/raid1/www/Hosts/bankrupt/TCREUR_Public/210727.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Tuesday, July 27, 2021, Vol. 22, No. 143
Headlines
B U L G A R I A
BULGARIAN ENERGY: Fitch Rates EUR600MM Eurobond Final 'BB'
C R O A T I A
3.MAJ: Proposes to Cover HRK74.5MMM 2020 Loss with Future Profit
DALEKOVOD: Koncar Unit Offers to Subscribe 31 Mil. New Shares
C Y P R U S
CYPRUS: Moody's Ups Issuer Rating to Ba1, Alters Outlook to Stable
F R A N C E
ZF INVEST: S&P Assigns 'B' LT Issuer Rating on Refinancing
G E R M A N Y
KAEFER ISOLIERTECHNIK: S&P Affirms B+ ICR, Alters Outlook to Stable
REVOCAR 2019: Moody's Affirms Ba1 Rating on EUR7.1MM Class D Notes
G R E E C E
NAVIOS MARITIME: S&P Cuts Ratings to 'CCC' on Refinancing Risk
I R E L A N D
BARINGS EURO 2018-3: Fitch Affirms B- Rating on Class F Notes
BLACKROCK EURO VIII: Fitch Affirms B- Rating on Class F Notes
GOLDENTREE LOAN: Fitch Affirms 'B-' F Notes Rating, Outlook Stable
JAMESTOWN RESIDENTIAL 2021-1: S&P Rates G-Dfrd Notes 'B-(sf)'
PROVIDUS CLO III: Moody's Assigns B3 Rating to EUR11.3MM F-R Notes
PROVIDUS CLO III: S&P Assigns B- (sf) Rating on Class F Notes
K A Z A K H S T A N
KASPI BANK: Moody's Ups LT Bank Deposit Ratings to Ba1
SB SBERBANK: Moody's Affirms Ba1 Deposit Rating, Outlook Now Pos.
R U S S I A
MAYKOPBANK JSC: Bank of Russia Provides Update on Administration
S E R B I A
ROMULIJANA: Public Auction Scheduled for August 30
S P A I N
RURAL HIPOTECARIO IX: Moody's Affirms B3 Rating on Class C Notes
S W E D E N
SSAB AB: S&P Alters Outlook to Positive, Affirms 'BB+' LT ICR
S W I T Z E R L A N D
ILIM TIMBER: Moody's Affirms B2 CFR & Alters Outlook to Positive
U N I T E D K I N G D O M
AI CONVOY: S&P Affirms 'B' Rating, Alters Outlook to Stable
AMICUS FINANCE: Administrator Proposes New Restructuring Plan
NENELITE LTD: Moody's Assigns B2 CFR & Rates Credit Facilities B1
PEOPLECERT HOLDINGS: S&P Assigns Prelim 'B' ICR, Outlook Stable
PEOPLECERT WISDOM: Fitch Assigns First-Time 'B(EXP)' LT IDR
PEOPLECERT WISDOM: Moody's Gives First Time B2 CFR, Outlook Stable
POLARIS 2021-1: S&P Assigns BB+ (sf) Rating to Cl. X1-Dfrd Notes
RALPH & RUSSO: Ralph Accuses Ex-Partner of Stealing Millions
WATERLOGIC GROUP: Moody's Affirms B3 CFR, Rates New $800MM Loan B3
WATERLOGIC HOLDINGS: S&P Affirms 'B' ICR on Debt Refinancing
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B U L G A R I A
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BULGARIAN ENERGY: Fitch Rates EUR600MM Eurobond Final 'BB'
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Fitch Ratings has assigned Bulgarian Energy Holding EAD's (BEH)
EUR600 million 2.45% Eurobond due on 22 July 2028 a final foreign
currency senior unsecured rating of 'BB' with a Recovery Rating of
'RR4'.
The assignment of the rating follows receipt of final documents
conforming materially to the preliminary documentation, based on
which Fitch assigned the Eurobond an expected rating of 'BB(EXP)'
with a Recovery Rating of 'RR4' on 12 July 2021.
The bond's rating is in line with BEH's senior unsecured rating of
'BB', as the bond constitutes a direct, general, unconditional,
unsecured and unsubordinated obligation of the company.
KEY RATING DRIVERS
Refinancing: Proceeds from the bond will be primarily used to repay
BEH's EUR550 million bond due on 2 August 2021. They can also be
used for other general corporate purposes, excluding coal-related
activities. Similar to the one maturing, the bond contains a
negative pledge as well as financial covenants as per the
prospectus definitions, including EBITDA coverage ratio of at least
4x (2020: 8.57x) and consolidated leverage ratio of not more than
4.5x (2020: 2.02x). If breached, BEH and its material subsidiaries
would not be allowed to incur additional financial indebtedness.
Healthy Liquidity: The refinancing has boosted BEH's liquidity,
making it sufficient at least until December 2023 when the EUR602
million state-provided financing to BEH's 100% subsidiary, NEK,
will mature. Fitch currently assumes that the facility at NEK will
be refinanced by BEH in the market. However, if it was converted to
equity by the state, which is being considered, BEH's liquidity
should be sufficient until June 2025, when another EUR600 million
bond will mature.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Upgrade of Bulgaria (BBB/Positive);
-- Further tangible government support to BEH, such as additional
state guarantees materially increasing the share of state
guaranteed debt, or cash injections, which would more tightly
link BEH's credit profile with Bulgaria's stronger credit
profile;
-- Stronger Standalone Credit Profile (SCP; currently at 'b+')
due to funds from operations (FFO) net leverage falling below
4x on a sustained basis, lower regulatory and political risk,
higher earnings predictability, and better corporate
governance.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Negative action on Bulgaria;
-- Weaker links with BEH and the Bulgarian state;
-- Weaker SCP, e.g. due to FFO net leverage exceeding 6x on a
sustained basis, escalation of regulatory and political risk,
or insufficient liquidity. A 'b' SCP would only trigger a
revision of the Outlook on BEH's Issuer Default Ratings to
Stable from Positive, with no impact on the senior unsecured
rating, provided that the sovereign rating was unchanged.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
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C R O A T I A
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3.MAJ: Proposes to Cover HRK74.5MMM 2020 Loss with Future Profit
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Annie Tsoneva at SeeNews reports that the management of Croatian
shipyard 3. Maj said that it proposing to cover the company's loss
of HRK74.5 million (US$11.7 million/EUR9.9 million) reported for
2020 with future profit.
According to SeeNews, the management of the shipyard said in a
bourse filing on July 16 the shareholders will vote on the proposal
at their annual general meeting, to be held in Rijeka on
Aug. 26.
Last year, the company's shareholders decided to cover the loss of
HRK114.1 million for 2019 with future profit, SeeNews notes.
On July 6, Croatia's Uljanik d.d. shipbuilding group which is
undergoing bankruptcy proceedings said that it is inviting
expressions of interest in the purchase of the entire 88.27% stake
it is holding in 3. Maj shipyard, SeeNews recounts. The deadline
for submitting letters of interest will expire on Aug. 27 and
potential investors will be able to carry out due diligence at 3.
Maj after Sept. 13, SeeNews states.
DALEKOVOD: Koncar Unit Offers to Subscribe 31 Mil. New Shares
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Annie Tsonev at SeeNews reports that a unit of Croatian electrical
equipment manufacturer Koncar Elektroindustrija has placed an offer
to subscribe for 31 million new shares from the capital increase of
local power transmission equipment maker Dalekovod, Koncar said.
According to SeeNews, Koncar said in a filing with the Zagreb
bourse on July 23 by subscribing this number of new shares, its
unit Napredna Energetska Rjesenja will contribute HRK310 million
(US$48.7 million/EUR41.2 million) in cash to Dalekovod's capital
increase.
Dalekovod shareholders decided on June 30 to increase the company's
share capital from HRK2.47 million to at least HRK152.47 million
and up to HRK412.47 million, in order to raise funding to cover
debt to creditors under a pre-bankruptcy agreement concluded in
January 2014, SeeNews discloses. Earlier this month, Dalekovod
opened the subscription for the new share issue, through which the
company aims to boost its share capital by at least HRK150 million
and up to HRK410 million, SeeNews recounts.
The new ordinary shares have been offered to potential investors at
their face value of 10 kuna each, SeeNews states.
Dalekovod said in a separate statement on July 26 that demand for
shares from the new issue topped the maximum amount planned in the
first and second round of subscription, SeeNews relates.
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C Y P R U S
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CYPRUS: Moody's Ups Issuer Rating to Ba1, Alters Outlook to Stable
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Moody's Investors Service has upgraded the Government of Cyprus's
long-term issuer and senior unsecured ratings to Ba1 from Ba2.
Concurrently, Moody's has also upgraded the country's senior
unsecured medium-term note programme ratings to (P)Ba1 from (P)Ba2
and has affirmed the commercial paper rating at Not Prime (NP) and
the other short term rating at (P)NP.
The outlook has been changed to stable from positive.
The key drivers for the rating action to upgrade Cyprus's ratings
to Ba1 are the following:
(1) Reduction in Cyprus's exposure to event risks because of a
decrease in banking sector risks;
(2) Resilience of the economy to the pandemic shock and robust
medium-term GDP growth prospects being supported by sizeable
European funds
The stable outlook reflects Moody's view that credit strengths and
challenges are balanced at the Ba1 rating level. National support
measures and sizeable EU funding limit the impact of the pandemic
on the supply side of the economy and contingent liabilities from
the crisis will probably remain contained. In addition, Moody's
expects debt affordability metrics to be favourable mitigating the
impact of the higher debt burden compared to the pre-pandemic level
on Moody's assessment of fiscal strength.
Concurrently, Moody's also raised Cyprus's local- and
foreign-currency country ceilings to A1 from A2 keeping the 6 notch
gap to the sovereign rating and reflecting de minimis exit risk
from the euro area.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE OF THE RATINGS TO Ba1
FIRST DRIVER: CYPRUS'S REDUCED EXPOSURE TO BANKING SECTOR RISKS
The primary driver for the upgrade of the ratings of Cyprus to Ba1
is the material improvement in the underlying credit strength of
the domestic banking system, which also reduces the risks of a
systemic banking crisis and therefore lowers the risk of a
crystallization of contingent liabilities in the banking system on
the government's balance sheet.
The stand-alone credit profile of the domestic banking system,
which is one of the two main considerations underpinning Moody's
assessment of banking sector risks for the sovereign, improved to
b3 from caa1 because of the recent upgrade of the baseline credit
assessments of the two largest banks in Cyprus (Bank of Cyprus
Public Company Limited (long-term bank deposits rating: B1
positive, Baseline Credit Assessment: b3) and Hellenic Bank Public
Company Ltd (long-term bank deposits rating: B1 positive, Baseline
Credit Assessment: b3)). The banks' risk profiles improved in
recent years because of the improving loan quality and the
strengthening of the banks' capital buffers. In addition, liquidity
ratios improved with the banks being less dependent on
confidence-sensitive foreign deposits.
Asset quality has further improved under challenging market
conditions in 2020, partly because banks have sold some legacy
problem loans and partly because a comprehensive policy response to
the pandemic has so far shielded borrowers from defaults. The
nonperforming exposures (NPEs) of the bank's local operations in
relation to total domestic loans and advances improved to 17.7% at
end-2020 from 27.9% end-2019 and 47.8% in December 2014. At the
beginning of 2021, repayments started for a number of borrowers
that used the broad loan repayment moratorium in 2020 covering at
its peak almost half of performing loans being the highest level of
payment deferrals in Europe, with indications that a large part of
loans under moratorium have resumed payments and inflow of new NPEs
will only increase moderately. The NPE ratio slightly increased to
18.1% in April 2021. Continued uncertainty surrounding the economic
recovery, especially in most affected sectors such as tourism,
could still result in a further uptick in new NPEs. Moody's
expectation, however, remains that new inflow of NPEs will be more
than offset by banks' sustained efforts to reduce legacy problem
loans.
The size of the domestic banking system, which is the other main
factor determining banking sector risk, increased to 221.5% of GDP
at end-2020 from 203.6% at end-2019. However, this was mainly
driven by the economic contraction in 2020 and the size of the
banking system measuring the risks of potential negative spill over
to the economy remains significantly below the levels of 271.9% of
GDP at end-2017 and the peak of 572.6% of GDP at end-2010.
SECOND DRIVER: RESILIENCE OF THE ECONOMY TO THE PANDEMIC SHOCK AND
ROBUST MEDIUM-TERM GDP GROWTH PROSPECTS BEING SUPPORTED BY SIZEABLE
EUROPEAN FUNDS
The second driver for the upgrade of Cyprus ratings is the relative
resilience of the economy to the pandemic shock in combination with
the robust medium-term GDP growth prospects. Despite its sizeable
exposure to tourism, the economy of Cyprus proved to be more
resilient to the pandemic shock compared to the Ba1- and Ba2-rated
medians as highlighted by a less severe contraction of economic
activity for Cyprus in 2020 (-5.1% compared to the Ba1- and
Ba2-rated medians of 7.1% and 5.6%, respectively) in combination
with Moody's forecast of a very similar average rebound of around
4% in economic growth in 2021-22. This was because Cyprus's
non-tourism related services such as business services, public
administration and shipping softened the significant pandemic shock
on the tourism sector. In addition, the support measures by the
authorities are effective in mitigating the impact of the pandemic
shock on the supply side of the economy and therefore materially
reduce the risk of lasting impairment on the economic strength of
Cyprus. Very effective in reducing the impact of the pandemic
related shock on the labour market was the sizeable take-up of the
introduced job retention scheme in the form of wage subsidies for
affected companies that are required to keep their employees for at
least the double duration of the period the scheme was used.
Moody's estimates that this job retention scheme saved around
26,000 jobs or 6% of employment in 2020.
Moody's expects GDP growth to be supported by sizeable European
Union (EU, Aaa stable) funding, the gradual recovery of the tourism
sector and solid growth in the non-tourism related services over
Moody's current forecast horizon out to 2025. Available EU funding
will increase substantially in 2021-26 compared to the 2014-20
period mainly because of the grants and loans from the Recovery and
Resilience Facility (RRF) in the amount of a total 4.2% and 1.0% of
GDP, respectively, and cheap funding via loans from Support to
mitigate Unemployment Risks in an Emergency (SURE) with a volume of
2.6% of GDP. Moody's simulations show that fully used RRF grants
would boost GDP growth by an average of 0.6 percentage points per
year in the years 2022-25. The actual impact on GDP growth may even
be higher because Moody's simulation does not take into account
spillover effects from other countries benefitting from higher EU
funding. Nor does it account for potential economic gains from
reform implementation tied to the RRF funds and potential long-term
effects of digital and green investment as well greater spending on
research and development.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's view that risks to Cyprus's
credit profile are balanced. This is based on Moody's expectation
that the government's support measures and sizeable EU funding
limit the impact of the pandemic on Moody's assessment of economic
strength and contingent liabilities from the crisis will probably
remain contained. Moody's expects that the impact of the higher
debt burden caused by the pandemic, which jumped by 25 percentage
points to 119.1% of GDP in 2020 and will likely not to fall below
the pre-pandemic level before 2025, on Moody's assessment of fiscal
strength will be mitigated by favourable debt affordability metrics
over the next 1-2 years. The European Central Bank's (ECB) Pandemic
Emergency Purchase Programme, which will be terminated if the ECB's
governing council judges that the pandemic crisis phase is over but
not before the end of March 2022, provides comfort that Cyprus will
continue to benefit from supportive funding conditions. Cyprus has
also benefited from cheap loans from the Support to Mitigate
Unemployment Risks in an Emergency (SURE) and intends to take a
portion of the loans available under the RRF. In addition, Cyprus
has the option to request a cheap loan with a volume of up to 2% of
GDP via the European Stability Mechanism (ESM)'s (Aa1 stable)
COVID-19 credit line until the end of 2022.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Cyprus's ESG Credit Impact Score is neutral to low (CIS-2),
reflecting moderately negative exposure to environmental risks and
neutral to low exposure to social risks and governance risks.
Cyprus's overall E issuer profile score is moderately negative
(E-3), reflecting chronic water shortages (though they are being
addressed with desalinization plants) and an exposure to rising
global temperatures. While the country's geographic location
positions it well to benefit from renewable energy, it remains
below the EU average in terms of the share of renewable energy in
gross final energy consumption. It is currently reliant on imported
liquid fuels such as diesel and fuel oil, though it is developing a
natural gas sector following gas finds in the Aphrodite field.
Moody's assesses its S issuer profile score as neutral to low
(S-2), reflecting low exposure to social risks over most
categories.
The only categories that entail moderately negative risk are
demographics, labour, and income, in line with many other European
countries. For example, Cyprus has a relatively high youth
unemployment rate. Analysis from the European Commission indicates
that pension expenditures in particular will increase materially
over the coming decades.
Cyprus's institutions and governance strength is reflected in a
neutral to low profile score (G-2).
GDP per capita (PPP basis, US$): 40,107 (2020 Actual) (also known
as Per Capita Income)
Real GDP growth (% change): -5.1% (2020 Actual) (also known as GDP
Growth)
Inflation Rate (HICP, % change Dec/Dec): -0.8% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -5.7% (2020 Actual) (also known as
Fiscal Balance)
Current Account Balance/GDP: -11.9% (2020 Actual) (also known as
External Balance)
External debt/GDP: 908% of GDP
Economic resiliency: baa2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On July 21, 2021, a rating committee was called to discuss the
rating of Cyprus, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including its
economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt
profile, has not materially changed. The issuer has become less
susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Cyprus's Ba1 government bond ratings would come under upward
pressure if progress on structural reforms would result in material
improvements of the sovereign's growth potential or would improve
Cyprus's institutions and governance strength, for example via
tangible improvements from reforms in the areas of the judiciary or
control of corruption. In addition, a very high absorption of EU
funding in combination with reform implementation tied to the RRF
funds would support stronger growth potential being rating
positive. A sustained, more rapid reduction of the debt burden to
pre-pandemic levels than currently expected by Moody's would also
put upward pressure on the rating. Moreover, a further material
reduction in the sovereign's exposure to banking sector risks would
also be rating positive.
WHAT COULD CHANGE THE RATINGS DOWN
Downward pressure on the Ba1 ratings would emerge if the economic
recovery would be materially weaker than expected by Moody's which
would likely go along with a lasting, significant impairment on the
economic strength of Cyprus and with a sizeable increase of NPEs
and banking sector risks. A sustained, material deterioration of
the government's fiscal position would also put downward pressure
on the ratings.
