/raid1/www/Hosts/bankrupt/TCREUR_Public/201209.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Wednesday, December 9, 2020, Vol. 21, No. 246
Headlines
C Z E C H R E P U B L I C
AVAST HOLDING: Moody's Affirms Ba2 CFR; Alters Outlook to Positive
F R A N C E
HOMEVI SAS: Moody's Affirms B1 CFR; Alters Outlook to Negative
G E R M A N Y
DOUGLAS: Prepares for Financial Restructuring in 2021
[*] GERMANY: Company Bankruptcies Caused More Damage to Creditors
[*] GERMANY: Coronavirus Lockdown Measures Hit Economy in Nov.
I R E L A N D
CARA GROUP: Court Allows Examiner to Negotiate Investment Deal
DRYDEN 79: Moody's Assigns B3 Rating to EUR7MM Class F Notes
INVESCO EURO V: Fitch Assigns B-(EXP)sf Rating on Class F Debt
JUBILEE CLO 2020-XXIV: Moody's Assigns (P)B3 Rating to Cl. F Notes
MARINO PARK: S&P Assigns Prelim B- (sf) Rating on Class E Notes
PALMER SQUARE 2020-2: Fitch Assigns LT B+sf Rating to Class F Debt
N O R W A Y
NORWEGIAN AIR: Lessors Neutral on Creditor Protection Petition
NORWEGIAN AIR: Norwegian, Irish Courts Grant Creditor Protection
R U S S I A
UZBEKISTAN: S&P Affirms 'BB-/B' Ratings, Outlook Remains Negative
U N I T E D K I N G D O M
AMIGO LOANS: S&P Affirms CCC+ Long-Term ICR, Off Watch Negative
B&M EUROPEAN: Moody's Upgrades CFR to Ba2, Outlook Stable
CONVATEC GROUP: Moody's Affirms Ba3 CFR; Alters Outlook to Positive
[*] UK: Economic Performance Poor Despite High Covid-19 Spending
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C Z E C H R E P U B L I C
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AVAST HOLDING: Moody's Affirms Ba2 CFR; Alters Outlook to Positive
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Moody's Investors Service affirmed Avast Holding B.V.'s (Avast)
corporate family (CFR) at Ba2, as well as its probability of
default rating at Ba2-PD. Concurrently, Moody's has affirmed the
Ba2 instrument ratings of SYBIL SOFTWARE LLC's senior secured Term
Loan B and Avast Software B.V.'s senior secured Term Loan B
tranches both due in 2023 as well as Avast Software B.V.'s senior
secured Revolving Credit Facility due in 2022. The outlook on all
entities has changed to positive from stable.
RATINGS RATIONALE
"We have changed Avast's outlook to positive as a reflection of the
strong performance during the last year, a solid market environment
and the company's voluntary reduction of debt earlier this year.
Avast benefitted from the push towards remote work since the
outbreak of the coronavirus pandemic and also weathered the
Jumpshot-issue in early 2020 without meaningful adverse effects on
the business. Moody's expects the company to maintain its prudent
financial policy so that the capital structure will improve further
going forward" says Dirk Goedde, a Moody's Assistant Vice
President-Analyst and lead analyst for Avast. "However, the
announced dividend policy constrains the free cash flow generation
and we see an inherent risk of Avast performing larger, debt-funded
acquisitions", Mr Goedde adds.
The positive outlook is based on the expectation of a stable profit
generation and a continuous gradual reduction of leverage over the
next quarters. The positive outlook does not factor in sizable
acquisitions going forward. Moody's estimates that Avast will
continue to pursue its track record of positive free cash
generation and use the proceeds to voluntarily reduce outstanding
debt so that Moody's-adjusted gross debt to EBITDA will reduce
towards 1.5x in the next 12-18 months, a reduction of 0.6x from the
last twelve months ended in June 2020. Additionally, Avast
maintains strong interest cover above 10x, calculated as Moody's
adjusted EBITDA-capex/interest expense. Besides sustained
improvements in credit metrics, medium term positive rating
pressure requires further gradual improvements in scale as well as
customer and end market diversification.
Avast has reported another strong Q3-2020 with organic revenue
growth of 8.6% compared to the previous period. The consumer
desktop segments contributed again the strongest growth and remains
with 82% the by far most important segment. The revenue growth was
driven by an increasing customer base where demand was fostered by
increasing remote working environment as a result of the
coronavirus-pandemic. Additionally, Avast benefitted from a
generally higher demand for personal information security as the
level of cyber-attacks is increasing. This strong performance
helped to compensate the downfall in revenues from the wind-down of
the Jumpshot business which had been closed after adverse media
attention appeared around the subsidiary selling customer data to
third parties.
Moody's believes that Avast's Moody's-adjusted EBITDA margin will
remain above 50% on an adjusted basis in the next 12-18 months. The
slight margin decreases in the last twelve months ended in June
2020 compared to the previous period is driven by exceptional costs
to wind-down Jumpshot as well as donations the company has made to
fight the coronavirus.
Moody's forecasts free cash flow (after interest) in the range of
$300-$340 million before dividends in the next 12-18 months.
However, given the announced dividend guidance, the free cash flow
after dividends is expected around $170 million in the next 12-18
months which is higher than our previous expectation of $150
million for 2019. In September 2020 Avast has used excess cash to
again voluntarily repay debt by additional $100 million.
Avast's Ba2 CFR is generally supported by (1) the group's large
base of more than 435 million users across desktop and mobile, (2)
high Moody's adjusted EBITDA margin above 50% in the last twelve
months ended in June 2020 and strong free cash flow generation, (3)
a track record of revenue and EBITDA growth, (4) large scale in
emerging growth areas such as mobile and (5) good revenue
visibility with an average contract tenor of 14 months and a an
increasingly sticky customer base.
Conversely, Avast's CFR is constrained by (1) the group's
relatively small percentage of paid users (4% in desktop) and some
focus on the US, (2) the overall limited scale with low
diversification in terms of end-products and customer segments (3)
the intense industry competition and inherent technology risks in
security software markets, (3) relatively low customer switching
costs and (4) lower deleveraging capacity because of dividend
payments.
Moody's views Avast's liquidity profile as very good. It is
supported by a cash balance of approximately $151 million as of
June 2020, forecasted free cash flow (FCF) generation in excess of
$170 million in 2020 and full availability under the senior secured
revolving credit facility (RCF), whose maturity is 2022. The credit
facilities are covenant-lite, with only a springing net first lien
leverage covenant on the RCF.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive ratings pressure could develop over time if Avast (1)
successfully continues to diversify its revenue and profit streams,
(2) maintains Moody's adjusted EBITDA margins well above 50%, (3)
maintains Moody's adjusted debt to EBITDA sustainably below 2.0x
(4) maintains free cash flow after dividend above 15% and (5)
pursues a conservative financial policy with no debt-funded
acquisitions.
Conversely, negative ratings pressure could materialise if (1)
Avast's paid user base declines on a continued basis, (2) adjusted
leverage remains sustainably above 3.0x, (3) FCF/debt is
consistently lower than 10% or (4) the liquidity profile weakens.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Software
Industry published in August 2018.
CORPORATE PROFILE
Avast was founded in 1988 in the Czech Republic, and has grown to
become a global provider of security software and related solutions
primarily focused on the consumer market (including mobile), with
small business clients as well. The company is one of the world's
largest online service companies in terms of installed user base,
with more than 435 million users worldwide.
In the last twelve months ended in June 2020 Avast reported revenue
of $879 million and Moody's adjusted EBITDA of $465 million.
The founders of Avast still own 35% in the company with the
remainder being free float.
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F R A N C E
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HOMEVI SAS: Moody's Affirms B1 CFR; Alters Outlook to Negative
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Moody's Investors Service affirmed the B1 corporate family rating
(CFR) and B1-PD probability of default rating of HomeVi S.a.S., the
third largest provider of elderly care services in France and the
largest operator in Spain. The rating agency has concurrently
affirmed the B2 ratings of 1) the senior secured term loan B of
EUR1,570 million due in October 2026, which includes the EUR400
million debt add-on for acquisitions and refinancing, and 2) the
senior secured revolving credit facility (RCF) of EUR130 million
due in 2026. The outlook has been changed to negative from stable.
RATINGS RATIONALE
Moody's decision to change Domusvi's outlook to negative from
stable is driven by the increase in Moody's adjusted gross leverage
profile of the company and its somewhat more aggressive M&A
strategy than previously anticipated by the rating agency. The
proposed EUR400 million debt raises will finance a number of
recently closed acquisitions and future opportunities in a
relatively short period of time.
The rating agency now anticipates that Moody's adjusted debt to
EBITDA ratio will rise to 6.8x at the end of 2020, pro forma the
signed and closed acquisitions, from 6.2x at end of 2019 (including
IFRS 16 lease adjustments and pro forma of the acquisitions the
company made in 2019), levels not commensurate with its B1 rating.
Over the next 12 to 18 months, Moody's expects Domusvi to gradually
reduce its leverage towards 6.0x supported by 1) a recovery in
occupancy in France and Spain following the negative impact of
disruptions caused by the coronavirus pandemic, 2) an improved
average daily rate as a result of new entrants, and 3) synergies
from recently acquired acquisitions.
The agency's slightly higher tolerance for leverage reflects the
negative effect that IFRS 16 has had on key leverage metrics
because of the long-term nature of its lease contracts, albeit
shorter than some key peers such as Financiere Colisee S.A.S. (B2
stable), but also Moody's expectation that the company will
generate solid free cash flow of around EUR50 million over the next
12 to 18 months. Successful integration of acquisitions is a risk,
but Domusvi has a good track record of integrating acquisitions to
date.
