDR) on
November 13, 2020.
The rating continues to reflect the reinsurer's 100% state
ownership and capital support from the state when needed. In
addition, the rating reflects the leading market positions of the
reinsurer in its key business segments, its sustainable profit
generation and the fairly low quality of its investment portfolio.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A material adverse change in Fitch's rating assumptions with
respect to the coronavirus impact.
- A downgrade of Belarus's Local-Currency Long-Term IDR would
lead to an equivalent change in the reinsurer's IFS Rating.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A positive rating action is prefaced by Fitch's ability to
reliably forecast the impact of the coronavirus pandemic on the
financial profiles of both the Belarusian insurance sector and the
reinsurer.
- A revision of the Outlook for Belarus's Local-Currency
Long-Term IDR to Stable would lead to an equivalent change in the
reinsurer's IFS Rating Outlook.
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.
BELARUSIAN REPUBLICAN: Fitch Affirms B IFS Rating, Outlook Now Neg.
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Fitch Ratings has revised Belarusian Republican Unitary Insurance
Company's Outlook to Negative from Stable and affirmed the
company's Insurer Financial Strength (IFS) Rating at 'B'.
KEY RATING DRIVERS
The revision of the Outlook follows a similar action on Belarus's
sovereign Long-Term Local Currency Issuer Default Rating (IDR) on
November 13, 2020.
The rating continues to reflect the insurer's 100% state ownership
and capital support from the state when needed. In addition, the
rating reflects the leading market positions of the insurer in its
key business segments, its sustainable profit generation and the
fairly low quality of its investment portfolio. The rating of
Belgosstrakh also benefits from state guarantees for insurance
liabilities under compulsory lines.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A material adverse change in Fitch's rating assumptions with
respect to the coronavirus impact.
- A downgrade of Belarus's Local-Currency Long-Term IDR would
lead to an equivalent change in the insurer's IFS Rating.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A positive rating action is prefaced by Fitch's ability to
reliably forecast the impact of the coronavirus pandemic on the
financial profiles of both the Belarusian insurance sector and the
insurer.
- A revision of the Outlook for Belarus's Local-Currency
Long-Term IDR to Stable would lead to an equivalent change in the
insurer's IFS Rating Outlook.
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.
EXPORT-IMPORT INSURANCE: Fitch Affirms B IFS Rating, Outlook Neg.
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Fitch Ratings has revised Export-Import Insurance Company of the
Republic of Belarus's (Eximgarant) Outlook to Negative from Stable
and affirmed the company's Insurer Financial Strength (IFS) Rating
at 'B'.
KEY RATING DRIVERS
The revision of the Outlook follows a similar action on Belarus's
sovereign Long-Term Local Currency Issuer Default Rating (IDR) on
November 13, 2020.
The rating continues to reflect the insurer's 100% state ownership
and capital support from the state when needed. In addition, the
rating reflects the leading market positions of the insurer in its
key business segments, its sustainable profit generation and the
fairly low quality of its investment portfolio. The rating of
Eximgarant also benefits from state guarantees for insurance
liabilities under compulsory and export credit insurance.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A material adverse change in Fitch's rating assumptions with
respect to the coronavirus impact.
- A downgrade of Belarus's Local-Currency Long-Term IDR would
lead to an equivalent change in the insurer's IFS Rating.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A positive rating action is prefaced by Fitch's ability to
reliably forecast the impact of the coronavirus pandemic on the
financial profiles of both the Belarusian insurance sector and the
insurer.
- A revision of the Outlook for Belarus's Local-Currency
Long-Term IDR to Stable would lead to an equivalent change in the
insurer's IFS Rating Outlook.
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.
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C Y P R U S
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AXION HOLDING: S&P Affirms B Long-Term Rating on Improved Liquidity
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S&P Global Ratings affirmed its 'B' long-term rating on Axion
Holding Cyprus Ltd.
The stable outlook reflects its expectation that, over the coming
12 months, the company's adjusted debt to EBITDA will remain in the
range 3x-4x.
Liquidity risks reduced after recent refinancing.
Axion issued a RUB5 billion bond in October 2020, with part of the
proceeds channeled to short-term debt repayment. This, together
with the issuance in April 2020 of a RUB1.35 billion bond maturing
in January 2023, led us to revise its liquidity to adequate from
previously less than adequate. Those bond issuances also helped to
lengthen the company's debt maturity profile. Axion's weighted
average maturity improved closer to 3x from less than 2x in March
2020.
Axion's growth benefits from accelerated digitalization but margins
remain relatively low.
Axion is increasing market share in Microsoft software distribution
business and continues expansion into more profitable cloud
business. S&P believes that the company's growing scale and its
success in cost optimization could help Axion to improve its
profitability in the medium term. Currently Axion's adjusted EBITDA
margin, at about 3%, is below average for the added-value
technology resellers sector, which is in the range of 6%-8%. This
stems from Axion's still high share of low value-added software and
hardware reselling in its product mix and price pressure due to
competition with other IT product resellers.
Business growth translates into decreasing leverage, with adjusted
debt to EBITDA expected at about 3.0x in the year to March 2021.
The company's S&P Global Ratings-adjusted debt to EBITDA dropped
materially to 3.2x in the year to March 30, 2020 (fiscal 2020) from
4.4x in fiscal 2019 and 6.6x in fiscal 2018. S&P said, “We think
it could further improve in the coming years. Still, we believe
that the company's acquisitive strategy and financial policy allow
for adjusted leverage remaining in the 3x-4x range. In the current
fiscal year, we expect the company's adjusted EBITDA to approach
$50 million, increasing from $39 million in fiscal 2020 on the back
of strong demand for remote work-related software, cloud service,
and cybersecurity software. This could support adjusted debt to
EBITDA decreasing toward 3x. In our adjusted EBITDA calculation for
the previous year, we deduct $3 million of capitalized development
costs. Our adjusted debt calculation includes $39 million of
operating leases (both reported under International Financial
Reporting Standards 16 and our incremental adjustment of $15
million to ensure better comparability with peers), and $15 million
of preferred stock, which we add to debt because it can be redeemed
for cash under certain conditions. We net the company's investment
in 10% of Norwegian Crayon's listed shares with a book value of $13
million (although we are mindful that the market value is currently
much higher) against Axion's debt, since we believe these assets to
be accessible for debt repayment. However, we don't net Axion's
cash balances against its debt because we believe it is tied into
the company's working capital."
Small scale and concentration on Microsoft and Russia remain key
risks.
S&P said, "We continue to incorporate in our business risk
assessment our view that Axion remains markedly smaller than its
global peers, and has low market share in a globally fragmented and
highly competitive Russian IT market. We also factor in Axion's
high reliance on Microsoft as a key supplier, representing about
50% of Axion's consolidated turnover globally and 40% in Russia, as
well the company's concentration on Russia, with about 90% of
EBITDA coming from this country. As a result, we factor in high
regulatory risks and exposure to Russian country risk. We are
mindful of the heightened substitution risk due to the Russian
government's import replacement policies, notably those policies
regarding the software supplied to Russian government-related
entities, which we understand represents about 10% of Axion's
portfolio. Nevertheless, we believe that the substitution threat is
moderate over the medium term due to the lack of suitable local
substitutes, in particular for Microsoft products.
"The stable outlook reflects our expectation that Axion will
maintain its adjusted debt to EBITDA between 3x and 4x in the next
12 months. Our view is supported by our assumption that Axion will
maintain its competitive position in the software licensing
segment. We also expect Axion will continue diversifying its
activity through expanding its cloud business, which should allow
it to gradually reduce the concentration on Microsoft.
"We could upgrade Axion if it increases its scale and improves its
EBITDA margin toward 5%. Additional factors that would support an
upgrade are a higher share of recurring revenue and smaller
concentration on Russia or Microsoft. A higher rating could also
hinge on adjusted debt to EBITDA sustainably below 3.0x and a free
cash flow-to-debt ratio of more than 10%, supported by a more
conservative financial policy together with adequate liquidity.
"We could take a negative rating action if liquidity risk
heightened due to a delay in refinancing that resulted in liquidity
sources being lower than liquidity uses over the next 12 months. A
downgrade might also follow if, for protracted period, Axion's
leverage remained materially above 4.0x or its free operating cash
flow (FOCF) remained negative."
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C Z E C H R E P U B L I C
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AVAST HOLDING: S&P Hikes ICR to BB+ on Voluntary Debt Repayments
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S&P Global Ratings raised its issuer and issue credit ratings on
Czech software company Avast Holding B.V. to 'BB+' from 'BB'. The
recovery rating on Avast's term loans is unchanged at '3'.
Avast has established a track record of voluntary debt repayments
and its growth strategy depends less on acquisitions, which
supports the rating. It prepaid $200 million (about 20%) of its
term loans during the first nine months of 2020, after a voluntary
debt reduction of $297 million in 2019. It achieved this through
strong free cash flow generation and because it has not pursued any
material acquisitions since the merger with AVG back in 2016. Over
the medium term, we expect Avast's inorganic growth strategy to be
focused on cash-financed tuck-in acquisitions, which will have
limited adverse impact on leverage. Avast's clear dividend policy
and positive track record of debt reduction also limit the risk of
a significant increase in shareholder remuneration. As a result,
S&P expects leverage to decline to about 1.7x in 2020 and to remain
sustainably below 2x thereafter.
Solid performance to date is supported by work-from-home measures,
which resulted in strong cash flow generation. Avast's performance
in the year to date exceeded our previous expectations--the data
privacy concerns related to its personal data collection business,
Jumpshot, have had little impact on customer retention after it
immediately disposed of the business. Revenue for the first nine
months of 2020 increased by 1.9%. Indeed, organic growth was 7.3%,
excluding the Jumpshot division, which had provided 4% of revenue
in FY2019. The consumer desktop division generates about 75% of
Avast's revenue and benefited from measures to support working from
home during the COVID-19 pandemic. As a result, the division saw
top-line growth of 9.1% during the first half of the year, mostly
on the back of strong user growth in privacy products such as VPN
and AntiTrack. S&P said, "As a result, we now expect 1%-3% top-line
growth in FY2020 (about 6%-8% on an organic basis) and about 3%
growth in FY2021. Previously, we forecast a top-line decline of 3%,
and 3% in organic growth. Based on stronger-than-anticipated
operating performance; lower interest expense due to voluntary debt
repayments; lower interest rates; and solid growth in deferred
revenue, we now expect FOCF of about $380 million-$390 million in
FY2020 and $390 million-$400 million in FY2021, compared with $310
million-$320 million and $320 million-$330 million previously."
S&P said, "Avast's high exposure to the competitive consumer
desktop segment, which has uncertain long-term growth prospects,
constrains our business risk assessment. Avast generates most of
its revenue from the highly competitive consumer desktop segment,
which has high customer attrition of about 30%-35% a year because
switching carries minimal costs for its end customers (including
switching to the free version of Avast's own products). Declining
PC sales and the ongoing transition of online activities to mobile
from desktop also constrain the segment's long-term growth
prospects. At the same time, despite the favorable industry trends,
performance at Avast's mobile and small and midsize enterprise
(SME) divisions has been subdued. These generate about 13% of
revenue between them, with mobile generating 8% and SME 5%. We
attribute this to a lack of clear strategy for monetizing the
mobile security market and a declining market share in the SME
market, where Avast faces significant competition from well-known
brands. During the first half of 2020, revenue declined by 4% at
the mobile division and by 7% at the SME division. Avast's mobile
segment relies heavily on the carrier distribution model, unlike
its direct business for its desktop division. It therefore took a
hit when the company lost contracts with certain U.S. carriers.
Meanwhile, the SME segment still hasn't recovered from exiting
certain countries."
The stable outlook is based on Avast's stable operating performance
and the expected reported top-line growth of 1%-3% (6%-8%
organically) in FY2020 and 1%-3% growth in FY2021. It has continued
to monetize its freemium user base and maintained stable adjusted
EBITDA margins of about 52%-54% which should enable FOCF to debt to
be above 40%. Because it is neither pursuing transformative
acquisitions nor altering its stable dividend policy, S&P expects
its adjusted debt to EBITDA to remain below 2x.
Although remote at this stage, S&P could lower the rating if Avast
deviates from its prudent acquisition and shareholder remuneration
policies and increases leverage on its balance sheet.
This could happen if acquisitions or increased shareholder
remuneration caused adjusted leverage to rise above 2x on a
sustainable basis.
S&P said, "We could raise the rating by one notch if Avast manages
to invigorate its mobile and SME divisions such that their solid
growth enables meaningful diversification from consumer desktop
segment. This would have to be accompanied by clear financial
policy commitment and a track record of maintaining leverage below
2x on a net debt basis. We view this scenario as unlikely within
the next 12 months."
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G E R M A N Y
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SC GERMANY: Fitch Assigns BBsf Rating to Class F Debt
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Fitch Ratings has assigned SC Germany S.A., Compartment Consumer
2020-1's (SCGC 2020-1) notes final ratings.
RATING ACTIONS
SC Germany S.A., Compartment Consumer 2020-1
Class A; LT AAAsf New Rating; previously AAA(EXP)sf
Class B; LT AAsf New Rating; previously AA(EXP)sf
Class C; LT Asf New Rating; previously A(EXP)sf
Class D; LT BBBsf New Rating; previously BBB(EXP)sf
Class E; LT BB+sf New Rating; previously BB+(EXP)sf
Class F; LT BBsf New Rating; previously BB(EXP)sf
Class G; LT NRsf New Rating; previously NR(EXP)sf
TRANSACTION SUMMARY
In SCGC 2020-1 Santander Consumer Bank AG (SCB, A-/Negative/F2) has
securitised an unsecured consumer loan portfolio with a 12-month
revolving period. The rated notes pay down pro rata until a
performance or other trigger is breached. This is SCB's sixth
public unsecured consumer transaction but the first that Fitch will
rate.
KEY RATING DRIVERS
Performance Expectation Near Financial Crisis
Fitch set a base case between the global financial crisis of
2007-2009 and more recent vintages, at 6% default rate and 15%
recovery rate. Fitch believes default and recovery rates will near
levels last seen during the financial crisis, because measures to
halt the spread of the coronavirus will shrink borrowers' incomes.
Fitch believes the economy will recover faster than after 2009, so
Fitch expects performance to be better than in the financial
crisis.
Revolving Period Affects Pro-rata Length
The portfolio's behaviour during the revolving period will extend
or shorten the pro-rata amortisation period, because triggers that
terminate the pro rata period incorporate the revolving period's
defaults, recoveries and replenishment. A lower trigger value will
shorten the pro-rata period and allow less funds to flow to junior
notes. Fitch set assumptions for defaults and replenishment during
the revolving period to determine a trigger value at start of
amortisation.