The principal methodology used in these ratings was Sovereign
Ratings Methodology published in November 2019.
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F R A N C E
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ZF INVEST: S&P Assigns 'B' LT Issuer Rating on Refinancing
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S&P Global Ratings assigned its 'B' long-term issuer rating to
France-based fresh food retailer ZF Invest and its 'B' issue
rating, with a '3' recovery rating, to the company's senior secured
term loan B (TLB).
S&P said, "The stable outlook reflects our view that, despite
strong competition in the French grocery market, ZF Invest will
achieve substantial growth thanks to new store openings, the
development of its online platform, and strong like-for-like
revenue growth, while maintaining adjusted EBITDA margins close to
9%-10% and improving adjusted leverage with debt to EBITDA below
8.0x (or below 7.0x when excluding the convertibles) by 2023."
The final ratings are in line with the preliminary ratings S&P
assigned on June 18, 2021.
ZF Invest's aggressive financial policy translates in very high
leverage in fiscals 2021-2022, limiting rating headroom. The
company issued a EUR1,382 million TLB and a EUR250 million RCF to
refinance EUR759 million of existing debt and repurchase EUR741
million of shareholders' payment-in-kind (PIK) convertible bonds.
Following the transaction, we estimate reported financial debt
jumped to EUR1,450 million from EUR818 million. S&P said, "In our
debt calculations, we include about EUR225 million of financial and
operating leases and the EUR188 million of shareholder's PIK
convertibles remaining in the capital structure. We treat the
convertibles as a debt-like obligation in our leverage calculation,
since the company is raising financial debt to repay the great
majority of them. However, in our analysis, we acknowledge their
cash-preserving characteristics and that they are deeply
subordinated to the TLB. We consequently expect leverage to stand
at 7.4x (or 6.6x when excluding convertibles) for fiscal 2021,
increasing to 8.1x (or 7.2x) in fiscal 2022. Metrics in 2021 will
benefit from an exceptionally strong operating performance that
will likely wane slightly, resulting in higher leverage. The
group's unadjusted gross financial leverage is consistent with
these numbers, remaining near 6.6x in 2021 before increasing to
7.8x in 2022. Although we anticipate that the company will
capitalize on its solid growth and deleverage materially from 2023,
we believe the financial sponsors' appetite for releveraging, as
seen with this transaction, will likely remain high, making
deleveraging fueled by EBITDA growth temporary, and justifying our
debt treatment of the convertibles, despite the cash-preserving
characteristics."
The group's ambitious investment plan, together with cash interests
and higher taxes, will hamper cash flow over the next 18-24 months.
S&P expects the company's FOCF will remain subdued between 2021 and
2023, and become negative in 2022 due to ambitious investments,
substantial interest expenses, and higher cash taxes incurred
because of the transaction. In particular, the new TLB will cost
about EUR58 million annual interests, while the repayment of the
majority of the PIK convertibles reduces the tax shield compared to
the historical performance, increasing cash taxes by about EUR20
million a year, constraining the company's overall financial
flexibility. Additionally, the new business plan envisages capex
rising to about EUR150 million-EUR160 million per year, since the
company intends to accelerate store openings under all its brands
and develop the new digital platform, monmarch.fr. S&P said,
"Although we recognize that expansion capex is mostly discretionary
and value accretive to boost future growth, the lack of significant
positive cash flow in the next 18-24 months makes the company more
vulnerable to unexpected headwinds. That said, we would expect the
company to preserve liquidity and its financial standing by scaling
down its expansionary capex should some unforeseen developments dim
its overall performance."
Geographic expansion and format diversification will support
double-digit revenue growth. SS&P said, "Between 2020 and 2024, we
expect ZF Invest's sales to increase by a 15%-18% compounded annual
rate, thanks to the opening of 40-50 new stores per year, the
development of the digital platform, and continuous organic growth,
supported by the attractiveness of the company's value proposition
to customers. Despite the still relatively small network of about
238 stores as of September 2020, over the past years Grand Frais
has established a strong reputation in France, allowing for
successful and rapid ramp-ups of newly opened stores and
like-for-like growth in older ones. ZF Invest, which holds a 50%
stake in Grand Frais and accounts for around two-thirds of sales,
is also developing additional and independent distribution
channels, such as the smaller-format Fresh stores in France (20
stores), Banco Fresco stores in northern Italy (two stores), and
the nascent digital platform monmarché.fr targeting urban areas.
Even if these independent activities currently only contribute
modestly to overall EBITDA, we believe they will foster growth in
the medium term while enhancing business diversity. In our
forecast, we view positively the group's solid track record of
growth, with both revenue and EBITDA increasing by about 150% over
2017-2020, to EUR1.9 billion and about EUR165 million,
respectively, while the standardized store format and quick ramp-up
period limit execution risk, in our view."
ZF Invest's integrated business model and brand awareness support
above-average EBITDA margins. S&P said, "We expect ZF Invest will
continue benefitting from a high EBITDA margin, about 10% as
adjusted by S&P Global Ratings. This is stronger than that of
traditional, larger food retailers. Profitability is supported by
the vertically integrated business model, combining direct and
long-standing relations with local suppliers, efficient in-house
processing and logistics, as well as by the company's successful
merchandizing concept, supporting higher-than-average sales
density. In our view, the specialization of each member within
Grand Frais has been instrumental to building a strong image of
quality food at affordable prices, while enabling a strong focus on
cost management of each segment. ZF Invest's efficient supply
chain--built around a centralized purchasing organization and
dedicated platform for each product category--allows for
below-average time to market of fresh products, which is a key
component of the group's competitive advantage."
Potential risks stem from limited control over Grand Frais and
stiffer competition. S&P said, "We recognize that, despite being
the main partner, ZF Invest does not have full control over Grand
Frais' product offering and store organization. This potentially
exposes the company to reputation risk and sanitary issues
dependent on its business partners. In the longer term, any hurdles
faced by ZF Invest's business partners, such as operating
underperformance and financial difficulties--which we do not
currently anticipate--could threaten the structure of the
partnership agreement. Additionally, larger food retailers' plans
to put a greater emphasis on quality, freshness, and product
traceability are likely to heighten competition in the segment in
the longer term. That said, we believe ZF Invest has the ability to
adjust its activities to operate more independently from its
partners, if needed, while its integrated and distinctive business
model provide it with de facto operational entry barriers in the
medium term."
S&P said, "The stable outlook reflects our view that, despite
strong overall competition in the French grocery market, ZF Invest
will achieve substantial growth thanks to new store openings, the
development of its online platform, and strong like-for-like
revenue growth, while maintaining adjusted EBITDA margins close to
9%-10%. We anticipate that FOCF will be constrained in the next
12-24 months by the company's sizable investments, but will
gradually improve from 2023. On the back of FOCF and a growing
EBITDA base, we forecast adjusted leverage to decline below 8.0x
(or below 7.0x when excluding the shareholder's convertibles) by
fiscal 2023.
"We could lower the rating if the group is unable to execute its
growth strategy or experienced operating setbacks, leading to
weaker EBITDA than in our base-case projection and thereby
jeopardizing deleveraging prospects, such that leverage would stay
above 8.0x (or 7.0x when excluding the convertibles) for longer
than expected. We could also lower the rating if we no longer
expected FOCF to turn sustainably positive in the 12-24 months
following the transaction.
"We view an upgrade as remote over the next 12 months because of
the high financial leverage. That said, we could raise the ratings
if, thanks to strong FOCF and adequate liquidity, ZF Invest
deleveraged such that adjusted debt to EBITDA improved sustainably
below 7.0x (or 6.0x when excluding the shareholders' convertibles)
and the financial sponsor committed to a leverage ratio in the
6x-7x range (or 5x-6x when excluding convertibles), with low risk
of releveraging."
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G E R M A N Y
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KAEFER ISOLIERTECHNIK: S&P Affirms B+ ICR, Alters Outlook to Stable
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S&P Global Ratings revised the outlook on insulation services
provider KAEFER Isoliertechnik to stable from negative, and
affirmed its 'B+' issuer and issue ratings.
The stable outlook reflects S&P's expectation that operating
performance will improve such that FFO to debt rebounds to
17%-19%.
S&P said, "Recovery in oil and gas prices and easing of
pandemic-related restrictions are fueling the recovery of KAEFER's
operating performance. Oil and gas customers are the group's most
important end market, account for about 30% of revenue according to
our estimates. With oil prices recovering to recently more than $70
per barrel, we expect new oil and liquefied natural gas projects
will be awarded, which had been delayed given the high uncertainty
on price development during the pandemic. Given the positive
economic development globally, we expect improved demand dynamics
also in its remaining end markets. The group should also benefit
from progress with vaccinations and the global easing of
pandemic-related restrictions, which caused extra costs and delays
in project execution for KAEFER. The positive sentiment translated
into order intake increasing 40% year on year to EUR656 million
during the first quarter of 2021, making it the strongest quarter
in the past four years.
"We now forecast an improvement in KAEFER's operating performance
in 2021 and 2022 on the dynamic order intake and an order backlog
of close to EUR1.5 billion. Overall, we estimate that revenue will
increase 6%-7% to about EUR1.65 billion in 2021 from EUR1.55
billion in 2020, but remain below pre-pandemic levels until
end-2022. In light of higher order volumes, reduction of
pandemic-related costs, and a better margin profile of current
projects, we expect the group's S&P Global Ratings-adjusted EBITDA
margin will substantially improve to above 6.3% in 2021 and about
6.4% in 2022 from 4.7% in 2020.
"Recovery in profitability and revenue are supporting stabilization
of credit metrics.Given our expectation that the group's
profitability will improve such that its EBITDA margin recovers to
more than 6.0%, we anticipate KAEFER will generate EBITDA of about
EUR100 million in 2021 and about EUR110 million in 2022. This
should allow KAEFER to reduce its debt to EBTIDA to about 3.5x-4.0x
in 2021 and 2022 from more than 4x in 2020, and generate FFO to
debt between 17%-19% up from 10.7% in 2020, thereby creating
sufficient headroom under the current rating.
"Free operating cash flow (FOCF) remains constrained on working
capital requirements with increasing revenue. Given our expectation
of a revenue increase in 2021 and 2022, we believe the group will
notably increase its amount of working capital so that its FOCF
will be negative in 2021 and neutral to slightly positive in 2022.
We estimate KAEFER will build up about EUR100 million in 2021 and
2022, which is about equal to the amount it released during 2020.
Additionally, we estimate capital expenditure (capex) will increase
to about EUR40 million per year from less than EUR30 million in
2020.
"Despite negative FOCF generation, liquidity remains solid with
sufficient covenant headroom. Of the EUR107 million cash and
cash-equivalents on the balance sheet at the end of March 2021, we
view EUR7.5 million as restricted. The company's EUR120 million
revolving credit facility (RCF) matures in 2023, and we understand
less than EUR5 million of it was utilized at the end of
first-quarter 2021. Given EBITDA improvement, we estimate headroom
on the springing covenant is sufficient over 2021 and 2022. We also
understand that management has canceled additional credit lines it
secured during the pandemic, reflecting the improved outlook on
operating performance and cash flow generation. We also understand
that management remains committed to its financial policy, which
targets net leverage below 3.0x on an S&P Global Ratings-adjusted
basis, and maintains a modest dividend policy.
"The acquisition of Wood's Industrial Service Limited (WGIS) has
softened the revenue decline in 2020 and is likely to strengthen
growth expectations over the next two years.The group closed the
transaction in 2020 for a cash payment of just below EUR100
million. The acquisition combined with the negative impacts from
COVID-19 on revenue and profitability led to weaker credit metrics
in 2020, with debt to EBITDA of 4.2x and FFO to debt of 10.7%. We
believe that the WGIS acquisition will strengthen KAEFER's position
in the U.K. and Ireland and the group's overall operating
performance. For now, we expect no material debt-financed
acquisitions and expect smaller bold-acquisitions of about EUR5
million-EUR10 million per year over next 24 months.
"The stable outlook reflects our expectations that KAEFER will
continue to strengthen its operations in their core end markets in
the next 12-18 months. This should allow KAEFER to maintain an FFO
to debt exceeding 15% and for its EBITDA margin to recover to above
6% by the end of 2021. Reflecting high working capital requirement
from expected higher revenue, we estimate FOCF will be negative
over the next 12-18 months.
"We would likely lower the rating if the group's operating and
financial performance recovers slower than anticipated, because of
lasting repercussions from COVID-19 or a more pronounced dent in
profitability from the volatile oil price environment." S&P could
also lower the ratings if:
-- S&P believed the company is unlikely to reach adjusted FFO to
debt sustainably above 15% by 2021, which it sees as in line with
the current rating;
-- FOCF generation remained negative over a prolonged period;
-- The EBITDA margin does not recover to more than 5.5% in 2021;
or
-- Liquidity deteriorates or covenant headroom becomes tight.
S&P said, "We could raise the ratings if the recovery in KAEFER's
credit metrics is stronger than we currently expect, with FFO to
debt sustainably above 20%, debt to EBITDA well below 4x, and
robust free cash flow generation. This could stem from
better-than-anticipated operating performance, for example due to
faster recovery of the oil and gas industry, leading to stronger
order intake, improved profitability, and strong cash generation.
An upgrade would be subject to our view that any improvement would
be sustainable and supported by the company's financial policy."
REVOCAR 2019: Moody's Affirms Ba1 Rating on EUR7.1MM Class D Notes
------------------------------------------------------------------
Moody's Investors Service has upgraded five ratings and affirmed
four ratings in two German Auto ABS transactions. The rating action
reflects the increased levels of credit enhancement for the
affected tranches, together with better than expected collateral
performance in RevoCar 2019 UG (haftungsbeschraenkt) ("Revocar
2019") and Asset-Backed European Securitisation Transaction Sixteen
UG (haftungsbeschrankt) ("ABEST 16").
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain the current ratings on the affected
notes.
Issuer: Asset-Backed European Securitisation Transaction Sixteen UG
(haftungsbeschrankt)
EUR540M Class A Notes, Affirmed Aaa (sf); previously on Sep 16,
2020 Affirmed Aaa (sf)
EUR18M Class B Notes, Affirmed Aaa (sf); previously on Sep 16,
2020 Upgraded to Aaa (sf)
EUR20M Class C Notes, Upgraded to Aaa (sf); previously on Sep 16,
2020 Upgraded to Aa1 (sf)
EUR16M Class D Notes, Upgraded to Aa2 (sf); previously on Sep 16,
2020 Upgraded to A2 (sf)
EUR11M Class E Notes, Upgraded to A2 (sf); previously on Sep 16,
2020 Upgraded to Baa2 (sf)
Issuer: RevoCar 2019 UG (haftungsbeschraenkt)
EUR366M Class A Notes, Affirmed Aaa (sf); previously on Apr 24,
2019 Assigned Aaa (sf)
EUR18.7M Class B Notes, Upgraded to Aa2 (sf); previously on Apr
24, 2019 Assigned A1 (sf)
EUR4.1M Class C Notes, Upgraded to A3 (sf); previously on Apr 24,
2019 Assigned Baa2 (sf)
EUR7.1M Class D Notes, Affirmed Ba1 (sf); previously on Apr 24,
2019 Assigned Ba1 (sf)
Revocar 2019 is a cash securitisation of agreements entered into
for the purpose of financing vehicles predominantly to private
obligors in Germany by Bank11 fuer Privatkunden und Handel GmbH
("Bank11") (NR). The originator also acts as the servicer of the
portfolio. Revocar 2019 featured a 1-year revolving period which
ended in April 2020.
ABEST 16 is a cash securitisation of auto loan receivables extended
by FCA Bank Deutschland GmbH, which is owned by FCA Bank S.p.A.
("FCAB") to obligors located in Germany. ABEST 16 featured a 1-year
revolving period which ended in December 2019.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches together with better than expected
collateral performance in both transactions.
Increase in Available Credit Enhancement
Sequential amortization in ABEST 16 led to the increase in the
credit enhancement available in this transaction.
Credit enhancement available under Class C, D and E Notes in ABEST
16 increased to 16.64%, 11.17% and 7.41% from 11.16%, 7.67% and
5.27% since the latest rating action in September 2020,
respectively.
Sequential amortization in Revocar 2019 led to the increase in the
credit enhancement available in this transaction.
Credit enhancement available under Class B and C Notes in Revocar
2019 increased to 6.19% and 4.53% from 3.83% and 2.80% since
closing, respectively.
Revision of Key Collateral Assumptions
As part of the rating action, Moody's reassessed its expected loss
and default probability assumptions for ABEST 16 and Revocar 2019
respectively, reflecting the collateral performance to date.
The collateral performance of ABEST 16 has continued to be stable
since closing. The delinquency rates remain at relatively low
levels, with 90 days plus arrears standing at 0.38% of the current
portfolio balance. Cumulative defaults currently stand at 0.48% of
original pool balance plus replenishments.
For ABEST 16, Moody's has reduced the expected loss assumption to
1.2% of the original pool balance plus replenishments, from 2.0%
since closing. The default probability assumption is 2.54% of the
current portfolio balance. Moody's left the assumption for
portfolio credit enhancement unchanged at 13%.
The collateral performance of Revocar 2019 has continued to be
stable since closing. The delinquency rates remain at relatively
low levels, with 60 days plus arrears standing at 0.05% of the
current portfolio balance. Cumulative defaults currently stand at
0.54% of original pool balance plus replenishments.
For Revocar 2019, Moody's has reduced the default probability
assumption on original balance to 1.7% from 2.0% since closing. The
default probability assumption is 2.5% of the current portfolio
balance. Moody's maintained the assumption for the recovery rate at
30% and the portfolio credit enhancement at 10%.
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Auto Loan- and Lease-Backed ABS" published in
December 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (1) performance of the underlying collateral that
is better than Moody's expected; (2) an increase in available
credit enhancement; and (3) improvements in the credit quality of
the transaction counterparties.
Factors or circumstances that could lead to a downgrade of the
ratings include: (1) an increase in sovereign risk; (2) performance
of the underlying collateral that is worse than Moody's expected;
(3) deterioration in the Notes' available credit enhancement; and
(4) deterioration in the credit quality of the transaction
counterparties.