Domusvi's rating continues to reflect (1) the company's leading
position in the fragmented French and Spanish nursing home markets,
which exhibit positive long-term demand prospects; (2) its good
track record of organic growth, integration of acquisitions and
good profitability compared with that of its peers; (3) its good
geographical and product diversification; and (4) the high barriers
to entry, including regulatory restrictions on the creation of new
beds through limited new greenfield authorizations.
Conversely, Domusvi's rating is constrained by its (1) high gross
leverage, which Moody's estimates at 6.8x as of the end of
September 2020 pro forma the acquisitions in 2019 and 2020; (2)
high level of fixed costs, relating to personnel and rental
expenses; and (3) exposure to the highly regulated French market,
particularly with respect to the fee rates applicable to the
existing clients.
LIQUIDITY PROFILE
Moody's expects the company's liquidity to remain good pro forma
the EUR400 million debt raise supported by the company's EUR 302
million of cash on balance sheet, a EUR130 million undrawn RCF, and
the rating agency's expectation that the company will generate
positive free cash flow of around EUR50million in the next 12 to 18
months Moody's understands that Domusvi will continue to remain
acquisitive over the next 12 to 18 months, to support both the
company's market positions and enter new markets. Moody's
anticipates that the company could use up to EUR150 million to
finance future acquisitions, but expects that the company will
ensure that liquidity remains adequate
The RCF lenders benefit from a net leverage covenant, which is
tested only if the RCF is drawn by or more than 40% (springing
covenant). Moody's expects the company to have good capacity under
the covenant, if tested. The company extended the maturity of its
debt facilities in November 2019 and does not have any near-term
refinancing risks. The next debt maturity will occur in October
2026, when the term loan B comes to maturity.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's expectation that leverage, as
measured by Moody's-adjusted debt to EBITDA, will remain high for
the B1 rating and that deleveraging towards 6.0x may be dependent
on the company's financial policy and M&A strategy. Moody's
considers that the company may also be challenged to generate the
positive FCF of EUR50 million that the agency forecasts, which is a
key mitigant to the company's high leverage and acquisitive
policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade is unlikely over the next 12 to 18 months in light
of the negative outlook. Over time, the rating agency could upgrade
Domusvi if its Moody's-adjusted debt/EBITDA falls sustainably below
5.0x while maintaining a good operating performance and
successfully executing its strategy, including the integration of
acquisitions; it maintains good liquidity, including positive free
cash flow to debt sustainably above 5%; and its Moody's-adjusted
EBITA/interest moves sustainably above 3.0x.
Conversely, Moody's could downgrade Domusvi if its Moody's-adjusted
debt/EBITDA fails to trend towards 6.0x over the next 12 to 18
months and to below 6.0x over time; the company fails to maintain
good liquidity, including positive free cash flow; its
EBITA/interest falls below 1.5x; or the company undertakes further
large debt-financed acquisitions given the agency's expectations
that future acquisitions will be financed through cash balances.
STRUCTURAL CONSIDERATIONS
The B2 ratings of the EUR1,570 million senior secured term loan B
and the EUR130 million senior secured RCF, one notch below the B1
CFR, reflect their structural subordination to operating companies'
liabilities, including significant operating leases with no
guarantees from operating subsidiaries. The B1-PD probability of
default rating, in line with the B1 CFR, reflects our typical 50%
corporate family recovery rate assumption for a bank's debt
structure with a springing covenant.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
COMPANY PROFILE
HomeVi S.a.S. (Domusvi), headquartered in Suresnes, France, is the
third-largest operator of nursing homes in France, primarily in the
Greater Paris, Bordeaux, Toulouse, Greater Lyon and French Riviera
regions. The company is also the largest operator of nursing homes
and mental care facilities in Spain. DomusVi entered the Portuguese
nursing home market in 2018 by closing two small acquisitions. The
company is majority owned by funds advised by Intermediate Capital
Group plc.
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G E R M A N Y
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DOUGLAS: Prepares for Financial Restructuring in 2021
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Arno Schuetze at Reuters reports that German perfume retailer
Douglas is preparing for a financial restructuring in 2021 as the
COVID-19 pandemic hits its business and its debt nears maturity,
two people familiar with the matter said.
According to Reuters, the sources said once the important Christmas
season is over, the company will kick off talks with its creditors
on options including a refinancing, a deal to amend and extend
maturities or a debt-for-equity swap.
Douglas' outstanding loans and bonds mature from February 2022,
Reuters discloses. In total, the company's net debt stood at
EUR2.1 billion (US$2.5 billion) as of June 2020 Reuters states.
The company's owner, private equity firm CVC, is willing to inject
additional equity, if needed, to safeguard its investment, the
sources said, adding that Lazard is acting as restructuring
adviser, Reuters notes.
Earlier this year, CVC started preparations for an initial public
offering or sale of Douglas, but the pandemic all but halted the
plans as sales crashed during the lockdown and talks of a state
bailout stalled in May, Reuters recounts.
[*] GERMANY: Company Bankruptcies Caused More Damage to Creditors
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Alexander Huebner at Reuters reports that despite a temporary
suspension of the obligation to file for insolvency this year,
company bankruptcies in Germany have caused significantly more
damage to creditors and cost more jobs, credit agency Creditreform
said on Dec. 8.
Creditreform said outstanding claims from insolvency creditors
amount to EUR34 billion this year, up from EUR23.5 billion last
year, Reuters relates. It added that the number of employees
affected by insolvencies has risen to 332,000 from 218,000 in 2019,
Reuters notes.
According to Reuters, Patrik-Ludwig Hantzsch, head of economic
research at Creditreform, predicted a sharp rise in corporate
insolvencies next year to around 24,000, the highest level since
2014.
[*] GERMANY: Coronavirus Lockdown Measures Hit Economy in Nov.
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Riham Alkousaa at Reuters reports that Germany's economic recovery
continued until October but has slowed since August, the Economy
Ministry said on Nov. 13, adding that lockdown measures implemented
to slow the spread of the coronavirus hit the economy in November.
The Economy Ministry said in its monthly report that the
restrictions imposed from the start of November which have seen
restaurants, bars and entertainment venues such as cinemas and
theatres close meant consumption was taking a hit, Reuters
relates.
According to Reuters, the ministry said it did not look like the
recovery would end in the fourth quarter though, as long as
restrictions remain limited.
The German government's council of economic advisers on Nov. 11
said it expected Europe's largest economy to shrink less than
initially feared this year thanks to a strong summer, but a second
wave of the COVID-19 pandemic was clouding the growth outlook for
2021, Reuters recounts.
The German economy grew by a record 8.2% in the third quarter
thanks to higher consumer spending and exports, but some experts
say a second partial lockdown could cause the economy to contract
slightly in the fourth quarter, Reuters discloses.
Insolvency applications from companies in Germany dropped by 35.4%
in August year-on-year, the Federal Statistics Office said on Nov.
13, adding that the drop was mainly due to a temporary suspension
of obligations to file for insolvency from March, not reflecting
the hardship many companies are facing due to the pandemic, Reuters
states.
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I R E L A N D
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CARA GROUP: Court Allows Examiner to Negotiate Investment Deal
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Ann O'Loughlin at Irish Examiner reports that the High Court has
given the go-ahead to an examiner to the Cara group of pharmacies
to negotiate an investment agreement designed at ensuring its
survival.
The group's directors are former RTE's Dragon Den presenter Ramona
Nicholas and her husband Canice Nicholas, Irish Examiner notes.
In September, the High Court confirmed the appointment of Ken
Tyrell of PwC as examiner following an earlier application by the
group's lender and largest creditor, Elm Corporate Credit, Irish
Examiner recounts. The appointment was over the Cara Pharmacy
Unlimited Company and a dozen related companies which altogether
employ more than 150, Irish Examiner discloses.
According to Irish Examiner, on Dec. 2, Mr. Justice Denis McDonald
granted Neil Steen SC, for the examiner, permission to negotiate
and execute an investment agreement as part of a scheme of
arrangement being drawn up as part of the examinership. The court
heard previously there had been 17 expressions of interest in the
group from potential investors, Irish Examiner relays.
The judge also made orders allowing the examiner to negotiate and
execute matters in relation to leases and to authorize payments
above EUR5,000, Irish Examiner says. Other matters sought by the
examiner have been adjourned to next week, according to Irish
Examiner.
The HSE, Elm Corporate and United Drug, which is Cara's main
supplier, were either supportive or neutral on the orders sought,
Irish Examiner relates.
DRYDEN 79: Moody's Assigns B3 Rating to EUR7MM Class F Notes
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Moody's Investors Service announced that it has assigned the
following definitive ratings to notes issued by Dryden 79 Euro CLO
2020 DAC:
EUR203,000,000 Class A Senior Secured Floating Rate Notes due 2034,
Definitive Rating Assigned Aaa (sf)
EUR17,100,000 Class B-1 Senior Secured Floating Rate Notes due
2034, Definitive Rating Assigned Aa2 (sf)
EUR17,900,000 Class B-2 Senior Secured Fixed Rate Notes due 2034,
Definitive Rating Assigned Aa2 (sf)
EUR28,000,000 Class C Mezzanine Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned A3 (sf)
EUR17,500,000 Class D Mezzanine Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned Baa3 (sf)
EUR24,500,000 Class E Mezzanine Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned Ba3 (sf)
EUR7,000,000 Class F Mezzanine Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in our methodology.
The Issuer is a managed cash flow CLO. At least 92.5% of the
portfolio must consist of senior secured obligations and up to 7.5%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be 90% ramped as of the closing date and
to comprise of predominantly corporate loans to obligors domiciled
in Western Europe. The remainder of the portfolio will be acquired
during the seven-month ramp-up period in compliance with the
portfolio guidelines.