CPR Hurts Senior Notes
Fitch has set a 22% base-case prepayment (CPR) assumption, which is
high relative to peers but still slightly below the historical
average in SCB's portfolio. The high CPR exposes senior notes to
late defaults by allocating a large portion of principal payments
to junior notes during the pro rata period.
Counterparty Risks Addressed
The transaction has a fully funded liquidity facility for payment
interruption and reserves for commingling and set-off risk, which
will be funded if the seller or Santander Consumer Finance, S.A.
(SCF; A-/Negative/F2) is downgraded. All reserves are adequate to
cover their respective exposures in line with its Structured
Finance and Covered Bonds Counterparty Rating Criteria. Replacement
criteria for the servicer, account bank and swap counterparty are
adequately defined and relevant ratings are above its criteria
thresholds.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Unanticipated decreases in the frequency of defaults or decreases
in recovery rates could produce lower losses than the base case and
could result in positive rating action on the notes. For example, a
simultaneous decrease of the default base case by 10% and increase
of the recovery base case by 10% would lead to a one-notch upgrade
of the class C notes.
Original ratings
Class A: AAAsf; Class B: AAsf; Class C: Asf; Class D: BBBsf; Class
E: BB+sf; Class F: BBsf
10% decrease in default rate
Class A: AAAsf; Class B: AA+sf; Class C: A+sf; Class D: BBB+sf;
Class E: BBB-sf; Class F: BB+sf
10% increase in recovery rate
Class A: AAAsf; Class B: AAsf; Class C: Asf; Class D: BBBsf; Class
E: BB+sf; Class F: BBsf
10% decrease in default rate and 10% increase in recovery rate
Class A: AAAsf; Class B: AA+sf; Class C: A+sf; Class D: BBB+sf;
Class E: BBB-sf; Class F: BB+sf
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Unanticipated increases in the frequency of defaults or decreases
in recovery rates could produce larger losses than the base case
and could result in negative rating action on the notes. For
example, a simultaneous increase of the default base case by 10%
and decrease of the recovery base case by 10% would lead to a
one-notch downgrade of the class A notes.
Original ratings
Class A: AAAsf; Class B: AAsf; Class C: Asf; Class D: BBBsf; Class
E: BB+sf; Class F: BBsf
10% increase in default rate
Class A: AA+sf; Class B: AA-sf; Class C: A-sf; Class D: BBB-sf;
Class E: BB+sf; Class F: BBsf
10% decrease in recovery rate
Class A: AAAsf; Class B: AAsf; Class C: Asf; Class D: BBBsf; Class
E: BB+sf; Class F: BBsf
10% increase in default rate and 10% decrease in recovery rate
Class A: AA+sf; Class B: AA-sf; Class C: A-sf; Class D: BBB-sf;
Class E: BB+sf; Class F: BBsf
Coronavirus Downside Scenario
Fitch acknowledges the uncertainty of the future path of
coronavirus-related containment measures, and has therefore
considered a more severe economic downturn than currently
contemplated in Fitch's base-case scenario. In the downside
scenario, targeted measures to contain coronavirus hotspots fail.
To prevent health systems from being overwhelmed, economies are
locked down again as in 2Q20. Lockdown measures, coupled with
extended periods of voluntary social distancing, cause a second
round of GDP declines. These prompt stress in financial markets
comparable to 2Q20, which in turn provokes a longer-lasting,
negative wealth and confidence shock that depresses consumer demand
and lead to a prolonged period of below-trend economic activity.
Recovery to pre-crisis GDP levels would be delayed until around the
middle of the decade. Economic contraction will return in the US
and Europe as major setbacks in containing the spread of the
coronavirus derail recovery progress and keep unemployment at
elevated levels, depressing personal income. For this sensitivity
Fitch assumed an 8% default rate, a 4.0x 'AAA'sf multiple, 10%
recovery rate and 50% 'AAA'sf haircut. Fitch found the ratings to
be sensitive to this more severe scenario causing rating category
changes on almost all notes.
Class A: AAsf; Class B: A+sf; Class C: BBB+sf; Class D: BB+sf;
Class E: BBsf; Class F: B-sf
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch reviewed the results of a third-party assessment conducted on
the asset portfolio information, and concluded that there were no
findings that affected the rating analysis.
Fitch conducted a review of a small targeted sample of the
originator's origination files and found the information contained
in the reviewed files to be adequately consistent with the
originator's policies and practices and the other information
provided to the agency about the asset portfolio.
Overall, Fitch's assessment of the asset pool information relied
upon for the agency's rating analysis according to its applicable
rating methodologies indicates that it is adequately reliable.
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.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and
enforcement mechanisms (RW&Es) that are disclosed in the offering
document and which relate to the underlying asset pool is available
by clicking the link to the Appendix. The appendix also contains a
comparison of these RW&Es to those Fitch considers typical for the
asset class as detailed in the Special Report titled
'Representations, Warranties and Enforcement Mechanisms in Global
Structured Finance Transactions'.
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.
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G R E E C E
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ALPHA BANK: S&P Withdraws CCC+ Rating on Series 3 Notes
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S&P Global Ratings withdrew its 'CCC+' issue rating on Alpha Bank's
(B/Stable/B) Covered Bond Program II, Series 3 Note (ISIN
XS2086617441), which was erroneously assigned on Nov. 8, 2019, due
to a system error.
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I R E L A N D
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BAIN CAPITAL 2020-1: S&P Puts Prelim B-(sf) Rating on Class F Notes
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S&P Global Ratings assigned its preliminary credit ratings to Bain
Capital Euro CLO 2020-1 DAC's class X, A, B-1, B-2, C, D, E, and F
notes. At closing, the issuer will also issue unrated subordinated
notes.
Bain Capital Euro CLO 2020-1 is a European cash flow CLO
transaction, securitizing a portfolio of primarily senior secured
leveraged loans and bonds. The transaction will be managed by Bain
Capital Credit U.S. CLO Manager, LLC.
The preliminary ratings assigned to Bain Capital Euro CLO 2020-1's
notes reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which S&P expects to be
bankruptcy remote.
-- The transaction's counterparty risks, which S&P expects to be
in line with its counterparty rating framework.
-- Under the transaction documents, the rated notes will pay
quarterly interest unless there is a frequency switch event.
Following this, the notes will permanently switch to semiannual
payment.
-- The portfolio's reinvestment period will end approximately
three years after closing, and the portfolio's maximum average
maturity date will be seven and a half years after closing.
A notable feature in this transaction is the introduction of loss
mitigation obligations. Loss mitigation obligations allow the
issuer to participate in potential new financing initiatives by a
borrower in default or in distress. 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. While the objective is
positive, it may 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 these loans'
positive effect 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.
Loss mitigation obligation mechanics
Under the transaction documents, the issuer can purchase loss
mitigation obligations, which are assets of an existing collateral
obligation held by the issuer, offered in connection with
bankruptcy, workout, or restructuring of the obligation, to improve
the recovery value of the related collateral obligation.
The purchase of loss mitigation obligations is not subject to the
reinvestment or eligibility criteria. They receive no credit in the
principal balance definition--except where loss mitigation
obligations meet the eligibility criteria, with certain exclusions,
and are purchased using principal proceeds–-in which case they
are afforded defaulted treatment in par coverage tests.
To protect the transaction from par erosion, any distributions
received from loss mitigation obligations, which are afforded
credit in the par coverage tests, will irrevocably form part of the
issuer's principal account proceeds. The cumulative exposure to
loss mitigation obligations is limited to 10% of target par.
The issuer may purchase loss mitigation obligations using either
interest proceeds, principal proceeds, or amounts in the
supplemental reserve account. The use of interest proceeds to
purchase loss mitigation obligations is subject to all interest
coverage tests passing following the purchase, and the manager
determining that there are sufficient interest proceeds to pay
interest on all the rated notes on the upcoming payment date.
The use of principal proceeds is subject to passing par coverage
tests and the manager having built sufficient excess par in the
transaction so that the principal collateral amount is equal to or
exceeds the portfolio's target par balance after the reinvestment.
To protect the transaction from par erosion, any distributions
received from loss mitigation obligations that are either purchased
with the use of principal, or purchased with interest or amounts in
the supplemental account--and have been afforded credit in the
coverage tests--will irrevocably form part of the issuer's
principal account proceeds and cannot be recharacterized as
interest.
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
collateralized debt obligations. As such, we have not applied any
additional scenario and sensitivity analysis when assigning
preliminary ratings to any classes of notes in this transaction.
"In our cash flow analysis, we used the EUR300 million target par
amount, the covenanted weighted-average spread (3.71%), the
reference weighted-average coupon (4.30%), and the covenanted
weighted-average recovery rates 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. Our
credit and cash flow analysis indicates that the available credit
enhancement for the class B-1 to F notes could withstand stresses
commensurate with 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 preliminary ratings assigned to the
notes.
"Under our structured finance ratings above the sovereign criteria,
we consider that the transaction's exposure to country risk is
sufficiently mitigated at the assigned preliminary rating levels."
Until the end of the reinvestment period on Jan. 22, 2024, 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 compares that with the
default potential of the current portfolio plus par losses to date.
As a result, until the end of the reinvestment period, the
collateral manager can, 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 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 preliminary ratings
are commensurate with the available credit enhancement for each
class of notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class X to E notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication. The results shown are based on actual weighted-average
spread, coupon, and recoveries.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
S&P Global Ratings believes there remains a high degree of
uncertainty about the evolution of the coronavirus pandemic.
Reports that at least one experimental vaccine is highly effective
and might gain initial approval by the end of the year are
promising, but this is merely the first step toward a return to
social and economic normality; equally critical is the widespread
availability of effective immunization, which could come by the
middle of next year. S&P said, "We use 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."
The transaction securitizes a portfolio of primarily senior secured
leveraged loans and bonds, and will be managed by Bain Capital
Credit U.S. CLO Manager, LLC.
Preliminary Ratings
Class Prelim Balance Subordination (%) Interest
rating (mil. EUR) rate
X AAA (sf) 1.50 N/A Three/six-month EURIBOR
plus 0.50%
A AAA (sf) 182.40 39.20 Three/six-month EURIBOR
plus 1.10%
B-1 AA (sf) 15.30 29.10 Three/six-month EURIBOR
plus 1.85%
B-2 AA (sf) 15.00 29.10 2.10%
C A (sf) 17.10 23.40 Three/six-month EURIBOR
plus 3.10%
D BBB (sf) 20.10 16.70 Three/six-month EURIBOR
plus 4.25%
E BB- (sf) 17.70 10.80 Three/six-month EURIBOR
plus 6.50%
F B- (sf) 5.40 9.00 Three/six-month EURIBOR
plus 8.03%
Sub notes NR 29.90 N/A N/A
NR--Not rated.
N/A--Not applicable.
EURIBOR--Euro Interbank Offered Rate.
BRIDGEPOINT CLO 1: S&P Assigns Prelim B-(sf) Rating to Cl. F Notes
------------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to
Bridgepoint CLO 1 DAC's class A to F European cash flow CLO notes.
At closing, the issuer will issue unrated subordinated notes.
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.
The preliminary 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 transaction's legal structure, which we expect to be
bankruptcy remote.
-- The transaction's counterparty risks, which we expect to be in
line with S&P's counterparty rating framework.
Portfolio Benchmarks
Current
S&P weighted-average rating factor 2,899.40
Default rate dispersion 470.74
Weighted-average life (years) 5.36
Obligor diversity measure 88.17
Industry diversity measure 16.49
Regional diversity measure 1.19
Transaction Key Metrics
Current
Portfolio weighted-average rating
derived from our CDO evaluator B
'CCC' category rated assets (%) 3.47
Covenanted 'AAA' weighted-average recovery (%) 35.22
Covenanted weighted-average spread (%) 3.70
Covenanted weighted-average coupon (%) 4.50
Unique Features
Loss mitigation obligations
Under the transaction documents, the issuer can purchase loss
mitigation obligations, which are assets of an existing collateral
obligation held by the issuer offered in connection with
bankruptcy, workout, or restructuring of an obligation, to improve
the recovery value of the related collateral obligation.
The purchase of loss mitigation obligations 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 transaction documents limit the CLO's exposure to loss
mitigation obligations that can be acquired with principal proceeds
to 3% of the target par amount.
The issuer may purchase loss mitigation obligations using either
interest proceeds, principal proceeds, or amounts standing to the
credit of the collateral enhancement account. The use of interest
proceeds to purchase loss mitigation obligations are subject to the
manager determining there are sufficient interest proceeds to pay
interest on all the rated notes and that all coverage tests would
pass on the upcoming payment date. The usage of principal proceeds
is subject to the following conditions: (i) par coverage tests
passing following the purchase; (ii) the manager having built
sufficient excess par in the transaction so that the principal
collateral amount is equal to or exceeding the portfolio's target
par balance after the reinvestment; (iii) the obligation is a debt
obligation that is pari passu or senior to the obligation already
held by the issuer with its maturity falling before the rated
notes' maturity date and not purchased at a premium.
To protect the transaction from par erosion, any distributions
received from loss mitigation loans that are either (i) purchased
with the use of principal, or (ii) purchased with interest or
amounts in the collateral enhancement 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 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 A or B notes on
the next succeeding payment date.
The bankruptcy exchange feature is only applicable during the
transaction's reinvestment period.
Rating rationale
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 EUR300 million target par
amount, the covenanted weighted-average spread (3.70%), the
covenanted weighted-average coupon (4.50%), and the covenanted
weighted-average recovery rates for all rating levels. We applied
various cash flow stress scenarios, using four different default
patterns, in conjunction with different interest rate stress
scenarios for each liability rating category.
"Under our structured finance sovereign risk criteria, we consider
that the transaction's exposure to country risk is sufficiently
mitigated at the assigned preliminary ratings."
Until the end of the reinvestment period on Jan. 15, 2024, the
collateral manager may substitute assets in the portfolio for so
long as S&P's 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 preliminary ratings
are commensurate with the available credit enhancement for the
class A to F notes. Our credit and cash flow analysis indicates
that the available credit enhancement for the class B1, B2, and C
notes 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 preliminary ratings assigned to the 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 A to E notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication.
"With regards the class F notes, as our ratings analysis makes
additional considerations before assigning ratings in the 'CCC'
category we would assign a 'B-' rating if the criteria for
assigning a 'CCC' category rating are not met."
S&P Global Ratings believes there remains a high degree of
uncertainty about the evolution of the coronavirus pandemic.
Reports that at least one experimental vaccine is highly effective
and might gain initial approval by the end of the year are
promising, but this is merely the first step toward a return to
social and economic normality; equally critical is the widespread
availability of effective immunization, which could come by the
middle of next year. S&P said, "We use 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."