===========
G R E E C E
===========
NAVIOS MARITIME: S&P Cuts Ratings to 'CCC' on Refinancing Risk
--------------------------------------------------------------
S&P Global Ratings lowered its ratings on dry bulk shipping and
logistics company Navios Maritime Holdings Inc. (Navios Holdings)
and the first priority ship mortgage notes to 'CCC' from 'CCC+'.
S&P is also lowering its issue rating on the senior secured notes
to 'CCC-' from 'CCC'. The recovery ratings and prospects are '3'
(50%) on the first priority ship mortgage notes, and '5' (25%) on
the senior secured notes.
S&P's negative outlook reflects the risk that Navios Holdings could
undergo a distressed exchange, debt restructuring, or default in
the next 12 months.
Navios Holdings faces mounting refinancing risk for its 2022 debt
maturities. The nearest debt maturity is the $477 million
outstanding 7.375% first priority ship mortgage notes due January
2022. S&P expects this will be followed by the $205 million, 11.25%
senior secured notes due August 2022, assuming that the company
will redeem $100 million of the senior secured notes to waive the
September 2021 springing maturity, as agreed with the noteholders.
Navios Holdings has raised the $100 million by obtaining
approximately $75 million from the $115 million 10.5% senior
secured term loan with an affiliate company Navios Shipmanagement
Holdings Corporation, and the proceeds from the disposal of bulk
carrier, Navios Azimuth, the only vessel in the senior secured
notes' collateral package.
S&P said, "We view Navios Holdings' liquidity as weak, with
currently constrained access to the capital markets. Its cash and
cash equivalents were only about $59 million as of March 31, 2021
and it has no committed liquidity lines available. We think that
short-to-medium-term charter rate conditions in dry bulk shipping
will help Navios Holdings' cash flow generation as industry demand
growth will moderately exceed supply growth in 2021, and likely
extend to 2022. That said, with the large debt maturities
approaching, we see a high risk that the company could undergo a
distressed exchange, debt restructuring, or default without an
unforeseen positive development to meet its financial commitments.
"Our negative outlook reflects the risk that Navios Holdings could
undergo a distressed exchange, debt restructuring, or default in
the next 12 months.
"We could lower our ratings if Navios Holdings announces an
exchange offer or debt restructuring that we view as distressed, or
if it enters into a default. We would view these as tantamount to
default if we felt that the lenders would receive less than the
promise of the original securities, subject to our view of adequate
compensation.
"We could raise the ratings if Navios Holdings were to successfully
refinance its near-term debt maturities. This would be subject to
the company's ability to access capital markets."
=============
I R E L A N D
=============
BARINGS EURO 2018-3: Fitch Affirms B- Rating on Class F Notes
-------------------------------------------------------------
Fitch Ratings has affirmed Barings Euro CLO 2018-3 DAC's notes and
revised the Outlooks on the class E and F notes to Stable from
Negative.
DEBT RATING PRIOR
---- ------ -----
Barings Euro CLO 2018-3 DAC
A-1 XS1914503377 LT AAAsf Affirmed AAAsf
A-2 XS1914504003 LT AAAsf Affirmed AAAsf
B-1 XS1914504425 LT AAsf Affirmed AAsf
B-2 XS1914505158 LT AAsf Affirmed AAsf
C XS1914505745 LT Asf Affirmed Asf
D XS1914507014 LT BBB-sf Affirmed BBB-sf
E XS1914506800 LT BB-sf Affirmed BB-sf
F XS1914507527 LT B-sf Affirmed B-sf
TRANSACTION SUMMARY
The transaction is a cash flow CLO, mostly comprising senior
secured obligations. It is still within its reinvestment period and
is actively managed by Barings U.K. Limited.
KEY RATING DRIVERS
Stable Transaction Performance: The rating actions reflect the
overall stable performance of the transaction.
The portfolio's weighted average rating factor (WARF) has improved
since the review in April 2021. The portfolio's weighted average
credit quality is 'B'/'B-'. By Fitch's calculation, the portfolio
WARF, excluding assets with a Fitch-derived rating (FDR) of 'D', is
36.0, an improvement from 36.9 at the review in April 2021.
According to the trustee's calculation, which excludes reported
defaults per the transaction documents, the Fitch WARF improved to
35.5 from 36.5.
Assets with a FDR in the 'CCC' category make up about 14% of the
collateral balance if including about 2% unrated assets, which is a
similar level as the last review. These have counter-balanced a
further below par condition (-2.1% versus -1.2% in April 2021) and
an increase in reported defaults to about EUR14 million from about
EUR9 million in the same period.
The Fitch weighted average spread test and WARF test and the 'CCC'
test are currently failing. However, the manager can move to
another matrix point. The portfolio is diversified with the top 10
obligors and the largest obligor below 15% and 2%, respectively.
Senior secured obligations comprise 98% of the portfolio. Fitch
views that these assets have more favourable recovery prospects
than second-lien, unsecured and mezzanine assets. Fitch's weighted
average recovery rate for the current portfolio is 65.6% based on
the investor report.
Model-implied Rating Deviation: Each tranche displays a comfortable
default rate cushion at its rating based on the current portfolio
analysis except for class E and F notes which display a shortfall.
Fitch no longer includes its coronavirus stress scenario in its
analysis of EMEA CLO notes.
The model-implied ratings (MIR) for the class E and F notes are one
notch below their current ratings '. The shortfall is driven by the
back-loaded default timing, which is not Fitch's base case
expectation. Given the credit enhancement level, the class F notes
display a safety margin and are in line with their rating. The
class F notes do not present a real possibility of default, which
is the meaning of 'CCC'. With the overall steady transaction
performance, and as the notes are already at the lowest rating in
the rating category, Fitch believes that a downgrade to the next
rating category is unlikely. This supports the revision of the
Outlook to Stable from Negative.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- At closing, Fitch used a standardised stress portfolio
(Fitch's stressed portfolio) that was customised to the
portfolio limits as specified in the transaction documents.
Even if the actual portfolio shows lower defaults and smaller
losses (at all rating levels) than Fitch's stressed portfolio
assumed at closing, an upgrade of the notes to above its
initial ratings during the reinvestment period is unlikely.
This is because the portfolio credit quality may still
deteriorate, not only by natural credit migration, but also
because of reinvestment.
-- After the end of the reinvestment period, upgrades may occur
in the event of better-than-expected portfolio credit quality
and deal performance, leading to higher credit enhancement and
excess spread available to cover for losses in the remaining
portfolio.
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- Downgrades may occur if build-up of the notes' credit
enhancement following amortisation does not compensate for a
higher loss expectation than initially assumed due to
unexpected high level of default and portfolio deterioration.
However, this is not Fitch's base case.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
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
Barings Euro CLO 2018-3 DAC
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations 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 or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
BLACKROCK EURO VIII: Fitch Affirms B- Rating on Class F Notes
-------------------------------------------------------------
Fitch Ratings has affirmed BlackRock European CLO VIII DAC's notes
and revised the Outlooks on the class E and F notes to Stable from
Negative.
DEBT RATING PRIOR
---- ------ -----
BlackRock European CLO VIII DAC
A-1 XS1984234242 LT AAAsf Affirmed AAAsf
A-2 XS1984235132 LT AAAsf Affirmed AAAsf
B-1 XS1984236023 LT AAsf Affirmed AAsf
B-2 XS1984236700 LT AAsf Affirmed AAsf
C-1 XS1984237344 LT Asf Affirmed Asf
C-2 XS1984238078 LT Asf Affirmed Asf
C-3 XS1984238664 LT Asf Affirmed Asf
D-1 XS1984239472 LT BBB-sf Affirmed BBB-sf
D-2 XS1984240132 LT BBB-sf Affirmed BBB-sf
E XS1984240728 LT BBsf Affirmed BBsf
F XS1984240645 LT B-sf Affirmed B-sf
X XS1984234168 LT AAAsf Affirmed AAAsf
TRANSACTION SUMMARY
BlackRock European CLO VIII DAC is a cash flow collateralised loan
obligation (CLO) of mostly European leveraged loans and bonds. The
transaction is in its reinvestment period and the portfolio is
actively managed by BlackRock Investment Management (UK) Limited
KEY RATING DRIVERS
Outlooks Revised to Stable (Positive): The revision of the Outlooks
on the class E and F notes to Stable from Negative reflect that the
coronavirus baseline stress no longer drives the Outlook. The
Stable Outlooks reflect the default-rate cushion that each tranche
benefits from at its current rating.
Asset Performance Resilient to Pandemic (Neutral): Asset
performance has been stable since Fitch's last review in November
2020. It was 0.6% below par as of the latest investor report dated
18 June. The transaction is passing all coverage tests. Exposure to
assets with a Fitch-derived rating (FDR) of 'CCC+' and below was
5.1% (or 5.6% if including unrated names that are treated as CCC in
the analysis while the manager may re-classify these assets as 'B-'
for up to 10% of the portfolio), compared with the 7.5% limit. The
exposure to defaulted assets is EUR4.0 million.
Average Credit-quality Portfolio (Neutral): Fitch assesses the
average credit quality of the obligors in the 'B'/'B-' category.
The Fitch weighted average rating factor (WARF) calculated by Fitch
of the current portfolio as of 18 July 2021 was 33.2, versus 32.8
in the investor report dated 18 June 2021 and a maximum of 34.0.
High Recovery Expectations (Positive): The portfolio comprises 97%
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 current portfolio was reported by the trustee at 65.5% as of
18 June 2021 compared with a minimum of 63.9%.
Diversified Portfolio (Positive): The portfolio is well-diversified
across obligors, countries and industries. The top 10 obligor
concentration is 12.5% and no obligor represents more than 1.4% of
the portfolio balance. The largest Fitch-defined industry as
calculated by the agency represents 12.0% and the three largest
Fitch-defined industries 31.1%, both within their respective limits
of 17.5% and 40.0%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- At closing, Fitch used a standardised stressed 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, given the portfolio credit
quality may still deteriorate, not only by natural credit
migration, but also by reinvestments and also because the
manager has the possibility to update the Fitch collateral
quality tests.
-- After the end of the reinvestment period, upgrades may occur
on better-than-initially expected portfolio credit quality and
deal performance, leading to higher credit enhancement and
excess spread available to cover for losses on the remaining
portfolio.
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- Downgrades may occur if the build-up of credit enhancement
following amortisation does not compensate for a larger loss
expectation than initially assumed due to unexpectedly high levels
of defaults and portfolio deterioration.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
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
BlackRock European CLO VIII DAC
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations 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 or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
GOLDENTREE LOAN: Fitch Affirms 'B-' F Notes Rating, Outlook Stable
-------------------------------------------------------------------
Fitch Ratings has revised GoldenTree Loan Management EUR CLO 1
DAC's class E and F notes to Stable Outlook from Negative and
affirmed all tranches.
DEBT RATING PRIOR
---- ------ -----
GoldenTree Loan Management EUR CLO 1 DAC
A-1A XS1772820657 LT AAAsf Affirmed AAAsf
A-1B XS1784284389 LT AAAsf Affirmed AAAsf
A-2 XS1772820905 LT AAAsf Affirmed AAAsf
B-1A XS1772821119 LT AAsf Affirmed AAsf
B-1B XS1772821549 LT AAsf Affirmed AAsf
C-1A XS1772821978 LT Asf Affirmed Asf
C-1B XS1772822273 LT Asf Affirmed Asf
D XS1772822513 LT BBB-sf Affirmed BBB-sf
E XS1772822869 LT BB-sf Affirmed BB-sf
F XS1772823248 LT B-sf Affirmed B-sf
TRANSACTION SUMMARY
GoldenTree Loan Management EUR CLO 1 DAC is a cash flow
collateralised loan obligation (CLO) of mostly European leveraged
loans and bonds. The transaction is in its reinvestment period and
the portfolio is actively managed by GoldenTree Loan Management
LP.
KEY RATING DRIVERS
Outlooks Revised to Stable (Positive): Fitch has revised the
Outlooks on the class E and F notes to Stable from Negative as the
coronavirus baseline stress no longer drives the Outlook. The
Stable Outlook for the class E note reflects the default-rate
cushion that the tranche benefits from at its current rating. For
the class F notes, the outlook was revised to Stable due to the low
likelihood of downgrade to 'CCCsf' given the available 5.2% credit
enhancement.
Asset Performance Resilient to Pandemic (Neutral): Asset
performance has been stable since Fitch's last review in August
2020. The deal was 2.2% below target par as per the investor report
dated 6 July 2021. Except for Fitch's 'CCC' limit tests, the
transaction is passing all coverage tests, Fitch-related
collateral- quality test and portfolio-profile test.
Fitch-calculated exposure to assets with a Fitch-derived rating
(FDR) of 'CCC+' and below was 7.67%, slightly higher than the 7.5%
limit. The transaction has defaulted assets.
Average Credit-quality Portfolio (Neutral): Fitch assesses the
average credit quality of the obligors in the 'B'/'B-' category.
The Fitch-weighted average rating factor (WARF) calculated by Fitch
of the current portfolio as of 17 July 2021 was 34.48, versus 34.06
in the investor report and a maximum of 37.
High Recovery Expectations (Positive): Senior secured obligations
comprise 98% of the portfolio. Fitch views the recovery prospects
for these assets as more favourable than for second-lien, unsecured
and mezzanine assets. The Fitch-weighted average recovery rate
(WARR) of the current portfolio was reported by the trustee at 67%
as of 6 July 2021, above the minimum of 63.9%.
Diversified Portfolio (Positive): The portfolio is well-diversified
across obligors, countries and industries. The top-10 obligor
concentration is 16.22% and no obligor represents more than 2.07%
of the portfolio balance. The largest Fitch-defined industry and
top-three Fitch-defined industries are both within their respective
limits of 17.5% and 40%.
Model deviation for Class F (Neutral): The rating for the class F
notes is a notch higher than the model-implied rating, reflecting a
limited margin of safety to default due to the available credit
enhancement of 5.2%, which is more in line with a 'B-sf' rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- At closing, Fitch used a standardised stressed portfolio
(Fitch 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, given the portfolio credit quality may
still deteriorate, not only by natural credit migration, but
also by reinvestments and also because the manager has the
possibility to update the Fitch collateral quality tests.
-- After the end of the reinvestment period, upgrades may occur
on better-than-initially expected portfolio credit quality and
deal performance, leading to higher credit enhancement and
excess spread available to cover for losses in the remaining
portfolio.
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- Downgrades may occur if the build-up of credit enhancement
following amortisation does not compensate for a larger loss
expectation than initially assumed due to unexpectedly high
levels of defaults and portfolio deterioration.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
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 or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
JAMESTOWN RESIDENTIAL 2021-1: S&P Rates G-Dfrd Notes 'B-(sf)'
-------------------------------------------------------------
S&P Global Ratings has assigned ratings to Jamestown Residential
2021-1 DAC's class A to G-Dfrd Irish RMBS notes. At closing, the
issuer also issued unrated class Z, R, X1, and X2 notes.
Jamestown Residential 2021-1 is a static RMBS transaction that
securitizes a EUR558 million portfolio of performing and
reperforming owner-occupied and buy-to-let mortgage loans secured
over residential properties in Ireland.
The portfolio cutoff date is June 30, 2021, however for our credit
analysis S&P has used the portfolio as of end of May 2021.
The securitization comprises a purchased portfolio, which was
previously securitized in Jepson Residential 2019-1 DAC. Bank of
Scotland (Ireland) Ltd., Nua Mortgages Ltd., and Start Mortgages
DAC originated the loans.
S&P's rating on the class A notes addresses the timely payment of
interest and the ultimate payment of principal. Its ratings on the
class B-Dfrd to G-Dfrd notes address the ultimate payment of
interest and principal. The timely payment of interest on the class
A notes is supported by the liquidity reserve fund, which was fully
funded at closing to its required level of 0.50% of the class A
notes' balance. Furthermore, the transaction benefits from the
ability to use principal to cover certain senior items.
Start Mortgages DAC, the administrator, is responsible for the
day-to-day servicing. In addition, the issuer administration
consultant, Hudson Advisors Ireland Ltd., helps devise the mandate
for special servicing, which Start Mortgages is implementing.
At closing, the issuer used the issuance proceeds to purchase the
beneficial interest in the mortgage loans from the seller. The
issuer grants security over all its assets in favor of the security
trustee. S&P considers the issuer to be bankruptcy remote under its
legal criteria.
There are no rating constraints in the transaction under S&P's
structured finance operational, sovereign, and counterparty risk
criteria.
Ratings
CLASS RATING* CLASS SIZE (MIL. EUR)
A AAA (sf) 355.00
B-Dfrd AA (sf) 45.75
C-Dfrd A (sf) 31.90
D-Dfrd BBB (sf) 27.70
E-Dfrd BB (sf) 11.00
F-Dfrd B (sf) 8.30
G-Dfrd B- (sf) 8.30
Z NR 66.60
R NR 12.90
X1 NR 0.10
X2 NR 2.00
*S&P's ratings address timely receipt of interest and ultimate
repayment of principal on the class A notes and the ultimate
payment of interest and principal on the other rated notes.
§Credit enhancement is calculated based on subordination and a
reserve fund, excluding write-off loans.
Dfrd--Deferrable.
NR--Not rated.
N/A--Not applicable.
PROVIDUS CLO III: Moody's Assigns B3 Rating to EUR11.3MM F-R Notes
------------------------------------------------------------------
Moody's Investors Service announced that it has assigned the
following definitive ratings to refinancing notes issued by
Providus CLO III Designated Activity Company (the "Issuer"):
EUR232,500,000 Class A-R Senior Secured Floating Rate Notes due
2034, Definitive Rating Assigned Aaa (sf)
EUR27,500,000 Class B-1-R Senior Secured Floating Rate Notes due
2034, Definitive Rating Assigned Aa2 (sf)
EUR10,000,000 Class B-2-R Senior Secured Fixed Rate Notes due
2034, Definitive Rating Assigned Aa2 (sf)
EUR26,300,000 Class C-R Senior Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned A2 (sf)
EUR23,400,000 Class D-R Senior Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned Baa3 (sf)
EUR18,700,000 Class E-R Senior Secured Deferrable Floating Rate
Notes due 2034, Definitive Rating Assigned Ba3 (sf)
EUR11,300,000 Class F-R Senior 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 Moody's methodology.