PGIM Loan Originator Manager Limited ("PGIM") will manage the CLO.
It will direct the selection, acquisition and disposition of
collateral on behalf of the Issuer and may engage in trading
activity, including discretionary trading, during the remaining
transaction's three-year reinvestment period. Thereafter, subject
to certain restrictions, purchases are permitted using principal
proceeds from unscheduled principal payments and proceeds from
sales of credit risk obligations or credit improved obligations.
In addition to the seven classes of notes rated by Moody's, the
Issuer will issue EUR 43,000,000 Subordinated Notes due 2034 which
are not rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
The Class F Notes are being issued as delayed drawdown notes.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to
disrupt economies and credit markets across sectors and regions.
Our analysis has considered the effect on the performance of
corporate assets from the current weak European economic activity
and a gradual recovery for the coming months. Although an economic
recovery is underway, it is tenuous and its continuation will be
closely tied to containment of the virus. As a result, the degree
of uncertainty around our forecasts is unusually high.
Moody's regards the coronavirus outbreak as a social risk under our
ESG framework, given the substantial implications for public health
and safety.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
August 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in August 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR 325,000,000
Diversity Score: 48
Weighted Average Rating Factor (WARF): 3255
Weighted Average Spread (WAS): 3.80%
Weighted Average Coupon (WAC): 4.50%
Weighted Average Recovery Rate (WARR): 41.5%
Weighted Average Life (WAL): 8 years
Moody's has addressed the potential exposure to obligors domiciled
in countries with local currency ceiling (LCC) of A1 or below. As
per the portfolio constraints and eligibility criteria, exposures
to countries with LCC of A1 to A3 cannot exceed 10% and obligors
cannot be domiciled in countries with LCC below A3.
INVESCO EURO V: Fitch Assigns B-(EXP)sf Rating on Class F Debt
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Fitch Ratings has assigned Invesco Euro CLO V Designated Activity
Company expected ratings.
The assignment of final ratings is contingent on the receipt of
final documents being in line with the information received for the
expected ratings.
RATING ACTIONS
Invesco Euro CLO V DAC
Class X; LT AAA(EXP)sf Expected Rating
Class A; LT AAA(EXP)sf Expected Rating
Class B-1; LT AA(EXP)sf Expected Rating
Class B-2; LT AA(EXP)sf Expected Rating
Class C; LT A(EXP)sf Expected Rating
Class D; LT BBB-(EXP)sf Expected Rating
Class E; LT BB-(EXP)sf Expected Rating
Class F; LT B-(EXP)sf Expected Rating
Subordinated; LT NR(EXP)sf Expected Rating
TRANSACTION SUMMARY
The transaction is a securitisation of mainly senior secured
obligations (at least 92.5%) with a component of senior unsecured,
mezzanine, second-lien loans and high-yield bonds. Note proceeds
will be used to fund a portfolio with a target par of EUR300
million. The portfolio will be actively managed by Invesco European
RR L.P. The collateralised loan obligation (CLO) has a four-year
reinvestment period and an 8.5-year weighted average life (WAL).
KEY RATING DRIVERS
'B' Portfolio Credit Quality: Fitch assesses the average credit
quality of obligors to be in the 'B' category. The Fitch weighted
average rating factor (WARF) of the identified portfolio is 32,
below the indicative covenanted maximum of 34.
High Recovery Expectations: At least 92.5% of the portfolio will
comprise senior secured obligations. Fitch views the recovery
prospects for these assets as more favourable than for second-lien,
unsecured and mezzanine assets. The Fitch weighted average recovery
rate (WARR) of the identified portfolio is 64.31%, above the
indicative covenanted minimum of 63%.
Diversified Asset Portfolio: The indicative maximum exposure of the
10 largest obligors for assigning the expected ratings is 21% of
the portfolio balance. The transaction also includes various
concentration limits, including the maximum exposure to the three
largest (Fitch-defined) industries in the portfolio at 40%. These
covenants ensure that the asset portfolio will not be exposed to
excessive concentration.
Portfolio Management: The transaction has a four-year reinvestment
period and includes reinvestment criteria similar to those of other
European transactions. Fitch's analysis is based on a stressed-case
portfolio with the aim of testing the robustness of the transaction
structure against its covenants and portfolio guidelines.
Cash Flow Analysis: Fitch used a customised proprietary cash flow
model to replicate the principal and interest waterfalls and the
various structural features of the transaction, and to assess their
effectiveness, including the structural protection provided by
excess spread diverted through the par value and interest coverage
tests.
The transaction was modelled using the current portfolio, and also
the current portfolio with a coronavirus sensitivity analysis
applied. Fitch's analysis for the coronavirus sensitivity analysis
was based on a stable interest-rate scenario but included the
front-, mid- and back-loaded default timing scenarios as outlined
in the agency's criteria.
RATING SENSITIVITIES
This section provides insight into the model-implied sensitivities
the transaction faces when one assumption is modified, while
holding others equal. The modelling process uses the modification
of these variables to reflect asset performance in upside and
downside environments. The results should only be considered as one
potential outcome, as the transaction is exposed to multiple
dynamic risk factors. It should not be used as an indicator of
possible future performance.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A 25% reduction of the mean default rate (RDR) across all
ratings and a 25% increase in the recovery rate (RRR) across all
ratings will result in an upgrade of no more than three notches
across the structure, apart from the class A which is already at
the highest 'AAAsf' rating.
- At closing, Fitch will use a standardised stress portfolio
(Fitch's stressed portfolio) that is customised to the portfolio
limits as specified in the transaction documents. Even if the
actual portfolio shows lower defaults and smaller losses at all
rating levels than Fitch's stressed portfolio assumed at closing,
an upgrade of the notes during the reinvestment period is unlikely,
as the portfolio credit quality may still deteriorate, not only by
natural credit migration, but also through reinvestments.
After the end of the reinvestment period, upgrades may occur if
better-than-expected portfolio credit quality and deal performance
lead to higher credit enhancement and excess spread available to
cover for losses on the remaining portfolio.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A 25% increase of the mean RDR across all ratings and a 25%
decrease of the RRR across all ratings will result in downgrades of
between two to five notches cross the structure.
Coronavirus Baseline Scenario Impact
Fitch carried out a sensitivity analysis on the target portfolio to
envisage the coronavirus baseline scenario. The agency notched down
the ratings for all assets with corporate issuers on Negative
Outlook regardless of sector. This scenario shows resilience of the
assigned ratings, with a substantial cushion across the class A to
D notes while the cushion is more limited for the class E and F
notes.
Fitch also considered the possibility that the stressed portfolio,
determined by the transaction's covenants, would further
deteriorate due to the impact of coronavirus-mitigation measures.
Fitch believes this risk is adequately addressed by the coronavirus
baseline sensitivity test, in which all classes pass the current
ratings.
Coronavirus Downside Scenario impact
Fitch has added a sensitivity analysis that contemplates a more
severe and prolonged economic stress caused by a re-emergence of
infections in the major economies, before halting recovery begins
in 2Q21. The downside sensitivity incorporates a single-notch
downgrade to all Fitch-derived ratings in the 'B' rating category
and a 0.85 recovery rate multiplier to all other assets in the
portfolio.
Under this downside scenario, the ratings would be one to five
notches below the current ratings.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognised Statistical Rating Organisations and/or European
Securities and Markets Authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information.
Overall, Fitch's assessment of the asset pool information relied
upon for the agency's rating analysis according to its applicable
rating methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
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 was not
prepared for this transaction. Offering Documents for this market
sector typically do not include RW&Es that are available to
investors and that relate to the asset pool underlying the trust.
Therefore, Fitch credit reports for this market sector will not
typically include descriptions of RW&Es.
JUBILEE CLO 2020-XXIV: Moody's Assigns (P)B3 Rating to Cl. F Notes
------------------------------------------------------------------
Moody's Investors Service announced that it has assigned the
following provisional ratings to notes to be issued by Jubilee CLO
2020-XXIV DAC:
EUR181,000,000 Class A Senior Secured Floating Rate Notes due 2034,
Assigned (P)Aaa (sf)
EUR21,000,000 Class B-1 Senior Secured Floating Rate Notes due
2034, Assigned (P)Aa2 (sf)
EUR10,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2034,
Assigned (P)Aa2 (sf)
EUR20,500,000 Class C Deferrable Mezzanine Floating Rate Notes due
2034, Assigned (P)A2 (sf)
EUR21,000,000 Class D Deferrable Mezzanine Floating Rate Notes due
2034, Assigned (P)Baa3 (sf)
EUR16,500,000 Class E Deferrable Junior Floating Rate Notes due
2034, Assigned (P)Ba3 (sf)
EUR8,250,000 Class F Deferrable Junior Floating Rate Notes due
2034, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in our methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and up to 10%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be over 90% ramped up as of the closing
date and to comprise of predominantly corporate loans to obligors
domiciled in Western Europe.
Alcentra Limited will manage the CLO. It will direct the selection,
acquisition and disposition of collateral on behalf of the Issuer
and may engage in trading activity, including discretionary
trading, during the transaction's three-year reinvestment period.
Thereafter, subject to certain restrictions, purchases are
permitted using principal proceeds from unscheduled principal
payments and proceeds from sales of credit risk obligations or
credit improved obligations.
In addition to the seven classes of notes rated by Moody's, the
Issuer will issue EUR 24,850,000 Subordinated Notes due 2034 which
are not rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to
disrupt economies and credit markets across sectors and regions.
Our analysis has considered the effect on the performance of
corporate assets from the current weak European economic activity
and a gradual recovery for the coming months. Although an economic
recovery is underway, it is tenuous and its continuation will be
closely tied to containment of the virus. As a result, the degree
of uncertainty around our forecasts is unusually high.
Moody's regards the coronavirus outbreak as a social risk under our
ESG framework, given the substantial implications for public health
and safety.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
August 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in August 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR 300,000,000
Diversity Score: 44
Weighted Average Rating Factor (WARF): 2975
Weighted Average Spread (WAS): 3.83%
Weighted Average Coupon (WAC): 4.00%
Weighted Average Recovery Rate (WARR): 43.0%
Weighted Average Life (WAL): 8.5 years
Moody's has addressed the potential exposure to obligors domiciled
in countries with local currency ceiling (LCC) of A1 or below. As
per the portfolio constraints and eligibility criteria, exposures
to countries with LCC of A1 to A3 cannot exceed 10% and obligors
cannot be domiciled in countries with LCC below A3.
MARINO PARK: S&P Assigns Prelim B- (sf) Rating on Class E Notes
---------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to Marino
Park CLO DAC's class X to E European cash flow CLO notes. At
closing, the issuer will issue unrated subordinated notes.
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 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.
Portfolio Benchmarks
Current
S&P weighted-average rating factor 2,697.14
Default rate dispersion 660.41
Weighted-average life (years) 4.95
Obligor diversity measure 132.25
Industry diversity measure 17.73
Regional diversity measure 1.19
Transaction Key Metrics
Current
Portfolio weighted-average rating
derived from our CDO evaluator 'B'
'CCC' category rated assets (%) 3.1
Covenanted 'AAA' weighted-average recovery (%) 37.30
Covenanted weighted-average spread (%) 3.74
Covenanted weighted-average coupon (%) 4.00
Under the transaction documents, the rated notes will pay quarterly
interest unless a frequency switch event occurs. Following this,
the notes will switch to semiannual payments. The portfolio's
reinvestment period will end approximately three years after
closing.
S&P said, "We understand that at closing the portfolio will be
well-diversified, primarily comprising broadly syndicated
speculative-grade senior-secured term loans and senior-secured
bonds. Therefore, we have conducted our credit and cash flow
analysis by applying our criteria for corporate cash flow CDOs.
"In our cash flow analysis, we used the EUR325 million target par
amount, the covenanted weighted-average spread (3.74%), the
reference weighted-average coupon (4.00%), and the target portfolio
weighted-average recovery rates, except for the 'AAA' level for
which we considered the covenanted weighted-average recovery rate
provided 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."
The transaction includes an amortizing reinvestment target par
amount, which is a predetermined reduction in the value of the
transaction's target par amount unrelated to the principal payments
on the notes. This may allow for the principal proceeds to be
characterized as interest proceeds when the collateral par exceeds
this amount, subject to a limit, and affect the reinvestment
criteria, among others. This feature allows some excess par to be
released to equity during benign times, which may lead to a
reduction in the amount of losses that the transaction can sustain
during an economic downturn. Hence, in S&P's cash flow analysis, it
has considered scenarios in which the target par amount declined by
the maximum amount of reduction indicated by the arranger.
Under S&P's structured finance sovereign risk criteria, it
considers 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. 16, 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 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 X to E notes. Our credit and cash flow analysis indicate that
the available credit enhancement could withstand stresses
commensurate with the same or higher rating levels than those we
have assigned. However, as the CLO will be in its reinvestment
phase starting from closing, during which the transaction's credit
risk profile could deteriorate, we have capped our preliminary
ratings assigned to the notes.
"The class E notes' current break-even default rate (BDR) cushion
is -0.27%. Based on the portfolio's actual characteristics and
additional overlaying factors, including our long-term corporate
default rates and the class E notes' credit enhancement, this class
is able to sustain a steady-state scenario, in accordance with our
criteria." S&P's analysis further reflects several factors,
including:
-- The class E notes' available credit enhancement is in the same
range as that of other CLOs we have rated and that have recently
been issued in Europe.
-- S&P's model-generated portfolio default risk is at the 'B-'
rating level at 25.64% (for a portfolio with a weighted-average
life [WAL] of 4.95 years) versus 15.35% if it was to consider a
long-term sustainable default rate of 3.1% for 4.95 years.
-- Whether the tranche is vulnerable to non-payment in the near
future.
-- If there is a one-in-two chance for this note to default.
-- If S&P envisions this tranche to default in the next 12-18
months.
S&P said, "Following this analysis, we consider that the available
credit enhancement for the class E notes is commensurate with a 'B-
(sf)' rating.
"In our view, the portfolio is granular in nature, and it is
well-diversified across obligors, industries, and asset
characteristics when compared to other CLO transactions we have
rated recently. Hence, we have not performed any additional
scenario analysis.
"Taking the above factors into account and following our analysis
of the credit, cash flow, counterparty, operational, and legal
risks, we believe that our preliminary ratings are commensurate
with the available credit enhancement for all of the rated classes
of notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class X to D notes
to five of the 10 hypothetical scenarios we looked at in our recent
publication."
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 Blackstone/GSO
Debt Funds Management Europe Ltd.
Ratings List
Class Prelim. Prelim. amount Interest rate Credit
Rating (mil. EUR) (%) enhancement (%)
X AAA (sf) 1.50 3mE + 0.45 N/A
A-1 AAA (sf) 201.50 3mE + 1.07 38.00
A-2A AA (sf) 30.50 3mE + 1.70 28.62
B A (sf) 22.50 3mE + 2.70 21.69
C BBB (sf) 18.00 3mE + 3.55 16.15
D BB- (sf) 19.50 3mE + 5.67 10.15
E B- (sf) 6.00 3mE + 8.03 8.31
Subordinated NR 24.00 N/A N/A
NR--Not rated.
N/A--Not applicable.
3mE--Three-month Euro Interbank Offered Rate.
PALMER SQUARE 2020-2: Fitch Assigns LT B+sf Rating to Class F Debt
------------------------------------------------------------------
Fitch Ratings has assigned Palmer Square European CLO 2020-2 DAC
final ratings.
RATING ACTIONS
Palmer Square European CLO 2020-2 DAC
Class A XS2249894820; LT AAAsf New RatingAAA(EXP)sf
Class B XS2249895041; LT AA+sf New RatingAA+(EXP)sf
Class C XS2249895553; LT A+sf New RatingA(EXP)sf
Class D XS2249895637; LT BBB-sf New RatingBBB-(EXP)sf
Class E XS2249895710; LT BBsf New RatingBB(EXP)sf
Class F XS2249896106; LT B+sf New RatingB+(EXP)sf
Sub. Notes XS2249896288; LT NRsf New RatingNR(EXP)sf
TRANSACTION SUMMARY
Palmer Square European Loan Funding 2020-2 DAC is an arbitrage cash
flow collateralised loan obligation (CLO) that is serviced by
Palmer Square Europe Capital Management LLC. Net proceeds from the
issuance of the notes will be used to purchase a static pool of
primarily secured senior loans and bonds with a component of
mezzanine obligations and high-yield bonds, totalling about EUR300
million.
KEY RATING DRIVERS
'B+'/'B' Portfolio Credit Quality
Fitch places the average credit quality of obligors in the 'B+'/'B'
category. The Fitch weighted average rating factor (WARF) of the
identified portfolio is 30.44.
High Recovery Expectation
Senior secured obligations make up 97.33% of the portfolio. Fitch
views the recovery prospects for these assets as more favourable
than for second-lien, unsecured and mezzanine assets. The Fitch
weighted average recovery rate (WARR) of the ramped portfolio is
68.07%.
Diversified Portfolio Composition
The largest three industries comprise 31.34% of the portfolio
balance, the top 10 obligors represent 12.86% of the portfolio
balance and no single obligor represents more than 1.34% of the
portfolio.
Portfolio Management
The transaction does not have a reinvestment period and
discretionary sales are not permitted. Fitch's analysis is based on
the ramped portfolio with the base-case scenario stress described
under Coronavirus Baseline Scenario Impact.
Cash Flow Analysis
Fitch used a customised proprietary cash flow model to replicate
the principal and interest waterfalls and the various structural
features of the transaction, and to assess their effectiveness,
including the structural protection provided by excess spread
diverted through the par value and interest coverage tests.
Coronavirus Baseline Scenario Impact
Fitch carried out a sensitivity analysis on the ramped portfolio to
envisage the coronavirus baseline scenario. The agency notched down
the ratings for all assets with corporate issuers on Negative
Outlook regardless of sector. Assets with a Fitch-derived rating
(FDR) on Negative Outlook represent 26.82%. This scenario shows
resilience of the assigned ratings, with substantial cushions
across rating scenarios.
Deviation from Model-implied Ratings
The rating on the class E notes is one notch lower than their
model-implied rating. This is because as a static transaction, the
servicer has limited ability to address potential adverse selection
as the portfolio amortises or refinances and to manage the
portfolio in a potentially recessionary environment caused by the
coronavirus pandemic.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A reduction of the mean rating default rate (RDR) by 25% at all
rating levels and an increase in the recovery rate (RRR) by 25% at
all rating levels would result in an upgrade of at least one notch
but no more than five notches across the structure.
- Except for the class A notes, which are already at the highest
'AAAsf' rating, upgrades may occur in case of better-than-expected
portfolio credit quality and deal performance, leading to higher
credit enhancement and excess spread available to cover for losses
on the remaining portfolio. If the asset prepayment speed is faster
than expected and outweigh the negative pressure of the portfolio
migration, this could increase credit enhancement and add upgrade
pressure on the rated notes.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- An increase of the RDR at all rating levels by 25% of the mean
RDR and a decrease of the RRR by 25% at all rating levels would
result in downgrades of at least one notch but no more than five
notches across the structure.
- Downgrades may occur if the build-up of credit enhancement
following amortisation does not compensate for a larger loss
expectation than initially assumed due to unexpectedly high level
of default and portfolio deterioration. As the disruptions to
supply and demand due to COVID-19 become apparent for other
vulnerable sectors, loan ratings in those sectors would also come
under pressure. Fitch will update the sensitivity scenarios in line
with the view of its Leveraged Finance team.
Coronavirus Downside Sensitivity
Fitch has added a sensitivity analysis that contemplates a more
severe and prolonged economic stress caused by a re-emergence of
infections in the major economies, before halting recovery begins
in 2Q21. The downside sensitivity incorporates a single-notch
downgrade to all FDRs in the 'B' rating category and a 0.85
recovery rate multiplier to all other assets in the portfolio. For
typical European CLOs this scenario results in a rating category
change for all ratings.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Most of the underlying assets or risk-presenting entities have
ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
Securities and Markets Authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information.
Overall, Fitch's assessment of the asset pool information relied on
for its rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
===========
N O R W A Y
===========
NORWEGIAN AIR: Lessors Neutral on Creditor Protection Petition
--------------------------------------------------------------
Conor Humphries at Reuters reports that major aircraft lessors
including Aercap and BOC Aviation, and Avolon on Dec. 7 told the
Irish High Court that they do not oppose a petition for extended
creditor protection by Norwegian Air and some of its subsidiaries.
Norwegian last month asked the court to begin a so-called
examinership legal process as the carrier seeks to stave off
collapse amid the coronavirus pandemic, Reuters relates.
According to Reuters, the lessors told a hearing on Dec. 7 that
they were neutral on Norwegian's petition.
NORWEGIAN AIR: Norwegian, Irish Courts Grant Creditor Protection
----------------------------------------------------------------
Terje Solsvik at Reuters reports that Norwegian Air was given
additional creditor protection by a court in Norway on top of that
granted by an Irish judge on Dec. 7, allowing the cash-strapped
airline's restructuring efforts to continue.
"A supplementary reconstruction process under Norwegian law will be
to the benefit of all parties and will increase the likelihood of a
successful result," Reuters quotes Chief Executive Jacob Schram as
saying.
Norwegian said it could now move forward with the dual-track
process, Reuters notes.
The company, which helped transform transatlantic travel, expanding
the European budget airline business model to longer-haul
destinations, has been forced to ground all but six of its 140
aircraft amid the COVID-19 pandemic, Reuters states.
According to Reuters, if successful in convincing creditors and
owners of its future potential, Norwegian could, with the help of
the courts, emerge as a smaller but more efficient carrier with
fewer aircraft, less debt and more equity.
The airline, which has said it could run out of cash by the end of
the first quarter of next year, aims to complete the debt
restructuring by Feb. 26, Reuters discloses.
While Norwegian's major aircraft-owning subsidiaries are Irish, the
parent company Norwegian Air ASA is registered in Norway, and the
company had told the Dublin court it could seek additional court
protection, Reuters notes.
After growing rapidly to become Europe's third-largest low-cost
airline and the biggest foreign carrier serving New York,
Norwegian's debt and liabilities stood at NOK66.8 billion (US$7.64
billion) at the end of September, Reuters relays.
The company's proposed rescue plan includes the conversion of debt
to equity and the raising of up to NOK4 billion from the sale of
new shares or hybrid instruments, according to Reuters.
===========
R U S S I A
===========
UZBEKISTAN: S&P Affirms 'BB-/B' Ratings, Outlook Remains Negative
-----------------------------------------------------------------
On Dec. 4, 2020, S&P Global Ratings affirmed its long- and
short-term foreign and local currency ratings on Uzbekistan at
'BB-/B'. The outlook remains negative.
Outlook
The negative outlook reflects S&P's view that Uzbekistan's external
and fiscal debt could continue to increase rapidly.
Downside scenario
S&P said, "We could lower the ratings over the next 12 months if we
thought that the rapid accumulation of government external debt in
recent years would not moderate in line with our projections, for
instance because ongoing investment needs lead to
higher-than-expected fiscal or external deficits.
"We could also lower the ratings if dollarization levels in the
economy significantly increase, despite recent reforms, or if we
observe increasing weakness in key state-owned enterprises (SOEs),
leading to the realization of contingent liabilities on the
government's balance sheet."
Upside scenario
S&P could affirm the ratings if the pace of external or fiscal debt
accumulation slows over the medium term, in line with its base
case, as economic growth and current account receipts increase to
mitigate additional external borrowing.
Uzbekistan's increased integration with the global economy and
government SOE reforms could support the ratings if they result in
increased economic growth potential and SOE financial resiliency.
Further diversification of the government's revenue base or the
composition of exports would also support the ratings.
Rationale
S&P said, "The negative outlook reflects our view that the
accumulation of external and fiscal debt might not moderate through
2023. Up until now, Uzbekistan has been using the significant
flexibility provided by the very strong fiscal and external asset
positions it began with in 2018. In our view, the room for
significant further external debt accumulation, at the current
rating level, has narrowed. This follows the sharp increase in
government external debt in recent years, related to the
government's plans to improve infrastructure and modernize the
economy. We also expect external debt to increase over the near
term because of COVID-19-related spending. However, we expect a
more selective approach to project implementation over through
2023, which should see the increase in gross external debt
moderate." Whether the economic benefits from the infrastructure
investments will be sufficient to mitigate the deterioration of the
fiscal and external balance sheets remains uncertain, and more
likely will materialize beyond 2023.
Uzbekistan's external position remains relatively strong compared
with similarly rated peers. The government's net debt burden is low
and supports the ratings. S&P said, "We expect government debt net
of liquid assets will climb to 8% of GDP by year-end 2020, from a
net asset position of 9% of GDP at year-end 2018. We anticipate a
slowdown in debt accumulation, with the change in net debt to GDP
averaging about 4.6% over 2021-2023. This would be a sharp
deceleration compared with our estimate of an average increase of
about 8% of GDP in 2019-2020. In 2020, the government expects to
spend an extra $1.3 billion (2.2% of GDP) related to COVID-19, but
most of the borrowing will be to finance current government
expenditure and the significant investment plans. Continuing rapid
debt accumulation could, in our view, reduce the government's
fiscal flexibility." The government predominately borrows from
abroad, although a large portion of government debt is
concessional.
S&P said, "Our ratings are constrained by Uzbekistan's low economic
wealth, as measured by GDP per capita. In our view, policy
responses may be difficult to predict, given the highly centralized
decision-making process and the relatively less developed
accountability and checks and balances between institutions. Our
ratings are also constrained by low monetary policy flexibility."
Institutional and economic profile: S&P expects the economy will
expand by 0.5% this year, showing resilience against COVID-19
effects and weak global growth
-- Despite the COVID-19-related shutdowns earlier in the year, S&P
expects growth to be just above zero because of strong outturns in
the agriculture and construction sectors.
-- The authorities continue to progress with institutional reforms
and, although S&P expects improvements in governance, it thinks
decision-making will remain centralized.
-- GDP per capita remains low, at an estimated $1,700 in 2020.
Over the past two years, Uzbekistan has made progress on its reform
and economic modernization agenda, which should improve the
economy's productive capacity and the government's institutional
capacity. S&P said, "However, notwithstanding the positive trend in
strengthening institutions, in our view, Uzbekistan is starting
from a low base. We believe that decision-making will remain highly
centralized in the hands of the president, making policy responses
more difficult to predict. We believe that checks and balances
between institutions remain weak." In addition, uncertainty over
any future succession remains, despite the relatively smooth
transfer of power to President Shavkat Mirziyoyev in 2016.
Broad-based policy reforms have included measures to increase the
judiciary's independence, remove restrictions on free expression,
and increase the government's accountability to its citizens.
Changes have also included the implementation of an anti-corruption
law, an increase in transparency regarding economic data, and the
liberalization of trade and foreign exchange regimes. The
government is working on a law to privatize nonagricultural land,
and reforms in the agricultural sector are expected, after the
abolition of state orders for cotton.
The government is also working on reforms of SOEs and the banking
sector. Major SOEs are implementing measures to improve corporate
governance and increase transparency, including by producing
audited financial statements. The government is working to unbundle
and corporatize large SOEs in the mining and energy sectors. S&P
has also seen the notable recent creation of the Ministry of
Energy, which will have regulatory purview over the oil, gas, and
electricity sectors. The government intends to prepare several
smaller companies for privatization, as well, which should pave the
way for the more challenging and economically rewarding prospect of
privatizing the larger SOEs.
The government initiated comprehensive banking sector reforms in
October 2019. The reforms aim to help banks operate in a more
commercially focused manner. Over $4 billion in loans from the
Uzbekistan Fund for Reconstruction and Development (UFRD),
previously lent through the banking sector to SOEs, were returned
to the UFRD balance sheet. In addition, to improve capitalization
in the system, the UFRD granted about $1.5 billion in loans to
banks to convert into equity. These measures also reduced
dollarization in the banking sector. Along with these balance-sheet
changes, the government has introduced regulations to reduce
subsidized lending and encourage lending in the local currency. S&P
understands the government plans to partially privatize several
banks before 2025.
S&P considers that continued moving away from a state-led economy
could improve productivity, attract foreign direct investment
(FDI), and reduce outflows from the budget. Attracting FDI is a
priority for the government, with current inflows low and
concentrated in the extractive industries, particularly natural
gas. Net FDI increased in 2019 to about $2.3 billion from about
$600 million in 2018.