The transaction securitizes a portfolio of primarily senior-secured
leveraged loans and bonds, and it will be managed by Bridgepoint
Credit Management Ltd.
Ratings List
Class Prelim. Prelim. amount Interest Credit
rating (mil. EUR) rate (%) enhancement (%)
A AAA (sf) 180.00 3mE + 1.21 40.00
B1 AA (sf) 17.50 3mE + 1.95 30.50
B2 AA (sf) 11.00 2.10 30.50
C A (sf) 23.00 3mE + 2.95 22.83
D BBB (sf) 19.80 3mE + 4.25 16.23
E BB- (sf) 15.70 3mE + 6.08 11.00
F B- (sf) 7.50 3mE + 7.74 8.50
Sub NR 27.35 N/A N/A
NR--Not rated.
N/A--Not applicable.
3mE--Three-month Euro Interbank Offered Rate.
===================
K A Z A K H S T A N
===================
FREEDOM FINANCE: S&P Affirms 'B' ICR on Strong Market Position
--------------------------------------------------------------
S&P Global Ratings affirmed its 'B' issuer credit rating and
'kzBB+' national scale rating on Kazakhstan-based Freedom Finance
Insurance (FFI). The outlook is stable.
S&P's credit analysis on FFI continues to reflect the balance
between the insurer's modest/minor market share, sound liquidity
cushion, relatively small absolute capital size, and conservative
investment strategies.
Over the past two years, FFI has rapidly established its franchise
on the Kazakhstan property and casualty (P/C) market. The start-up
costs resulted in initial operating losses in 2019. S&P said,
"Considering the Kazakhstan tenge (KZT) 2.9 billion in gross
written premium (GWP) over the first 10 months of 2020, we believe
that the company is still growing, with a budding market share of
slightly above 1% for the same period. During that time, FFI grew
by 29% (compared with the same period in 2019), based on GWP, and
posted a negative underwriting result due to the still high expense
ratio. We forecast that FFI's GWP will climb further at around 15%
in 2021-2022, primarily in the motor insurance sector, while the
economy recovers from COVID-19 fallout and low oil prices in 2020.
However, we anticipate that the company won't achieve underwriting
profitability until after 2022 because of still high expense ratios
of above 60% in 2021 and gradually growing loss ratios (close to
45%-50% by end-2022). That said, we expect that the company will be
able to manage its cost base and underwriting profitability."
Founded by Russian businessman Mr. Timur Turlov, FFI commenced
operations at the beginning of 2019 and benefited from good
capitalization relative to its still small portfolio. However, the
FFI's forecasted capital adequacy in 2020-2021 might come under
pressure due to substantial insurance premium growth in 2020. We
consider that the company may lean on potential capital support
from the shareholder if this is the case. S&P believes shareholder
is committed to further FFI's business growth, as demonstrated by
the KZT1.5 billion capital injection earlier this year. This
supported helped keep the regulatory ratio (167% as of Nov. 1,
2020) sufficiently above minimum requirements of 100%. Our view of
the company's capital adequacy offsets any setbacks stemming from
its relatively small absolute size in an international context
(total capital/equity close to USD11 million as of Nov. 1, 2020).
S&P considers, however, the company's healthy business volume and
expected gradually stabilizing operating performance.
FFI continued to follow its approved investment strategy. S&P said,
"The average credit quality of the company's investment portfolio
is at our 'BBB' level, and its investments are toward cash,
government-related assets and bonds, as well as deposits, which is
generally the highest credit quality available in domestic
currency. This supports our view of the company's modest risk
tolerance. FFI has limited exposure to foreign-exchange risk
because most of its assets (close to 95%) and liabilities are
denominated in Kazakhstani tenge. We consider that this allowed FFI
to create a sufficient liquidity cushion to meet its future
insurance obligations."
The stable outlook reflects S&P's view that FFI will continue to
gradually establish its franchise in Kazakhstan over the next 12
months. It also factors in its expectation that FFI will preserve a
sufficient capital cushion and earnings relative to the complexity
of risks that it will write during this period.
S&P could consider a negative rating action in the next 12 months
if:
-- FFI's capital adequacy weakened because of
stronger-than-expected growth, higher-than-expected losses, or in
the absence of further capital support from the owner; or
-- FFI revised its investment strategy, prompting a significant
drop in the average quality of invested assets to 'BB' or below.
A positive rating action is unlikely within the next 12 months. It
would most likely depend on better-than-expected operating
performance. This could happen if execution risk reduces as the
company establishes its presence and strengthens its reputation in
Kazakhstan, while maintaining stable operating performance that
===================
L U X E M B O U R G
===================
DIAVERUM HOLDING: S&P Places 'B-' ICR on CreditWatch Positive
-------------------------------------------------------------
S&P Global Ratings placed its 'B-' issuer credit rating on Diaverum
Holding Sarl and its 'B-' issue rating on the group's senior
secured credit facilities on CreditWatch with positive
implications.
The CreditWatch placement follows the Nov. 16 announcement of the
planned listing of Diaverum AB on the Nasdaq Stockholm Stock
Exchange.
S&P said, "The process, which we expect to conclude by the end of
this year, will include both the selling of existing shares by the
majority financial sponsor, Bridgepoint Advisers, and the issuance
of new shares. We expect the proceeds from the new share issuance
by Diaverum AB to total approximately EUR290 million, which the
group will use to repay the current drawdowns under the group's RCF
(EUR130 million as of Sept. 30, 2020), partly repay its EUR740
million term loan B maturing in July 2024, and bolster certain cash
balances for general corporate purposes, such as future
acquisitions and the payment of transaction fees related to the IPO
process. We understand the group will use the proceeds from the
sold Bridgepoint-owned shares to repay in full the existing EUR160
million second-lien facilities due July 2025, as well as the EUR220
million term loan B add-on due July 2024." These facilities are
currently at the Diaverum Holding Sarl level. Following the
transaction's completion, we understand there will be no debt
siting above Diaverum AB, the future listed entity. According to
the existing senior secured debt documentation, for pro
forma--after listing--senior secured net debt to EBITDA of above
4.75x, at least 50% of the net cash proceeds from a group listing
need to be applied for debt repayment purposes.
The publicly stated net debt to EBITDA of no higher than 3.5x
supports a higher credit rating.
S&P said, "Based on the latest available information, we anticipate
that the transaction will result in a material debt reduction from
the currently very high level. Diaverum's S&P Global
Ratings-adjusted gross cash-paying debt to EBITDA stood at 8.0x in
2019, down from 9.1x in 2018, rising to 16.7x when including EUR1.3
billion of super senior and preferred equity certificates that we
view as debt-like under our methodology."
The COVID-19 pandemic has had a limited effect on the group so far
this year.
S&P said, "This is particularly pertinent in terms of revenue, and
we expect this to remain the case, given that dialysis is
life-saving in nature and patients require regular treatment. In
the year to date (Sept. 30, 2020), the COVID-19 pandemic has caused
an approximate EUR7.1 million increase in the group's cost base, of
which EUR4 million related to personal protective equipment (PPE).
On a pro forma basis, the EBITDA margin stood at 21.5%. This is
just 50 basis points shy of our expectations of 22%-23% for 2020.
We anticipate the group's operating performance to continue to
exhibit resilience regardless of the duration of the pandemic,
given the critical role of its services. We understand that there
were supply issues of PPE earlier in the year following the
outbreak of the pandemic, which affected availability and prices,
but this has since been resolved and the supply chain remains
intact.
"The extent of the ultimate rating uplift will depend on the final
ownership structure, our assessment of Diaverum's capital
allocation policy, and its tolerance for deviation from stated
targets.
"We understand Bridgepoint will retain a significant stake in the
listed company following the transaction's completion. The level of
ownership and influence that the financial sponsor will retain
posttransaction will shed light on the group's adherence to the
publicly stated financial policy targets. We note that the public
guidance for future shareholder distributions is approximately 25%
of net profits from 2021 onward, which does not appear very
generous. We also think the group will likely continue to reinvest
its free cash flows in bolt-on acquisitions and potential new
contract tenders--where applicable--in line with its external
growth strategy in recent years. We think this could ultimately
constrain the extent of the uplift for Diaverum's overall credit
profile."
CreditWatch
S&P said, "We expect to resolve the CreditWatch in the next three
months, once the transaction completes and we gain further clarity
on the group's final capital and ownership structure. We will also
assess the group's strategic direction, business plan, and
commitment to the publicly stated financial policy targets."
NETS TOPCO 3: Fitch Puts B+ LT IDR on Rating Watch Positive
-----------------------------------------------------------
Fitch Ratings has placed Nets Topco Lux 3 Sarl (Nets) Long-Term
Issuer Default Rating (IDR) of 'B+' and senior secured debt rating
of 'BB' on Rating Watch Positive (RWP).
The RWP on Nets is driven by its announced signing of a framework
agreement to merge with Nexi S.p.A. (BB-/RWP), a leading player in
the Italian digital payment market. The merger, which will be
performed via a share exchange with existing shareholders of Nets
and Nexi, will in its view result in a stronger combined operating
profile compared with the individual companies.
Before the merger Nets will complete the divestment of its
account-to-account (A2A) business to Mastercard while Nexi is also
in the process of merging with SIA, its main competitor in Italy.
Nexi estimates that the leverage of the merged group, pro-forma for
estimated synergies, will be lower than the current individual
leverage levels of Nets, Nexi and SIA.
The transaction is subject to regulatory approvals and is expected
to close in 2Q21. Fitch will resolve the RWP following a successful
merger in line with the terms announced.
KEY RATING DRIVERS
Merger Impact Positive for Operations: Fitch expects that upon the
transaction completion between Nexi, Nets and SIA Nets will be a
part of a stronger entity with a larger scale of operations, as
well as better geographic, segmental and customer diversification.
The merged group will benefit from significant revenue, cost and
capex synergies including from cross-selling, central procurement,
joint investment in products and technology and operations
optimisation, which will support deleveraging.
Debt Repayment: Nets is expected to complete the divestment of its
A2A business to Mastercard for EUR2.85 billion in 1Q21, based on
the latter's guidance. Fitch expects that the sale proceeds will be
used to fund Nets' PeP acquisition (closed in October 2020) and
repay senior secured debt. The expectation of debt repayment is
supported by Nexi's valuation of Nets at EUR7.8 billion, which
implies EUR6 billion of equity value and EUR1.8 billion of net
debt, compared with Nets' 2Q20 net debt of EUR3.7 billion. A part
of the remaining outstanding debt will be refinanced with an
already committed EUR1.5 billion bridge facility, as per Nexi's
guidance.
Net Leverage Lower Post-Merger: Nexi expects that the merged
group's (Nexi, SIA, and Nets) pro-forma net debt/EBITDA (as defined
by Nexi) will be 3.3x in 2020, including synergies, declining to
below 3x in 2021. This compares with Nets' standalone 2020 leverage
estimated at 4.8x (as defined by Nexi), pro-forma for its PeP
acquisition and A2A business disposal. Fitch notes the deal itself
and the associated synergies extraction face execution risks,
making the timing and extent of deleveraging currently unclear.
Leading Market Positions: Nets has leading positions on Nordic
markets where the company benefits from its full-service offering
across the payment value chain from merchant acquiring, payment
processing and clearing. The company diversified its footprint into
DACH region (Germany, Austria and Switzerland), Poland and
southeast Europe countries via a series of acquisitions in
2018-2020, paving the way for faster growth in the under-penetrated
markets. The transaction with Nexi will result in a larger,
stronger and more diversified pan-European player.
FCF to Improve from 2021: Fitch expects Nets' free cash flow (FCF)
to turn positive from 2021 on the back of improved revenue and
profitability, debt repayment and a significant reduction in
non-recurring costs. FCF has been under pressure in 2020 due to
COVID-related restrictions impacting EBITDA and large one-off
expenses, including Thomas Cook charge-backs, restructuring and
integration costs related to businesses acquired in 2019-2020 and
ongoing cost-optimisation expenses.
DERIVATION SUMMARY
Nets is well-positioned in the Nordic payment services market,
occupying leading positions in Denmark, Norway and Finland as well
as strong positions in Germany and Poland. Its full-service
offering across the entire payment value chain in Scandinavia is
unique among peers and is a key competitive advantage. In Denmark
and Norway Nets also benefit from operating and processing the
national debit card schemes. The key rating constraint for Nets is
its high gross leverage driven by rapid growth via M&As.
Italian payment company Nexi (BB-/RWP) is the most comparable rated
peer. Nets has leading positions in its regions of operations but
these are mature where the digital payment sector may be
approaching saturation. Nexi has faster potential growth in the
less mature Italian market, with a strong position in merchant
acquiring and payment processing. Better growth prospects combined
with higher margins and lower leverage stand behind Nexi's higher
rating. Its announced integration with SIA materially strengthens
its position in the Italian domestic market, widening the catchment
of its merchant-acquiring and card issuance platform, while
strengthening its position in debit card and digital payment
solutions to corporates and public authorities.
Another close peer is a UK-based payment company Hurricane Bidco
Ltd (Paymentsense, B/Stable). It has lower leverage than and
similar margins to Nets, as well as a strong growth profile in the
UK payments market but the rating is constrained by its small
scale, as well as by its limited geographic and value-chain
diversification. Nets is also broadly comparable with the other
peers that Fitch covers in its business services - data, analytics
and transaction processing (DAP) credit opinions portfolio.
KEY ASSUMPTIONS
- Organic revenue to decline 7% yoy in 2020 followed by
mid-single digit growth in 2021-2022. Total revenue to decline 1%
yoy in 2020, reflecting the pro-forma contribution of PeP
- Fitch-defined EBITDA margin at 30% in 2020, improving to
34%-35% in 2021-2023
- Capex at 12% of total revenue in 2020, reducing to 10% in
2021-2023
- Working capital outflow of around EUR25 million per year until
2023, supporting organic expansion
- Around EUR160 million of non-recurring costs in 2020 consisting
of charge-back losses from Thomas Cook and costs related to the
integration of acquired businesses, restructuring and
transformation programme. Fitch expects non-recurring costs to
decline to EUR30 million-EUR40 million in 2021-2023, primarily
related to the integration of acquired businesses and
transformation programme.
KEY RECOVERY ASSUMPTIONS
The recovery analysis is performed for the existing debt structure,
assuming EUR1.8 billion of senior secured debt is repaid with
proceeds from the A2A business sale.
In conducting its bespoke recovery analysis, Fitch estimates that
Nets' intellectual property, patents and client portfolio, in case
of default, would generate more value in a going-concern
restructuring than a liquidation of the business.
- Fitch estimates post-restructuring EBITDA would be around
EUR300 million compared with EUR363 million at the previous rating
action in January 2019. The adjustment reflects the disposal of the
A2A business. Fitch would expect a default to come from either a
fall in revenue and EBITDA from a loss of major contracts or a
sustained decline in EBITDA due to intensified competition.
- Fitch has applied a 6.5x distressed multiple to
post-restructuring EBITDA to account for Nets' scale, customer and
geographical diversification as well as to reflect high valuation
multiples in the sector. Nets' EBITDA multiple for the transaction
with Nexi is estimated at around 20x.
- 10% of administrative claims have been taken off the enterprise
valuation to account for bankruptcy and associated costs.
- Fitch expects that EUR1.8 billion out of the total EUR2.85
billion sale proceeds will be spent on senior secured debt
repayments leading to total debt reduction to EUR1.95 billion
compared with EUR3.8 billion at end-2Q20. Nets' revolving credit
facility (RCF) is assumed to be fully drawn as per its criteria.
Its recovery expectation for senior secured lenders of the term
loan B (TLB) and the RCFs is 85% (in line with a 'RR2') leading to
a two-notch uplift of the senior secured debt rating to 'BB'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Successful completion of the merger with Nexi in line with the
announced terms
- FFO gross leverage below 6.0x
- FFO interest cover above 3.0x
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Cancellation of the merger with Nexi
- FFO gross leverage sustainably above 8.0x
- FFO interest cover below 2.0x
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Nets' liquidity is supported by EUR205
million of cash on the balance sheet at end-2Q20 and a EUR300
million RCF due in 2021. The latter facility will be cancelled once
the sale of A2A business is complete and Nets receives EUR2.85
billion of proceeds. Fitch expects the company to have new
liquidity facilities or centralised treasury management after the
completion of its transaction with Nexi. Positive FCF expected from
2021 will also be supportive of Nets' liquidity on a standalone
basis.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
===========
R U S S I A
===========
KRASNOYARSK KRAI: S&P Affirms 'BB' Long-Term ICR, Outlook Negative
------------------------------------------------------------------
On Nov. 20, 2020, S&P Global Ratings affirmed its 'BB' long-term
issuer credit rating on the Russian Region of Krasnoyarsk Krai. The
outlook remains negative.
Outlook
S&P said, "The negative outlook indicates that we could downgrade
Krasnoyarsk Krai in the next 12-18 months, should financial
indicators worsen more than we currently project. The region's
financials in 2021-2022 could weaken if a prolonged recession were
to erode cash reserves or lead to higher debt. In our view,
Krasnoyarsk Krai will aim to maintain a prudent approach to
expenditure and continue to post an operating surplus, despite the
macroeconomic environment. We also assume that Krasnoyarsk Krai
will maintain a sufficient liquidity buffer, tapping capital
markets or arranging bank loans or committed facilities when
needed."
Downside scenario
S&P could lower the rating if Krasnoyarsk Krai reports materially
higher deficits after capital accounts than in its base case. That
could happen if the region increases expenditure without a parallel
increase in transfers and subsidies from the central government. A
protracted revenue shortfall could also lead to a downgrade.
Upside scenario
S&P could revise the outlook to stable if it sees risks for the
region reducing, in particular, if it believes the adverse effects
of commodity price declines and the pandemic have subsided, and
Krasnoyarsk Krai has restored its budgetary performance to solid
pre-pandemic levels, while maintaining liquidity buffers and
containing debt accumulation.
Rationale
S&P said, "We anticipate that Krasnoyarsk Krai's 2020 budgetary
performance will be better than our previous expectations, driven
by higher-than-expected corporate profit tax, owing to metal price
dynamics as well as transfers from the central government
significantly above our previous forecast. That said, we believe
that downside risks will remain in 2021-2022, since the current
environment is reducing the regions' headroom to withstand future
potential pressure.
"We believe that Krasnoyarsk Krai will achieve operating surpluses
above 5% of operating revenue on average in 2020-2022, while its
ability to balance the budget will help keep deficits after capital
accounts below 4% of total revenue. This assumption is better than
the average 6%-9% deficit we expect for the Russian local and
regional government (LRG) sector.
"Accumulated cash reserves as a result of the previous year's high
tax revenue, supported by transfers from the central government,
will help the region finance its deficits. We estimate the region's
tax-supported debt will be about 33% of consolidated operating
revenue by 2022, and remain low by international standards, which
will continue to support the rating.
The centralized institutional framework and the region's reliance
on commodities constrain the rating
Like other Russian regions, Krasnoyarsk Krai's financial position
depends heavily on the federal government's decisions under
Russia's institutional setup, which remains unpredictable, with
frequent changes to the tax mechanisms affecting regions. Decisions
regarding regional revenue and expenditure are centralized at the
federal level, constraining the predictability of Krasnoyarsk
Krai's financial policy.
S&P said, "We have revised our base-case GDP growth forecast for
Russia for 2020, and now expect the economy will contract by 3.5%,
reflecting weakness in external demand as well as shrinking
investment. We believe that Krasnoyarsk Krai's decline in gross
regional product will be even more pronounced in 2020 compared with
Russia as a whole, due to some structural characteristics. A
decline in production at certain oil fields was planned, but a
rebound is expected in 2021-2024.
"The region's economy benefits from large reserves of metals,
including Russia's largest volumes of nickel, cobalt, and copper,
and more than 20% of its gold, as well as substantial coal
reserves. We expect that the local economy's reliance on oil and
metal extraction will bring volatility in 2020-2022. Production
will mainly stem from two companies: Norilsk Nickel and Rosneft.
Both operate in cyclical industries and together account for over
20% of Krasnoyarsk Krai's revenue. We expect the oil price and
extraction declines to hit Krasnoyarsk Krai's operating revenue.
However, we note that revenue from the metal industry is recurrent
and supports corporate profit tax.
"Despite an expected reduction in operating revenue in 2020, and
stagnation in 2021, we believe Krasnoyarsk Krai has sufficient
flexibility to balance its budget. Financial management has a
strong track record of cost control, as shown in previous turbulent
years, and is advanced in attracting external funding (bonds and
bank loans). Additionally, we believe the region's management can
postpone some investment projects in response to declining revenue.
At the same time, we note that Krasnoyarsk Krai, in line with other
Russian regions, lacks reliable long-term strategic planning and
does not have sufficient mechanisms to counterbalance volatility
stemming from the concentrated nature of its economy and tax
base."
Despite widening deficits in 2020-2021, sufficient liquidity and
low debt support the rating
S&P said, "We believe that Krasnoyarsk Krai's operating balances
will weaken and the region will return to posting modest deficits
after capital accounts in 2020-2022 after a strong surplus last
year. The deterioration will primarily reflect the decline in
average commodity prices, in particular oil, and weaker economic
conditions, influencing the performance of some of the region's
largest taxpayers and reducing expected corporate profit tax
receipts. Tax collection in the region is still benefiting from
favorable market prices for metals and maintained production
volumes. We note that performance over the 10 months ended Nov. 1,
2020, shows Russian ruble 11 billion of surplus after capital
investments, but downside risks prevail in our view with relation
to 2021-2022 performance.
"We believe that pressure on expenditure from the implementation of
national development projects, announced by the Russian president
in 2018, will continue to push up the region's spending. We don't
expect Krasnoyarsk Krai will stop any of the federal projects.
However, the region has some flexibility to cut or postpone its own
investment programs if needed.
"In view of the deficit in 2021-2022 and increased debt repayments,
we believe the region will resort to market financing. We project
tax-supported debt will fluctuate at about 33%-35% of consolidated
operating revenue over 2020-2022. Compared with international
peers, total debt remains low. As an active participant in Russia's
bond market, Krasnoyarsk Krai enjoys good access to external
liquidity, in our view. It has a proven track record of obtaining
financing in periods of tight market conditions, and continuous
federal treasury liquidity support in the form of short-term loans.
Debt service will likely remain below 10% of operating revenue on
average.
"We believe that Krasnoyarsk Krai's contingent liabilities are low.
They include the debt and payables of the region's
government-related entities, as well as the municipal sector's
debt. The unitary enterprises and regional joint stock companies,
of which Krasnoyarsk Krai owns 25% or more, are mostly financially
healthy. The municipal sector's debt mainly consists of commercial
loans and does not represent a significant liability for the
region."
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
Ratings Affirmed
Krasnoyarsk Krai
Issuer Credit Rating BB/Negative/--
POLYUS PJSC: Fitch Affirms BB IDR; Alters Outlook to Positive
-------------------------------------------------------------
Fitch Ratings has revised the Outlook on PJSC Polyus's Long-Term
Issuer Default Rating (IDR) to Positive from Stable and affirmed
the IDR at 'BB'.
The Positive Outlook reflects sizeable gross debt reduction during
2020 as a result of strong operating performance and current gold
prices and forecast solid credit metrics over 2020-2023 despite
investments, enabling Polyus to maintain production averaging at
2.9 million ounces (oz) over 2021-2024. Fitch forecasts Polyus's
funds from operations (FFO) gross leverage to stay below its
positive rating sensitivity of 2.5x, albeit with a gradual increase
towards 2.5x by 2024. Development capital expenditure for Sukhoi
Log will start materially weighing on free cash flow (FCF)
generation from 2023 and is a key leverage driver.
The Positive Outlook could translate into an upgrade if Polyus
continues to adhere to its publicly stated financial policies,
leading to financial performance at least in line with its rating
case.
Polyus has a strong business profile as the fourth-largest gold
producer globally, with the lowest position among major goldminers
on the global gold all-in sustaining cost curve and a large reserve
life that is likely to be enhanced in the medium term following the
Sukhoi Log development. The rating also incorporates product,
geographical and shareholder concentration.
KEY RATING DRIVERS
Fourth-largest Gold Producer: Polyus's output has been rebased at
2.8 million ounces (Moz) since 2019, reflecting Natalka mine's ramp
up towards its 0.5Moz annual capacity, placing the company as the
fourth-largest gold producer globally. Fitch continues to expect
Polyus's output to plateau within the 2.7Moz-3.1Moz range from 2020
as selective development capex is roughly offset by grade
variations, particularly at Olimpiada and Verninskoye.
Consequently, Fitch expects that Polyus will remain the
fourth-largest gold producer globally.
Sukhoi Log FID in 2022: Polyus expects to take a final investment
decision (FID) on the Sukhoi Log project in southeast Siberia in
late 2022, shortly after the feasibility study is finalised. Fitch
has conservatively incorporated Sukhoi Log capex in its rating case
as Polyus designates it as its flagship greenfield project. Sukhoi
Log would be one of the world's largest gold mines, with 40 Moz of
JORC reserves. Polyus currently estimates construction capex at
USD3.3 billion including indirect and contingency spending. A
successful ramp-up of Sukhoi Log would have a transformative impact
on the business profile but in 2027 at the earliest.
Continued Capital Expenditure: Fitch expects Polyus's capital
expenditure to remain high in 2021-2024 and potentially thereafter.
Fitch expects increased overburden stripping in the near term to
drive capital expenditure as well as projects, such as the
Verninskoye mill expansion. After 2021, expansion at the
Blagodatnoye mill and Bio Units modernisation at Olimpiada are
expected to drive capital expenditure. Sukhoi Log could
substantially increase capital expenditure over 2023-2026.
Strong Cash Generation, Significant Headroom: Fitch expects FFO
gross leverage to bottom out at 1.3x in 2020 (2019: 2.1x) on record
high gold prices. Fitch expects gold price moderation to 1,200/oz
by 2022, falling grades at Olimpiada and Verninskoye, and negative
FCF on Sukhoi Log capex to drive leverage back to 2.5x by 2024, but
for it to average at 2.2x over 2021-2024. If Polyus does not
proceed with Sukhoi Log as Fitch assumes for 2021-2024, this would
result in leverage firmly below 2x over the rating horizon.
Its forecast is predicated on gold prices declining in 2021 and
stabilising in 2022, low-single-digit cost inflation, stable ore
volumes processed, albeit at varying grades, Blagodatnoye mill
expansion, and favourable taxation due to the regional investment
project regime for these projects, supporting strong total cash
costs (TCC).
Financial Policy: Its forecast incorporates Polyus's dividend
pay-out ratio of 30% of EBITDA. Leverage peaked at 4.4x at end-2016
due to Polyus's debt-funded USD3.4 billion share buyback in 1H16.
Fitch does not expect any material share buybacks or special
dividends leading to a significant deterioration of Polyus's
financial profile over the rating horizon.
Low First-Quartile Producer: Polyus is a world-class gold producer
with large-scale high-grade reserves and efficient open pit mining
operations. The group consistently ranks in the lowest cost
position among major miners globally with average TCC not exceeding
USD400/oz and all-in sustaining costs fluctuating around USD600/oz
since 2015, both on the lower end of the first quartile on the
global cash cost curve.
Average TCC will stay close or slightly above USD400/oz over the
rating horizon as Polyus's flagship mines Olimpiada, Blagodatnoye
and Natalka will account for 75%-80% of output and are expected to
retain their TCC at or below USD400/oz.
Large Reserve Base: Polyus reported proved and probable gold ore
reserves of 58Moz and measured, indicated and inferred mineral
resources of 112Moz for its operating mines as at December 2019.
The group estimates that it ranks third globally by attributable
gold reserves and third by attributable gold resources. Polyus puts
its average life of mine at around 21 years based on 2019
production, a comfortable level for a gold miner. Reserves and
resources exclude Sukhoi Log and other exploration and development
projects.
DERIVATION SUMMARY
Polyus has a strong business profile with scale comparable with
peers, such as Kinross Gold Corporation (BBB-/Positive) and
AngloGold Ashanti Limited (BBB-/Stable). Polyus has a superior
reserve base and strong cost position, offset by higher
concentration of operations in Russia while AngloGold and Kinross
operate in several countries with varying operating environment
risk, the latter mitigated by diversification and conservative
financial policies.
Polyus's closest Russian mining peers include PJSC ALROSA
(BBB-/Stable) and PJSC MMC Norilsk Nickel (BBB-/Stable), which both
have strong market shares in their respective markets, and are also
cost leaders globally. ALROSA applies a FCF-based dividend policy,
underpinning its lower leverage on a through-the-cycle basis, while
Norilsk Nickel operates on a much larger scale (based on EBITDA
size) and is well diversified across products with comparable
revenue contribution from nickel, copper and palladium.
The strength of Polyus's business profile is reflected in its
positive rating guideline of FFO gross leverage of 2.5x compared to
1.5x for Nord Gold SE (BB/Stable) and a downgrade guideline of
Norilsk Nickel of 2.5x.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer
Include:
- Average gold price of USD1,742/oz in 2020 (taking into account
YTD performance), USD1,400/oz in 2021 and USD1,200/oz thereafter
- USD/RUB exchange rate averaging 71.5 in 2020, 70.9 in 2021 and
69.5 in 2022-2024
- Gold production at 2.8 Moz in 2020 and averaging at roughly 2.9
Moz in 2021-2024
- Capex/sales averaging at 18% in 2020 and 37% in 2021-2024
(2018-2019 average: 25%)
- Dividends in line with Polyus's dividend policy: 30% of EBITDA
if net debt/EBITDA is under 2.5x
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Adherence to the existing financial policies supporting FFO
gross leverage below 2.5x and FFO net leverage below 2.0x on a
sustained basis
- Neutral-to-positive FCF generation throughout the cycle
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- As the rating is on Positive Outlook, a negative rating action
is unlikely in the short term. However, an Outlook may be revised
to Stable from Positive if the company is unable to maintain credit
metrics within the positive guidelines.
- Higher-than-expected shareholder distributions leading to
materially weaker liquidity and/or leverage profile (eg FFO gross
leverage above 3.5x or FFO net leverage above 3.0x on a sustained
basis) would lead to a downgrade
- Sustained negative FCF generation
LIQUIDITY AND DEBT STRUCTURE
Solid Liquidity, US Dollar Indebtedness: Polyus's liquidity
position at September 30, 2020 was strong, with a USD1.6 billion
cash cushion covering USD209 million short-term debt. Negative FCF
generation from 2021 is manageable as Polyus has high cash, limited
near-term maturities and USD1.5 billion in committed credit lines.
Debt maturities are moderate at USD0.3 billion in 2021 and USD0.5
billion in 2022, rising to USD0.9 billion in 2023. Fitch notes that
Polyus has a policy of pro-actively refinancing its maturities.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
=========
S P A I N
=========
CODERE SA: Fitch Assigns CCC+ Rating to EUR250MM Sr. Notes
----------------------------------------------------------
Fitch Ratings has assigned Codere S.A. a final Issuer Default
Rating (IDR) of 'CCC' and its EUR250 million super senior notes a
final rating of 'CCC+'/RR3.
The ratings reflect Codere's weak liquidity profile and high
leverage, which Fitch expects could put pressure on the ratings in
the short to medium term. Uncertainties over pandemic development
in South American region (particularly in 2021) and global recovery
will challenge the company's capacity to deleverage by 2022.
Business profile strengths such as geographic diversification and
strong local positions are offset by exposure to currency risks and
a weak product mix, with online representing less than 5% of
revenues.
The rating could come under pressure if liquidity becomes very
tight in light of renewed second lockdowns in Latin America, to
which Codere is heavily exposed. On the contrary, if the pandemic
abates later in 2021, the credit profile may strengthen, mitigating
refinancing risks, and providing additional financial flexibility
at the rating level.
KEY RATING DRIVERS
Liquidity Strengthened, Still Weak: Proceeds from the debt
restructuring provided Codere with the liquidity it needed for the
coupon payment in 4Q20. However, Fitch forecasts that muted
consumer spending recovery in core markets and only partially
discretionary investments will pressure Codere's cash flow
generation. Therefore, Fitch expects monthly free cash flow (FCF)
to remain consistently negative through to 2Q21. Its conservative
Fitch-case projections suggest that further incremental cash could
be needed in 1H21 depending on the evolution of the pandemic.
Weak Deleveraging Capacity: Codere exhibits high leverage metrics
in line with its rating category, due to its expectation of
incremental debt and depressed, albeit recovering, profitability
post pandemic. High fixed costs, common for asset-light gaming
operators, result in low coverage ratios. Fitch expects funds from
operations (FFO) fixed charge cover to remain below 1.5x until at
least 2023 under its rating-case projections. Together with
Codere's structural exposure to volatile currencies, this will
hamper the group's deleveraging capacity and lead to high
refinancing risks by 2022-2023.
High Pandemic Exposure: Codere faces a significant revenue impact
from the closure of its land-based operations worldwide. This is
not meaningfully mitigated by online gaming; which Fitch forecasts
will not exceed 8% by 2022. Fitch's case assumes renewed lockdowns
lasting no longer than four weeks in Europe in 4Q20, and moderate
growth in 2021 being dragged by continued social distancing and a
slow GDP recovery, with gaming as a discretionary expense suffering
from impaired purchasing power.
FCF Turning Negative: The impact of the pandemic will lead to
Codere's EBITDA turning negative, before moderately recovering in
2021. Codere recently improved the profitability of its core
operations, with the Fitch-defined EBITDA margin rising to 15.9% in
2018, from 12.0% in 2016, but slipping to 13.7% in 2019 due to
local foreign-currency depreciation. Fitch expects that
cost-optimisation efforts will help operating profitability return
to pre-pandemic levels in 2022-2023.
However, the company's large gaming-hall portfolio and developing
online platform require significant maintenance and investment,
which is likely to keep FCF negative until 2023. This leaves Codere
with little room to absorb possibly higher taxation and interest
costs, despite investment flexibility in its online business.
Solid Geographic, Limited Product Diversification: Codere's
geographical concentration has improved in recent years, with the
largest market generating 25% of revenue and the three largest
accounting for 70% of revenue. Diversification by product is
weaker, with 79% of revenue being generated from slots and only 13%
from sports betting. Its share of online revenues is also low.
Fitch assesses the company's product and channel mix as weak, as
Fitch expects online gaming and sports betting (offline and online)
to outperform the market in the medium term.
Exposure to Volatile Currencies: Over 60% of revenue is generated
in the Latin American market, including 23% in Argentina. The high
volatility of emerging-market currencies leads to significant
currency-risk exposure; Argentina's hyperinflationary environment
and increased gaming taxes had caused EBITDA to contract to EUR70
million in 2019, from EUR108 million in 2017.
Most of Codere's debt is euro-denominated, putting additional
pressure on its leverage metrics and debt service capabilities.
Moreover, like other corporates operating in Argentina, Codere is
subject to transfer and convertibility risk, undermining its
unrestricted access to local cash. However, Codere should generate
sufficient cash (or EBITDA) from other countries to service its
foreign-currency obligations. Consequently, Argentina's Country
Ceiling of 'CCC' is not currently a rating constraint.
Mid-Sized International Gaming Operator: Codere operates a variety
of gaming venues in Europe, including Italy and Spain, as well as
in Latin America. It also operates online gaming sites and
applications in some of those markets. Codere enjoys leading or
podium positions in niche gaming segments within its countries of
operation, primarily in the gaming-hall segment, and works under a
single brand in most venues.
Market Opportunities, Regulatory Risks: Fitch expects the
sports-betting industry in Latin America to expand at low- to
medium-single digits that exceed the stagnating rates of European
markets. Codere is well positioned for growth in the region due to
its established offline and recently launched online platforms. At
the same time, regulation continues to evolve in Latin America and
is skewed towards shaping optimal taxation for the industry.
Responsible gaming initiatives could also pressure companies within
the region.
ESG Factors: Codere has an ESG Relevance Score of 4 for Management
Strategy and Financial Transparency due to strategic risks of
land-based operations focus and a recent case of defective
financial accounting (largely impacting its Mexican operations).
This factor has a negative impact on the credit profile, as already
reflected in the rating, and is relevant to the rating in
conjunction with other factors.
DERIVATION SUMMARY
Codere's business profile is positioned in the lower range of
Fitch's rated gaming portfolio, with lower diversification into
online business compared with Flutter (BBB-/Negative), GVC Holdings
Plc (BB/Negative) and Sazka Group a.s. (BB-/Negative), as well as
weaker corporate governance score. Codere's FFO margin is also
lower than that of Sazka, GVC and other peers in the 'BB' rating
category, but stronger than those of Intralot S.A. (CC) and Enjoy
S.A. (CCC). Codere's financial profile assessment puts further
pressure on its ratings, with liquidity risks over the next 12-18
similar to Inspired Entertainment, Inc (CCC+). Fitch forecasts that
Codere will keep elevated leverage and weak fixed charge cover
ratios compared with peers in the next two to three years.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Revenue recovering to ca. 85% of 2019 revenue in 2021, led by
recovery of European markets, and gradually improving to 97% of
2019 revenue by 2023;
- FX rates movement according to management forecasts, with local
currency depreciation in line with or slightly more conservative
than Fitch's forecasts for the Latam region;
- Cost flexibility assumptions are based on cost variability
observed in 1H20. Fitch considers flexible costs to be 90%-100%
variable depending on the country, and fixed costs to be 50%
variable in Europe, 60%-80% variable in Latin America and 95%
variable online;
- Non-recurring OPEX of 2.5%-3.0% of revenues, related to growth
of online business, operational efficiencies and management
transition;
- Working capital (as defined by Fitch) normalising in 2021
offsetting the net year-on-year inflow of up to EUR30 million
expected at the end of 2020;
- Capex (including capex financing) representing 6%-10% of
revenues;
- PIK used for both issues of senior secured notes.
Fitch's Key Recovery assumptions:
- The recovery analysis assumes that Codere would remain a going
concern in the event of restructuring and that it would be
reorganised rather than liquidated. Fitch has assumed a 10%
administrative claim in the recovery analysis.
- The EBITDA estimate reflects Fitch's view of a sustainable,
post-restructuring EBITDA of EUR180 million, on which Fitch bases
the enterprise value, a level at which the capital structure would
become unsustainable.
- Fitch assumes a distressed multiple of 4.5x, reflecting the
group's comparative size, leading market positions and geographical
diversification, with large exposure to Latin America.
- Fitch applies a blended Recovery Rating cap to calculate the
final Recovery Rating in line with its methodology. Even though the
company is headquartered in Spain, the group has exposure to
countries with lower Recovery Rating caps, like Italy and most
Latin American countries.
Its waterfall analysis generates a ranked recovery for super-senior
creditors in the 'RR3' band, indicating a 'CCC+' instrument rating
assigned to the new super senior debt, one notch above the IDR. The
waterfall analysis output percentage on current metrics and
assumptions is 52% for the new super senior notes, as its recovery
estimates are capped at 'RR3' after applying the blended cap.
Under its recovery analysis the amended senior secured notes
post-restructuring result in a 'RR4', using a mid-point of 41%
after applying the blended cap, indicating a debt instrument rating
of 'CCC', in line with the IDR. This reflects their subordination
to the new super-senior notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Evidence of lower monthly cash burn with negative FCF margin
stabilising within the low single digit to neutral range;
- FFO adjusted leverage sustainably trending below 8.0x;
- FFO fixed charge cover above 1.5x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Heightened liquidity risks leading to further cash requirements
resulting from new lockdowns or lingering extensions in one or
several core markets, increasing risks of EBITDA deterioration in
1Q21;
- Slower than expected recovery post-pandemic leading to EBITDA
margin below 12% from 2021 onwards;
- No deleveraging capacity with FFO adjusted leverage forecasted
to approach 10.0x in 2021-2022 resulting in heightened refinancing
risks;
- FFO fixed charge trending towards 1.0x.
ESG CONSIDERATIONS
Codere has an ESG Relevance Score of 4 for Management Strategy and
Financial Transparency. Except for the matters discussed, the
highest level of ESG credit relevance, if present, is a score of 3
- ESG issues are credit neutral or have only a minimal credit
impact on the entity(ies), either due to their nature or the way in
which they are being managed by the entity(ies).
LIQUIDITY AND DEBT STRUCTURE
Strengthened Liquidity, Still Weak: Despite the new money
injection, Fitch expects liquidity to remain tight throughout 2020
and 2021 due to large fixed costs and capex requirements stemming
from the land-based nature of the business, as well as continuous
investments in the online platform. This could require further
funding if the company is unable to implement cost restructuring
and cash preservation measures.
Current liquidity at end-October 2020 (post-restructuring) is
adequate at around EUR150 million. However, additional business
disruptions could significantly reduce the liquidity headroom
within the next six months, despite management guidance over EUR50
million liquidity by March 2021. Further liquidity enhancements
from payment deferrals and other cash preservation initiatives
could give some headroom to avoid a breach of the minimum liquidity
covenant included in the current bond documentation.
The main debt maturities (post-restructuring) are in 2H23,
providing some buffer to navigate through the patchy
macro-environment and recovery phase post pandemic. However,
refinancing of the amended notes will be needed well before
mid-2023 to stabilise the company's long-term financial profile.
Post-restructuring, debt will comprise the new EUR250 million
super-senior notes maturing on September 30, 2023, together with
the amended senior secured notes of EUR500 million and USD300
million, with maturity extended by two years to November 1, 2023.
The new super-senior notes will also rank senior to the existing
and amended senior secured notes. Proceeds of these notes were used
to redeem the outstanding revolving credit facility and provide
additional liquidity for operating purposes. Existing local credit
facilities issued at the operating companies will remain on balance
sheet after the debt restructuring. Fitch assumes these will be
refinanced.
SUMMARY OF FINANCIAL ADJUSTMENTS
- Fitch restricts EUR40 million of total cash for minimum
liquidity requirements and operational needs.
- Adjustments to IFRS 16 metrics made according to its Corporate
Rating Criteria, including application of a 7.2x blended
capitalization multiple to annual rents for its assumption of
operating lease debt.
ID FINANCE: Fitch Publishes B- LT IDR, Outlook Negative
-------------------------------------------------------
Fitch Ratings has published ID Finance Spain S.L.'s Long-Term
Foreign-Currency Issuer Default Rating (IDR) at 'B-' and Short-Term
IDR at 'B'. The Outlook on the Long-Term IDR is Negative. Fitch has
also published the long-term rating of IDF Spain's senior unsecured
debt at 'B-'/RR4.
IDF Spain, headquartered in Barcelona, was founded in 2015 and is
an online consumer loan provider primarily targeting underbanked
clients in Spain.
KEY RATING DRIVERS
IDRs
IDF Spain's ratings reflect its small size (in terms of both
tangible equity and net loans), short operating history, business
model focused on risky underbanked borrowers leading to high credit
risk and vulnerability to regulatory restrictions, as well as
ongoing economic pressure from the coronavirus pandemic. The
ratings also reflect the company's record of reaching sound
profitability within a short time from its establishment, strong
operating margins, lean cost structure, short-dated loan portfolio,
moderate market risk and experienced management team.
Fitch's assessment of IDF Spain's business model takes into account
the company's ability to continue reporting sound profitability and
maintaining access to funding sources since the onset of the
economic fallout caused by the coronavirus pandemic. IDF Spain has
tightened its lending policies while continuing new loan issuance
with lower impairments and maintained adequate bottom-line
profitability. This resulted in an increase in IDF Spain's equity
base and contained leverage. Additionally, the company was able to
extend its funding maturities in difficult funding markets.
