/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/211008.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 Friday, October 8, 2021, Vol. 22, No. 196 Headlines B E L A R U S BELARUSBANK: Moody's Alters Outlook on B3 Deposit Rating to Neg. BELINVESTBANK: Moody's Alters Outlook on B3 Deposit Rating to Neg. B O S N I A A N D H E R Z E G O V I N A KTK VISOKO: Bosnian Court Launches Bankruptcy Proceedings F R A N C E ILIAD HOLDING: Fitch Publishes 'BB' Foreign Currency IDR ILIAD HOLDING: S&P Assigns 'BB' LongTerm ICR, Outlook Stable RENAULT SA: Fitch Alters Outlook on 'BB' LongTerm IDR to Stable SIRONA HOLDCO: S&P Gives Prelim. 'B' Rating on Buyout by SK Capital G E R M A N Y TUI AG: To Sell Share at Discount in Rights Offering I R E L A N D ANCHORAGE CAPITAL 5: Fitch Gives 'B-(EXP)' Rating to Class F Debt DEER PARK CLO: S&P Assigns B- Rating on Class F-R Notes DILOSK RMBS 5: S&P Assigns Prelim. B- Rating on X1 Notes FAIR OAKS III: Fitch Assigns B-(EXP) Rating on Class F Debt FAIR OAKS III: S&P Assigns Prelim. B- Rating on Class F-R Notes HARVEST CLO X: Fitch Raises Class F Notes Rating to 'BB-' JUBILEE CLO 2015-XV: Moody's Affirms B1 Rating on Class F Notes I T A L Y BACH BIDCO: Moody's Gives 'B2' CFR & Rates New EUR275MM Notes 'B2' SHIBA BIDCO: Moody's Assigns 'B2' CFR, Outlook Stable SOCIETA DI PROGETTO: Fitch Rates Sec. Notes 'BB+', Outlook Stable SUNRISE SPV 93: Fitch Assigns BB(EXP) Rating on Class E Notes ZONCOLAN BIDCO: Fitch Assigns First Time 'B(EXP)' LongTerm IDR ZONCOLAN BIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable L U X E M B O U R G CULLINAN HOLDCO: Fitch Assigns First Time 'BB-(EXP)' LongTerm IDR CULLINAN HOLDCO: Moody's Assigns First Time B1 Corp. Family Rating SK INVICTUS II: Moody's Rates New $600MM Senior Secured Notes 'B2' N E T H E R L A N D S BOCK CAPITAL: Fitch Assigns Final 'B' LT IDR, Outlook Stable E-MAC PROGRAM II: Moody's Ups Rating on EUR15.75MM D Notes to Ba2 EDML BV 2021-1: Fitch Assigns BB+(EXP) Rating on Class E Debt EDML BV 2021-1: Moody's Assigns (P)Ba1 Rating to Class E Notes INTERTRUST NV: S&P Lowers LT ICR to 'BB' on Margin Deterioration N O R W A Y HURTIGRUTEN GROUP: S&P Alters Outlook to Stable & Affirms CCC+ ICR P O L A N D CANPACK SA: Fitch Gives 'BB(EXP)' Rating to USD800MM Unsec. Notes CANPACK SA: S&P Affirms 'BB' ICR on Strong Demand, Outlook Stable R U S S I A CREDIT BANK: Fitch Gives Final 'B-' on USD350MM Perpetual AT1 Notes METKOMBANK: Moody's Affirms 'B2' LongTerm Deposit Ratings URALKALI PJSC: Fitch Alters Outlook on 'BB-' LT IDR to Negative S W E D E N HEIMSTADEN AB: Fitch Gives 'BB-(EXP)' to New EUR300MM Securities HEIMSTADEN BOSTAD: Fitch Gives 'BB+(EXP)' to EUR1-Bil. Securities HEIMSTADEN BOSTAD: S&P Rates New Unsecured Sub Hybrid Notes 'BB+' S W I T Z E R L A N D BREITLING HOLDING: S&P Affirms 'B' ICR, Outlook Stable BREITLING HOLDINGS: Moody's Affirms B2 CFR Following Refinancing T U R K E Y ALTERNATIFBANK AS: Fitch Affirms 'B+' Foreign Currency IDR BURGAN BANK: Fitch Affirms 'B+' Foreign Currency IDR TURKLAND BANK: Fitch Affirms 'B' LT IDRs, Outlook Negative U N I T E D K I N G D O M ALBION HOLDCO: Fitch Assigns 'BB-(EXP)' LT IDR, Outlook Stable ALBION HOLDCO: Moody's Assigns First Time B1 Corp. Family Rating ALBION HOLDCO: S&P Assigns 'BB-' ICR, Outlook Stable CLEVELAND BRIDGE: Asset Auction Scheduled for Nov. 9 EUROSAIL-UK 2007-2: Fitch Affirms CCC Rating on Class E1c Debt HARBOUR ENERGY: Fitch Assigns First Time 'BB' IDR, Outlook Stable HARBOUR ENERGY: S&P Assigns 'BB' ICR, Outlook Stable MAISON BIDCO: Fitch Assigns First Time 'BB-' IDR, Outlook Stable MAISON BIDCO: S&P Assigns Preliminary 'B+' ICR, Outlook Stable NORD GOLD: Moody's Upgrades CFR to Ba1, Outlook Remains Stable RANGERS FC: HMRC Wanted to Give More Time for Club to Pay Debt RANGERS: Administrators Should Have Sold Training Ground, Players STANLINGTON NO.1: Moody's Ups Rating on GBP5.7MM E Notes From Ba2 THE RESIDENCE: Legacie Set to Acquire Stalled Project TOWD 2019-GRANITE4: S&P Assigns Prelim. B+ Rating on G Notes X X X X X X X X [*] BOOK REVIEW: Hospitals, Health and People - - - - - ============= B E L A R U S ============= BELARUSBANK: Moody's Alters Outlook on B3 Deposit Rating to Neg. ---------------------------------------------------------------- Moody's Investors Service changed the outlooks on the B3 long-term deposit ratings of Belarusbank and Belagroprombank JSC, as well as their issuer outlooks to negative from stable, affirming all the ratings and assessments of the two banks. RATINGS RATIONALE The rating actions follow the change of the outlook on Belarus's B3, sovereign rating to negative from stable on October 1, 2021. The negative outlooks on the two banks' long-term deposit ratings reflect Moody's expectations that their ratings will likely be downgraded in case of a downgrade of the sovereign rating. BANK-SPECIFIC FACTORS BELARUSBANK Belarusbank's B3 long-term local and foreign currency deposit ratings incorporate its b3 Baseline Credit Assessment (BCA) and Moody's assessment of a very high probability of government support, which, however, results in no rating uplift. Belarusbank's BCA reflects (1) the strong links between the bank's credit profile and the government's creditworthiness, given direct sovereign exposure and lending to systemically important state-owned enterprises; (2) weak operating environment in Belarus, translating into asset quality pressures and a high cost of funding; and (3) the bank's substantial reliance on market funding and foreign-currency deposits. Factors underpinning Belarusbank's BCA are the bank's dominant market position, sound capitalization, good cost efficiency, and granular funding structure. BELAGROPROMBANK JSC Belagroprombank's B3 long-term local and foreign currency deposit ratings incorporate its caa1 Baseline Credit Assessment (BCA) and Moody's assessment of a very high probability of government support, which results in a one-notch rating uplift. Belagroprombank's BCA reflects (1) the strong links between the bank's credit profile and the government's creditworthiness, given direct sovereign exposure and lending to systemically important state-owned enterprises; (2) the bank's weak loss absorption capacity given low reserves coverage of problem loans; and (3) high funding dollarisation and limited foreign-exchange cash buffers, which constrain the bank's liquidity profile. The key factors underpinning Belagroprombank's BCA are (1) a track record of government support, including direct capital injections that strengthen the bank's capital position, asset transfers and support provided to the bank's borrowers, and (2) Belagroprombank's diversified and relatively stable customer deposit base, given status as Belarus' second-largest state-owned bank. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS A positive rating action on the two banks' ratings is currently unlikely, given the negative outlooks. However, the outlooks may be changed to stable, if the sovereign outlook is stabilized and there is no severe deterioration of the banks' standalone credit profiles in the next 12-18 months. The banks' long-term deposit ratings could be downgraded in case of a downgrade of the sovereign rating, restrictions on payments to customers or severe deterioration in the banks' standalone credit profiles. A significant weakening of the banks' operating environment, their liquidity, asset quality or capital adequacy beyond Moody's current expectations would result in a downgrade of their Baseline Credit Assessments (BCAs). LIST OF AFFECTED RATINGS Issuer: Belagroprombank JSC Affirmations: Adjusted Baseline Credit Assessment, Affirmed caa1 Baseline Credit Assessment, Affirmed caa1 Long-term Counterparty Risk Assessment, Affirmed B3(cr) Short-term Counterparty Risk Assessment, Affirmed NP(cr) Long-term Counterparty Risk Ratings, Affirmed B3 Short-term Counterparty Risk Ratings, Affirmed NP Short-term Bank Deposit Ratings, Affirmed NP Long-term Bank Deposit Ratings, Affirmed B3, Outlook Changed To Negative From Stable Outlook Action: Outlook, Changed To Negative From Stable Issuer: Belarusbank Affirmations: Adjusted Baseline Credit Assessment, Affirmed b3 Baseline Credit Assessment, Affirmed b3 Short-term Bank Deposit Ratings, Affirmed NP Long-term Bank Deposit Ratings, Affirmed B3, Outlook Changed To Negative From Stable Outlook Action: Outlook, Changed To Negative From Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks Methodology published in July 2021. BELINVESTBANK: Moody's Alters Outlook on B3 Deposit Rating to Neg. ------------------------------------------------------------------ Moody's Investors Service changed to negative from stable the outlooks on Belinvestbank's B3 long-term deposit ratings, OAO "Sber Bank's" B2 long-term local-currency (LC) deposit rating and its B3 long-term foreign currency (FC) deposit rating, as well as the two banks' issuer outlooks. All of the banks' ratings and assessments were affirmed. RATINGS RATIONALE The rating actions follow the change of the outlook on Belarus's B3 sovereign rating to negative from stable on October 1, 2021. The negative outlooks on the two banks' long-term deposit ratings reflect Moody's expectations that their ratings will likely be downgraded in case of a downgrade of the sovereign rating. BANK-SPECIFIC FACTORS BELINVESTBANK Belinvestbank's B3 long-term local and foreign currency deposit ratings incorporate its caa1 Baseline Credit Assessment (BCA) and Moody's assessment of a high probability of government support, which results in a one-notch rating uplift. Belinvestbank's BCA is constrained by its unstable operating environment, thin core equity capital buffer and substantial dollarisation of deposits amid constrained foreign-currency liquidity. At the same time, it is supported by the bank's ample liquidity buffers, its strong loan-loss reserve coverage of problem loans and the strong linkage of its asset quality to the sovereign creditworthiness. OAO "SBER BANK" A very high probability of affiliate support from Russia's Sberbank (Baa3 stable, ba1) results in a one-notch uplift of OAO "Sber Bank's" B2 long-term local-currency (LC) deposit rating above its b3 BCA, while the bank's B3 long-term foreign-currency (FC) deposit rating is constrained by the country's FC deposit ceiling of B3. Both LC and FC deposit ratings of the bank are currently positioned at the levels of the respective country ceilings, which are based on the Government of Belarus' B3 (negative) rating. A downgrade of the sovereign rating would likely lead to both ceilings being lowered, and hence it would result in a downgrade of OAO "Sber Bank's" deposit ratings. OAO "Sber Bank's" b3 BCA is constrained by its operating environment characterised by increased political uncertainty, high external vulnerability and a weak economic outlook; the bank's large stock of problem loans and narrowed net interest margin. Factors underpinning OAO "Sber Bank's" BCA are its solid capital and reserves buffer and access to stable funding sources and the parent's liquidity in case of need. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS A positive rating action on the two banks' ratings is currently unlikely, given the negative outlooks. However, the outlooks may be changed to stable, if the sovereign outlook is stabilized and there is no severe deterioration of the banks' standalone credit profiles in the next 12-18 months. The banks' long-term deposit ratings could be downgraded in case of a downgrade of the sovereign rating, restrictions on payments to customers or severe deterioration in the banks' standalone credit profiles. A significant weakening of the banks' operating environment, their liquidity, asset quality or capital adequacy beyond Moody's current expectations would result in a downgrade of their Baseline Credit Assessments (BCAs). LIST OF AFFECTED RATINGS Issuer: Belinvestbank Affirmations: Adjusted Baseline Credit Assessment, Affirmed caa1 Baseline Credit Assessment, Affirmed caa1 Long-term Counterparty Risk Assessment, Affirmed B3(cr) Short-term Counterparty Risk Assessment, Affirmed NP(cr) Long-term Counterparty Risk Ratings, Affirmed B3 Short-term Counterparty Risk Ratings, Affirmed NP Short-term Bank Deposit Ratings, Affirmed NP Long-term Bank Deposit Ratings, Affirmed B3, Outlook Changed To Negative From Stable Outlook Action: Outlook, Changed To Negative From Stable Issuer: OAO ''Sber Bank'' Affirmations: Adjusted Baseline Credit Assessment, Affirmed b2 Baseline Credit Assessment, Affirmed b3 Short-term Bank Deposit Ratings, Affirmed NP Long-term Bank Deposit Rating (Foreign Currency), Affirmed B3, outlook changed to Negative from Stable Long-term Bank Deposit Rating (Local Currency), Affirmed B2, outlook changed to Negative from Stable Outlook Action: Outlook, Changed To Negative From Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks Methodology published in July 2021. =========================================== B O S N I A A N D H E R Z E G O V I N A =========================================== KTK VISOKO: Bosnian Court Launches Bankruptcy Proceedings --------------------------------------------------------- SeeNews reports that a Bosnian commercial court said it has launched bankruptcy proceedings against Zenica-based textile producer KTK Visoko. The Zenica commercial court said in a statement on Oct. 5 the decision to launch the proceedings was taken on Sept. 30, SeeNews relates. The court said all creditors are invited to submit their claims against KTK Visoko in the next 30 days, SeeNews notes. According to SeeNews, the statement said KTK Visoko has not been fulfilling its obligations for a long period of time and will be unable to fulfill them in the near future as its bank account has been blocked since 2013. =========== F R A N C E =========== ILIAD HOLDING: Fitch Publishes 'BB' Foreign Currency IDR -------------------------------------------------------- Fitch Ratings has published ILIAD HOLDING's Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB' and a senior secured instrument rating of 'BB-'/RR5. The Outlook on the IDR is Stable. The rating reflects ILIAD HOLDING's intended full ownership of operating subsidiary Iliad S.A. and is based on a consolidated rating profile, reflecting Fitch's assessment of strong parent-subsidiary linkage (PSL) between the two. Iliad is ILIAD HOLDING's sole operating asset and drives Fitch's assessment of its operating profile. Iliad has a solid position in the French telecoms market based on the deployment of its own mobile and fixed network and partnerships with passive infrastructure providers. The acquisition of UPC Poland will enable Iliad to create an integrated, fixed and mobile operator in Poland that strengthens its market position and provides opportunities for growth from network-and-product convergence. Investment risks in Italy since the launch of Iliad's mobile operations in 2018 have reduced as Iliad Italy has started to generate EBITDA (after leases). The Stable Outlook reflects that while ILIAD HOLDING's funds from operations (FFO) net leverage is above the thresholds of the rating, the group retains sufficient capacity through organic free cashflow (FCF) generation and asset disposals to deleverage to below 4.5x by 2024. The higher leverage is partly due to Italian spectrum payments in 2022, without which deleveraging to below 4.5x would be 12 to 18 months faster. ILIAD HOLDING's senior secured rating is one notch lower than the IDR due to structural subordination because of the significant quantum of debt held at the operating company level. KEY RATING DRIVERS Strong Domestic Position: Following the acquisition of UPC in Poland Fitch estimates that France will account for about 70% of group EBITDA on a pro-forma basis. Iliad has a 23% subscriber market share in fixed broadband and a 19% share in mobile. Its technology and pricing innovation, coupled with an industry-leading cost structure, has enabled it to build a well-entrenched position in fixed broadband with strong cash generation. This is exemplified by Iliad's domestic EBITDA margin of 40% at end-2020. The cash generation has provided Iliad with the scope to invest in its own fibre and mobile network in France and pursue growth opportunities. Competitive Market, EBITDA Growth: The French telecoms market is typified by four market participants with either full or partial ownership of their mobile and end-to-end fixed broadband networks. While significant increases in pricing pressure are unlikely, the market structure will make profitable revenue growth through increasing subscribers difficult. However, Iliad should be able to increase EBITDA in France over the next 12 to 24 months through upselling higher-value tariffs to its own customers, migrating customers on to its own network (saving wholesale and roaming fees) and increasing operating leverage. Passive Infrastructure Partnerships Supportive: Iliad has created infrastructure partnerships through the partial sale of its mobile tower portfolio in France and Poland and aims to sell its remaining stakes over the next 18 months. Iliad also has a 49% stake in Investissements dans la Fibre des Territoires, a JV created with Infravia to access fibre networks outside of dense urban areas. Fitch believes the partnerships have multiple benefits for the company as they release value in passive assets to fund network deployments and invest in assets that improve its competitive position, improve the risk/return dynamics in fixed-network deployment and reduce its FCF outlay while increasing the pace of network coverage. Although the partnerships will result in higher operating costs, on balance, Fitch believes that given its market position and size of FCF generation in France, they improve the scalability of Iliad's platform. UPC Poland Acquisition Synergistic: Iliad has agreed to acquire UPC Poland for an enterprise value of EUR1.53 billion. The acquisition will enable Iliad to move from being a mobile-only operator to a converged, fixed and mobile network operator that strengthens its market position in Poland and enables the extraction of revenue, cost and network synergies. Following completion of the acquisition, Poland will account for about 27% of total EBITDA in 2021 on a pro-forma basis. Iliad expects to fund the transaction with a combination of cash and debt issued at the level of its Polish operating subsidiary Play. Progress on Building Scale in Italy: Iliad's investment in Italy is at an early stage and has yet to build sufficient scale to become FCF-generative on a standalone basis. The company has made significant progress, having gained 7.8 million subscribers (1H21) or about a 10% market share. This provides sufficient scale to generate EBITDA this year. The continued deployment of its own network and a slower pace of growth will enable Iliad to expand EBITDA margins further. The deployment of its own network enables Iliad to convert variable costs into fixed while reducing national roaming costs. Taking Calculated Risks in Italy: Factors that reduce the risks and improve the chances to make a return in Italy include the existence a of long-term national roaming agreement with RAN-sharing in rural areas, a comparatively lower operating cost structure, affordable off-network interconnection rates, availability of third-party mobile towers, low prevalence of handset subsidies and circumventing traditional distribution methods. High Leverage but Deleveraging Capacity: Fitch's base case estimates that ILIAD HOLDING's pro-forma consolidated FFO net leverage (including the acquisition of UPC Poland and 100% buy-out of minorities at Iliad) will decline to below 4.5x by 2024 from 4.8x in 2022. The pace of decline is restrained by EUR959 million of one-off spectrum payments in Italy in 2022, which is partially offset by expected proceeds from tower disposals in Poland. Excluding the EUR959 million Italian spectrum payment, pro-forma consolidated net leverage would be 4.4x in 2022 and within the thresholds of the rating. Fitch estimates that ILIAD HOLDING has an organic deleveraging capacity of 0.2x FFO net leverage per year. Consolidated Rating Approach: Fitch assess that the PSL between ILIAD HOLDING and Iliad is moderate to strong. This reflects majority ownership, control of Iliad, one-way cross default clauses in ILIAD HOLDING's loan agreement and influence over dividend policy. These factors, on balance, outweigh the lack of both legal guarantees of debt between the two entities and cash fungibility. As a result of Fitch's PSL assessment, the rating of ILIAD HOLDING is based on a consolidated credit profile incorporating Iliad. Structural Subordination of Debt: Following ILIAD HOLDING's buyout of minorities at Iliad and acquisition of UPC Poland, pro-forma Fitch-defined consolidated gross debt would be EUR13.8 billion at end-2021, of which EUR4.2 billion is issued by ILIAD HOLDING and the remainder by Iliad. The quantum of gross debt issued by Iliad leads to structural subordination of the debt issued by holding company. As result, the debt issued by ILIAD HOLDING is rated one notch lower than its IDR. DERIVATION SUMMARY ILIAD HOLDING's rating is based on a consolidated credit profile including Iliad, which is the holding company's sole operational asset and drives the holding company's operating profile. Iliad's operating profile in France and Poland are broadly in line with other alternative telecoms operators with well- entrenched domestic positions and ownership of both fixed and mobile network assets, such as UPC Holding BV (BB-/Negative), Telenet Group Holding NV and VMED O2 Limited (both BB-/Stable). ILIAD HOLDING's higher IDR reflects lower, sustained leverage expectations. Risks related to achieving sufficient scale and turning FCF positive in Italy - which contributes towards negative FCF at the group level in the short- to medium-term - have a lower bearing on the rating as Iliad Italy starts to generate EBITDA. Iliad's operating profile is seen as weaker then domestically focused incumbent operators such as Royal KPN N.V. (BBB/Stable). The stronger operating profile of incumbent operators like Royal KPN reflects their higher service-revenue market share in both mobile and fixed, network economies of scale from servicing multiple market segments and a market structure that is predominantly based on two to three duplicate mobile or local loop network infrastructures. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer are based on a consolidated basis, pro-forma for the acquisition of UPC Poland in 2021: -- Revenue of EUR2.9 billion in 2021, increasing by 3% to 4% p.a. during 2022-2024; -- Fitch-defined EBITDA margin (excluding lease interest costs) of 38% in 2021, 39% in 2022 and remaining broadly stable thereafter; -- Capex excluding spectrum of 29% of revenue in 2021, gradually declining to 23% by 2024; -- Dividends paid by Iliad of EUR180 million per annum; -- Disposal proceeds used to pay down debt at ILIAD HOLDING in 2021 and 2022; -- ILIAD HOLDING acquires 100% of Iliad. At time of writing ILIAD HOLDING had achieved 96.46% ownership through a public tender process; a sufficient level to squeeze out minorities. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Sustained competitive position in France, successful integration of UPC Poland, and improved scale and network roll-out in in Italy; -- Consolidated FFO net leverage trending sustainably below 4.0x; -- FFO (on a standalone basis excluding Iliad, including interest earned from inter-company loans)-to- gross interest cover above 2x; -- Significant FCF generation. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Failure to show significant progress of reducing consolidated FFO net leverage sustainably below 4.5x by 2024; -- FFO (on a standalone basis excluding Iliad, including interest earned from inter-company loans)-to- gross interest cover below 1.5x; -- A significant degradation in Iliad's market share of mobile or fixed broadband in France and/or operating FCF; -- Higher-than-expected FCF burn at Iliad Italy with distant prospects of turning FCF-positive. 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: Iliad has comfortable liquidity with cash and cash equivalents of EUR1.6 billion and undrawn revolving credit facilities (RCF) of EUR1.65 billion at end-1H21. This provides ample capacity to cover maturities of EUR532 million in 2021. ILIAD HOLDING has a five-year, undrawn EUR300 million RCF facility and a cash balance of EUR86 million. It is expected to receive about EUR180 million in dividend from Iliad. This comfortably covers annual interest payments of EUR133 million. Following the refinancing of its EUR3.6 billion bridge to bond facility, ILIAD HOLDING will have no short-term maturities. ILIAD HOLDING's EUR1.2 billion bridge to disposal facility is expected to be repaid by 2022 with proceeds from the sale of tower assets in France and Poland. 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. ILIAD HOLDING: S&P Assigns 'BB' LongTerm ICR, Outlook Stable ------------------------------------------------------------ S&P Global Ratings assigned its 'BB' long-term issuer credit ratings to Iliad Holding S.A.S., owner of Iliad S.A., and its 'B+' issue rating to its proposed EUR3.6 billion senior secured notes. The stable outlook reflects S&P's view that Iliad Holding's leverage should rapidly improve toward 4.0x by 2023, owing to Iliad's strengthening of its domestic, Italian, and Polish market positions. Iliad Holding S.A.S., owner of Iliad S.A., is raising about EUR4.8 billion in new debt (EUR3.6 billion notes and EUR1.2 billion bridge to disposal) to take the group private and refinance EUR1.8 billion of existing debt. Iliad is also financing the acquisition of No. 3 fixed broadband operator UPC Poland through a mix of debt and cash at its Polish subsidiary Play. S&P expects adjusted leverage to reach 5.1x in 2021 with combined group gross reported debt of about EUR14 billion. S&P said, "We expect Iliad Holding's S&P Global Ratings-adjusted debt to EBITDA will be about 5.1x in 2021, including its EUR3.0 billion take-private of Iliad, before reducing to 4.6x by 2022 and 4.2x by 2023. Iliad founder, Xavier Niel, has financed a EUR3.1 billion buyback of the remaining 29% stake he did not already own in the French telecom group's equity via his vehicle, Iliad Holding S.A.S. The transaction is financed with about EUR3.6 billion new debt. This includes the refinancing of about EUR1.8 billion of existing debt at Iliad Holding, and at least EUR1.2 billion of proceeds from the disposal of Iliad's 30% and 40% remaining stakes in the French and Polish tower portfolios it sold to Cellnex in 2019 and 2021. These were previously valued at about EUR600 million and EUR533 million (historic transaction). Iliad also announced it is acquiring Liberty Global's Polish fixed internet operator UPC for around EUR1.5 billion equivalent, which will be financed with a mix of debt and cash at Play. "We anticipate that Iliad's adjusted leverage should improve to 4.6x by 2022 and 4.2x by 2023 including the 5G spectrum commitments (0.1x-0.2x impact). This improvement stems from ongoing absolute EBITDA and free operating cash flow (FOCF) growth from considerable savings in roaming, local loop costs, and improved business mix in Iliad's French operations by 2022. It also reflects breakeven EBITDA in Iliad's Italy mobile activities and its footprint expansion and synergies in Poland with the convergence of Play's mobile services and UPC's hybrid fixed-coaxial (HFC) network. In addition, we expect that Iliad Holding's FOCF after leases will break even by 2022 and exceed EUR500 million by 2023. "We anticipate Iliad Holding, through Iliad, will continue to show organic mid-single-digit revenue growth, supported by mobile and fixed network deployment in France, market share gains in Italy despite tough competition, and the expansion of convergent services in Poland, following the acquisition of UPC. We think Iliad Holding's performance will be driven by Iliad's expansion of its mobile and fiber-to-the-home (FTTH) network coverage and capacity in France, and our assumptions of breakeven EBITDA in Italy and a smooth integration of UPC Poland within Play. We expect Iliad's increasing mobile network coverage and capacity will help it gradually terminate its costly roaming agreement with Orange in France. Moreover, the likely steady shift of asymmetric digital subscriber line (ADSL) customers to Iliad's FTTH offering -- strengthened by its partnership with InfraVia, allowing access to FTTH sockets in medium- and low-density areas -- should generate hefty savings on local loop unbundling fees paid by Iliad to Orange in dense areas. Furthermore, as mobile and fixed customers are increasingly skewed toward higher-priced contracts (EUR9.99 per month [/m] and EUR19.99/m 5G mobile plans; EUR44.99/m FTTH broadband offering), this would support a gradual increase in average revenue per user (ARPU) and Iliad's EBITDA margin. In addition, Iliad's launch of business-to-business (B2B) offerings should provide about EUR400 million or more of revenue by 2024. We acknowledge Iliad's successful start in Italy, reaching 7.8 million customers in three years (10.1% market share). This has been supported by the simplicity of its offering and its smart distribution, with limited physical stores and a denser network of automatic kiosks. We anticipate EBITDA after leases will be positive in 2021, after reaching break even in first-half 2021 as increasing customer volumes on Iliad's network (about 50%) start to balance expensive data consumption from customers--reflecting Iliad's low-cost, high-data-allowance mobile offers. Iliad's arrival in Poland is very recent, following its acquisition of Poland's No. 2 mobile operator Play in 2020. We anticipate that Play's solid operating performance and cash flow, combined with the UPC fixed network, will enable Iliad to strengthen its position in Poland by offering bundled services while generating significant synergies." Iliad is a large and diversified European telecom operator that has strengthened its market position over the past few years; it is France's third-largest national and converged operator. S&P's view of Iliad's business risk profile is underpinned by: -- Its increasing size and market diversification, with the acquisition of Poland's No. 2 mobile operator (in terms of revenues) and No. 3 fixed operator; -- Its solid No. 3 position in the French fixed-broadband market (revenue market share) after Orange and SFR; and -- Its leading alternative FTTH position in France. As of June 30, 2021, FTTH subscribers represented about 49% of its fixed customer base in France, up from 27% in 2019, with about 3.3 million subscriptions and 1.1 million net customer additions over the past 12 months. S&P said, "Our assessment also reflects the company's high margins (reported EBITDA-after-leases margin is 40%-41% on average in France and 38%-39% on a consolidated basis); proven ability to innovate across various fields, including product and service offerings, distribution, and marketing; and its capacity to differentiate itself through attractive offerings, while defending ARPU in a market plagued by price pressure at the low end. We also note the company's ability to start operations from scratch and gain critical size quickly, with a competitive offering." In France, Iliad is the close No. 4 mobile operator in terms of revenue, after Bouygues, SFR, and Orange, having launched its mobile operations in 2012. In Italy, Iliad reached 10.1% subscriber market share (7.8 million mobile customers) in about three years while developing its flexible distribution network. However, Iliad's market positioning and service offering slightly lag peers'. Play represents Iliad's only No. 2 position (revenue market share). In Italy, Iliad has no fixed service offering and no fixed network or B2B offering, although it is expected to launch fixed offers by the end of the year. In France, although Iliad has recently started to cover the handset segment with a leasing offer to address this market, the lack of handset-subsidized offers--a 17 million-subscriber market not addressed in the context of rising data consumption, and in a world where smartphone usage continues to increase--was a competitive disadvantage for Iliad. It has only recently launched B2B offers in France, a market dominated by Orange, SFR, and Bouyges Telecom. Furthermore, Iliad's mostly digital and online distribution strategy leaves it highly exposed to online advertising campaigns and aggressive promotions in France, as happened in 2018-2019. Although Iliad has increased its physical distribution network (107 stores at year-end 2020, from 81 in 2019) it is still about 5-6 times smaller than closest competitor Bouygues. Iliad's free cash flow has been hampered by material capital expenditure on its networks. Its investments will soar to EUR2.4 billion this year before somewhat reducing (albeit remaining considerable) reflecting its FTTH and 5G deployments in France and network build-up in Italy. The number of connectible sockets increased to 22.7 million at the end of June, with its fiber plans available in 10,700 municipalities. At June 30, Free had activated over 4,000 4G sites with 700MHz frequencies and had the most 5G sites (all frequencies combined) in France, with over 10,200 running sites (including some 1,300 using 3.5GHz frequencies). In addition, group capex rose during the first half of the year to secure supplies and increase inventories of components for its set-top boxes and electronic equipment in view of current market shortages. S&P said, "Therefore, we anticipate that Iliad Holding will generate negative FOCF after leases this year, while improving to about breakeven by 2022 and significantly positive by 2023 mostly driven by cost savings stemming from the end of its costly roaming agreement on Orange's 3G network in France." The stable outlook reflects S&P's view that Iliad Holding's adjusted leverage will consistently decline from 5.1x toward 4.5x this year and toward 4.0x in 2023, together with adjusted FFO to debt improving toward 20% and adjusted FOCF to debt (net of built to suit) toward 5% over the same period. Rating upside would arise if Iliad Holding's adjusted debt to EBITDA reduces sustainably below 4.0x and its reported FOCF after leases becomes sustainably positive. Rating downside could occur if Iliad Holding's metrics fail to strengthen as S&P forecast in its base case, which could stem from any unforeseen operational setback, including any integration issues in Poland, or reflect a more aggressive financial policy than it currently expects, with more appetite for leverage or shareholder returns. RENAULT SA: Fitch Alters Outlook on 'BB' LongTerm IDR to Stable --------------------------------------------------------------- Fitch Ratings has revised Renault SA's Outlook to Stable from Negative, while affirming the automotive group's Long-Term Issuer Default Rating (IDR) at 'BB'. The Outlook change reflects that Renault's key credit metrics have stopped deteriorating, although Fitch believes that they will remain weak for the ratings for at least a couple of years. Fitch expects free cash flow (FCF) to be moderately negative in 2021, mostly as a result of remaining pressure on working capital. However, Fitch expects Renault's automotive operating margin to become positive again, due to a stronger-than-expected recovery in revenue and a successful implementation of the group's cost-saving measures. Flexibility in the rating is minimal as stretched credit ratios could be further affected by a still adverse economic environment. Gross leverage is high for the rating and the recovery in profitability and cash generation could be derailed by a slower-than-expected rebound in new vehicle sales and continuous supply- chain issues. KEY RATING DRIVERS Stronger Mix; Improved Pricing: Measures to boost sales and pricing have started to yield results in the past 12 months, halting Renault's revenue decline over the last three years. The product mix has improved, with smaller discounts to customers and a greater proportion of higher-end models. Renault under-performed the overall industry in 1H21 but Fitch views its sales performance as resilient versus Fitch's expectations, particularly given its lack of exposure to the faster-recovering US and China markets, compared with Europe. Restructuring Measures on Track: Renault is well on track with its initial target of about EUR2 billion in fixed-cost savings by 2022 versus 2019, excluding capex, having achieved EUR1.8 billion of gross savings at end-June 2021. Furthermore, Renault plans to cut capex and capitalised R&D costs to below EUR4 billion, from EUR5 billion in 2019. This should lower its break-even point by about 25%-30% by 2023 and boost profitability. Nonetheless, the implementation cost of these measures will weigh on operating margins and cash generation as Fitch includes about EUR0.5 billion-EUR0.6 billion of annual cash restructuring costs in the next three years. Recovering Profitability: The combination of cost savings and higher revenue has prompted a rebound in profitability so far in 2021. Its automotive operating margin recovered to 0.4% in H121, from nearly -10% in H120 and -3.3% in 2020, including a solid performance at Avtovaz. Fitch projects automotive operating margin at around 0.5% this year and to increase further to 2.5%-3% by 2024, in line with the rating. 2021 FCF at Risk: Fitch expects the FCF margin to improve to about 0.5%-1% in the medium term as underlying EBITDA strengthens, dividend payment from RCI Banque resumes and on firmer control of capex. However, the improvement will remain constrained by the cash impact of restructuring costs; limited dividends from Nissan, historically a strong contributor; and continuous investments in electrification and other technologies. Also, the effect of the microchip shortage on production and inventories remains unclear for the next few months. This could hit working-capital development in 2021 and lead to a negative FCF margin of 0.5%-1%, worse than Fitch's projection of only marginally negative-to-break-even FCF. Nonetheless, Fitch would expect working capital to reverse its outflows in 2022. Declining Leverage: Fitch projects a sharp drop in indebtedness in 2021 as the effect of better FCF on debt reduction is compounded by the sale of Renault's stake in Daimler for EUR1.1 billion. Fitch also expects funds from operations (FFO) to be boosted by the resumption of dividend payment from RCI Banque, which could amount to EUR0.5 billion-EUR0.7 billion annually. This should lead to a fall in FFO net leverage to 1.7x at end-2021, from more than 9x at end-2020, and further to just below 1.5x through to end-2023, a level more commensurate with the rating. Updated EV Strategy: Renault has ambitious targets, albeit largely similar to close peers', to develop dedicated electric platforms and reduce battery costs. The group plans to launch 10 new battery electric vehicles (BEVs) by 2025 and produce up to 1 million BEVs by 2030. In particular, it targets about 30% of its Renault brand's European sales of passenger cars to come from BEVs, reaching a share of up to 90% by 2030. Nonetheless, Renault will face fiercer competition from peers, which have caught up with its early start in vehicle electrification, as well as new entrants such as Chinese manufacturers, which are developing a more credible product offering in the mass-market segment. EV Ecosystem: Renault plans to increase in-house development of electric components, notably the powertrain, to reduce costs. It has also unveiled a comprehensive strategy to manage the battery's entire lifecycle. This includes generating revenue from batteries during their lifetime, chiefly from electricity passed from vehicle to grid, of about EUR400 per car, and during the recycling process, of up to EUR500 per car. This could offset the pressure on profitability coming from a higher share of less profitable EV compared with combustion-engine vehicles. Strained Alliance: While the scale of Renault remains modest on a standalone basis, compared with large international peers such as Volkswagen and Toyota, it can derive material synergies from its alliance with Nissan. This is an important advantage for new powertrains and autonomous driving technologies but which Fitch believes has not been deployed to its full potential. Investigations into ex-CEO Carlos Ghosn have triggered some turmoil between the two partners and disrupted several joint projects. Nonetheless, Fitch believes that new management at Nissan and Renault will bring stability, having agreed to coordinate strategies and name leaders for regions and technologies. Effect from ESG Factors: Renault has an ESG Relevance Score of '4' each for GHG Emissions & Air Quality and Governance Structure. The group is facing stringent emission regulation, notably in Europe, which is its main market. Investments in lower emission are a key driver of the group's strategy and cash generation. The Governance Structure score reflects the complex shareholding structure, including the partial ownership of the French State and cross-shareholdings with Nissan. The complicated relationship was illustrated by the developments surrounding merger discussions between Renault and FCA, which ultimately failed. DERIVATION SUMMARY On a standalone basis, Renault is smaller than General Motors Company (GM, BBB-/Stable), Ford Motor Company (BB+/Stable) and Hyundai Motor Company (BBB+/Stable), but Renault's alliance with Nissan, extended to Mitsubishi Motors, provides it with a capacity for substantial economies of scale and synergies, although Fitch believes that these synergies have not yet delivered their full potential. Renault's brand positioning is moderately weaker than US peers'. Nonetheless, Fitch believes Renault's relative position should incorporate Dacia, which despite not having a high brand value and leading market shares, enhances product and geographic diversification and is a healthy contribution to profitability. Compared with Hyundai and Kia Motors Corporation (BBB+/Stable), Fitch sees a closer comparison in competitiveness and brand positioning. Renault's financial profile has deteriorated significantly compared with investment grade-rated global automotive manufacturers'. Renault's automotive operating and FCF margins are expected to be lower than GM's and Stellantis N.V.'s (BBB-/Stable). In addition, FFO gross leverage is also expected to be at the high-end of the industry's. No country-ceiling, parent/subsidiary or operating environment aspects apply to the rating. KEY ASSUMPTIONS -- Unit sales up 10% to just more than 3 million vehicles in 2021, and gradually increasing further to 3.7 million units by 2024 due to capacity resizing; -- Automotive revenue increasing moderately more than unit sales from product-mix improvement and pricing discipline; -- Automotive operating margin turning positive in 2021 to around 0.5%, and improving further to 2.5%- 3% by 2024, after including restructuring cost totaling EUR1 billion over 2021- 2023; -- Positive working-capital contribution of EUR1.3 billion over 2021-2024, following significant outflow in 2020; -- Capex declining to EUR3.6 billion in 2021, and maintained at EUR3.8 billion-EUR4 billion over 2022-2024; -- Modest common dividend payment to resume in 2023; -- No major acquisitions and asset disposals from 2022 to 2024, following the disposal of the Daimler stake in 2021. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Group operating margin recovering to 3% (2020: -3.4%, 2021F: 0.6%, 2022F: 1.7%); -- FCF margin above 0.5% (2020: -11.3%, 2021F -0.2%, 2022F: 1.1%); -- Cash flow from operations (CFO)/total debt above 35% (2020: - 2%, 2021F: 21%, 2022F: 27%); -- FFO net leverage below 1.5x (2020: 9.1x, 2021F: 1.7x, 2022F: 1.6x). Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Increasing risk of deteriorating liquidity; -- Group operating margin below 1.5%; -- FCF margin remaining negative by 2023; -- CFO/total debt below 25%; -- FFO net leverage above 2.5x. 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 Adequate Liquidity: Substantial free cash absorption from falling FFO and large working-capital outflows significantly reduced liquidity in mid-2020. This prompted Renault to tap EUR4 billion of its EUR5 billion credit line guaranteed by the French state before its expiry at end-2020. Liquidity has also been boosted by a EUR1 billion Eurobond issued in November 2020 and another EUR600 million bond in April 2021. Fitch expects liquidity to improve further as working capital normalises and cash flow generation recovers. Renault has a record of maintaining a prudent financial policy, including a material reported net cash position and availability under revolving credit lines of at least 20% of revenue. Diversified Debt Structure: Renault's debt structure is diversified and consists mainly of euro- and yen-denominated unsecured bonds. The notes' maturities are spread out between 2021 and 2027. The group has also raised debt through bank credit lines, including at the level of its subsidiaries. For its liquidity needs, the group has direct access to EUR3.5 billion of an undrawn revolving credit facility. It also has access to a EUR2.5 billion commercial paper programme, of which EUR1.3 billion was used at end-2020. It further uses account-receivables factoring (several receivables securitisation programmes in different countries) to fund its working-capital needs. ISSUER PROFILE Renault is a France-based mass-market automotive manufacturer with annual sales of about EUR50 billion. Its brand portfolio includes Renault, Dacia, Lada, Samsung and Alpine and it owns RCI Banque, a subsidiary dedicated to vehicle sales financing and leasing. Renault has a significant equity investment in Nissan (43.4% shareholding) worth about EUR8.5 billion-EUR9 billion. SUMMARY OF FINANCIAL ADJUSTMENTS -- Fitch adjusts leverage metrics for financial services operations. -- Fitch calculated a target debt-to-equity ratio of 5x for RCI Banque, below the actual ratio of 8.2x at end-2020. -- Fitch assumes that Renault makes a EUR3.2 billion equity injection into RCI Banque, to bring its debt-to-equity ratio down to 5x. ESG CONSIDERATIONS Renault has an ESG Relevance Score of '4' for Governance Structure, reflecting its complex shareholding structure, which has a negative impact on its credit profile and is relevant to the rating in conjunction with other factors. Renault has an ESG Relevance Score of '4' for GHG Emissions & Air Quality as it is facing stringent emission regulation, notably in Europe which is its main market. This has a negative impact on its credit profile and is relevant to the rating in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. SIRONA HOLDCO: S&P Gives Prelim. 