S&P expects growth will decelerate this year to 0.5% because of the
fallout from COVID-19 and weakness in key trading partners due to
low oil prices. The government reacted swiftly to the pandemic,
closing transport links with other countries and restricting travel
within its own borders. Large events were cancelled and schools and
universities moved to remote learning. There were also restrictions
on retail stores. The strongest lockdown measures were in March-May
and July-August. The government has begun a phased lifting of
restrictions as the number of new cases declines. During the
restriction periods, large segments of the economy still continued
to operate. The agricultural sector and the important industrial
sector--including food processing, manufacturing, oil refining, and
metals and mining--continued to operate. Large infrastructure and
investment projects also continued, but at a slower pace for
additional safety measures.
The government introduced stimulus measures to counteract the
effects of the pandemic. The original amount was about $1 billion
but was increased in anticipation of a second wave of COVID-19
cases. It has spent about $1.1 billion of the $1.3 billion (2.2% of
GDP) of additional COVID-19-related spending this year from the
budget:
-- About $100 million on health-related measures to mitigate the
impact of the virus;
-- $870 million to support entrepreneurship, employment, and
infrastructure projects; and
-- About $70 million to support low income households.
The central bank set up revolving credit facilities of about $3
billion to support private-sector business and ensure additional
provision of liquidity to the banking sector and cash in ATMs, and
businesses in key sectors eligible for zero-cost debt service
deferrals.
S&P expects GDP growth will average about 5% annually over its
forecast period through 2023, supported by growth in the services,
manufacturing, and natural resources sectors. The construction
sector's contribution to GDP is small but increasing. The economy
has been government led for many years, and still depends on SOEs,
which contribute a large share of GDP. Nevertheless, successful SOE
sector reforms, including the modernization of operations to
support cost recovery, could lead to increased growth potential for
Uzbekistan. The country has significant natural resources,
including large reserves of diverse commodities, the export of
which has supported past current account surpluses. Globally, the
country is one of the top 20 producers of natural gas, gold,
copper, and uranium.
Uzbekistan's population is young. Almost 90% are at or below
working age, which presents an opportunity for labor supply-led
growth. However, it will remain a challenge for job growth to match
demand, in our view. Despite steady growth, GDP per capita remains
low, at a forecast $1,700 at year-end 2020.
Flexibility and performance profile: External debt to exceed liquid
public and financial sector external assets
-- S&P expects the current account deficit will average about 6%
of GDP over the forecast period due to consumption and investment
demands of a more outward-facing economy, which will increase
external indebtedness.
-- The government's net debt burden will remain low despite
ongoing fiscal deficits, with the expected change in net debt
averaging about 5% of GDP through 2023.
-- S&P expects dollarization will remain about 50% of total loans
and will gradually decline over the forecast period, improving
monetary policy effectiveness while price stability and confidence
in the currency increase.
S&P said, "In 2020, we expect a government deficit of 7.5% of GDP
as the government increases spending in response to COVID-19 and
the pace of government investment and modernization spending
remains elevated. After 2020, we anticipate the government will
continue increasing social spending on areas such as education and
health care, and that capital expenditure will remain elevated,
given the government's investment plans. Currently, social
expenditure makes up over 50% of government expenditure. The
government implemented tax reforms in 2019, which help increase
revenue in 2019 by 25% over 2018. The reforms simplified the tax
code and lowered some tax rates, helping expand the tax base and
increase collection rates. Fiscal transparency has increased as the
government brought extrabudgetary spending onto the budget, for
instance with the UFRD.
"We estimate general government debt at $21 billion (37% of GDP) at
year-end 2020. General government debt is almost all external and
denominated in foreign currency, making it susceptible to exchange
rate movements. We note the exchange rate depreciated 14% in 2019
and expect 10% depreciation this year, increasing the level of debt
in local currency terms. Besides the government's Eurobonds and
local currency debt (about Uzbekistani sum 5.2 trillion, or $500
million, at year-end 2020), debt is split roughly equally between
official bilateral and multilateral creditors. In our estimate of
general government debt, we include external debt of SOEs
guaranteed by the government, due to the ongoing support to the
SOEs from the government. As reforms of SOEs continue, if it
becomes apparent that sizable government financial support will be
necessary, we could reconsider our assessment of contingent
liabilities. A large portion of general government debt is
concessional, resulting in low debt-servicing costs. We estimate
interest payments at about 2% of revenue on average over our
forecast period.
"The government crossed into a net debt position in 2019, although
debt remains low relative to that of peers. We expect net general
government debt will increase to 18% of GDP by 2023. The
government's assets, about 25% of GDP, are mostly kept at the UFRD.
Founded in 2006, and initially funded with capital injections from
the government, the UFRD has received revenue from gold, copper,
and gas sales above certain cutoff prices. We include only the
external portion of UFRD assets in our estimate of the government's
net asset position because we view the domestic portion, which
consists of loans to SOEs and capital injections to banks, as
largely illiquid.
"We expect the current account deficit will moderate in 2020 to
about 5.4% of GDP, down from 5.8% in 2019. The current account,
despite lower exports (including lower gas exports) and weaker
tourism receipts (an increasing component of services exports), has
been supported by higher gold prices, restrained imports, and
stable remittances. Remittances and income from abroad are an
important component of Uzbekistan's current account, given the
large number of Uzbeks working abroad, particularly in Russia.
Exports remain heavily dependent on commodities and gold is the
main export good. We expect the current account balance will
average a deficit of about 6% of GDP over our forecast period in
order to fulfill the economy's need for the capital goods and high
technology goods to modernize. Additionally, consumer goods imports
should remain elevated, given the increased ease of trade.
"Current account deficits will mostly be financed with debt over
the forecast period. This year, we forecast Uzbekistan will move to
a net external debt position, when only considering liquid public
and financial sector external assets. Our measure of external
liquidity (gross external financing needs to current account
receipts, plus usable reserves) is relatively strong at 85%,
because of the long-dated nature of the economy's external debt and
the high level of reserves. We expect FDI will increase over our
forecast period. The authorities have increased the external
statistical capacity related to coverage, timeliness, and
transparency.
"We include in our estimate of the central bank's reserve assets
its significant holdings of monetary gold. The central bank is the
sole purchaser of gold mined in Uzbekistan. It purchases the gold
with local currency, then sells dollars in the local market to
offset the increase in reserves from the gold. We do not include
UFRD assets in the central bank's reserve assets, but instead
consider them government external assets, because we view them as
fiscal reserves.
"We expect dollarization of loans in the banking system, currently
at about 49% in October, will remain around 50% over the next year
before declining, because of banking sector reforms. In addition to
the removal of $4 billion in dollar-denominated loans from the
banking sector, the conversion of $1.5 billion to loans in local
currency and increases in retail and commercial lending in local
currency should keep dollarization on a declining trend. Deposit
dollarization is at about 43% as of October 2020, and we expect
local currency deposit growth will outpace foreign currency deposit
growth. In our view, declining dollarization should help improve
the effectiveness of monetary policy transmission mechanisms.
However, our assessment of monetary policy is still constrained by
high inflation.
"Positively, the central bank is moving toward inflation targeting,
but we expect this transition will take a few years. Although the
effects of the September 2017 currency devaluation have mostly
worked through the economy, we expect inflation will average about
10% over our forecast period." More open trade policies have
allowed domestic prices to move toward regional and international
prices, putting inflationary pressure on domestic goods. Growth in
public sector wages and the liberalization of regulated prices
should also add to inflationary pressure over the forecast period.
Reducing credit to the economy will have a deflationary impact over
the forecast period to 2023. In response to COVID-19 and lower
inflationary expectations, the central bank lowered its refinancing
rate to 14% from 16%.
One of Uzbekistan's most significant economic reforms was the
liberalization of the exchange rate regime in September 2017 to a
managed float from a crawling peg, which was overvalued in
comparison with the black-market rate. Although S&P believes the
central bank initially intervened heavily in the foreign exchange
market, it now only intervenes intermittently to smooth volatility.
The relatively short track record of the float constrains its
assessment of monetary flexibility, as does its perception of the
potential for political interference in the central bank's
decision-making.
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
Uzbekistan
Sovereign Credit Rating BB-/Negative/B
Transfer & Convertibility Assessment BB-
Senior Unsecured BB-
===========================
U N I T E D K I N G D O M
===========================
AMIGO LOANS: S&P Affirms CCC+ Long-Term ICR, Off Watch Negative
---------------------------------------------------------------
S&P Global Ratings affirmed its long-term issuer credit rating on
U.K.-based guarantor lending company Amigo Loans Ltd. and its
senior secured debt ratings at 'CCC+' and removed them from
CreditWatch with negative implications, where they were placed on
Sept. 22, 2020. The outlook is negative.
Amigo Loans faces continued uncertainty regarding the scale of
customer complaint provisions and the ongoing investigation by the
Financial Conduct Authority (FCA) into its past lending practices.
Amigo has also recently revamped its board and senior management
team, having ended its long-running dispute with former material
shareholder, Richmond Group Ltd.
Moreover, reported liquidity levels at the end of November
demonstrated stability.
S&P removed the ratings from CreditWatch negative because Amigo no
longer faces a material near-term liquidity concern and our
previous governance concerns have reduced. However, the new
management team is still working through the high volumes of
complaints, payment holidays are coming to an end, and the outcome
of the FCA's investigation into Amigo's lending practices is
looming. The combined effect of these considerations could yet
impair Amigo's liquidity within the next 12 months.
Amigo reported GBP160 million in cash as of Nov. 25, 2020, up from
GBP145 million at June 30, 2020, in line with its strategy to build
liquidity buffers. Amigo's next semiannual coupon payment on its
GBP234.1 million outstanding secured bond, which is due in 2024, is
in January 2021. S&P believes that Amigo has sufficient liquidity
to cover this payment, although subsequently it will depend on
favorable trends in terms of cash payments for customer redress and
collections.
Amigo has finalized its voluntary agreement with the FCA, under
which it will work through the backlog of complaints so that it can
deal with all new complaints within eight weeks. During
April-September 2020, total provisions for complaints increased to
GBP159.1 million from GBP117.5 million at the financial year ending
on March 31, 2020. Amigo's provisions include an allowance for
future claims and estimated redress in known cases. S&P understands
that from April-September 2020, GBP53.2 million was used, of which
GBP44.7 million was used from July-September.
S&P considers Amigo's high volume of complaints and ongoing FCA
investigation as negative social factors, notwithstanding Amigo's
strategy of serving customers that mainstream banks exclude.
Of the 59,000 customers to whom Amigo granted a payment holiday
from April 1-Nov. 30, 2020, about 17,000 are still deferring
payments. Although cash collections have held up as customers
returned to regular payments, Amigo's collections capacity may come
under pressure in 2021 when the U.K. unemployment rate is expected
to rise.
Amigo paused new lending in late March and further extended the
waiver on the asset performance triggers linked to its
securitization facility until June 25, 2021. Collections from the
pledged assets will be used to amortize the facility during this
period.
The company is undergoing a strategic review and aims to relaunch
its lending business in early 2021. S&P understands that Amigo will
seek the FCA's guidance before starting to lend again.
In September 2020, a general shareholder meeting took place at the
request of Richmond Group, which proposed several resolutions that
were voted down by the shareholders. The resolutions included the
appointment of James Benamor, Glen Crawford, Gary Jennison, Richard
Price, and Jonathan Roe as directors of Amigo and the removal of
Nayan Kisnadwala and Roger Lovering as directors. Since the
meeting, several of the management team have resigned. Glen
Crawford chose not to rejoin the board as CEO and subsequently
Nayan Kisnadwala stepped down as chief financial officer (CFO) and
left the company.
S&P said, "We understand that the long dispute between the board
and Mr. Benamor has come to an end. He sold down his majority stake
in Amigo and the Richmond Group is no longer a material
shareholder. We consider that the resolution of this dispute
implies that governance factors are improving.
"We will monitor the stability of the new board, given the number
of changes it has undergone. Gary Jennison is the CEO and Mike
Corcoran is the new CFO and they are embracing the challenge of
dealing with regulatory risk and resolving legacy issues."
Environmental, social, and governance (ESG) credit factors for this
credit rating change:
-- Consumer related
-- Strategy, execution, and monitoring
-- Governance factors
Amigo's liquidity depends on favorable complaints trends and cash
collections.
S&P expects that principal liquidity sources over the 12 months
from Nov. 25, 2020, will be:
-- GBP160 million (we do not regard short-term investments as
cash);
-- Net working capital inflows (difference between cash receipts
and loan originations), assuming that Amigo will resume lending in
2021.
S&P doesn't assume that Amigo will be able to draw on its
securitization facility further, as the performance triggers are
suspended.
S&P expects that the principal liquidity uses over the same period
will be:
-- Facility fees and coupon payment on the bond; and
-- Cash outflow for complaints.
Debt maturities
-- 2024: GBP231.7 million
-- 2022: GBP132.4 million securitization facility (the facility's
performance triggers were waived until June 25, 2021)
The negative outlook indicates that Amigo's liquidity and business
stability could come under greater pressure over the next 12
months, particularly if complaint levels remain high, and the level
of cash collections and performance of its loan book deteriorates.
Moreover, regulatory and operational risks could also weaken
Amigo's business model and debt-servicing capacity.
S&P said, "We could lower the rating in the next 12 months if we
believed that regulatory or operational issues were likely to make
Amigo's business model less viable or that its liquidity was
materially weakening. We could also consider a downgrade if Amigo
decides on a public bond repurchase below par or goes into debt
restructuring.
"We could revise the outlook back to stable if Amigo demonstrates
that it can maintain solid liquidity, improve its business
prospects via growth in new loan origination, and improve its
management stability. At the same time, we will consider whether
customer complaints have reduced, what its updated strategy looks
like, and whether Amigo can resume lending."
B&M EUROPEAN: Moody's Upgrades CFR to Ba2, Outlook Stable
---------------------------------------------------------
Moody's Investors Service upgraded B&M European Value Retail S.A.'s
Corporate Family Rating (CFR) to Ba2 from Ba3 and its Probability
of Default Rating (PDR) to Ba2-PD from Ba3-PD. Concurrently, the
ratings of the GBP400 million senior secured notes due 2025 has
been upgraded to Ba2 from Ba3. The outlook on all ratings is
stable.
Moody's rating action reflects the company's increased financial
track record, as evidenced by a continued strong performance in
2020 driven by sales and EBITDA growth well above the average of
the UK retail sector, resulting in substantially lower leverage
than the Rating Agency expected. Although Moody's anticipates
additional shareholder distributions and/or investments, leverage
is expected to remain in line with the rating requirements.
RATINGS RATIONALE
B&M's Ba2 rating reflects the company's focus on fast-growing
retail niche markets, good scale, low-cost propositions and
above-average profitability compared with traditional retailers.
B&M's business model is based on a narrow selection of items across
a broad range of grocery and general merchandise product groups,
direct sourcing and a simple low-cost approach, resulting in
selling prices significantly and consistently below those offered
by both specialist and general retailers. The company's focus on
selected best-selling products through constant monitoring of
prevailing consumer trends, in-house product design capabilities
and direct sourcing process are key to its ability to offer
products at competitive or even disruptive prices.
In sharp contrast to clothing chains and many other retailers, B&M
is emerging as a winner from the coronavirus crisis as it continues
to win customers away from competitors. The company has
outperformed both the food and non-food segments of retail in the
past three years and continues to open new stores, contrary to
traditional retailers.
While scale and international diversification remain limited
compared to rated peers, the strengths of B&M's business model have
become more and more apparent over the last three years, with
operating and EBITDA margins consistently twice as high as sector
peers in the last three years.
B&M's rating is constrained by its limited size and geographic
diversification, and the limited scope for significant debt
reduction as management prioritises growth and shareholder returns.
Additionally, the UK retail industry continues to face headwinds,
with unabated competitive pressures and an uncertain outlook for
consumer spending. Consumer sentiment is likely to remain weak
given the challenges posed by the coronavirus pandemic and the exit
of the UK from the European Union on employment levels and
purchasing power, although these very same trends could indeed
benefit value retailers such as B&M.
The company's operating performance in the six months to September
2020, (first half of fiscal year 2021, ending March 2021) was
strong, with reported EBITDA up 57.8% year on year at GBP387.7
million, on an IFRS16 basis. The EBITDA increase was driven by the
25.3% increase in revenue to GBP2.2 billion. The strong sales
performance has been broad-based across all key product categories,
with sustained revenue growth driving operational leverage on a
fixed cost base. The strong sales performance during the months of
lockdown further highlights the company's already strong track
record of growth, having grown revenue from GBP1.6 billion in
fiscal 2015 to GBP3.8 billion in fiscal 2020, with most of the
growth coming from new stores openings.
As of September 26, 2020, Moody's-adjusted debt to EBITDA improved
to 3.1x from 4.0x in fiscal 2020, driven by higher EBITDA, in turn
reflecting rising sales and operational leverage. Other debt
metrics remain also solid, with Moody's-adjusted free cash flow of
GBP219 million in the first half of fiscal 2021, up from GBP114
million in fiscal 2020, or 10.6% of Moody's-adjusted gross debt, up
from 5.5% in fiscal 2020. Retained Cash Flow (RCF) to net debt also
improved to 26% from around 17% in fiscal 2020, when excluding the
GBP150 million special dividend paid in March 2020, while remaining
stable if including the special dividend in RCF.
On November 12, the company announced both a 59.2% increase in the
interim ordinary dividend for fiscal 2021 to GBP43 million as well
as another special dividend of GBP250 million. Both dividends will
be paid out of existing cash and will therefore not affect the
company's leverage. However, Moody's believes that further
shareholder distributions or M&A activity are likely over the next
12-18 months because net leverage (pro forma for both dividends to
be paid out over the next few months) is currently around 1.2x on a
reported basis, which is well below the 2.5x targeted by the
company (roughly equivalent to Moody's adjusted leverage below
4.5x).
LIQUIDITY
B&M's liquidity is more than adequate following the refinancing
measures implemented in July 2020, with GBP439 million cash on
balance sheet as at September 26, 2020, GBP150 million available
under an undrawn revolving credit facility, and only GBP68 million
of debt maturities in the next 12-18 months. Moody's expects the
company to continue generate significant positive free cash flows
from operations but also to invest it in new stores and continue
making distributions to shareholders.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Financial policies are clear and balanced between the interests of
shareholders and credit investors. The company is on record with
the statement that it intends to maintain reported net leverage
below 2.25x (based on pre IFRS 16 figures). B&M's capital policy is
to allocate cash surpluses in the following order of priority: (1)
the roll-out of new stores with a strong payback profile; (2)
ordinary dividend cover to shareholders; (3) mergers & acquisition
opportunities; and (4) returns of surplus cash to shareholders. The
company has a dividend policy which targets a pay-out ratio of
between 30%-40% of net income on a normalised tax basis. Having
received coronavirus-related government support through GBP38
million of business rates relief, the recent shareholder
distributions could expose the company to public criticism.
Since listing in 2014, the company has continued to develop its
approach to governance as it grows and matures but remains somewhat
weak in terms of board composition and size and composition of two
of the board committees, in Moody's opinion.
STRUCTURAL CONSIDERATIONS
The Ba2 rating on the senior secured notes, in line with the
corporate family rating, reflects the pari passu capital structure
and the shared security and guarantee portfolio with the term loan
A and the revolving credit facility, although the latter have
slightly shorter maturities.
RATING OUTLOOK
Although additional shareholder distributions or acquisitions will
likely result in higher net and gross debt, Moody's expects that
leverage will remain within the range expected for the Ba2 rating.
The stable outlook also assumes that the company will continue
opening new stores while growing its revenue, EBITDA and cash flow
from operations.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure could develop if all the following
expectations are met: (i) sustained good liquidity, with extended
and long dated debt maturities; (ii) Debt/EBITDA remaining
sustainably below 3.5x, with financial policies in line with a
lower leverage; and (iii) RCF to net debt sustained in the
mid-teens.
Conversely, negative rating pressure could develop if any of the
following occurs: (i) Debt/EBITDA rising above 4.5x; (ii) RCF to
net debt below 10%; (iii) a significant weakening in profitability;
or (iv) a more aggressive growth strategy or financial policy; and
v) weakening liquidity. All ratios mentioned in the factors for an
upgrade/downgrade are on a Moody's adjusted basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail Industry
published in May 2018
LIST OF AFFECTED RATINGS:
Issuer: B&M European Value Retail S.A.
Upgrades:
LT Corporate Family Rating, Upgraded to Ba2 from Ba3
Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD
Backed Senior Secured Regular Bond/Debenture, Upgraded to Ba2 from
Ba3
Outlook Actions:
Outlook, Remains Stable
B&M European Value Retail S.A. (B&M) is a fast-growing European
value retailer and discounter competing in both the general
merchandise and grocery markets, through its store brands B&M and
Heron Foods in the UK, and Babou in France. The company is
headquartered in Liverpool and listed on the London Stock Exchange.
The Arora family is the largest shareholder, holding 15% of the
share capital as well as voting rights.
CONVATEC GROUP: Moody's Affirms Ba3 CFR; Alters Outlook to Positive
-------------------------------------------------------------------
Moody's Investors Service affirmed Convatec Group PLC's Ba3
corporate family rating (CFR) and Ba3-PD probability of default
rating (PDR). Concurrently, Moody's has changed ConvaTec's outlook
to positive from stable.
RATINGS RATIONALE
"Today's outlook change to positive primarily reflects ConvaTec's
improving operating and financial performance over the last few
quarters in spite of some reductions in volumes brought about by
coronavirus" says Frederic Duranson, a Moody's Assistant Vice
President-Analyst and lead analyst for ConvaTec. "ConvaTec has a
path to return to EBITDA growth which will enable it to delever to
3.5x next year, along with larger debt amortisation." Mr Duranson
adds.
Following weak organic performance since its IPO at the end of
2016, ConvaTec's manufacturing, supply and sales execution began to
improve in 2019. While prior year comparables were relatively weak,
ConvaTec's organic revenue growth of nearly 5% (before currency
effects) in the nine months to September 30, 2020 demonstrates
resilience in the face of coronavirus thanks to its product
diversity. The group's largest segment, Advanced Wound Care, has
suffered from reduced surgery procedures and access to the
community setting but coronavirus has boosted demand for critical
care products while infusion devices benefit from ongoing strong
demand. Revenue growth translated into EBITDA improvements in the
first half of 2020 but as revenue growth slows in the second half
and transformation investments ramp up, Moody's expects that 2020
EBITDA will reach its low point.
Moody's forecasts that operating costs related to ConvaTec's
far-reaching transformation programme will reach up to $130 million
in 2021 (including ongoing investments) and will match forecast
ongoing benefits next year therefore revenue growth should be the
main driver behind EBITDA gains. With the exception of the Ostomy
Care segment, which faces customer destocking and whose product
range is being reduced, Moody's believes that ConvaTec will achieve
organic revenue growth in the 3% area in 2021. From 2022, the
rating agency expects that the completion of the transformation and
some related investments will boost EBITDA on top of revenue
growth.
In addition to EBITDA growth from 2020, mandatory debt amortisation
of $90 million next year, accelerating to $150 million in 2022,
will support ConvaTec's reduction in its Moody's adjusted gross
debt/EBITDA to 3.5x in 2021 and to a 3.0x area in 2022 from Moody's
expectation of 3.9x for 2020. The group's ongoing solid free cash
flow generation averaging over $200 million per annum (cash flow
from operations less capex and dividends) since 2017 will aid this
deleveraging. Moody's believes the company will maintain this level
in the coming years following a dip to below $150 million this
year.
Governance considerations support the rating action. The
transformation programme contributes to the simplification of the
company's organisational structure, including the reduction in the
number of business units and enhanced strategic and operational
focus. Moody's assessment of ConvaTec's governance also takes into
account the execution risks attached to the transformation plan
which is still under way. The rating agency believes that the
group's policies in terms of (i) leverage (management-adjusted net
leverage below 2.0x), (ii) shareholder remuneration (dividend
payout ratio of 35% - 45% of management-adjusted net income, of
which up to 30% is typically paid in kind) and (iii) acquisitions
are relatively prudent.
Social risks that Moody's considers in ConvaTec's credit profile
principally relate to demographic and societal trends as well as
responsible production. The group faces constant downward price
pressure, particularly in European wound care markets, which may
intensify in the more commoditised and competitive parts of
ConvaTec's portfolio. ConvaTec is also exposed to reputational
damage, additional costs and the risk of customer loss associated
with product recalls, safety and manufacturing compliance issues
and litigation. Some of these risks have materialised in the past
for ConvaTec and have been addressed with a good degree of
success.
LIQUIDITY
Moody's views ConvaTec's liquidity as good. It is supported by a
cash balance of $450 million as of June 30, 2020, forecast cash
flow from operating activities of around $270 million in 2020
(before capex and dividends) and full availability under the $200
million equivalent revolving credit facility maturing in 2024. The
rating agency anticipates that headroom under the two maintenance
covenants (net leverage and interest cover) on the term loans and
RCF will be sufficient at all times.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
ConvaTec's ratings could experience positive pressure should (1)
the group record consistent organic growth in revenue and EBITDA
across its business lines, and (2) Moody's-adjusted gross
debt/EBITDA sustainably decrease toward 3.0x. Maintenance of
prudent financial policies would also be a pre-requisite to any
positive rating action.
Conversely, ConvaTec's ratings could come under downward pressure
if (1) operating performance deteriorated, or (2) Moody's adjusted
gross debt/EBITDA was sustained above 4.0x, or (3) the group
adopted a more aggressive financial policy characterised by
debt-funded acquisitions or dividend payout ratio increases.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Medical Product
and Device Industry published in June 2017.
COMPANY PROFILE
Convatec Group PLC, headquartered in Reading, UK and listed on the
London Stock Exchange, is a global medical products provider
focused on therapies for the management of chronic conditions. The
company develops and manufactures products in the areas of advanced
wound care, ostomy care, continence and critical care and infusion
devices. In the 12 months to June 30, 2020, ConvaTec reported
revenues of $1.8 billion and adjusted EBITDA of $462 million. As of
November 30, 2020, ConvaTec had a market capitalisation of GBP4.1
billion.
[*] UK: Economic Performance Poor Despite High Covid-19 Spending
----------------------------------------------------------------
Chris Giles at The Financial Times reports that the UK has spent
more money fighting coronavirus than almost all comparable
countries but still languishes towards the bottom of league tables
of economic performance in 2020 and deaths caused by the virus,
according to Financial Times research.
On Nov. 25, the independent Office for Budget Responsibility said
the UK's economy was set to shrink by 11.3% in 2020, while the
government would need to borrow GBP394 billion to fund a shortfall
in taxes and GBP280 billion in public spending to fight Covid-19,
the FT relates.
Compared with the average of other G7 leading economies, the cost
to the UK government is set to be over 80% more, while the UK is
also on course to suffer a 90% deeper decline in economic output in
2020 and almost 60% more deaths, the FT discloses.
According to the FT, economists said the UK's poor performance had
stemmed from allowing the virus to become too prevalent both in the
spring and autumn before enforcing social distancing, with the
result that the government was ultimately forced to impose more
draconian restrictions undermining the economy.
Chancellor Rishi Sunak has been the voice in cabinet arguing
repeatedly for looser restrictions, the FT notes. And in his
spending review, Mr. Sunak, as cited by the FT, said that the
unprecedented peacetime public spending had been well targeted on
ensuring lower unemployment rates than in other countries.
Britain's unusual position in the international data starts with
the amount the government has intervened to support jobs,
households and companies during the pandemic, the FT states.
The UK government's support was broad based, with the OBR
documenting GBP127 billion on public services, including GBP22
billion on test and trace alone; GBP72 billion on the furlough and
other job support schemes; and GBP34 billion on business support,
the FT relays.
The National Audit Office criticized the government for tardy
efforts to secure personal protective equipment for health workers,
costing taxpayers GBP10 billion more than if it had acquired the
PPE in 2019, the FT recounts.
The NHS test and trace system has come under fire for failing to
report results quickly and reach contacts sufficiently fast to stop
the spread of the virus this autumn, the FT states.
Although, as Mr. Sunak noted, the job support helped limit the rise
in unemployment, it did not stop the UK suffering the worst
economic contraction in more than 300 years this year or improve
the UK's economic performance relative to other comparable
countries, according to the FT.
One element of the UK's poor international performance stems from a
difference in the way public sector output is measured, but
economists said this would not explain the international weakness,
the FT notes.
Nor did the heavy UK spending noticeably save lives during the
pandemic, with the cumulative death total per 100,000 people from
coronavirus at the bottom of the international league table, the FT
says.
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S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
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