As part of this reset, the Issuer has extended the reinvestment
period to four and half years and the weighted average life to
eight and half years. It has also amended certain concentration
limits, definitions including the definition of "Adjusted Weighted
Average Rating Factor". The issuer has included the ability to hold
workout obligations. In addition, the Issuer has amended the base
matrix and modifiers that Moody's has taken into account for the
assignment of the definitive ratings.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of secured senior loans or senior secured
bonds and up to 10% of the portfolio may consist of unsecured
senior loans, second-lien loans, high yield bonds and mezzanine
loans. The underlying portfolio is expected to be almost fully
ramped as of the closing date.
Permira Credit Group Holdings Limited ("Permira") will continue to
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 four and half years 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 and credit improved
obligations.
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.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 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 December 2020.
Moody's used the following base-case modeling assumptions:
Performing par and principal proceeds balance: EUR374,123,205
Diversity Score(*): 48
Weighted Average Rating Factor (WARF): 2900
Weighted Average Spread (WAS): 3.65%
Weighted Average Coupon (WAC): 3.75%
Weighted Average Recovery Rate (WARR): 44.00%
Weighted Average Life (WAL): 8.5 years
PROVIDUS CLO III: S&P Assigns B- (sf) Rating on Class F Notes
-------------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Providus CLO III
DAC's class A, B-1, B-2, C, D, E, and F notes. The issuer also
issued unrated subordinated notes.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will switch to semiannual payment.
The portfolio's reinvestment period will end approximately 4.5 year
after closing, and the portfolio's maximum average maturity date
will be approximately 8.50 years after closing
The ratings assigned to the notes reflect our assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
Portfolio Benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,832.26
Default rate dispersion 604.26
Weighted-average life (years) 5.13
Obligor diversity measure 103.65
Industry diversity measure 16.04
Regional diversity measure 1.41
Transaction Key Metrics
CURRENT
Total par amount (mil. EUR) 375
Defaulted assets (mil. EUR) 0
Number of performing obligors 141
Portfolio weighted-average rating
derived from S&P's CDO evaluator 'B'
'CCC' category rated assets (%) 4.74
Covenanted 'AAA' weighted-average recovery (%) 36.01
Covenanted weighted-average spread (%) 3.65
Covenanted weighted-average coupon (%) 3.75
Loss mitigation loan mechanics
Under the transaction documents, the issuer can purchase loss
mitigation loans, which are assets of an existing collateral
obligation held by the issuer offered in connection with the
obligation's bankruptcy, workout, or restructuring, to improve its
recovery value.
Loss mitigation loans allow the issuer to participate in potential
new financing initiatives by the borrower in default. This feature
aims to mitigate the risk of other market participants taking
advantage of CLO restrictions, which typically do not allow the CLO
to participate in a defaulted entity's new financing request.
Hence, this feature increases the chance of a higher recovery for
the CLO. While the objective is positive, it can also lead to par
erosion, as additional funds will be placed with an entity that is
under distress or in default. This may cause greater volatility in
our ratings if the positive effect of these loans does not
materialize. In our view, the presence of a bucket for loss
mitigation loans, the restrictions on the use of interest and
principal proceeds to purchase these assets, and the limitations in
reclassifying proceeds received from such assets from principal to
interest help to mitigate the risk.
The purchase of loss mitigation loans is not subject to the
reinvestment criteria or the eligibility criteria. The issuer may
purchase loss mitigation loans using interest proceeds, principal
proceeds, or amounts standing to the credit of the supplemental
reserve account. The use of interest proceeds to purchase loss
mitigation loans is subject to (i) the manager determining that
there are sufficient interest proceeds to pay interest on all the
rated notes on the upcoming payment date; and (ii) in the manager's
reasonable judgment, following the purchase, all coverage tests
will be satisfied on the upcoming payment date. The use of
principal proceeds is subject to (i) passing par coverage tests
including the reinvestment overcollateralization test; (ii) the
manager having built sufficient excess par in the transaction so
that the principal collateral amount is equal to or exceeds the
portfolio's reinvestment target par balance after the reinvestment;
and (iii) the obligation purchased has a par value greater than its
purchase price.
Loss mitigation loans that are purchased with principal proceeds
and have limited deviation from the eligibility criteria will
receive collateral value credit in the adjusted collateral
principal amount or the collateral principal amount determination.
To protect the transaction from par erosion, any distributions
received from loss mitigation loans purchased with the use of
principal proceeds will form part of the issuer's principal account
proceeds and cannot be recharacterized as interest.
Loss mitigation loans that are purchased with interest will receive
zero credit in the principal balance determination, and the
proceeds received will form part of the issuer's interest account
proceeds. The manager can elect to give collateral value credit to
loss mitigation loans, purchased with interest proceeds, subject to
them meeting the same limited deviation from eligibility criteria
conditions. The proceeds from any loss mitigations reclassified in
this way are credited to the principal account.
The cumulative exposure to loss mitigation loans purchased with
principal is limited to 2% of the reinvestment target par balance.
The cumulative exposure to loss mitigation loans purchased with
principal and interest is limited to 10% of the reinvestment target
par balance.
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. We consider that the portfolio will be well-diversified on the
effective date, primarily comprising broadly syndicated
speculative-grade senior secured term loans and senior secured
bonds. Therefore, we conducted our credit and cash flow analysis by
applying our criteria for corporate cash flow collateralized debt
obligations.
"In our cash flow analysis, we used the EUR375 million par amount,
the covenanted weighted-average spread of 3.65%, the covenanted
weighted-average coupon of 3.75%, and the covenanted
weighted-average recovery rates for all rating levels. We applied
various cash flow stress scenarios, using four different default
patterns, in conjunction with different interest rate stress
scenarios for each liability rating category.
"We consider that the transaction's documented counterparty
replacement and remedy mechanisms adequately mitigate its exposure
to counterparty risk under our current counterparty criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned ratings, as the exposure to individual
sovereigns does not exceed the diversification thresholds outlined
in our criteria.
"We consider that the transaction's legal structure is bankruptcy
remote, in line with our legal criteria.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B-1 to D notes could withstand
stresses commensurate with higher rating levels than those we have
assigned. However, as the CLO is still in its reinvestment phase,
during which the transaction's credit risk profile could
deteriorate, we have capped our assigned ratings on the notes. In
our view the portfolio is granular in nature, and well-diversified
across obligors, industries, and asset characteristics when
compared to other CLO transactions we have rated recently. As such,
we have not applied any additional scenario and sensitivity
analysis when assigning ratings on any classes of notes in this
transaction. The class A and class E notes can withstand stresses
commensurate with their assigned rating levels.
"Our cash flow analysis also considers scenarios where the
underlying pool comprises 100% floating-rate assets (i.e., the
fixed-rate bucket is 0%) and where the fixed-rate bucket is fully
utilized (in this case, 10%). In both scenarios, the class F
cushion is negative. Based on the portfolio's actual
characteristics and additional overlaying factors, including our
long-term corporate default rates and the class F notes' credit
enhancement (6.75%), we believe this class is able to sustain a
steady-state scenario, where the current market level of stress and
collateral performance remains steady. Consequently, we have
assigned our 'B- (sf)' rating to the class F notes, in line with
our criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our ratings are
commensurate with the available credit enhancement for the class A,
B-1, B-2, C, D, E, and F notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class A to E notes
to five of the 10 hypothetical scenarios we looked at in our
publication How Credit Distress Due To COVID-19 Could Affect
European CLO Ratings, published on April 2, 2020.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
Environmental, social, and governance (ESG) credit factors
S&P said, "We regard the exposure to ESG credit factors in the
transaction as being broadly in line with our benchmark for the
sector. Primarily due to the diversity of the assets within CLOs,
the exposure to environmental credit factors is viewed as below
average, social credit factors are below average, and governance
credit factors are average. For this transaction, the documents
prohibit assets from being related to the following industries:
thermal coal, fossil fuels, and unconventional sources, oil sands
and associated pipelines industry, controversial weapons, trade in
ozone and depleting substances, endangered and protected wildlife,
pornography, tobacco, weapon or firearms, gambling, payday lending,
production of or trade in drugs, trading in food commodity
derivatives, production of palm oil, and marijuana. Accordingly,
since the exclusion of assets from these industries does not result
in material differences between the transaction and our ESG
benchmark for the sector, no specific adjustments have been made in
our rating analysis to account for any ESG-related risks or
opportunities."
Providus CLO III is a European cash flow CLO securitization of a
revolving pool, comprising euro-denominated senior secured loans
and bonds issued mainly by speculative grade borrowers. Permira
Debt Managers Group Holdings Ltd. manages the transaction.
Ratings List
CLASS RATING AMOUNT SUB(%) INTEREST RATE*
(MIL. EUR)
A AAA (sf) 232.50 38.00 Three/six-month EURIBOR
plus 0.95%
B-1 AA (sf) 27.50 28.00 Three/six-month EURIBOR
plus 1.65%
B-2 AA (sf) 10.00 28.00 2.00%
C A (sf) 26.30 20.99 Three/six-month EURIBOR
plus 2.10%
D BBB- (sf) 23.40 14.75 Three/six-month EURIBOR
plus 3.10%
E BB- (sf) 18.70 9.76 Three/six-month EURIBOR
plus 6.26%
F B- (sf) 11.30 6.75 Three/six-month EURIBOR
plus 8.70%
Sub. notes NR 34.70 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A—-Not applicable
===================
K A Z A K H S T A N
===================
KASPI BANK: Moody's Ups LT Bank Deposit Ratings to Ba1
------------------------------------------------------
Moody's Investors Service has upgraded the following global scale
ratings and assessments of Kaspi Bank JSC: its Baseline Credit
Assessment and Adjusted BCA to ba3 from b1, its long-term local and
foreign currency bank deposit ratings to Ba1 from Ba2, its
long-term Counterparty Risk (CR) Assessment to Ba1(cr) from Ba2(cr)
and its long-term Counterparty Risk Ratings to Ba1 from Ba2, its
long-term local currency senior unsecured Medium Term Notes program
rating to (P)Ba3 from (P)B1 and subordinate MTN program rating to
(P)B1 from (P)B2. The outlook on the bank's global scale long-term
deposit ratings and the overall issuer outlook were changed to
stable from positive.
Concurrently, Moody's has upgraded Kaspi Bank's national scale
long-term deposit rating to Aa3.kz from A1.kz and its national
scale long-term CRR to Aa2.kz from A1.kz.
Kaspi Bank's short-term deposit ratings and CRRs of Not Prime and
its short-term CR Assessment of Not Prime(cr) were affirmed.
A List of Affected Credit Ratings is available at
https://bit.ly/3rz0dg1
RATINGS RATIONALE
The upgrade of Kaspi Bank's BCA and ratings recognizes the bank's
robust financial fundamentals and its demonstrated resilience to
the adverse operating environment in 2020, when Kazakhstan's
economy was hit by the coronavirus pandemic and the oil price
plunge. In 2020 and the first quarter of 2021, the bank's
profitability remained robust, its liquidity buffer strengthened
and its asset quality improved.
During 2020, approximately KZT610 billion of loans, or nearly half
of gross loans, participated in Kaspi Bank's three-months payment
holidays program [1]. Given that 96% of borrowers, whose payments
were deferred, have resumed their monthly payments after the
holidays [2] and that loan book growth has accelerated since the
middle of 2020, Kaspi Bank's problem loans remained flat in
absolute terms and decreased as a percentage of gross loans in
2020.
The decrease in Kaspi Bank's capital buffer under Basel III in 2020
was discretionary and resulted from the bank's large dividend
payout to its recently listed parent company, Kaspi.kz. The bank's
robust profitability, with a return on average assets consistently
exceeding 7%, remains key to its loss absorption capacity and
provides flexibility in terms of dividend payments and capital
management. Moody's expects that in the next 12-18 months the
bank's capital adequacy will remain close to the current levels and
comfortably above the regulatory requirements.
HIGH GOVERNMENT SUPPORT
The bank's Ba1 deposit ratings are based on its BCA of ba3 and a
high probability of support from the Government of Kazakhstan (Baa3
positive) for the bank's deposit holders, which results in two
notches of uplift from the bank's BCA. As of June 1, 2021, Kaspi
Bank's systemic importance to Kazakhstan's banking system was
supported by its 19.2% market share in retail deposits and 9.1% in
total banking system assets [3]. Moreover, the share of Kaspi.kz
payments platform in total cashless and digital transactions in
Kazakhstan reached 69% in 2020, based on the National Bank of
Kazakhstan's data, which indicates its high importance to the
broader financial system [4].
STABLE OUTLOOK
The stable outlook on the long-term deposit ratings reflects
Moody's assessment that the expected operating environment
improvements and potentially higher government support capacity
will unlikely lead to a further ratings upgrade in the next 12-18
months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Kaspi Bank's ratings could be prompted by a further
increase in its market share and systemic importance, on the back
of sustained strong financial fundamentals. The bank's ratings
could be downgraded, if its asset quality, capitalization and
profitability deteriorate significantly.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks
Methodology published in July 2021.
SB SBERBANK: Moody's Affirms Ba1 Deposit Rating, Outlook Now Pos.
-----------------------------------------------------------------
Moody's Investors Service has upgraded SB Sberbank JSC's Baseline
Credit Assessment to b1 from b2, affirming its Adjusted BCA of ba2,
its long-term local and foreign currency bank deposit ratings of
Ba1, its long-term Counterparty Risk Assessment (CR Assessment) of
Ba1(cr) and its long-term local and foreign currency Counterparty
Risk Ratings (CRRs) of Ba1. The bank's Not Prime short-term deposit
ratings and CRRs and its Not Prime(cr) short-term CR Assessment
were affirmed. The outlook on the long-term deposit ratings and the
overall issuer outlook were changed to positive from stable.
RATINGS RATIONALE
The upgrade of SB Sberbank's BCA recognizes the improvements in the
bank's financial fundamentals, which were sustained amid the
adverse operating environment in 2020, when Kazakhstan's economy
was hit by the coronavirus pandemic and the oil price plunge. In
2020 and the first quarter of 2021, the bank's asset quality
avoided deterioration and its capital position strengthened, while
its profitability and liquidity buffer remained robust.
Following a marked reduction in the bank's problem loans (defined
as Stage 3 and purchased or originated credit impaired under
IFRS-9) in 2018-19, the share of such loans remained approximately
flat in 2020, despite the deteriorated operating environment. The
bank's loan loss reserve coverage of problem loans (93% as of
year-end 2020) considerably exceeded the sector average.
SB Sberbank's capital adequacy has strengthened materially over the
last two years, supported by the bank's profitable performance and
capitalization of its 2019 earnings. Despite record dividends paid
out in Q2 2021, the bank's regulatory Tier 1 ratio remained solid
at 15.6% as of June 1, 2021. SB Sberbank has demonstrated its
capacity to consistently generate a ROAA of 2.0-2.5%, and Moody's
expects the bank's capital position to be maintained in the next
12-18 months, on the back of resumed loan growth, stable
profitability and normalized dividend payouts.
SB Sberbank's liquidity and funding profile is solid: the bank is
predominantly funded by customer deposits and long-term funds
raised from state-owned development institutions. Despite
significant concentration of its corporate deposit base, liquidity
risks are well covered by the ample buffer of liquid assets held by
the bank (40% of the tangible banking assets as of the end of March
2021, excluding pledged securities).
VERY HIGH AFFILIATE SUPPORT
SB Sberbank's Adjusted BCA of ba2 benefits from two notches of
uplift above its b1 BCA, given Moody's assessment of a very high
probability of affiliate support from the bank's parent, Sberbank
(Baa3 stable, ba1). This assessment reflects the parent's 99.99%
ownership and control of SB Sberbank, the strategic importance of
the neighboring Kazakh market to Sberbank, their common brand and
high reputational risk for the parent, as well as the historical
track record of support.
MODERATE GOVERNMENT SUPPORT
The additional one notch of uplift in SB Sberbank's Ba1 deposit
ratings above its ba2 Adjusted BCA result from Moody's view of a
moderate probability of support from the Government of Kazakhstan
(Baa3 positive). This assessment reflects the balance between SB
Sberbank being a foreign subsidiary, which limits the government's
propensity to support the bank, and its very strong market position
as Kazakhstan's second-largest bank. This prominent market position
supports SB Sberbank's systemic importance to the banking system of
Kazakhstan, underpinning Moody's assessment of the likelihood of
government support in case of need.
OUTLOOK CHANGED TO POSITIVE FROM STABLE
Moody's changed the outlook on SB Sberbank's long-term deposit
ratings to positive from stable, to reflect the expected operating
environment improvements, which should support the bank's asset
quality and profitability, and potentially higher government
support capacity, which is currently captured in the positive
outlook assigned to the sovereign debt rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
SB Sberbank's BCA could be upgraded if the bank's asset quality
improves and its profitability remains strong over the next 12-18
months. The bank's deposit ratings could be upgraded if a BCA
upgrade was combined with an improvement in the parent's standalone
credit strength, as reflected in its BCA, or an upgrade of
Kazakhstan's sovereign rating. The bank's BCA could be downgraded,
if its financial fundamentals significantly deteriorate, while
weakening in the parent's standalone credit strength could result
in a downgrade of SB Sberbank's deposit ratings.
LIST OF AFFECTED RATINGS
Issuer: SB Sberbank JSC
Upgrade:
Baseline Credit Assessment, Upgraded to b1 from b2
Affirmations:
Adjusted Baseline Credit Assessment, Affirmed ba2
Short-term Counterparty Risk Assessment, Affirmed NP(cr)
Long-term Counterparty Risk Assessment, Affirmed Ba1(cr)
Short-term Counterparty Risk Ratings, Affirmed NP
Long-term Counterparty Risk Ratings, Affirmed Ba1
Short-term Bank Deposit Ratings, Affirmed NP
Long-term Bank Deposit Ratings, Affirmed Ba1, Outlook Changed To
Positive From Stable
Outlook Action:
Outlook, Changed To Positive From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks
Methodology published in July 2021.
===========
R U S S I A
===========
MAYKOPBANK JSC: Bank of Russia Provides Update on Administration
----------------------------------------------------------------
The provisional administration to manage the credit institution JSC
MAYKOPBANK (hereinafter, the Bank), in the course of its inspection
of the Bank, established evidence suggesting assets had been
siphoned off by extending loans to borrowers with dubious solvency
or unable to meet their obligations, according to the Bank of
Russia's Press Service.
According to the assessment by the provisional administration, the
value of the Bank's assets is insufficient to fulfil its
obligations to creditors.
As the Bank of Russia had a reasonable assumption that the Bank's
officials had performed financial transactions suspected of being
criminal offences, the Bank of Russia submitted this information to
the Prosecutor General's Office of the Russian Federation and the
Investigative Committee of the Ministry of Internal Affairs of the
Russian Federation for consideration and procedural
decision-making.
The provisional administration to manage the credit institution was
appointed by Bank of Russia Order No. OD-537, dated April 2, 2021,
effective from April 2, 2021.
===========
S E R B I A
===========
ROMULIJANA: Public Auction Scheduled for August 30
--------------------------------------------------
Annie Tsoneva at SeeNews, citing state news agency Tanjug, reports
that bankrupt Serbian hotel and spa services company Romulijana has
been put up for sale at a starting price of RSD91.3 million
(US$913,00/EUR774,000).
According to SeeNews, a public auction for the sale of Romulijana
will be held on Aug. 30, Tanjug said, citing the bankruptcy
receiver at the company.
The most important part of Romulijana's assets are 12 real estate
units covering more than 5,100 square metres at several locations
in Gamzigrad municipality, eastern Serbia, SeeNews discloses.
The Gamzigradska Banja-bazed company has been in a bankruptcy
procedure since March 2016, SeeNews notes.
=========
S P A I N
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RURAL HIPOTECARIO IX: Moody's Affirms B3 Rating on Class C Notes
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Moody's Investors Service has upgraded and affirmed the ratings of
Notes in RURAL HIPOTECARIO IX, FTA, a Spanish RMBS transaction. The
upgrade reflects the increased level of credit enhancement for the
affected Notes.
EUR1021.7M Class A2 Notes, Upgraded to Aa2 (sf); previously on May
22, 2019 Downgraded to A1 (sf)
EUR210M Class A3 Notes, Affirmed A1 (sf); previously on May 22,
2019 Downgraded to A1 (sf)
EUR29.3M Class B Notes, Affirmed Ba1 (sf); previously on May 22,
2019 Affirmed Ba1 (sf)
EUR28.5M Class C Notes, Affirmed B3 (sf); previously on May 22,
2019 Affirmed B3 (sf)
The maximum achievable rating is Aa1(sf) for structured finance
transactions in Spain.
RATINGS RATIONALE
The upgrade of the rating of the class A2 Notes is prompted by the
increase in credit enhancement for the affected tranche. For
instance, the credit enhancement increased to 13.17% from 11.11%
since May 2019.
Moody's affirmed the ratings of the classes of Notes that had
sufficient credit enhancement to maintain their current ratings.
Key Collateral Assumption Revised
As part of the rating actions, Moody's reassessed its lifetime loss
expectation and recovery rate for the portfolio reflecting its
collateral performances to date. Moody's maintained its expected
loss assumption of the transaction at 3.77% as a percentage of the
original pool balance.
Moody's has also assessed loan-by-loan information as a part of its
detailed transaction review to determine the credit support
consistent with target ratings levels and the volatility of future
losses. As a result, Moody's maintained the MILAN CE assumption of
the transaction at 13%.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
December 2020.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (i) a decrease in sovereign risk; (ii) performance
of the underlying collateral that is better than Moody's expected;
(iii) an increase in the Notes' available credit enhancement; and
(iv) improvements in the credit quality of the transaction
counterparties.
Factors or circumstances that could lead to a downgrade of the
ratings include: (i) an increase in sovereign risk; (ii)
performance of the underlying collateral that is worse than Moody's
expected; (iii) deterioration in the Notes' available credit
enhancement; and (iv) deterioration in the credit quality of the
transaction counterparties.
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S W E D E N
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SSAB AB: S&P Alters Outlook to Positive, Affirms 'BB+' LT ICR
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S&P Global Ratings revised its outlook on Swedish steelmaker SSAB
AB to positive from stable and affirmed its 'BB+' long-term issuer
credit rating on the company.
The positive outlook reflects a potential upgrade in the coming
six-to-12 months as the company accelerates toward a debt-free
position on the back of extremely strong steel industry
conditions.
The steel industry has completed an unprecedented turnaround from
trough to peak in 12 months. After posting very weak results in
2020, with EBITDA of only SEK3.4 billion, S&P now expects SSAB to
post EBITDA of around SEK16 billion in 2021. This is thanks to a
recovery in demand in all regions and for all products after muted
demand in the automotive, construction, and capital goods
industries during the COVID-19 pandemic in 2020. Support for demand
also comes from the rollout of global stimulus programs, including
the rebuilding of infrastructure and the transition to a more
sustainable low-carbon economy, and from supportive regulations,
such as controls on steel production in China and exports. The
extraordinary market conditions are also evident from a hike in
steel prices. For example, hot-rolled coil steel sold for EUR1,060
per ton in the second quarter of 2021 in Europe, compared to EUR340
per ton a year ago, an increase of close to 150%. During the first
half of 2021, steel companies ran their facilities at full
capacity, and the order books for the rest of the year look
promising. During the first half of 2021, SSAB, like other steel
companies, seized on the healthy demand, promoting its value-added
products, for example, quenched and tempered steels and advanced
high-strength steels. That said, at some point during 2022, demand
and prices will soften toward normal levels, and S&P expects that
2023 will reflect mid-cycle industry conditions.
SSAB will reduce its net debt substantially in 2021, which could
lead to an upgrade to 'BBB-'.The company's journey to reduce its
reported net debt started a few years ago and has seen some delays.
S&P said, "However, we expect that SSAB will translate the
record-high profitability in 2021 into cash flows from operations
of about SEK10 billion. With a relatively modest capex budget and
no pressure to increase it, we expect that SSAB's net reported debt
will decline to about SEK4 billion by the end of 2021 from SEK10
billion on Dec. 31, 2020, and that it will have limited debt by
mid-2022, well below its public gearing target of 35%. In our view,
if SSAB maintains minimal reported net debt, it will be able to
withstand volatility in the steel industry. For example, with
reported net debt of up to SEK4 billion--equivalent to S&P Global
Ratings-adjusted debt of about SEK7 billion--and multiyear EBITDA
of SEK8 billion-SEK9 billion, the company's adjusted funds from
operations (FFO) to debt would be 100%, compared to 60% that we
expect for the 'BBB-' rating. It would be above 50% with depressed
EBITDA of SEK4.5 billion at the bottom of the cycle, compared with
45% that we see as commensurate with the bottom of the cycle. In
our view, once it reaches a debt-free position, SSAB is likely to
allocate excess free operating cash flow to its shareholders,
rather than increasing its capex substantially or pursuing mergers
and acquisitions (M&A). We continue to view the company's liquidity
as strong."
SSAB continues to convert its basic oxygen furnace (BOF) in
Oxelosund, Sweden, to an electric arc furnace, but some challenges
persist. S&P continues to see the conversion of the Oxelosund BOF
to an electric arc furnace as the next milestone on the company's
environmental, social, and governance journey, allowing it to
produce fossil-free steel. SSAB aims to commission the project by
2026. At the moment, the company is yet to secure all the
environmental permits and the necessary electricity. However,
strong support from the government to complete the project and
reduce Sweden's overall CO2 emissions should help the company to
meet its target. Lastly, S&P understands that delays will not have
any operational consequences.
The positive outlook reflects a potential upgrade in the coming
six-to-12 months as SSAB accelerates toward a debt-free position on
the back of extremely strong steel industry conditions. S&P said,
"We view the company's ability to maintain limited reported net
debt and average EBITDA of about SEK8.5 billion as underscoring its
ability to maintain its competitive position and achieve adjusted
FFO to debt of 60% under less favorable market conditions. Under
our base case, we project EBITDA of around SEK16 billion in 2021
and SEK8.5 billion–SEK10.5 billion in 2022, translating into a
net-debt-free position by mid-2022." An upgrade also depends on
further improvements in SSAB's business model, which will better
position the company for the next downturn.
Some of the triggers for an upgrade to 'BBB-' include:
-- No sudden change in the current market conditions that would
delay SSAB's ability to achieve limited reported net debt by
mid-2022 and undermine its ability to maintain a robust balance
sheet over time.
-- Adjusted FFO to debt of 60% or more, together with positive
discretionary cash flow (after capex and dividends) under normal
industry conditions. In our view, the company would be able to meet
this target even at the low point of the cycle if its reported net
debt remained limited.
-- Better visibility on the company's capital allocation between
dividends and capex for 2022.
-- Progress with the company's conversion of the BOF in Oxelosund,
and later on, with converting its other BOFs, as an important part
of ensuring it has the assets to operate sustainably in the long
term.
S&P may revise the outlook to stable if it sees a material change
in steel industry conditions, or if SSAB contemplates a sizable
debt-funded acquisition that would delay its deleveraging.
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S W I T Z E R L A N D
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ILIM TIMBER: Moody's Affirms B2 CFR & Alters Outlook to Positive
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Moody's Investors Service has changed Ilim Timber Continental
S.A.'s outlook to positive from stable. At the same time, Moody's
affirmed the B2 corporate family rating and the B2-PD probability
of default rating.
RATINGS RATIONALE
The rating action reflects the company's very strong operating and
financial performance in 2020-21 thanks to particularly favourable
industry conditions which is likely to lead to a sustainable
reduction in its leverage. The rating action also factors in
Moody's expectation that the company will pursue its balanced
financial policy, appropriately sizing investment spending and
shareholder distributions, and maintain sound liquidity,
proactively managing refinancing needs.
Demand for sawn timber remains high due to buoyant housing starts
and strong repair and remodelling activity while supply growth is
minimal. As a result, average North American lumber prices may
increase up to 40%-50% in 2021 compared to 2020. Although the
industry tailwind is likely to fade off in 2022, the prices still
may remain at or above the last five-year average.
Ilim Timber will demonstrate exceptionally strong financial results
in 2021 after already good performance in 2020. Its
Moody's-adjusted EBITDA increased to EUR69 million in 2020 from
EUR36 million a year earlier and may skyrocket above EUR200 million
in 2021 on the back of high lumber prices. However, as industry
conditions stabilise over the next 18 months, EBITDA is likely to
return to a more sustainable level of EUR50 million- EUR60 million
in 2022.
The company generates robust free cash flow (FCF) which will
support a sustainable debt reduction. Following FCF of EUR40
million in 2020, Ilim Timber may generate EUR45 million in 2021,
after accounting for a temporary large investment spending and
shareholder distributions. Therefore, its gross debt may reduce to
EUR150 million and net debt to EUR100 million as of year-end 2021
from EUR213 million and EUR204 million, respectively, in 2018.
Therefore, the company's leverage, measured as Moody's-adjusted
debt/EBITDA, should decline below 1.0x in 2021 from 2.6x in 2020
and 5.8x in 2019, and then level off at 2.0x-2.5x in 2022 because
of the moderation in earnings.
At the same time, the rating action factors in a large cash sweep
payment in 2022 and a sizeable final debt repayment in 2023 under
Ilim Timber's syndicated debt facility, unless the company
refinances it earlier.
Ilim Timber's rating factors in (1) the company's geographic
diversification of assets, with two mills in Germany and the other
two in Eastern Siberia, Russia; (2) the proximity of the company's
production assets to reliable and accessible raw material supply
and an established distribution infrastructure; (3) its diversified
customer base and established sales channels to all key regions;
(4) its well-invested modern saw mills in Germany that require
low-maintenance capital spending; and (5) its improved financial
discipline and prudent financial policy which targets net leverage
of 2.0x-2.5x on a reported basis.
The rating also takes into account Ilim Timber's (1) low product
portfolio diversification because around 74% of the company's sales
are represented by sawn timber, a market characterised by
seasonality and volatility in terms of price; (2) fairly small size
on a global scale, reflected in its revenue of EUR517 million in
2020; (3) high operational concentration at Wismar mill in Germany;
(4) somewhat volatile spreads between cost of logs and sawn timber
prices, resulting in volatile profitability; and (5) the partial
exposure to an emerging market's (Russia) operating environment.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Ilim Timber's rating incorporates corporate governance
considerations, in particular its highly concentrated ownership,
which creates the risk of rapid changes in the company's strategy
and development plans, revisions in its financial policy and an
increase in shareholder payouts or related-party transactions that
could be detrimental to the company's credit strength. In
particular, Moody's notes the relatively regular issuance of loans
to related parties, including the company's shareholders. The
substantial part of such loans was provided over the last six years
and represents a material amount compared to the company's total
assets. In addition, interests are usually accrued under these
loans until maturity. These practices as well as somewhat limited
transparency on the purpose of these loans together with the
absence of dividend payments present an area of concern for
Moody's. However, the company's focus on delivery on business plan
targets and consistent strategy towards debt reduction over the
past four years partly mitigate the risks related to corporate
governance.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects the company's strong positioning
within the current rating category and the possibility of an
upgrade over the next 12-18 months, subject to the company's (1)
maintaining its credit metrics commensurate with the higher rating;
(2) strengthening its liquidity, including refinancing of the
syndicated debt facility; and (3) pursuing a balanced financial
policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating if the company was to (1) maintain
a strong balance sheet with Moody's-adjusted debt/EBITDA below 3.5x
and EBITDA interest coverage above 3.5x on a sustainable basis
including during market troughs, (2) maintain strong liquidity, and
(3) pursue a conservative financial policy and generate positive
post-dividend FCF on a sustainable basis. A rating upgrade would
also require good visibility into the company's ability to manage
short- and mid-term debt maturities and continued access to
funding.
Moody's could downgrade Ilim Timber's rating if its (1)
Moody's-adjusted debt/EBITDA was to rise above 5.0x on a sustained
basis; (2) operating performance, cash generation or market
position were to weaken materially; or (3) liquidity was to
deteriorate.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Paper and
Forest Products Industry published in October 2018.
Switzerland-domiciled Ilim Timber is one of the largest softwood
sawn timber producers in Europe. The company operates two
facilities in Germany and two in Russia, with a total annual
production capacity of 2.6 million cubic meters of sawn timber and
0.2 million cubic meters of plywood. In 2020, Ilim Timber reported
revenue of EUR517 million, of which 74% was derived from sawn
timber, 15% from by-products and 11% from plywood segment, and
Moody's-adjusted EBITDA of EUR69 million. The company generates 75%
of its revenue from operations in Germany and 25% from its mills in
Russia. Ilim Timber is controlled by Boris and Mikhail Zingarevich.
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U N I T E D K I N G D O M
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AI CONVOY: S&P Affirms 'B' Rating, Alters Outlook to Stable
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S&P Global Ratings revised its outlook on aerospace and defense
firm AI Convoy (Cobham) to stable from negative, reflecting its
view that through next year the company's good order book will
support above-average EBITDA margins, reasonable free operating
cash flow (FOCF), and a gradual reduction in leverage.
At the same time, S&P affirmed the 'B' ratings; the recovery rating
on the first-lien debt remains '3'.
Despite significant disposals that resulted in a smaller revenue
and EBITDA base, Cobham's operating performance has remained
resilient through 2020 and 2021, supported by robust demand from
the defense industry. The company's remaining operating
segments--Advanced Electronic Solutions (AES, the largest by
revenue), Electrical and Electronic Equipment, Communications &
Connectivity, and Aviation Services Australia--continue to exhibit
good revenue and EBITDA generation. On a like-for-like basis,
discounting the effect of the segments that were sold, revenue grew
slightly in 2020 and is expected to increase again this year. S&P
forecasts that in 2022, revenue will edge slightly (about 5%-7%)
higher than the 2021 total.
S&P said, "Despite very tough industry conditions, we expect
marginal improvements in Cobham's commercial aerospace-related
businesses, which have been recovering more slowly. We expect the
company's overall EBITDA margins to rise to above 20% this year and
stay at about that level next year. Cobham's capital expenditure
(capex) is expected to decrease significantly from 2020, and it
should see inflows of working capital. This supports our base case
that the business will remain robust. Further, the company's
liquidity remains adequate, supported by a good amount of cash on
the balance sheet and availability under the revolving credit
facility (RCF), which has ample headroom on its springing covenant.
At this stage, we have not factored in any further business
disposals into our forecast."
The company decreased its leverage through some of the proceeds of
the Mission Systems and Aero Connectivity businesses, and its key
metrics are forecast to improve in 2022. The Mission Systems
business was sold to Eaton for $2.83 billion in June 2021, with
about 50% of the proceeds distributed as shareholder returns. $830
million was used to reduce first-lien debt and the remainder
covered transaction-related fees, other related expenses, and
taxes. The U.S. dollar-denominated first-lien term loan has been
reduced to about $524 million from $1,188 million, with the
remainder used to reduce the euro-denominated first-lien term loan.
The original $655 million payment-in-kind (PIK) preference shares
held by minority co-investor Blackstone and $1.025 billion of
interest-free preferred equity certificates (IFPECs) held by Advent
and Blackstone (both of which S&P views as debt-like) are expected
to decrease significantly through the dividends received by the
financial sponsors. Paying down the first-lien term loan
demonstrates Cobham's commitment to continue reducing its
leverage.
In absolute terms, S&P Global Ratings-adjusted EBITDA is forecast
to contract in 2021 after the large disposals. 2022 will see EBITDA
increases of about 6%-9%. Despite the EBITDA contraction in 2021,
S&P expects leverage to decrease slightly. S&P forecasts that
Cobham's debt to EBITDA (excluding the shareholder loans) will be
about 7.0x-7.4x in 2021, dropping below 7x in 2022. Further, funds
from operations (FFO) to debt (excluding shareholder loans) is
expected to be about 6.8%-7.2% in 2021 and more than 8.5% in 2022.
The improvements will stem from the lower gross debt, offset
slightly by the lower expected FFO generation this year. Despite
these improvements, Cobham's key credit metrics remain firmly in
the highly leveraged category and are commensurate with those of
similarly rated peers. S&P expects its interest coverage ratios to
decline slightly in 2021, despite the lower interest costs from a
reduction in debt, as top-line effects flow down.
The sale of the Mission Systems and Aero Connectivity businesses,
alongside other disposals last year, have materially reduced the
group's business perimeter. As a result, S&P's reassessed the
company's business risk profile in the context of its reduced
product and service offerings. The trend of disposals began when
the company was acquired by private-equity firm Advent and minority
co-investor Blackstone in 2020. Cobham now has five core businesses
remaining, compared with 10 in 2020. S&P still views a number of
the group's current operations as market-leading. Barriers to entry
remain high given the complex nature of the services provided, the
high costs of technological development, and the long-term
contracts in place. However, the breadth of the product range has
narrowed in the past 18 months, and revenue and EBITDA are
generated from a more-concentrated stream of sources. Any further
disposals will concentrate the business further. Cobham enjoyed
strong market positions in some of the divested markets--such as
air-to-air refueling and oxygen supply--and without these, its
competitive advantage has diminished somewhat versus the rated peer
group. As a result of these changes, S&P now assesses the group's
business risk as weak, and any further key disposals will likely
cement this position, especially when compared with the rated peer
group.
The remaining divisions are split among markets such as defense,
space, mining, government contracts, and commercial aerospace,
which provides some diversification. However, the stability of
future revenue is affected slightly by the sale of the Mission
Systems and Aero Connectivity segments, which had 93% and 95%
exposure, respectively, to defense and government contracts, upon
which the pandemic had only a limited impact. Most divisions have
continued to operate at reasonable levels during the pandemic,
aside from the Aero Communications business, which derived about
80% of revenue from commercial aerospace. The 12-month view of
revenue through March 2021 shows a significant reliance on the
Advanced Electronic Solutions business, whereas the group benefited
from greater diversification prior to the disposals. Cobham also
has a fairly high geographic concentration: In 2020, it generated
almost 60% of revenue in the U.S. The U.S. and Australia accounted
between them for almost three-quarters of the company's sales.
Cobham's revenue and EBITDA are declining this year, as the large
divestments have affected top-line growth, but margins are expected
to improve.The Mission Systems business contributed $729 million of
revenue in 2020 and $210 million of EBITDA. This business was the
company's air-to-air refueling segment, one of the key
technological innovations the company was founded upon. S&P said,
"Combined with the sale of the Aero Connectivity business, which
closed at the start of the year, Cobham has divested 38% of its
2020 revenue and around 45% of its EBITDA, and we expect further
sales. Therefore, we expect Cobham's revenue to contract to about
$1.53 billion-$1.57 billion in 2021, down by 35%-40% compared with
2019. S&P Global Ratings-adjusted EBITDA is expected to be around
$350 million-$370 million in 2021." Margins are expected to rise
above 20% in 2021, which is an improvement on the previous year.
This is driven by reduced one-off costs, such as those related to
the KC-46 program, tailing off; lower research and development
expenditure; increasing efficiency in operations across
manufacturing and logistics; and footprint optimization.
S&P said, "The stable outlook indicates that revenue and EBITDA
generation in 2021 and 2022 is supported by a good order book with
a focus on the defense and space businesses but some exposure to
commercial aerospace. EBITDA margins should be above average for
the industry. We also expect the company to generate reasonable
FOCF and forecast that leverage will decrease slowly.
"We could lower the ratings if the group was not able to perform in
line with the base case, such that liquidity weakens or leverage
begins to rise on a sustained basis. This could stem from potential
further disposals or additional shareholder distributions. Further,
if FFO cash interest coverage weakens to below 1.5x with little
prospects of a swift and sustainable improvement, we could lower
the rating.
"We could consider raising the ratings if Cobham's revenue and
EBITDA started to rise significantly, supporting deleveraging
prospects, with debt to EBITDA trending sustainably below 7x
(excluding preference shares) and FFO cash interest coverage
remaining sustainably above 2.5x. We would also need to see
continued positive FOCF generation, supported by adequate liquidity
and ample covenant headroom."
AMICUS FINANCE: Administrator Proposes New Restructuring Plan
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Marc Shoffman at Peer2Peer Finance News reports that peer-to-peer
lender Crowdstacker is among creditors set to consider a
restructuring plan for one of its defaulted loans, which would be
one of the first uses of new insolvency rules introduced last
year.
According to Peer2Peer Finance News, administrators can now pursue
restructuring plans for a company to bring it out of administration
under the Corporate Insolvency and Governance Bill.
Amicus Finance, which raised a total of GBP15,368,280 from
Crowdstacker investors between 2015 and 2017, fell into
administration in 2019 and its administrators are now looking to
make use of these new laws, Peer2Peer Finance News discloses.
The changes allow a restructuring plan to be passed even if there
isn't majority approval as long as those owed money aren't
worse-off than the original plan, Peer2Peer Finance News notes.
Amicus administrator Begbies Traynor has proposed a new
restructuring plan that would rescue the company as "a going
concern" rather than letting it go into liquidation or be
dissolved, as was previously agreed, Peer2Peer Finance News
relates.
Under the new plan, Crowdstacker would receive GBP75,000 plus a
share of GBP2.2 million as a secured creditor, Peer2Peer Finance
News discloses.
The current plan that Begbies Traynor is looking to amend would
have meant creditors waiting for the administration to complete to
see how much they can get back, Peer2Peer Finance News states.
Under the new plan, Begbies Traynor would still be in charge of
distributing money but the company would no longer be in
administration, Peer2Peer Finance News relays.
It also involves a minority shareholder of Amicus, Omni Partners,
injecting GBP3.1 million into the company, with Twentyfour Assets
Management investing GBP640,000, according to Peer2Peer Finance
News.
James Davison, a partner for law firm DLA Piper, said this could
set a precedent for other administrations but added it was unclear
if the plan would proceed, Peer2Peer Finance News notes.
Companies House documents show that GBP4.1 million was owed to
Crowdstacker investors when Amicus fell into administration in
February 2019, Peer2Peer Finance News discloses.
According to Peer2Peer Finance News, Crowdstacker's chief executive
Karteek Patel said at the time that that the investors who loaned
money to Amicus would have their capital and interest back by the
end of the year.
NENELITE LTD: Moody's Assigns B2 CFR & Rates Credit Facilities B1
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Moody's Investors Service assigned a B2 CFR and B2-PD PDR to
Nenelite Limited ("UDG Huntsworth"). Moody's also assigned B1
rating to the company's proposed senior secured first lien credit
facilities. The outlook is stable.
Nenelite Limited is a newly formed entity established by CD&R to
facilitate the pending acquisition of UDG Healthcare plc (UDG) and
combination with CD&R existing portfolio company Huntsworth.
Proceeds from the proposed term loan, as well as a (unrated) 2nd
lien GBP term loan (GBP equivalent of approximately $463m) and
contributed equity and other funding outside the restricted group
from CD&R will be used to fund the acquisition of UDG for appx.
GBP2.9 billion, to repay outstanding debt of Huntsworth and to pay
transaction costs.
The following ratings were assigned
Assignments:
Issuer: Nenelite Limited
Probability of Default Rating, Assigned B2-PD
Corporate Family Rating, Assigned B2
Senior Secured First Lien Term Loan, Assigned B1 (LGD3)
Senior Secured First Lien Revolving Credit Facility, Assigned B1(
LGD3)
Outlook Actions:
Issuer: Nenelite Limited
Outlook, Assigned Stable
RATINGS RATIONALE
UDG Huntsworth's B2 Corporate Family Rating reflects the company's
high financial leverage. Moody's estimates LTM debt/EBITDA is
approximately 7 times including synergies and excluding the
temporary adverse impact of COVID-19 in the most recent LTM period.
Moody's expects debt/EBITDA will approach the mid 6 times range
within 12-18 months from closing. The rating reflects the company's
high level of customer concentration with the top 10 pharmaceutical
customers representing approximately 42% of revenues as well as the
inherent risks in commercial pharmaceutical services.
The company benefits from its significant scale in the provisions
of communications, marketing, advisory and contract packaging
services. The company is widely diversified with multiple contracts
across most of its segments with its largest customers. Moody's
also has a positive view of the contract packaging operations as
this segment typically has high switching costs for customers.
Moody's expects the company will benefit from longer term tailwinds
including favorable trends for outsourcing by its clients and
increasing therapeutic complexity. While the merger of UDG and
Huntsworth has some integration risks, they should be limited to
eliminating duplicate back-off and administrative costs.
UDG Huntsworth will have a very good liquidity profile. Moody's
expects the company will generate consistent free cash flow of
around $150 million per annum after closing. The company will have
access to a $400 million revolving credit facility which will be
undrawn at closing.
ESG considerations are material to UDG Huntsworth's ratings. Social
risk considerations relate to pharmaceutical drug pricing, which
could have negative effects for UDG Huntsworth. Drug pricing
pressure could have a negative impact for UDG Huntsworth if pharma
customers look to trim expenses or reduce the scope of existing
projects. Any type of regulation that impacted pharma companies
marketing activities could also impact demand for UDG Huntsworth's
services. The company also has social risks related to responsible
production, as its contract packaging operations are subject to
stringent oversight by the FDA and any compliance-related
disruptions could have an adverse impact on revenue and earnings.
From a governance perspective Moody's expects UDG Huntsworth's
financial policies to remain aggressive given it ownership by its
private equity owners.
Moody's understands that following the acquisition audited
financial statements will be provided by the Huntsworth Company (as
defined in the term sheet), which will be the parent company of
substantially all operations and assets of the combined firm.
The outlook is stable. Moody's expects that UDG Huntsworth will
moderately reduce leverage toward the mid six times range within 12
to 18 months of closing while maintain a very good liquidity
profile. Moody's expects the company may utilize free cash flow to
fund 'tuck in' acquisitions of the type undertaken historically by
the two predecessor companies.
As proposed, the new senior secured first lien credit facilities
are expected to provide covenant flexibility that could adversely
affect creditors. The facilities include incremental debt capacity
up to the greater of $444 million and 100% of EBITDA, plus unused
capacity under certain other baskets that are not based on a total
secured leverage ratio incurrence test, plus unlimited amounts so
long as total secured leverage does not exceed 5.75 times (if pari
passu secured). Amounts up to the greater of $222 million and 50%
of EBITDA may be incurred with an earlier maturity date than the
initial term loans. There are no express "blocker" provisions which
prohibit the transfer of specified assets to unrestricted
subsidiaries; such transfers are permitted subject to carve-out
capacity and other conditions. Non-wholly-owned subsidiaries are
not required to provide guarantees; dividends or transfers
resulting in partial ownership of subsidiary guarantors could
jeopardize guarantees, with no explicit protective provisions
limiting such guarantee releases. There are no express protective
provisions prohibiting an up-tiering transaction. The proposed
terms and the final terms of the credit agreement may be materially
different.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if UDG Huntsworth were to materially
deleverage and adopt more balanced financial policies such that
debt/EBITDA was sustained below five times. Further diversification
by product offering would be a credit positive as well.
Ratings could be downgraded if the company's operating performance
were to falter or financial policies were to become more aggressive
such that debt/EBITDA was sustained in the high six times range. A
material reduction in diversity would be a credit negative. Moody's
notes the credit documentation permits a potential separation of
its commercial packaging segment. The company would remain highly
diversified if this were to occur, however without the greater
stability of the packaging business the company would need to
operate with somewhat more moderate financial leverage.
UDG Huntsworth is the company formed by the combination of UDG
Healthcare plc and Huntsworth. Headquartered in London, UK,
Huntsworth is a global provider of communications, market access
and marketing services, principally to pharmaceutical and
biotechnology companies. Headquartered in Dublin, Ireland UDG
Healthcare plc is a global leader in healthcare advisory,
communications, commercial, clinical and packaging services.
Pro-forma combined revenues are approximately $1.8 billion.
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
PEOPLECERT HOLDINGS: S&P Assigns Prelim 'B' ICR, Outlook Stable
---------------------------------------------------------------
S&P Global Ratings assigned its preliminary long-term 'B' issuer
credit rating to PeopleCert Holdings UK Ltd, the ultimate parent of
the combined PeopleCert group. S&P is also assigning a preliminary
issue rating of 'B' to the proposed senior secured notes,
reflecting a recovery rating of '3' (rounded estimate 50%) based on
its expectations of meaningful recovery in the event of a default.
S&P said, "The stable outlook reflects our expectations that the
group will successfully integrate AXELOS and achieve rapid organic
revenue growth, allowing it to reduce leverage to S&P Global
Ratings-adjusted debt to EBITDA of 4.0x-4.5x. The stable outlook
also reflects our expectation that free cash flow generation will
support the group's liquidity position.
"Our preliminary rating on PeopleCert reflects the group's
relatively small size in the highly fragmented professional
education solutions industry, its elevated leverage at the closing
of the transaction and execution risks around its expansion
strategy, as well as acquisition-related integration risks. These
challenges are partially offset by the group's vertically
integrated business model, which supports above-average
profitability, and high barriers to entry thanks to the ownership
of the ITIL and PRINCE2 frameworks. We expect the group will
deliver high revenue and earnings growth, which should see it
quickly deleverage to 4.0x-4.5x debt to EBITDA in FY2022. Our
rating also incorporates our assumption that the group will follow
a balanced financial policy with a strong focus on reducing
leverage over the medium term."
Following the acquisition of AXELOS, PeopleCert will become a
leading integrated provider of professional certifications. On June
21, 2021 PeopleCert reached an agreement to acquire AXELOS, the
owner of the intellectual property for a portfolio of IT and
project management frameworks and certifications from U.K.-based
professional services provider Capita PLC, for GBP389 million.
PeopleCert plans to finance the acquisition by issuing EUR300
million senior secured notes and via a GBP140 million equity
injection from Silicon Valley-based private equity firm FTV
Capital, which will become a minority shareholder. The remaining
proceeds from the proposed debt issuance and cash on balance sheet
will be used to redeem PeopleCert's existing debt and fund
transaction-related costs. S&P said, "We estimate that S&P Global
Ratings-adjusted leverage will be about 6.4x at closing of the
proposed transaction, based on pro forma adjusted EBITDA of about
GBP41 million for the combined group during the 12 months to March
31, 2021. We anticipate that the group will close 2021 with
adjusted leverage of 5.7x on a fully consolidated basis."
The IT and project management frameworks are PeopleCert's main
assets, and the group is rapidly expanding its languages
division.Since 2018, PeopleCert has been the exclusive distributor
and examinations provider for AXELOS' portfolio of products,
deriving most of its revenues from the commercialization of ITIL
and PRINCE2 exams (about 90% of total exam revenues in 2020) in
exchange of royalty fees. ITIL and PRINCE2 are frameworks with
strong positions in IT and project management, respectively (global
market shares of about 25%) and are used by over 50,000 corporate
organizations and 800 government bodies globally. ITIL is a broad
framework of IT service management best practices that prepare
organizations for their digital transformation. While ITIL is the
market's only broad IT service framework, PeopleCert mainly
competes with associations and non-for-profit organizations, and
operates alongside providers of more specific certifications--for
example, COBIT (for cybersecurity) or Amazon Web Services (cloud
computing). PRINCE2 is the world's leading project management
framework, encompassing various practices and initiatives to
increase organizational effectiveness. It mainly competes with PMP,
which has a stronger market share in the U.S. and China, whereas
PRINCE2 leads in the U.K. and continental Europe. With the
completion of the acquisition, PeopleCert will now fully own,
develop, and commercialize 700 certifications in the IT and
business sectors, and continue to provide language examinations
under the Common European Framework of Reference (CEFR) through
LanguageCert.
Full ownership of its flagship certifications, and strong tailwinds
in the languages division, will boost organic growth of 20%-30%
during the next 12-18 months.Increasing demand for professional
certifications in IT and project management (supported by the sharp
increase in remote working and digitization), increased focus on
marketing outreach, and full control over its pricing strategy
could drive sound growth in PeopleCert's exam volumes and revenue
over our forecast period. In 2015-2018, the group's ITIL and
PRINCE2 revenues faced temporary declines due to increases in exam
prices and historic underinvestment, which led to a fall in
volumes. However, after the rollout of the updated ITIL4
certification in 2019, revenue growth picked up and continued until
the pandemic hit in March 2020. In 2020, exam revenues declined by
13% because of pandemic-related effects on corporate and government
education budgets. In the first quarter of 2021, revenue growth
resumed at about 20% for the combined group.
S&P believes LanguageCert will contribute to future growth through
a rapid increase in volumes. While the company currently has a very
small share in this market--it competes with established players
such as Pearson and the IELTS SELT Consortium--in our view demand
for LanguageCert's exams will be strong. Demand will be supported
by recent contract wins with several European government bodies
(such as the U.K. Home Office and the French Ministry of
Education). These factors should translate into above-peer-average
adjusted EBITDA margins of about 50%-60% over our forecast period.
PeopleCert's relatively small earnings base and concentration in
two main frameworks could expose it to volatile credit metrics.
With forecasted revenues of about GBP80 million-GBP100 million and
adjusted EBITDA of GBP40 million-GBP50 million in 2021 (pro forma
the AXELOS acquisition), PeopleCert's revenues and earnings base is
considerably smaller than some of its larger, more diversified
peers in the broader education and media sectors. Although S&P
anticipates high top-line and earnings growth, the limited scale
and scope of operations could expose the group to increased
volatility in credit metrics in the event of operating
underperformance or unforeseen exceptional costs. The group also
currently lacks audited financial accounts for the consolidated
group's perimeter, which could lead to some variation in forecasted
credit metrics.
S&P said, "We also see PeopleCert's heavy reliance on ITIL and
PRINCE2 certifications as a risk. These certifications generated
89% of its exam revenue in 2020. Although used by corporations and
governments globally, they are not immune to competitive pressures;
specialized providers could disrupt parts of PeopleCert's
end-markets. PeopleCert will need to invest continually in updating
its certifications to stay ahead of the pack. That said, a decline
in ITIL or PRINCE2's relevance is unlikely in the near-to-medium
term and would be gradual rather than abrupt.
"We expect leverage will reduce to 4.0x-4.5x by the end of 2022
from above 6.0x at closing due to rapid top-line and earnings
growth.Under our base case, we also envision PeopleCert continuing
to generate significant cash, with free operating cash flows (FOCF)
of GBP10 million-GBP20 million in 2021 and GBP30 million-GBP40
million in 2022. Rapid deleveraging and high cash flow generation
will be supported by strong organic growth of 8%-12% in the group's
main ITIL and PRINCE2 certifications divisions, as the group is
expected to increase its focus on boosting exam volumes and
introduce a variety of related products (such as mock exams and
mandatory reading materials) that should boost average fees earned
per certification. PeopleCert's proprietary technology
capabilities--enabling it to provide examination services virtually
(including online proctoring and identification) and so eliminate
the staff and real estate needs of physical examinations--will also
support profitability. The rapid expansion of the languages
division, LanguageCert, on strong relationships with government
bodies and an increased need for immigration- and education-related
languages certifications, will also support the group's growth.
"We anticipate that PeopleCert's financial policy will be less
aggressive than those of private equity-owned peers.We expect
PeopleCert will focus on reducing leverage over the next
two-to-three years, while pursuing moderate shareholder
distributions funded by part of the group's free cash flow
generation. The group has historically operated with very low
leverage and we understand its founder, controlling shareholder and
CEO Byron Nicolaides, will maintain a cautious approach and focus
on deleveraging after completing the AXELOS acquisition. As such,
we anticipate that PeopleCert's financial policy will be less
aggressive compared with private-equity-owned peers such as
Prometric, Ascend, and Colibri Group. The participation of private
equity firm FTV Capital as PeopleCert's minority shareholder will
not materially change the group's financial policy, in our view."
PeopleCert has a smaller scale of operations than some of its
better-diversified competitors, but it stands to achieve higher
profitability and lower leverage compared with peers. PeopleCert
operates alongside other global testing solutions and
certifications providers such as Prometric and Pearson Vue, as well
as regional and more specialized certifications providers such as
Ascend Learning and Colibri Group.
Compared to peers, S&P believes PeopleCert has a smaller and more
concentrated earnings base that exposes it to higher volatility in
earnings and credit metrics. On the other hand, its vertically
integrated business model and growth prospects compare positively
to most certifications providers, who depend on external (largely
non-profit) awarding organizations to enhance the marketability and
commercialization of their products, while paying hefty royalty
fees that eat into profitability margins.
S&P's preliminary rating on PeopleCert is higher than its ratings
on U.S.-based peers Prometric, Ascend Learning, and Colibri Group
(all owned by private equity sponsors). This mainly reflects
PeopleCert's lower leverage and more conservative financial policy.
Prometric (B-/Negative) is an established provider of testing
solutions for external awarding organizations through multi-year
contracts. Ascend Learning (B-/Stable) and Colibri Group (McKissock
Investment Holdings; B-/Stable) develop and distribute a range of
professional certifications in the health care and real estate
industries, respectively.
S&P said, "However, our preliminary rating on PeopleCert is lower
than our ratings on larger more diversified peers such as Pearson
PLC (BBB-/Stable). Pearson's business division, Pearson Vue, is the
global leader in testing solutions and has a significantly larger
scale of operations (with over 15 million exams delivered annually,
compared to PeopleCert's 570,000).
"The final ratings will depend on our receipt and satisfactory
review of all final documentation and final terms of the
transaction.The preliminary ratings should therefore not be
construed as evidence of final ratings. If S&P Global Ratings does
not receive final documentation within a reasonable time frame, or
if the final documentation and final terms of the transaction
depart from the materials and terms reviewed, we reserve the right
to withdraw or revise the ratings. Potential changes include, but
are not limited to, the finalization of the documentation, use of
the proceeds, maturity, size and conditions of the facilities,
financial and other covenants, security, and ranking.
"The stable outlook reflects our expectation that, over the next 12
months, PeopleCert will integrate the AXELOS business and achieve
rapid organic revenue growth, allowing it to reduce leverage, with
adjusted debt to EBITDA declining to 4.0x-4.5x, while maintaining
FOCF to debt comfortably above 5%. The stable outlook also reflects
our assumption that PeopleCert will generate FOCF of GBP15
million-GBP20 million and maintain an adequate liquidity position.
"We could lower our ratings if PeopleCert was unable to grow its
revenue and earnings in line with our base case, or followed a more
aggressive financial policy than we currently expect, such that
adjusted debt to EBITDA stayed above 5.0x or FOCF to debt
deteriorated toward 5%." This could happen if:
-- It struggles to integrate AXELOS, or fails to achieve volume
growth in its core IT and business certifications divisions,
leading to persistently high leverage; and/or
-- The group prioritized debt-funded acquisitions or large
shareholder distributions over deleveraging.
S&P said, "A positive rating action is unlikely in the near term,
in our view. Over the longer term, we could raise our ratings if
PeopleCert meaningfully expanded its size and scope of operations
and reduced its dependence on the ITIL and PRINCE2 frameworks,
while achieving strong and stable growth in earnings and FOCF
generation." An upgrade would also require adjusted debt to EBITDA
to decline comfortably below 4.0x and the financial policy to aim
at maintaining improved credit metrics, with limited risk of
re-leveraging.
PEOPLECERT WISDOM: Fitch Assigns First-Time 'B(EXP)' LT IDR
-----------------------------------------------------------
Fitch Ratings has assigned PeopleCert Wisdom Limited (PeopleCert) a
first-time expected Long-Term Issuer Default Rating (IDR) of
'B(EXP)' with a Positive Outlook. Fitch also assigned the senior
secured notes (SSN) issued by PeopleCert Wisdom Issuer plc an
expected instrument rating of 'B+ (EXP)' with a Recovery Rating of
'RR3'.
PeopleCert is an entity incorporated to merge PeopleCert Holdings
UK and Axelos Ltd. (AXELOS). PeopleCert Holdings UK is an
examination and awarding body for professional and language
certifications, while AXELOS is a manager and developer of
intellectual property (IP) around business certifications
frameworks, including ITIL and PRINCE2 products.
The ratings of PeopleCert reflect its modest scale and high
leverage that are balanced by its leadership in
business-certification product niches. The Positive Outlook
reflects Fitch's expectations that the company will lead ITIL and
PRINCE2 products into a new growth cycle, expand its scale and
improve profit margins, also due to the integration of AXELOS.
Fitch sees clear deleveraging prospects, with leverage falling
towards Fitch's sensitivity for an upgrade to 'B+' by 2023.
The assignment of final ratings is contingent on the completion of
the merger, the issue of the rated debt securities, and the receipt
of final documents conforming to information already received.
KEY RATING DRIVERS
High Leverage but Deleveraging Prospects: Fitch projects
PeopleCert's funds from operations (FFO) gross leverage,
post-acquisition of AXELOS, at above 7.0x in 2021, taking into
account AXELOS earnings contribution only for about half a year.
Fitch expects the metric to decline sustainably below 5.0x by 2023,
Fitch's upgrade sensitivity to 'B+', after about two years of
trading as a combined entity. The new debt package includes
euro-denominated SSNs equivalent to about GBP255 million, callable
after two years, and no revolving credit facility (RCF). The notes
proceeds, together with an equity injection of about GBP140
million, will finance the acquisition of AXELOS, refinance existing
debt and cover transaction fees.
Training Value-Chain Positioning: PeopleCert mainly operates as an
awarding and examination body for professional and language
qualifications. Its portfolio includes widely adopted business and
IT qualifications such as ITIL and PRINCE2 as well as language
certificates such as SELT. Key clients are training organisations
and are primarily charged on the number of exams taken by their
students. It also provides on-line proctoring, accreditation,
training and several additional services. Additionally, it has a
business-to-consumer platform. IP rights ownership, experience in
exam design and broad market adoption of certifications create
barriers to entry.
Strategy Subject to Execution Risks: Management's strategy is to
strengthen project management and the IT portfolio, particularly
ITIL and PRINCE2, develop new markets and launch new certifications
and additional services. In languages, it plans to act as a market
disruptor. Fitch sees execution risks in its planned geographical
expansion and from fierce competition in languages, and thus
forecast conservative revenue growth. Its merger with AXELOS also
faces challenges, due to complexities in post-merger workstreams.
However, this is mitigated by management's deep knowledge of AXELOS
as PeopleCert Holdings UK had been the sole examination institute
for AXELOS's frameworks since 2018.
IP Drives Business Certifications: ITIL and PRINCE2 are the leading
accreditations in their respective sectors in English-speaking
countries. ITIL is the most adopted framework in IT, while PRINCE2
leads in project management ahead of competitor PMP. Both
qualifications experience cyclical trends, linked to new versions'
periodical launches, and have begun or are approaching a revamp
phase. Fitch conservatively estimates CAGR of about 7% in the
number of business certification exams for 2021-2025, below
historical growth in an upswing. For the same period, Fitch also
assumes mild pricing deflation, as a consequence of the new
currency mix resulting from its geographical expansion.
Ambitious Plan in Languages: Management expects significant growth
in languages up to 2025. Main growth pillars include exams such as
SELT, a key test for UK visas, as the company is one of the five
globally approved exam providers. Other activities include
expansion in ESOL and LTE exams, tenders with government bodies and
non-English language expansion. Fitch acknowledges market share
growth opportunities in this fragmented space, as manifested in
3.5x revenue growth for 2019-2020 for the division. However, Fitch
sees stiff competition from established competitors with strong
brands and hence project a revenue CAGR of 9% over 2021-2025 for
languages.
Debt Reduction, Dividend Payments: PeopleCert is a family-owned
business controlled by Byron Nicolaides and is exposed to key-man
risk. After the acquisition of AXELOS, the growth equity investor
FTV capital will own a minority stake and be represented on the
board. Fitch expects the owners to adopt a conservative stance on
leverage, reducing leverage to increase their equity value,
potentially monetising it through an IPO. However, Fitch expects
cash dividends to be paid annually, as permitted under the proposed
debt documentation. Recourse to additional debt, including to fund
acquisitions, may be negative for PeopleCert's ratings.
AXELOS Acquisition Strategically Sound: Fitch believes the
acquisition of AXELOS is strategically sensible. As a joint venture
between UK government bodies and Capita Plc (Capita), AXELOS owned
and managed the frameworks of ITIL and PRINCE2. While PeopleCert
acted as the sole examination institute for AXELOS, the latter
retained the bare IP rights. The merger of the two companies will
allow PeopleCert to integrate vertically, and to be in full control
of the qualification's frameworks. Controlling the entire value
chain from product design to pricing and commercial policies will
be key to supporting a relaunch of AXELOS's legacy portfolio.
Strong Cash Conversion: Fitch-defined EBITDA margin, adjusted for
IFRS 16, will be around 53% in 2022, once the integration is
completed, before rising over 57% by 2024. The growth in
profitability is supported by the elimination of commission costs,
previously payable to AXELOS from PeopleCerts pre-acquisition.
Neutral cash from working capital and around GBP5 million of yearly
capex feed into a post-dividend free cash flow (FCF) margin of over
15%.
Stability in Qualifications Markets: Fitch see broad stability in
the education and qualifications markets. Trends in digital
transformation are also likely to support investments in technology
and process-management-related qualifications. Additionally, global
outsourcing of services towards developing countries will fuel
increase in demand for qualifications in new geographies.
Nevertheless, Fitch sees cyclicality in corporate-training budgets
that may become exposed to global shocks such as the spread of
coronavirus.
DERIVATION SUMMARY
PeopleCert is strongly positioned as an examination institute and
awarding organisation in certain niches related to IT and
project-management qualifications. Its revenue base is protected by
IP rights ownership for several qualification frameworks, while its
position in language-testing is one of a market challenger. It
competes in European and international markets with highly
diversified education content providers such as Pearson and several
academic bodies.
PeopleCert's ratings are based on the company's market position in
certain product niches, as well as widening EBITDA and FCF margins,
in particular following the acquisition of AXELOS. Also, they
reflect PeopleCert's high leverage, albeit with clearer
deleveraging prospects than that of 'B' rated peers. The company
compares well with Fitch-rated LBO and speculative-grade peers in
business services and education. Education peers such as Global
University Systems Holdings BV (GUSH, B/Stable) and GEMS Menasa
Cayman Ltd (B/Stable) have higher turnover scale and leverage, but
have lower EBITDA margins than PeopleCert, despite their high
earnings.
Within Fitch's wider business service portfolio, Fitch sees some
comparison with LBO peers in ERP services including Teamsystem
Holdings SpA (B/Stable) and Bock Capital Bidco B.V. (Unit 4,
B(EXP)/Stable), as well as with other services such as Poligon AB
(B+/Stable). Fitch believes that ERP providers' diversified
customer base provides for lower business risk, as they also rely
on a contract customer base versus PeopleCert's IP-driven business
model. Both Teamsystem and Unit 4 have higher leverage. Fitch sees
comparable leverage between PeopleCert and Poligon, but the
latter's EBITDA margins are considerably lower, balanced by a
portfolio of long-term contracts with customers.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
-- Total revenue CAGR over 5% for 2021-2025;
-- CAGR of 7% for business exams and 8% for languages for 2021
2025;
-- Moderate exam pricing deflation; pricing stability for
languages for 2021-2025;
-- EBITDA margin, adjusted for IFRS 16, at 57% in 2024 after
integration of AXELOS and cost savings;
-- Broadly neutral cash outflow from working capital to 2025;
-- Capex on average at about EUR5 million p.a. to 2025.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that the combination of PeopleCert
and AXELOS would remain a going- concern in distress and through a
balance-sheet restructuring, rather than be liquidated in a
default. Most of its value is derived from its portfolio of
certification brands, its IP rights and certain goodwill from
relationships with clients and training organisations. The IP
rights portfolio is not part of the secured collateral, but
negative-pledge clauses are present in the SSN documentation.
Our analysis assumes a going-concern EBITDA of around EUR40
million, compared with projected LTM pro-forma (for merger) EBITDA
to December 2020 of EUR53 million. At this level of going-concern
EBITDA, which assumes corrective measures to have been taken, Fitch
would expect the company to still generate positive FCF, but for
the financial structure to become unsustainable due to increased
leverage, making refinancing challenging.
A restructuring may arise from financial distress related to
increased competition in the qualifications industry by established
peers or new entrants. This may include a decline in the
international prestige and applicability of qualifications such
ITIL or PRINCE2. Under this scenario, a reduction in pricing power
may hit both revenue and margins, affecting leverage.
Post-restructuring scenarios may involve acquisition by a larger
company to combine PeopleCert's IP portfolio and clients within an
existing platform.
After applying an enterprise value multiple of 5.0x to the
post-restructuring going-concern EBITDA, Fitch's waterfall analysis
generated a ranked recovery in the 'RR3' band after deducting 10%
for administrative claims. This indicates a 'B+'/'RR3'/69%
instrument rating for the proposed SSNs. Fitch included in the
waterfall EUR1 million of local facilities that Fitch understands
from management are mainly borrowed within the restricted group.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Operating leverage manifested by improving scale and higher
EBITDA margin post-integration;
-- FFO gross leverage below 5.0x, driven by revenue consolidation
in IT and project management and by higher revenue in
languages;
-- FFO interest coverage sustainably above 3.0x;
-- Consistent FCF generation with post-dividend FCF margins in
double digits.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Positive sensitivities not met within 18-24 months will lead
to the Outlook being revised to Stable;
-- FFO gross leverage higher than 6.5x, led by stagnation in
revenue and reduction in margins or recourse to debt-funded
acquisitions;
-- FFO interest coverage remaining below 2.0x;
-- Reduction of FCF margins towards low single digits.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: The combined entity will benefit,
post-merger, from a growing buffer of cash on its balance sheet.
Fitch expects around GBP32 million for 2021, growing to around
GBP65 million for 2023. It does not benefit from any RCF
commitment.
Currency Mix Broadly Stable: PeopleCert's reporting currency is
sterling. Revenue in 2020 as almost equally divided between
sterling, euros and US dollars. The cost base is mainly variable
and euro-denominated. Fitch understands from management that the
cost currency mix will not change materially throughout the
business plan, as AXELOS's legacy cost base will be reduced. The
new SSNs will be denominated in euros.
Fitch expects stability in the currencies involved. However, minor
mismatches can emerge as the company diversifies towards new
geographies such as India. Fitch believes that, should these
mismatches emerge, management will consider implementing hedging
policies.
ISSUER PROFILE
PeopleCert was founded by holdings related to Byron Nicolaides, the
key shareholder of PeopleCert Holdings UK Ltd, and by funds advised
by FTV Capital. The company mainly operates as an awarding and
examination body for professional and language qualifications. Its
portfolio includes widely adopted business and IT qualifications
such as ITIL and PRINCE2 as well as language certificates such as
SELT and LTE.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch adjusted EBITDA for the application of IFRS 16.
SOURCES OF INFORMATION
The sources of information used to assess this rating were annual
audited accounts of the merged entities, a draft version of the
debt documents, a rating agency presentation and a meeting with
management.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
PEOPLECERT WISDOM: Moody's Gives First Time B2 CFR, Outlook Stable
------------------------------------------------------------------
Moody's Investors Service has assigned a B2 corporate family rating
and B2-PD probability of default rating to PeopleCert Wisdom
Limited. Concurrently, Moody's has assigned a B2 instrument rating
to the contemplated new EUR300 million backed senior secured fixed
rate notes due 2026 to be issued by PeopleCert Wisdom Issuer plc.
The outlook on all ratings is stable.
RATINGS RATIONALE
The ratings reflect PeopleCert's business profile as an established
operator in the industry for certification of persons, offering
products across a wide spectrum of disciplines with strong market
shares in the area of IT and project management. The acquisition of
AXELOS has significantly enhanced PeopleCert's credit profile,
creating a vertically integrated operator that owns 98% of the
underlying intellectual property from which it derives its
revenues. Supported by its strong profitability, Moody's expects
PeopleCert to rapidly delever from the initial 5.7x leverage at
closing of the transaction, somewhat dependent on the successful
integration of AXELOS and the realisation of associated synergies.
PeopleCert's B2 CFR also reflects (1) the company's leading
positions in the global market for IT and project management
certifications; (2) its vertically integrated business model
supporting high profitability and good FCF generation of over GBP30
million per year expected from 2022; and (3) the substantial growth
potential of the LanguageCert business and the ancillary services
offering.
Conversely, the CFR is constrained by (1) PeopleCert's small scale
in terms of revenue, somewhat offset by its high profit margins;
(2) its currently limited revenue diversification with focus on its
core IT and PM examinations segments; and (3) some execution risk
related to the AXELOS acquisition and targeted synergies.
ESG CONSIDERATIONS
PeopleCert's ratings factor in certain governance considerations
such as the company's ownership structure with the founder and CEO
of the company as the majority shareholder holding 79% of share
capital and private equity firm FTV Capital as the minority
shareholder holding the remaining 21% of shares. Moody's regards
the company's financial policy as balanced, with a clear focus on
deleveraging despite an initially relatively high leverage, and
also the intention to pay annual dividends.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that PeopleCert
will be able to continue the strong revenue growth trajectory
achieved during the first half of 2021 and sustain its very high
EBITA margins. The outlook further assumes that the company will
successfully execute the integration of AXELOS, including the
realisation of targeted synergies, and at the same time maintains a
good liquidity supported by good free cash flow generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating could occur if PeopleCert delivers on
its ambitious growth strategy, diversifying from its core IT and PM
examination business and leading to a significant step-up in its
scale, Moody's-adjusted Debt/EBITDA sustainably decreases below
4.0x and profitability is maintained at current high levels and
liquidity is considered good. An upgrade would also require the
company to successfully complete the integration of AXELOS and
realise the targeted synergies.
Downward pressure on the rating could develop if PeopleCert fails
to grow its revenue or exam volumes start to decline,
Moody's-adjusted Debt/EBITDA increases above 5.5x, profitability
significantly decreases from current high levels, free cash flow
generation declines to the low single digits or liquidity weakens.
LIQUIDITY PROFILE
Pro forma for the contemplated transaction, Moody's considers
PeopleCert's liquidity profile to be adequate, despite the absence
of a revolving credit facility. At closing of the transaction, the
company has a moderate cash balance of GBP17 million, however,
Moody's expects the cash position to grow going forward as excess
cash is accumulated. The company's liquidity is supported by its
good free cash flow generation which Moody's forecasts to reach
around GBP35 million in 2022.
STRUCTURAL CONSIDERATIONS
The B2 instrument rating of the new EUR300 million backed senior
secured notes is aligned with PeopleCert's B2 CFR and reflects the
limited amount of other debt and non-debt liabilities in the
capital structure. The company's PDR of B2-PD is also in line with
the CFR and reflects the use of a 50% family recovery rate,
considering the absence of any financial covenant but a security
package that includes share pledges, intragroup receivables, bank
accounts and floating charges over the company's intellectual
property. Further, the notes benefit from guarantees by material
subsidiaries representing 99.7% of consolidated EBITDA at closing.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
CORPORATE PROFILE
PeopleCert is an established operator in the market for
certifications of persons with focus on IT, project management and
language skills. The company was founded in 2000 by the current CEO
and majority-owner (79% of share capital) Byron Nicolaides and is
headquartered in the UK, with minority shareholder FTV Capital
(21%).
PeopleCert owns a portfolio of around 700 different certifications
across its main segments and has delivered around 432k exams in
over 200 countries around the world in 2020. During the year ended
December 31, 2020, the group generated pro forma revenue of GBP68
million and a company-adjusted EBITDA of GBP43 million.
POLARIS 2021-1: S&P Assigns BB+ (sf) Rating to Cl. X1-Dfrd Notes
----------------------------------------------------------------
S&P Global Ratings assigned credit ratings to Polaris 2021-1 PLC's
class A to X1-Dfrd notes. At closing, the issuer also issued
unrated class X2 and RC1 and RC2 residual certificates.
Polaris 2021-1 is an RMBS transaction that securitizes a portfolio
of owner-occupied and buy-to-let (BTL) mortgage loans that are
secured over properties in the U.K. This is the third RMBS
transaction originated by Pepper group in the U.K. that it has
rated. The first one was Polaris 2019-1 PLC.
The loans in the pool were originated between 2018 and 2021 by
Pepper Money and Pepper (UK) Ltd, a nonbank specialist lender.
The collateral comprises complex income borrowers, borrowers with
immature credit profiles, and borrowers with credit impairments,
and there is a high exposure to self-employed borrowers and
first-time buyers. Approximately 15.3% of the pool comprises BTL
loans and the remaining 84.7% are owner-occupier loans.
The transaction includes a 12.1% prefunded amount, expressed as a
percentage of the total transaction size, where the issuer can
purchase additional loans from the closing date (inclusive) until
the first interest payment date, subject to the eligibility
criteria outlined in the transaction documentation.
The transaction benefits from a fully funded liquidity reserve
fund, which will be used to provide liquidity support to the class
A notes and to pay senior fees and expenses and senior swap
payments. After the step-up date, the liquidity reserve will
amortize in line with the class A notes' outstanding balance and
the excess above the required amount will be released to the
principal waterfall. Principal can be used to pay senior fees and
interest on some classes of the rated notes subject to conditions.
A swap hedges the mismatch between the notes, which pay a coupon
based on the compounded daily Sterling overnight index average rate
(SONIA), and loans, which pay fixed-rate interest before
reversion.
At closing, the issuer used the issuance proceeds to purchase the
full beneficial interest in the mortgage loans from the seller. The
issuer grants security over all of its assets in favor of the
security trustee.
S&P said, "There are no rating constraints in the transaction under
our counterparty, operational risk, or structured finance sovereign
risk criteria. We consider the issuer to be bankruptcy remote.
"Our credit and cash flow analysis and related assumptions consider
the transaction's ability to withstand the potential repercussions
of the COVID-19 outbreak, namely higher defaults and longer
recovery timing. Considering these factors, we believe that the
available credit enhancement is commensurate with the ratings
assigned. We have also tested the sensitivity of the ratings to
stressed spread compression assuming a higher prepayment rate,
potentially compressing the excess spread available. The assigned
ratings can withstand these stresses."
Ratings
CLASS RATING AMOUNT (MIL. GBP)
A AAA (sf) 365.500
B-Dfrd AA+ (sf) 19.125
C-Dfrd A+ (sf) 14.875
D-Dfrd A (sf) 8.500
E-Dfrd BBB+ (sf) 6.375
F-Dfrd BBB- (sf) 6.375
Z-Dfrd BB (sf) 4.250
X1-Dfrd BB+ (sf) 12.750
X2 NR 6.375
RC1 Residual Certs NR N/A
RC2 Residual Certs NR N/A
NR--Not rated.
N/A—Not applicable.
RALPH & RUSSO: Ralph Accuses Ex-Partner of Stealing Millions
------------------------------------------------------------
Rhys Blakely at The Times reports that the designer of the Duchess
of Sussex's GBP56,000 engagement dress has accused her former
business partner and boyfriend of stealing millions of pounds from
their collapsed fashion empire.
Tamara Ralph and Michael Russo, who are both Australian, founded
their eponymous label in London in 2010.
Clients included the Gwyneth Paltrow and Angelina Jolie, and in
2017 Meghan Markle wore a Ralph & Russo dress for the official
portrait marking her engagement to Prince Harry, The Times
discloses.
However, since the company entered administration in March with
debts of GBP23 million, each of the former lovers has been accused
of using company money for personal expenses, The Times relates.
According to The Times, administrators for the company told the
high court that Ralph "extracted substantial sums" while she was in
"de facto control".
WATERLOGIC GROUP: Moody's Affirms B3 CFR, Rates New $800MM Loan B3
------------------------------------------------------------------
Moody's Investors Service has affirmed the B3 corporate family
rating and B3-PD probability of default rating of Waterlogic Group
Holdings Limited. Concurrently, Moody's has also assigned a B3
rating to the proposed $800 million equivalent dual-tranche backed
senior secured term loan B and the proposed $125 million equivalent
backed senior secured first-lien revolving credit facility, to be
issued by Waterlogic Finance Limited. The outlook on all the
ratings remains stable.
Proceeds from the new dual-tranche backed senior secured term loan
B, together with $60 million of shareholders' equity, will be used
to refinance the company's existing capital structure, pay
associated fees and expenses and fund M&A opportunities.
"Waterlogic's ratings continue to be constrained by its aggressive
M&A strategy which has led to high leverage levels in recent years
together with the company's historically negative free cash flow
(FCF) generation. More positively, the company's benefits from its
good positioning in the water cooler market and the positive
underlying dynamics of the sector" says Luigi Bucci, Moody's lead
analyst for Waterlogic.
"The proposed transaction will extend moderately Waterlogic's
maturity profile and will help the company to simplify its capital
structure. The equity injection from shareholders will also support
a reduction in pro forma leverage" adds Mr Bucci.
RATINGS RATIONALE
The B3 CFR of Waterlogic reflects (1) its well-established
positioning in the niche water cooler market; (2) the company's
high geographical diversification and low customer concentration;
(3) its good degree of revenue visibility; (4) the positive
underlying growth dynamics for the sector; and (5) its adequate
liquidity supported by an upsized RCF.
Counterbalancing these strengths are the company's (1) active
debt-funded acquisition strategy, which has led to sustained high
leverage in recent years; (2) historically negative FCF generation,
although likely to improve over time; (3) limited scale with a low
degree of product diversification; and (4) exposure to the highly
fragmented and competitive water cooler market.
Moody's expects revenue in 2021 — excluding the recently
announced targeted round of acquisitions — to grow in the low
teens in percentage terms, driven by M&A undertaken in the later
part of 2020 together with organic growth in the low- to
mid-single-digit percentages. For 2022, the rating agency forecasts
organic revenue growth in the mid-single-digit percentages as the
growth momentum is likely to continue. Ultimately, growth rates
will likely be higher than these levels on a reported basis as they
will be supported by the acquisitions completed in July 2021 and
onwards.
Management-adjusted EBITDA is likely to remain resilient and grow
broadly in line with revenue in 2021 and 2022. Organic growth will
be supplemented by around $15 million of additional EBITDA that
Waterlogic is targeting from acquisitions that the refinancing
transaction gives it the flexibility to make. On a Moody's-adjusted
basis, 2021 EBITDA growth evolution will be more positive and will
benefit from the reduction in certain exceptional items, such as
pandemic-related items, which the rating agency is not adjusting in
its metrics.
Moody's expects Moody's-adjusted leverage to reduce towards 6x and
around 5.5x, in 2021 and 2022, respectively, from 8.0x (pro forma:
7.5x) in 2020. Improvements in both years will be driven, to a
large extent, by the rating agency's assumption of EBITDA
expansion, M&A driven and organic. The proposed refinancing
exercise is also slightly deleveraging as $60 million will be
injected from shareholders into the company to fund M&A as part of
the transaction. However, Moody's sees downside risk on its current
deleveraging estimates because of the acquisitive nature of the
company and its tendency to incur additional debt in this respect.
The rating agency forecasts an overall improvement in FCF towards
break-even levels in 2021. Operating performance improvements will
be, however, impacted by a step-up in capital spending after 2020
underspend because of lower sales, continued ERP-related spending
together with a sustained level of exceptional items. Moving into
2022, Moody's expects FCF to be in the $0-5 million range. While
EBITDA growth, phasing-out of ERP-related costs and lower
exceptional items will support the company's ongoing improvements
in FCF, the positive impact from these factors will be to a large
extent offset by the higher interest costs of the new capital
structure together with a continued step-up in capital spending.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody's has considered in the analysis of Waterlogic the following
environmental, social and governance (ESG) considerations. In terms
of governance, the long-term investor Castik Capital is the main
shareholder of Waterlogic. Over the course of 2020, funds managed
by Castik Capital, together with management, sold minority stakes
in the company to British Columbia Investment Management
Corporation, Neuberg Berman, StepStone and Skandia. While the
track-record under the current structure is limited, the financial
policies of the company have remained aggressive, as illustrated by
the round of debt-funded acquisitions completed over 2020 and
2021.
In terms of environmental considerations, Waterlogic's proposition,
converse to bottled water coolers, can be considered by its
customers as an environment-friendly option because of lower
servicing needs and, mostly, absence of plastic.
LIQUIDITY
Moody's sees the company's liquidity as adequate, despite its
historical track-record of negative FCF generation. Waterlogic's
liquidity profile is supported by a cash balance of $64 million as
of May (likely to reduce as part of the refinancing transaction)
and access to the proposed upsized RCF of $125 million, likely to
be undrawn at closing.
The company's RCF, maturing in 2027, has a springing leverage
covenant of 10x (4.8x at closing), which will be tested only if the
facility is drawn by more than 40%. The rating agency expects the
headroom under the covenant to remain adequate over time.
STRUCTURAL CONSIDERATIONS
The B3 ratings on the backed senior secured first-lien term loan B
and the pari passu RCF are in line with the CFR and reflect the
pari passu nature of these instruments. The instruments are
guaranteed by material subsidiaries representing a minimum of 80%
of consolidated EBITDA. The credit facilities are secured by
shares, material intercompany receivables, bank accounts as well by
an all-asset security in respect of certain obligors, including UK,
USA and Australia. The capital structure also includes shareholder
loans, which are treated as equity under Moody's Hybrid Equity
Credit methodology published in September 2018.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the company
will maintain a good operating momentum supporting leverage
reduction from the current levels while making progress towards
stabilizing its FCF generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade would depend on a continued improvement in the
underlying operating performance of the company, together with a
less aggressive financial policy. Waterlogic's ratings could be
upgraded if its: (1) Moody's-adjusted debt/EBITDA were to decline
sustainably below 6.0x; and (2) FCF were to turn positive on an
ongoing basis; and (3) Moody's-adjusted EBITDA margin were to
remain in the high teens in percentage terms.
The rating agency would consider a rating downgrade if Waterlogic's
operating performance were to weaken significantly. The ratings
could be downgraded if: (1) Moody's-adjusted debt/EBITDA were to
increase sustainably above 7.0x; or (2) profitability and margins
were to erode; or (3) liquidity were to weaken.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
LIST OF AFFECTED RATINGS
Assignments:
Issuer: Waterlogic Finance Limited
BACKED Senior Secured Bank Credit Facility, Assigned B3
Affirmations:
Issuer: Waterlogic Group Holdings Limited
Probability of Default Rating, Affirmed B3-PD
LT Corporate Family Rating, Affirmed B3
Outlook Actions:
Issuer: Waterlogic Finance Limited
Outlook, Remains Stable
Issuer: Waterlogic Group Holdings Limited
Outlook, Remains Stable
COMPANY PROFILE
Headquartered in the UK, Waterlogic is a leading manufacturer and
global distributor of point-of-use (POU) water coolers designed for
environments such as offices, factories, hospitals, hotels,
schools, restaurants and other workplaces. In 2020, the company had
subsidiaries across 18 countries in Europe, the US, Latin America
and Australia. In 2020, Waterlogic generated $368 million in
revenue and $126.6 million in company-adjusted EBITDA.
WATERLOGIC HOLDINGS: S&P Affirms 'B' ICR on Debt Refinancing
------------------------------------------------------------
S&P Global Ratings affirmed its 'B' long-term issuer credit rating
on U.K.-based water-dispenser service provider Waterlogic Holdings
Ltd. (Waterlogic). S&P has assigned a 'B' long-term issuer credit
rating to financial subsidiary Waterlogic Finance Ltd. S&P has also
assigned a 'B' issue rating and '3' recovery rating to the new term
loan B and a new revolving credit facility (RCF). S&P will withdraw
the issue ratings on the existing senior secured term loan B and
RCF on transaction close.
The stable outlook indicates that an improvement in EBITDA would
support a reduction in leverage and positive FOCF generation in
2021.
S&P said, "Our affirmation reflects a modest increase in FOCF from
2022 thanks to an improvement in EBITDA. Heavy investments and
nonrecurring costs have undermined Waterlogic's cash flows and
leverage metrics since 2018. We predict that FOCF will turn
positive in 2021 and increase to more than $15 million in 2022
because of an improvement in profitability.
"Rating headroom remains tight due to additional leverage. Our
forecasts are sensitive to Waterlogic's ability to improve EBITDA
after exceptional costs. We expect S&P Global Ratings-adjusted debt
to EBITDA of about 11.4x in 2021 (7.6x excluding shareholder
loans), improving to 9.8x (6.5x excluding shareholder loans) in
2022. We expect adjusted EBITDA of $110 million in 2021 and $130
million in 2022. This is supported by our projection of a
significant improvement in profitability thanks to margin-accretive
acquisitions, lower exceptional costs, and organic growth from past
investments. We estimate that the adjusted EBITDA margin will
increase to 25% in 2021, compared with 23% in 2020. As in 2019 and
2020, nonrecurring costs of about $10 million to implement
enterprise resource planning (ERP) will reduce EBITDA temporarily
in 2021.
"Waterlogic is making material growth investments. The company has
accelerated its investments in projects involving point-of-use
(POU) water dispensers and ERP. We forecast annual capital
expenditure (capex) of about $70 million, largely related to the
POU projects, and expect the company to undertake further bolt-on
acquisitions to build scale, technological expertise, and product
diversity in a fragmented market.
"We expect Waterlogic's performance to be resilient in 2021,
despite uncertainties related to the COVID-19 pandemic. We expect
Waterlogic's core POU proposition to remain attractive thanks to
continued investments in new products and technology, including its
"Firewall" water-purification technology that has proved resistant
to COVID-19. That said, we believe that recurring service and
rental revenues from POU water dispensers, which account for about
67% of Waterlogic's revenues, will continue to support its
performance over the long term. Furthermore, we estimate that
demand for Waterlogic's products will gradually improve in 2021
with the relaxation of pandemic-related containment measures across
its countries of operation. As a result, we expect organic growth
of about 7%-8% in 2021 and 3%-4% in 2022. In addition, a high
degree of variability in the company's cost base and an ability to
scale back growth capex should further support cash flows in
unfavorable conditions.
"The stable outlook incorporates our view that Waterlogic's
improving profitability will support its FOCF generation. We expect
FOCF to be marginally positive in 2021 due to heavy investments and
one-off exceptional costs. However, we expect modestly positive
FOCF from 2022 because of lower exceptional costs and EBITDA from
acquisitions. Our outlook also reflects our view that Waterlogic
should continue to witness stable growth rates because of recurring
POU water-dispenser rental revenues, recent acquisitions, and
growth investments. We expect that Waterlogic's adjusted leverage
will improve to 11.4x in 2021 (about 7.6x excluding shareholder
loans), alongside funds from operations (FFO) cash interest
coverage of above 2.0x.
"We could lower the ratings if Waterlogic's operational performance
is weaker than we anticipated, resulting in higher leverage or
negative FOCF on a sustained basis. This could happen if the
company fails to reduce exceptional costs in line with its budget,
or if growth investments are not accretive to EBITDA. We could also
lower the ratings if the company is unable to reduce leverage, or
if a more aggressive financial policy results in weaker credit
metrics.
"We are unlikely to take a positive rating action in the near term
given Waterlogic's financial-sponsor ownership and our assumption
of ongoing debt-financed bolt-on acquisitions, which constrain our
view of its financial policy. However, we could raise the ratings
if the owner committed to improve the financial policy, and we
expected the company's debt to EBITDA to fall materially and
sustainably below 5.0x and its FFO to debt to rise above 12%."
*********
S U B S C R I P T I O N I N F O R M A T I O N
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Editors.
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