'B' Rating on Buyout by SK Capital ------------------------------------------------------------------- S&P Global Ratings assigned its 'B' preliminary long-term ratings to Sirona Holdco and to the proposed first-lien senior secured debt of EUR830 million issued by pharma and specialty chemicals company Sirona Holdco. S&P said, "The stable outlook reflects our expectation that Sirona will continue to generate positive free operating cash flow (FOCF) and maintain at least adequate liquidity. We also expect the group to maintain its adjusted debt-to-EBITDA ratio below 6.5x in the next 12 months, which we view as commensurate with the current rating." The private equity firm SK Capital is acquiring a majority stake in the French SEQENS group from Eurazeo, with the transaction scheduled to close in fourth-quarter 2021. The planned financing for this acquisition comprises a EUR830 million senior secured term loan B (TLB) due in seven years and a EUR130 million revolving credit facility (RCF) due in 6.5 years. The capital structure will also include about EUR80 million of existing debt at SEQENS, which will be rolled over. The transaction will be further supported by equity, a portion of which is expected to be in the form of preference shares provided by the private equity sponsor. S&P considers that the proposed preference shares put in place in the capital structure qualify for equity treatment under our methodology in light of the equity-stapling clause, and given that they are highly subordinated, and default-free. The preliminary ratings reflect relatively moderate debt at closing of the transaction, which primarily includes the EUR830 million proposed TLB, translating into about 5.5x S&P Global Ratings-adjusted debt to EBITDA as of end-2021. This is based on our expectation of adjusted EBITDA of EUR180 million-EUR185 million in 2021. Following a very strong year in 2020, the positive market trend has continued into 2021 with high demand for pharmaceuticals and a gradual recovery of market demand in some of the chemicals businesses, which were affected by the pandemic last year. Moreover, S&P has seen a strong performance in the paracetamol chain, which has been benefiting from tight supply due to the production stop at a main Chinese competitor from the beginning of this year. This contributed to about 45% year-on-year growth in the group's reported post IFRS-16 EBITDA (including MS but excluding Wavelength) in the first five months of 2021. S&P said, "However, we anticipate moderate re-leveraging in coming years, with debt to EBITDA weakening, but still below 6.5x in 2022. This is due to the expected normalization of the paracetamol chain. We expect this non-recurring positive effect to gradually fade out in 2022, which is likely to more than compensate for modest growth in other businesses. Nevertheless, we anticipate ongoing healthy market demand for pharmaceuticals, especially for the new API unit (POTENT) and contract development and manufacturing organization (CDMO) business. This, together with Sirona's strong competitive position in the salicylics and paracetamol chain, will contribute to good growth potential in coming years. "We view the planned carve-out and disposal of the MS business, combined with the addition of Wavelength as credit positive for the business risk profile. The disposal of the MS business, which generated about EUR160 million sales and EUR27 million EBITDA in 2020 and is expected to be completed at the same time as the buyout, will result in a smaller size of the group with less product and end-market diversification. However, this will be largely compensated by the addition of Wavelength with about EUR80 million sales and EUR15 million reported EBITDA in 2020. We understand that the MS business is exposed to more cyclical end markets and has shown more volatile EBITDA margins and a higher capital intensity than the rest of the group. As an API producer with focus on complex products (like inhalation, injectables, and controlled substances) and a strong pipeline of new products to be brought to the market in the next several years, Wavelength should have a higher-than-group-average growth rate and margin in the coming years. Therefore, we view this change in group portfolio as credit positive for business risk, as it will reduce Sirona's profit volatility and maintenance capital expenditure (capex) intensity and reinforce the group's focus on the more resilient pharmaceuticals market, which has good growth potential and a healthy margin. "We expect Sirona to sustain positive FOCF generation despite high growth capex in coming years. Sirona intends to use onshoring for APIs and intermediates in Europe and the U.S., which suffered from shortages and concerns about quality of supplies from Asia, especially during the pandemic. The company plans to accelerate investments to capture market opportunities from the global trend for greater autonomy in critical medicines. Consequently, capex will be higher than normal in 2021-2023, although we note that the French government will cover more than 50% of the expense through subsidies or advance payments that the group will pay back upon the completion of the projects. FOCF is therefore likely to be constrained in 2022 and 2023. Nevertheless, in the long term, we expect the investments will support higher sales and FOCF generation. "Our assessment of business risk is supported by the group's continuous expansion into the more profitable and resilient pharmaceutical synthesis business through acquisitions and organic growth projects, which proved to be resilient during the pandemic. Sirona benefits from diversified end markets, a large share of which are less cyclical and fairly resilient--particularly pharma, healthcare, cosmetics, electronics, and food. Supported by organic growth projects and a series of strategic acquisitions, Sirona has continuously shifted toward the more resilient and profitable pharmaceutical synthesis and specialty chemicals businesses, which together now account for about 90% of group EBITDA (including Wavelength). Acquisitions over recent years, especially PCAS and PCI Synthesis and the current addition of Wavelength, are a good fit for the group's strategy to expand into the fast-growing CDMO business. As a result, the group's performance has proved quite resilient during the pandemic." Sirona benefits from leading positions in its niche markets in Europe, supported by highly regulated markets and barriers to entry in the pharmaceutical business. It is the No. 1 producer of aspirin globally and No. 2 producer of paracetamol in Europe. The company also has strong market position in various generic APIs within its API CDMO business unit. The addition of Wavelength is expected to further strengthen the group's market positioning given Wavelength's leading market position particularly in more complex APIs such as steroids, cytotoxics, and other high-potency compounds. Barriers to entry are high for these pharma products, given the regulated nature of the market and the requirements of specific regulatory authorities. However, Sirona's business risk profile is constrained by the group's relatively small size, as reflected in expected revenue of EUR1.1 billion and adjusted EBITDA of about EUR185 million in 2021, which S&P expects will decrease to EUR150 million-EUR160 million in 2022. Sirona's higher concentration in Europe than much larger and more diversified global competitors is also a constraint. In 2021, post transaction, we expect the group to generate about 25% of total revenue in France and more than 65% in Europe as a whole. In terms of assets, 13 of the group's 24 production facilities are located in France. SEQENS's chemicals business is somewhat exposed to cyclical end markets like auto albeit declining with the disposal of MS. Its more commodity-like products, such as phenol and acetone, despite large captive use, are exposed to the high volatility of raw material prices, especially benzene and propylene. This is mitigated, to some extent, by the contractual pass-through of benzene costs to phenol customers. Overall the highly leveraged financial risk profile also reflects its private equity ownership. S&P said, "We note the shareholders' commitment to keep leverage below the opening leverage (excluding the positive performance from the paracetamol chain). Nevertheless, we still need to see track record of a clear deleveraging path of the group in the future. In addition, we expect Sirona will more focus on accelerating the integration of Wavelength and implementing growth projects in the next two years rather than additional acquisitions." S&P said, "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 we do not receive final documentation within a reasonable time, 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, utilization of the proceeds, maturity, size and conditions of the facilities, financial and other covenants, security, and ranking. "The stable outlook reflects our expectation that Sirona will continue to generate positive FOCF and maintain at least adequate liquidity. We also expect the group to maintain its adjusted debt-to-EBITDA ratio below 6.5x in the next 12 months, which we view as commensurate with the current rating. "We could lower the rating if leverage weakens to above 6.5x without the prospect of a swift recovery, in combination with FOCF turning negative without any prospect of return to positive territory with normalized capex. This could stem from a material deterioration of market conditions or unexpected operational risks, such as from the implementation of various growth projects. In addition, weaker liquidity or a more aggressive financial policy regarding capex, acquisitions, or dividends could also put downward pressure on the rating. "We view an upgrade as remote at this stage. We could raise the rating if Sirona demonstrated a track record of healthy organic growth while at least maintaining its current profitability and generating sustainably solid FOCF. An upgrade would be contingent on adjusted debt to EBITDA improving to sustainably below 5x and a strong commitment from the shareholder to keep adjusted leverage at this level." ============= G E R M A N Y ============= TUI AG: To Sell Share at Discount in Rights Offering ---------------------------------------------------- William Wilkes and Thomas Mulier at Bloomberg News report that TUI AG will raise EUR1.1 billion (US$1.3 billion) by selling new stock, making it the latest travel company to tap investors for cash to reduce a giant pandemic debt pile. According to Bloomberg News, TUI said on Oct. 5 in a statement the share sale, at a discount price of 2.15 euros each in a rights offering, will allow the world's biggest tour operator to reduce its draw on a state-backed rescue loan to zero. Bloomberg reported in June that TUI was exploring ways to raise about EUR1 billion in fresh capital to help it pay back state bailouts. TUI has been the beneficiary of three government-support packages since the pandemic hammered its core business, taking mainly British and German tourists to warm-weather destinations, Bloomberg News notes. The company, which operates airlines, hotels and cruise ships, has relied on the German government and private investors to pitch in on prior financing, while also selling off some assets, Bloomberg News states. With the TUI offering, European airlines will have announced US$8.91 billion in equity fundraising this year, out of a global total of US$21.8 billion for the industry as a whole, based on data compiled by Bloomberg. A return to positive cash flow this past summer gives TUI's management some breathing space as it plots an exit from the crisis, provided the recovery doesn't falter yet again, Bloomberg News relays. The company also said it expects a wider return to international travel this winter season with capacity significantly better than last year, Bloomberg News notes. Still, it expects to operate only at 60% to 80% of normal levels, Bloomberg News discloses. The company, as cited by Bloomberg News, said the fully underwritten rights offering, at a 35% discount, will cut TUI's debt to EUR6.5 billion from EUR8.7 billion. Top shareholder Unifirm Ltd. will exercise rights for its entire 32% stake, Bloomberg News says. The offering will run from Oct. 8-Nov. 2, according to Bloomberg News. ============= I R E L A N D ============= ANCHORAGE CAPITAL 5: Fitch Gives 'B-(EXP)' Rating to Class F Debt ----------------------------------------------------------------- Fitch Ratings has assigned Anchorage Capital Europe CLO 5 DAC expected ratings. The assignment of final ratings is contingent on final documents conforming to the information used for the analysis. DEBT RATING ---- ------ Anchorage Capital Europe CLO 5 DAC A LT AAA(EXP)sf Expected Rating B-1 LT AA(EXP)sf Expected Rating B-2 LT AA(EXP)sf Expected Rating C LT A(EXP)sf Expected Rating D LT BBB-(EXP)sf Expected Rating E LT BB-(EXP)sf Expected Rating F LT B-(EXP)sf Expected Rating Subordinated Notes LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY Anchorage Capital Europe CLO 5 DAC is a securitisation of mainly senior secured obligations (at least 90%) with a component of senior unsecured, mezzanine, second-lien loans and high-yield bonds. Note proceeds will be used to fund a portfolio with a target par of EUR430 million. The portfolio will be actively managed by Anchoarge CLO ECM LLC. The collateralised loan obligation (CLO) has a 4.7-year reinvestment period and an 8.7-year weighted average life (WAL). KEY RATING DRIVERS Average Portfolio Credit Quality (Neutral): Fitch assesses the average credit quality of obligors in the 'B'/'B-' category. The Fitch weighted average rating factor (WARF) of the identified portfolio is 25.97, below the indicative maximum Fitch WARF covenant of 27.63. Strong Recovery Expectation (Positive): At least 90% of the portfolio will comprise senior secured obligations. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch weighted average recovery rate (WARR) of the identified portfolio is 62.12%, above the indicative minimum Fitch WARR covenant of 60.25%. Diversified Portfolio (Positive): The indicative top-10 obligor limit and fixed-rate asset limit for the expected rating analysis is 23% and 15%, respectively. The transaction also includes various concentration limits, including a maximum exposure to the three-largest Fitch-defined industries in the portfolio at 42.5%. These covenants ensure that the asset portfolio will not be exposed to excessive concentration. Portfolio Management (Neutral): The transaction has a 4.7-year reinvestment period and includes reinvestment criteria similar to those of other European transactions. Fitch's analysis is based on a stressed-case portfolio with the aim of testing the robustness of the transaction structure against its covenants and portfolio guidelines. Cash-flow Modelling (Neutral): The WAL used for the transaction's stressed-case portfolio is 12 months less than the WAL covenant, to account for strict reinvestment conditions after the reinvestment period, including the over-collateralisation tests and Fitch 'CCC' limit being passed together with a linearly decreasing WAL covenant. When combined with loan pre-payment expectations this ultimately reduces the maximum possible risk horizon of the portfolio. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- An increase of the default rate (RDR) at all rating levels by 25% of the mean RDR and a decrease of the recovery rate (RRR) by 25% at all rating levels would result in downgrades of no more than five notches, depending on the notes. -- Downgrades may occur if the build-up of the notes' 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. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- A reduction of the RDR at all rating levels by 25% of the mean RDR and an increase in the RRR by 25% at all rating levels would result in upgrades of up to four notches depending on the notes, except for the class A notes, which are already at the highest rating on Fitch's scale and cannot be upgraded. -- At closing, Fitch will use 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. This is because the portfolio credit quality may still deteriorate, not only by natural credit migration, but also by reinvestments, and also because the manager can update the Fitch collateral quality test. -- After the end of the reinvestment period, upgrades may occur on better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio. 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 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. DEER PARK CLO: S&P Assigns B- Rating on Class F-R Notes ------------------------------------------------------- S&P Global Ratings assigned its preliminary credit ratings to Deer Park CLO DAC's class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R reset notes. At closing, the issuer will have unrated subordinated notes outstanding from the existing transaction. The transaction is a reset of the existing Deer Park CLO, which closed in September 2020. The issuance proceeds of the refinancing notes will be used to redeem the refinanced notes (class X, A-1, A-2A, A-2B, B, C, D, and E notes of the original Deer Park CLO transaction), and pay fees and expenses incurred in connection with the reset. The reinvestment period will be extended to April 2026. The covenanted maximum weighted-average life will be 8.5 years from closing. 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 preliminary 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 2,753.41 Default rate dispersion 625.70 Weighted-average life (years) 4.96 Obligor diversity measure 154.20 Industry diversity measure 19.37 Regional diversity measure 1.21 Transaction Key Metrics CURRENT Total par amount (mil. EUR) 350.00 Defaulted assets (mil. EUR) 0.00 Number of performing obligors 194 Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 4.55 Covenanted 'AAA' weighted-average recovery (%) 36.25 Covenanted weighted-average spread (%) 3.45 Covenanted weighted-average coupon (%) 4.00 S&P said, "Our preliminary ratings reflect our assessment of the preliminary 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 CDOs. "In our cash flow analysis, we used the EUR347 million par amortizing amount, consisting of EUR350 million target par minus EUR3 million of reinvestment target par adjustment cap, the covenanted weighted-average spread of 3.45%, the covenanted weighted-average coupon of 4.00%, and the covenanted weighted-average recovery rates of 36.25%. 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 expect that the transaction's documented counterparty replacement and remedy mechanisms will 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 preliminary ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria. "At closing, we consider that the transaction's legal structure will be 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-R, B-2-R, and C-R notes could withstand stresses commensurate with higher ratings 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. The class A-R, D-R, and E-R notes can withstand stresses commensurate with the assigned preliminary ratings. 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. "For the class F-R notes, our credit and cash flow analysis indicates a negative cushion at the assigned preliminary rating. Nevertheless, based on the portfolio's actual characteristics and additional overlaying factors, including our long-term corporate default rates and recent economic outlook, we believe this class is able to sustain a steady-state scenario, in accordance with our criteria." S&P's analysis reflects several key factors, including: -- The available credit enhancement for this class of notes is in the same range as other CLOs that S&P rates, and that has recently been issued in Europe. -- The portfolio's average credit quality is similar to other recent CLOs. -- S&P's model generated BDR at the 'B-' rating level of 22.69% (for a portfolio with a weighted-average life of 4.96 years), versus a generated BDR at 15.38% if we were to consider a long-term sustainable default rate of 3.1% for 4.96 years. -- The actual portfolio is generating higher spreads and recoveries at the 'AAA' rating compared with the covenanted thresholds that S&P has modelled in our cash flow analysis. -- Whether the tranche is vulnerable to nonpayment in the near future. -- If there is a one-in-two chance for this note to default. -- If S&P envisions this tranche to default in the next 12-18 months. -- Following this analysis, S&P considers that the available credit enhancement for the class F-R notes is commensurate with the assigned preliminary 'B- (sf)' rating. Until the end of the reinvestment period on April 2026, the collateral manager may substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and compares that with the default potential of the current portfolio plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager may, through trading, deteriorate the transaction's current risk profile, as long as the initial ratings are maintained. S&P said, "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe that our preliminary ratings are commensurate with the available credit enhancement for the class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R reset 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-R to E-R 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-R notes." Deer Park CLO is a European cash flow CLO securitization of a revolving pool, comprising euro-denominated senior secured loans and bonds issued mainly by sub-investment grade borrowers. Blackstone Ireland Ltd. will manage the transaction. Environmental, social, and governance (ESG) 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: biological, nuclear, chemical or similar controversial weapons, anti-personnel land mines, or cluster munitions. 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." DILOSK RMBS 5: S&P Assigns Prelim. B- Rating on X1 Notes -------------------------------------------------------- S&P Global Ratings assigned its preliminary credit ratings to Dilosk RMBS No. 5 DAC's class A, B-Dfrd, C-Dfrd, D-Dfrd, E-Dfrd, F-Dfrd, and X1-Dfrd notes. At closing, the issuer will issue unrated class X2, Z1, and Z2 notes. The loans in the pool were originated by Dilosk DAC (Dilosk), a nonbank specialist lender, under its ICS Mortgages brand over the last two years. While Dilosk was established in 2013, it has only been originating BTL mortgages since 2017 and owner-occupied mortgages since late 2019, and thus historical performance data is limited. The transaction includes up to 30% pre-funded amount where the issuer can add loans up until the first interest payment date subject to certain conditions. Approximately 76.0% of the preliminary pool comprises owner-occupied loans, and the remaining 24.0% are BTL loans. The collateral comprises prime borrowers. All of the loans have been originated recently and thus under the Irish Central Bank's mortgage lending rules limiting leverage (through loan-to-value limits) and debt burden (through loan-to-income limits). No borrowers in the portfolio have a currently active payment holiday as a result of the COVID-19 pandemic. The transaction benefits from liquidity provided by a general reserve fund, and in the case of the class A notes, class A liquidity reserve fund. Principal can be used to pay senior fees and interest on the notes subject to various conditions. The transaction incorporates a swap to hedge the mismatch between the notes, which pay a coupon based on the three-month EURIBOR, and certain loans, which pay fixed-rate interest before reversion. At closing, the issuer will use 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. There are no rating constraints in the transaction under our counterparty, operational risk, or structured finance sovereign risk criteria. Preliminary Ratings CLASS PRELIM. RATING CLASS SIZE (%) A AAA (sf) 83.5 B-Dfrd AA (sf) 8.25 C-Dfrd A+ (sf) 3.50 D-Dfrd BBB+ (sf) 2.25 E-Dfrd BB+ (sf) 1.50 F-Dfrd B- (sf) 0.75 X1-Dfrd B- (sf) 2.50 X2 NR 1.25 Z1 NR 0.25 Z2 NR 1.25 FAIR OAKS III: Fitch Assigns B-(EXP) Rating on Class F Debt ----------------------------------------------------------- Fitch has assigned Fair Oaks Loan Funding III DAC expected ratings. DEBT RATING ---- ------ Fair Oaks Loan Funding III DAC Class X LT AAA(EXP)sf Expected Rating Class A LT AAA(EXP)sf Expected Rating Class B-1 LT AA(EXP)sf Expected Rating Class B-2 LT AA(EXP)sf Expected Rating Class C LT A(EXP)sf Expected Rating Class D LT BBB-(EXP)sf Expected Rating Class E LT BB-(EXP)sf Expected Rating Class F LT B-(EXP)sf Expected Rating Subordinated Notes LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY Fair Oaks Loan Funding III Designated Activity Company is a securitisation of mainly senior secured obligations (at least 90%) with a component of senior unsecured, mezzanine, second-lien loans and high-yield bonds. Refinancing note proceeds will be used to refinance existing notes. The portfolio has a target par of EUR350 million. The portfolio is actively managed by Fair Oaks Capital Limited. The collateralised loan obligation (CLO) has a four-and-a-half-year reinvestment period and an eight-and-a-half-year weighted average life (WAL). KEY RATING DRIVERS Above-Average Portfolio Credit Quality (Positive): Fitch considers the average credit quality of obligors to be in the 'B' category. The Fitch weighted average rating factor (WARF) of the current portfolio is 23.9. High Recovery Expectations (Positive): At least 90% of the portfolio will comprise senior secured obligations. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch weighted average recovery rate (WARR) of the current portfolio is 63.5%. Diversified Asset Portfolio (Positive): The transaction has a concentration limit for the 10 largest obligors of 18%. The transaction also includes various concentration limits, including the maximum exposure to the three largest (Fitch-defined) industries in the portfolio at 40%. These covenants ensure the asset portfolio will not be exposed to excessive concentration. Portfolio Management (Neutral): The transaction has a 4.5-year reinvestment period and includes reinvestment criteria similar to those of other European transactions. Fitch's analysis is based on a stressed-case portfolio with the aim of testing the robustness of the transaction structure against its covenants and portfolio guidelines. Reduced Risk Horizon (Positive): The stressed-case portfolio was prepared with a 7.5-year WAL. Under the agency's CLOs and Corporate CDOs Rating Criteria, the WAL used for the transaction stress portfolio was 12 months less than the WAL covenant to account for structural and reinvestment conditions after the reinvestment period, including the overcollateralisation tests, Fitch WARF test and Fitch 'CCC' limitation passing after reinvestment together with a linearly decreasing WAL covenant. When combined with loan pre-payment expectations this ultimately reduces the maximum possible risk horizon of the portfolio. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- An increase of the default rate (RDR) at all rating levels by 25% of the mean RDR and a decrease of the recovery rate (RRR) by 25% at all rating levels would result in downgrades of no more than four notches, depending on the notes. -- Downgrades may occur if the build-up of the notes' 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. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- A reduction of the RDR at all rating levels by 25% of the mean RDR and an increase in the RRR by 25% at all rating levels would result in upgrades of up to four notches depending on the notes, except for the class X and A notes, which are already at the highest rating on Fitch's scale and cannot be upgraded. -- At closing, Fitch used a standardised stressed portfolio (Fitch's stressed portfolio) that was customised to the portfolio limits as specified in the transaction documents. Even if the actual portfolio shows lower defaults and smaller losses at all rating levels than Fitch's stressed portfolio assumed at closing, an upgrade of the notes during the reinvestment period is unlikely. This is because the portfolio credit quality may still deteriorate, not only by natural credit migration, but also by reinvestments, and also because the manager can update the Fitch collateral quality test. -- After the end of the reinvestment period, upgrades may occur on better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio. 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 Fair Oaks Loan Funding III DAC 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. FAIR OAKS III: S&P Assigns Prelim. B- Rating on Class F-R Notes --------------------------------------------------------------- S&P Global Ratings assigned preliminary credit ratings to Fair Oaks Loan Funding III DAC's class X-R to F-R European cash flow CLO reset notes. At closing, the issuer will not issue additional unrated subordinated notes in addition to the EUR35 million of existing unrated subordinated notes. The preliminary ratings reflect S&P's 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. -- The transaction's legal structure, which S&P expects to be bankruptcy remote. -- The transaction's counterparty risks, which S&P expects to be in line with its counterparty rating framework. Portfolio Benchmarks CURRENT S&P weighted-average rating factor 2685.14 Default rate dispersion 575.72 Weighted-average life (years) 5.03 Obligor diversity measure 115.39 Industry diversity measure 20.00 Regional diversity measure 1.33 Transaction Key Metrics CURRENT Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 1.71 Modeled 'AAA' weighted-average recovery (%) 34.70 Modeled weighted-average spread (%) 3.40 Modeled weighted-average coupon (%) 4.00 At closing, the portfolio will be well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. S&P said, "Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow CDOs. As such, we have not applied any additional scenario and sensitivity analysis when assigning ratings to any classes of notes in this transaction." S&P said, "In our cash flow analysis, we used the EUR350 million performing pool balance, the covenanted weighted-average spread (3.40%), the reference weighted-average coupon (4.00%), and the covenant weighted-average recovery rates for all ratings as indicated by the collateral manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1-R, B-2-R, C-R, D-R, and E-R notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from closing, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes. "For the class F-R notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses that are commensurate with a 'CCC+' rating. However, after applying our 'CCC' criteria, we have assigned a preliminary 'B-' rating to this class of notes." The one-notch uplift (to 'B-') from the model generated results (of 'CCC+'), reflects several key factors, including: -- The available credit enhancement for this class of notes is in the same range as other CLOs that S&P rates, and that have recently been issued in Europe. -- The portfolio's average credit quality is similar to other recent CLOs. -- S&P's model generated BDR at the 'B-' rating level of 25.57% (for a portfolio with a weighted-average life of 5.03 years), versus if it was to consider a long-term sustainable default rate of 3.1% for 5.03 years, which would result in a target default rate of 15.59%. -- S&P also noted that the actual portfolio is generating higher spreads and recoveries versus the covenanted thresholds that it has modelled in its cash flow analysis. S&P said, "For us to assign a rating in the 'CCC' category, we also assessed (i) whether the tranche is vulnerable to non-payments in the near future, (ii) if there is a one in two chance for this note to default, and (iii) if we envision this tranche to default in the next 12-18 months." Following this analysis, S&P considers that the available credit enhancement for the class F-R notes is commensurate with the preliminary 'B- (sf)' rating assigned. S&P said, "Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned ratings. "At closing, we expect the transaction's documented counterparty replacement and remedy mechanisms to adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "We expect the transaction's legal structure to be bankruptcy remote, in line with our legal criteria. "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our preliminary ratings are commensurate with the available credit enhancement for each class of notes. "In addition to our standard analysis, to provide an indication of how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class X-R to E-R notes to five hypothetical scenarios. The results shown in the chart below are based on the covenanted weighted-average spread, coupon, and recoveries. "As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F-R notes." Environmental, social, and governance (ESG) 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: coal and fossil fuels, hazardous chemicals, pesticides, controversial weapons, pornography, tobacco, predatory or payday lending activities, and weapons and firearms. 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." Ratings List CLASS PRELIM. PRELIM. INTEREST RATE CREDIT RATING AMOUNT (%) ENHANCEMENT (%) (MIL. EUR) X-R AAA (sf) 2.00 3mE + 0.50 N/A A-R AAA (sf) 213.50 3mE + 1.00 39.00 B-1-R AA (sf) 30.30 3mE + 1.75 27.49 B-2-R AA (sf) 10.00 2.05 27.49 C-R A (sf) 21.00 3mE + 2.15 21.49 D-R BBB (sf) 24.50 3mE + 3.00 14.49 E-R BB- (sf) 16.80 3mE + 6.11 9,69 F-R B- (sf) 9.40 3mE + 8.65 7.00 Sub NR 35.00 N/A N/A NR--Not rated. N/A--Not applicable. 3mE--Three-month Euro Interbank Offered Rate. HARVEST CLO X: Fitch Raises Class F Notes Rating to 'BB-' --------------------------------------------------------- Fitch Ratings has upgraded the class C-R, E and F notes and affirmed other tranches of Harvest CLO X DAC. Fitch also removed the class C-R, D-R, E and F notes from Under Criteria Observation. The Rating Outlook remains Stable for all tranches. DEBT RATING PRIOR ---- ------ ----- Harvest CLO X DAC B-R XS1649635940 LT AAAsf Affirmed AAAsf C-R XS1649636245 LT AAAsf Upgrade AA+sf D-R XS1649636674 LT A+sf Affirmed A+sf E XS1114266197 LT BBB+sf Upgrade BB+sf F XS1114266866 LT BB-sf Upgrade B+sf TRANSACTION SUMMARY The transaction is a cash-flow collateralized loan obligation (CLO) backed by a portfolio of mainly European leveraged loans and bonds. The transaction has exited its reinvestment period in November 2018 and the portfolio is currently amortizing. KEY RATING DRIVERS The analysis was based on the current portfolio and evaluated the combined impact of amortization and performance since the last review in February 2021 and the recently updated Fitch CLOs and Corporate CDOs Rating Criteria (including, among others, a change in the underlying default assumptions). In addition, Fitch performed a scenario that assumes a one-notch downgrade on the Fitch IDR Equivalency Rating for assets with a Negative Outlook on the driving rating of the obligor. Transaction Deleveraging The upgrade of the class C-R, E and F notes reflects the further deleveraging of the transaction since the last review in February 2021. The transaction has been amortizing approximately EUR62.4 million during the review period. Class A-R notes have been paid in full in August 2021, class B-R notes have been paid down around EUR0.6 million in the same payment month. Overall credit enhancement (CE) have improved across all rated notes. Deviation from Model-implied Rating Class F has been upgraded to 'BB-sf' which is a deviation from the model implied rating of 'BBsf'. The deviation by negative one notch reflects that the model-implied rating would not be resilient based upon a scenario that assumes a one-notch downgrade on the Fitch IDR Equivalency Rating for assets with a Negative Outlook on the driving rating of the obligor. The deviation is motivated by the limited default rate cushion when considering this scenario in the analysis. Portfolio Performance As per the report dated Aug. 31, 2021, the transaction is passing all the coverage tests but the Fitch weighted average rating factor (WARF) test, weighted average recovery rate (WARR) test and weighted average life (WAL) test are failing. Fitch CCC obligation makes up 15.8% of the portfolio, exceeding the 7.5% limit. No defaulted asset is currently reported. The transaction has not reinvested since Fitch's last review and the failing collateral quality tests constrain the transaction from reinvestment. Asset Credit Quality 'B'/'B-' Portfolio: Fitch assesses the average credit quality of the obligors in the 'B'/'B-' category for the transaction. The Fitch WARF reported by the trustee was 38.12 in the Aug. 31, 2021 monthly report, above the maximum covenant of 34.00. The Fitch calculated WARF under the updated Fitch CLOs and Corporate CDOs Rating Criteria is 27.20 as of Sept. 25, 2021 Asset Security Senior secured obligations make up 99.49% of the portfolio. Fitch views the recovery prospects for these assets as more favorable than for second-lien, unsecured and mezzanine assets. Fitch WARR of the current portfolio is 60.8% as per the report, below the test limit of 61.80%. Portfolio Concentration As the transaction amortizes, the portfolio becomes more concentrated. Although the concentration risk is increasing, this is offset by pay down of the assets and increased credit enhancement. Currently there are 63 assets from 57 obligors in the portfolio. The top 10 obligors exposure is 30.8% and the largest single obligor represents 3.49% of the portfolio balance, above its 2.5% limit. As per Fitch's calculation the largest industry is chemicals at 17.8% of the portfolio balance, above the 15.0% test limit. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- An increase of the RDR at all rating levels by 25% of the mean RDR and a decrease of the RRR by 25% at all rating levels will result in downgrades of no more than four notches depending on the notes. -- Downgrades may occur if the build-up of credit enhancement following amortization does not compensate for a larger loss expectation than initially assumed due to unexpectedly high level of default and portfolio deterioration. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- A reduction of the default rate (RDR) at all rating levels by 25% of the mean RDR and an increase in the recovery rate (RRR) by 25% at all rating levels would result in an upgrade of up to five notches depending on the notes. -- Except for the class B-R and C-R notes, which are already at the highest 'AAAsf' rating, upgrades may occur in case of better than expected portfolio credit quality and deal performance, and continued amortization that leads to higher credit enhancement and excess spread available to cover for losses on the remaining portfolio. 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 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. Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. JUBILEE CLO 2015-XV: Moody's Affirms B1 Rating on Class F Notes --------------------------------------------------------------- Moody's Investors Service has upgraded the ratings on the following notes issued by Jubilee CLO 2015-XV DAC: EUR26,000,000 Refinancing Class C Deferrable Mezzanine Floating Rate Notes due 2028, Upgraded to Aa1 (sf); previously on Jan 22, 2021 Upgraded to Aa3 (sf) EUR23,500,000 Refinancing Class D Deferrable Mezzanine Floating Rate Notes due 2028, Upgraded to A2 (sf); previously on Jan 22, 2021 Upgraded to A3 (sf) Moody's has also affirmed the ratings on the following notes: EUR252,750,000 Refinancing Class A Senior Secured Floating Rate Notes due 2028, Affirmed Aaa (sf); previously on Jan 22, 2021 Affirmed Aaa (sf) EUR60,250,000 Refinancing Class B Senior Secured Floating Rate Notes due 2028, Affirmed Aaa (sf); previously on Jan 22, 2021 Upgraded to Aaa (sf) EUR27,000,000 Class E Deferrable Junior Floating Rate Notes due 2028, Affirmed Ba1 (sf); previously on Jan 22, 2021 Upgraded to Ba1 (sf) EUR15,250,000 Class F Deferrable Junior Floating Rate Notes due 2028, Affirmed B1 (sf); previously on Jan 22, 2021 Affirmed B1 (sf) Jubilee CLO 2015-XV DAC, issued in June 2015 and refinanced in October 2017, is a collateralised loan obligation (CLO) backed by a portfolio of mostly high-yield senior secured European loans. The portfolio is managed by Alcentra Limited. The transaction's reinvestment period ended in July 2019. RATINGS RATIONALE The rating upgrades on the Class C and D notes and the affirmations on the ratings on the Class A, B, D and F notes are primarily a result of the deleveraging of the Class A notes following amortisation of the underlying portfolio since the last rating action in January 2021. The Class A notes have paid down by approximately EUR116.9 million (47.2%) since the last rating action in January 2021 and EUR121.8 million (48.2%) since closing. As a result of the deleveraging, over-collateralisation (OC) has increased across the capital structure. According to the trustee report dated August 2021 [1] the Class A/B, Class C, Class D and Class E OC ratios are reported at 157.6%, 138.7%, 125.2% and 112.6% compared to December 2020 [2] levels of 135.5%, 124.9%, 116.8% and 108.6%, respectively. The key model inputs Moody's uses in its analysis, such as par, weighted average rating factor, diversity score and the weighted average recovery rate, are based on its published methodology and could differ from the trustee's reported numbers. In its base case, Moody's used the following assumptions: Performing par and principal proceeds balance: EUR301.8M Defaulted Securities: EUR2.45M Diversity Score: 38 Weighted Average Rating Factor (WARF): 2985 Weighted Average Life (WAL): 3.56 years Weighted Average Spread (WAS) (before accounting for Euribor floors): 3.55% Weighted Average Coupon (WAC): 3.23% Weighted Average Recovery Rate (WARR): 44.89% Par haircut in OC tests and interest diversion test: 0.24% The default probability derives from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The estimated average recovery rate on future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance and a collateral manager's latitude to trade collateral are also relevant factors. Moody's incorporates these default and recovery characteristics of the collateral pool into its cash flow model analysis, subjecting them to stresses as a function of the target rating of each CLO liability it is analysing. Moody's notes that the September 2021 trustee report was published at the time it was completing its analysis of the August 2021 data. Key portfolio metrics such as WARF, diversity score, weighted average spread and life, and OC ratios exhibit little or no change between these dates. 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. Counterparty Exposure: The rating action took into consideration the notes' exposure to relevant counterparties, such as account bank and swap provider, using the methodology "Moody's Approach to Assessing Counterparty Risks in Structured Finance" published in May 2021. Moody's concluded the ratings of the notes are not constrained by these risks. Factors that would lead to an upgrade or downgrade of the rating: This transaction is subject to a high level of macroeconomic uncertainty, which could negatively affect the ratings on the note, in light of uncertainty about credit conditions in the general economy. In particular, the length and severity of the economic and credit shock precipitated by the global coronavirus pandemic will have a significant impact on the performance of the securities. CLO notes' performance may also be impacted either positively or negatively by: (1) the manager's investment strategy and behaviour; and (2) divergence in the legal interpretation of CDO documentation by different transactional parties because of embedded ambiguities. Additional uncertainty about performance is due to the Portfolio amortisation: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio, which can vary significantly depending on market conditions and have a significant impact on the notes' ratings. Amortisation could accelerate as a consequence of high loan prepayment levels or collateral sales by the collateral manager or be delayed by an increase in loan amend-and-extend restructurings. Fast amortisation would usually benefit the ratings of the notes beginning with the notes having the highest prepayment priority. Recovery of defaulted assets: Market value fluctuations in trustee-reported defaulted assets and those Moody's assumes have defaulted can result in volatility in the deal's over-collateralisation levels. Further, the timing of recoveries and the manager's decision whether to work out or sell defaulted assets can also result in additional uncertainty. Moody's analysed defaulted recoveries assuming the lower of the market price or the recovery rate to account for potential volatility in market prices. Recoveries higher than Moody's expectations would have a positive impact on the notes' ratings. ========= I T A L Y ========= BACH BIDCO: Moody's Gives 'B2' CFR & Rates New EUR275MM Notes 'B2' ------------------------------------------------------------------ Moody's Investors Service has assigned a B2 corporate family rating and B2-probability of default rating to Bach Bidco S.p.A (Bip or the company). Concurrently, Moody's has assigned a B2 rating to the proposed EUR275 million senior secured floating rate notes due 2028 issued by Bach Bidco S.p.A. The outlook on the rating is stable. The proceeds from the notes will be used to refinance the EUR275m bridge loan used to finance the acquisition of Bip by the private equity firm CVC Capital Partners, the refinancing of certain existing debt and for related fees and expenses. RATINGS RATIONALE Bip is strongly positioned within the B2 CFR, supported by (1) its strong track record of organic revenue growth since inception with no single year-on-year revenue decline or steadiness since 2003; (2) a business model that has proven to be resilient through economic cycles; (3) solid base of long standing client relationships built over several years; (4) attractive position in digital consulting which has significant medium-term growth potential and (5) Moody's adjusted free cash flow (FCF) to debt expected to be sustained above 5% in the next 12-18 months. Conversely, the CFR is constrained by (1) Bip's small scale in a highly competitive and fragmented industry; (2) some level of geographic and customer concentration; (3) reliance on key employees' network of client relationships; (4) high starting leverage of 5.3x, which is expected to reduce to 4.5x by 2023; and (5) the possibility of debt funded acquisitions or shareholder friendly polices given its private equity ownership. Moody's regards the company's financial policy as an ESG consideration in accordance with its ESG framework. Moody's expects Bip will continue to its grow revenue and EBITDA over the medium-term as acquisitions completed in 2020 are integrated into the business. Following the closing of this transaction, revenue and Moody's adjusted EBITDA is expected to reach around EUR350 million and EUR65 million respectively in 2021. The rating agency expects Bip will generate revenue in the range of EUR380 to EUR420 million with Moody's adjusted EBITDA of EUR68 to EUR74 million over 2022 and 2023 on an organic basis. As the company grows and EBITDA generation improves, leverage will gradually reduce from 5.3x as of 2021 (pro forma the transaction) to 5.1x and 4.5x in 2022 and 2023 respectively. Bip's cash flow generation is expected to remain healthy, with the company expected to generate FCF of EUR20-25 million per year, equivalent to around 6-7% of Moody's adjusted debt, which is strong for its rating category. ESG CONSIDERATIONS Funds advised and controlled by CVC Capital Partners will own 75% of the of the company while the remaining 25% will be owned by the equity partners following closing of the transaction. Governance risk is a consideration here as private equity owners often have a higher tolerance for leverage, an appetite to pursue acquisitions for growth and financial policies that maximize equity returns. LIQUIDITY Moody's considers Bip's liquidity as adequate supported by (1) a pro forma starting cash balance of EUR19 million as of September 2021, (2) access to a fully undrawn EUR50 million revolving credit facility (RCF) at closing of the transaction, and (3) expected FCF generation of at least EUR20-25 million per year. The RCF is expected to remain undrawn and there are no maintenance covenants in the structure. STRUCTURAL CONSIDERATIONS The proposed capital structure includes EUR275 million senior secured floating rate notes due 2028 and a EUR50 million super-senior RCF also due in 2028. The security package for the notes and RCF is limited to share pledges and intercompany receivables which is considered to be weak. However, the RCF will rank ahead of the notes in an enforcement scenario under the provisions of the intercreditor agreement. The B2 rating assigned to the proposed senior secured notes is in line with the CFR, reflecting upstream guarantees from operating companies. The B2-PD probability of default rating is at the same level as the CFR, reflecting the assumption of a 50% family recovery rate. The notes and the RCF benefit from upstream guarantees from operating companies accounting for at least 70% of consolidated EBITDA. RATING OUTLOOK The stable outlook reflects expectation of continued growth in revenue and EBITDA while maintaining stable EBITDA margins over the medium term; no significant re-leveraging from starting level and healthy free cash flow generation above 5% of Moody's adjusted debt and adequate liquidity. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive pressure could arise if (1) Bip continues to grow its size and scale in terms of revenue and EBITDA (2) its Moody's-adjusted (gross) leverage falls towards 4.5x on a sustained basis while delivering a still solid operating performance; (3) it maintains a strong liquidity profile, including an improvement in Moody's adjusted FCF/Debt to around 10% on a sustained basis. Negative pressure could arise if (1) its revenue and EBITDA declined, including if there was a sustained deterioration in the market or competitive environment; (2) its Moody's-adjusted (gross) leverage rises above 6.0x on a sustained basis; or (3) if its free cash flow generation also deteriorates and its liquidity profile weakens. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. COMPANY PROFILE Established in Milan in 2003, Bip is a consulting firm providing management consulting and business integration services with a strong focus on digital transformation to a wide range of clients in energy, utilities, technology, media, telecommunications, public sector and healthcare industries amongst others. Bip generated revenue of EUR331 million and company adjusted EBITDA of EUR62 million for the last twelve months ending June 30, 2021. SHIBA BIDCO: Moody's Assigns 'B2' CFR, Outlook Stable ----------------------------------------------------- Moody's Investors Service has assigned a B2 corporate family rating and B2-PD probability of default rating to Shiba Bidco S.p.A. (Arcaplanet or the company). Concurrently, Moody's has assigned a B2 rating to the proposed EUR550 million guaranteed senior secured notes due 2028 and a Ba2 rating to the proposed EUR80 million super-senior secured revolving credit facility due 2028, both of which will be raised by Shiba Bidco S.p.A. The outlook on the ratings is stable. These facilities will be used to finance a portion of the acquisition of Arcaplanet by Cinven and Fressnapf Group. "Arcaplanet benefits from an attractive business profile, characterised by growing demand for pet care solutions as well as good revenue visibility, and Moody's expect the company will build upon its solid historical track record of growth, given management's ambitious footprint expansion strategy", said Fabrizio Marchesi, Vice President and Moody's lead analyst for the company. "However, opening leverage is high, especially for a company that is of a relatively small size and has limited geographic and product line diversification, while cash flow generation will be limited over the next 12-18 months, given high levels of capital intensity. This means the credit rating is positioned at the weaker end of the rating category", added Mr. Marchesi. RATINGS RATIONALE Arcaplanet's B2 CFR is supported by i) its position as the leading pet care specialty retailer in Italy, with a chain of 503 stores and around 13% market share (proforma the merger of Maxi Zoo); ii) a well-recognised brand with a loyal customer base, which generates repeat revenue; iii) the large and attractive Italian pet care market, which Moody's believe will grow 2-3% per year; and iv) Moody's expectations that Arcaplanet will deliver gains in revenue and EBITDA, driven by ongoing footprint expansion, greater vertical integration and synergies from the merger with Maxi Zoo. Conversely, the rating is constrained by i) the company's small size, significant geographic concentration, and limited product line diversification; ii) high Moody's adjusted leverage of 6.8x at transaction close and Moody's expectation of limited free cash flow (FCF) generation over the next 12-18 months; iii) execution risks related to the integration of Maxi Zoo and management's vertical integration project as well as potential threats from online competition; and iv) the risk of releveraging from additional M&A or shareholder-friendly actions. Moody's expects that Arcaplanet will continue to grow its top-line, mainly due to the maturing of stores that have been launched over the last three years, as well as new store rollouts planned from July 2021 onwards. Revenue is forecast to rise towards EUR500 million in 2021 and EUR535 million in 2022, from EUR465 million in 2020 (proforma the merger with Maxi Zoo). The rating agency considers that revenue gains, in combination with the delivery of synergies from the integration of Maxi Zoo, will drive Moody's adjusted EBITDA (proforma the merger with Maxi Zoo) towards EUR115 million and EUR130 million in 2021 and 2022, respectively. Moody's note that this includes significant Moody's adjustments of around EUR40 million per year for operating leases. Moody's adjusted leverage is expected to improve to 6.6x and 5.8x over the same period. Moody's estimates that Arcaplanet's Moody's adjusted free cash flow (FCF) will be negligible over the next 12-18 months, given a high level of capital intensity related to store network expansion and upstream integration into food production. Additionally, the company will likely face cash outlays of up to EUR24 million over the period, in order to implement expected synergies. At transaction close, Arcaplanet will be majority-owned by funds advised by Cinven, with the remainder of share capital held by the Fressnapf Group, which will own a significant minority stake, and management, which will reinvest alongside Cinven and Fressnapf. As is often the case in highly levered, private-equity-sponsored deals, Moody's consider that Arcaplanet's shareholders will have a higher tolerance for leverage/risk and that governance will be comparatively less transparent relative to publicly traded companies, with more limited board diversification. LIQUIDITY Moody's consider Arcaplanet's liquidity to be adequate and supported mainly by access to a fully undrawn EUR80 million super-senior revolving credit facility (RCF) at closing of the transaction, as Moody's assume cash on balance will be close to zero at transaction closing. Cash flow generation is expected to improve, but only from 2023 onwards. Moody's highlight there are no maintenance covenants on any of the debt facilities. STRUCTURAL CONSIDERATIONS The proposed capital structure includes EUR550 million of senior secured notes due 2028, as well as an EUR80 million super-senior RCF, which is also due in 2028. The security package provided to senior secured lenders is ultimately limited to pledges over shares, bank accounts, and intercompany receivables. The B2 rating assigned to the proposed senior secured notes is in line with the CFR, reflecting the size of the Ba2-rated super-senior RCF which ranks ahead. The B2-PD probability of default rating is at the same level as the CFR, reflecting Moody's assumption of a 50% family recovery rate. RATING OUTLOOK The stable outlook reflects Moody's expectations of continued growth in revenue and Moody's adjusted EBITDA over the next 12 to 18 months, as well as improvements in annual Moody's adjusted FCF generation towards mid-single digits as a percentage of Moody's adjusted debt from 2023 onwards. The outlook also assumes no material releveraging from opening levels from any future acquisitions, debt refinancing, or shareholder distributions, as well as the company maintaining an adequate liquidity profile. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive pressure on the ratings could develop over time if Arcaplanet materially improves its size and scale by continuing to record growth in revenue and Moody's adjusted EBITDA; Moody's adjusted leverage improves to below 4.5x on a sustained basis; and Moody's adjusted FCF/debt rises sustainably towards high single-digit levels. Any positive rating action would also require the company to maintain adequate liquidity and would depend on the company's financial policy. For example, positive rating action would be less likely in the event of material debt-funded acquisitions or shareholder distributions. Conversely, negative rating pressure could occur if expected organic revenue and EBITDA growth does not materialize; Moody's adjusted leverage does not trend towards 6.0x on a sustained basis; FCF generation turns negative for a sustained period; or the company's liquidity deteriorates so that it is no longer adequate. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Retail Industry published in May 2018. COMPANY PROFILE Arcaplanet is Italy's leading specialty pet care retail chain. The company provides pet food, pet care accessories, and (non-prescription) pet care health products, across a proprietary network of 375 stores across Italy as well as through an online platform. Proforma the planned merger with Maxi Zoo, the enlarged Arcaplanet will count 503 retail locations. The combined group recorded proforma revenue of EUR465 million and company adjusted EBITDA of EUR62 million in the year ended December 2020. SOCIETA DI PROGETTO: Fitch Rates Sec. Notes 'BB+', Outlook Stable ----------------------------------------------------------------- Fitch Ratings has affirmed Societa di Progetto Brebemi S.p.A.'s (Brebemi) senior secured class notes at 'BB+' with a Stable Outlook. RATING RATIONALE Brebemi's operational toll road benefits from its route location linking fairly wealthy and densely populated Milan and Brescia areas in the economically diversified region of Lombardy. Brebemi has a balanced user profile of commuters and heavy vehicles willing to pay Brebemi's relatively high toll rates in exchange for shorter travel times and high quality service compared with the competing tolled alternative on the A4 motorway. Class A1 and A2 Ratings The class A1 and A2 notes' 'BB+' ratings reflect the favourable northern Italy catchment area and a regulatory asset base (RAB) based pricing system sustaining revenue growth. The ratings also consider Fitch's view that the pandemic will likely delay the project ramp-up phase compared with initial projections. Consequently, Fitch expects normalised and mature traffic volumes only in 2026 when the debt service coverage ratio stabilises at around 1.4x under the Fitch Base Case (FBC) and slightly lower in the Fitch Rating Case (FRC). Class A3 Rating The class A3 zero coupon notes' 'BB+'' rating reflects the risk associated with the timely payment of the terminal value (TV) at concession maturity by the grantor, Concessioni Autostradali Lombarde (CAL). Fitch's assessment of CAL's obligation to pay the TV is notched down from Fitch's internal assessment of the Region of Lombardy. CAL is contractually bound to pay the TV by 2042. A cash sweep mechanism caps class A3 accretion at EUR760 million, but the TV payment from CAL remains the sole pledged funding source for the full repayment of the class A3 notes at maturity. Fitch views the TV mechanism as robust. The TV payment is contractually equal to the non-amortised value of the asset and allows Brebemi to recover its investment. The TV will be paid by the new concessionaire at concession maturity (2040) or in case of delays by the grantor (CAL) two years later (2042). Amid the uncertainty of re-tendering the asset, Fitch assesses the grantor's contractual obligation to pay the TV. As class A3 is contractually pari passu with the senior fully amortising tranches, the credit profile of the class A3 notes is similar to that of the senior fully amortising debt, but ultimately linked to the creditworthiness of CAL's obligation to pay the TV in a timely manner. KEY RATING DRIVERS Favourable Location, Limited History - Revenue Risk (Volume): Midrange Brebemi opened to traffic in 2014 but remains in ramp-up due to the delayed opening of interface connections, with additional network connections and pandemic-induced delays expected to extend ramp-up through 2026. Brebemi's toll rates are relatively high on a euro/km basis compared with the competing A4 motorway but only moderately higher for a full-length trip than the A4. In Fitch's view, limited traffic history limits adequate testing of price elasticity, and higher annual tariff increases on Brebemi compared with A4 could impair elasticity over time. Fitch views positively the wealthy Lombardy region's familiarity with tolling and its economic strength. RAB-Based Pricing - Revenue Risk (Price): Midrange The price-cap mechanism allows a fair return (weighted average cost of capital; WACC) on the asset base and recovery of operating costs and depreciation of assets, resulting in a residual TV at concession maturity. The grantor has been supportive of Brebemi during ramp-up and demonstrated a favourable rebalancing mechanism in 2014, which included public grants, extension of concession tenor and implementing a TV payment at concession maturity to ensure maintenance of the WACC. New Road, Minimal Maintenance Needs - Infrastructure Development and Renewal: Stronger Brebemi is a new asset, with minimal infrastructure renewal needs expected over the concession's life. While capex costs were elevated in constructing the roadway, the contractual fixed-price operations & maintenance (O&M) agreement covers a modest capex component, which is expected to be sufficient. No heavy maintenance capex is currently envisaged in the concession. Fitch expects any additional capex would be eligible for remuneration, based on guidelines set by the transport authority (ART), in an updated business plan. Fully Amortising, Adequate Protections - Debt Structure (Class A1/A2) Stronger The debt structure comprises EUR1.9 billion euro-denominated senior and junior debt . Senior amortising debt (EUR1.4 billion split into bank loan, class A1, class A2 and a restructured swap) is fully amortising and hedged to almost 100% fixed rate, with adequate protections - robust forward-and-backward looking lock-up and no-releverage undertakings. However, Brebemi only has a six-month debt service reserve account (nine months until 2021) and a back-ended repayment profile. The class A3 notes (EUR0.6 billion) are partially reliant on project cash flows via a two-phase cash sweep mechanism, but their full repayment is expected to rely on the timely payment of the TV by a new concessionaire or, in case of delay by the grantor. The class A3 notes rank pari passu with the senior amortising debt and have no unilateral enforcement action until 2040 when non-payment of interest becomes an event of default. Junior debt (EUR0.2 billion, not rated by Fitch) is repaid through a cash sweep capped at a target amortisation schedule. It is floating rate and fully subordinated to senior debt that cannot be accelerated even in case of a junior event of default. Financial Profile Fitch expects the DSCR under Fitch's updated FRC to average 1.2x until 2025 and remain below 1.4x until at least 2026 when Fitch expects the ramp-up to end. This results in an average annual DSCR of 1.3x. The TV always covers net senior debt and the TV/net debt ratio improves to 1.7x in 2038 as the senior debt retires and the class A3 notes remain flat at the agreed threshold of EUR760 million. PEER GROUP Brebemi is comparable with North Carolina Turnpike (NCTA; BBB/Stable) and a number of other privately rated toll roads. Like Brebemi, NCTA provides notable peak-period time savings for commuters in a well-developed roadway network in a wealthy and industrialised catchment area, with competition from larger facilities nearby. NCTA had a successful ramp-up phase with growth continually exceeding sponsor expectations, despite being located in an area with low familiarity with toll roads. NCTA further benefits from a backstop from the State of North Carolina to cover operating expenses should revenues be insufficient, creating a gross pledge of revenues for debt. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Continuing Covid-19 outbreaks, including the emergence of new variants leading to an escalation of or protracted period of restricting measures leading to a material worsening traffic profile than Fitch's expectations; -- Fitch views the grantor's obligation to pay the TV as ranking below the Region of Lombardy direct debt and the class A3 rating could move in tandem with Fitch's internal assessment of the Region of Lombardy. A change in the assessment of CAL's credit linkage with the Region of Lombardy could also widen the notching. Factor that could, individually or collectively, lead to positive rating action/upgrade: -- A sustained increase in traffic leading to stabilised average senior DSCR of 1.4x in the FRC well before 2026. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three 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. CREDIT UPDATE Performance Update Total traffic decline in 2020 was around 29%, largely aligned with other Italian large networks, but slightly worse than the 25% decline Fitch anticipated in the FRC last August 2020. In January to August 2021, traffic was 11% below 2019, but substantially recovering with light vehicles traffic growth materially outpacing heavy vehicles, in a sign of rising consumer confidence amid a fall in Covid-19 infections and successful progress in the vaccination programme. Fitch expects traffic to continue well on its recovery path remaining 10% below 2019 this year and fully recovering in 2022. From 2023, traffic ramp up should continue leading to mature and stabilised traffic from 2026 onwards. Brebemi has limited flexibility in reducing operating expenditure given its fixed contract with a third-party operator, while negligible capex limits scope for cutbacks to cushion the impact on cash flow available for debt service. Despite this, Brebemi was able to reach an agreement with its O&M operator to reprofile its operating and maintenance capex expenses to better fit 2020-2021 cash flow generation amid the traffic reduction. Regulatory Framework Brebemi was one of the few Italian toll roads entitled for a tariff increase in 2021 (+3.5%) and aligned with Fitch's expectations. Fitch understands the company has recently started negotiations with the grantor aimed at agreeing the key terms of the next regulatory period (2022-2026). Fitch does not envisage the new guidelines set by ART in June 2021 to materially or negatively change the regulatory environment for the company. Liquidity Brebemi's liquidity position continues to remain comfortable. As of August 2021, cash available and the debt service reserve account was sufficient to cover next 18 months debt service. FINANCIAL ANALYSIS The FBC financial projections assume prudent traffic growth rates, in line with the external traffic consultant's P80 forecast, resulting in CAGR of traffic at around 3% until the end of the concession Fitch maintained expenses in line with the sponsor's forecast, as the majority of costs are covered under a fixed-price contract. Conversely, Fitch updated its forecast with internal long-term inflation and made conservative assumptions on non-toll revenues and the revenue loss from the discount policy. In the context of the formula leading to yearly tariff increase (Inflation + "X factor"), Fitch assumed an "X" of 1.5% in each year from 2022, which corresponds to a toll increase of around 3.0% per year. The average senior annual DSCR is 1.4x under the FBC. The FRC has a more conservative stance on some key variables, namely traffic (external consultant's P90 forecast, CAGR of 2.6%), and O&M (5% stress on opex not covered under the fixed-price contract). Similar to the FBC, the FRC assumes an "X factor" of 1.5% in each year from 2022. The average senior annual DSCR is 1.3x. The results of the sensitivities are in line with the ratings as the project shows moderate resilience to stresses such as a delayed traffic ramp-up, a flat 2% yoy increase in tariff or 10% increase in opex. ASSET DESCRIPTION Brebemi operates a small stretch of toll road directly linking Milan and Brescia, in one of the wealthiest and industrialised European regions. Traffic is still in ramp up phase amid delays in the opening of interface connections as well as expected network enhancements both east (Brescia) and west (Milan). Brebemi is exposed to competition from another toll road managed by Autostrade per l'Italia (A4 Milan-Brescia). 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. SUNRISE SPV 93: Fitch Assigns BB(EXP) Rating on Class E Notes ------------------------------------------------------------- Fitch Ratings has assigned Sunrise SPV 93 S.r.l. - Series 2021-2's asset-backed securities expected ratings. The assignment of the final ratings is contingent upon receipt of final documents and legal opinions conforming to the information already received. DEBT RATING ---- ------ Sunrise SPV 93 S.r.l. - Series 2021-2 Class A notes LT AA-(EXP)sf Expected Rating Class B notes LT A(EXP)sf Expected Rating Class C notes LT BBB(EXP)sf Expected Rating Class D notes LT BB+(EXP)sf Expected Rating Class E notes LT BB(EXP)sf Expected Rating Class M notes LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY The transaction is a 12-month revolving securitisation of unsecured consumer loans granted to private customers by Agos Ducato S.p.A. (Agos, A-/Negative/F1). This is the 20th public securitisation of unsecured consumer loans originated by Agos. The proceeds of the euro-denominated notes will be used to fund the purchase of a portfolio of personal loans and loans granted for the purchase of vehicles, furniture or other goods. Part of the proceeds will be used to fund a cash reserve and a liquidity reserve. The notes will amortise sequential and will pay a fixed interest rate except for the class A notes, which will bear a floating rate. KEY RATING DRIVERS Mainly Unsecured Personal Loans: At closing, 74.5% of the portfolio (limited to 80% by portfolio concentration limits through the revolving period) will consist of personal loans, which have experienced greater historical loss rates than other consumer loan products. In line with the Italian consumer lending market, the originator only benefits from unsecured recourse against the obligor upon the latter's default. The rest of the portfolio is composed of auto loans and finalised loans. Performance in Line with Peers: Fitch expects a stressed portfolio weighted average (WA) lifetime default rate of 7.3% and a WA recovery rate of 10.3%. The assumptions - derived over the stressed portfolio composition at the end of the revolving period - are based on the originator's historical performance and take into account the performance during the pandemic (also of other Sunrise transactions), in addition to Fitch's improved macroeconomic forecasts for Italy. Revolving Period Risk Addressed: Fitch has applied a WA stress multiple of 4.3x at 'AA-sf(EXP)' to the expected default rates to reflect possible portfolio deterioration during the 12-month revolving period. The agency believes that revolving conditions are adequate and addressed by default stress multiples. High Excess Spread: The transaction will benefit from a minimum portfolio yield of 7.0% during the revolving period. This contributes to an increase of the cash reserve towards its target of 2.5% of the current portfolio balance excluding defaulted loans (from 0.5% of the initial portfolio funded at closing). Sovereign Cap: The rating of the class A notes is limited to 'AA-sf(EXP)' by the cap on Italian structured finance transactions of six notches above Italy's sovereign rating (BBB-/Stable/F3). RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- The class A notes are sensitive to changes in Italy's Long Term IDR. A downgrade of Italy's IDR and revision of the 'AA- sf' rating cap for Italian structured finance transactions would trigger downgrades of the notes rated at this level. -- Unexpected increase in the frequency of defaults or decrease of the recovery rates that could produce loss levels higher than the base case. For example, a simultaneous increase of the default base case by 25% and a decrease of the recovery base case by 25% would lead to two-notch downgrades of the class A, C, D and E notes and three notches for the class B notes. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- The class A notes are sensitive to changes in Italy's Long Term IDR. An upgrade of Italy's IDR and revision of the 'AA- sf' rating cap for Italian structured finance transactions could trigger upgrades of the notes rated at this level, provided sufficient credit enhancement is available to withstand stresses at a higher rating scenario. -- Unexpected decrease of the frequency of defaults or increase of the recovery rates that could produce loss levels lower than the base case. For example, a simultaneous decrease of the default base case by 25% and an increase of the recovery base case by 25% would lead to two-notch upgrades of the class B, C and E notes and three notches for the class D notes. 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 Sunrise SPV 93 S.r.l. - Series 2021-2 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, and concluded that there were no findings that affected the rating analysis. Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, 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. 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. ZONCOLAN BIDCO: Fitch Assigns First Time 'B(EXP)' LongTerm IDR -------------------------------------------------------------- Fitch Ratings has assigned Zoncolan Bidco S.p.A. (Zoncolan) a first-time expected Long-Term Issuer Default Rating (IDR) of 'B(EXP)' with a Stable Outlook. Fitch has also assigned the senior secured notes (SSN) issued by Zoncolan an expected instrument rating of 'B+ (EXP)' with a Recovery Rating of 'RR3'. Zoncolan is an entity incorporated by funds managed by Partners Group and entities controlled by founder and CEO Luca Spada, to acquire the Italian fixed wireless access (FWA) broadband operator Eolo S.p.A. (Eolo). The ratings of Eolo reflect its niche position in the wider Italian broadband market, its high leverage, although moderate for its rating, and its delayed free cash flow (FCF) conversion prospects. The Stable Outlook indicates Fitch's expectations of Eolo being able to exploit the opportunity to expand its FWA services to rural and suburban areas in Italy. This expansion opportunity is supported by the lagging development of fibre networks outside urban centres, and by limitations of fibre deployment in non-urban areas given Italy's geographical characteristics. The assignment of final ratings is contingent on the completion of the acquisition, on the issue of the rated debt securities, and on the receipt of final documents conforming to information already received. KEY RATING DRIVERS FCF Negative through FY24: Fitch expects Eolo's free cash flow (FCF) to turn positive in the financial year ending March 2025 (FY25). Fitch expects Fitch EBITDA, adjusted for the application of IFRS16, to average around 45% over the next five years. A low tax charge and mild-to-neutral cash outflow from working capital feed into high Cash Flow from Operations (CFO) margins, averaging around 38% for the FY22-FY24 period. A high capital intensity, exceeding 40% yearly, will drive FCF into negative territory for the next three financial years. However, Fitch believes that FCF should turn positive once the investments required for the licence extension and for the optimisation and expansion of the network, decrease. Significant Capex Plan: Eolo's capex mainly relates to customer premise equipment (CPE) and base transceiver stations (BTS). Investments involve maintaining the current customer base, the acquisition of new clients, and wider technological optimisation. Fitch believes that CPE expenditure is linked to the customer base growth, and is fairly predictable. By contrast, BTS investments offer lower predictability, and are potentially subject to increases to keep pace with the targeted customer expansion. Overall Fitch expects Eolo to invest over EUR330 million over the next three years. This figure includes an estimated component to cover the extension to 2029 of the right-of-use of frequencies. Mildly Leveraged LBO: Eolo's leverage is high, but moderate for its rating. Fitch expects its funds from Operations (FFO) gross leverage at around 4.0x for FY22, easing thereafter to levels compatible with a 'B+' rating for the sector. Fitch believes Eolo's mild leverage balances its delayed FCF generation, stabilising its financial risk profile around the 'B' rating. However, delayed customer growth or hikes in capex can affect the liquidity of the company, increasing leverage. Under this scenario, drawdowns under the revolving credit facility (RCF) may become necessary to preserve cash and fund the investment plan, including the FY23 spectrum extension payment. Slow Fibre Deployment in Italy: The deployment of ultra-broadband solutions in Italy is slow. While urban areas are covered by technologies such as FTTH (fibre-to-the-home) or FTTC (fibre-to-the-cabinet), suburban and rural areas are poorly covered by fibre. The expansion of Open Fiber S.p.A.'s local access network in those areas is proceeding with delays. Additionally, geographical conditions in Italy outside urban areas can lead to variability in the effectiveness of fibre coverage and connection speeds. This will leave room for FWA operators to be competitive even in those rural areas that may theoretically be covered by fibre. Benign Operating Environment for FWA: Fitch believes that there is a case for FWA technology to expand in areas uncovered by fibre or where the FTTC connection is structurally sub-optimal. The retention of users will be possible even on completion of fibre deployment in the country given that fibre efficiency is expected to be poor. Eolo and Linkem are the key FWA providers in the country. While Linkem mainly covers urban and suburban districts, Eolo is focused on suburban and rural areas, with limited overlap. However, Fitch believes that, to exploit the technological time gap, FWA operators such as Eolo need timely upfront investments to build an attractive customer offering. Technological Risk: The FWA technology provides wireless broadband using a hybrid system of fibre and wireless signals. Despite the presence of captive demand, Fitch believes there is a degree of technology risk. In particular, the roll-out of FWA may be affected by several installation challenges, both due to geography and to the bandwidth adopted. This may make Eolo's offer uneconomical or lead to higher prices for customers. In this backdrop, the deployment of fibre, though sub-optimal, alternative technologies such as satellite broadband and the deployment of the 5G mobile network may challenge Eolo's business proposition. Roll-out-Driven Financial Policy: Eolo was created from a management buyout of an Italian division of BT Group. It is currently controlled by Luca Spada and is exposed to a degree of key person risk. After the acquisition by Partners Group, Mr. Spada will keep a minority stake and serve as CEO. Fitch expects the new owners to maintain a conservative stance on leverage. They will focus on customer expansion to increase their equity value at the exit of the investment. For this reason, Fitch believes in the centrality of capital expenditure in the group's finances, with the aim of expanding Eolo's FWA network in target areas. DERIVATION SUMMARY Eolo holds a strong position in the FWA technology niche of the Italian broadband market. Its business model enables the company to grow in customer and geographical coverage in suburban and rural areas of Italy, seizing the opportunity given by the slow and structurally sub-optimal roll-out of fibre. In this niche it mainly competes with Linkem, but limited overlap exists between the two networks. Eolo's ratings are based on its expanding business model, its high leverage, though limited for its rating category, and its relevant capital expenditure requirements. Eolo is highly comparable with the LBO and high yield public and privately rated issuers covered by Fitch in the telecommunications sector. Eolo's operating profile compares well with that of Crystal Almond Intermediary Holdings Limited (Wind Hellas, 'B'/RWE) by size, negative FCF generation and (CFO less Capex)/total debt metrics. While Eolo's EBITDA margins are much higher, allowing for higher capex to invest in network expansion, upgrades and subscriber growth, Wind Hellas benefits from less exposure to technological risk and from a stronger market position as the third player in the Greek telecommunications market. Eolo's market share is weak in the Italian fixed broadband market but is protected by its niche segment as the largest FWA provider in Italian rural areas, where competition is very limited. Fitch sees possible comparisons with infrastructural and utility-like businesses such as Techem Verwaltungsgesellschaft 675 mbH (Techem, 'B'/Negative), which has similar EBITDA margins to Eolo, network expansion plans and a customer-driven capex model. Techem is bigger, however, faces lower competition pressures and operates in a more favourable legislative environment, resulting in higher debt capacity. Eolo's leverage is lower than that of other 'B' rated telecom peers like Wind Hellas, PLT VII Finance S.a.r.l.'s (Bite, 'B'/Stable) and Silknet JSC ('B'/Stable), and even 'B+' rated peers such as Eircom Holdings (Ireland) Limited (Eircom, 'B+'/Positive) and Melita Bidco ('B+'/Stable). However, Eolo's ratings are constrained by negative FCF through FY24 and medium-to-long term technological and competitive risks affecting FWA providers in Italy. KEY ASSUMPTIONS -- Revenue growth of around 12% in 2022 decreasing to 8% in 2025; -- Gross subscribers growing at an average rate of about 10% per year for FY22-FY24 with stable average revenue per user (ARPU) and decreasing churn; -- Limited cash tax payments due to a large amount of losses carried forward up to 2026; -- Capex at 47% of revenue in FY22, 52% in FY23 decreasing to 34% by FY25; -- No drawdowns under the RCF. Key Recovery Assumptions Our recovery analysis assumes that Eolo would be considered a going concern (GC) in bankruptcy, and that it would be reorganised rather than liquidated. This is given the prevalence in its asset base of the inherent value of its customer portfolio of broadband clients in suburban and rural areas is Italy. Fitch has assumed a 10% administrative claim. Fitch assesses a GC EBITDA at around EUR80 million. Fitch's distress scenario assumes slower customer growth, stagnation in pricing and higher capital expenditure requirements to sustain the customer base. This will lead to contracting margins and higher cash needs to fund capex, causing increases in leverage also through drawdowns of the RCF. At the GC EBITDA, Fitch expects Eolo to be FCF negative. However, the company may be able to achieve positive FCF in the future after the scaling-down of capex requirements, following a cut in unprofitable areas from its FWA coverage. Fitch uses a 5.0x multiple, at the middle of Fitch's distressed multiples range for high-yield and leveraged- finance credits. Fitch's choice of multiple is justified by the potential attractiveness of the business for sector incumbents, balanced by the lack of FCF generation in the medium term. The EUR125 million RCF is assumed to be fully drawn on default. The RCF ranks super senior and ahead of the senior secured notes. Fitch's waterfall analysis generates a ranked recovery for the senior secured noteholders in the 'RR3' category, leading to a 'B+' instrument rating. This results in a waterfall- generated recovery computation output percentage of 61%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- A successful roll-out of FWA network leading to a broadband leadership in target niches with customer expansion and control on pricing; -- Evidence of improvements in cash flow generation feeding into sustainably positive FCF margin; -- FFO gross leverage sustainably below 4.0x and (CFO- Capex)/total debt higher than 4%. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Disruptions in FWA expansion due to faster-than-expected and more efficient roll-out of fibre networks in rural and suburban areas in Italy; -- Evidence of delays in achieving FCF break-even, caused by slower customer growth or higher capex requirements; -- FFO gross leverage higher than 5.0x, caused by a reduction in margins and by increases in gross debt in the absence of liquidity to fund investments. 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 Satisfactory Liquidity: Eolo's cash position as of FY22 is expected around EUR50 million, and provides a buffer for the capex investment expected for the FY22-24 period. Additionally, the company has an RCF committed for EUR125 million, currently undrawn. Under Fitch's rating case no drawdowns under the RCF are expected, even in FY24 when the cash buffer will be tighter due to the infrastructural investment plan. ISSUER PROFILE Zoncolan is an entity incorporated by funds managed by Partners Group and entities controlled by founder and CEO Luca Spada, to acquire the Italian fixed wireless access (FWA) broadband operator Eolo S.p.A. (Eolo). 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. ZONCOLAN BIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable --------------------------------------------------------------- S&P Global Ratings assigning its preliminary 'B' long-term issuer credit and issue ratings to Zoncolan Bidco SpA (Eolo) and the proposed senior secured notes. The stable outlook indicates that S&P expects adjusted debt to EBITDA to remain below 5x in FY2022-FY2023, with adjusted free operating cash flow (FOCF) to debt, incorporating discretionary growth capital expenditure (capex), expected to remain below 5% and very close to breakeven over the period. Partners Group announced the acquisition of a majority stake in broadband internet fixed-wireless-access (FWA) provider Eolo from private-equity fund Searchlight and a vehicle controlled by Eolo's founder and CEO (Luca Spada) for an enterprise value of approximately EUR1.3 billion through holding company Zoncolan Bidco SpA (Eolo) in July 2021. S&P said, "Our preliminary 'B' long-term issuer rating on Zoncolan Bidco SpA reflects Eolo's acquisition by financial sponsor Partners Group and weak FOCF over FY2022-FY2023 due to high capex. This is mitigated by our expectation that peak leverage will remain below 5x at the end of FY2022 and gradually reduce to about 4.3x-4.4x in FY2023 as a result of continued topline and EBITDA growth amid supportive economic conditions. Under our base case, FOCF to debt will remain minimal, very close to breakeven and below 5% to FY2023, constraining the rating and limiting Eolo's potential for further deleveraging. This reflects high capex, scheduled leases, and long-term incentive plan payments, along with the extension of its 26 GHz and 28 GHz spectrum licenses set to expire in 2022. Eolo's current planned expansion capex assumption is discretionary and factors in a degree of flexibility. That said, we see potential for relatively high investments in future growth and developing Eolo's infrastructure network to absorb most of its cash flow generation to FY2023." Eolo's small scale is mitigated by its well-established position in structurally underserved targeted service areas and its relatively high profitability. Eolo has a well-established market position in FWA broadband technology in rural and suburban areas in Italy. With revenue of EUR187 million in FY2021, the company has a small size and narrow focus relative to established integrated players like Telecom Italia or convergent players across Europe. This is further constrained by its single presence in the Italian market, with only a small share of the overall national broadband market (approximately less than 5%). Eolo's area of focus offers significant opportunity for growth and increased broadband penetration potential, as it typically includes municipalities below 10,000 inhabitants with low population density in "grey II" areas (where there are few existing broadband providers) and "white" areas (where there are no current providers). That said, FWA technology represents less than 9% of the Italian broadband market in 2021. S&P said, "We note Eolo has a relatively high adjusted EBITDA margin of 47% as of FY2021 and we expect margins to increase to about 50% over the next two years, which supports our view of the business. The improvement in profitability reflects increased network and related scale effects. We expect a higher subscriber base and slightly higher average revenue per user (ARPU) to improve operational leverage and cover costs associated with network deployment." The company has experienced rapid growth due to a successful uptake in underpenetrated areas, with a solid execution track record and low customer churn. Eolo benefits from a first mover advantage, with an existing FWA network and ongoing investments to expand broadband coverage and the density of its network within its targeted areas across Italy. FWA is a fixed internet technology that provides wireless access through radio frequencies (5Ghz and 28Ghz) between base transceivers mounted on transmission towers and customer premises equipment (CPE) receivers, usually linked to an external antenna located on the consumer's home and acting as a radio terminal. Eolo has experienced a continuous increase in demand for FWA solutions in rural areas. The operator mainly competes with two or three players, currently limited to no substitute from a technological standpoint because of the costs associated with deploying the network or laying cable and fiber wires. Between 2019 and 2021, Eolo's subscriber base increased by 49.6% due to low penetration of broadband and fiber in Italy, reflecting technical challenges and the historically low focus on broadband and fiber from incumbent telecommunications and cable companies. S&P said, "We believe Eolo is positioned to continue to benefit from rising demand for bandwidth and higher FWA penetration. Eolo currently operates on two main frequency spectrums, 5GHz and 28GHz, providing broadband to 568,000 customers, mainly retail customers, with 30Mbps and 100Mbps speed offerings, and up to 1Gbps for selected business-to-business (B2B) customers principally in the North of Italy where Eolo has historically been present. We view Eolo's FWA rollout strategy as prudent as the company will continue to focus on small towns and villages that either do not currently have network coverage or where competition is less intense and more fragmented than in cities. These areas represent approximately 11.5 million potential household broadband connections, where Eolo can increase its market share as it expands its network. "The competitive landscape is set to evolve gradually, but we do not expect a material impact in the medium term. We anticipate Eolo's revenues to continue to increase by 15% in FY2022 and about 10% per year thereafter, reflecting its ongoing investments to upgrade its infrastructure network from 5GHz to 28GHz bandwidth and higher FWA broadband penetration. While we do not anticipate its position and current offering to be meaningfully challenged in the near term, we highlight a potential for increasing competition and alternate solutions to start being deployed by incumbents and other bandwidth providers as potential risks in the medium term. This may include FWA-like offerings using 5G/4G mobile networks or the gradual deployment of the superior fiber-to-the-home (FTTH) technology in certain peripheral areas. The latter risk is bigger but more remote, as these alternatives are currently more capex-intense and less competitive, requiring a higher density of investments and infrastructure. Although Eolo has started entering into various wholesale partnerships with most of the national operators, we think the recent entry of Iliad in Italy has added more competitive pricing pressures on the established players (Vodafone, Wind Tre, and TIM). Existing players with broader financial flexibility may also start to become more aggressive in closing the technological divide in Italy. In this context, Eolo's ability to attract new subscribers, reduce customer churn, or grow ARPU from existing subscribers may be hindered by its limited offering, with the absence of bundled products or convergent services in our view." Eolo has launched a EUR375 million senior secured notes issuance to back Partners Group's acquisition of a 75% equity stake in the company. S&P said, "The financing package includes the proposed seven-year senior secured notes to be issued by Zoncolan Bidco SpA and a EUR125 million 6.5-year super senior secured RCF, which we expect to remain undrawn at the transaction's closing. We note the new sponsor Partners Group and current CEO and founder of Eolo, Luca Spada (whose controlling vehicle holds the remaining 25% stake), have demonstrated a strong equity commitment to Eolo, contributing EUR910 million in equity and capping leverage just under 5.4x on an S&P Global Ratings-adjusted basis at the closing of the transaction." S&P said, "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 we do not receive final documentation within a reasonable time, 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 change the ratings. Potential changes include, but are not limited to, utilization of the proceeds, maturity, size and conditions of the facilities, financial and other covenants, security, and ranking. "The stable outlook indicates that we expect adjusted debt to EBITDA to remain below 5x in FY2022-FY2023, with adjusted FOCF to debt incorporating discretionary growth capex anticipated to remain below 5% and very close to breakeven over the period. "We could lower the rating if Eolo's adjusted EBITDA was significantly lower than we expected, for example owing to lower revenue growth and a reduced EBITDA margin due to higher operating expenditures. Such a decline could also stem from increasing competition, causing higher churn or price pressure combined with a need for higher capex investment. This could increase adjusted leverage above 5.5x or reduce FOCF further below breakeven without prospects of a near-term recovery. "We could raise the rating as a result of ongoing strengthening in EBITDA and FOCF, enabling a ratio of adjusted debt to EBITDA below 4.5x, along with FOCF to debt comfortably above 5%." An upgrade would also hinge on a more supportive financial policy, especially the private equity sponsor's commitment to maintaining leverage and credit metrics at a level commensurate with a higher rating. =================== L U X E M B O U R G =================== CULLINAN HOLDCO: Fitch Assigns First Time 'BB-(EXP)' LongTerm IDR ----------------------------------------------------------------- Fitch Ratings has assigned Cullinan Holdco SCSp (Graanul) an expected first-time Long-Term Issuer Default Rating (IDR) of 'BB-(EXP)' and its proposed senior secured notes an expected rating of 'BB+(EXP)' with a Recovery Rating of 'RR2'. The expected IDR is driven by the sale of a stake in Graanul by existing shareholders to Apollo fund and by its planned new capital structure. The rating is constrained by Graanul's small size relative to that of other issuers in the 'BB' rating category, customer concentration and exposure to environmental and renewable-energy regulations. Rating strengths are predictable cash flows underpinned by medium-term take-or-pay contracts with investment-grade or high sub-investment grade utilities and pass-through or fixed-price escalation provisions. The rating also incorporates Fitch's expectations that the company will balance M&A activities and dividend pay-out with maintaining its credit profile. The Stable Outlook reflects Fitch's expectations of successful contract renewals and a continuation of favourable industry trends in the medium term. The assignment of the final ratings is contingent on the receipt of final documents conforming to information already reviewed. KEY RATING DRIVERS Small Scale, Growth Potential: Graanul's scale is moderate with an end-2020 EBITDA of EUR120 million, despite a leading position in wood-pellet markets in Europe. Fitch forecasts EBITDA to grow to around EUR170 million by 2024, based on investments in capacity expansion and bolt-on acquisitions. Potential growth can be higher if the company channels all funds available within the scope of its financial policy to M&A rather than dividend distributions. Concentrated Customer Base: Graanul has a concentrated customer base with the three-largest European off-takers, Drax Group Holdings Limited (BB+/Stable), RWE AG (BBB+/Stable), and Orsted A/S (BBB+/Stable), which currently account for around 90% of contracted volumes. Customer concentration is not uncommon among pellet producers who bid for large contracts that often result in a significant share by a single customer in the total revenue mix. Graanul is currently bidding for contracts with new customers and diversification is likely to increase jointly with growth in produced volumes in the medium term. Some De-Leveraging Expected: The transaction related to the change in the ownership structure will drive an increase in funds from operations (FFO) net leverage to 4.5x at end-2021 from 1.3x at end-2020. Based on Fitch's growth assumptions and expected capex Fitch forecasts free cash flow (FCF) generation of EUR70 million-EUR80 million per annum. Despite high organically generated FCF Fitch assumes only moderate deleveraging to around 4.2x over the next four years, due to expected bolt-on M&As and dividend payments. Graanul, however, has low maintenance capex and large flexibility in FCF deployment, which provides a buffer for unforeseen business interruptions. Medium-Term Revenue Visibility: Approximately on average 80% of Graanul's revenue is contracted on a take-or-pay basis with the balance sold on the spot market. Graanul targets take-or-pay contracts with a duration of four to five years in contrast to peers such as Enviva Partners, LP (BB-/Stable), which has a weighted average contract duration of 13.2 years. Shorter contracts allow for more frequent pricing renegotiation, but, at the same time, may reduce long-term earnings visibility. Strong Renewal Rate: Renewal rates have been historically very strong and Graanul has a long-lasting relationship of more than 10 years with its top-three customers. It is the largest European wood-pellet supplier located in close proximity to its customers, with an ability to provide sustainable bulk deliveries of good-quality product, which supports future renewals. Resilient Margins: Approximately 85% of take-or-pay contracts include either shipping and a raw-material cost pass-through mechanism or have fixed-price escalation clauses. Graanul has also lower shipping costs than suppliers from North America, and has modest benefits from its six own combined heat and power (CHP) plants that provide energy and heat needed in pellets production. Its large share of variable costs - estimated at 90% - partially offsets the impact on margins from a volume decline. Supportive Regulation: Currently renewable subsidies schemes for renewable biomass in the UK, accounting for around 40% of Graanul's market, run until 2027. EU which represents the other half of Graanul's orders, is increasingly moving towards renewables. In the recent EU 'Fit for 55' climate and energy laws package, the EU increased its target share of renewable energy to 40% of total by 2030, from 32% currently. Regulatory Risk: In its revised Renewable Energy Directive II, the EU is proposing stricter regulation on the sources of wood that can be used for pellet production. At present, the changes are not expected to materially affect certified pellet producers, such as Graanul and larger biomass utilities. However, regulatory developments remain a risk as the stability of sources of supply and treatment of biomass as renewable energy is critical for Graanul's long-term business prospects. Notching for Notes: Fitch rates the senior secured notes using a generic approach for 'BB' category issuers, which reflects the relative instrument ranking in the capital structure, in accordance with Fitch's Corporates Recovery Ratings and Instrument Ratings Criteria. The notes are secured by a share pledge of guarantors comprising 85% of Graanul's EBITDA as of June 2021 and security over assets in the US. The Recovery Rating is 'RR2'. This results in the senior secured rating being notched up twice from the IDR. DERIVATION SUMMARY Graanul is the largest wood-pellet producer in the European markets and competes directly with the largest global pellet producer Enviva. Graanul is smaller in scale with an expected 2021 EBITDA of around USD150 million-equivalent, compared with Enviva's forecast USD260 million. Post-transaction Graanul's FFO net leverage of 4.5x will be comparable to Enviva's 2021 forecast. Both companies use take-or-pay contracts but Graanul prefers shorter-term duration (four to five years) versus Enviva's weighted average 13.2 years. Shorter duration of contracts and proximity to European customers result in Graanul's expected stronger EBITDA margins of over 28% in 2021, versus Enviva's 22%. Sunoco LP (BB/Positive) is the largest fuel distributor in the US distributing around 8 billion gallons per annum. In addition to distributing motor fuel, Sunoco also distributes other petroleum products such as propane and lubricating oil, and around 25% of its volumes is sold under long-term contracts. Sunoco is larger than both Enviva and Graanul but has comparable expected leverage of 4.0x-4.3x in 2021. KEY ASSUMPTIONS -- EBITDA CAGR of 6.7%, including M&A contribution, over 2020- 2024; -- EBITDA margin of above 28% in 2021 and around 27% in 2022- 2024; -- M&A of EUR60 million per annum in 2022-2024; -- Capex on average EUR33 million per annum 2022-2024; -- Dividends of EUR60 million per annum in 2023-2024; -- Volume CAGR of 7.4%, including M&A contribution, over 2020- 2024. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- FFO net leverage consistently below 3.5x; -- Improvement in the business profile including scale, customer diversification and contract duration. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- EBITDA margin below 23%; -- Adverse developments in regulation related to biomass energy; -- Loss of contracts and/or material reduction in share of contracted revenue; -- FFO net leverage consistently above 4.3x. 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 Adequate Liquidity Post-Transaction: Following the bond issuance all existing debt will be repaid. Graanul will maintain sufficient liquidity with a new EUR100 million super senior revolving credit facility due in 2025. Liquidity will be also supported by a modest cash balance of around EUR20 million-EUR30 million and FCF generation. ISSUER PROFILE Graanul is the largest European wood pellet manufacturer and second largest globally, but due to a fragmented market, it accounts for around 6% of global pellet production capacity and 8% of global production. Its manufacturing plants, with a total output of 2.9m/t, are located mainly in Europe with 83% of production derived from assets in Estonia (36%), Latvia (44%) and Lithuania. The sole non-European production facility accounting for 17% of Graanul's capacity is located in the US (Woodville). SUMMARY OF FINANCIAL ADJUSTMENTS Fitch reclassified leases as other liabilities, effectively reducing balance-sheet debt by EUR5.1 million at end-2020. Furthermore, Fitch has reclassified EUR1.8 million of depreciation of right- of-use assets and EUR0.1 million of interest on lease liabilities as lease expenses, reducing Fitch EBITDA by EUR1.9 million in 2020. Fitch added back EUR1.6 million of non-recurring transaction costs to EBITDA 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. CULLINAN HOLDCO: Moody's Assigns First Time B1 Corp. Family Rating ------------------------------------------------------------------ Moody's Investors Service has assigned a first-time B1 corporate family rating and a probability of default rating of B1-PD to Cullinan Holdco SCSp, an intermediate holding company of AS Graanul Invest (Graanul or the company) following the proposed acquisition by Apollo Global Management. Concurrently, Moody's has assigned a B1 rating to the proposed EUR600 million floating and fixed rate guaranteed senior secured notes maturing 2026, to be issued by Cullinan Holdco SCSp. The outlook on all ratings is stable. RATINGS RATIONALE Cullinan Holdco SCSp's B1 corporate family rating (CFR) reflects (1) Graanul's market position as the largest wood pellets producer in Europe, the key consumer market which is protected by solid barriers to entry such as its production scale and long-term relationships with key customers spanning over 10 years, (2) revenue stability, benefiting from a majority (~80%) of sales contracts being long-term take-or-pay with a typical 3-5 years tenor with high quality customers dominated by fixed price escalators and raw materials price increase pass through mechanisms, (3) the tailwinds from the current regulatory environment, supporting demand for a more environmental friendly energy mix driving demand for wood pellets, (4) its historically solid and fairly stable profitability with company-reported EBITDA margins around 23%-24% in 2017-19 and 28% in 2020, which is protected by Graanul's low position on the global production cost curve, its geographical proximity to end-customers and flexible cost structure (approximately 90% of total costs are variable), (5) track record of positive Moody's-adjusted free cash flow (FCF) generation supported by moderate maintenance capex and working capital requirements and dividend distribution contained under the contemplated debt documentation, and (6) its good liquidity. At the same time, the rating is constrained by (1) the relatively small size of Graanul with total revenues of EUR454 million in the twelve months ended June 2021, (2) its high operational concentration being a single product-company with a high customer concentration (top 3 customers accounting for 81% of total revenues in 2020) and geographical concentration (all customers located in Europe and operating facilities concentrated in the Baltics region), (3) the group's highly leveraged capital structure for its rating category, exemplified by Moody's-adjusted gross debt/EBITDA of 5.2x as of June 30, 2021 pro forma for the proposed notes issuance, with the expectation of a rapid reduction on the back of production capacity expansion and operational improvements over the next two years, (4) the risk of adverse changes in the regulatory environment as Graanul's customers rely on receiving continued government support in a form of tax breaks, special tariffs and subsidies in Europe in order to displace coal with biomass, and (5) the threat of technological advances in wind and solar energy generation that could potentially make them more competitive as compared to biomass. LIQUIDITY Following the closure of the proposed transaction, Moody's considers the liquidity of Graanul as good. The agency expects that the company's liquidity sources including cash on hand (estimated EUR10 million at closing), anticipated funds from operations over EUR90 million (Moody's estimate) that the company will generate in 2022 will be sufficient to cover its liquidity needs such as working cash, working capital outflow and capital expenditures together amounting to slightly lower than EUR40 million. Following the proposed bond placement Graanul will have no near term maturities, until its bond is due in 2026. Moody's does not expect Graanul to make any significant drawings under its EUR100 million revolving credit facility (RCF) over the same period. The RCF is subject to a springing covenant test if drawn more than 40%. ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS Environmental considerations include Graanul's exposure to a strongly growing renewable energy industry as a result of the energy transition and related regulatory incentives. The company's product is currently viewed as a sustainable renewable energy source that can play a role in carbon transition. The increasing international and national targets for CO2 emissions reduction, particularly in Europe, drive demand for biomass, including wood pellets, benefitting the company. Graanul's combined heat and power plants are biomass-fired, thus, reducing its own carbon footprint. The company's raw materials and production process are sustainability-certified and Graanul is the only large-scale producer already fully compliant with 2030 EU sustainability targets under RED II. Governance considerations include the private equity-owned nature of the company. Following the proposed acquisition Graanul will be indirectly majority-owned (80%) by Apollo Global Management. As is often the case with private equity-sponsored deals, governance practices are less transparent and the shareholder has a higher tolerance for leverage, as illustrated by Graanul's starting high leverage estimated at 5.2x Moody's-adjusted debt/EBITDA as of June 30, 2021 pro forma for the proposed bonds placement. STRUCTURAL CONSIDERATIONS Cullinan Holdco SCSp is the borrower of the EUR100 million super senior RCF and the proposed EUR600 million guaranteed senior secured notes, both due in 2026. The company's RCF and proposed notes share the same security and guarantee package. The security package is limited to certain shares pledges and bank accounts as well as intercompany receivables and substantially all assets of the U.S. subsidiary. The instruments are guaranteed by certain operating companies that generate at least 80% of the company's consolidated EBITDA. The super senior RCF ranks ahead of the proposed guaranteed senior secured notes. Given the absence of material prior-ranking debt as well as junior claims, the guaranteed senior secured notes are rated B1, in line with the CFR. RATIONALE FOR THE STABLE OUTLOOK The stable outlook reflects Moody's expectation that over the next two years Graanul will reduce its Moody's-adjusted leverage from 5.2x as of June 30, 2021 (pro forma for the proposed notes issuance) supported by production capacity expansion and operational improvements. The stable outlook also assumes that the company will maintain its solid profitability, measured as Moody's-adjusted EBITA margin of around 17%, as well as good liquidity with expected positive Moody's-adjusted FCF (net of dividend payments) generation in the range of EUR40-50 million per annum. Nevertheless, the rating and outlook do not factor in any larger, more transforming and potentially debt-funded acquisitions or sizeable dividend payouts. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The ratings could be upgraded if Graanul's (1) leverage is reduced to below 4.5x Moody's-adjusted gross debt/EBITDA on a sustainable basis, (2) EBITA margin remains at around 17%-18%, (3) the company consistently generates positive FCF with FCF/debt in the high single digits and maintains its good liquidity. The ratings could be downgraded, if Graanul's (1) operating performance deteriorates, including because of material adverse regulatory change or customer loss, (2) profitability declines substantially (3) Moody's-adjusted leverage increases above 5.5x debt/EBITDA on a sustained basis over the next two years, including because of a large debt-funded acquisition, or (4) if the company was not able to generate positive FCF and its liquidity deteriorates. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Manufacturing published in September 2021. COMPANY PROFILE Cullinan Holdco SCSp is a Luxembourg-domiciled intermediate holding company that will own the entire share capital of AS Graanul Invest (Graanul or the company) following the proposed acquisition by Apollo Global Management. Graanul is headquartered in Estonia and is the largest utility-grade wood pellet producer in Europe with 12 production plants in the Baltics region (Estonia, Latvia and Lithuania) and the US. The company aggregates and processes wood fiber into transportable wood pellets sold under long-term take-or-pay supply contracts to major power generators in Europe who use the pellets in dedicated biomass or co-fired coal plants. In addition, the company owns six combined heat and power plants in Estonia and Latvia, which are biomass-fired and provide the majority of the company's internal heat and power needs. For the twelve months ended June 30, 2021, the company generated EUR454 million in revenues and around EUR129 million in company-reported EBITDA. SK INVICTUS II: Moody's Rates New $600MM Senior Secured Notes 'B2' ------------------------------------------------------------------ Moody's Investors Service assigned a B2 rating to SK Invictus Intermediate II S.a.r.l.'s (dba Perimeter Solutions) proposed $600 million senior secured notes issue. Moody's also affirmed the B2 Corporate Family Rating and B2-PD Probability of Default Rating. The outlook is revised to positive from stable. The B1 ratings on the senior secured first lien revolving credit facility and first lien term loan as well as the Caa1 rating on the senior secured second lien term loan will be withdrawn upon repayment of the outstanding debt. The assigned ratings are subject to the transaction closing as proposed and review of final documentation. "The positive outlook reflects the company's improved leverage following the sale to EverArc and expectations for more conservative financial policies as a public company," said Domenick R. Fumai, Moody's Vice President and lead analyst for SK Invictus Intermediate II S.a.r.l. Assignments: Issuer: SK Invictus Intermediate II S.a.r.l. Senior Secured Regular Bond/Debenture, Assigned B2 (LGD4) Affirmations: Issuer: SK Invictus Intermediate II S.a.r.l. Corporate Family Rating, Affirmed B2 Probability of Default Rating, Affirmed B2-PD Outlook Actions: Issuer: SK Invictus Intermediate II S.a.r.l. Outlook, Changed To Positive From Stable RATINGS RATIONALE On June 16, 2021, SK Invictus Holdings S.a.r.l., the ultimate parent of SK Invictus Intermediate II S.a.r.l. announced it had agreed to be acquired by EverArc Holdings Ltd. (unrated) in a transaction valued at approximately $2 billion in cash and preferred shares. EverArc is a publicly-listed acquisition company on the London Stock Exchange formed in 2019 to acquire companies or business segments. The transaction is expected to be funded with a combination of $400 million in EverArc equity, $1.15 billion in proceeds from an equity issuance to a group of institutional equity investors, $600 million in senior secured notes and the issuance of $100 million in preferred equity. Prior to the close of the transaction, Perimeter Solutions S.A. will file a registration statement with the SEC and apply to have its common stock and warrants listed on a US-based stock exchange. At closing, EverArc will reorganize and with Perimeter Solutions, become wholly-owned subsidiaries under a newly formed Luxembourg company, Perimeter Solutions S.A. Perimeter Solutions will continue to be led by the current management team, including CEO Edward Goldberg. The outlook revision to positive reflects Perimeter Solutions' revised capital structure that will consist of lower balance sheet debt than under its previous owner and expectations the company will adopt a more conservative financial policy as a public company. Fire Safety benefitted from strong wildfire activity in the US during 2020 and is experiencing another robust fire season, while Oil Additives saw demand recover as miles driven has rebounded from the pandemic. Moody's now expects FY 2021 results to exceed the previous forecast and estimates that adjusted leverage will be approximately in the low 4x range in FY 2021 compared to previous projections of low 5x and well below double-digits at the end of 2019. EBITDA and free cash flow will remain strong over the next 12 to 18 months driven by further USFS tanker capacity growth and increased tanker capacity for its key customer, US Forest Services (USFS), expansion into new markets such preventive pre-treatment measures to supply utilities, home protection, geographical diversification and increased service delivery capabilities. Although Perimeter Solutions has reduced leverage, the B2 CFR rating is constrained by expectations that credit metrics are more likely to be volatile compared to similarly rated chemical companies. Moody's also factors into the current rating that acquisitions will be strategic tuck-ins conservatively financed with available cash and limited use of the revolving credit facility. The rating further incorporates the company's lack of scale and limited product diversity, with a substantial portion of earnings attributed to the Fire Safety segment, which is unpredictable due to the nature of wildfires. Perimeter Solutions' rating is underpinned by strong industry positions in both of its segments. Perimeter Solutions is the sole supplier of fire retardants to the US government and a leading supplier to key state and municipal fire agencies, as well as Canadian provinces and Australia. In the Oil Additives segment, Perimeter Solutions benefits from an industry which has a limited number of suppliers and the company's position as the only supplier with operations in both North America and Europe. Both segments have high barriers to entry including extensive qualification requirements and require highly specialized formulations, which increase customers' switching costs and lead to long-term customer relationships. The Oil Additives segment has historically contributed to consistent EBITDA generation, which partially mitigates the volatility associated with the Fire Safety Business. Perimeter Solutions also benefits from strong margins and an asset-light business model that contributes to its ability to generate substantial free cash flow. ESG CONSIDERATIONS Moody's also considers environmental, social and governance factors in the rating. As a specialty chemicals company, environmental risks are categorized as moderate. However, several of Perimeter Solutions' products may result in significant future risks. Phosphorous pentasulfide (P2S5) used in the preparation of oil additives is extremely reactive and is classified as an explosion hazard. Perimeter Solutions, which also manufactures Class A and B firefighting foams, states it is not currently involved in any litigation related to PFAS. However, given the stability of the fluorine-based products utilized, Moody's will actively monitor this risk as any litigation could be material to the company's financial status. Nonetheless, its aerial fire retardants are important products in fighting and containing large wildfires to limit personal injury of both inhabitants and firefighting personnel in the surrounding areas, confine property damage and minimize destruction of the environment. Governance risks are average due to the requirements as a public company, which include a majority of independent directors on the board, improved financial disclosure requirements as a public company and expectations for more conservative financial policies compared to most private companies. STRUCTURAL CONSIDERATIONS Debt capital pro forma for the transaction is comprised of an unrated $100 million first lien senior secured revolving credit facility and $600 million senior secured notes. The B2 rating on the senior secured notes, in line with the B2 CFR, reflects a first lien position on substantially all assets with no loss absorption from junior debt in the capital structure. Perimeter has a very good liquidity profile with cash on the balance sheet, expectations for positive free cash flow generation of at least $60 million in 2021 and an unrated $100 million revolving credit facility, which will have approximately $85 million of availability. The credit agreement for the revolving credit facility contains a springing first lien net leverage ratio covenant that is triggered if revolver borrowings exceed 40% of utilization. Moody's does not expect that the covenant will be triggered over the next 12 months. The positive outlook reflects Moody's base case scenario of normalized fire seasons and continued stability in the oil additives business, the company's adjusted Debt/EBITDA is sustained below 4.5x, free cash flow generation of at least $40 million and minimum available liquidity of $70 million to mitigate any unanticipated volatility in earnings during the rating horizon. The positive outlook also includes expectations that the company will adopt a more conservative financial policy. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Moody's could upgrade the ratings if adjusted leverage is below 4.0x on a sustained basis in a weak wildfire season, if free cash flow-to-debt is sustained above 10%, and the company demonstrates a track record of conservative financial policies. Moody's would likely consider a downgrade if adjusted leverage is sustained above 5.0x, free cash flow remains negative for an elevated period, or available liquidity falls below $60 million. A downgrade could also be considered if there is a large debt-financed acquisition or dividend to shareholders. Perimeter Solutions is a specialty chemical producer operating in two segments: Fire Safety and Oil Additives. The Fire Safety business involves formulating and manufacturing fire safety chemicals, including Phos-Chek(R) fire retardants, Class A and B foams, and water enhancing gels for wildland, military, industrial, and municipal fires. The Oil Additives segment produces phosphorus pentasulfide used in the preparation of ZDDP-based lubricant additives that possess anti-wear properties in engine oils and prolong the useful life of engines. Perimeter Solutions had revenue of $351 million for the last twelve months ending June 30, 2021. The principal methodology used in these ratings was Chemical Industry published in March 2019. ===================== N E T H E R L A N D S ===================== BOCK CAPITAL: Fitch Assigns Final 'B' LT IDR, Outlook Stable ------------------------------------------------------------ Fitch Ratings has assigned Bock Capital Bidco B.V. (Unit4) a final Long-Term Issuer Default Rating (IDR) of 'B' with a Stable Outlook. Fitch has also assigned a final 'B+'/'RR3' instrument rating to the company's secured loan facilities. All final ratings are on par with already assigned expected ratings. The assignment of final ratings follows review of loan documentation conforming to information already received by Fitch. The key rating drivers are unchanged. Fitch expects Unit4's Fitch-defined funds from operations (FFO) leverage to be high, ending 2021 at 8.2x, pro-forma for the divestments and recapitalisation, with only gradual deleveraging by 2023 on the back of mid-single-digit revenue growth and modest margin improvement. Deleveraging flexibility is supported by strong free cash flow (FCF) generation with robust (operating cash flow minus capex)/total debt metrics. KEY RATING DRIVERS Stable Customer Relationship: Unit4 benefits from typically stable relationships with its customers, which leads to good revenue visibility and reduced earnings volatility. Unit4's annual customer churn is about 6%, which is broadly comparable with other enterprise resource planning (ERP) providers catering for small and medium-sized companies, such as TeamSystem Holding S.p.A. ERP software is critical for day-to-day operations. Customers usually face a prohibitively high risk of operating disruption when switching their ERP provider. Growing Recurring Revenue: Unit4 has made good progress increasing recurring revenue as a proportion of total revenue, and Fitch believes further improvement is likely, with growth coming primarily from recurring services (cloud and maintenance). Fitch views this trend as credit positive as intrinsically less volatile recurring revenue provides better visibility of cash flow generation. Recurring cloud and maintenance services accounted for 67% of total revenue in 2020. Abundant Market Opportunities: Unit4 operates in a potentially huge and growing total addressable market of above EUR10 billion in size, which provides substantial growth opportunities. However, the market is fragmented and intensely competitive, with a slew of players of all sizes and market positioning, from full ERP suite providers to single functionality specialists. Fitch believes the ability to offer competitive products and support services to a targeted niche customer base is more important than pursuing a market share for medium-sized ERP providers such as Unit4. Good Geographic Diversification: Unit4's good geographic diversification across the Nordics, Continental Europe and UK/Ireland, with some inroads into APAC and the US, leads to more resilient revenue generation compared with single country-focused providers. Moderate Growth: Fitch expects Unit4's revenue to grow by mid-single digits per year, supported by gradual migration to cloud-based solutions with wider up- and cross-sell opportunities and typically higher pricing. Fitch believes the company faces a better outlook for onboarding new customers in 2021 as some of its potential clients opted to delay ERP transformation in pandemic-hit 2020. Growth is likely to moderate after this pent-up demand is exhausted, likely from 2022. Continuing lock-down restrictions may take their toll on revenue growth. Gradual Margin Improvement: Fitch projects Unit4's EBITDA margins to gradually improve, but remain lower than some of its peers, such as TeamSystem. Profitability would benefit from cloud operations achieving a higher scale with superior gross margins. The launch of a new suite of ERPx-based 'out-of-the-box'-designed solutions that require less bespoke customisation should also be margin accretive. Overall, margins will continue to be diluted by significant revenues from low-margin professional services such as product deployment, ERP implementation, training and customisation. The ability to provide reasonably priced human support is a significant competitive advantage, but with lower profitability implications. Covid-19 lock-downs triggered some efficiency improvements such as significantly lower travel and wider use of remote work, which is likely to be largely sustainable in the post-pandemic environment and contribute to stronger profitability. Restructuring Costs Down: Fitch expects Unit4's restructuring and exceptional costs to abate with a streamlined operating profile. The company has largely completed divestment of non-core operations and its Growth4U efficiency improvement programme that was initiated in 2019. Strong Cash Flow: Unit4's asset-light business model with Fitch-defined EBITDA margin in the low-to-mid-20s territory and capex of around 2% of revenue is intrinsically strongly cash flow-generative, in Fitch's view. Fitch expects Unit4's pre-dividend FCF margin in a low-teen percentage range once its restructuring and exceptional costs abate from 2022. The company's typically early billing leads to consistently positive working capital inflows. Fitch treats capitalised R&D as operating cash costs on par with key US and EMEA tech peers, which reduces reported EBITDA. High Leverage: Fitch expect Unit4's FFO leverage to be a high 8.2x on a pro-forma basis at end-2021. The pace of deleveraging is likely to be moderate, at 0.4x-0.5xper year, driven by mid-single-digit yoy percentage revenue growth and gradually improving FFO margins. Fitch primarily relies on gross metrics given the lack of any covenanted restrictions on shareholder distributions. Deleveraging may be accelerated if Unit4 uses significant cash on its balance sheet and internally generated cash flow for value-accretive acquisitions instead of shareholder pay-outs. The payment-in-kind note is treated outside of the rated perimeter as it meets Fitch's criteria to be treated as such. The shareholder loan that was outstanding in 2020 has been removed from the capital structure under the new ownership in 2021. DERIVATION SUMMARY The closest Fitch-rated peer is TeamSystem (B/Stable), a leading (about 40% market share) Italian accounting and ERP software company with over 75% of recurring revenue in total. TeamSystem holds stronger market shares in its home market, but Unit4 has better geographical diversification. TeamSystem primarily caters to the SME sector with a churn rate in the 6%-10% range. A stronger peer is Dedalus SpA (B/Stable), a leading pan-European healthcare software company, with a lower churn rate (below 1%) and a more supportive industry trend with EU-wide rising healthcare digitalisation. Unit4's operating profile is broadly comparable to Fitch-covered technology peers with 'B' category ratings. The company's leverage is higher than for many of its tech peers, which is a key factor that places it at the 'B' rating. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Revenue growth in the mid-single-digit yoy percentage range in 2021-2023, with marginally stronger growth in 2021; -- Improving EBITDA margins gradually increasing to 27% by 2023 2024 from slightly above 24% in 2021; -- Slightly negative change in working capital in 2021, turning slightly positive in 2022-2023; -- Capex below 3% of revenue; and -- No shareholder distributions. KEY RECOVERY RATING ASSUMPTIONS -- The recovery analysis assumes that Unit4 would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated given the intellectual know-how within the group and a wide and low-churn-rate customer base. -- Fitch estimates that the post-restructuring EBITDA would be about EUR78 million. Fitch would expect a default to come from higher competitive intensity leading to revenue losses and/or overspend on new products. The EUR78 million EBITDA is about 15% lower than Fitch's forecast of pro-forma FY21 EBITDA of EUR92 million. -- An enterprise value (EV) multiple of 6.0x is applied to the GC EBITDA to calculate a post-reorganisation EV. The multiple is in line with that of other similar software companies with a low-churn-rate subscriber base exhibiting strong pre-dividend FCF generation. -- 10% of administrative claims taken off the EV to account for bankruptcy and associated costs. -- The total amount of first-lien secured debt for claims includes EUR675 million senior secured term loan and a multi currency EUR100 million pari passu ranked revolving credit facility (RCF), which Fitch assumes to be fully drawn. -- Fitch estimates the expected recoveries for senior secured debt at 54%. This results in the senior secured debt instrument being rated 'B+'/'RR3', one notch above the IDR of 'B'. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- FFO gross leverage below 6x; -- FFO interest coverage sustained above 2.5x; -- Disciplined M&A with limited additional debt; and -- Maintenance of healthy operating performance, with an increasing contribution of cloud revenues and robust FFO margins. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- FFO gross leverage persistently above 7.5x or low progress deleveraging to below this level including due to shareholder distributions; -- FFO interest coverage persistently below 2x; and -- A failure to improve profitability and maintain robust revenue growth from cloud services leading to the FCF margin declining to a low-single-digit range. 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: Fitch views Unit4's liquidity situation as satisfactory. The company had above EUR60 million of cash on its balance sheet after the refinancing transaction at end-1H21, by Fitch's estimates. This is supported by positive strong internal cash flow generation and EUR100 million untapped RCF as a part of a new financial package. Unit4 issued debt with a maturity of seven years. ISSUER PROFILE After a series of divestments, Unit4 is strategically focused on providing ERP solutions for medium-size people-centric organisations. The company has made good progress in migrating its customer base to a cloud-based platform with a stronger contribution of recurring revenue and higher pricing. This should support growth and help margin improvement. E-MAC PROGRAM II: Moody's Ups Rating on EUR15.75MM D Notes to Ba2 ----------------------------------------------------------------- Moody's Investors Service has upgraded the ratings of eight Notes and affirmed the ratings of eight Notes in five E-MAC NL transactions. The rating action reflects the better than expected collateral performance and increased levels of credit enhancement for the affected Notes. Moody's affirmed the ratings of the Notes that had sufficient credit enhancement to maintain their current ratings. Issuer: E-MAC NL 2004-I B.V. EUR763M Class A Notes, Affirmed Aaa (sf); previously on Mar 8, 2018 Affirmed Aaa (sf) EUR17.5M Class B Notes, Upgraded to Aa1 (sf); previously on Mar 8, 2018 Affirmed Aa2 (sf) EUR12M Class C Notes, Upgraded to Aa3 (sf); previously on Mar 8, 2018 Upgraded to A1 (sf) Issuer: E-MAC NL 2004-II B.V. EUR584M Class A Notes, Affirmed Aaa (sf); previously on Jun 27, 2017 Affirmed Aaa (sf) EUR13M Class B Notes, Affirmed Aa1 (sf); previously on Jun 27, 2017 Affirmed Aa1 (sf) EUR8.5M Class C Notes, Upgraded to Aa3 (sf); previously on Jun 27, 2017 Upgraded to A1 (sf) Issuer: E-MAC NL 2005-I B.V. EUR476.2M Class A Notes, Affirmed Aaa (sf); previously on Dec 11, 2017 Affirmed Aaa (sf) EUR10.5M Class B Notes, Upgraded to Aa2 (sf); previously on Dec 11, 2017 Affirmed Aa3 (sf) EUR7.8M Class C Notes, Upgraded to A1 (sf); previously on Dec 11, 2017 Upgraded to A3 (sf) Issuer: E-MAC Program II B.V. / Compartment NL 2007-IV EUR654.85M Class A Notes, Affirmed Aaa (sf); previously on Dec 11, 2017 Affirmed Aaa (sf) EUR16.8M Class B Notes, Affirmed Aa1 (sf); previously on Dec 11, 2017 Affirmed Aa1 (sf) EUR12.6M Class C Notes, Affirmed Aa3 (sf); previously on Dec 11, 2017 Affirmed Aa3 (sf) EUR15.75M Class D Notes, Upgraded to Ba2 (sf); previously on Dec 11, 2017 Downgraded to B3 (sf) Issuer: E-MAC Program III B.V. / Compartment NL 2008-I EUR160M Class A2 Notes, Affirmed Aaa (sf); previously on Jul 16, 2015 Affirmed Aaa (sf) EUR7.5M Class B Notes, Upgraded to Aa1 (sf); previously on Jul 16, 2015 Upgraded to Aa2 (sf) EUR3.9M Class C Notes, Upgraded to Aa2 (sf); previously on Jul 16, 2015 Upgraded to A2 (sf) RATINGS RATIONALE The rating action is prompted by an increase in credit enhancement for the affected Notes and by decreased key collateral assumptions, namely the portfolio Expected Loss (EL) assumption and, except for E-MAC NL 2004-II B.V., the MILAN CE assumption, due to better than expected collateral performance. Revision of Key Collateral Assumptions As part of the rating action, Moody's reassessed its lifetime loss expectation for the portfolios reflecting the collateral performance to date. Delinquencies have been volatile in all five transactions over the past year and have generally increased during the coronavirus pandemic. However, cumulative losses are relatively low and have been either stable, or decreasing due to post-foreclosure proceeds, for several years in all five transactions, despite significant pool amortisation. Cumulative losses as a percentage of original pool balance are currently 0.42% in E-MAC NL 2004-I B.V., 0.60% in E-MAC NL 2004-II B.V., 0.58% in E-MAC NL 2005-I B.V., 1.01% in E-MAC Program II B.V. / Compartment NL 2007-IV, and 0.96% in E-MAC Program III B.V. / Compartment NL 2008-I. Due to the stable cumulative losses, Moody's has decreased the expected loss assumption as a percentage of original pool balance for E-MAC NL 2004-I B.V. from 0.70% to 0.55%, for E-MAC NL 2004-II B.V. from 1% to 0.8%, for E-MAC NL 2005-I B.V. from 1% to 0.8%, for E-MAC Program II B.V. / Compartment NL 2007-IV from 1.7% to 1.4% and for E-MAC Program III B.V. / Compartment NL 2008-I from 1.7% to 1.3%. 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 rating levels and the volatility of future losses. As a result, Moody's has decreased the MILAN CE for E-MAC NL 2004-I B.V. from 8% to 6%, for E-MAC NL 2005-I B.V. from 8.5% to 7.5%, for E-MAC Program II B.V. / Compartment NL 2007-IV from 9% to 8% and for E-MAC Program III B.V. / Compartment NL 2008-I from 12% to 10%. For E-MAC NL 2004-II B.V. Moody's has maintained the MILAN CE assumption at 6.0%. Increase in Available Credit Enhancement The increase in the credit enhancement available in these transactions is driven by non-amortising reserve funds. For E-MAC NL 2005-I B.V. and, to a lesser extent, E-MAC NL 2004-II B.V. and E-MAC Program III B.V. / Compartment NL 2008-I, the rating action is also driven by a build-up of credit enhancement due to sequential amortisation. In E-MAC Program II B.V. / Compartment NL 2007-IV the reserve fund was underfunded due to negative excess spread for some time, but since July 2018 it has been fully funded. The increase in available excess spread benefits the Class D notes the most. All five of these transactions can alternate between sequential amortization and OC target amortisation, depending on a set of curable triggers related to 60 plus days arrears, unpaid PDL balance, and funding of reserve accounts and liquidity facilities compared to their target levels. Over the past two years, only E-MAC NL 2004-I B.V. and E-MAC Program II B.V. / Compartment NL 2007-IV have been consistently in OC target amortisation. Over this same period E-MAC NL 2004-II B.V. and E-MAC Program III B.V. / Compartment NL 2008-I have alternated between sequential and OC target amortisation, depending mainly on where 60 days plus arrears are positioned compared to the trigger level of 1.50% of outstanding pool balance. In the past two years E-MAC NL 2005-I B.V. has been consistently in sequential amortisation. Exposure to Ineligible Loans The pools backing the transactions E-MAC NL 2004-I B.V., E-MAC NL 2004-II B.V., and E-MAC NL 2005-I B.V. include loans with maturity dates falling less than two years prior the respective notes legal final maturity dates. The pool backing E-MAC NL 2004-I B.V. also includes two loanparts with a maturity date falling after the notes legal final maturity date in July 2036, however in both cases these loanparts are combined with other loanparts held by the same borrower which reach their maturity dates before the notes legal final maturity date. The transaction documents specify that these loans are not eligible to be included in the pools, but the seller has not repurchased them. There is a risk that if these loans are not fully repaid before the notes legal final maturity date, there could be insufficient principal funds available to redeem the mortgage-backed notes in full. Moody's has taken this risk into account in its analysis, and has observed that over time the exposure to such loans has decreased in these transactions, as the affected loans are prepaid by the borrowers. Moody's will continue to monitor this exposure. The pools backing the transactions E-MAC Program II B.V. / Compartment NL 2007-IV and E-MAC Program III B.V. / Compartment NL 2008-I do not include any loanparts with maturity dates falling less than two years prior the respective notes legal final maturity dates. 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) performance of the underlying collateral that is better than Moody's expected; (ii) an increase in available credit enhancement; and (iii) 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. EDML BV 2021-1: Fitch Assigns BB+(EXP) Rating on Class E Debt ------------------------------------------------------------- Fitch Ratings has assigned EDML 2021-1 B.V. expected ratings, as follows: DEBT RATING ---- ------ EDML 2021-1 B.V. A LT AAA(EXP)sf Expected Rating B LT AA+(EXP)sf Expected Rating C LT A+(EXP)sf Expected Rating D LT A(EXP)sf Expected Rating E LT BB+(EXP)sf Expected Rating F LT NR(EXP)sf Expected Rating RS LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY EDML 2021-1 is a static securitisation of prime Dutch mortgage loans originated by Elan Woninghypotheken B.V. (Elan, formerly known as Dynamic Credit Woninghypotheken B.V.). The loans were sold by Elan, while Quion administers, originates and services the portfolio on Elan's behalf. KEY RATING DRIVERS Low Modelled Loss: The transaction is a refinancing of the existing DCDML 2016-1 and EDML 2018-2 deals. Further assets were added from the Elan's book that are comparable in their credit characteristics. A low indexed current loan-to-value results in high recovery projections. Resulting loss assumptions are floored at Fitch's minimum loss level, eg 4% in a 'AAA' scenario. Interest Rate Risk Addressed: Mismatches between the fixed-rate loans (99.9%) and the floating-rate notes are hedged through an interest rate swap. Interest on the loans will reset at some point to another fixed rate, as is typical for Dutch mortgages. Any change in the asset yield is reflected in a simultaneous change in the swap rate. The interest rate policy outlines provisions to set a loan interest rate at least 0.9% over the swap rate. Interest Deferral Permitted: The transaction documents allow for interest to be deferred on notes until they become the most senior in the structure. Once a class of notes becomes most senior, only the non-payment of interest from the recent accrual period will trigger an event of default, while previously accrued interest is to be repaid by the final maturity date. Principal funds can be used to pay deferred interest on the most senior notes. Counterparty Risks Addressed: Commingling risk is adequately addressed by the use of a collection foundation account (CA) and remedial actions for the collection account bank, in line with Fitch's criteria. Payment interruption risk (PIR) for the class A and B notes is addressed by a non-amortising liquidity facility, while in Fitch's view the PIR for lower-ranking notes, rated up to 'A+sf' is adequately reduced by structural features, including the CA and the servicing set-up. Replacement provisions for the issuer and collection account bank, as well for the servicer are clear and concise. RATING SENSITIVITIES Factor that could, individually or collectively, lead to negative rating action/downgrade: -- Material increases in the frequency of defaults and loss severity on defaulted receivables producing losses greater than Fitch's base case expectations may result in negative rating action on the notes. Fitch's analysis revealed that a 15% increase in the weighted average foreclosure frequency (WAFF), along with a 15% decrease in the weighted average recovery rate (WARR), would imply a downgrade of the class A notes to 'AA+sf', class B notes to 'AA-sf', class C notes to 'Asf', class D notes to 'BBB+sf' and class E notes to 'CCC'. Factor that could, individually or collectively, lead to positive rating action/upgrade: -- Fitch's analysis shows that a 15% decrease in the WAFF, along with a 15% increase in the WARR would imply an upgrade of the class B notes to 'AAAsf', the class C notes would remain at 'A+sf', an upgrade of the class D notes to 'A+sf' and an upgrade of the class E notes to 'Asf'. 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 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action Fitch received the results of a third party assessment conducted on the asset portfolio information, and concluded that there were no findings that affected the rating analysis. Overall, 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. ESG CONSIDERATIONS EDML 2021-1 B.V. has an ESG Relevance Score of '4' for Data Transparency & Privacy due to the limited historical performance data available from the originator, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. EDML BV 2021-1: Moody's Assigns (P)Ba1 Rating to Class E Notes -------------------------------------------------------------- Moody's Investors Service has assigned provisional ratings to Notes to be issued by EDML 2021-1 B.V.: EUR492M Class A Mortgage-Backed Notes 2021 due January 2060, Assigned (P)Aaa (sf) EUR6.5M Class B Mortgage-Backed Notes 2021 due January 2060, Assigned (P)Aa3 (sf) EUR9M Class C Mortgage-Backed Notes 2021 due January 2060, Assigned (P)A2 (sf) EUR4M Class D Mortgage-Backed Notes 2021 due January 2060, Assigned (P)Baa2 (sf) EUR4M Class E Mortgage-Backed Notes 2021 due January 2060, Assigned (P)Ba1 (sf) Moody's has not assigned any ratings to the EUR2.5 million Class F Mortgage-Backed Notes 2021 due January 2060 and to the EUR40 million Class RS Notes 2021 due January 2060. The Classes A to F are mortgage backed Notes. The proceeds of the Class RS Notes will be partially used to fund the reserve account. RATINGS RATIONALE The Notes are backed by a static pool of Dutch prime residential mortgage loans originated by Elan Woninghypotheken B.V. ("Elan", NR). This represents the sixth issuance out of the EDML/DCDML label. The portfolio of assets amounts to approximately EUR518.7 million as of August 2021 pool cut-off date. The reserve account will be funded to 0.35% of the total portfolio balance at closing and the total credit enhancement for the Class A Notes will be 5.50%. The ratings are based on the credit quality of the portfolio, the structural features of the transaction and its legal integrity. According to Moody's, the transaction benefits from various credit strengths such as a granular portfolio, a non-amortising cash advance facility sized at 0.50% of Class A and B Notes balance and a non-amortising reserve account sized at 0.35% of the securitised portfolio balance. However, Moody's notes that the transaction features some credit weaknesses such as an unrated servicer. Various mitigants have been included in the transaction structure such as a back-up servicer facilitator which is obliged to appoint a back-up servicer in the event the servicing agreement is terminated in respect of the servicer. Moody's determined the portfolio lifetime expected loss of 0.9% and a Aaa MILAN credit enhancement ("MILAN CE") of 6.5% related to borrower receivables. The expected loss captures Moody's expectations of performance considering the current economic outlook, while the MILAN CE captures the loss Moody's expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and MILAN CE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the ABSROM cash flow model to rate RMBS. Portfolio expected loss of 0.9%: This is in line with the Dutch Prime RMBS sector and is based on Moody's assessment of the lifetime loss expectation for the pool taking into account: (i) the collateral performance of Elan originated loans to date, as provided by the originator and observed in previously securitised portfolios and (ii) the current macroeconomic environment in the Netherlands. MILAN CE of 6.5%: This is in line with the Dutch Prime RMBS sector average and follows Moody's assessment of the loan-by-loan information taking into account the following key drivers: (i) the collateral performance of Elan originated loans to date as described above; (ii) the weighted average current loan-to-value of 85.95% which is better than the sector average; and (iii) the potential drift in asset quality through further advances. 