The Negative Outlook on IDF Spain's Long-Term IDR reflects Fitch's
view that in line with most of its European consumer finance peers,
downside risk from the pandemic to IDF Spain's financial metrics,
notably asset quality, earnings and profitability as well as
capitalisation and leverage, will remain considerable over the
Outlook horizon. It also reflects Fitch's view that the company has
rating headroom to emerge from the coronavirus crisis with its
ratings intact but the economic fallout from the pandemic
represents a medium-term risk to its ratings.
IDF Spain has a nominal franchise, with total assets and equity of
EUR43.9 million and EUR8.8 million, respectively, at end-3Q20. The
company has demonstrated its ability to turn into a profitable
business effectively within two years following the start of
operations in mid-2015. This was supported by experienced
management with a record of establishing online-based consumer
finance companies in other jurisdictions.
IDF Spain is exposed to higher-risk underbanked borrowers with
limited credit histories and variable incomes. The unsecured nature
of its lending and the small loan sizes make recoveries of
individual loans inefficient, but its granular portfolio, high
lending margins and cost-efficient online-based business model
partly mitigate these risks. Its high-margin business model exposes
the company to the risk of regulatory caps or other client
affordability measures, which could have a material adverse impact
on the sustainability of the business model which is reflected in
ESG scores of '4' for Customer Welfare and Exposure to Social
Impacts.
Having been negative up to 2019, IDF Spain's gross debt/tangible
equity ratio was 3.4x at end-1H20, which is not a constraining
factor for the 'B-' rating. While IDF Spain's currently acceptable
leverage remains sensitive to higher impairment charges or lower
lending volumes as a result of the fallout from the pandemic, this
is partly balanced by high margins, strong provision levels,
moderate market risk, full retention of profits and a limited
ability to de-lever from lower business volumes. Nonetheless, its
small absolute equity base means that leverage remains sensitive to
loss events.
IDF Spain's margins compare well with peers. Operational efficiency
has improved in line with its growing scale. Bottom-line
profitability was sound in 9M20 with an annualised pre-tax return
on average assets at just below 16%. However, IDF Spain's short
operating history and the coronavirus fallout constrain its
assessment of profitability.
As a result of a recent bond issuance, IDF Spain's funding and
liquidity profile has improved due to a longer average tenor,
reduced related party funding and a comparatively smaller
proportion of secured funding (around 43% at end-3Q20 compared with
around 74% at end-2019) primarily sourced via a peer-to-peer
lending platform (Mintos). Nonetheless, IDF Spain's funding profile
remains relatively concentrated on peer-to-peer online platforms,
which means that Fitch's assessment of funding and liquidity
remains a relative rating weakness. Funding and liquidity risks are
partly balanced by IDF Spain's short-dated asset base and generally
sound cash generation.
IDF Spain's impaired loans ratio (90 days overdue or Stage 3
loans/gross loans) was around 28.4% at end-3Q20, which although
improved year-on-year, is high. Impairment charges to revenue
remained above 60% and Fitch-estimated impaired loans generation
((impaired loans + write-offs)/average gross loans) fell to 59.8%
in 9M20 compared with 78.3% in 2019. This metric is improving, but
it remains weaker than IDF Spain's peers. Positively, impaired
loans were provisioned at around 149% at end-3Q20, with excess
provisions providing some loss-absorption capacity in addition to
the improving equity base and stable profit generation.
IDF Spain's growth has materially exceeded its peers and is driven
by the start-up nature of the company. The short-term nature of its
loan portfolio (the average maturity is about 150 days) means that
seasoning of the portfolio should have minimal impact on
recognition of impaired loans. The rapid growth should not have
strained the company's infrastructure or control environment given
its reliance on IT and other systems of an established sister
company.
IDF Spain's short-term nature of loan portfolio provides it with
some flexibility to deleverage in times of stress. However,
profitability is highly sensitive to business volumes due to its
still small scale of operations. This exposes the company to
elevated risk of economic deterioration from further waves of the
coronavirus pandemic further depressing new loan issuances.
SENIOR UNSECURED DEBT RATING
IDF Spain's senior unsecured debt rating is equalised with its
Long-Term IDR, reflecting Fitch's expectation of average recoveries
for the notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Upside potential is limited in the medium term, but sustained
growth of IDF Spain's tangible equity base and general business
scale with maintenance of sound profitability and adequate leverage
coupled with improved asset quality could support an upgrade in the
medium to long term.
A longer track record of sound profitability while maintaining
asset quality indicators at current levels and ensuring continued
funding access could lead to a revision of the Outlook to Stable
from Negative over the Outlook horizon (12 to 18 months).
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Given the currently challenging operating environment, IDF Spain's
ratings are particularly sensitive to a deterioration in the
company's asset quality (including a weakening of its provisioning
levels), earnings and profitability and continued access to
multiple funding sources.
A material increases in leverage with gross debt/tangible equity
exceeding 5x on a sustained basis, in particular with no clear path
of deleveraging in the short-term.
A regulatory event or loss event that has the potential to affect
business model stability and ultimately viability.
IDF Spain's senior unsecured notes' rating is primarily sensitive
to changes in the Long-Term IDR. In addition, changes to Fitch's
assessment of relative recovery prospects for senior unsecured debt
in a default (e.g. as a result of material balance sheet
encumbrance) could result in the senior unsecured debt rating being
notched down relative to IDF Spain's IDR.
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
IDFinance Spain SL: Exposure to Social Impacts: 4, Customer Welfare
- Fair Messaging, Privacy & Data Security: 4
IDF Spain has an ESG Relevance Score of 4 for Customer Welfare and
Exposure to Social Impacts. This reflects Fitch's view that IDF
Spain's positioning in the high-cost credit sector means that its
business model is sensitive to potential regulatory changes (such
as lending caps) and conduct-related risks. This has a negative
impact on the credit profile, and is relevant to the rating in
conjunction with other factors.
Except for the matters discussed, the highest level of ESG credit
relevance, if present, is a score of 3 - ESG issues are credit
neutral or have only a minimal credit impact on the entity(ies),
either due to their nature or the way in which they are being
managed by the entity(ies).
NH HOTEL: Fitch Affirms B- LT IDR, Outlook Negative
---------------------------------------------------
Fitch Ratings has affirmed NH Hotel Group S.A.'s (NHH) Long-Term
Issuer Default Rating (IDR) at 'B-' with a Negative Outlook and
senior secured long-term rating at 'B+'/'RR2'.
The affirmation reflects NHH's satisfactory financial flexibility
and deleveraging capacity, mirroring that of the consolidated
profile of the Thai group Minor International Public Limited
(Minor), which owns 94% of NHH. This is despite the re-emergence of
operational disruption in the lodging sector as a result of the
global pandemic, this time mostly centred in Europe and North
America, which will impact the performance of the sector for longer
than previously expected.
The Negative Outlook reflects uncertainty around the financial
profile of the consolidated Minor group and of NHH post-pandemic,
in what it seems will be a volatile return to business normality
between 2021 and 2022.
NHH's Standalone Credit Profile (SCP) remains 'b'. It reflects
satisfactory liquidity and Fitch's forecast progressive revenue per
available room (RevPAR) recovery through 2021 and 2022, with
leverage metrics expected to return within the parameters
compatible with the current SCP in 2022-2023.
KEY RATING DRIVERS
Long-lasting High Exposure to COVID-19: The pandemic disruption
will have a longer and deeper-than-forecast impact on NHH's credit
metrics, especially on deleveraging prospects, given the recent
resurgence of infections, particularly in Europe. As a result of
the new restrictions on movements imposed by governments and
considering that business trips are unlikely to meaningfully resume
until the pandemic is contained, Fitch expects occupancies for NHH
to decline during 4Q20 and remain at least 45% below
pre-coronavirus levels in 2021. The change in corporates' policies
towards virtual meetings could also lead to a permanent loss of a
proportion of business travel.
Top-line Pressure Remains in 2021: Fitch projects a sharp decline
in NHH's top line with 2020 reaching roughly one-third of 2019
revenues, before reaching around 57% in 2021. Fitch no longer
expects full portfolio reopening by the end of 2020. Its forecast
assumes that a muted market recovery with a slower-than-expected
NHH portfolio reopening will lead to a negative single digit EBITDA
margin in 2021. Fitch projects an improvement in the EBITDA margin
towards 15.5% by 2023 driven by occupancy recovery in all markets,
as well as NHH's cost optimisation efforts.
Parent-Subsidiary Linkage Assessment: Fitch has adjusted its
assessment of ties between NHH and Minor to 'moderate' from
'strong' due to independent liquidity and treasury management
demonstrated by NHH, as well as dividend restrictions that are
still in place for a material part of its external financing,
reinforced in the extended revolving credit facility (RCF)
documentation. However, Minor's nearly full ownership (94%) of NHH
still assumes the possibility that the parent could decide to
access NHH's cash flows through a change in financial policy and
control of the board.
NHH's rating is therefore constrained at 'B-', reflecting Minor's
consolidated credit profile and the moderate linkage between the
two entities in line with Fitch's Parent and Subsidiary Rating
Linkage Criteria.
Higher Post-Pandemic Leverage: Its rating case expects funds from
operations (FFO) adjusted net leverage to peak in 2020 and to
remain highly elevated in 2021, before stabilising at around 6.0x
in 2022 with gradual deleveraging thereafter. Operating leases
remain a high burden on adjusted financial debt, especially given
the high share of fixed rents. This is mitigated by NHH's efforts
to renegotiate and cancel onerous leases along with rent
variability and NHH's introduction of a cap mechanism. However,
only 24% of leases have a degree of variability or a cap mechanism
at the moment.
A return to pre-crisis trading conditions, combined with a
continued focus on free cash flow (FCF) generation and the support
of a conservative financial policy by the shareholder, could
accelerate deleveraging and support NHH's credit profile. However,
uncertainty around this scenario supports the Negative Outlook.
Actions Protecting Cost Base: NHH's cost base has been aided by
measures from different European governments (especially in Spain,
where the group is based) that have largely enabled a temporary
reduction in staff costs and could partially support 2021 recovery.
This will also provide some fiscal relief. The cost base is also
aided by the implementation of a contingency plan to adapt
operations. NHH's EBITDA is also partially supported by its 22%
freehold portfolio, its bargaining power with its landlords and the
outsourced nature of part of its opex.
Sufficient Liquidity to Weather Crisis: NHH's EUR421 million of
readily available cash (as defined by Fitch as of September 2020),
and the absence of any large maturities before 2023, provide a
liquidity cushion to withstand the current crisis well into 2021.
Fitch expects NHH to further slow its capex, carefully manage its
costs and working capital, focusing on cash preservation in the
highly volatile environment. However, there is a risk of a more
aggressive financial policy imposed by NHH's parent from 2022. This
could increase pressure on FCF, which Fitch still forecast to be
negative in 2021, before turning positive in 2022.
Financial Policy Still Uncertain: Minor has publicly established a
long-term target net leverage of around 2.5x for NHH. Despite
restrictions imposed by the bond and RCF documentation on
dividends, investments, guarantees or new loans, Fitch still view
the possibility of a change in financial policy as potentially
detrimental to NHH's credit quality in the longer term. The current
crisis could lead Minor to upstream more cash from NHH than Fitch
has assumed in its rating case, putting additional pressure on
NHH's longer-term credit profile. However, this is unlikely while
there are stringent covenants in place that prevent any such cash
upstream through to the end of 2021.
DERIVATION SUMMARY
NHH is one of the 10 largest European hotel chains. It is
significantly smaller than global peers such as Accor SA
(BB+/Stable) or Melia Hotels International by breadth of activities
and number of rooms. NHH focuses on urban cities and business
travellers, while Accor and Melia are more diversified across
leisure and business customers. NHH is comparable with Radisson
Hospitality AB in urban positioning, although Radisson is present
in a greater number of cities. NHH had an EBITDA margin of more
than 17% in 2019, which is above that of close competitor Radisson
but still far from that of asset-light operators such as Accor or
Marriott International, Inc.
NHH's FFO lease-adjusted net leverage of 5.0x (adjusted for
variable leases) at end-2019 was higher than that of peers due to
its large exposure to leases. NHH remains a more asset-heavy hotel
group than peers, although its use of management contracts is
around 14% of its hotel portfolio as of end-June 2020. NHH
nevertheless owns rather than leases a material proportion of its
hotel assets, which eases the cost base in a disruptive scenario
such as the coronavirus pandemic.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Revenue decreasing by 67% in 2020, driven by a decline in
RevPAR across all regions, followed by a weak recovery in 2021.
- EBITDA deteriorating more sharply than revenues in 2020 as a
result of limited immediate cost reductions versus the sudden
decline in trading activity. The EBITDA margin to recover towards
15% by end-2023 from negative in 2020 and 2021.
- Around EUR400 million of aggregate capex for 2020-2023 to cover
maintenance capex, additional repositioning within the portfolio,
development of the current signed pipeline and some additional
limited expansion.
- Dividend distribution in line with legal restrictions and
historical policy from 2022, with EUR20 million of extraordinary
dividend in 2023.
Recovery Assumptions:
NHH's 'RR2' Recovery Rating for the senior secured notes' rating
reflects the collateral of EUR356.8 million secured notes and a
EUR236 million RCF, which rank equally with each other. Collateral
includes Dutch hotels as properties that would be managed by NH
group operators, a share pledge on a Dutch hotel, share pledges on
Belgian companies owning hotels that equally would be managed by NH
group operator companies and finally a share pledge on NH Italy as
a single legal entity operating and owning the whole Italian group.
This includes both assets and operating contracts. The described
collateral had a market value of EUR1,676 million at end-June 2020
as evaluated by a third-party appraiser and reflecting the release
of two hotels from the collateral executed in September 2020.
The expected distribution of recovery proceeds results in potential
full recovery for senior secured creditors, including for senior
secured bonds even after a conservative haircut of 45% on the
collateral valuation.
However, the Recovery Rating is constrained by Fitch's
country-specific treatment of Recovery Ratings for Spain, which
effectively caps the uplift from the IDR at two notches at
'B+'/'RR2'. The waterfall analysis output percentage based on
current metrics and assumptions remains capped at 90%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Improvement of the credit profile of the consolidated Minor
group.
The following developments would be considered for the assessment
of NHH's SCP but only provided that Fitch has reassessed links with
Minor as weak:
- FFO lease-adjusted net leverage below 5.5x on a sustained
basis, due for instance to NHH's limited dividend distribution.
- EBITDAR/ (gross interest + rent) sustainably above 1.3x.
- Continued improvement in the operating profile via EBIT margin
and RevPAR uplift.
- Sustained positive FCF.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Weakening of the credit profile of the consolidated Minor group
so long as Fitch assesses links between Minor and NHH as strong or
moderate.
The following developments would be considered for the assessment
of NHH's SCP and in the event of Minor displaying a stronger SCP:
- FFO lease-adjusted net leverage above 6.0x beyond 2021, for
example due to protracted market recovery, or shareholder's
initiatives such as increased dividend payments.
- EBITDAR/ (gross interest +rent) below 1.3x.
- Weakening trading performance leading to EBIT margin (excluding
capital gains) trending toward 5% in 2021 and thereafter.
- Negative FCF.
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: NHH's EUR236 million RCF (recently extended
until 2023) and EUR29 million of unsecured facilities were drawn as
of September 2020 and provide a healthy liquidity buffer, with
EUR421 million of readily available cash on balance sheet as of
September 2020 (as defined by Fitch). This cash together with EUR29
million available committed credit lines support the rating through
its forecasted crisis scenario, along with the recently signed
syndicated loan for EUR250 million (with maturity in 2023) and
NHH's capacity to strengthen liquidity with further
cash-preservation measures, including through adjustments to capex
plans and the cost base.
The maturity extension of the RCF to March 2023 led to a revised
amount of EUR236 million together with additional restrictions to
dividends and capex in 2021. The ownership of unencumbered assets
(EUR1,115 million of unencumbered assets as valued at end-June 2020
partially by a third-party appraiser) provides additional financial
flexibility in case of need.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
NHH's rating is linked to Minor International's rating.
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.
VALENCIA: S&P Affirms 'BB/B' Issuer Credit Ratings, Outlook Stable
------------------------------------------------------------------
On Nov. 20, 2020, S&P Global Ratings affirmed its 'BB/B' long and
short-term issuer credit ratings on Spain's Autonomous Community of
Valencia. The outlook is stable.
Outlook
The stable outlook reflects S&P's view that, despite Valencia's
very weak budgetary performance and increases in tax-supported
debt, the Spanish central government will continue to provide
sufficient financial support to the region, mitigating the risk
that its very high tax-supported debt ratios would otherwise
imply.
Downside scenario
S&P said, "We could lower the rating on Valencia if we thought the
central government's willingness or ability to provide financial
support to Valencia was in question, if this support proved
insufficient, or if we had doubts about its timeliness and
efficacy. We could also lower the rating on Valencia if the
regional government showed a weakening commitment to improving
regional budgetary metrics, leading to weaker performance than we
forecast."
Upside scenario
S&P said, "We could raise the rating on Valencia if we expected a
structural improvement in the region's budgetary metrics, for
example through a meaningful reform of the regional financing
system or through the central government's explicit absorption of
regional debt. In this scenario, we would also expect the regional
government to clearly demonstrate a commitment to maintain a sound
budgetary trajectory."
Rationale
The rating on Valencia is underpinned by the supportive nature of
Spain's institutional framework for normal status regions, as
demonstrated by the strength of central government support, which
we expect to continue. In S&P's view, this support mitigates the
risk arising from Valencia's consistently high deficits and very
high levels of debt. The central government provides full coverage
of Valencia's financing needs, supporting the region's liquidity.
The Spanish government is by far the region's largest creditor.
The regional financing system and central government support
mitigate the impact of the COVID-19 pandemic on Valencia
To diminish the pandemic's impact on regional accounts, the Spanish
central government is providing far reaching budgetary support to
the regional tier. Financing system resources were increased in
March 2020, despite mounting evidence of expected declines in GDP
and tax collection. The central government also provided early
support measures in the form of ad hoc funds to cover some health
care expenditure and school meals.
In June 2020, the central government created a COVID-19 fund,
endowed with EUR16 billion, or about 1.4% of our estimate of
Spain's GDP in 2020, to cover the additional health care,
education, and transportation system expenditure, as well as lost
revenue from regions' own tax sources. In S&P's view, this fund is
evidence of the supportive nature of the institutional framework
for Spanish normal status regions, and in line with its
expectations.
On Sept. 30, 2020, the central government announced it was
suspending the fiscal rules (deficit targets, expenditure growth
rates, and debt limits) for 2020 and 2021. The government also
established a nonbinding reference deficit for 2021 at 2.2% of
regional GDP, but announced it would cover half of this target
through the creation of a new fund, worth about EUR13.5
billion--meaning an effective deficit reference rate of 1.1% of
regional GDP. Moreover, the central government will channel about
EUR10 billion of EU support to the regional tier over two years, to
maintain investment levels. S&P sees this as evidence of the
central government's continued commitment to centralize the burden
of countermeasures to the virus on its own accounts.
The nonbinding nature of the deficit reference implies that there
will not be any consequences for excess spending over this target.
Moreover, the central government has committed to financing all of
the regions' deficit needs, while appealing for individual
responsibility in drafting the regional budgets for the year.
S&P sees the Spanish institutional framework as fundamentally
supportive, given the high degree of central government assistance
to the regional tier, although it is also currently subject to some
uncertainty following the suspension of fiscal rules.
S&P said, "In this context, we understand regions may differ in
their approach to the new targets. Although some regions may seek
to fully use the reference deficit, or even surpass it, others may
decide to stay within or even below it, mindful of the potential
impact of excessive deficits on future debt sustainability. We
expect Valencia's financial management to exhaust the deficit
reference for 2021, as it continues to push for a reform of the
financing system that could structurally transform its budgetary
outlook.
"COVID-19 has fundamentally changed the economic growth outlook for
Spain. We now expect a recession in 2020, followed by a recovery in
2021. We see Valencia's economy as somewhat weaker than Spanish
peers', with a GDP per capita below the national average.
Valencia's unemployment rate, at 17.3% as of third-quarter 2020, is
very high in an international context, and we expect it will
continue to rise in the current environment.
"Central government support should mitigate the impact of the
pandemic on regional finances, but we expect Valencia to continue
posting large deficits and accumulating debt
"In our view, central government budgetary support for Valencia in
2020 will suffice to prevent a deterioration of the region's
accounts for the year, despite the impact of COVID-19.
"In fact, we expect Valencia's performance for the year will be
stronger than that posted in 2019, with an operating deficit of
about 2.2% of operating revenue and a deficit after capital
accounts of about 6.4% of total revenue (compared with close to 17%
of total revenue in the prior year). Although we expect an increase
in operating expenditure due to the pandemic, we believe central
government support for the year, which we estimate at about EUR1.5
billion, or 10% of operating revenue, will be more than enough to
cover that increase.
"In contrast, we expect Valencia's performance to deteriorate in
2021. The central government has already announced the amount of
revenue it will distribute to the financing system for 2021.
Advances from the system will only decline by about 0.6%, but
overall resources will be about 2.5% less than for 2020, due to a
lower positive settlement from previous years' financing systems.
Moreover, although the central government will once again provide
budgetary support, we estimate it will be less than in 2020, at
about 8% of our estimate of operating revenue. We expect Spain's
economy to recover in 2021, which should have a positive impact on
Valencia's own tax sources (real estate transactions, wealth, and
other smaller taxes), but overall we expect Valencia's revenue to
decline.
"At the same time, we do not envisage a meaningful reduction in
operating expenditure, since we think the region will seek to
maintain or reinforce the quality of public services (especially
health care). We therefore expect a widening of the negative
operating balance, to reach about 6.6% of operating revenue, and an
overall deficit of about 9.6% of total revenue.
"Starting in 2021, we expect Valencia to receive transfers
associated with the REACT-EU fund. We believe these transfers will
likely boost capital revenue and expenditure, with a broadly
neutral budgetary impact. Nevertheless, these funds could help
relieve some pressure on the capital expenditure budgets, while at
the same time stimulating the economy, and should therefore be
clearly positive for the region.
"We believe budgetary performance may again deteriorate in 2022. If
the pandemic has subsided by then, we think the extraordinary
government support for the regions will likely be phased out. At
the same time, we expect all regions to face a negative settlement
from the financing system with regard to 2020, since they are now
receiving higher funds than they are entitled to. We think the
central government will allow regions to return such negative
settlements over many years, as it did with the negative
settlements generated in 2008 and 2009. However, barring an
extraordinary performance of Valencia's own taxes, we believe
operating revenue will decline in 2022 compared with 2021. Despite
our expectation of very moderate expenditure increases, we think
this scenario will once again lead to widening deficits, which
could be in line with the ones posted in 2018 and 2019."
This scenario may be more optimistic if the central government
decides to provide further support in 2022, or if the regional
financing system undergoes a noteworthy reform that increases
transfers to the region. However, S&P does not have any clear
indication that this will be the case.
Given this budgetary trajectory, S&P expects Valencia's debt will
continue to increase. Although tax-supported debt ratios should
temporarily decline in 2020 and 2021, due to a denominator effect
thanks to central government transfers, the region's debt should
nevertheless climb to about 347% of consolidated operating revenue
by 2022. Valencia's debt burden metrics are the highest of all
Spanish regions, and also stand out in an international context.
Currently, about 97% of Valencia's debt is direct debt. This is
because the region has taken direct responsibility for
government-related entity (GRE) debt over the past few years, aided
by the central government's liquidity facility (Fondo de Liquidez
Autonomico), which allows the refinancing of the maturities of GREs
within the official perimeter of the region.
At year-end 2019, Valencia owed about 84% of its total debt to the
central government, which provides funding at very low interest
rates. This mitigates the risk that such a high debt stock would
otherwise imply, in our view. In 2020, Valencia has used loans from
commercial banks to refinance about EUR2.2 billion in loans from
early editions of the central government's liquidity facilities--at
higher interest rates, based on then-prevailing market
conditions--achieving substantial cost savings over the life of the
loans.
Although Valencia's liquidity metrics are very weak, S&P notes the
availability of central government liquidity facilities, which
fully cover the region's debt service requirements.
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
Ratings Affirmed
Valencia (Autonomous Community of)
Issuer Credit Rating BB/Stable/B
Senior Unsecured BB
Commercial Paper B
===========================
U N I T E D K I N G D O M
===========================
CINEWORLD: Secures GBP336-Mil. Debt Lifeline Amid Pandemic
----------------------------------------------------------
Emma Newlands and Henry Saker-Clark at The Scotsman report that
Cineworld has secured a GBP336 million (US$450 million) debt
lifeline to help guide the troubled cinema chain through the
coronavirus pandemic.
The group, which has temporarily closed its UK and US sites, said
it has also secured access to another GBP233 million in liquidity
to boost its finances, The Scotsman relates. The new lending
facility will mature in 2024, The Scotsman discloses.
Last month, Cineworld shut the doors to 633 of its cinemas, The
Scotsman recounts. Its network in Scotland includes Aberdeen,
Edinburgh, Dundee, Falkirk, and Glasgow.
Cineworld said it has also extended an GBP83 million revolving
credit facility, which was due to expire next month, to May 2024,
and pulled forward an expected tax refund of more than GBP150
million to early 2021, The Scotsman notes.
According to The Scotsman, Susannah Streeter, senior investment and
markets analyst at Hargreaves Lansdown, said: "The curtain has been
raised on a more positive picture for Cineworld, with the company
grabbing hold of another financial lifeline as the post pandemic
world comes more sharply into view.
"The AstraZeneca vaccine results have washed another wave of relief
over the entertainment and hospitality industry, with hopes raised
again that mass inoculation programmes will inspire movie goers to
snap up seats once cinemas reopen.
"The company is still eyeing May next year for a grand reopening of
movie theatres around the world, but that will depend on just how
quickly studios schedule big releases. It's hoped the vaccine
breakthroughs will help unblock the pipeline of productions,
however that is likely to depend on the success and speed of mass
inoculations."
GOODWIN'S CONSTRUCTION: Enters Administration, 30 Jobs Affected
---------------------------------------------------------------
Megan Kelly at Construction News reports that Manchester-based
Goodwin's Construction Services Group has fallen into
administration, with 30 jobs lost.
According to Construction News, administrator FRP Advisory blamed
project delays caused by the coronavirus crisis for the firm going
under. It said the firm, formerly known as Goodwin Construction
Group, had faced significant cashflow difficulties in recent
months, Construction News relates.
It had also seen a number of projects delayed prior to the onset of
the pandemic, Construction News notes.
According to Construction News, FRP partner and joint administrator
John Lowe -- john.lowe@frpadvisory.com -- said: "Goodwin's
Construction Services was a strong business but, unfortunately, the
challenges facing the business left it with no option other than to
appoint administrators as it was unable to generate the cashflow to
remain solvent. Our priority is now to support those employees
affected and we will be working closely with the redundancy
payments service to do so."
The firm was too small to be required to disclose its turnover, but
its most recent filed accounts to June 30, 2019, showed it owed
GBP3.5 million to creditors within one year, while having GBP1.7
million cash at bank and in hand, Construction News discloses. The
firm was owed GBP2.7 million by debtors in the same period and had
a total of GBP106,000 in fixed assets, Construction News states.
Goodwin's Construction Services worked across the industrial,
residential, retail, commercial and leisure sectors. The company
is part of parent company the Goodwin Group, which remains
unaffected and continues to trade as normal.
ONEWEB: Exits Chapter 11 Bankruptcy Protection
----------------------------------------------
Ayanti Bera at Reuters reports that satellite operator OneWeb said
on Nov. 20 it has emerged from Chapter 11 bankruptcy protection
with US$1 billion in equity investment from a consortium of the UK
Government and India's Bharti Enterprises, the new owners of the
UK-based company.
According to Reuters, the investment puts OneWeb on track to
compete with Elon Musk's SpaceX in the race to use low-Earth orbit
satellites to provide high-bandwidth and low-latency communication
services.
OneWeb said it appointed Neil Masterson, former co-chief operating
officer at Thomson Reuters, as its new chief executive officer,
succeeding Adrian Steckel, who will continue as an adviser to the
board, Reuters relates.
OneWeb, founded in 2014 by entrepreneur Greg Wyler, filed for
bankruptcy protection at the end of March after its biggest
investor SoftBank Group Corp pulled funding, Reuters recounts.
SB ENERGY: Fitch Withdraws BB-(EXP) Rating on New $600 MM Notes
---------------------------------------------------------------
Fitch Ratings has withdrawn the 'BB- (EXP)' expected rating with a
Stable Outlook assigned to SB Energy Holdings Limited's Restricted
Group 1's (SBEH RG1) proposed USD600 million notes due 2025. The
expected rating was assigned on July 7, 2020.
Fitch is withdrawing SBEH's expected rating as it is no longer
expected to convert to a final rating. Fitch does not expect SBEH
RG1's forthcoming debt issuance to proceed as previously
envisaged.
KEY RATING DRIVERS
Not applicable.
RATING SENSITIVITIES
Not applicable.
SEADRILL LTD: Debt Restructuring Talks with Creditors Ongoing
-------------------------------------------------------------
Nerijus Adomaitis at Reuters reports that offshore oil drilling
contractor Seadrill expects the market for its rigs to remain
depressed until late 2021, the Oslo-listed firm said on Nov. 20 as
it continued talks with creditors over a debt restructuring.
Seadrill, controlled by Norwegian-born billionaire John Fredriksen,
in September suspended interest payments after failing to agree
with lenders on amending terms for its US$5.7 billion bank debt,
and warned that restructuring could wipe out its equity, Reuters
recounts.
"We are engaged in constructive discussions with our financial
stakeholders as we look to carry out a comprehensive restructuring
of our balance sheet and our cash balance provides us with the
necessary flexibility to manage this process," Reuters quotes Chief
Executive Stuart Jackson as saying.
According to Reuters, Seadrill, which emerged from U.S. Chapter 11
restructuring in 2018, said it had US$851 million in cash and cash
equivalents at the end of September, but didn't update the level of
its liabilities, which stood at US$7.3 billion at the end of June.
The company said while some demand has emerged, it remained
significantly below 2019 levels, and Seadrill plans to scrap more
idle rigs, pending creditor approval, Reuters relates.
About Seadrill Ltd.
Seadrill Limited (OSE:SDRL, OTCQX:SDRLF) --
http://www.seapdrill.com/-- is a deepwater drilling contractor
providing drilling services to the oil and gas industry. As of
March 31, 2018, it had a fleet of over 35 offshore drilling units
that include 12 semi-submersible rigs, 7 drillships, and 16 jack-up
rigs.
On Sept. 12, 2017, Seadrill Limited sought Chapter 11 protection
after reaching terms of a reorganization plan that would
restructure $8 billion of funded debt. It emerged from bankruptcy
in July 2018.
Demand for exploration and drilling has fallen further during the
COVID-19 pandemic as oil firms seek to preserve cash, idling more
rigs and leading to additional overcapacity among companies serving
the industry.
In June 2020, Seadrill wrote down the value of its rigs by $1.2
billion and said it planned to scrap 10 rigs.
Seadrill is presently in talks with lenders on a restructuring of
its $5.7 billion bank debt.
SYNLAB UNSECURED: Fitch Affirms B LT IDR, Alters Outlook to Pos.
----------------------------------------------------------------
Fitch Ratings has revised Synlab Unsecured Bondco Plc's (Synlab)
Outlook to Positive from Stable and affirmed the healthcare
provider's Long-Term Issuer Default Rating (IDR) at 'B'. Fitch has
also affirmed the senior secured debt issued by Synlab Bondco Plc
at 'B+'/'RR3' ahead of its planned refinancing.
Synlab intends to refinance its EUR375 million 8.25% senior notes
with a new EUR375 million senior secured term loan B (TLB).
The Positive Outlook reflects likely improvements to Synlab's
credit profile, on strong trading performance as routine and
COVID-19-related testing activities will materially exceed its
previous expectations. This will lead to sustained stronger
operating and cash flow margins from 2020 onwards.
In addition, Synlab is planning to use most of the proceeds - an
estimated EUR500 million - from its disposal of non-core testing
business Analytics and Services (A&S) toward debt reduction subject
to the provisions of the financing documentation. This will also
lead to stronger than initially projected credit metrics through
2023.
On completion of the refinancing Fitch expects to withdraw the
senior notes rating following their early full redemption.
KEY RATING DRIVERS
Stronger Volume Rebound: Fitch has revised its full-year
expectations for Synlab with sales growth of around 18% in 2020 on
the back of substantial COVID-19-testing estimated to reach EUR500
million, together with a robust recovery of routine medical-testing
services since May. This is supported by strong 3Q20 results and
continuously high levels of COVID-19 testing activity, which Fitch
projects to continue at least until 2022. Strong business volumes
will support sustained EBITDA margin (Fitch-defined, excluding the
impact of IFRS 16) of 18% through 2023. This compares with its
previous projection of 16% in 2020, followed by 18% thereafter.
Medium-Term Impact from Pandemic: Fitch views COVID-19 testing,
which accounts for 20% of Synlab's 2020 sales, will continue to
materially support sales and EBITDA, albeit at a slower pace from
2021 onwards. However, Fitch expects demand for this testing
service to remain strong despite the prospects of near-term vaccine
launches. In its view it could take at least two years to reach
wide-spread immunisation of the population in Europe before
COVID-19 testing loses its wider relevance. Fitch therefore
projects contribution from this business service to remain through
2023. Even if demand declines to negligible levels by 2023-2024,
Synlab's operating profile will remain defensive and resilient, and
its credit profile will be more dependent on the owners' financial
policy.
Accelerated Deleveraging: The prospect of an improved leverage
profile is the key consideration behind its revision of the Outlook
to Positive. Volume-driven EBITDA and funds from operations (FFO)
expansion will accelerate deleveraging towards 7.0x on a gross
basis in 2020. Proceeds from the A&S sale of around EUR500 million
will be used to reduce senior secured debt, resulting in lower FFO
adjusted gross leverage to below 6.5x - its positive rating
sensitivity - in the next 12-18 months
Healthy FCF: Fitch projects improving free cash flow (FCF) margins
to increase to 6% and above from 2021 onwards on higher EBITDA,
lower cash debt service following the refinancing, and contained
trade working capital and capex requirements. Such margins are in
line with 'B+' rated peers', supporting the Positive Outlook. Fitch
expects a trading working capital outflow of EUR80 million in 2020,
due to increased business volumes before normalising to EUR10
million-EUR15 million in the following years. Lower debt service
cost, together with assumed debt prepayments from the disposal
proceeds, will reduce estimated interest costs to around EUR100
million by 2022 from around EUR120 million in 2019 (excluding IFRS
16-related lease interest expense).
Impact of Sponsor's Exit Strategy: The rating remains subject to
near-term corporate actions in connection with Cinven's intention
to fully or partially exit the business, which will materially
impact Synlab's financial profile and which Fitch treats as event
risk.
Supportive Sector Fundamentals: Lab-testing is regarded as social
infrastructure given its defensive non-cyclical characteristics.
The sector is driven by steadily rising demand as preventive and
stratified medicine becomes more prevalent. Incremental volumes in
a structurally growing market compensate for price and
reimbursement pressures, as national regulators contain rising
healthcare costs. National or pan-European sector constituents such
as Synlab are best-placed to capitalise on positive long-term
demand fundamentals and extract additional value through
scale-driven efficiencies and market-share gains by displacing less
efficient and less-focused smaller peers.
Synlab has an ESG Relevance Score of 4 due to its Exposure to
Social Impact as the company operates in a regulated medical
market, which is subject to pricing and reimbursement pressures as
governments seek to control national healthcare spending and
contain rising healthcare costs. This may have a negative impact on
the credit profile and is relevant to the rating in conjunction
with other factors.
DERIVATION SUMMARY
Synlab is the largest lab-testing company in Europe. As with other
sector peers, such as CAB Societe d'excercice liberal par actions
simplifiee (B/Negative) and Cerba, Synlab benefits from a defensive
and stable business model given the infrastructure-like nature of
lab-testing services. This has been reinforced by the company's
performance during the pandemic. Fitch therefore projects that
Synlab will be able to generate consistently positive FCF,
supporting its 'B' IDR.
Synlab's sustained EBITDA margin at around 18% (Fitch-defined,
pre-IFRS 16) is slightly behind European industry peers', due to
exposure to the German market with structurally lower
profitability. The lab-testing market in Europe has attracted
significant private-equity investment, leading to highly leveraged
financial profiles.
The revision of the Outlook to Positive is largely driven by its
expectation of accelerated deleveraging benefitting from the
pandemic-induced additional testing volumes and debt prepayments
from an asset disposal, which should lead to a lower FFO adjusted
gross leverage at 7.3x in 2020 and below 6.5x from 2021 onwards,
from 8.8x in 2019.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Sales growth in 2020 of 18% due to COVID-19-related testing,
gradually easing to low single-digit organic growth in key markets
by 2023;
- EBITDA margin (Fitch-defined) at 18% through 2023;
- Around EUR50 million of bolt-on acquisitions in 2020 on slower
M&A activity due to COVID-19, before rising up to EUR150 million
per annum until 2023, funded by internal cash flows;
- Enterprise value (EV)/EBITDA acquisition multiples of 10x;
- Capex temporarily reduced to 3% of sales in 2020 given
coronavirus-related freeze on non-essential capex, and at 4% in
2021-2023;
- FCF margin of 3% in 2020, followed by 6%-7% until 2023;
- Redemption of EUR375 million senior notes with a new TLB in the
same amount in 4Q20, and
- Proceeds from the disposal of A&S applied towards debt
prepayment of around EUR500 million in 2021.
Recovery Assumptions:
- The recovery analysis assumes that Synlab would be reorganised
as a going-concern (GC) in bankruptcy rather than liquidated given
its asset-light operations.
- A 10% administrative claim.
- Synlab's GC EBITDA of around EUR315 million is slightly above
its previously estimated post-restructuring EBITDA of EUR300
million and takes into account additional earnings coming from
COVID-19 testing but also the disposal of A&S. Distress could come
as a result of adverse regulatory changes, or an aggressive and
poorly executed M&A strategy leading to an unsustainable capital
structure.
- The distressed EV/EBITDA multiple of 6x reflects Synlab's
geographic breadth and scale as European lab-testing market leader
and with cash-generative operations. This compares with the
EV/EBITDA multiple of 9x-11x for smaller targets that are being
acquired in the sector.
- Revolving credit facility (RCF) to be fully drawn upon default
and ranks super senior, on enforcement, ahead of the senior secured
and senior debt.
- The allocation of value in the liability waterfall results in a
Recovery Rating 'RR1' for the first-lien RCF (EUR250 million)
indicating a 'BB' instrument rating with an output percentage based
on the current assumptions of 100%, and a Recovery Rating 'RR3' for
the senior secured TLB and notes (EUR2.3 billion), leading to a
'B+' instrument rating with an output percentage of 59%.
- On completion of the refinancing with the addition of the
senior secured TLB of EUR375 million to replace the senior notes in
the same amount Fitch expects output percentage to decrease to 54%
for the enlarged senior secured debt, but still remaining in the
'RR3' translating into an unchanged 'B+' instrument rating.
- The senior notes of EUR375 million have zero recovery under the
waterfall calculation. The Recovery Rating for the senior notes is
'RR6' corresponding to an instrument rating of 'CCC+'. On
completion of the refinancing and full redemption of the senior
notes Fitch expects to withdraw this instrument rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FFO-adjusted gross leverage below 6.5x and FFO fixed-charge
coverage above 2.0x (2019: 2.0x); and
- Improved FCF margin to the mid-to-high single digits or a more
conservative financial policy reflected in lower debt-funded M&A
spending.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Outlook Revision to Stable:
- Application of A&S disposal proceeds toward other permitted
payments, including dividends, leading to FFO adjusted gross
leverage remaining above 6.5x and FFO fixed charge cover below
2.0x; and
- Mid-single-digit FCF margin.
Downgrade:
- FFO-adjusted gross leverage above 8.0x beyond 2020 or FFO
fixed-charge coverage at or below 1.5x for a sustained period (both
adjusted for acquisitions);
- Reduction in FCF margin to only slightly positive levels or
large debt-funded and margin-dilutive acquisitions; and
- Absence of or negative like-for-like sales growth or inability
to extract synergies, integrate acquisitions or other operational
challenges leading to EBITDA margin declining to below 17%.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: Synlab's liquidity position is comfortable
with EUR280 million of cash on balance sheet as of end-September
2020 and a further EUR200 million available under the RCF. Strong
operating performance should facilitate higher internal cash
generation, which together with the A&S disposal proceeds, could
support some debt prepayment and bolt-on M&A of up to EUR150
million a year.
Synlab benefits from diversified sources of funding and maturity
profiles. The refinancing will further improve debt maturity
headroom and diversification. It will also lower cash debt service
by around EUR15 million (excluding the impact of potential debt
prepayment using the disposal proceeds).
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
Synlab has an ESG Relevance Score of 4 for its Exposure to Social
Impact as the company operates in a regulated medical market, which
is subject to pricing and reimbursement pressures. This may have 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.
[*] UK: 34% of Hospitality Sector Firms Fear Economic Survival
--------------------------------------------------------------
Katharine Hay at The Scotsman reports that a total of 34% of
traders in the UK hospitality sector said they have low or no
confidence that their business will survive due to the latest
Covid-19 restrictions.
The recent figures were published by the Office for National
Statistics on Nov. 19 and show the accommodation and food service
industry had the highest percentage of businesses fearing economic
survival over the winter period, The Scotsman notes.
The news comes as a wave of five-star hotels across Scotland have
had to close for a second time due to the latest Covid-19
restrictions, The Scotsman states.
According to The Scotsman, the recent ONS statistics show 30% of
the UK's pubs had already stopped trading by the end of October
compared to just 20% in the same position at the end of September.
A total of about one in five (21%) of businesses in the hospitality
sector said they have high confidence that trade will continue to
do well in the coming months despite the nation-wide coronavirus
restrictions, while 36% said they are moderately confident and just
10% said they are not sure, The Scotsman discloses.
For all types of businesses across the UK, the study confirmed a
total of one in seven (14%) fear they won't survive the next three
months, The Scotsman relays.
The ONS survey with these latest statistics was carried out in the
first two weeks of November, according to The Scotsman.
[*] UK: Nightclub Operators to Meet Business Secretary Today
------------------------------------------------------------
Hannah Uttley at The Telegraph reports that nightclub operators
will meet the Business Secretary this week in a last-ditch attempt
to thrash out a potential lifeline for the beleaguered sector.
Bosses from Deltic Group, Fabric, Revolution Bars and Slug &
Lettuce owner Stonegate will meet Alok Sharma, today Nov. 24, in
the hope that the industry can secure a bailout following eight
months of closure, The Telegraph relates.
According to The Telegraph, Peter Marks, chief executive of Deltic,
which is the UK's largest nightclub operator, said the industry has
not been treated as a priority.
"Every day you hear these announcements coming out from government
supporting this and supporting that and there's still nothing for
us, we've got crumbs," The Telegraph quotes Mr. Marks as saying.
The crisis has forced many firms to make swathes of staff
redundant, The Telegraph relays. This month Revolution Bars
launched a company voluntary arrangement, which will lead to the
permanent closure of six of its 76 sites, The Telegraph recounts.
Deltic, which owns club brands including Oceana and Pryzm, has put
itself up for sale and warned that it will run out of cash by
mid-December if it does not secure a deal, The Telegraph states.
A BEIS spokesman, as cited by The Telegraph, said: "Since March, we
have delivered over [GBP]11bn of grants to around 900,000
businesses. In October we announced further support for businesses
like nightclubs which have had to stay shut, enabling them to stay
afloat."
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2020. All rights reserved. ISSN 1529-2754.
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