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 AN UPGRADE OR DOWNGRADE OF THE RATINGS: Factors that may cause an upgrade of the ratings of the notes include significantly better than expected performance of the pool together with an increase in credit enhancement of Notes. Factors that would lead to a downgrade of the ratings include: (i) increased counterparty risk leading to (a) potential operational risk of servicing or cash management interruptions and/or (b) the risk of increased swap linkage due to a downgrade of a swap counterparty rating; and (ii) economic conditions being worse than forecast resulting in higher arrears and losses. INTERTRUST NV: S&P Lowers LT ICR to 'BB' on Margin Deterioration ---------------------------------------------------------------- S&P Global Ratings lowered its long-term issuer credit ratings on Intertrust N.V. and Intertrust Group B.V. and its issue ratings on the group's senior unsecured debt to 'BB' from 'BB+'. The recovery rating on the debt remains at '3', indicating its expectation of about 60% recovery for debtholders. S&P said, "The outlook is stable, indicating our opinion that the group's sales will remain resilient, and that despite margin pressure we expect the group will deleverage toward 3.6x in 2022, combined with solid free operating cash flow (FOCF). "We forecast that Intertrust's operating margins will remain under pressure in 2021 and 2022. Despite relative resilience in the group's underlying revenue, in particular in the funds and capital markets segments where growth remains solid, we expect Intertrust's operating performance will be weaker than initially anticipated this year and the next. Not only do we expect negative impact from the group's business mix developments, because the higher-margin corporate services will grow at a slower pace than the funds business, but Intertrust will also incur exceptional costs associated with its global compliance remediation activities in both years. These one-off costs will temporarily offset the benefits from cost savings achieved by the group's transformation program, in which it made good progress in transferring roles to centers of excellence. Although we expect the group's margins will improve in the medium term after completion of the compliance remediation work, profitability is unlikely to recover to levels achieved in the past, before the Viteos acquisition, and we believe the group's operating efficiency and overall profitability will remain somewhat weaker in the long term compared with our prior assessment. "As a result, the group's credit metrics will again fall short of our prior expectations in 2021. Although we had expected Intertrust's S&P Global Ratings-adjusted leverage would decline significantly below 4x in 2021, we no longer think this will happen. The group's leverage is likely to remain at 4.0x or marginally above for the third year in a row, after 4.3x in 2020 and 4.8x in 2019, implying that credit metrics will again not be in line with what we view as commensurate for a 'BB+' rating. "The announced share buyback program adds pressure on cash flow generation, which we think will result in further delays to deleveraging. In addition, while the group's new capital allocation policy includes a target, unadjusted net leverage of 3x, and the dividend payout ratio was reduced to 20% of net income versus 40% previously, we view the announced share buyback program as a somewhat negative signal to creditors, since share buyback payments will further pressure cash flow generation and therefore reduce cash available for debt repayments." Although payments to shareholders will not greatly affect leverage in 2021, given they will start only in the last quarter, they will significantly delay deleveraging in 2022. Intertrust's liquidity remains strong, reflecting its limited working capital and capital expenditure (capex) requirements. With the exception of the US$150 million term loan maturing in June 2022, Intertrust does not have significant debt repayments in the short term and cash generation will remain ample to cover the group's limited working capital and capex needs, as well as the expected payments to shareholders. S&P said, "We expect the group's FOCF generation will remain solid, although weaker than under our previous base case, at around EUR110 million-EUR130 million in 2021-2022. However, we project that discretionary cash flows after payments to shareholders will be materially lower than our prior expectations in 2022 at around EUR60 million-EUR70 million (we previously expected EUR110 million-EUR120 million)." S&P said, "The stable outlook indicates our opinion that global economic growth and increasing complexity of the global regulatory and tax landscape will support demand for Intertrust's services. Despite slower growth in its higher-margin markets and temporary higher costs associated with compliance remediation activities until 2022, we think Intertrust's EBITDA margins will recover to about 35% and leverage will decline to about 3.6x by 2022. "We could lower the ratings if Intertrust's profitability deteriorated further due to higher-than-anticipated costs associated with compliance remediation activities or continued low growth in the group's higher-margin segments, resulting in a sustained unfavorable margin mix. Specifically, we could downgrade Intertrust if adjusted margins declined toward 30%. We might also lower the ratings if the group adopts a more aggressive financial policy, such that adjusted debt to EBITDA deteriorates long term to above 4.5x. "We could raise the ratings if Intertrust demonstrated continued revenue growth and reduced one-off transformation and compliance remediation costs to support EBITDA margins and FOCF generation, such that adjusted debt to EBITDA improved to around 3.5x on a sustained basis, and the group committed to maintain a prudent financial policy enabling it to support credit metrics at these levels." =========== N O R W A Y =========== HURTIGRUTEN GROUP: S&P Alters Outlook to Stable & Affirms CCC+ ICR ------------------------------------------------------------------ S&P Global Ratings affirmed its 'CCC+' issuer credit rating on cruise ship operator Hurtigruten Group AS (Hurtigruten). S&P also affirmed its 'CCC+' issue ratings on the group's existing EUR85 million revolving credit facility (RCF) and EUR655 million term loan B facilities, and its 'B-' issue rating on the EUR300 million senior secured notes issued by Explorer II AS. The stable outlook indicates that the group's improved liquidity position should enable it to navigate the full reopening of its cruising operations and maintain enough headroom in the event of further setbacks arising from the ongoing effects of the COVID-19 pandemic. It also reflects the group's long-dated capital structure and S&P's expectation that the group's operating cash flows will turn positive over the next 12 months. After more than a year of severely disrupted operations, Hurtigruten is restarting its sailings, boosted by strong consumer demand and decreasing government-mandated restrictions. The group's Norwegian coast segment returned to full operations in Q3 2021, and the expeditions segment is expected to gradually resume sailing by Q4 2021-Q1 2022. The restart is supported by strong demand trends and expectations of government-imposed restrictions easing over the second half of 2021 and 2022. High vaccination rates among Hurtigruten's main customer jurisdictions (Germany, the Nordic countries, and the U.K. historically accounted for about 80% of Hurtigruten's customer base) should help ensure that the eased environment is sustained. Hurtigruten has solid booking levels for the 2022 season, and by mid-August 2021, bookings for 2022 were about 33% higher than those for the same period two years earlier. Under the proposed transaction, Hurtigruten will receive an injection of EUR75 million of subordinated shareholder funding, as well as increasing its flexibility under the existing debt documentation. The proposed transaction needed approval by term loan holders because the existing facilities were fully exhausted following the EUR46.5 million term loan D issuance that the group completed in March 2021. With the addition of EUR25 million secured, as well as unlocking a EUR75 million unsecured debt basket, the transaction will also provide flexibility to access further financing in case of any potential delays in the recovery of operations. S&P views the proposed shareholder funds as akin to equity because of their subordinated nature to the rest of the debt in the structure, lack of cash-pay interest requirements, and link to the common equity. Hurtigruten's capital structure comprises: -- EUR85 million RCF due February 2024; -- EUR300 million senior secured notes due February 2025; -- EUR655 million term loan B due February 2025; -- EUR105 million term loan C due June 2023; and -- EUR46.5 million term loan D due June 2023. S&P said, "Our updated forecast envisions continued subdued earnings and heavy cash outflows for the full year to December 2021, although we expect a strong recovery in 2022.Following the group's resumption of sailings in 2021, the pandemic continued to affect trading volumes. They therefore remained subdued in the first half of 2021, compared with (still partially pre-pandemic) H1 2020. Currently about 65% of Hurtigruten's fleet is operational, and most of its remaining fleet is set to enter operations during Q4 2021, including the relatively new explorer ships MS Roald Amundsen and MS Fridtjof Nansen. The two remaining explorer ships, MS Santa Cruz and MS Spitsbergen, are expected to be operational during first-half 2022. We anticipate that occupancy levels will be sound in 2022, but will remain below 2019 levels, partly due to the lingering effects of government-imposed social-distancing measures, as well as a gradual (rather than abrupt) recovery in international travel volumes. We expect that 2023 will be the first full year of recovery in occupancy rates back to 2019 levels. As a result, we now anticipate EUR640 million-EUR680 million of revenue and S&P Global Ratings-adjusted EBITDA of EUR145 million-EUR155 million for the year to December 2022. We expect adjusted leverage to remain high at above 10x in 2022, and free operating cash flow (FOCF) after leases to remain negative during the year, because of a sharp increase in capital expenditure (capex). We anticipate that adjusted leverage will further improve to about 8.0x-8.5x and FOCF after leases to turn broadly neutral in 2023, thanks to a full recovery in adjusted EBITDA to EUR190 million-EUR210 million. "Subject to the proposed transaction's successful completion, we believe Hurtigruten will be well positioned to cover its liquidity needs over the next 12 months, while maintaining adequate covenant headroom. As of June 30, 2021, Hurtigruten's accessible cash balances stood at EUR85.8 million, boosted by the completed sale and leaseback transaction on its Svalbard real estate portfolio earlier in the year. With the proceeds of the shareholder instrument, Hurtigruten's accessible cash balances should increase to about EUR160 million. The transaction would also improve Hurtigruten's access to additional funding, with the addition of EUR100 million in undrawn debt baskets in the amended senior debt documentation. Coupled with the reopening of its operations, we believe the proposed transaction will increase Hurtigruten's liquidity headroom over the next 12 months. That said, the transaction remains subject to execution risk, as a majority vote from existing term loan lenders will be necessary to approve the injection. "The sustainability of Hurtigruten's path to recovery remains uncertain, with potential further waves of the pandemic affecting the international travel sector's recovery over the next 12 months. Although vaccine rollouts in Hurtigruten's main customer demographic are already very high, and the possibility of further COVID-19 variants, and the varying degree of protection that current vaccines can provide against new variants, adds some uncertainty to our outlook on Hurtigruten for the next 12 months. Our base case envisions no government-mandated restrictions and a gradual pickup in demand will lead to subdued occupancy rates until Q2 2022, with a swift pickup in operating metrics thereafter. That said, we do not envision occupancy rates to fully recover to pre-pandemic levels until later in 2022, suggesting that 2023 could be the group's first full year of recovery. "The stable outlook reflects our forecast of a gradual recovery in top line and earnings over the next 12 months, as well as continued support on cash flows from a strong pre-booking momentum for future sailings. The stable outlook also reflects the recent shareholder funding injection and senior debt documentation amendment, which should allow the business to maintain sufficient liquidity headroom over the same period. Under our updated base case, we anticipate that revenue and EBITDA will remain severely subdued in fiscal year (FY) ending Dec. 31, 2021, gradually recovering over FY2022 and leading to adjusted debt to EBITDA of about 10x by the end of the year (about 9x excluding debt-like shareholder instruments)." S&P could lower the ratings if it saw an increased risk of default in the next 12 months. This could occur if: -- New government-imposed restrictions threatened Hurtgiruten's recovery prospects, such that we anticipated earnings to remain under pressure and operating cash burn to lead to reduced liquidity headroom; or -- S&P was to view specific default events, such as the likelihood of interest forbearance, a broader debt restructuring, or debt purchases below par, as an increasing possibility. Although unlikely in the short term, S&P could take a positive rating action on Hurtigruten if the group managed to successfully fully restart its operations quicker than currently anticipated, and COVID-19-related uncertainties abated. A positive rating action would be contingent on the group building a track record of earnings recovery, such that adjusted debt to EBITDA reduced toward 8.0x and FOCF after leases turned positive on a sustainable basis. =========== P O L A N D =========== CANPACK SA: Fitch Gives 'BB(EXP)' Rating to USD800MM Unsec. Notes ----------------------------------------------------------------- Fitch Ratings has assigned CANPACK's proposed USD800 million senior unsecured notes due 2029 a 'BB(EXP)' expected rating with a Recovery Rating of 'RR4'. The notes' rating is aligned with that of CANPACK's existing notes and CANPACK Long-Term Issuer Default Rating (IDR). The proceeds from the bonds will be used to finance ongoing investments in two greenfield metal-can production plants in North America. The USD300 million increase to Fitch's USD500 million rating case issuance assumption, partly to finance additional expansionary projects, will not lead to a change in rating or Outlook for CANPACK, but will limit headroom at the existing rating. Fitch expects continued strong customer demand and predictable operating margins as well as pre-contracted expansion projects to support good EBITDA growth over the rating horizon. KEY RATING DRIVERS Strong Performance Extends into 2021: CANPACK's strong performance continued through 1H21, with beverage can volumes up by 29% and turnover and EBITDA both increasing by more than 40% compared with 1H20. This was partly supported by recent investments in additional plant capacity in Colombia and a new plant in the Czech Republic commissioned in June 2020. The EBITDA margin reached record levels above 18% in 2020 and 1H21 due to operating at full capacity and costs being under control. In 1H21, there were limited issues with soaring raw materials costs and logistics issues. Rising Costs Diluting Margins: Cost inflation and recent high aluminium prices means that Fitch expects margins to decrease in 2H21 to around 14.0% from 18.5% in 2020. CANPACK's effective 100% pass-through of the LME-related aluminium increase mean that soaring aluminium prices will also inflate turnover. Fitch believes that actual cash EBITDA will remain unaffected by the higher aluminium input costs, although other pressure on margins from high transport, labour and other raw material costs are likely. Fitch expects this effect to lessen over the rating horizon and EBITDA will also benefit from new capacity coming on stream. Further Leverage Increase: Additional debt and very high expansionary capex in 2022 and 2023, up to USD1.63 billion for 2021-2024 from USD1.15 billion previously, will put further pressure on funds from operations (FFO) net leverage, which Fitch expects to be outside the negative sensitivities, peaking at 4.3x in 2022. Fitch expects the company to delever with FFO net leverage below 3.5x by 2024. There is no headroom for further increase or delays to the forecast deleveraging in Fitch's rating. Volatile FCF to Continue: Expansionary capex and large working-capital consumption have been a function of the company's high organic growth strategy and kept free cash flow (FCF) largely negative in the past four years. CANPACK's additional capex delays its return to positive FCF, and Fitch forecast negative FCF in 2021-2023, due to USD485 million of additional expansionary investments on top of the two greenfield plants, in Pennsylvania (USD483 million; production started in 3Q21 and with full capacity expected in 4Q22) and in Indiana (USD400 million; planned start in 4Q22 and full capacity in 3Q23). Well-Managed Expansion Strategy: CANPACK's growth has been almost exclusively through new greenfield investments, having developed operations in 17 countries over the last 18 years. The strategy is to grow with existing customers, mainly beverage producers, and with a large share of volumes for new facilities being pre-contracted. This has led to high efficiency in new plant construction and projects being implemented within set budgets and timeframes, now typically expected to be less than one year from start to project completion. Favourable Packaging Sub-Sector: CANPACK is largely a metal beverage can manufacturer (86% of 2020 turnover) and Fitch views this as an attractive packaging segment with good growth fundamentals. The sector is benefiting from the transition to aluminium cans from plastic and glass bottles given much higher levels of recyclability. As it is lightweight and easily stackable, it is also lighter and more compact for transport. Rating Perimeter: Fitch's rating case for CANPACK includes the operations and financial results of CANPACK US LLC, despite CANPACK not owning this business. However, they are co-issuers of the recent and proposed bonds and are jointly and severally liable for these senior unsecured bonds, which now form a vast majority of the combined group's debt. Consolidated Approach: The management provides audited combined accounts for the CANPACK group (i.e. a consolidated approach including both CANPACK S.A. and CANPACK US and their subsidiaries). In addition, both companies are owned by the same ultimate parent and managed by the same senior executives. Fitch would reassess the inclusion of CANPACK US in the event that the capital structure no longer includes this co-issuer structure, including joint and several liability, for the vast majority of the debt. DERIVATION SUMMARY CANPACK compares favourably with Fitch-rated beverage packaging peers, with good profitability supported by its relatively new and cost-effective production footprint. It has strong market positions, ranking third in Europe and fourth globally behind global beverage can leaders Ball Corporation, Crown Holdings Inc and Ardagh Group S.A. (B+/Stable; third globally). However, these companies are significantly larger than CANPACK (3x-5x the size), with Ardagh Metal Packaging S.A. (B+/Stable) of similar size to CANPACK. CANPACK is similar in size to newly formed Titan Holdings II B.V. (B/Stable), Europe's largest metal food can producer (recently spun off from Crown Holdings) but Titan has higher leverage and weaker margins than CANPACK. CANPACK's Fitch-defined EBITDA and FFO margins averaged 16.0% and 14,0%, respectively, in 2018-2020 compared with Ardagh Metal Packaging's 14.0% and 8.5%. However, CANPACK's volatility of margins (both EBITDA and FCF) is typically higher than peers, which is explained by the company's current high investment growth phase. While lacking the scale of its larger peers Ball and Crown, margins are fairly similar due to CANPACK having a large share of production in central and eastern Europe and emerging markets as well as a portfolio of substantially newer manufacturing plants than its peers. CANPACK compares favourably in leverage with FFO net leverage forecast at 2.7x for 2021, at 4.3x in 2022 and below 4x by 2023. This remains lower than many rated peers, Berry Global, Inc (BB+/Stable; 5.2x end-2020 and 4.9x for 2021), Ardagh Group (near 7.7x at end 2020 and 7.1x for 2021) and Titan Holdings (above 8x for 2021), but very similar to Silgan Holdings Inc. (BB+/Stable; 4.1x at end-2020 and 3.5x for 2021) and higher than Smurfit Kappa Group plc (BBB-/Stable; 1.8x for 2020). RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Completion of US green-field investments delivering expected levels of pre-contracted sales, with the consolidated group generating revenue in excess of USD3 billion; -- Maintenance of strong EBITDA margin sustained above 17% and FFO margin above 12%; -- FFO net leverage sustained below 3x; -- FCF margin sustained above 1%. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Delay and cost-overruns of investments leading to weaker operating performance and EBITDA margins sustained below 15%; -- FCF margin failing to turn positive from 2023; -- FFO net leverage sustained above 3.5x; -- Change to corporate or capital structure indicating ineffective consolidation scope of both CANPACK and CANPACK US operations. 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 Satisfactory Liquidity: CANPACK had readily available cash of USD406 million at end-2020 (after Fitch adjustment for working capital seasonality) and access to undrawn revolving credit facilities (RCFs) totalling EUR467 million. Fitch expects both cash and RCFs to be partly utilised in 2021 to cover increasing capex needs in 2H21. Despite the new notes issue in 2020 (with USD400 million to partially fund ongoing North American greenfield investments), liquidity will be somewhat strained during the rating horizon due to expansionary capex of approximately USD1.6 billion over 2021-2024. FCF is highly negative in 2021- 2023 due to high capex and the planned new USD800 million debt issue will be used to cover funding needs. Liquidity is supported by continued strong FFO generation throughout 2021-2024, limited near-term maturities (the notes maturing in 2025 and 2027) and positive FCF generation from 2024. Debt Structure: CANPACK's debt is composed of EUR600 million and USD400 million unsecured notes issued in October 2020 maturing in 2027 and 2025, respectively, and rank pari passu with the unsecured RCF. These notes are jointly issued with CANPACK US and the two companies are jointly and severally liable for the full amount of the notes as outlined in the bond documentation. For covenant purposes, audited combined accounts are also taken into consideration. Last year, the RCFs were upsized and amended to also be reflected in combined accounts. Fitch accordingly rates the company using a consolidated approach. ISSUER PROFILE With revenues of USD2.3 billion in 2020, Poland-based CANPACK is a global manufacturer of aluminium cans, glass containers and metal closures for the beverage industry and of steel cans for the food and chemical industries. Serving customers across some 95 countries globally, it is the fourth-largest supplier of beverage cans in the world and ranks number three in Europe. 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. CANPACK SA: S&P Affirms 'BB' ICR on Strong Demand, Outlook Stable ----------------------------------------------------------------- S&P Global Ratings affirmed its 'BB' long-term issuer credit ratings on CANPACK S.A. and CANPACK US LLC and its 'BB' issue rating and '3' recovery rating on the existing senior unsecured notes. S&P also assigned its 'BB' issue rating and '3' recovery rating to the proposed $800 million senior unsecured notes, due in 2029, in line with the existing notes. The stable outlook reflects S&P's view that CANPACK's credit metrics are likely to remain commensurate with a significant financial risk profile, with S&P Global Ratings-adjusted debt to EBITDA expected to temporarily increase to about 3.8x and fund from operations (FFO) to debt of 20%-25% in the next 12 months. Proceeds from the $800 million senior unsecured notes will mainly be used for construction and expansion. CANPACK S.A. and CANPACK US LLC will use about $400 million to build a new plant in Muncie, U.S., and $100 million to expand the plant in Olyphant, U.S., with about $220 million for potential growth projects. S&P said, "In our view, the investment follows strong demand in first-half 2021 and the need to create additional capacity to cover limited industry supply. We anticipate the new facilities will expand the company's current 26-billion-can capacity as of September 2021 by 8 billion by year-end 2023." S&P said, "In our view, the group's expansion plan will continue to undermine free operating cash flow (FOCF) in 2021 and 2022.The investments in the new facilities require further capital expenditure (capex), which we estimate will reach up to $600 million in 2021 and $700 million-$750 million in 2022, compared with $371 million in 2020. Therefore, we anticipate negative FOCF of about $310 million-$330 million in 2021 and $450 million-$480 million in 2022, versus negative $50 million in 2020. "However, we anticipate that the higher debt resulting from the issuance will be partly offset by better operational performance in 2021.In first-half 2021, the group experienced more than 42% year-on-year growth in revenue, with a roughly stable EBITDA margin. This growth was driven by continued at-home consumption supported by increasing work-from-home models offered by companies following the pandemic, as well as higher demand through e-commerce. Furthermore, increasing demand for aluminum cans is supported by a high recyclability rate compared to other beverage containers. The first lines at CANPACK's Olyphant plant will start can production from third-quarter 2021 and we anticipate a further contribution to EBITDA that, together with higher demand, will enable the company to outperform our previous forecasts. We now anticipate S&P Global Ratings-adjusted EBITDA will reach close to $490 million in 2021, from our previous forecast of about $360 million and compared with $437 million recorded in 2020. At the same time, we forecast net debt of $1.3 billion in 2021, mainly comprising the $400 million senior unsecured notes, the $737 million-equivalent notes (EUR600 million), the proposed $800 million notes, some other bank loans, and our adjustment to operating leases of $38 million--from which we deduct an anticipated year-end cash balance of $780 million-$800 million. This results in our expectation of adjusted debt to EBITDA of 2.5x-3.0x in 2021, compared with our previous forecast of 3.2x-3.3x. Given the higher cash burn in 2022, we anticipate a temporary increase in leverage to up to 3.8x-3.9x in 2022. "The stable outlook reflects our view that CANPACK's credit metrics are likely to remain commensurate with a significant financial risk profile, with S&P Global Ratings-adjusted debt to EBITDA expected to temporarily increase to about 3.8x and FFO to debt of 20%-25% in the next 12 months." S&P could lower the ratings if: -- Adjusted debt to EBITDA exceeds 4.0x; and -- Adjusted FFO to debt falls below 20% on a prolonged basis. This could happen because of lower utilization rates (due to large contract losses or lower demand for beverage cans), or pricing pressure. Large debt-funded shareholder distributions or capacity expansions could also result in higher leverage. Furthermore, S&P could lower the rating if its assessment of holding company GGH's group credit profile deteriorates. S&P could raise the ratings if: -- Adjusted debt to EBITDA remains below 3.0x; and -- Adjusted FFO to debt increases and stays above 30%; or -- CANPACK generates positive and sustainable adjusted FOCF. An upgrade would also be contingent upon an improvement in GGH's group credit profile. =========== R U S S I A =========== CREDIT BANK: Fitch Gives Final 'B-' on USD350MM Perpetual AT1 Notes ------------------------------------------------------------------- Fitch Ratings has assigned Credit Bank of Moscow's (CBM) USD350 million issue of US dollar-denominated perpetual additional Tier 1 (AT1) notes a final 'B-' rating. The bonds have been issued by CBM's special purpose vehicle, CBOM Finance PLC (Ireland). The proceeds from the issue are being used solely for financing a perpetual subordinated loan to CBM, which will count as regulatory Tier 1 capital at the bank. The bonds have a 7.625% coupon rate and no established redemption date. However, CBM has an option to repay the notes every five years starting from 2027 subject to the Central Bank of Russia's (CBR) approval. The assignment of the final rating follows the completion of the issue and receipt of documents conforming to the information previously received. The final rating is the same as the expected rating assigned on 23 September. KEY RATING DRIVERS The notes are rated four notches below CBM's 'bb' Viability Rating (VR). According to Fitch's Bank Rating Criteria, this is the highest possible rating that can be assigned to deeply subordinated notes with fully discretionary coupon omission issued by banks with a VR anchor of 'bb'. The notching reflects the notes' higher loss severity in light of their deep subordination and additional non-performance risk relative to the VR given a high write-down trigger and fully discretionary coupons. The upcoming notes should qualify as AT1 capital in CBM's regulatory accounts due to a full coupon omission option at the bank's discretion, and full or partial write-down if either (i) the bank's core Tier 1 capital ratio falls below 5.125% (versus a 4.5% regulatory minimum) for six or more operational days in aggregate during any consecutive 30 operational days; or (ii) the CBR approves a plan for the participation of the CBR in bankruptcy-prevention measures in respect of the bank, or the Banking Supervision Committee of the CBR approves a plan for the participation of the Deposit Insurance Agency in bankruptcy-prevention measures in respect of the bank. Fitch expects any coupon omission to occur before the bank breaches the notes' 5.125% core Tier 1 trigger. There is no specific trigger that would oblige CBM to omit coupons before hitting the 5.125% trigger. However, if the bank's capital ratios fell below minimum levels including buffers (i.e. 8% for core Tier 1), the bank would be required to submit a capital-recovery plan to the CBR. Fitch sees at least a moderate risk that any such plan would include the omission of coupons on the AT1 securities. The risk of coupon omission is reasonably mitigated by CBM's stable financial profile, adequate internal capital generation, and moderate headroom over capital minimums, including buffers (the bank's regulatory core Tier 1 ratio was 9.7% at end-2Q21). ESG CONSIDERATIONS CBM has an ESG Relevance Scores of '4' for Governance Structure and Group Structure due to significant level of relationship-based operations, a lack of transparency with respect to ownership structure and significant double leverage at the level of the bank's holdco. These considerations have a moderately negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- The issue rating could be downgraded if CBM's VR is downgraded, particularly by two notches or more. If the VR was downgraded by one notch to 'bb-', the notes' rating could be affirmed as the minimum notching for these instruments reduces to three notches for VRs of 'bb-' and below, compared with four notches at 'bb'. -- The issue ratings could also be downgraded if Fitch takes a view that non-performance risk has increased and widens the notching between CBM's VR and the issue's ratings. For example, this could arise if the bank fails to maintain reasonable headroom over the minimum capital adequacy ratios (including buffers) or if the instrument becomes non performing, i.e. if the bank cancels any coupon payment or at least partially writes off the principal. In this case, the issue rating will be downgraded based on Fitch's expectations about the form and duration of non-performance. Factor that could, individually or collectively, lead to positive rating action/upgrade: -- The issue rating could be upgraded if CBM's VR is upgraded. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond 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. METKOMBANK: Moody's Affirms 'B2' LongTerm Deposit Ratings --------------------------------------------------------- Moody's Investors Service has affirmed the long-term local and foreign currency bank deposit ratings of Metkombank at B2, the outlook on these ratings remains stable. Concurrently, Moody's affirmed Metkombank's Baseline Credit Assessment (BCA) and Adjusted BCA of b2, the bank's long-term local and foreign currency Counterparty Risk Ratings (CRR) of B1 and its long-term Counterparty Risk Assessment (CR Assessment) of B1(cr). The bank's Not Prime short-term local and foreign currency bank deposit ratings, Not Prime short-term local and foreign currency CRRs and Not Prime(cr) short-term CR Assessment were also affirmed. RATINGS RATIONALE AFFIRMATION OF THE BCA AND DEPOSIT RATINGS Affirmation of Metkombank's BCA and deposit ratings reflects the bank's strong capital and liquidity buffers that are counterbalanced by its volatile profitability metrics, as well as the elevated key-man risk and lack of business diversification. As of June 30, 2021, Metkombank's tangible common equity/risk-weighted assets (TCE/RWA) was 18.9%, and Moody's expects the bank to sustain its strong capital adequacy level over the next 12-18 months, despite some possible moderate growth in RWA and regular large dividend payments by the bank, which in 2021 amounted to 66% of 2020 IFRS net profit. A downside risk to Metkombank's capital adequacy may stem from an abrupt negative revaluation of its investments in securities, as they amounted to 2.4x the bank's total shareholder equity as of June 30, 2021. The high exposure to securities, that are mostly fixed income instruments, makes the bank's profitability metrics volatile, though the credit quality of these instruments is good as they mainly include sovereign and high-quality corporate bonds. Another factor behind the volatility of Metkombank's financial result is the high concentration of the bank's loan book, with the 20 largest credit exposures (including off-balance-sheet guarantees) together accounting for 131% of its TCE as of June 30, 2021. However, the potential negative effect of credit losses will be mitigated by stable dynamics of the bank's loan portfolio and its small size as net loans account for around one third of the bank's total assets, while problem loans (at 15.3% of total loans as of June 31, 2021) mainly comprise legacy loans and are already 121% covered by loan loss reserves. Metkombank's customer deposit base is also highly concentrated with the 20 largest depositors accounting for the half of the total customer funding as of June 30, 2021, however the risk of deposit volatility is partially addressed by the bank's ample unencumbered liquidity which amounted to 50% of total assets as of June 30, 2021. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS Governance is highly relevant for Metkombank, as it is to all entities in the banking industry. Historically, Metkombank's business is based largely on relationships with companies controlled by, or associated with, the bank's main shareholders and their partners. Although the reported level of related-party lending is moderate (3.4% of the bank's shareholder equity reported as of June 30, 2021 under IFRS), Moody's estimates that the volume of loans issued based on the shareholders' business links is higher. These links render the bank's business and financial fundamentals highly exposed to key-man risk. In addition, Metkombank's business volumes are small and comprise a limited number of customers which makes the bank's performance dependent on the performance of individual borrowers and depositors and, therefore, deprives the bank of business diversification benefits. RATINGS OUTLOOK The stable outlook on Metkombank's long-term deposit ratings reflects Moody's view that the risks inherent to the bank's concentrated business model and narrow market franchise are mitigated by its ample capital and liquidity buffers. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Metkombank's ratings could be upgraded if the bank significantly improves its business diversification, expands its currently narrow customer base, reduces market risk exposure, and displays sustainable good asset quality and robust profitability. Metkombank's ratings could be downgraded as a result of a significant deterioration in its solvency metrics or a significant deposit outflow and shortage of liquidity, although these are not Moody's base case scenarios at the moment. LIST OF AFFECTED RATINGS Issuer: Metkombank Affirmations: Long-term Counterparty Risk Ratings, affirmed B1 Short-term Counterparty Risk Ratings, affirmed NP Long-term Bank Deposits, affirmed B2, outlook remains Stable Short-term Bank Deposits, affirmed NP Long-term Counterparty Risk Assessment, affirmed B1(cr) Short-term Counterparty Risk Assessment, affirmed NP(cr) Baseline Credit Assessment, affirmed b2 Adjusted Baseline Credit Assessment, affirmed b2 Outlook Action: Outlook remains Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks Methodology published in July 2021. URALKALI PJSC: Fitch Alters Outlook on 'BB-' LT IDR to Negative --------------------------------------------------------------- Fitch Ratings has revised the Outlook on Uralkali PJSC's Long-Term Issuer Default Rating (IDR) to Negative from Stable and affirmed the Long-Term IDR at 'BB-'. The Negative Outlook reflects the uncertainty regarding Uralkali's capital allocation policy and the change in its ownership structure, with limited visibility of the parent's financial profile. While the incurrence covenant in Uralkali's Eurobonds due in 2024 and the maintenance covenant in its pre-export facility (PXF) provide some insulation, they also allow an increase in leverage and their potential revision following the refinancing may support a re-assessment of Fitch's approach to a consolidated profile. Fitch expects that a stronger price environment and better cash flow generation will be offset by large dividend payments to the sole parent, Uralchem. Fitch assumes Uralkali could pay around USD4 billion dividends over 2021-2024 (under Fitch's mid-cycle price assumptions for potash) to Uralchem, using almost all capacity under the 3.5x net debt/EBITDA incurrence Eurobond covenant. This translates into funds from operations (FFO) net leverage remaining at around 4x, which is Fitch's negative sensitivity, over the next four years. The rating continues to reflect the company's strong business profile with global leadership in potash output, favourable cost position and Fitch-adjusted EBITDA margins of around 50% through the cycle, balanced against relatively high leverage compared with similarly rated peers, lack of record of adherence to a strict financial policy and lack of transparency at the parent level. KEY RATING DRIVERS Change in Shareholding Structure: Uralchem previously owned 46% of Uralkali, and acquired a controlling stake of 81.47% in November 2020. In February and March 2021, Uralkali acquired the remaining 18.53% of shares from the other shareholder Rinsoco, kept at a subsidiary level as treasury shares, meaning Uralchem now effectively owns 100% of Uralkali. Uralkali's management does not expect any operational integration with Uralchem at present but anticipates some synergies, with Uralkali focusing on potash mining and Uralchem on the chemical processing. Overall Weak Ties: Fitch currently views the legal and operational ties as weak, given 4x net debt/EBITDA maintenance covenant in Uralkali's PXF and 3.5x net debt/EBITDA incurrence covenant in its Eurobonds documentation. However, this ring-fencing mechanism may not provide strong insulation, as evidenced by the relaxation of the maintenance covenant in 2016 following a shareholder distribution. Covenants will also be subject to revision in the medium term due to refinancing, which may support a shift to a consolidated approach. Further disclosure of Uralchem's cash flow generation and its need for cash flows from the subsidiary to meet its debt service requirements would help us better assess the ties between the two companies under Fitch's Parent and Subsidiary Linkage Rating Criteria. Opportunistic Implementation of Financial Policy: Uralkali's net debt/EBITDA ratio averaged 3.4x in the last three years versus the company's internal target leverage ratio of 2.0x-2.5x, due to large distributions in the form of shareholder loans. Uralkali's dividend policy is discretionary and not linked to any financial metric. This allows flexibility to make large shareholder distributions under the 3.5x net debt/EBITDA Eurobond incurrence covenant and under the PXF maintenance covenant of 4x. Higher Leverage: Under Fitch's potash price deck, the agency expects Uralkali to have exceptionally strong EBITDA of around USD2 billion in 2021, up from USD1.2 billion in 2020. Fitch then expects EBITDA to moderate to USD1.7 billion from 2022. However, Fitch expects FFO net leverage to remain at 4x over 2022-2024, despite a stronger market environment, due to large dividend pay-outs, putting pressure on the rating. Positive Price Environment: Strong global demand from farmers is supporting the current rally in spot markets. Export disruptions at Belaruskali due to political sanctions against the government could further increase spot prices. Fitch conservatively expects muriate of potash (MOP) prices (FOB Vancouver) to average USD228/tonne in 2021-2024. Fitch base its assumptions on the contract prices, which underperformed in 1H21, including the contract between Belaruskali and India. Some Capex Flexibility: Management views most of the new investments as strategic. However, Fitch assumes Uralkali will be able to mitigate any potential long-term pricing pressure through delaying a portion of its expansionary capex (around USD200 million per year), which represents half of its total investments. Emerging Markets and Industry Risks: The 'BB-' rating takes into account Uralkali's exposure to the potash demand cycle, as well as the high contribution of developing markets to its revenue generation. These markets present strong growth potential, but also tend to exhibit more unpredictable demand patterns than mature agricultural regions. Operational risks are also higher in potash mining than in production of other fertilisers, as water-soluble salt deposits are susceptible to flooding. This is evidenced by the issues at different potash mines across the world, including Uralkali's Solikamsk 2 mine incident in 2014. ESG - Governance and Group Structure: Fitch has revised Uralkali's ESG Relevance Score for Governance Structure to '4' from '3' due to concentrated ownership following the change in the shareholding structure and limited visibility regarding the company's capital allocation policy and track record of adherence to it. Uralkali has an ESG Relevance Score of '4' for Group Structure due to limited transparency and visibility regarding the financial performance of its parent and reliance on the subsidiary for its debt service and significant shareholders distributions. DERIVATION SUMMARY Uralkali's strong business profile is underpinned by its leading cost position amid its potash peers, which supports adjusted EBITDA margins of about 50% and positive free cash flow (FCF) generation through the cycle. Its closest Fitch-rated EMEA fertiliser peers include PJSC PhosAgro (BBB-/Stable) and OCP S.A. (BB+/Stable), all with low-cost mining operations and strong global market outreach. The Mosaic Company (BBB-/Stable) is one of the largest producers of potash and phosphate in the world but generates lower margins than Uralkali. Uralkali's leverage has been driven by significant share buybacks and loans provided to shareholders until 2020. This is unlike its similarly rated leveraged peers, which have accumulated debt due to intensive capex. KEY ASSUMPTIONS -- Fitch's Price deck for Potash FOB Vancouver: USD220/tonne in 2021 and USD230/tonne over 2022-2024; -- RUB/USD at 74.1 in 2021; 72.5 in 2022 and 72 in 2023-2024; -- EBITDA margin increasing towards 56% in 2021 and stabilizing at 50% in 2022-2024; -- Capex at about 17% of revenue in 2021, then at around 13% in 2022-2024; -- Dividend payments to Uralchem utilising capacity under the 3.5x net debt/EBITDA incurrence covenant. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- The Outlook is Negative, meaning positive rating action is unlikely at least in the short term. However, maintaining FFO net leverage below 4x and clarity about the parent's financial profile and the company's capital allocation policy may lead to a revision of the Outlook to Stable; -- A record of adherence to disciplined financial policy and enhancement of corporate governance practices along with positive FCF and FFO net leverage sustained at or below 3.5x would lead to positive rating action. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- An aggressive financial policy resulting in sustained leverage pressure with FFO net leverage significantly above 4x; -- Aggressive shareholder actions that are detrimental to Uralkali's credit profile, limited visibility about the parent's financial profile and capital allocation policy indicating weaker corporate governance or Fitch's re- assessment of the ties with the parent. 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 Adequate Liquidity: As at end-June 2021, Uralkali had USD0.5 billion of cash and cash equivalent versus USD1.2 billion of short-term debt. In June 2021 Uralkali signed a USD1.25 billion five-year sustainability-linked PXF with a pool of international banks. As of 30 June 2021, USD400 million was drawn down and the remaining USD850 million was drawn down in 3Q21. The group's liquidity is further supported by a USD1.6 billion undrawn committed credit facility from Sberbank available for drawdown from June 2022 until November 2022 and amortising from December 2022 to March 2026. Fitch expects positive FCF before dividends over the next four years. Uralkali also benefited from substantial uncommitted lines of USD1.1 billion in June 2021, which Fitch does not include in Fitch's liquidity ratio. ISSUER PROFILE Uralkali is one of the world's largest potash producers with five mines, six potash processing plants and one carnallite plant all situated in the towns of Berezniki and Solikamsk (Perm Territory, Russia). Uralkali posted sales of USD2.7 billion in 2020 and EBITDA of USD1.2 billion. SUMMARY OF FINANCIAL ADJUSTMENTS -- USD28 million of leases were excluded from the debt amount; EBITDA was reduced by USD3.3 million of right-of-use asset depreciation and USD2.5 million of interest linked to leases; -- USD108 million of trade receivables sold in 2020 were added back to end-2020 current assets and to liabilities as secured debt; -- USD115 million of net derivate financial liabilities as of end-2020 were added to the debt amount. ESG CONSIDERATIONS Fitch has revised Uralkali's ESG Relevance Score for Governance Structure to '4' from '3' due to concentrated ownership following the change in the shareholding structure. Uralkali has an ESG Relevance Score of '4' for Group Structure due to limited transparency and significant shareholder distributions. Both have a negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =========== S W E D E N =========== HEIMSTADEN AB: Fitch Gives 'BB-(EXP)' to New EUR300MM Securities ---------------------------------------------------------------- Fitch Ratings has assigned Heimstaden AB's proposed EUR300 million perpetual capital securities an expected rating of 'BB-(EXP)'. The rating is line with Heimstaden AB's existing subordinated debt rating. The proposed hybrid would qualify for 50% equity credit. Heimstaden AB will use the hybrid proceeds to finance some of its capital contribution to subsidiary company Heimstaden Bostad AB (BBB/Stable), which will use these funds for the acquisition of a large portfolio of residential property from Akelius Residential Property AB (BBB/Stable). The final rating is contingent on receipt of final documents conforming materially to the preliminary documentation reviewed by Fitch. KEY RATING DRIVERS SECURITIES Hybrid Notched Off IDR: The proposed perpetual hybrid is rated two notches below Heimstaden AB's Long-Term Issuer Default Rating (IDR) of 'BB+'. This reflects the hybrid's deeply subordinated status, ranking behind senior creditors and senior only to equity (ordinary and preference shares), with coupon payments deferrable at the discretion of the issuer and no formal maturity date. It also reflects the hybrid's greater expected loss severity and higher risk of non-performance relative to senior obligations. Equity Treatment: Under Fitch's hybrid criteria, the proposed hybrid securities qualify for 50% equity credit due to deep subordination, a remaining effective maturity of at least five years, full discretion to defer coupons for at least five years and limited events of default. Equity credit is limited to 50% because of a cumulative interest coupon, a feature that is more debt-like in nature. Effective Maturity Date: Although the hybrids are perpetual, Fitch deems their effective maturity to be five years after its first reset date in accordance with Fitch's Corporate Hybrids Treatment and Notching Criteria. From this date, the issuer will no longer be subject to replacement language, which discloses the intent to redeem the instrument at its reset date with the proceeds with either a similar instrument or equity. The instrument's equity credit would change to 0% five years before the effective maturity date. The coupon step-up remains within Fitch's aggregate threshold rate of 100bp. ISSUER Holding Company Function: At end-1H21 Heimstaden AB owned 45.7% of the shareholder capital in Heimstaden Bostad, a large residential-for-rent property company, as well as 50.3% of the voting rights (post-Akelius pro forma: 45.3% and 50.1%, respectively). The other shareholders are long-term Nordic institutional investors owning various percentages of stapled preference shares and equity, and all bound by a shareholder agreement, which defines operational, governance, financial and strategic parameters. Heimstaden AB itself is 70% owned (96% of votes) by Fredensborg AS, which is almost exclusively owned by Ivar Tollefsen. Asset Manager Function: Heimstaden AB also has a property management agreement with Heimstaden Bostad, remunerating its costs for managing the existing SEK186 billion residential-for-rent portfolio (post-Akelius pro forma: SEK274.8 billion) alongside its own small SEK4.5 billion real estate portfolio located primarily in Iceland. Main Income Streams: Most of the income streams of Heimstaden AB are directly from Heimstaden Bostad and include (i) rental income from its own small real estate portfolio (not from Heimstaden Bostad); (ii) Heimstaden Bostad remuneration for property management, which includes an above-cost profit component; and (iii) an asset management fee of 0.2% of gross asset value (GAV) in Heimstaden Bostad, and (iv) dividends from class A preferred shares in Heimstaden Bostad. The class A shares are at the top of the equity capital remuneration waterfall. Heimstaden AB's Incremental Leverage: Incremental leverage (above Heimstaden Bostad's debt/EBITDA metrics) is less than 3.0x higher on a proportionally consolidated gross debt basis. Fitch includes the subsidiary's hybrid bonds, which lose their equity credit as they rank ahead of Heimstaden AB's own bank and bond debt, and its hybrids. This incremental leverage at end-2020 totalled SEK9.5 billion gross debt relative to Heimstaden Bostad's equity credit-adjusted end-2020 net debt of SEK69.3 billion. Fitch has applied 50% equity credit to Heimstaden AB's own hybrid bonds and preferred shares. Positioning of the Rating: Various factors informed the 'BB+' IDR for Heimstaden AB. Firstly, Heimstaden AB is a holding company reliant upon recurring, largely unsubordinated, income streams. Secondly, the subordinated dividends from Heimstaden Bostad, retained after discretionary re-investment, are paid after Heimstaden Bostad's subordinated debt (its hybrids). Thirdly, the incremental debt's effect on proportional consolidated gross debt/EBITDA is below 3.0x. Fourthly, the residential-for-rent asset class generates stable income streams, particularly given high geographic diversification. Quality of Income Streams Place Rating: Of the interplay between these various factors, the reliance upon income streams (i) to (iii), which does not cover Heimstaden AB's core interest expense, drives a non-investment grade rating, whereas the combination of additional subordinated dividend income can help cover debt service - but that larger amount of cashflow is paid after servicing junior subordinated debt at Heimstaden Bostad, which is rated 'BB+'. Incremental leverage at Heimstaden AB does not warrant further notching. DERIVATION SUMMARY There are no relevant publicly rated real estate holding company peers to compare Heimstaden AB with. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Core property management fee, which includes an above-cost profit component, and asset management agreement fee (percentage of its GAV), both paid by Heimstaden Bostad, covering Heimstaden AB's administration expenses; -- Increased rental income after acquisition of the Iceland residential portfolio in 1H21; -- Heimstaden AB's board choose to re-invest virtually all of Heimstaden Bostad's dividends in its equity. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Upgrade of Heimstaden Bostad's IDR; -- Heimstaden AB's standalone EBITDA/interest expense coverage ratio above 1.5x; -- Liquidity score above 1.0x. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Downgrade of Heimstaden Bostad's IDR; -- Heimstaden AB's standalone EBITDA/interest expense coverage ratio below 1.0x; -- Heimstaden AB's proportional consolidated gross debt/EBITDA greater than 3x of Heimstaden Bostad's proportional consolidated gross debt/EBITDA; -- Liquidity score below 1.0x. 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 Recent New RCF Capacity: At 3Q21, Heimstaden AB had SEK6.5 billion of cash and, post-end-2020, has two undrawn revolving credit facilities (RCFs) totalling SEK1 billion. Secured debt and unsecured debt after acquiring the Iceland residential-for-rent portfolio during 1H21 were SEK2.3 billion and SEK11.7 billion, respectively. Heimstaden AB's portion of Heimstaden Bostad's Akelius acquisition-related equity increase is SEK8.5 billion, funded from existing cash and a SEK7 billion bridge facility. ISSUER PROFILE Heimstaden AB will hold 45.3% of the capital and minimum 50% of the votes in Heimstaden Bostad (taking into account the latter's acquisition of the Akelius portfolio). Heimstaden AB manages its subsidiary's residential-for-rent pan-European portfolio and owns a small residential portfolio, mainly in Iceland. HEIMSTADEN BOSTAD: Fitch Gives 'BB+(EXP)' to EUR1-Bil. Securities ----------------------------------------------------------------- Fitch Ratings has assigned Heimstaden Bostad AB's proposed EUR1 billion perpetual capital securities an expected rating of 'BB+(EXP)'. The rating is line with Heimstaden Bostad's existing subordinated debt rating. The proposed hybrid, which may be issued in one or two benchmark sized tranches, would qualify for 50% equity credit. The hybrid proceeds will be used to partly finance the acquisition of a large portfolio of residential property from Akelius Residential Property AB (BBB/Stable) comprising properties in Sweden, Germany and Denmark for SEK92.5 billion, announced 26 September 2021. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation reviewed. KEY RATING DRIVERS SECURITIES Hybrid Notched Off IDR: The proposed perpetual hybrid securities are rated two notches below Heimstaden Bostad AB's Long-Term Issuer Default Rating (IDR) of 'BBB'. This reflects the hybrids' deeply subordinated status, ranking behind senior creditors and senior only to equity (ordinary and preference shares), with coupon payments deferrable at the discretion of the issuer and no formal maturity date. It also reflects the hybrid's greater loss severity and higher risk of non-performance relative to senior obligations. Equity Treatment: Under Fitch's hybrid criteria, the proposed securities qualify for 50% equity credit due to deep subordination, a remaining effective maturity of at least five years, full discretion to defer coupons for at least five years and limited events of default. Equity credit is limited to 50% given the cumulative interest coupon, a feature that is more debt-like in nature. Effective Maturity Date: Although the hybrids are perpetual, Fitch deems their effective maturity 20 years after the first reset date in accordance with the agency's Corporate Hybrids Treatment and Notching Criteria. From this date, the issuer will no longer be subject to replacement language, which discloses the intent to redeem the instrument with the proceeds from similar instrument or equity. The instrument's equity credit would change to 0% five years before the effective maturity date (i.e. 15 years after the respective reset date). The coupon step-up remains within Fitch's aggregate threshold rate of 100bp. Special Redemption Event Call: The proposed hybrids include Heimstaden Bostad's right to redeem the hybrid bonds should the Akelius portfolio acquisition not go ahead. This right to redeem has not impacted Fitch's view of the permanence of the instrument as Fitch expects the acquisitions to occur, subject to necessary regulatory approval. ISSUER Akelius Acquisition: The Akelius SEK92.5 billion portfolio complements Heimstaden Bostad's existing footprint in locations (Stockholm, Malmo, Copenhagen and Berlin) that are well known to Heimstaden Bostad's management and on-the-ground operational teams. The Akelius acquisition brings a high-quality portfolio, which Heimstaden Bostad plans to mainly retain and to continue a strategy of refurbishment and quality improvement to increase rent as new tenants churn, although keeping within the boundaries of relevant markets' regulated rents. Berlin becomes Heimstaden Bostad's largest city at 14% of the enlarged portfolio by rent (21% by fair value). Sizeable Residential Portfolio: Heimstaden Bostad's pre-Akelius SEK186 billion (approximately EUR18 billion, as at end-1H21) residential-for-rent portfolio is Nordic-weighted, with additional diversification from properties in Netherlands, Germany, UK and CEE countries. This geographic exposure provides wide diversification across countries and cities and reduces exposure to individual regulatory regimes, economic, and demographic trends. Regulated and Market Rents: Demand for Heimstaden Bostad's residential units are supported by necessity-based demand, structural undersupply, and resultant low vacancy. The stability of its rental income is further supported by a mix of regulated and market rents. Regulated rents tend to be below market rent and display index-linked rental growth. Historically, Heimstaden Bostad has achieved positive like-for-like rental growth and vacancy has remained below 5%. Its management has targeted markets where home ownership is already established, and therefore government measures to preserve (voters') wealth creation are aligned with conducive conditions for the rented residential portfolio. The portfolio includes assets in the Czech Republic (8% of 2Q21 portfolio value), which are transitioning from regulated to market rents. These market characteristics provide potential for further rental growth as low regulated rents revert to market but also have higher vacancies and higher yields. Post-Akelius High leverage: Heimstaden Bostad's net debt/EBITDA was 20.4x at end-2020, reflecting the inherently low income yield of the company's residential portfolio compared to commercial real estate peers. Fitch expects its cash flow leverage to rise to 24.3x in 2022 and reduce as rental uplifts translate into EBITDA (2024: 22.1x). Further issuance of hybrids (at 50% equity credit) aids this profile. The forecast funds-from-operations fixed-charge cover ratio is 1.7x in 2022 and gradually rises thereafter towards 2x. Fitch includes 100% of hybrid bond coupons in its interest cover ratio. Without post-end-2021 portfolio revaluation uplifts, Fitch calculates future loan-to-value (LTV) at 53%-55%. Unique Governance Framework: Fitch rates Heimstaden Bostad on a standalone basis based on its unique governance framework. Heimstaden Bostad has grown its portfolio by attracting capital from large Nordic institutional investors and by dividend reinvestment. The relationship between the owners is governed by a shareholder agreement, which gives the institutional owners control over key strategic matters (reserved matters) while day-to-day operations are handled by the majority owner Heimstaden AB, which also has the majority of shareholders' votes. DERIVATION SUMMARY With its enlarged portfolio of EUR27.5 billion, Heimstaden Bostad will be the second-largest (if Vonovia SE and Deutsche Wohnen SE combine) European residential landlord, with around 145,000 units in the Nordics, Central Europe, UK and CEE (Czech and Poland) providing wide diversification. Its combined portfolio value is larger than Fitch-rated Akelius' end-2020 (pre-disposal) EUR12.2 billion, than Fitch-rated Annington Limited's (BBB/Stable; EUR9 billion as at March 2020) Ministry of Defence housing portfolio, and materially larger than Grainger's (EUR3.2 billion as at September 2020) residential-for-rent portfolio. Both Annington and Grainger are located across the UK. It is also larger than Peach Property Group AG's (BB-/Stable; EUR1.9 billion as at December 2020), located mainly in the North Rhine-Westphalia region of Germany. In all cases, Fitch acknowledges the necessity-based purpose and demand for this asset class, the stability of rental income in many markets (particularly the regulated rent markets), the fundamentals of inherent demand as household numbers increase and the lack of supply in many markets. Longevity of tenant stay is conducive to stable income, as seen in many entities' occupancy rates and rent collection even during the pandemic, and rental uplift is planned for post-refurbishment units. Different companies have different policies of concentrating on city centres or more urban locations. Various forms of tenant-protective rental regulation, constraining rental growth, are in place per country. Compared with commercial real estate, the net initial yields (NIYs) on residential-for-rent have been low, reflecting the above underlying qualities and the different interest rate regimes of countries. Fitch acknowledges the higher debt capacity of residential-for-rent assets compared with more volatile commercial real estate (office, retail, industrial) and adjusts all rated companies' net debt/recurring rental-derived EBITDA thresholds for their NIYs and quality of each entity's portfolio. Heimstaden Bostad's debt capacity net debt/EBITDA (as seen in the upgrade and downgrade rating sensitivities) are similar to Akelius (before its disposal took place). However, Akelius had similar yields but a greater geographic diversification as it benefits from a US portfolio. At around 2.5%, Heimstaden Bostad's and Akelius's properties have lower average income yields, reflecting their higher share of regulated rents than Grainger's UK portfolio and their locations in more attractive prime cities in comparison to Peach's secondary cities in Germany. The NIY on Grainger's regulated (and inherently shrinking) and growing market-rent portfolio is 2% and 4%, respectively, which corresponds to a blended 3% yield. Peach's average NIY yield is around 3.5%. The geographical diversification of Heimstaden's and Akelius's portfolios, which balances out city-specific developments such as the Berlin rent regulation, stands out as a material rating benefit to their ratings compared with peers. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Consideration for the SEK92.5 billion Akelius portfolio includes additional, committed, equity of SEK24.8 billion, inherited secured debt of SEK11.4 billion, Heimstaden Bostad cash of SEK3.6 billion, and a SEK65 billion unsecured bridge, of which SEK54.5 billion is expected to be used. The portfolio adds SEK2 billion of net operating income; -- For net debt/EBITDA calculation purposes in forecast years, Fitch has annualised rents of signed and planned acquisitions, disposals and developments rather than include part-year contributions, which can affect this ratio; -- Moderate 2.0%-2.5% like-for-like rental growth driven by annual regular uplifts, indexation and reletting upon tenants vacating apartments; -- The Akelius transaction increases Heimstaden Bostad's central admin cost base by SEK230 million; -- Around SEK3 billion of capex (rising to SEK3.8 billion) per year, comprising developments and capex to upgrade apartments. Fitch assumes an average 7.5% yield (increased rent) on this capex spent; -- Continued portfolio growth through acquisitions, with around SEK30 billion of properties assumed to be acquired in 2022- 2024; -- The forecasts assume many shareholders choose to reinvest cash dividends to support the group's financial policy. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Net debt/EBITDA below 19x; -- EBITDA net interest cover above 2.5x; -- Unencumbered investment property assets/unsecured debt above 2.0x; -- For Fitch's EMEA REITs senior unsecured debt uplift: A lower share of secured debt with maintained share of assets in liquid markets. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Net debt/EBITDA above 22x; -- EBITDA net interest cover below 1.75x; -- Unencumbered investment property assets/unsecured debt below 2.0x; -- Changes to the governance structure that loosen the ring- fencing around Heimstaden Bostad. 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: As at 30 October 2021, Heimstaden Bostad will have in place a comfortable liquidity position comprising SEK22.4 billion of revolving credit facilities and construction facilities, and SEK16.4 billion readily available cash, compared to SEK2.9 billion short-term debt maturities in 2021 and SEK2.4 billion in 2022. The Akelius acquisition is funded by around SEK24.8 billion fresh equity from existing shareholders, SEK3.6 billion existing Heimstaden Bostad cash resources, SEK11.4 billion secured debt inherited with the Akelius portfolio, and a new SEK65 billion unsecured bridge, of which SEK54.5 billion is expected to be used. The unsecured bridge is expected to be refinanced in the debt capital markets with hybrids and unsecured debt. Heimstaden Bostad is funded by a mix of unsecured (bonds and commercial paper), secured (traditional bank and Danish realkredit mortgages) and subordinated hybrid debt. At end-2Q21, 46% of debt was secured, 30% was unsecured and the remaining 25% was hybrid bonds. Its secured debt is primarily related to assets in Denmark and Netherlands, Germany and Sweden. ISSUER PROFILE Heimstaden Bostad AB owns and, through Heimstaden AB, operates residential-for-rent properties across Europe. With the complementary Akelius-acquired portfolio, the portfolio totals SEK274.8 billion (EUR27.1 billion). HEIMSTADEN BOSTAD: S&P Rates New Unsecured Sub Hybrid Notes 'BB+' ----------------------------------------------------------------- S&P Global Ratings assigned its 'BB+' issue rating to the proposed unsecured subordinated hybrid notes to be issued by Swedish residential real estate company Heimstaden Bostad AB (BBB/Stable/--). Heimstaden intends to issue about EUR1 billion of unsecured subordinated hybrid notes in one or two benchmark-sized tranches. Part of the proceeds will be used to finance the recently announced acquisition of a portfolio of residential assets for Swedish krona (SEK) 92.5 billion. The proposed hybrid notes will have a noncall period lasting at least 5.25 years from issuance. The notes are optionally deferrable and subordinated. However, Heimstaden could call the tranches early in the case of a "special redemption event," which would occur if Heimstaden fails to close the announced acquisition. Accordingly, until Heimstaden closes the transaction or waives its right to call the bonds for redemption prior to finalization of the transaction, S&P will assign no equity content to the proposed hybrid bonds. S&P said, "Once the transaction closes, we expect to classify the proposed notes as having intermediate equity content until their respective first reset date(s), which will be more than five years after the issue date, because the notes meet our criteria in terms of subordination, permanence, and optional deferability during this period. "Consequently, in calculating Heimstaden's credit ratios, we will treat 50% of the principal outstanding and accrued interest under the hybrids as equity, rather than debt. We will also treat 50% of the related payments on these notes as equivalent to a common dividend. Both treatments are in line with our hybrid capital criteria. "We estimate that, pro forma the transaction, the company's hybrid capitalization rate will amount to around 13%-14%. We understand that the company is committed to keeping the subordinated hybrid notes as a permanent part of its capital structure and its capitalization rate below our 15% threshold. "The issue rating on the proposed notes is two notches below the 'BBB' long-term rating on Heimstaden, reflecting our view of the notes' subordination and interest deferability." Under S&P's methodology: -- S&P deducts one notch for the subordination of the proposed notes because Heimstaden has an investment-grade rating (that is, 'BBB-' or above); and -- S&P said, "We deduct an additional notch for payment flexibility to reflect that the deferral of interest is optional. The notching of the proposed securities takes into account our view that there is a relatively low likelihood that Heimstaden will defer interest payments. Should our view change, we may significantly increase the number of downward notches that we apply to the issue rating, more quickly than we might take a rating action on Heimstaden." ===================== S W I T Z E R L A N D ===================== BREITLING HOLDING: S&P Affirms 'B' ICR, Outlook Stable ------------------------------------------------------ S&P Global Ratings affirmed its 'B' long-term issuer credit rating on Switzerland-based luxury watch manufacturer Breitling Holding S.a.r.l., and assigned a 'B' issue rating to the company's proposed CHF950 million TLB due 2028. S&P said, "The stable outlook reflects our view that Breitling's S&P Global Ratings-adjusted debt to EBITDA will temporarily approach 7.0x in fiscal 2022 (ending March 31, 2022) before reducing comfortably to 6.0x-6.5x from fiscal 2023. At the same time, Breitling will generate positive annual free operating cash flow (FOCF) in excess of CHF30 million. "The rating on Breitling already incorporates our view that its owner has a shareholder-friendly financial policy. Breitling intends to raise a new CHF950 million-equivalent euro-denominated TLB to refinance its existing capital structure by repaying in advance its CHF563 million TLB due July 2024. The group also plans to use the new TLB to fund a CHF312 million extraordinary dividend payment to Breitling's sole shareholder CVC Capital Partners. This follows the CHF140 million dividend distribution in November 2019. Furthermore, part of the proceeds will be used to pay transaction-related costs and to settle CHF60 million intercompany loans primarily in the consolidated perimeter. We believe this transaction will materially reduce Breitling's existing rating headroom, since we estimate its leverage will likely approach 7.0x by the end of fiscal 2022. We believe Breitling could adapt future shareholder remunerations to ensure S&P Global Ratings-adjusted debt to EBITDA of 6.0x-7.0x." Breitling's recent performance suggests solid revenue expansion this year. Breitling continued to post solid top line expansion in the first five months of fiscal 2022 (April through August), as sales increased about 77% compared with the previous year and about 16% versus fiscal 2020 (pre-COVID-19). S&P said, "We now believe the company should be able to generate CHF630 million–CHF655 million in sales in fiscal 2022, growth of 30%-35% compared with last year. This is supported by new store openings, the successful launch of new products with higher average sales prices, and the ongoing expansion of its ladies segment. We acknowledge some risks associated with the expected growth such as further COVID-19-related restrictions in core countries, and supply chain challenges. We understand Breitling's management expects revenues in excess of CHF670 million in fiscal 2022." According to Euromonitor, the luxury timepieces market will experience growth of 10% per year on average over 2021-2025 by retail value. This rate exceeds the expected 6% volume growth according to Euromonitor and is underpinned by consumers' increasing preference for high-quality and premium watches. These trends provide Breitling with relatively good growth prospects in the medium term, since the company intends to further expand its super luxury segment (retail price range of CHF9,000–CHF30,000), currently accounting for about 5% of its net sales. Furthermore, Breitling's revenue growth will benefit from ongoing expansion in other areas where it is less developed, such as its ladies segment, the Chinese market, and the direct-to-consumer sales (DTC) channel, including e-commerce. S&P said, "We expect Breitling will generate solid FOCF, despite the planned expansionary investments.We anticipate Breitling will be able to generate solid FOCF in excess of CHF30 million per year from fiscal 2022 after lease payments. We acknowledge the company has an ambitious growth plan translating into capex of about CHF50 million in fiscal 2022 and about CHF45 million in fiscal 2023 before normalizing at about CHF40 million per year. Expansionary investments primarily include information technology and digitalization as well as direct-to-consumer sales channels, which entail investments in boutiques and shop corners in select countries such as China, U.S., the U.K., Germany, France, and Italy. "The stable outlook on Breitling reflects our view that the group will post profitable top-line expansion, taking advantage of consumers' positive reaction to new collections, increased focus on women's products, and growth in the e-commerce segment and selected retail expansion. "We expect S&P Global Ratings-adjusted debt to EBITDA will approach 7x at the end of fiscal 2022. We also project the company will generate healthy FOCF above CHF30 million per year, despite "increasing investment required to support the DTC expansion. That said, to maintain the current rating, we consider the headroom for any negative deviation from our base case as limited. "We could consider a negative rating action if adjusted debt to EBITDA increases permanently above 7.0x. This scenario could materialize if we observed a contraction of demand for luxury watches due to erosion of Breitling's market share or further COVID-19-related restrictions. This would translate into deteriorating EBITDA margins and FOCF turning negative. In addition, rating pressure could arise if Breitling's private equity owner exhibited a more aggressive financial policy. "We currently see an upgrade as remote at this stage, since it would hinge on a clear commitment from the financial sponsor to a long-term strategy that implies a low risk of releveraging beyond 5x." BREITLING HOLDINGS: Moody's Affirms B2 CFR Following Refinancing ---------------------------------------------------------------- Moody's Investors Service has affirmed the B2 corporate family rating, B2-PD probability of default rating on Breitling Holdings S.a r.l. Concurrently, Moody's has also assigned B2 instrument ratings to the proposed euro equivalent CHF950 million backed senior secured term loan B and the CHF90 million backed senior secured revolving credit facility (RCF) raised by Breitling Financing S.a r.l. The outlook on both entities remains stable. Proceeds from the new proposed euro equivalent CHF950 million backed senior secured term loan B will be used to fund a CHF312 million distribution to shareholders, refinance the existing euro equivalent CHF563 million backed senior secured term loan B1 due in July 2024, CHF15 million of estimated transaction costs and cash overfunding of CHF60 million which will repay an existing intercompany loan. The ratings on the existing backed senior secured term loan B1 and backed senior secured RCF will be withdrawn upon repayment. RATINGS RATIONALE The proposed dividend recapitalisation is credit negative, with the rating being weakly positioned at B2 because Breitling's debt-to-EBITDA (Moody's adjusted) will increase significantly to 7.0x proforma the transaction, from 4.6x for last twelve months ended June 30, 2021. The rating agency anticipates that leverage will only come down to below 6.0x in fiscal 2023 (year ending March 31, 2023). The transaction demonstrates Breitling's aggressive financial policy as it represents the second dividend recap in the last two years since CVC took ownership of the company in 2017. Both recapitalisations led to a material increase in leverage. The increase in gross leverage to around 7.0x and delay in deleveraging is a clear deviation from Moody's previous expectations of deleveraging to around 5.0x by fiscal 2022 when Moody's upgraded Breitling to B2 back in July 2021. In Moody's view, there is a risk that leverage could remain elevated due to the company's shareholder friendly financial policy and the potential for further dividend recapitalisations. Moody's view the company's more aggressive financial policy as a governance risk under Moody's ESG framework. In addition, the company must continue to grow the current profitability levels seen over the last few years of rapid growth in its top line and EBITDA. The higher leverage will leave very limited headroom for any deviation from growth in EBITDA forecast by Moody's over the next 6 to 12 months -- namely Moody's adjusted EBITDA of greater than EUR160 million in fiscal 2022 and around EUR200 million in fiscal 2023. The rating affirmation reflects Moody's expectation that the company will reduce its leverage through EBITDA growth coming from ongoing strong operating performance, solid growth prospects in retail and e-commerce, as well as the company's good pipeline of new products. Moody's also expects Breitling's operating performance will be supported by the company's expansion in China, in the super luxury watch segment and in ladies' watches, which are currently underrepresented at Breitling. Moody's expects Breitling will continue to generate healthy levels of cash resulting in a free cash flow to debt ratio increasing above 5% in the next 12-18 months. LIQUIDITY Moody's expects Breitling to maintain good liquidity with a starting cash balance of CHF204 million after the dividend payment, access to an undrawn CHF90 million RCF expiring in 2028 and positive free cash flow generation. There are no significant debt maturities until 2028. In Moody's view, there is a degree of uncertainty with regards to how this cash will be used in the future, with the risk that management might consider another dividend recap. The RCF is subject to a springing net senior secured leverage covenant of 9.0x if drawings exceed 40%, which provides ample headroom compared to a net senior secured leverage of 4.1x at the transaction's closing. Moody's does not expect the RCF to be drawn over the next 18 months. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS Moody's believes that governance was a key rating driver in today's rating action. The sizable dividend payment only two years after the first dividend demonstrates the company's more aggressive financial policy. Following the dividend payment, Breitling has no debt capacity left within its rating category. STRUCTURAL CONSIDERATIONS The holding company Breitling Financing S.a r.l. is the issuer of the CHF90 million RCF and the proposed euro equivalent CHF950 million backed senior secured term loan B. These debt instruments are guaranteed by the parent holding company Breitling Holdings S.a r.l. along with domestic and foreign subsidiaries, which together generate at least 70% of Breitling's reported EBITDA. The RCF and the backed senior secured term loan B are secured by share pledges and material intercompany receivables. The B2 rating on the RCF and the backed senior secured term loan B is in line with the CFR, reflecting their pari passu ranking and the absence of any significant liabilities ranking ahead or behind. The B2-PD PDR is in line with the B2 CFR assuming a 50% recovery rate typical for a capital structure comprising bank debt with loose covenants. RATIONALE FOR THE STABLE OUTLOOK The stable outlook reflects Moody's expectations that Breitling will continue its strong operating performance, leading to a decline in its Moody's-adjusted leverage below 6.0x by fiscal 2023, supported by more normalized trading conditions and the company's strategic initiatives to grow in retail, e-commerce, the super luxury segment, ladies' watches and China. The stable outlook also incorporates Moody's expectations that Breitling will generate sustained positive FCF and maintain good liquidity. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The rating is currently weakly positioned and upside potential is limited at this stage. Quantitatively, upward pressure could arise over time if Breitling's Moody's-adjusted (gross) debt/EBITDA falls below 4.5x on a sustainable basis and its FCF generation (as adjusted by Moody's) becomes significantly stronger with a FCF to debt ratio trending towards high-single digits. Before a rating upgrade, the company has to demonstrate a more balanced financial policy. The rating agency could downgrade Breitling's rating if its Moody's-adjusted debt/EBITDA remains sustainably above 6.0x and does not improve to this level by fiscal 2023, as a result of a deviation from operating forecasts, debt-funded acquisitions or further shareholder distributions. Negative pressure could also build if the company's Moody's-adjusted FCF becomes negative or if liquidity weakens. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Consumer Durables published in September 2021. LIST OF AFFECTED RATINGS Issuer: Breitling Financing S.a r.l. Assignments: BACKED Senior Secured Bank Credit Facility, Assigned B2 Outlook Actions: Outlook, Remains Stable Issuer: Breitling Holdings S.a r.l. Affirmations: Probability of Default Rating, Affirmed B2-PD LT Corporate Family Rating, Affirmed B2 Outlook Actions: Outlook, Remains Stable COMPANY PROFILE Breitling is a Switzerland-based manufacturer of luxury watches. On April 28, 2017, CVC agreed to acquire an 80% stake in the company from the Schneider family for an enterprise value of CHF823 million. Theodore Schneider, Breitling's former executive chairman, subsequently sold the remaining 20% to CVC in 2018 for CHF87 million. =========== T U R K E Y =========== ALTERNATIFBANK AS: Fitch Affirms 'B+' Foreign Currency IDR ---------------------------------------------------------- Fitch Ratings has affirmed Alternatifbank A.S.'s (Alternatifbank) Long-Term Foreign-Currency (LT FC) Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. It has also affirmed the bank's Viability Rating (VR) at 'b-'. In addition, Fitch has affirmed the support-driven LT FC IDR of Alternatif Finansal Kiralama A.S at 'B+' with a Stable Outlook, which mirrors that of the parent Alternatifbank. KEY RATING DRIVERS IDRS, SUPPORT RATINGS The bank's LT FC IDR is driven by institutional support from its 100% shareholder, The Commercial Bank (P.Q.S.C.) (CBQ; A/Stable). Fitch's view of the propensity and ability of CBQ to provide support reflects Alternatifbank's ownership, strategic importance, integration and role within the wider group. Fitch's view of government intervention risk caps the bank's LT FC IDR at 'B+', one notch below Turkey's rating. This reflects Fitch's assessment that weaknesses in Turkey's external finances make an intervention in the banking system impeding banks' ability to service their FC obligations more likely to happen than a sovereign default. The LT LC IDR, which is also driven by institutional support, is one notch above the bank's LT FC IDR, reflecting Fitch's view of a lower likelihood of government intervention in LC. The Stable Outlook on the bank's LT IDRs mirrors that on the sovereign rating. VR Alternatifbank's 'b-' VR is constrained by its weak core capitalisation, and weak, below-sector-average profitability. The VR also reflects the bank's limited franchise and the concentration of operations in the volatile Turkish market, adequate asset quality for its rating and manageable refinancing risks. The Turkish operating environment remains volatile amid weak monetary policy credibility, exposure to investor sentiment (due to high FC debt), deposit dollarisation, and inflationary pressures. The lira depreciated by 11% against the US dollar in 8M21, exacerbated by the replacement of the central bank's governor in March 2021, and has come under further pressure following the latest 100bp cut in the policy rate. Nevertheless, Fitch has revised the outlook on the operating environment score to stable, reflecting Fitch's view that the inherent uncertainty and volatility in the Turkish operating environment is captured at the 'b+' level, despite some persistent downside risk to banks' financial profiles. The outlook considers Turkey's resilient growth prospects (Fitch's 2021 GDP forecast: 9.2%; 2022: 3.5%), the easing in short-term external financing pressures and the Stable Outlook on the sovereign rating (BB-/Stable) - given the high interlinkages between the banking sector and sovereign balance sheets. The impact of the gradual removal (expected from 4Q21) of most regulatory forbearance measures that have supported reported asset quality and capital metrics during the pandemic, is likely to be limited for Alternatifbank. Alternatifbank has market shares of assets, loans and deposits of below 1%. Its growth has moderated in recent years (1H21: lending contracted by 4% (FX-adjusted); sector: up 4%), due to operating environment and capitalisation constraints. FC lending is still high (46%; sector: 37%), despite deleveraging, inflated by the lira depreciation. Alternatifbank's non-performing loans (NPLs) ratio at end-1H21 (3.0%; end-2020: 4.8%) is below sector average. Foreclosed assets comprised a further 2% of total assets (24% of common equity Tier 1 (CET1)). Stage 2 loans were a fairly high 12% of loans (50% restructured) - broadly in line with the sector - largely comprising FC, including legacy construction and real estate loans. Asset-quality risks are high though they have partly eased given the resilient growth outlook. Risks reflect concentrations (end-1H21: the top 25 cash loans comprised about 42% of total loans (4.3x of CET1)) and exposure to the construction (17%, including real estate development), energy (7%) and logistics (5%) sectors. Total NPLs reserves coverage rose to 128% at end-1H21 (sector: 139%), mainly reflecting NPL collections. Specific Stage 3 coverage (61%) reflects reliance on collateral, though Stage 2 reserves coverage was adequate (12%). Core capitalisation is very weak given concentration risks, the lira depreciation (given the inflation of FC risk-weighted assets) and weak internal capital generation. Leverage is also high (end-1H21: 6.3% tangible equity/tangible assets). Its CET1 ratio was 8.1% at end-1H21 (7.8% net of forbearance), implying less than a 100bp buffer above its 7% minimum regulatory requirement, though Fitch expects capital support from CBQ to continue to underpin compliance with regulatory minimums. Unreserved NPLs (net of specific reserves) were equal to 12% of CET1 at end-1H21. Pre-impairment operating profit (annualised) comprised just 0.4% of average loans. The total capital ratio is higher (end-1H21: 16.6%), reflecting additional Tier 1 capital from CBQ, which provides a partial hedge against lira depreciation. CBQ has provided regular capital support to Alternatifbank (USD225 million since 2018), including a USD25 million cash injection (equal to 9% of end-2020 equity) in 1Q21, with a further USD25 million budgeted in 4Q21, which would provide about 60bp uplift to its CET1 ratio, and USD50 million by end-2023. Alternatifbank's below-sector-average profitability in recent years reflects the loan book clean-up and low economies of scale. Margins have also tightened significantly since 3Q20 (1H21: 1.8%; sector: 3.7%) due to the high lira interest-rate environment, given that the bank's liabilities reprice quicker than its assets, and the bank's concentration in low-yielding corporate lending and expensive term deposit and FC wholesale funding. It reported an operating profit loss in 1H21, reflecting low growth and revenue generation, and the full absorption by loan impairments of pre-impairment operating profit. Fitch expects performance to remain weak and under pressure in the medium term. However, margins should benefit from lower lira interest rates and growth in granular deposit funding. Customer deposits were 57% of total funding at end-1H21, of which 46% is in FC (sector: 56%). The bank's gross loans/deposits ratio of 130% underperforms the sector (105%), reflecting reliance on FC wholesale funding (43% of total funding). Excluding parent funding, FC wholesale funding is lower, but still high (28%). Refinancing risks remain high, as for the sector, but are partly mitigated by the presence of CBQ. The bank's funding and liquidity profile is adequate, and supported by the presence of CBQ. FC wholesale funding maturities are fairly diversified, while FC liquidity is sufficient to cover short-term FC non-deposit liabilities (net of parent funding) due within a year, in addition to about 10% of FC deposits at end-1H21. Nevertheless, FC liquidity could come under pressure from prolonged market closure or deposit instability, if not offset by shareholder support. NATIONAL RATING The affirmation of the National Rating reflects Fitch's view that Alternatifbank's creditworthiness in LC relative to other Turkish issuers has not changed. SUBSIDIARY RATING The ratings of Alternatif Finansal Kiralama are equalised with those of the parent, reflecting Fitch's view that it is a core and highly integrated subsidiary and the sole provider of leasing products within the group. Fitch's view of support also considers Alternatif Finansal Kiralama's full ownership and shared branding. The Stable Outlook mirrors that of its parent bank. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: LT IDRs, SUPPORT RATING -- The bank's LT IDRs are sensitive to Fitch's view of government intervention risk in the banking sector, and could be downgraded if Fitch assesses this risk as having increased. The ratings could also be downgraded if Fitch's assessment of the bank's owner's ability and propensity to provide support materially weakens. VR -- The bank's VR could be downgraded due to further erosion of its core capitalisation, given its limited buffer over the regulatory minimum, which could result from a significant increase in impaired loans leading to losses or if unreserved NPLs materially rise. -- The VR is sensitive to a marked deterioration in the operating environment, given the concentration of its operations in the domestic market. A sharp weakening in asset quality, likely resulting from high concentration risks, or a weakening in the bank's FC liquidity position due to deposit outflows or an inability to refinance maturing external obligations, could result in a downgrade if not offset by shareholder support. SUBSIDIARY RATING -- The ratings are sensitive to adverse changes in Alternatifbank's ratings; and Fitch's view of the ability and willingness of the parent to provide support in case of need. Factors that could, individually or collectively, lead to positive rating action/upgrade: LT IDRs, SUPPORT RATING -- An upgrade of Turkey's LT IDRs or a revision of the Outlook to Positive would likely lead to a similar action on the bank's LT IDRs. A material improvement in Turkey's external finances or a marked increase in its net FX reserves position, resulting in a significant reduction in Fitch's view of government intervention risk in the banking sector, could lead to an upgrade of the bank's LT FC IDR to the level of Turkey's LT FC IDR. However, given Turkey's large external vulnerabilities and weak net FX reserves position, this would take time, in Fitch's view. VR -- Upside to the VR is unlikely at present unless there is a material strengthening in the bank's core capitalisation and underlying profitability. SUBSIDIARY RATING -- An upgrade of Alternatifbank would likely lead to a similar action on the subsidiary's ratings. NATIONAL RATING -- The National Rating is sensitive to changes in the bank's LT LC IDR and its creditworthiness relative to other Turkish issuers. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond 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. 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. BURGAN BANK: Fitch Affirms 'B+' Foreign Currency IDR ---------------------------------------------------- Fitch Ratings has affirmed Burgan Bank A.S.'s (Burgan Bank Turkey) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. The bank's Viability Rating (VR) has been affirmed at 'b-'. KEY RATING DRIVERS IDRs Burgan Bank Turkey's 'B+' LTFC IDR is driven by institutional support from its 99.4% shareholder, Kuwait-based Burgan Bank K.P.S.C. (Burgan Bank Kuwait; A+/Negative), in case of need. This reflects the bank's ownership and integration with the group, common branding and the record of support. Burgan Bank Turkey is Burgan Bank Kuwait's largest international subsidiary, and represented 15% of the parent's consolidated assets at end-2020. Government intervention risk, which might impede banks' ability to service FC obligations, caps the bank's LTFC IDR at 'B+', one notch below Turkey's rating. The bank's LT Local-Currency (LC) IDR is one notch above its LTFC IDR, in line with Turkey's rating, given lower intervention risk in LC. The Stable Outlook on the LT IDRs mirror that on the sovereign rating (BB-/Stable). VR The VR reflects the bank's exposure to Turkish operating environment risks, weak operating profitability and high asset quality risks, in light of which, and notwithstanding the record of capital support from its parent, Fitch considers core capitalisation to be tight. Burgan Bank Turkey has a limited franchise (end-1H21: 0.4% of sector assets) and limited competitive advantages. The Turkish operating environment remains highly volatile amid weak monetary policy credibility, banks' exposure to investor sentiment (due to high foreign currency debt), high deposit dollarisation, lira weakness and inflationary pressures (Fitch forecast: 17.2% inflation at end-2021). The lira depreciated 11% against the US dollar in 8M21, exacerbated by the abrupt replacement of the central bank governor in March 2021, and has come under further pressure following the latest 100bp cut in the policy rate. Nevertheless, Fitch has revised the outlook on the 'b+' operating environment to stable, reflecting Fitch's view that the inherent uncertainty and volatility in the Turkish operating environment is captured at the 'b+' level, despite some persistent downside risk to banks' financial profiles. The stable outlook considers Turkey's resilient growth prospects (Fitch's 2021 GDP forecast: 9.2%; 2022: 3.5%) and the easing in short-term external financing pressures supported by a narrowing current account deficit and a recovery in gross sovereign FX reserves position, among others. It also reflects the Stable Outlook on the sovereign rating, given the high interlinkages between the banking sector and sovereign balance sheets. The gradual removal (expected from 4Q21) of regulatory forbearance measures poses a risk to the bank's nonperforming loan (NPL) ratio, which is significantly higher net of forbearance. The bank's asset quality metrics significantly underperform the sector (end-1H21: NPLs: 10.6% of loans; sector: 3.7%) and Stage 2 loans (19%). Exposure to FC lending (including project finance) reduced to 54% at end-1H21 (sector: 36%) from 59% at end-2020 but remains high. In addition, exposure to single-name risk, and the risky tourism (11%), real estate (9%) and contracting (9%) sectors is material. The 25 largest cash exposures amounted to an exceptionally high 57% of gross loans (5.8x equity). Total reserves coverage of NPLs (80%; 88% including free provisions) is significantly below the sector average (139%), reflecting low specific reserves coverage (35%) due to a highly collateralised portfolio. However, reserves (24%) against Stage 2 loans are above the sector average. Provisions are calculated as per IFRS 9 methodology. Operating profitability is weak and likely to remain under pressure, given a tighter net interest margin (1H21: 2.8%; 2020: 3.5%, including swap costs), limited economies of scale (Fitch-adjusted cost/income ratio: 62%; sector: 37%) and asset quality risks. The bank made a TRY9.8 million operating loss in 1H21 excluding gains from the sale of fixed assets of TRY96.3 million, which Fitch considers as non-recurring income, following a TRY300 million operating loss in 2020 (equal to 18% of common equity Tier 1 (CET1)). However, the latter included TRY195 million of free provisions (equal to under 1% of loans) set aside for unexpected losses, which were not released in 1H21 and are not expected to be fully released in the short term. The bank's after-tax profit was TRY75.9 million in 1H21, compared with an after-tax loss of TRY267 million in 2020. The bank's CET1 ratio improved to 8.6% at end-1H21 (end 2020: 7.5%), following the conversion of subordinated debt from its parent. Core capitalisation remains very weak, given thin buffers over regulatory requirements, unreserved NPLs (equal to 22% of CET1), weak internal capital generation, concentration risks, and the lira depreciation (which inflates FC risk-weighted assets). Fitch expects ordinary support from Burgan Bank Kuwait to support the bank's compliance with its 7.0% CET1 regulatory minimum. The bank's total capital adequacy ratio (end-1H21: 18.7%) is supported by FC Tier 2 debt from its parent, which provides a partial hedge against lira depreciation. In 2020, the bank converted USD50 million of subordinated debt from its parent to a perpetual loan, supporting its Tier 1 ratio (end-1H21: 10.4%). Customer deposits (end-1H21: 67.5% of total funding) are mainly in FC (63%; sector: 56%) and from retail depositors (72%). The deposit base is moderately concentrated, with the 20 largest deposits comprising 17%. A high loans/deposits ratio (end-1H21: 134%, including finance leases), reflects a high share of both loans and wholesale funding. FC wholesale funding comprises 30% of total funding, but a lower 10% net of group funding, mitigating refinancing risks. FC liquidity is adequate, with additional comfort provided by the presence of the bank's parent, and is broadly sufficient to cover FC wholesale funding falling due within 12 months. However, it could come under pressure in the event of prolonged market closure or FC deposit outflows. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: IDRs, VR -- The bank's LT IDRs are sensitive to a change in the sovereign rating and Fitch's view of government intervention risk in the banking sector. Its ratings are also sensitive to Fitch's view of the parent's ability and propensity to provide support, in case of need. -- The bank's VR could be downgraded due to further erosion of its core capitalisation, given its limited buffer over the regulatory minimum, which could result from a significant increase in impaired loans leading to losses or if unreserved NPLs materially rise. -- A marked deterioration in the operating environment given the concentration of its operations in the domestic market, or of the bank's FC liquidity position due to deposit outflows or an inability to refinance maturing FC debt, if not offset by shareholder support, could also result in a downgrade of the VR. Factors that could, individually or collectively, lead to positive rating action/upgrade: IDRs, VR -- An upgrade of Turkey's LT IDRs or revision of the Outlook to Positive would likely lead to similar action on the bank's LT IDRs. A material improvement in Turkey's external finances or a marked increase in its net FX reserves position, resulting in a significant reduction in Fitch's view of government intervention risk in the banking sector, could lead to an upgrade of the bank's LTFC IDR to the level of Turkey's LTFC IDR. However, given Turkey's large external vulnerabilities and weak net FX reserves position, this would take time, in Fitch's view. -- The VR could be upgraded upon a marked strengthening of its core capitalisation, combined with an easing of asset quality risks and a sustained, significant improvement in underlying profitability. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS NATIONAL RATING The National Rating has been affirmed at 'AA(tur)' with a Stable Outlook, reflecting Fitch's view that the bank's creditworthiness in local currency relative to other Turkish issuers has not changed. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES Factor that could, individually or collectively, lead to negative rating action/downgrade: NATIONAL RATING -- The National Rating is sensitive to a negative rating action on the bank's LTLC IDR or a worsening in its relative creditworthiness to other Turkish issuers. Factor that could, individually or collectively, lead to positive rating action/upgrade: NATIONAL RATING -- The National Rating is sensitive to changes in the bank's LTLC IDR and also in its relative creditworthiness to other Turkish issuers. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond 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. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The ratings of Burgan Bank Turkey are linked to the ratings of Burgan Bank Kuwait. 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. TURKLAND BANK: Fitch Affirms 'B' LT IDRs, Outlook Negative ---------------------------------------------------------- Fitch Ratings has affirmed Turkland Bank A.S.'s (T-Bank) Long-Term Foreign-Currency (LT FC) and Long-Term Local-Currency (LT LC) Issuer Default Ratings (IDRs) at 'B' with a Negative Outlook. It has also affirmed the bank's Viability Rating (VR) at 'ccc+'. KEY RATING DRIVERS LT FC and LT LC IDRS, SUPPORT RATING T-Bank's LT FC and LT LC IDRs of 'B' are driven by institutional support from its 50% Jordan-based owner, Arab Bank Plc (BB/Negative), as reflected in its Support Rating of '4'. The Negative Outlook on the bank's IDRs mirrors that on its parent. T-Bank's support-driven IDRs are notched three times below its parent's IDRs, reflecting its limited role in the Arab Bank group, weak performance and Fitch's view that Turkey constitutes a non-core market for Arab Bank compared with its other strategically important markets. Arab Bank continues to classify T-Bank as an investment held-for-sale in its financial statements, which, in Fitch's view, indicates a high potential for disposal, and, in turn, limits potential reputational risk for Arab Bank and reduces its propensity to support T-Bank in case of need. Arab Bank holds only a 50% stake in T-Bank, which may also complicate the prompt provision of solvency support, if required. Nevertheless, the affirmation of T-Bank's Support Rating considers the record of timely and sufficient provision of capital and liquidity support to date from both Arab Bank and its other 50% owner, Lebanon-based BankMed Sal. NATIONAL RATING The affirmation of the National Rating reflects Fitch's view that T-Bank's creditworthiness in LC relative to other Turkish issuers has not changed. The Negative Outlook reflects downside risks to its creditworthiness relative to other Turkish issuers. VR The affirmation of T-Bank's 'ccc+' VR reflects the bank's small size and limited franchise as a universal bank servicing commercial and corporate customers (market shares of banking sector assets, loans and deposits are below 1%). Asset quality remains weak and single-name borrower risk is very high, albeit both should be considered in light of loan book deleveraging since 2017. The Turkish operating environment remains highly volatile amid weak monetary policy credibility, banks' exposure to investor sentiment (due to high FC debt), high deposit dollarisation, Turkish lira weakness and inflationary pressures (Fitch forecast: 17.2% inflation at end-2021). The lira depreciated by 11% against the US dollar in 8M21, exacerbated by the abrupt replacement of the central bank's governor in March 2021, and has come under further pressure following the latest 100bp cut in the policy rate. Nevertheless, Fitch has revised the outlook on the 'b+' operating environment score to stable, reflecting Fitch's view that the inherent uncertainty and volatility in the Turkish operating environment is captured at the 'b+' level, despite persistent downside risk to banks' financial profiles. The stable outlook considers Turkey's resilient growth prospects (Fitch's 2021 GDP forecast: 9.2%; 2022: 3.5%) and the easing in short-term external financing pressures supported by a narrowing current account deficit and a recovery in gross sovereign foreign-exchange reserves, among others. It also reflects the Stable Outlook on the sovereign rating (BB-/Stable) - given the high interlinkages between the banking sector and the sovereign balance sheets. The impact of the gradual removal (expected from 4Q21) of most regulatory forbearance measures that have supported reported asset quality, capital and performance metrics during the pandemic, is likely to be limited for the banking sector, including for T-Bank. T-bank's asset quality has become significantly weaker than small bank peers' and the sector average following the clean-up and recognition of problem exposures in its loan book. The weaker asset quality also reflects the bank's loan book contraction. Problem loans comprised nearly half of the gross loan book at end-1H21, including material non-performing loans (NPLs; 33%, down from 39% at 2020), reflecting high NPL inflows since end-2017, and high Stage 2 loans (15%). Of Stage 2 loans 22% were restructured suggesting the potential for further NPL growth. Total reserves coverage (including reserves against Stage 1, Stage 2 and Stage 3) of NPLs is low (end-1H21: 55%), partly reflecting reliance on hard collateral, which could be challenging to realise in the challenging Turkish operating environment. Specific NPL reserves coverage was a low 44%, although coverage of Stage 2 loans was an above-sector-average 20%. Twenty-three percent of the loan book was denominated in FC at end-1H21, which - although below both sector and peer averages - is high given the sensitivity of FC borrowers to lira depreciation. By sector, total credit exposures (cash and non-cash) were concentrated in non-bank financial institutions (mainly factoring and leasing, 21% of the total), risky contracting (10%) and real estate development sectors (4%) and textile (9%), while single-name risk is also material (the top 25 cash loans amounted to 60% of gross loans, or 2.6x of CET1 at end-1H21). However, the bank's aim is to decrease concentration risks. T-Bank generally reports below-sector-average profitability metrics, due to its lack of economies of scale, loan book deleveraging since 2017, below-sector-average pricing power (given its limited franchise) and ensuing weak revenue base. The bank is structurally unprofitable, as reflected in pre-impairment operating losses reported in 2020/1H21. Nevertheless, it reported an operating profit in both periods (1H21: operating profit/risk-weighted assets (RWAs): 4.5% (annualised); 2020: 1.5%), mainly reflecting lumpy loan collections, although the bank reported a slight widening of its net interest margin due to repricing of its mainly short-term loan book. Fitch does not regard such a level to be sustainable given T-Bank's small size and lack of economies of scale. T-Bank's capitalisation remains weak despite comfortable reported capital adequacy ratios, including a CET1 ratio of 15.7% at end-1H21. The latter included a 140bp uplift due to regulatory forbearance, while asset-quality risks remain high, given material unreserved NPLs (end-1H21: equal to 66% of CET1 capital), fairly high Stage 2 loans, weak internal capital generation capacity and sensitivity to lira depreciation (due to the inflation of FC risk-weighted assets (RWAs)). Further capital support is likely to be needed to strengthen the bank's loss absorption buffer and support planned growth, in light of its weak internal capital generation. The bank is budgeting for a USD85 million core capital injection from its two shareholders by end-2024. T-Bank is mainly funded by customer deposits (1H21: nearly 91% of total funding). A high 47% of customer deposits are in FC (sector: 56%), although the bank has no FC wholesale funding exposure. Its FC liquidity position is generally moderate (coverage of FC deposits was 55% at end-1H21), and is supported by the bank's foreign parents. Nevertheless, FC liquidity could come under pressure in case of material FC deposit outflows. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: IDRS, SUPPORT RATING AND VR -- The bank's IDRs and Support Rating could be downgraded if there is a reduction in the ability or propensity of the parent banks to provide support. The ratings could also be downgraded if T-Bank does not receive sufficient and timely capital support in case of further material weakening in asset quality or performance. -- The bank's ratings are also sensitive to a change in Fitch's view of government intervention risk in the banking sector. -- The VR is sensitive to a marked deterioration in the operating environment, given the concentration of its operations in the domestic market. -- The bank's VR could be downgraded due to a material deterioration of asset quality leading to significant pressure on its capital position, or a weakening of its FC liquidity position due to deposit outflows, if not offset by shareholder support. NATIONAL RATING -- The National Rating is sensitive to changes in the bank's LT LC IDR and also in its relative creditworthiness to other Turkish issuers. Factors that could, individually or collectively, lead to positive rating action/upgrade: IDRS, SUPPORT RATING AND VR -- The Outlook on the bank's IDRs could be revised to Stable in case of a similar action on Arab Bank. -- An upgrade of the bank's ratings is unlikely in the near term given the Negative Outlook on Arab Bank's rating. -- Upside for the VR could come from a record of sustainable growth and positive operating profitability, in combination with an easing of pressures on the bank's weak asset quality and core capitalisation. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond 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. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS T-Bank's LT FC and LT LC IDRs of 'B' are driven by institutional support from the bank's 50% Jordan-based owner, Arab Bank Plc (BB/Negative), as reflected in its Support Rating of '4'. The Negative Outlook on the bank's IDRs mirrors that on its parent. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. =========================== U N I T E D K I N G D O M =========================== ALBION HOLDCO: Fitch Assigns 'BB-(EXP)' LT IDR, Outlook Stable -------------------------------------------------------------- Fitch Ratings has assigned Albion HoldCo Limited an expected Long-Term Issuer Default Rating (IDR) of 'BB-(EXP)'. The Outlook is Stable. Fitch has also assigned the senior secured debt issued by Albion Financing 1 S.a.r.l a 'BB+(EXP)'/'RR2' expected rating, the senior secured term loan B issued by Albion Financing 3 S.a.r.l a 'BB+(EXP)'/'RR2' expected rating and the senior unsecured debt issued by Albion Financing 2 S.a.r.l a 'BB-(EXP)'/'RR4' rating. The assignment of final ratings is contingent on the receipt of final documents conforming to information already received. Albion HoldCo Limited is the issuer and new acquiring company of UK-based temporary power and energy supply provider, Aggreko. The ratings reflect the company's strong market share in the global temporary power and energy services sector, which supports its resilient and strong profitability. The company also benefits from wide geographical and end-customer diversification, with its largest revenue contribution coming from North America. This mitigates exposure to any volatility in respect to any particular sector or customer. Aggreko's strong business profile is offset by a highly leveraged financial structure at closing, which is in line with a 'B' rating according Fitch's Ratings Navigator. KEY RATING DRIVERS Resilient Underlying Market: With an ageing electrical infrastructure in most countries, a continued trend of urbanisation as well the transition to renewable energy sources, Fitch believes that the demand for temporary power is growing and outpacing current supply. The gap between demand and supply of power has widened as governments remain reluctant to bridge the power gap, due to the large financial investments required and the unwillingness to invest in fossil fuel-based power plants amid the energy transition. Cost Initiatives Drive Strong Profitability: The company has displayed strong and resilient profitability despite some exposure to cyclical end-markets. Excluding the impact from Covid-19, Fitch expects that strong profitability generation will resume to pre-pandemic levels from 2021, aided by the recovery of underlying markets and the cost-savings initiatives the company has embarked upon. Fitch believes that the company's funds from operations (FFO) margin will return to over 20% in 2021 (2020: 16%) and remain there through the medium term. The key cost initiatives include exiting certain lower return projects, depots and geographies in the power solutions - utility division and an organisational structure review, which management expects will lead to operational efficiencies and free up fleet to be deployed elsewhere. Additionally, the use of data analytics and predictive maintenance should continue to drive down service material costs, addressing functional costs across finance, HR and IT, discretionary costs such as travel/professional fees and costs associated with exchange listing. Healthy FCF Generation: Free cash flow (FCF) generation is driven to some degree by working capital flows, but has remained strong throughout the pandemic, mainly as a result of improved management of receivables, the reduction of dividends to preserve cash and the postponement of non-essential capex. Fitch expects FCF to remain positive throughout Fitch's forecast horizon on the back of improving profitability, and stabilise at around 2% of revenue after 2021, a level which Fitch considers commensurate with the rating. No Short-term Refinancing Risk: Post-closing, Aggreko's debt will be made up entirely of long-term debt maturing in 2026 and beyond. Additional liquidity will be available via a GBP300 million revolving credit facility and GBP150 million guarantee facility, also available until 2025-2026. The tenor of debts removes near-term refinancing risks. High Leverage Constrains Ratings: Fitch estimates that end-2021 gross and net leverage will both be around 5.5x, a level more in line with the 'B' category for the Business Services sector. Fitch expects gradual improvement in leverage to around 4.5x by end-2024 as a result of growth in underlying cash flows, but even at this level, it will remain high for the current rating and act as a constraining factor. DERIVATION SUMMARY Aggreko's rating reflects the company's global leading position in the global provision of temporary power and energy services sector, which has supported strong profitability and FCF generation. The rating profile also considers the relative short-term nature of the company's underlying contract length in the rental solutions business. The company operates through three key divisions, which include i) rental solutions (contributing to around 53% of group revenue), the ii) power solutions- utilities division and iii) power solutions- industrials division. Historically, the power solutions - utility business has accounted for a much more significant portion of revenues and EBITDA, but the company has recently begun to strategically downsize this business and focus on select accretive new contracts. Albion's forecast gross debt/EBITDA is considerably lower than that of Modulaire (B/Stable), while its forecast EBITDA/interest expense coverage is closer to Boels (BB-/Stable). KEY ASSUMPTIONS -- Strong double-digit revenue growth across all operational divisions in 2021, following the rebound of underlying market dynamics from Covid-19. After 2021, Fitch is forecasting more normalised single-digit revenue growth, in line with global economic growth. -- Consolidated EBITDA margin to improve throughout Fitch's forecast horizon following the number of key cost savings initiatives the company has launched. -- No dividends distribution in line with management expectations throughout Fitch's forecast period. -- Capex in line with management expectations' throughout Fitch's forecast period. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- FFO leverage below 4.0x; -- FFO interest coverage above 4.5x; -- Improvement of FCF margin above 3%. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- FFO leverage sustainably above 5.5x; -- FFO interest coverage below 3.0x; -- FCF below 1%. 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 Strong Liquidity: Following the acquisition of Aggreko by I Squared & TDR Capital, Aggreko's existing debt has been entirely refinanced with long-term debt maturing in 2026. Additional liquidity is provided by a GBP300 million revolving credit facility and GBP150 million guarantee facility, also available until 2025-2026. The tenor of debts removes near-term refinancing risks. 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. ISSUER PROFILE Founded in 1962, Aggreko has a long history in providing temporary power and energy supply generation across 182 locations in 80 countries. The company operates through complementary business units, which share fleet and infrastructure with its largest market in North America (31% of total revenue as of 2020). ALBION HOLDCO: Moody's Assigns First Time B1 Corp. Family Rating ---------------------------------------------------------------- Moody's Investors Service assigned B1 corporate family rating to Albion HoldCo Limited (Aggreko) along with a B1-PD probability of default rating. Moody's further assigned B1 rating to the proposed GBP300 million revolving credit facility due 2026 issued by Albion Midco Limited and the GBP1 billion equivalent term loan B due 2026 issued by Albion Financing 3 S.a.r.l. The agency also assigned B1 ratings to the proposed GBP700 million equivalent senior secured notes due 2026 issued by Albion Financing 1 S.a.r.l. In addition, Moody's assigned B3 rating to the proposed GBP350 million senior notes due 2027 issued by Albion Financing 2 S.a.r.l. The rating outlook on all ratings is stable. RATINGS RATIONALE The B1 CFR reflects Aggreko's leadership position in mobile modular power and temperature control and energy services, a market where the company has established a strong market share and with good growth prospects. The company benefits from a large fleet of power generators which are often used in remote locations where there are no alternatives to procure energy. Aggreko further benefits from good sector, customer and geographic diversity albeit with some end market cyclicality and occasional one off material revenues (i.e. the Tokyo Olympics). Furthermore, the company is expected to have adequate liquidity following the proposed financing. Offsetting these positives is gross pro forma Moody's adjusted leverage estimated at 4.6x in 2021 reducing slightly to 4.4x in 2022 which is higher than a number of similarly rated peers. Aggreko is expected to generate limited free cash flow owing to significant planned capital expenditures. An element of Aggreko's capex is required to refurbish its fleet on an ongoing basis to extend its useful life, while the remainder of planned investment is more discretionary as Aggreko seeks to transition its fleet over time in order to reduce carbon emissions. Also, Moody's notes risks stemming from Aggreko's exposure to the commodity pricing cycles and declining revenues from its power solutions utilities business unit mostly operating in emerging markets. Aggreko operates through rental solutions, power solutions industrial and power solutions utilities segments that serve different groups of customers utilising the same fleet of mobile power units which creates efficiencies. It offers its customers "mission critical" value proposition which, together with its proven reliability, global reach, speed of deployment and sophisticated R&D capabilities earned the company strong reputational advantages such that it has been able to maintain a close to 20% market share (according to the offering memorandum), placing it in a clear leadership position. Aggreko also benefits from attractive market dynamics such that a number of its key industry sectors, such as oil and gas and petrochemicals, mining, and events have grown at mid-to-high single digit rates in recent years. Conversely, the utilities segment where the company also operates has been in decline due to management selectively bidding on higher margin business. The business is also global and well diversified geographically with primary areas of exposure being North America (31% of revenues), Europe (15.5%) and Africa and the Middle East (22.6%). However, meaningful presence in a variety of emerging markets brings attendant risks in terms of currency and regulatory exposures, although Aggreko has an extensive track record of operating in these markets. While Aggreko serves a range of industry sectors and aims to become a sector specialist in its chosen industry, this strategy also creates exposures to some of the cyclical factors associated with oil and gas and petrochemicals, as well as mining and construction. Positively, Aggreko benefits from a measure of revenue visibility such that 75% of power solutions utilities, 50% - 75% of power solutions industrial and 35% of rental solutions revenues are secured for the next 12 months. Pro forma for the contemplated financing, the company will have gross debt of GBP2.1 billion and a weak Free Cash Flow to Debt ratio in the low single digits. However, there is an element of flexibility in the company's capital expenditure which can be postponed in a downturn, positively impacting the Free Cash Flow to Debt ratio. LIQUIDITY Aggreko's liquidity post transaction is expected to be adequate with GBP240 million cash, and GBP70 million drawn on the GBP300 million revolving credit facility. The company will have no debt maturities until 2026. Aggreko has also been working on optimising its working capital through reductions in payables and inventory, as well as focusing on improving the quality of trade receivables; as a result, working capital is not anticipated to be a material use of cash. ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS Aggreko's exposure to environmental risks stems from its use of carbon-based fuels and the emissions they produce. The company is managing this exposure with own initiatives to transition its operations to net-zero by 2030 and also reduce diesel fuel usage in customer solutions, as well as air quality emissions from customer solutions by 50% by 2030. Aggreko expects the transition to a less carbon-intensive fleet to provide a significant tailwind to demand as customers seek to reduce their own carbon footprint From the social risk perspective, the recovery from the coronavirus pandemic, related quarantines and ensuing economic downturn is the key social risk facing a range of companies globally, including Aggreko. Apart from the pandemic-related risks, the company is exposed to health and safety risks which it addresses through a health and safety team in every region and regular audits. From the corporate governance perspective, Aggreko is owned by two private equity funds, I Squared & TDR Capital, that took it private in August 2021. The moderately high leverage of the proposed financing points to an aggressive financial policy. STRUCTURAL CONSIDERATIONS Aggreko's senior secured debt including its GBP300 million revolving credit facility, GBP1 billion equivalent term loan B and GBP700 million equivalent senior secured notes are rated B1, in line with the corporate family rating. The company's GBP350 million senior notes are rated B3 reflecting their junior position in the capital structure. RATING OUTLOOK The stable rating outlook reflects Moody's expectations that leverage will slowly decline over the next 12 to 18 months supported by a recovery in revenues following the drop experienced as a result of the global pandemic in 2020. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive rating momentum would result from Aggreko's leverage measured as debt/EBITDA reducing towards 3.5x including Moody's standard adjustments, as well as stronger free cash flows on a sustained basis . Adequate liquidity would also be needed for an upgrade. Conversely, downward rating pressure could be caused by debt/EBITDA failing to reduce sustainably below 4.5x or free cash flow turning negative. Any liquidity challenges would also be viewed negatively. LIST OF AFFECTED RATINGS: Issuer: Albion Financing 1 S.a.r.l. Assignments: BACKED Senior Secured Regular Bond/Debenture, Assigned B1 Outlook Actions: Outlook, Assigned Stable Issuer: Albion Financing 2 S.a.r.l. Assignments: BACKED Senior Unsecured Regular Bond/Debenture, Assigned B3 Outlook Actions: Outlook, Assigned Stable Issuer: Albion Financing 3 S.a.r.l. Assignments: Senior Secured Bank Credit Facility, Assigned B1 Outlook Actions: Outlook, Assigned Stable Issuer: Albion HoldCo Limited Assignments: LT Corporate Family Rating, Assigned B1 Probability of Default Rating, Assigned B1-PD Outlook Actions: Outlook, Assigned Stable Issuer: Albion Midco Limited Assignments: Senior Secured Bank Credit Facility, Assigned B1 Outlook Actions: Outlook, Assigned Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Equipment and Transportation Rental Industry published in April 2017. COMPANY PROFILE Headquartered in Glasgow, Aggreko is the leading global provider of modular power generation and temperature control equipment, furnishing critical equipment rental and energy services to a diverse mix of end-markets, clients and countries. The company operates across 182 sales and services centres, serving customers in 80 countries. In 2020, Aggreko generated revenues of GBP1,365 million (2019: GBP1,613 million) and EBITDA of GBP420 million (2019: GBP564 million). ALBION HOLDCO: S&P Assigns 'BB-' ICR, Outlook Stable ---------------------------------------------------- S&P Global Ratings assigned its 'BB-' long-term issuer credit rating to U.K.-based Albion Holdco Ltd. (Aggreko). S&P also assigned a 'BB-' issue rating with a recovery rating of '3' to the new senior secured debt, and a 'B' issue rating with a recovery rating of '6' to the new senior unsecured debt. The stable outlook reflects the view that Aggreko should continue to benefit from the post-pandemic rebound across key end-markets, gradually improving EBITDA margins toward 31%-32% through ongoing efficiency improvements, supporting an S&P Global Ratings-adjusted debt-to-EBITDA ratio well below 5x and a free operating cash flow (FOCF)-to-debt ratio of about 2% in 2022. TDR Capital and I-Squared have each acquired 50% of U.K.-based Albion Holdco Ltd. (Aggreko) for a total consideration of GBP2,290 million. Aggreko will repay any outstanding debt with new issuances and an equity injection. Aggreko's acquisition by TDR Capital and I-Squared will result in a new capital structure for Aggreko, with gross debt and S&P Global Ratings-adjusted leverage rising. The transaction is being funded with a financing package of GBP2,500 million-equivalent, comprising GBP1,700 million-equivalent of senior secured debt. There is a further GBP350 million-equivalent of senior unsecured debt, a new GBP300 million senior secured revolving credit facility (RCF), and a new GBP150 million bonding line facility. The new RCF is expected to be GBP70 million drawn at transaction close. As part of the transaction, the existing RCF and the U.S. private placement notes will be redeemed. The total consideration payable for the transaction is GBP2,290 million, and S&P expects about GBP150 million of cash to remain on the balance sheet as at "day one" following transaction close. TDR and I-Squared are injecting GBP700 million of equity (evenly split between the two owners), and Oaktree will hold GBP95 million of preferred equity, which sits above the rated entity, and we treat the Oaktree preferred equity as debt-like. S&P said, "We forecast adjusted debt to EBITDA of about 4.6x-4.8x in 2021, and at similar levels in 2022. We also expect funds from operations (FFO) to debt will be about 12%-14% through 2022. Aggreko's cash interest costs will be higher but we expect FFO cash interest coverage to be about 3x-4x through 2022." Aggreko benefits from leading market positions in the services it provides, while reasonable diversification of its revenue supports its business risk. Aggreko is the only pure player in the industry, benefiting from market-leading positions in key operations and the ability to deliver complex power solutions to customers within short timeframes. The company provides mission-critical services and has developed a strong track record of execution, with in-house design and manufacturing and on-site response teams to support the smooth operation of its assets. It has reasonable diversification regarding the end-markets served, through its three main operating segments: rental solutions, power solutions industrial, and power solutions utilities. It has a slight reliance on the utility market, accounting for 28% of revenue in 2020, yet this is fairly stable since it is derived predominantly from government-related national utilities. The exposure to oil and gas (17% of 2020 revenue) and petrochemical and refining (10%) has been a major contributing factor to the reduction of revenue in the past year. These sectors face the largest changes in the transition to cleaner, less environmentally detrimental technologies, and were also hit by reducing oil prices and the pandemic's market impact. The events business and construction operations are experiencing a post-pandemic rebound, boosted by growth in events with greater energy intensity and increased fiscal spend from governments. Aggreko has a strong presence in developing markets, although 31% of 2020 revenue was derived from North America, and a further 16% from Europe. The power solutions industrial and power solutions utilities businesses are largely focused in Asia, the Middle East, Africa, and Latin America, supporting revenue diversification. The industry in which Aggreko operates remains highly capital intensive, which weighs on the group's FOCF generation. S&P said, "We expect capital expenditure (capex) of about GBP200 million-GBP220 million in 2021, at around 13%-14% of revenue, because the company operates in a capital-intensive industry, with expenditure required to maintain the existing fleet and develop new assets in response to projects. In addition, we anticipate that the absolute level of capex will continue rising, reflecting a higher spend on the energy transition and the growth and mobilization of major projects as fleet utilization levels reach target levels. The company benefits from the long useful life of its assets, on average 12-15 years, as well as continuous monitoring of its equipment to minimize costs of repair and maintaining operations. Aggreko deems a considerable portion of its capex as discretionary, with the ability to postpone if required, although capex remained high in 2020 during the pandemic, at about 15% of the group's sales. We expect FOCF of about GBP30 million-GBP55 million in 2022, reflecting higher capex of GBP245 million-GBP260 million." Aggreko's operations in end-markets such as oil and gas and petrochemicals have increased investment in the energy transition. About 75% of Aggreko's fleet relies on diesel-engine-produced power, so the company is focused on a gradual transition to cost-efficient, low-emission technologies. This is largely through the growth of natural gas infrastructures and hybrid power projects using battery and solar technology. Aggreko aims to reduce diesel fuel usage by at least 50% by 2030. There has been accelerated investment in hydrogen technology as part of the group's Net Zero program. Meanwhile, 95% of Aggreko's U.K. facilities have transitioned to renewable energy. The company has already implemented several initiatives across its sites to help customers reduce their carbon footprint, such as deploying gas-powered generators to an oil and gas site in Egypt and reducing carbon emissions across its Granny Smith and Syama goldmines. This transition to cleaner sources of energy will be a key component of the group's research and development costs and its capex over the medium term. S&P said, "The stable outlook reflects the view that Aggreko should continue to benefit from the post-pandemic rebound across key end-markets, gradually improving EBITDA margins toward 31%-32% through ongoing efficiency improvements, supporting an adjusted debt-to-EBITDA ratio well below 5x and an FOCF-to-debt ratio of about 2% in 2022. "We could lower the ratings on the group if we expected revenue and EBITDA to decline, such that margins dropped below 30% on a sustainable basis with leverage prospects of more than 5x. We could also lower the ratings if we were to see FFO cash interest coverage was sustainably lower than 3x, and if we expected FOCF generation to turn negative. "We view upside as limited based on our current financial policy assessment of Aggreko's owners. We could raise the ratings on the group if we thought that there was a high likelihood and explicit commitment to deleverage, including a substantial reduction in gross financial debt, resulting in a debt-to-EBITDA ratio below 4x on a sustained basis and an FFO-to-debt ratio also consistently well above 20%. Furthermore, we would need to see continued positive FOCF generation and Aggreko's EBITDA margins increasing toward 35%." CLEVELAND BRIDGE: Asset Auction Scheduled for Nov. 9 ---------------------------------------------------- Business Sale reports that it has been confirmed that an auction of the property and assets of collapsed engineering firm Cleveland Bridge will take place next month. According to Business Sale, the firm's most recently available accounts at Companies House, for the year ending December 30 2019, show GBP7.1 million in fixed assets and close to GBP13.7 million in current assets. Cleveland Bridge fell into administration in July 2021 as a result of issues including severe disruption to several of its infrastructure projects across the world as a result of COVID-19, Business Sale recounts. Administrators from FRP Advisory then announced last month that the Darlington-based firm's property and assets would be prepared for sale after they failed to find a buyer for the company, Business Sale relates. At the time of the company's collapse, its creditors were owed close to GBP22 million, Business Sale discloses. The online auction will be managed by the Leeds office of Sanderson Weatherall and will include plant and equipment, such as lifting machinery, containers and transport vehicles, along with other property and assets, Business Sale notes. The auction will take place on Nov. 9, with bidding closing the following morning, according to Business Sale. Aside from the effects of COVID-19, FRP Advisory said that the business had been impacted by rising steel prices and an apparent error in estimation on an GBP11 million project, Business Sale relays. In addition, the firm's Saudi Arabian parent company ARPIC declined to provide GBP12 million to plug a funding gap in the summer, Business Sale states. EUROSAIL-UK 2007-2: Fitch Affirms CCC Rating on Class E1c Debt -------------------------------------------------------------- Fitch Ratings has upgraded three tranches of Eurosail-UK 2007-2 NP plc and affirmed seven tranches. DEBT RATING PRIOR ---- ------ ----- Eurosail-UK 2007-2 NP Plc Class A3a XS0291422623 LT AAAsf Affirmed AAAsf Class A3c XS0291423605 LT AAAsf Affirmed AAAsf Class B1a XS0291433158 LT AAAsf Affirmed AAAsf Class B1c XS0291434123 LT AAAsf Affirmed AAAsf Class C1a XS0291436250 LT AAAsf Upgrade AA+sf Class D1a XS0291441417 LT BBBsf Upgrade BBB-sf Class D1c XS0291442498 LT BBBsf Upgrade BBB-sf Class E1c XS0291443892 LT CCCsf Affirmed CCCsf Class M1a XS0291424165 LT AAAsf Affirmed AAAsf Class M1c XS0291426889 LT AAAsf Affirmed AAAsf KEY RATING DRIVERS Foreclosure Frequency Macroeconomic Adjustments: Fitch applied foreclosure frequency (FF) macroeconomic adjustments to the UK non-conforming sub-pool because of the expectation of a temporary mortgage underperformance (see Fitch Ratings to Apply Macroeconomic Adjustments for UK Non-Conforming RMBS to Replace Additional Stress). With the end of the government's repossession ban, there is still uncertainty regarding the borrowers' performance in the UK non-conforming sector where many borrowers have already rolled into late arrears over recent months. Borrowers' payment ability may also be challenged with the end of the Coronavirus Job Retention Scheme and the Self-employed Income Support Scheme. The adjustment is 1.58x at 'Bsf' while no adjustment is applied at 'AAAsf' as assumptions are deemed sufficiently remote at this level. Stabilised Asset Performance: Total arrears have remained elevated since the initial increase observed in mid-2020, with one-month plus arrears at 18.8% as of September 2021, compared with 18.4% in June 2020. While total arrears have remained stable, more accounts continue to roll into longer dated arrears, with three-month plus arrears increasing to 12.9% from 11.0% between June 2020 and September 2021. Due to the previous moratoria on repossessions, servicers have not been able to proceed with possession orders, which has led to an increase in longer-dated arrears as these would have typically been repossessed once they were three or more months delinquent. Longer dated arrears are expected to remain elevated until the backlog of repossessions can be cleared. Payment holidays have decreased to the point where there are none outstanding, and are not expected to increase as the scheme is now closed to new applications. Fitch expected that borrowers who utilised payment holidays could roll into arrears as their holiday ended. However, the majority of borrowers have resumed making full scheduled payments. Sequential Payments to Continue: Fitch expects the transaction to continue amortising sequentially. Pro-rata amortisation is being prevented by a breach of the cumulative loss trigger, which cannot be cured. The sequential amortisation and non-amortising reserve fund have allowed credit enhancement (CE) to build up for all notes. This supports the upgrades of the class C1a, D1a and D1C notes. Liquidity Facility Mitigates Payment Interruption Risk: The transaction features a non-amortising liquidity facility provided by Danske Bank AS and sized at GBP32.2 million. All classes of notes have access to the liquidity facility, with all classes apart from the A and M subject to a 50% PDL lockout trigger. In Fitch's expected case, the lockout trigger is not breached and the liquidity facility is sufficient to mitigate payment interruption risk for all classes of notes. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- The transaction's performance may be affected by changes in market conditions and the economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce CE available to the notes. -- Additionally, unanticipated declines in recoveries could also result in lower net proceeds, which may make certain notes' ratings susceptible to potential negative rating action depending on the extent of the decline in recoveries. Fitch conducts sensitivity analyses by stressing both a transaction's base-case FF and recovery rate (RR) assumptions, and examining the rating implications on all classes of issued notes. Fitch tested a 15% increase in the WAFF and a 15% decrease in the WARR. The results indicate downgrades of up to six notches for the subordinated notes. Factor that could, individually or collectively, lead to positive rating action/upgrade: -- Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and potential upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the FF of 15% and an increase in the RR of 15%. The ratings on the subordinated notes could be upgraded by up to four notches. 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 transactions. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS Eurosail-UK 2007-2 NP Plc has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to the pool exhibiting an interest-only maturity concentration of legacy non-conforming owner-occupied loans of greater than 20%, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Eurosail-UK 2007-2 NP Plc has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to a significant proportion of the pool containing owner-occupied loans advanced with limited affordability checks, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. HARBOUR ENERGY: Fitch Assigns First Time 'BB' IDR, Outlook Stable ----------------------------------------------------------------- Fitch Ratings has assigned Harbour Energy PLC a Long-Term Issuer Default Rating (IDR) of 'BB' with a Stable Outlook. Fitch has also assigned an expected senior unsecured rating of 'BB(EXP)' to Harbour's upcoming notes with a Recovery Rating of 'RR4'. The notes' final rating is contingent on the receipt of final documents conforming materially to information already provided. Harbour's 'BB' rating reflects (i) its increased scale of production following the completed acquisitions; (ii) low financial leverage and conservative financial and hedging policies; and (iii) a favourable tax position. At the same time, Harbour's 1P and 2P reserve life is lower than peers' (2P: seven years based on the 2020 pro-forma production), and its cost of production and decommissioning liabilities are high. Fitch believes that Harbour should be able to maintain broadly stable production from the current asset base in the medium term. Its longer-term performance will depend on its ability to pursue M&A opportunities or transfer contingent resources (2C) into reserves. Fitch rates the proposed senior unsecured notes using a generic approach for 'BB' category issuers, which reflects the relative instrument ranking in the capital structure, in accordance with Fitch's Corporates Recovery Ratings and Instrument Ratings Criteria. While most of the company's debt will be represented by the secured reserve base landing (RBL), the company's leverage is low and it plans to focus on unsecured funding. KEY RATING DRIVERS Largest UKCS Player: After acquiring ConocoPhillips' UK assets in 2019 and Premier Oil plc in 2021, Harbour has become the largest UK Continental Shelf (UKCS) player by level of production. The company's current production (2021 proforma guidance: 185-195 thousand barrels of oil equivalent per day, kboe/d) is focused mainly on the UK (more than 90%) but well-diversified by hubs. Harbour operates over two-thirds of its production, which makes its capex fairly flexible; and its portfolio is well-balanced between liquids (around 55% of production) and natural gas (45%). Low Reserve Life: Harbour's reserve life is lower than peers. In 2020, its 2P reserve life based on the pro-forma production stayed at seven years, lower than that of Aker BP ASA (BBB-/Stable, 11 years), Lundin Energy AB (BBB-/Stable, 11 years) and Neptune Energy Group Midco Limited (BB/Stable; 12 years). This is mitigated by Harbour's conservative leverage, which should allow for acquisitions, and substantial resources (2C), a significant share of which relates to assets in production or under development. While Harbour should be able to maintain relatively stable production in the medium term from the current reserve base, its production potential over the longer term will depend on its ability to replenish reserves organically and through acquisitions. High Costs, Low Taxes: Harbour's current cost position of USD16/boe is fairly high, albeit typical for UKCS, and could put the company at a disadvantage in a consistently low oil-price environment. This is mitigated by Harbour's favourable tax position with significant accumulated losses, which should largely shield it from taxes in the next five years. Overall, Harbour's Fitch-projected unit margins (funds from perations (FFO)/boe) are broadly comparable with its North Sea-focussed peers. Conservative Financial Policies: Harbour targets maintaining net leverage (defined as net debt to EBITDAX) below 1.5x through the cycle. Fitch's projected FFO net leverage below 2.0x over 2021-2024 is commensurate with the company's target, although Fitch recognises that leverage could be affected by potential acquisitions. Fitch assumes dividends will be paid in 2022-2024 but note that the company is yet to formalise its dividend policy. Moderate Capital Intensity: Fitch assumes Harbour's capital intensity to be moderate relative to peers at around USD10/boe produced over the forecast horizon, or around USD750 million per year (excluding decommissioning obligations). Harbour's focus is on small scale, short cycle capex with projects largely based on the current infrastructure, including infill drillings. Harbour operates around two-thirds of its production, which gives it a reasonably high degree of control over its capex budget. Hedging Policies Positive: Fitch positively views Harbour's hedging policy, which should protect its cash flows in case of a significant drop in oil and natural gas prices. Fitch estimates that currently 36% of its liquids production and 57% of its natural gas production in 2022-23 are hedged at an average price of USD61/bbl and USD6.2/mcf, respectively (mainly using swaps). This is above Fitch's price deck used for the period. Addressing Energy Transition Risks: Fitch assumes that at least in the next three to five years the impact of energy transition on oil and gas companies will be limited. However, over the long term industry participants, and in particular pure upstream players, may be subject to more vigorous regulations, and their margins could be affected by carbon taxes and other regulatory measures. Fitch views positively Harbour's target to become carbon neutral on the Scope 1&2 basis by 2035 through minimising emissions and investments in carbon offsets. High Decommissioning Obligations: Harbour has an ESG Relevance Score of '4' for 'Exposure to Environmental Impacts' due to high decommissioning liabilities, which negatively affect the company's cash flows. Harbour's pro-forma decommissioning liabilities at end-2020 were high at around USD4.5 billion (pre-tax, excluding a refund from Shell), or around USD8/boe per 2P reserves (Aker BP: USD3/boe; Ithaca Energy Ltd (B/Stable): USD6/boe). Most decommissioning-related cash outflows are long term and tax deductible. Fitch's approach is not to add decommissioning liabilities to debt, but to deduct them from projected operating cash flow as they are being incurred. Fitch assumes that over the forecast horizon Harbour's gross decommissioning expense will average around USD300 million per year on a pre-tax basis. DERIVATION SUMMARY Harbour's level of production (pro-forma 2020: 234kboe/d) is comparable with that of Aker BP ASA (211kboe/d) and higher than that of Lundin (165kboe/d) and Neptune (165kboe/d). Its 2P reserve life is low relative to peers (seven years in 2020, compared to Neptune's 12 years and Aker BP and Lundin's 11 years) and counterbalanced by substantial 2C resources and low leverage (FFO net leverage below 2x in 2021-2024), allowing for acquisitions. KEY ASSUMPTIONS -- Brent price of USD63/bbl in 2021, USD55/bbl in 2022, and USD53/bbl in 2023 and 2024; -- TTF price of USD10/mcf in 2021, USD6/mcf in 2022, and USD5/mcf in 2023 and 2024; -- Production volumes averaging around 200 kboe/d through 2024; -- Capex (excluding decommissioning) averaging approximately USD750 million per year through 2024; -- Dividends paid out from 2022. RATING SENSITIVITIES Factor that could, individually or collectively, lead to positive rating action/upgrade: -- Material improvement in the business profile (e.g. much higher proved reserve life and lower production costs) while maintaining a conservative financial profile (FFO net leverage below 1.5x). Factors that could, individually or collectively, lead to negative rating action/downgrade: -- FFO net leverage consistently above 2.0x; -- Falling proved reserve life; -- Falling absolute level of reserves; -- Consistently negative FCF after dividends. 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 Strong Immediate Liquidity: Harbour's capital structure is dominated by a senior secured RBL facility maturing in 2027 with current availability of USD3.3 billion. Harbour's planned notes will be subordinated to the RBL and are meant to be mainly used to repay the USD400 million junior facility from Shell. Harbour's liquidity buffers are represented by the unutilised RBL portion (around USD700 million at 30 June 2021) and unrestricted cash (USD424 million). Fitch views Harbour's immediate liquidity position as strong but it could be affected by RBL re-determinations and possible acquisitions. ISSUER PROFILE Harbour is a medium-scale independent oil and gas producer with assets mainly in the UKCS. ESG CONSIDERATIONS Harbour has an ESG Relevance Score of '4' for 'Exposure to Environmental Impacts' due to high decommissioning obligations, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. HARBOUR ENERGY: S&P Assigns 'BB' ICR, Outlook Stable ---------------------------------------------------- S&P Global Ratings assigned a 'BB' issuer credit rating to Harbour Energy PLC (Harbour), and a 'BB-' issue credit rating to its proposed $500 million senior unsecured notes due 2026. The stable outlook reflects S&P's expectation of gradual deleveraging, with funds from operations (FFO) to debt moving to 30%-35% on the back of strong free operating cash flow, which should allow Harbour to build rating headroom in the coming years. Harbour Energy is a midsize oil and gas producer with a balanced mix of oil and gas, albeit with a short reserve life. Following the completion of a reverse merger between Chrysaor and Premier, Harbour Energy emerged as one of the larger independent oil and gas players in the North Sea. With the expected 2021 production at 170,000-180,000 boepd (or 185,000-195,000 boepd pro forma the merger), the company is well placed compared with the peers in the region. Its production is similar to that of Lundin Energy (BBB-/Stable/--; 180,000-195,000 boepd), bigger than Neptune Energy (BB-/Stable/--; 130,000-135,000 boepd), and smaller than Aker BP (BBB-/Positive/--; 210,000-220,000 boepd). S&P also expects production to grow in 2022 after a relatively weak 2021, which was affected by deferral of investment activities and maintenance. Despite the large production, Harbour's oil reserves are relatively small, with proved and probable reserves (2P) of 572 million barrels of oil equivalent (mmboe) as of Dec. 31, 2020 (pro forma the merger). This translates into a short reserve life of about eight years on a 2P basis. To compare, the peers in the region typically have larger 2P reserves: 601 mmboe for Neptune, 826 mmboe for Lundin, and 842 mmboe for Aker BP (all as of Dec. 31, 2020). S&P said, "Acquisitions are likely to remain the main driver of growth over next few years, but are not part of our base case. Harbour grew through acquisitions, and will likely continue doing so, as greenfield new country exploration is not part of its strategic focus. The company publicly stated its desire to have substantial presence in more than one region, while currently its reserves and resources are concentrated in the U.K. Areas of potential growth include Asia or the Gulf of Mexico, where Harbour already owns assets, but any transaction remains uncertain at this stage. "We do not expect production to grow materially in the existing portfolio. Many of Harbour's assets are mature, and natural production decline may be meaningful. The company will therefore need to invest considerably to at least sustain its production rate and maintain its reserves. The late life of assets also translates into relatively high operating expenses, as economies of scale are less pronounced and efficiency of operations is lower. According to the company, its 2021 operating expenses per barrel will likely be about $15/boe-$16/boe, which is higher than that of Neptune Energy ($11/boe-$12/boe) and substantially higher than that of investment grade peers like Aker BP (around $9/boe) or Lundin (around $3/boe). Although its accumulated $4 billion tax loss means that Harbour will likely not pay material tax until 2025, this is not a structural strength. "Our assessment of financial risk as significant balances the company's financial policy of keeping net debt to EBITDAX (EBITDA plus exploration expense) below 1.5x with uncertainty on key elements like dividends and acquisitions. We assume that FFO to debt will improve in 2022 and will consistently remain above 30%. The current rating incorporates some leeway for the company to do acquisitions in the future. We anticipate that the acquisitions might put pressure on credit metrics, pushing them outside the rating-commensurate level. The current rating allows for temporary weakness in credit metrics, provided that there is a clear deleveraging expectation. We do not assume dividends in our base case given the absence of dividend policy. In reality, though, it is likely that the company might introduce a dividend as soon as 2022. We understand that the dividend will not influence the net debt-to-EBITDAX target, so leverage will remain below 1.5x during normal market conditions, and will go to 1.5x only during period of low commodity prices or during counter-cyclical acquisitions. We note that the leverage at the higher end of the company's financial policy translates to FFO to debt of about 25%, below the 30% threshold for the rating. Hence, the rating relies on the assumption that the company would maintain a certain degree of headroom against its financial policy target and would not leverage itself up to the maximum by paying dividends. "At June 30, 2021, we estimate adjusted debt at $6.9 billion, which is more than double the reported net debt of $2.6 billion. By far the largest adjustment is asset retirement obligations (ARO) of about $3.5 billion. The ARO adjustment is standard in the industry, but Harbour's ARO adjustment is one of the largest we make (as a proportion of total adjusted debt). The company's decommissioning liability is spread out across more than 10 years. In the next few years, we expect annual payments of about $200 million. "Based on our oil and gas price deck, we expect healthy free operating cash flow in the next few years.Our expectation of high gas prices in 2022 and 2023, materially above the long-term deck, will boost Harbour's metrics in the next few years. The effect will be muted by the company's strict hedging policy (50%-70% over the next 12 months, gradually decreasing in following years), but we do not see this as a shortcoming, because hedging enhances the predictability of the cash flow, even at a cost of unrealized earnings during high spot prices. We estimate that operating cash flow should comfortably cover capex, leaving room for dividends. "The stable outlook reflects our expectation that, over the next 12-18 months, Harbour Energy will continue building the headroom under the 'BB' rating, as it grows production, generates positive free operating cash flow, and deleverages. "Under our oil and gas price deck, we expect Harbour Energy will generate adjusted EBITDA of $1.9 billion-$2.1 billion in 2021, and $2.3 billion-$2.5 billion in 2022. This should translate into FFO to debt of about 18%-22% in 2021 and about 30%-35% in 2022. Although FFO to debt is somewhat low for the rating in 2021, we view this as a transitional year post the Chrysaor and Premier merger, and the metrics we expect in 2022 are comfortable for the rating. "We may lower the rating on Harbour if the company's financial policy became more aggressive than we currently anticipate. Alternatively, the downgrade may be warranted in case of operational issues or if oil and gas prices declined materially." For a downgrade, S&P would look at FFO to debt staying below 30% for a long time, as well as one or more of the following factors: -- More aggressive financial policy, for example substantial dividends that lead to net debt to EBITDAX close to the company's 1.5x target during normal market conditions, or debt-funded mergers and acquisitions (M&A) that push the company's net debt to EBITDAX above 1.5x without a clear deleveraging path. -- Inability to support the level of the reserves, translating into shrinking reserve life over time. Although unlikely in the next 12 months, S&P may consider an upgrade if: -- The company grew its business, increasing production toward 250,000 boepd and reducing operating costs. -- FFO to debt moved above 45% on a sustainable basis, with clarity on the dividend policy. MAISON BIDCO: Fitch Assigns First Time 'BB-' IDR, Outlook Stable ---------------------------------------------------------------- Fitch Ratings has assigned Maison Bidco Limited (trading as "Keepmoat" under the name of its indirectly owned subsidiary Keepmoat Homes Limited) a first-time Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook and a senior secured rating of 'BB+'. Maison Finco Plc's planned issuance of GBP275 million senior secured notes, which is guaranteed by group entities including Maison Bidco Limited, Keepmoat Homes Limited and MCI Developments Limited is rated 'BB+(EXP)'. The assignment of the final instrument rating is contingent on receipt of final documentation conforming to information already received. The IDR reflects Keepmoat's solid business profile, which benefits from established collaborative business partnerships with local authorities and registered providers in sourcing land and delivering mixed-tenure residential developments. The high leverage resulting from the acquisition of Keepmoat by Aermont Capital (announced in August 2021) constrains the rating. Fitch expects funds from operations (FFO) leverage at 4.0x for the financial year to end-October 2021 (FY21), gradually reducing to below 3.5x in the next 24 months. KEY RATING DRIVERS Affordable-Focused Homebuilder: Keepmoat is a UK homebuilder specialising in delivering large-scale, residential-led, schemes, which are predominantly on brownfield sites (72% of FY20 completions). The company's geographical focus is in the north, the Midlands and part of Scotland, where the company offers a standardised product, typically two- to four-bedroom homes. Keepmoat's homes are affordable, mostly aimed at first-time buyers (FY20: 76% of total private sales) and social landlords. The average selling price (ASP) of Keepmoat's homes in 2020 was GBP165,000 compared with GBP267,000 for England overall. Forward funding contract sales to registered providers, representing 26% of FY20 total sales, provides revenue visibility and reduces working capital needs. Capital-Light Business Model: With about 4,000 units expected to be delivered in FY21, Keepmoat is one of the UK's largest partnership-focused homebuilders. Its business model entails working closely with Homes England, local authorities and registered providers from the early stages of a development, including the identification and sourcing of suitable land and its project planning. The relatively lower land value in brownfield areas and deferred land payments limit Keepmoat's initial capital requirements. In residential schemes commissioned by registered providers, staged payments enhance the project's cash flow cycle compared with traditional homebuilders. Leverage Constrains the Ratings: The prospective GBP275 million notes issue - part of the acquisition financing - will increase total debt by about GBP120 million after the repayment of an existing loan (GBP157.5 million). Fitch calculates FY21 FFO leverage at 4.0x before falling to below 3.5x over the next 24 months given the expected increase of volumes. Despite Keepmoat's established business model, leverage constrains the rating. UK Housing Market Undersupplied: The UK housing market continues to be under-supplied, as the amount of new homes keeps falling significantly short of the annual 300,000 units the government expects. In the 12 months to end-March 2020, there were 243,770 newly completed homes. Fitch expects Keepmoat to benefit from this inherent undersupply and from government initiatives targeting first-time buyers, such as the recent extension of the Help to Buy scheme to March 2023. Senior Secured Rating Uplift: The instrument rating for Keepmoat's senior secured notes are based on Fitch's rating grid for issuers with 'BB' category IDRs. Keepmoat's senior secured ratings are viewed as a category 2 first-lien, which translates into a two-notch uplift from the IDR of 'BB-'. DERIVATION SUMMARY Keepmoat is a UK partnership-focused homebuilder operating within the affordable end of the market. Relative to traditional homebuilding, the partnership model has lighter demands on capital, as the land acquired is generally cheaper and can be acquired through deferred payment terms. The company's geographic focus on the north and the Midlands, and away from London, is similar to that of Miller Homes Group Holdings plc (BB-/Positive). Both companies offer predominantly standardised single-family homes, although Miller Homes' ASP in 2020 was higher at GBP260,000 compared to Keepmoat's GBP165,000. Both are owned by financial sponsors, the leverage of the two medium-size homebuilders constraints their ratings within the 'bb' category. Keepmoat shares some similarities with Berkeley Group Holdings plc (BBB-/Stable), which also focuses on housing-led schemes on brownfield sites. However, Berkeley's geographical focus on London and the South East, its typical product - mainly large multi-family condominiums - and an ASP of more than GBP700,000 in the past four years, differentiate its business model from Miller Homes' and Keepmoat's. Berkeley's rating is underpinned by FFO gross leverage, which has been below 1.0x for at least four years and projected to remain around that level over the next four years. The Spanish housebuilders AEDAS Homes, S.A. and Via Celere Desarrollos Inmobiliarios, S.A. (both 'BB-'/Stable) focus on the most affluent areas within their domestic market and the products offered (apartments of large condominiums) are similar to those of Berkeley. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- FY21 volumes to return to pre-Covid-19 levels (FY19), gradually increasing to more than 4,500 by FYE24; -- ASP broadly flat in the next four years at around GBP180,000 per unit; -- Disciplined land acquisition and measured working capital outflow totalling about GBP160 million in FY21-FY24; -- Operating profits to increase as operations scale up; -- No dividends payments and M&A activity. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- FFO gross leverage below 2.5x; -- Positive FCF. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- FFO gross leverage above 3.5x; -- A change in the partnership model approach indicating an increase in speculative development or land purchases; -- Unexpected distribution to shareholders that would lead to a material reduction in cash flow generation and slower deleveraging. 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 Adequate Liquidity: Keepmoat's liquidity pro-forma for the proposed GBP275 million senior secured notes issue and the access to a new GBP70 million super-senior revolving credit facility is adequate. Fitch acknowledges part of the new senior secured notes are earmarked to repay the existing GBP157.5 million term loan and a GBP9 million shareholders loan. At completion of these transactions, the capital structure of Keepmoat will mainly comprise the new senior secured notes maturing in 2027. ESG CONSIDERATIONS The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. MAISON BIDCO: S&P Assigns Preliminary 'B+' ICR, Outlook Stable -------------------------------------------------------------- S&P Global Ratings assigned its preliminary 'B+' long-term issuer credit rating to Maison. S&P also assigned its preliminary 'B+' issue rating, with a preliminary recovery rating of '3', to the developer's proposed GBP275 million senior secured bond. The stable outlook reflects S&P's expectation of continuous and profitable business growth on the back of sustained demand for affordably priced housing in the U.K. This should support adjusted debt to EBITDA below 4.0x, interest coverage well above 3.0x, and adequate liquidity in the next 12 months. The inherent volatility and cyclicality of the real estate developer industry constrains Maison's business, although demand for its affordably priced homes should remain strong. S&P said, "Our long-term issuer credit rating on Maison reflects our view that the company operates in the highly cyclical, competitive, and fragmented homebuilder sector. Nevertheless, we think demand should remain robust for affordably priced homes, Maison's market segment. About 76% of the company's private sales are to first-time buyers, which accounted for 64% of total sales in FY2020. We think the government will continue to support the U.K. housing market with several initiatives and schemes, such as help-to-buy or other initiatives when help-to-buy ends in 2023, benefiting Maison's customers' access to housing. We also think the inherent supply-demand imbalance in the U.K. should continue to support Maison's future average selling prices. Maison's somewhat low profitability makes it vulnerable to cost inflation, but more efficient land management should mitigate the pressure. S&P said, "We estimate that Maison's adjusted EBITDA margin will be about 11% for the next 12-24 months, slightly higher than approximately 10% prior to the COVID-pandemic. We note that this is still lower than rated peers in its industry. For example, we expect Miller Homes Group Holdings PLC's (B+/Negative/--) EBITDA margin to be about 17%-18% over the same period. This is mainly the result of Maison's focus on the affordably priced housing market, where average selling prices and margins over construction spending are lower than mid-end housing projects. Maison has exposure to building materials and other associated cost increases because parts of its sales contracts are at fixed prices. In FY2020, registered providers' sales contracts at fixed prices accounted for 26% of total deliveries, with the remaining 74% open market sales that benefited from increases in sales prices. We forecast price volatility for certain build materials because demand for materials and logistics capacity currently exceeds supply. We think cost inflation will be one of the largest risks for Maison in the short term. However, we understand these risks are partly offset by back-to-back contracts with suppliers and subcontractors, which are reviewed at different construction stages. We also think Maison's increasing focus on land-procurement efficiencies should support its gross margins as soon as it starts using its more recently purchased and more profitable land plots for construction. We acknowledge that the company offers a relatively standard product range focused on single family homes, which should also benefit operating efficiency." Partnerships, which account for about 80% of Maison's current land pipeline, reduce capital requirements but expose the company to administrative decisions. Keepmoat has a long track record of operating a partnership model and has had about 200 partners to date, with some relationships lasting more than 20 years. Keepmoat's key partners are either direct landowners (such as Homes England, local authorities, and private landowners) or registered providers (public or private bodies catering for social housing). These partners provide good-quality land and deferred payment terms, with settlement aligned with completion stages. Maison's current landbank covers about six years of operations, and about 86% of its landbank benefits from deferred payment terms. S&P thinks the partnership model, which translates into an asset-light model, supports the predictability of Maison's land procurement and reduces cash flow needs during its operations. As of September 2021, Maison's completions for FY2021 were almost fully pre-sold, and it has already sold more than one-third for FY2022. That said, this business model leaves Maison exposed to possible changes in its partners' policies and respective funding. S&P said, "Following Aermont's acquisition of Maison, we forecast that debt to EBITDA will remain below 4.0x. Factoring in the successful issuance of the proposed senior secured notes of GBP275 million, we forecast Maison's adjusted debt to EBITDA to be about 3.7x-3.8x in the next 12 months, compared to about 2.5x as of August 2021 based on interim management accounts. We expect Maison's interest coverage to be robust at about 6x. Maison will also benefit from a long debt maturity profile of close to six years, driven by the notes' tenor and the absence of material short-term maturities. Our debt calculation does not include land payables, which is in line with our criteria and our assessment of the company's peers. For FY2021, our calculation of EBITDA excludes about GBP50 million-GBP60 million of costs expensed. We consider these to be exceptional because they mostly relate to the acquisition, which we view as a transformational event. "Part of the equity contribution from Aermont will come in the form of a shareholder loan, which we view as akin to equity, so we do not include it in our adjusted debt calculation. As part of the acquisition, Aermont will downstream funds through several interim holding companies to Maison. Maison will then use these funds, together with the proceeds from the proposed notes, to cover the cash consideration of the acquisition and to refinance most of the existing debt. We do not include the shareholder loan as part of our adjusted debt calculation given the strong equity components included in its documentation. We understand it is subordinated to senior liabilities, its maturity will be beyond any outstanding interest-bearing debt, and it is stapled to equity. We understand that some exceptional and voluntary prepayment will be possible, but it is limited by the restrictions included in the documentation. "Our rating factors in Aermont's controlling stake in Maison, which could lead to a more aggressive financial policy in the future. Upon the transaction's closure, the main shareholder of the company will be funds managed by Aermont Capital. We note that, following the acquisition, the board of directors of Maison will comprise a majority of Aermont directors alongside the executive directors, and there will be no independent members. Although it is not in our base-case scenario, we think having a financial sponsor as the company's main shareholder could eventually push the company toward a more aggressive financial strategy, weakening its credit metrics. "The final ratings will depend on our receipt and satisfactory review of all final transaction documentation of the proposed senior secured notes. Accordingly, the preliminary ratings should not be construed as evidence of a final rating. If we do not receive the final documentation within a reasonable timeframe, or if the final documentation departs from the materials reviewed, we reserve the right to withdraw or revise our ratings. Potential changes include but are not limited to: The utilization of bond proceeds; maturity, size, and conditions of the bonds; financial and other covenants; and security and ranking of the bonds. "The stable outlook reflects our expectation that the company will generate sufficient revenue of more than GBP700 million from its growing home business segment in the next 12 months, with an adjusted EBITDA margin at about 11%. Over the same period, we anticipate that Maison's adjusted debt to EBITDA will stay below 4.0x and interest coverage will remain well above 3x. We also assume Maison will maintain adequate liquidity, including sufficient headroom under its covenants and undrawn revolving credit facility (RCF) to fund its working capital needs and support its growth. "We could lower the ratings if Maison's debt to EBITDA increased above 4x and EBITDA interest coverage declined to 3x or lower on a sustainable basis, or if its liquidity position deteriorated significantly. This could happen if exceptional costs or inflated build costs exceeding our base case result in lower completions or a higher cost base, in turn leading to a substantial decrease in EBITDA compared with our base case. We could also lower the rating if Aermont were to change its approach toward the company, moving to a more aggressive financial policy. "The likelihood of an upgrade is currently remote. However, we could consider raising the ratings if we saw a solid and material improvement in the scale of business and margin levels combined with stable operating cash flows. We could also take a positive rating action if we saw a significant change in the existing ownership and governance of the company, accompanied by a tighter financial policy commensurate with a higher rating level." NORD GOLD: Moody's Upgrades CFR to Ba1, Outlook Remains Stable -------------------------------------------------------------- Moody's Investors Service has upgraded Nord Gold plc's corporate family rating to Ba1 from Ba2 and probability of default rating to Ba1-PD from Ba2-PD. Concurrently, Moody's upgraded the $400 million backed senior unsecured notes issued by Celtic Resources Holdings DAC, a designated activity company incorporated under the laws of Ireland, to Ba1 from Ba2. The outlook on both entities remains stable. RATINGS RATIONALE The upgrade of Nord Gold reflects the company's track record of deleveraging, operational and geographical diversification, with nine active mines, good reserve base, which is dominated by open-pit mines, competitive operating costs, resulting in a Moody's-adjusted EBITDA margin of above 40% on a sustained basis and history of organic growth and good corporate governance. Moody's expects the company to continue delivering strong operating performance, which will allow it to maintain modest levels of leverage under various gold price scenarios despite its dividend policy, which anticipates fairly high dividend distributions starting from 2022 of 50% of the company's pre-dividend free cash flows, adjusted by the amount of the development capital spending, provided that the company's reported net debt/EBITDA is below 1.5x. Moody's estimates the dividend of about $400 million for 2021, of which about $200 million is to be paid out in 2021. In March 2020, Nord Gold acquired a 19.9% stake in Cardinal for $27.2 million, which had an active gold mine in Ghana (Government of Ghana, B3 negative), aiming to acquire full control over the company. Throughout July to September 2020, Nord Gold acquired additional shares resulting in an increase of ownership to 27.8%. In December 2020, following a few rounds of competitive bids, the company sold its share in Cardinal for a total consideration of $122.9 million. Following suspension of this M&A opportunity the company priorotises low risk, brownfield expansion options and attractive projects near exiting operations, while some of its less efficient mining and exploration projects could be put up for sale. Inter alia, the company is ramping up the capacity of the Gross mine in Russia and plans to launch its Tokko project, also located in Russia. The increase in production at these projects, together with gradual depletion of Taparko and lower production at Bissa, located in Burkina Faso should contribute to a lower share of EBITDA generated in high risk jurisdictions. An increased production at Lefa, located in Guinea, will not be sufficient to make up for the lower production at Taparko and Bissa. In 2020, Nord Gold produced 52% of its gold in Russia and Kazakhstan, and 48% in Burkina Faso and Guinea. Moody's estimates that the ramp-up of the Gross mine and the launch of the Tokko mine, combined with the depletion of the Taparko mine and the fall in production at the Bissa mine, will lead to the share of revenue and EBITDA from Russia and Kazakhstan, in aggregate, growing to 65% and 73%, respectively, by 2024-25 (2020: 52% and 65%, respectively). Gross' phase I expansion was completed in September 2021, which will allow the company to increase its ore-processing capacity to 18 million tonnes per annum (mtpa) from 16 mtpa by year-end 2021. The company expects to complete Gross' phase II expansion by early 2024, which will lead to an increase in ore capacity to 26 mtpa and thereby increase the Gross mine annual production to approximately 350 thousand ounces, compared with 275 koz in 2020. In 2021, the company is conducting feasibility study of the Tokko project, adjacent to the Gross mine. The Tokko mine construction will commence in the second half of 2022. The company expects to pour first gold in the second half of 2024 and to gradually increase production to 230 koz by 2026. Moody's expects the Tokko mine to have the lowest cash cost in the company's portfolio of assets, with a total cash cost (TCC) of around $430/oz. Nord Gold's all-in sustaining costs (AISC) increased to $1,049/oz in H1 2021 from $1,028/oz in the year-earlier period. Moody's expects that the ramp-up of Gross and launch of Tokko will lead to TCC falling to about $700/oz in 2024 and below $700/oz in 2025 from the current level of about $800/oz-$850/oz and will support EBITDA under various price scenarios. Nord Gold has a strong liquidity. As of June 30, 2021, the company had $389 million in cash and cash equivalents, and $150 million available under its revolving credit facility agreements, including the $100 million ESG-linked revolving credit facility expiring beyond the next 12 months. In H1 2021, the company repaid $525 million of its bank debt. As of June 30, 2021, the company had an outstanding $400 million backed senior unsecured notes maturing in October 2024. Moody's expects Nord Gold to generate operating cash flow of at least $450 million-$550 million over the next 12 months under various price scenarios. This cash flow, reinforced by cash and available credit facilities, will be sufficient to cover the company's estimated capital spending of about $500 million, and its dividend payouts over the same period. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS ESG Issuer Profile Scores and Credit Impact Scores for Nord Gold are available on Moodys.com. In order to view the latest scores, please go to the landing page for the Nord Gold on MDC and view the ESG Scores section. RATIONALE FOR STABLE OUTLOOK The stable rating outlook reflects Moody's expectation that Nord Gold will maintain its Moody's-adjusted debt/EBITDA below 2.0x, preserve good liquidity and pursue a balanced financial policy, with modest gross debt over the next 12-18 months. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Moody's does not expect any positive pressure on Nord Gold's rating over the next 12-18 months because of the company's fairly small scale of operations and gold output volume, with the latter likely remaining around 1 moz per year and substantial concentration of its operations in geographies with heightened business risks (Burkina Faso and Guinea), although this concentration will fall over the next 2-3 years. Over the longer term, positive pressure on the rating could emerge if the company were to sustain its reduced operational concentration in geographies with heightened business risks, increase production volumes, maintain its robust financial metrics, generate positive post-dividend free cash flow (FCF) on a sustainable basis, pursue a balanced financial policy and maintain good liquidity. Moody's could downgrade the rating if Moody's-adjusted gross debt/EBITDA were to exceed 2.5x on a sustained basis, (CFO-dividends)/debt were to be lower than 30% on a sustained basis, or liquidity and liquidity management were to deteriorate significantly. A significant deterioration in the company's operating performance caused by possible operational disruptions in geographies with heightened business risks or growing exposure to high risk jurisdictions as a result of the M&A transactions could also exert negative pressure on the rating. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Mining published in September 2018. Nord Gold is an established pure-play gold producer, with nine producing mines in Russia, Kazakhstan, Burkina Faso, Guinea and a portfolio of exploration projects in West Africa, Eurasia and the Americas. In the 12 months that ended June 30, 2021, Nord Gold produced 1,031 thousand ounces (koz) of gold (2020: 1,078 koz). In the same period, the company generated revenue of $1.9 billion (2020: $1.7 billion) and Moody's-adjusted EBITDA of $1,016 million (2020: $818 million). Alexey Mordashov, together with his sons Nikita and Kirill, controls 99.94% of the company's ordinary shares. RANGERS FC: HMRC Wanted to Give More Time for Club to Pay Debt -------------------------------------------------------------- Greig Cameron at The Times reports that new documents reveal a senior HMRC official suggested tax authorities should give Rangers Football Club more time to pay back its debt but his proposal was voted down by executives. Des Dolan, part of the revenue's debt management and banking directorate, made representations to the highest level of the organization as officers in his division favored supporting a company voluntary arrangement (CVA), The Times discloses. A CVA works either by giving a longer time period for a company to pay its debt or by creditors accepting they will receive a lower amount, The Times states. HMRC's traditional position had been to vote against the CVA of a business when it came to such situations, The Times notes. RANGERS: Administrators Should Have Sold Training Ground, Players ----------------------------------------------------------------- Greig Cameron at The Times reports that the administrators of Rangers Football Club should have considered selling the club's training ground as well as exploring options to find new owners for Ibrox stadium, a court has ruled. According to The Times, Paul Clark and David Whitehouse, from Duff & Phelps, should also have tried to sell stars such as Kyle Lafferty, Steven Naismith and Lee Wallace to bring in money for creditors. A case was brought by BDO, the liquidator of RFC 2012, the oldco Rangers, to request compensation as they felt the insolvency professionals could have followed a different strategy, The Times relates. Legal proceedings were first lodged in 2017 but evidence did not begin being heard in court until earlier this year, The Times recounts. Rangers went into administration in February 2012 following the non-payment of national insurance and VAT, The Times discloses. STANLINGTON NO.1: Moody's Ups Rating on GBP5.7MM E Notes From Ba2 ----------------------------------------------------------------- Moody's Investors Service has upgraded the ratings of one note in Barley Hill No.1 plc and three notes in Stanlington No. 1 PLC transactions. The rating action reflects better than expected collateral performance and the increased levels of credit enhancement for the affected notes. Moody's affirmed the ratings of the notes that had sufficient credit enhancement to maintain the current rating. Issuer: Barley Hill No.1 plc GBP202.2M Class A Notes, Affirmed Aaa (sf); previously on Apr 11, 2019 Definitive Rating Assigned Aaa (sf) GBP6.95M Class B Notes, Upgraded to Aaa (sf); previously on Apr 11, 2019 Definitive Rating Assigned Aa1 (sf) Issuer: Stanlington No. 1 PLC GBP162.7M Class A Notes, Affirmed Aaa (sf); previously on Feb 15, 2021 Affirmed Aaa (sf) GBP20.5M Class B Notes, Affirmed Aaa (sf); previously on Feb 15, 2021 Upgraded to Aaa (sf) GBP11.3M Class C Notes, Upgraded to Aa1 (sf); previously on Feb 15, 2021 Upgraded to Aa3 (sf) GBP6.9M Class D Notes, Upgraded to Aa2 (sf); previously on Feb 15, 2021 Upgraded to Baa1 (sf) GBP5.7M Class E Notes, Upgraded to A3 (sf); previously on Feb 15, 2021 Affirmed Ba2 (sf) RATINGS RATIONALE The rating action is prompted by better than expected collateral performance and the increased levels of credit enhancement for the affected notes. Revision of Key Collateral Assumptions: As part of the rating action, Moody's reassessed its lifetime loss expectation for the portfolio reflecting the collateral performance to date. The performance of Barley Hill No.1 plc has been better than initially expected at closing. 90 days plus arrears as a percentage of current balance are currently standing at 5.3% with pool factor at 46.6%. Barley Hill No.1 plc has no losses since closing. Moody's assumed the expected loss as a percentage of current pool balance of 4.2% for Barley Hill No.1 plc. This corresponds to an expected loss assumption as a percentage of the original pool balance of 2.0% down from 2.5% previously. 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 rating levels and the volatility of future losses. As a result, Moody's has maintained the MILAN CE at 13% for Barley Hill No.1 plc. The performance of Stanlington No. 1 PLC has been better than initially expected at closing. 90 days plus arrears as a percentage of current balance are currently standing at 9.0% with a pool factor at 64.8% while they were already at 8.5% at closing in 2017. Stanlington No. 1 PLC has incurred only 0.5% cumulative losses as a percentage of the original pool balance since closing. Moody's assumed the expected loss as a percentage of current pool balance of 5.2% for Stanlington No. 1 PLC. This corresponds to expected loss assumption as a percentage of the original pool balance of 3.9% down from 6% previously. Furthermore, the phasing out of coronavirus related forbearance measures has not translated into materially worsened collateral performance in the transaction. Stanlington No. 1 PLC has a moderate weighted average current loan to indexed original property value ratio of 61.5% which will support future performance. 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 rating levels and the volatility of future losses. As a result, Moody's has maintained the MILAN CE at 25% for Stanlington No. 1 PLC. Increase in Available Credit Enhancement Sequential amortization and non-amortizing reserve funds led to the increase in the credit enhancement available in this transaction. For Barley Hill No.1 plc, the credit enhancement for the most senior tranche affected by today's rating action, class B notes, increased to 26.2% from 11.8% since closing. For Stanlington No. 1 PLC, the credit enhancement for Classes C, D and E Notes affected by today's rating action, increased to 22.5%, 17.8% and 13.9% from 20.6%, 16.3% and 12.7% since last rating action. 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) performance of the underlying collateral that is better than Moody's expected; (ii) an increase in available credit enhancement; (iii) improvements in the credit quality of the transaction counterparties; and (iv) a decrease in sovereign risk. 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. THE RESIDENCE: Legacie Set to Acquire Stalled Project ----------------------------------------------------- Dan Whelan at Place North West reports the Legacie Developments has exchanged contracts on the GBP250 million Infinity project in Liverpool and the 300-apartment The Residence in Salford after both developments fell into administration last year. The deals between Legacie and administrator David Rubin & Partners are subject to ratification by the courts, Place North West notes. According to Place North West, a spokesperson for Legacie said: "Legacie has a solid track record of delivering some of the highest quality and award-winning developments in the North West in recent years. We can confirm that we have put in bids to rescue the [Residence and Infinity] schemes so that we are not left with more stalled developments. "It would be inappropriate for us to comment on the business of the former owners of the site." The administrator will head to court later this month to request the Residence deal be rubber stamped, Place North West discloses. However, a consortium of the Elliot Group scheme's original investors is expected to oppose the deal, Place North West notes. The investors had been lined up to acquire the site out of administration but their bid was bettered by Legacie's undisclosed cash offer in August, Place North West relays. Residence investors will receive a dividend as a result of the Legacie deal but will not get back their deposits in full, administrator David Rubin told Place North West. In Liverpool, investors had also been negotiating a deal to take ownership of the 1,000-home Infinity but talks broke down and Legacie stepped in, Place North West recounts. It is understood that the Infinity investors have since made an improved offer for the Leeds Street site but, as the administrator has already exchanged contracts with Legacie, it will be up to the court to decide what happens to the investors' bid, according to Place North West. No date has been set for the Infinity hearing, Place North West states. The Infinity and Residence projects, which have a combined GDV of more than GBP300 million and were both designed by Falconer Chester Hall, were placed into administration following developer Elliot Lawless's arrest as part of Operation Aloft, Place North West discloses. Operation Aloft is an investigation into corruption relating to development and land deals within Liverpool City Council. Mr. Lawless has not been charged and denies wrongdoing, Place North West notes. The GBP70 million Residence scheme, located within Salford's Greengate neighbourhood, comprises a 34-storey tower and an additional 14-storey block. Contractor Careys had completed the concrete frame for the 300-home development before the project fell into administration, Place North West states. Infinity is a three-tower scheme reaching 39-storeys at its highest point. Contractor Vermont started on site in 2019 but, like Residence, work stopped in early 2020, Place North West relays. TOWD 2019-GRANITE4: S&P Assigns Prelim. B+ Rating on G Notes ------------------------------------------------------------ S&P Global Ratings assigned preliminary ratings to Towd Point Mortgage Funding 2019-Granite4 PLC's (Towd Point) class A2 to G-Dfrd U.K. RMBS notes. At closing, the issuer will also issue unrated class Z, XA1, XA2, and XA3 notes. Towd Point is a static RMBS transaction that closed in 2019. As part of this reissuance, the issuer will exercise its subordinated redemption option and will reissue the class B-Dfrd to F-Dfrd notes. Towd Point will also issue rated class A2 and G-Dfrd notes, and unrated class Z, XA1, XA2, and XA3 notes. The outstanding class A1 notes are currently rated 'AAA (sf)'. The transaction securitizes a portfolio of owner-occupied mortgage loans secured on properties in the U.K. The preliminary pool is unchanged from the pool backing the original issuance, although it has amortized to £2.557 billion as of the June 2021 portfolio reference date, down from £3.769 at closing in 2019. S&P considers the collateral to be nonconforming based on the prevalence of loans to self-certified borrowers and borrowers with adverse credit history, such as prior county court judgments (CCJs), an individual voluntary arrangement, or a bankruptcy order. The pool is well seasoned with almost all the loans being more than 10 years seasoned. There is high exposure to interest-only loans in the pool at 61.8%. Of the pool, 9.4% of the mortgage loans are currently in arrears greater than (or equal to) one month, and 1.4% of the loans are outstanding past their maturity. S&P said, "We have considered the latter to be defaulted and have modelled the transaction undercollateralized. We have applied our standard recovery assumptions to the loans that are past maturity." The class A1 and A2 notes will benefit from dedicated liquidity facilities and liquidity reserves. The class B-Dfrd notes will benefit from a liquidity reserve. Principal can be used to pay senior fees and interest on the notes subject to various conditions. Landmark Mortgages Ltd. is the servicer in this transaction. There are no rating constraints in the transaction under our counterparty, operational risk, or structured finance sovereign risk criteria. S&P considers the issuer to be bankruptcy remote. At the October 2021 issuance date, it expects the legal documents to be in line with its legal criteria. Preliminary Ratings CLASS PRELIM. RATING* CLASS SIZE A2 AAA (sf) 11.78% B-Dfrd AA+(sf) 3.00% C-Dfrd AA- (sf) 4.45% D-Dfrd A (sf) 1.50% E-Dfrd BBB (sf) 1.90% F-Dfrd BB (sf) 1.30% G-Dfrd B+ (sf) 0.60% Z NR 1.45% XA1 NR 3.75% XA2 NR 0.35% XA3 NR 2.00% Note: The transaction also has outstanding class A1 notes, issued as part of the 2019 issuance, which are rated 'AAA (sf)'. *S&P's preliminary ratings address timely receipt of interest and ultimate repayment of principal for the class A2 notes, and the ultimate payment of interest and principal on the other rated notes. NR--Not rated. N/A--Not applicable. =============== X X X X X X X X =============== [*] BOOK REVIEW: Hospitals, Health and People --------------------------------------------- Author: Albert W. Snoke, M.D. Publisher: Beard Books Softcover: 232 pages List Price: $34.95 Order your personal copy today at http://www.beardbooks.com/beardbooks/hospitals_health_and_people.html Hospitals, Health and People is an interesting and very readable account of the career of a hospital administrator and physician from the 1930's through the 1980's, the formative years of today's health care system. Although much has changed in hospital administration and health care since the book was first published in 1987, Dr. Snoke's discussion of the evolution of the modern hospital provides a unique and very valuable perspective for readers who wish to better understand the forces at work in our current health care system. The first half of Hospitals, Health and People is devoted to the functional parts of the hospital system, as observed by Dr. Snoke between the late 1930's through 1969, when he served first as assistant director of the Strong Memorial Hospital in Rochester, New York, and then as the director of the Grace-New Haven Hospital in Connecticut. In these first chapters, Dr. Snoke examines the evolution and institutionalization of a number of aspects of the hospital system, including the financial and community responsibilities of the hospital administrator, education and training in hospital administration, the role of the governing board of a hospital, the dynamics between the hospital administrator and the medical staff, and the unique role of the teaching hospital. The importance of Hospitals, Health and People for today's readers is due in large part to the author's pivotal role in creating the modern-day hospital. Dr. Snoke and others in similar positions played a large part in advocating or forcing change in our hospital system, particularly in recognizing the importance of the nursing profession and the contributions of non-physician professionals, such as psychologists, hearing and speech specialists, and social workers, to the overall care of the patient. Throughout the first chapters, there are also many observations on the factors that are contributing to today's cost of care. Malpractice is just one example. According to Dr. Snoke, "malpractice premiums were negligible in the 1950's and 1960's. In 1970, Yale-New Haven's annual malpractice premiums had mounted to about $150,000." By the time of the first publication of the book, the hospital's premiums were costing about $10 million a year. In the second half of Hospitals, Health and People, Dr. Snoke addresses the national health care system as we've come to know it, including insurance and cost containment; the role of the government in health care; health care for the elderly; home health care; and the changing role of ethics in health care. It is particularly interesting to note the role that Senator Wilbur Mills from Arkansas played in the allocation of costs of hospital-based specialty components under Part B rather than Part A of the Medicare bill. Dr. Snoke comments: "This was considered a great victory by the hospital-based specialists. I was disappointed because I knew it would cause confusion in working relationships between hospitals and specialists and among patients covered by Medicare. I was also concerned about potential cost increases. My fears were realized. Not only have health costs increased in certain areas more than anticipated, but confusion is rampant among the elderly patients and their families, as well as in hospital business offices and among physicians' secretaries." This aspect of Medicare caused such confusion that Congress amended Medicare in 1967 to provide that the professional components of radiological and pathological in-hospital services be reimbursed as if they were hospital services under Part A rather than part of the co-payment provisions of Part B. At the start of his book, Dr. Snoke refers to a small statue, Discharged Cured, which was given to him in the late 1940's by a fellow physician, Dr. Jack Masur. Dr. Snoke explains the significance the statue held for him throughout his professional career by quoting from an article by Dr. Masur: "The whole question of the responsibility of the physician, of the hospital, of the health agency, brings vividly to mind a small statue which I saw a great many years ago.it is a pathetic little figure of a man, coat collar turned up and shoulders hunched against the chill winds, clutching his belongings in a paper bag-shaking, tremulous, discouraged. He's clearly unfit for work-no employer would dare to take a chance on hiring him. You know that he will need much more help before he can face the world with shoulders back and confidence in himself. The statuette epitomizes the task of medical rehabilitation: to bridge the gap between the sick and a job." It is clear that Dr. Snoke devoted his life to exactly that purpose. Although there is much to criticize in our current healthcare system, the wellness concept that we expect and accept today as part of our medical care was almost nonexistent when Dr. Snoke began his career in the 1930's. Throughout his 50 years in hospital administration, Dr. Snoke frequently had to focus on the big picture and the bottom line. He never forgot the importance of Discharged Cured, however, and his book provides us with a great appreciation of how compassionate administrators such as Dr. Snoke have contributed to the state of patient care today. Albert Waldo Snoke was director of the Grace-New Haven Hospital in New Haven, Connecticut from 1946 until 1969. In New Haven, Dr. Snoke also taught hospital administration at Yale University and oversaw the development of the Yale-New Haven Hospital, serving as its executive director from 1965-1968. From 1969-1973, Dr. Snoke worked in Illinois as coordinator of health services in the Office of the Governor and later as acting executive director of the Illinois Comprehensive State Health Planning Agency. Dr. Snoke died in April 1988. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2021. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *