/raid1/www/Hosts/bankrupt/TCREUR_Public/211117.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Wednesday, November 17, 2021, Vol. 22, No. 224
Headlines
B E L G I U M
ONTEX GROUP: Moody's Affirms B1 CFR, Alters Outlook to Negative
F I N L A N D
NOKIA OYJ: Moody's Affirms 'Ba2' CFR, Alters Outlook to Positive
OUTOKUMPU OYJ: Moody's Ups CFR to Ba3 & Alters Outlook to Stable
I R E L A N D
ARES EUROPEAN XV: Moody's Assigns (P)B3 Rating to EUR15MM F Notes
BLACKROCK EUROPEAN XII: Moody's Gives (P)B3 Rating to Cl. F Notes
DUNEDIN PARK: S&P Assigns B- (sf) Rating to EUR12MM Cl. F-R Notes
HENLEY CLO III: Fitch Puts B- Cl. F Notes Rating on Watch Evolving
IRELAND: Insolvencies to Spike as Pandemic Supports Removed
I T A L Y
BANCA DEL MEZZOGIORNO: Moody's Cuts Long Term Issuer Rating to Ba3
L U X E M B O U R G
CORESTATE CAPITAL: S&P Places 'BB-' ICR on CreditWatch Negative
LSF11 SKYSCRAPER: Moody's Affirms 'B2' CFR Amid Sika Transaction
N E T H E R L A N D S
TELEFONICA EUROPE: S&P Assigns 'BB' Rating to Hybrid Securities
N O R W A Y
AUTOMATE INTERMEDIATE: S&P Upgrades ICR to B+, Outlook Positive
B2HOLDING ASA: S&P Alters Outlook to Positive, Affirms 'B+' ICR
R U S S I A
GTLK JSC: Fitch Affirms 'BB+' LT IDR, Alters Outlook to Positive
S P A I N
CODERE SA: Fitch Affirms Then Withdraws 'C' IDR
U N I T E D K I N G D O M
B&M EUROPEAN: Moody's Rates New GBP250MM Sr. Secured Notes 'Ba2'
B&M EUROPEAN: S&P Rates New GBP250MM Senior Secured Notes 'BB'
BLUE O TWO: Enters Administration Due to Covid-19 Pandemic
BRITISH TELECOMMUNICATIONS: Moody's Rates New Hybrid Notes 'Ba1'
BRITISH TELECOMMUNICATIONS: S&P Rates Sub Hybrid Securities 'BB+'
BT GROUP: Fitch Rates Proposed Hybrid Securities 'BB+(EXP)'
DALE GLOBAL: Director Faces 7-Year Disqualification
DERBY COUNTY FOOTBALL: Accepts 21-Point Deduction
DEVON SCHOOL: Accountant Responsible for Liquidation Jailed
MARKS AND SPENCER: Fitch Affirms 'BB+' IDR, Alters Outlook to Pos.
NEON REEF: Ceases Trading Amid Soaring Gas Prices
SATUS 2021-1: S&P Assigns Prelim B- (sf) Rating to F- Dfrd Notes
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B E L G I U M
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ONTEX GROUP: Moody's Affirms B1 CFR, Alters Outlook to Negative
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Moody's Investors Service has changed to negative from stable the
outlook on the ratings of Ontex Group NV ('Ontex' or the
'company'), a leading manufacturer of hygienic disposable products.
Concurrently, Moody's has affirmed the company's B1 corporate
family rating and B1-PD probability of default rating, as well as
the B1 rating on the EUR580 million senior unsecured notes due
2026.
"The outlook change to negative from stable reflects the company's
weak operating performance in 2021 and our expectation that any
recovery will be slower than previously anticipated because of
rising raw material costs, supply chain disruptions and
difficulties in passing price rises to end-customers in some
markets, particularly in Europe, the impact of which is not fully
offset by cost savings," says Pilar Anduiza, a Moody's Analyst and
lead analyst for Ontex.
RATINGS RATIONALE
Ontex's operating performance is weak and continues to be impaired
by a challenging competitive environment, resulting in slightly
lower than anticipated volume sales, and its large presence in some
emerging markets, which results in significant exposure to
foreign-currency exchange volatility. In addition, in 2021, the
company has been further affected by rising input costs, that it
has not been able so far to pass on to some end-customers,
particularly retailers in Europe, as well as supply chain
disruptions, which are expected to persist and compress
profitability in 2022.
As a result, Moody's expects that any recovery will be slower than
previously anticipated, as the cost savings stemming from the cost
reduction plan announced in 2021 will only partially compensate for
the expected deterioration in margins, while earnings will continue
to be depressed through 2023 because of the large one-off costs
associated with the company's cost cutting programme.
Therefore, Moody's expects that further EBITDA improvements will be
modest and slower than previously anticipated, with Moody's
adjusted EBITDA remaining between EUR165 million- EUR190 million
over the next 24 months.
Moody's now expects Ontex's adjusted gross debt to EBITDA ratio to
remain high, at around 6.6x in 2021 (from 7.2x in 2020, or 5.6x
excluding the RCF drawings repaid in early 2021) and above 5.3x in
2022. Moody's expects that free cash flow generation will also be
negative at around EUR50 million in 2021 and to remain slightly
negative at around EUR10 million in 2022, mainly because of the
restructuring-related one-off costs.
More positively, Moody's notes that the company is going through a
strategic review of its operations and its leverage might reduce in
the event of potential disposals of non-core assets that the
company may consider.
The rating agency will closely monitor the progress the new
management will make towards its net leverage target of 3.0x by
2023. In this respect, Moody's expects that cash proceeds from any
potential asset sales will be applied to debt reduction. This would
in turn at least partially compensate for the slow earnings growth
trajectory expected.
Ontex's B1 CFR continues to be supported by the company's leading
market positions in the production of hygienic disposable products
in Europe and a number of emerging markets; and its good
diversification by product and geography, with a balance between
its own and retail brands.
However, Ontex's CFR is constrained by the price-competitive nature
of the industry, which has resulted in lower volume sales, and by
the strong bargaining power of large retailers; its exposure to the
negative impact from foreign-currency volatility, also combined
with the recent and sharp increase in raw materials; and the high
level of restructuring costs the company still have to face until
2023 to support future growth, further constraining earnings and
cash flow generation.
LIQUIDITY
Ontex's liquidity remains adequate, though it was weakened owing to
the slower than expected improvement in operating performance and
the associated reduced headroom under covenants, which tighten
overtime.
Liquidity is supported by around EUR140 million of cash as of June
2021 (pro-forma for the refinancing transaction), and full
availability under its EUR250 million revolving credit facility
(RCF) due 2024. Despite the cumulative EUR60 million negative free
cash flow in 2021-2022, the existing cash balance and the
availability under the RCF will sufficiently cover the company's
cash needs over the next 12-18 months.
However, the debt facilities are subject to a maintenance covenant
to be tested semi-annually with progressive step-downs over time.
Moody's notes tightening headroom under this covenant, particularly
when the covenant steps down. Therefore, there is limited room for
underperformance relative to the rating agency's current
expectations.
STRUCTURAL CONSIDERATIONS
The B1 rating on the new senior unsecured notes is in line with the
CFR. All liabilities within the capital structure rank pari passu
among themselves. Moody's assumes a 50% standard family recovery
rate, to reflect the presence of both notes and bank debt within
the company's capital structure.
The instruments are guaranteed by material subsidiaries
representing a minimum of 70% of consolidated EBITDA.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's expectation that the recovery
of Ontex's operating performance will be slower than previously
anticipated and remain under pressure over the next 12 to 18 months
on the back of slow sales volumes recovery, high input costs and
additional restructuring costs, with leverage likely to remain
above 5.25x in 2022, if not compensated by debt reduction from
disposals of non-core assets.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the ratings could develop overtime in case of
(1) a material improvement in operating performance and
profitability, with EBITA margin trending towards high single digit
in percentage terms; and (2) leverage, measured as Moody's-adjusted
(gross) Debt/EBITDA, declining below 4.5x on a sustained basis.
The ratings could be downgraded in case of (1) a sustained
deterioration in operating performance, absent any signs of
improvements, leading to sustained negative free cash flow
generation; (2) a deterioration in the liquidity profile, stemming
from the reduced capacity under the financial covenants; or (3) a
sustained deterioration in credit metrics, such that
Moody's-adjusted (gross) Debt/EBITDA fails to reduce towards
5.25x.
LIST OF AFFECTED RATINGS
Affirmations:
Issuer: Ontex Group NV
Probability of Default Rating, Affirmed B1-PD
LT Corporate Family Rating, Affirmed B1
Senior Unsecured Regular Bond/Debenture, Affirmed B1
Outlook Actions:
Issuer: Ontex Group NV
Outlook, Changed To Negative From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Consumer
Packaged Goods Methodology published in February 2020.
COMPANY PROFILE
Ontex Group NV, headquartered in Aalst-Erembodegem, Belgium, is a
leading manufacturer of branded and retailer-branded hygienic
disposable products across Europe, the Americas, the Middle East
and Africa. Ontex operates in three product categories: baby care,
adult incontinence and feminine care. Ontex generated net sales of
around EUR2 billion in 2020 and EBITDA of EUR202 million (as
adjusted by Moody's). Ontex is a public company listed on the
Euronext Brussels stock exchange.
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F I N L A N D
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NOKIA OYJ: Moody's Affirms 'Ba2' CFR, Alters Outlook to Positive
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Moody's Investors Service has changed to positive from stable the
outlook on the ratings of Nokia Oyj's (Nokia), a leading provider
of radio access/mobile broadband wireless and fixed communications
equipment to telecom operators and enterprises. Concurrently,
Moody's has affirmed the company's Ba2 corporate family rating, its
Ba2-PD probability of default rating, the Ba2 senior unsecured
long-term debt ratings, the (P)Ba2 senior unsecured medium term
note (MTN) programme rating, the Not Prime Commercial Paper and the
(P)NP other short-term rating.
"The outlook change to positive from stable reflects Nokia's
significant improvement in operating performance and margins," says
Ernesto Bisagno, a Moody's Vice President -- Senior Credit Officer
and lead analyst for Nokia.
"It also reflects our expectation that Nokia's credit metrics will
continue improving over the next two years supported by solid
growth in the Network Infrastructure division and increased
contribution from new 5G contracts in the Mobile Network division,"
adds Mr Bisagno.
RATINGS RATIONALE
The rating reflects (1) Nokia's significant scale and relevance,
with a top-three global market position in wireless and fixed
network equipment; (2) its broad geographical diversification, with
sales well spread across all major regions; (3) its improving
operating performance and cash flow with potential for additional
margin improvement beyond 2021; and (4) its strong liquidity and
balanced financial policy.
The rating is constrained by (1) the cyclicality of the telecom
equipment industry; (2) the company's exposure to intense
competition and technology cycles; (3) its high investment needs
and R&D costs, combined with ongoing restructuring costs; and (4)
the execution risk associated with its strategy to improve the
competitiveness of its products and gain share in the very
competitive mobile telecom equipment market.
Nokia's Moody's-adjusted EBITDA increased to EUR2.1 billion in 2020
(from EUR1.9 billion in 2019) and improved further towards EUR3
billion in the 12 months that ended September 2021, driven by a
recovery in revenue (+3% constant currency at 9M 2021), lower
operating costs on the back of the restructuring programme and its
more favourable product and geographical mix.
As a result, the company's Moody's-adjusted gross debt/EBITDA
improved to 2.8x as of September 2021 (4.3x in 2019). Nokia
reported a Moody's adjusted net cash position at September 2021 of
EUR804 million, which included cash and short investments of EUR9.4
billion.
For the full year 2021, Moody's expects Nokia's revenue to increase
between 1.5%-2.0% compared to 2020, in line with company guidance,
driven by a combination of strong growth in the Network
Infrastructure division and higher intellectual property rights
(IPR) sales, partially offset by weaker revenue in the Mobile
Network division because of lower network deployment services in
particular in North America due to market share loss and price
erosion in that market.
The rating agency expects Nokia's Moody's-adjusted operating
margins in 2021 to be materially stronger than in 2020 at around
9.1%, with the caveat that they might be affected by restructuring
costs, potential supply chain disruptions and input price
increases.
Over 2022-23, Moody's expects stronger revenue growth as the 2021
headwinds from the Mobile Network division will fade away, driven
by increased contribution from new 5G contracts and stronger
performance in the Network Infrastructure division, and Cloud and
Network Services. The rating agency expects Nokia to report
additional profit growth over 2022-23, driven by higher revenue and
better margins on the back of a stronger product mix.
Stronger earnings will continue to support cash flow, although
there is potential for some working capital volatility in the next
quarters because of the supply chain disruptions.
Moody's assumes that capital spending will increase modestly at
around EUR900 million each year (including leases post IFRS 16) and
that dividends would be reinstated in 2022 at around EUR600 million
- EUR700 million. Nokia's Moody's-adjusted free cash flow (FCF)
will remain strong at around EUR2 billion in 2021 and decline
towards EUR1 billion in 2022, owing to the payment of dividends and
higher working capital needs.
As a result, Moody's anticipates additional improvements in Nokia's
credit metrics, with Moody's-adjusted gross debt/EBITDA declining
towards 2.3x in 2022 and the company maintaining a net cash
position, leaving Nokia strongly positioned in the rating
category.
LIQUIDITY
Nokia's liquidity remains strong, reflecting a cash balance of
EUR.4 billion (including EUR2.5 billion of short-term investments)
as of September 2021; a EUR1.5-billion revolving credit facility
(RCF, fully undrawn as of September 2021) maturing in 2026, with no
financial covenants and no significant adverse change clause for
drawdowns; the expected positive FCF generation of EUR2 billion in
2021 and EUR1 billion in 2022; and the limited debt maturities over
2021-23 mostly including a $500 million bond maturing in June
2022.
STRUCTURAL CONSIDERATIONS
Nokia's probability of default rating of Ba2-PD incorporates the
use of a 50% family recovery rate assumption, reflecting a capital
structure comprising both bank debt and bonds. All of Nokia's debt
instruments, including its EUR1.5 billion revolving credit
facility, are senior unsecured, have investment-grade style
documentation and have no financial covenants. Nokia's rated bonds
have a Ba2 rating, at the same level as Nokia's Ba2 corporate
family rating.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Moody's expectations that Nokia's
operating performance will continue to improve driven by a
combination of positive growth in its markets, increased
contribution from 5G contracts, market share gains and operating
margin growth.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Further upward pressure on the rating will develop if Nokia
continues to execute successfully its strategy and improves its
competitive position in Mobile Networks. Quantitatively, upward
pressure would require the company's operating margin
(Moody's-adjusted) and FCF (after shareholder
distributions)/adjusted debt to remain sustainably in the
high-single digits in percentage terms; and its Moody's-adjusted
debt/ EBITDA to trend towards 2.5x.
Downward rating pressure is unlikely in the next 18 months, but
could arise if operating performance deteriorates, reflecting
sustained market share losses and inability to regain the
competitive position of its products in the 5G cycle.
Quantitatively, downward pressure would arise if its Moody's
adjusted operating income turns negative on a sustained basis;
Moody's-adjusted debt/EBITDA remains above 3.5x; FCF (after
shareholder distributions) turns negative; or liquidity
deteriorates significantly.
LIST OF AFFECTED RATINGS
Affirmations:
Issuer: Nokia Oyj
Probability of Default Rating, Affirmed Ba2-PD
LT Corporate Family Rating, Affirmed Ba2
Commercial Paper, Affirmed NP
Other Short Term, Affirmed (P)NP
Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba2
Senior Unsecured Regular Bond/Debenture, Affirmed Ba2
Withdrawals:
Issuer: Nokia Finance International B.V.
BACKED Commercial Paper, Withdrawn , previously rated NP
Outlook Actions:
Issuer: Nokia Oyj
Outlook, Changed To Positive From Stable
Issuer: Nokia Finance International B.V.
Outlook, Changed To Rating Withdrawn From No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Diversified
Technology published in August 2018.
COMPANY PROFILE
Headquartered in Espoo, Finland, Nokia is a leading provider of
radio access/mobile broadband wireless and fixed equipment,
software and services to telecommunication operators, as well as
enterprises. The company also operates a licensing, brand and
technology development business. Nokia reported total group net
sales of EUR21.9 billion and EBITDA of EUR2.1 billion in 2020.
Nokia has four operating and reportable segments for the financial
reporting purposes: (1) Mobile Networks, (2) Network
Infrastructure, (3) Cloud and Network Services and (4) Nokia
Technologies.
OUTOKUMPU OYJ: Moody's Ups CFR to Ba3 & Alters Outlook to Stable
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Moody's Investors Service has upgraded to Ba3 from B2 the corporate
family rating and to Ba3-PD from B2-PD the probability of default
rating of Finnish stainless steel producer Outokumpu Oyj
("Outokumpu" or "group"). Concurrently, Moody's upgraded to Ba3
from B1 the instrument rating on the group's EUR250 million
guaranteed senior secured notes due June 2024. The outlook on the
ratings has been changed to stable from positive.
"The upgrade recognizes Outokumpu's decision to redeem in full its
EUR250 million guaranteed senior secured notes due 2024, which will
noticeably reduce its gross debt and future interest costs and
demonstrates an increasingly prudent financial policy", says Goetz
Grossmann, a Moody's Vice President and lead analyst for Outokumpu.
"The rating action further reflects the group's considerable
operating performance improvements this year and our expectation
that its credit metrics will remain well in line with our
requirements for a Ba3 rating over the next two years."
RATINGS RATIONALE
The upgrade to Ba3 follows Outokumpu's announcement on November 4,
2021 that it will repurchase in full its outstanding EUR250 million
guaranteed senior secured notes on December 7, 2021, ahead of its
original maturity in June 2024. This will be the second material
voluntary debt prepayment of the group this year, after a private
placement of new shares worth EUR209 million completed in May 2021
that was also used to reduce debt and leverage. Pro forma for the
notes redemption, Outokumpu's Moody's-adjusted leverage reduces to
around 2.0x gross debt/EBITDA from 2.3x as of September 30, 2021,
which are very low levels for a Ba3 rating. This marks a
significant decline in the ratio over just three quarters from over
11x at the end of 2020, mainly thanks to a strong earnings recovery
boosted by rebounding demand and significantly higher stainless
steel and ferrochrome prices this year. Outokumpu's
Moody's-adjusted EBITDA, as a result, surged to a multi-year record
of EUR715 million for the 12 months through September 30, 2021,
from EUR176 million (including high one-off restructuring costs) in
the full year 2020.
Although Moody's does not expect current stainless steel and
ferrochrome prices to be sustainable, they will likely remain at
historically high levels through 2022, supported by continued
strong demand and increased raw material costs that the group
should be able to largely pass on to its customers. Moreover,
Moody's expects a more favorable demand/supply balance in the EU in
the coming years, assuming less import pressure after the
imposition of anti-dumping duties against stainless cold and
hot-rolled coil imports from key importing regions (e.g. China,
Indonesia, India, Taiwan) earlier this year.
Given that demand in most end-markets of the group remains cyclical
and that steel prices have been highly volatile historically,
Moody's expects Outokumpu's earnings and cash flow to remain
sensitive to changes in business and market conditions also in the
future. At the same time, Moody's appreciates the group's
implemented cost savings and efficiency measures that should yield
EUR250 million run-rate EBITDA improvements (raised from EUR200
million in November 2021) by the end of 2022, of which EUR163
million have already been realized. These measures should support a
more elevated profitability level through the cycle.
Combined with a much lower interest burden following the debt
prepayments (over EUR560 million including the upcoming bond
repurchase), the group's improved earnings profile will also
support sustained strong free cash flow (FCF) generation, which
Moody's projects to be solidly positive over the next two years.
Assuming no material increases in dividend payments, Moody's
expects Outokumpu's financial policy to remain prudent with a focus
on keeping leverage in line with its current target ratio of below
3x reported net debt/EBITDA (1.0x at the end of September 2021).
The Ba3 CFR also positively reflects the group's consistently
strong liquidity and suspension of dividend payments in 2020 and
2021, which helped protect positive FCF in both years and which
further illustrates its conservative financial policy.
Factors constraining Outokumpu's rating include its exposure to
cyclical end-markets (e.g. automotive, chemical, energy and
industrial); periods of high and typically volatile stainless steel
import penetration, especially in Europe; and the high sensitivity
of its profitability to changing market conditions, currency
effects, and volatile input costs (e.g. nickel) and ferrochrome
prices.
LIQUIDITY
Outokumpu's short-term liquidity profile is strong. As of September
30, 2021, the group had EUR316 million in unrestricted cash and
cash equivalents as well as EUR574 million available under its
committed revolving credit facility, of which EUR42 million will
mature in 2022 and EUR532 million in 2024.
The group has further access to a fully available SEK1,000 million
(around EUR100 million) committed revolving credit facility,
guaranteed by the Swedish Export Credit Agency EKN (maturing in May
2023), and to an EUR800 million Finnish Commercial Paper programme,
of which EUR100 million was outstanding as of September 30, 2021.
In total, Outokumpu's available liquidity reserves amounted to
around EUR1 billion as of that date, including EUR34 million
available under a capital spending facility for the expansion of
its Kemi mine. These cash sources, together with Moody's forecast
of annual funds from operations of more than EUR500 million over
the next 12-18 months, significantly exceed expected capital
spending of around EUR200 million per annum (including lease
payments), minor working capital needs and Moody's standard 3% of
sales working cash assumption. Moody's further expects Outokumpu to
consistently comply with its gearing maintenance covenant.
ESG CONSIDERATIONS
In terms of governance, the upgrade recognizes Outokumpu's
significant voluntary debt prepayments from available cash this
year, as well as the suspension of dividend payments in 2020 and
2021, which reflect its prudent financial policy and proven
commitment to de-leveraging and strengthening of its balance
sheet.
OUTLOOK
The stable outlook reflects Outokumpu's solid rating positioning as
shown by credit metrics that currently exceed Moody's expectations
for a Ba3 rating. Moody's expects the group to sustain metrics at
levels well in line with the current rating also over the next
12-18 months, despite projected weaker earnings primarily on
retreating steel and ferrochrome prices. The stable outlook further
assumes that Outokumpu will stick to a conservative and predictable
financial policy (e.g. abstain from excessive dividends or share
repurchases), while maintaining positive FCF and a strong liquidity
profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating would build, if Outokumpu's (1)
Moody's-adjusted EBIT margin could be sustained at or above 6.5%,
(2) Moody's-adjusted leverage remained sustainably below 3.0x gross
debt/EBITDA, (3) liquidity could be maintained at a strong level.
An upgrade would further require the group to improve its
Moody's-adjusted (CFO-dividends)/debt to 25% or higher and sustain
positive FCF through various economic cycles.
The rating could be downgraded, if Outokumpu's (1) Moody's-adjusted
EBIT margin declined sustainably below 5%, (2) Moody's-adjusted
leverage exceeded 4.0x gross debt/EBITDA; (3) Moody's-adjusted
(CFO-dividends)/debt reduced sustainably below 20%, or (4)
liquidity contracted.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Steel published
in November 2021.
COMPANY PROFILE
Headquartered in Helsinki, Finland, Outokumpu is a leading global
manufacturer of flat-rolled stainless steel. It holds the #1 market
position in Europe with an around 30% cold rolled market share and
is the second largest stainless steel company in the USMCA region
with a market share of around 24% in 2020. With total revenue of
EUR5.6 billion in 2020 and 9,915 employees, Outokumpu is one of the
largest Finnish companies. The group operates 18 production sites,
including integrated stainless steel mills in Europe and North
America, as well as a fully owned chrome mine close to its
Tornio/Finland based steel plant. Outokumpu's main shareholder is
Solidium Oy, a holding company wholly owned by the Finnish
government, with a stake of around 15.5%.
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I R E L A N D
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ARES EUROPEAN XV: Moody's Assigns (P)B3 Rating to EUR15MM F Notes
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Moody's Investors Service announced that it has assigned the
following provisional ratings to notes to be issued by Ares
European CLO XV DAC (the "Issuer"):
EUR310,000,000 Class A Senior Secured Floating Rate Notes due
2036, Assigned (P)Aaa (sf)
EUR33,750,000 Class B-1 Senior Secured Floating Rate Notes due
2036, Assigned (P)Aa2 (sf)
EUR15,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2036,
Assigned (P)Aa2 (sf)
EUR32,500,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2036, Assigned (P)A2 (sf)
EUR34,375,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2036, Assigned (P)Baa3 (sf)
EUR26,625,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2036, Assigned (P)Ba3 (sf)
EUR15,000,000 Class F Senior Secured Deferrable Floating Rate
Notes due 2036, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in Moody's methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and up to 10%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be 61% ramped as of the closing date and
to comprise of predominantly corporate loans to obligors domiciled
in Western Europe. The remainder of the portfolio will be acquired
during the 7 month ramp-up period in compliance with the portfolio
guidelines.
Ares Management Limited ("Ares") will manage the CLO. It will
direct the selection, acquisition and disposition of collateral on
behalf of the Issuer and may engage in trading activity, including
discretionary trading, during the transaction's four and a half
year reinvestment period. Thereafter, subject to certain
restrictions, purchases are permitted using principal proceeds from
unscheduled principal payments and proceeds from sales of credit
risk obligations or credit improved obligations.
In addition to the seven classes of notes rated by Moody's, the
Issuer will issue EUR44,800,000 Subordinated Notes due 2036 which
are not rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in December 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR500m
Diversity Score: 49*
Weighted Average Rating Factor (WARF): 3125
Weighted Average Spread (WAS): 3.70%
Weighted Average Coupon (WAC): 4.00%
Weighted Average Recovery Rate (WARR): 44.5%
Weighted Average Life (WAL): 8.58 years
BLACKROCK EUROPEAN XII: Moody's Gives (P)B3 Rating to Cl. F Notes
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Moody's Investors Service (announced that it has assigned the
following provisional ratings to notes to be issued by BlackRock
European CLO XII Designated Activity Company (the "Issuer"):
EUR246,000,000 Class A Senior Secured Floating Rate Notes due
2035, Assigned (P)Aaa (sf)
EUR29,000,000 Class B-1 Senior Secured Floating Rate Notes due
2035, Assigned (P)Aa2 (sf)
EUR10,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2035,
Assigned (P)Aa2 (sf)
EUR18,400,000 Class C-1 Senior Secured Deferrable Floating Rate
Notes due 2035, Assigned (P)A2 (sf)
EUR10,000,000 Class C-2 Senior Secured Deferrable Floating Rate
Notes due 2035, Assigned (P)A2 (sf)
EUR27,600,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2035, Assigned (P)Baa3 (sf)
EUR20,200,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2035, Assigned (P)Ba3 (sf)
EUR11,800,000 Class F Senior Secured Deferrable Floating Rate
Notes due 2035, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings are based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in Moody's methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and up to 10%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be 80% ramped as of the closing date and
to comprise of predominantly corporate loans to obligors domiciled
in Western Europe.
BlackRock Investment Management (UK) Limited ("BlackRock") will
manage the CLO. It will direct the selection, acquisition and
disposition of collateral on behalf of the Issuer and may engage in
trading activity, including discretionary trading, during the
transaction's four and a half year reinvestment period. Thereafter,
subject to certain restrictions, purchases are permitted using
principal proceeds from unscheduled principal payments and proceeds
from sales of credit risk obligations or credit improved
obligations.
In addition to the eight classes of notes rated by Moody's, the
Issuer will issue EUR31,270,000 Subordinated Notes due 2035 which
are not rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the Notes in order of seniority.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated Notes' performance is subject to uncertainty. The Notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the Notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in December 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR400,000,000
Diversity Score: 53
Weighted Average Rating Factor (WARF): 3025
Weighted Average Spread (WAS): 3.70%
Weighted Average Coupon (WAC): 3.50%
Weighted Average Recovery Rate (WARR): 43.00%
Weighted Average Life (WAL): 8.58 years
DUNEDIN PARK: S&P Assigns B- (sf) Rating to EUR12MM Cl. F-R Notes
-----------------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Dunedin Park CLO
DAC's class X-R, A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R reset
notes. At closing, the issuer had unrated subordinated notes
outstanding from the existing transaction.
The transaction is a reset of the existing Dunedin Park CLO, which
closed in September 2019. The issuance proceeds of the refinancing
notes were used to redeem the refinanced notes (class A-1, A-2A,
A-2B, B, C, and D notes of the original Dunedin Park CLO
transaction), subordinated noteholder payment, and pay fees and
expenses incurred in connection with the reset.
The reinvestment period was extended to May 2026. The covenanted
maximum weighted-average life is 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 ratings assigned to the notes 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.
Portfolio Benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,824.40
Default rate dispersion 585.72
Weighted-average life (years) 4.83
Obligor diversity measure 155.85
Industry diversity measure 18.39
Regional diversity measure 1.17
Transaction Key Metrics
CURRENT
Total par amount (mil. EUR) 400.00
Defaulted assets (mil. EUR) 0.00
Number of performing obligors 196
Portfolio weighted-average rating
derived from our CDO evaluator B
'CCC' category rated assets (%) 5.14
Covenanted 'AAA' weighted-average recovery (%) 36.50
Covenanted weighted-average spread (%) 3.50
Covenanted weighted-average coupon (%) 4.00
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. We consider that the portfolio is 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 EUR397.5 million par
amortizing amount, consisting of EUR400 million target par minus
EUR2.5 million of reinvestment target par adjustment cap, the
covenanted weighted-average spread of 3.50%, the covenanted
weighted-average coupon of 4.00%, and the covenanted
weighted-average recovery rates of 36.50%. We applied various cash
flow stress scenarios, using four different default patterns, in
conjunction with different interest rate stress scenarios for each
liability rating category.
"The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under our current counterparty criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned ratings, as the exposure to individual
sovereigns does not exceed the diversification thresholds outlined
in our criteria.
"We consider that the transaction's legal structure is bankruptcy
remote, in line with our legal criteria.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B-1-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 X-R, A-R, D-R, and E-R notes can withstand stresses
commensurate with the assigned 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 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 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 23.54%
(for a portfolio with a weighted-average life of 4.83 years),
versus a generated BDR at 14.97% if we were to consider a long-term
sustainable default rate of 3.1% for 4.83 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 its 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 'B- (sf)' rating.
Until the end of the reinvestment period on May 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
ratings are commensurate with the available credit enhancement for
the class X-R, 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 X-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."
Dunedin 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. manages 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, product or
activity deemed illegal under international law or the local law of
the obligor, or the trade in cannabis. 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 RATING AMOUNT SUB (%) INTEREST RATE*
(MIL. EUR)
X-R AAA (sf) 2.00 N/A Three/six-month EURIBOR
plus 0.44%
A-R AAA (sf) 248.00 38.00 Three/six-month EURIBOR
plus 0.98%
B-1-R AA (sf) 30.00 28.00 Three/six-month EURIBOR
plus 1.78%
B-2-R AA (sf) 10.00 28.00 2.00%
C-R A (sf) 29.00 20.75 Three/six-month EURIBOR
plus 2.25%
D-R BBB (sf) 24.00 14.75 Three/six-month EURIBOR
plus 3.00%
E-R BB- (sf) 20.00 9.75 Three/six-month EURIBOR
plus 6.26%
F-R B- (sf) 12.00 6.75 Three/six-month EURIBOR
plus 8.93%
Sub NR 47.80 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A—-Not applicable.
HENLEY CLO III: Fitch Puts B- Cl. F Notes Rating on Watch Evolving
------------------------------------------------------------------
Fitch Ratings has removed Henley CLO III DAC from Under Criteria
Observation (UCO) and placed class B to F notes on Rating Watch
Evolving (RWE). The class A notes have been affirmed.
DEBT RATING PRIOR
---- ------ -----
Henley CLO III DAC
A XS2240855671 LT AAAsf Affirmed AAAsf
B-1 XS2240855838 LT AAsf Rating Watch On AAsf
B-2 XS2252204685 LT AAsf Rating Watch On AAsf
C XS2240856216 LT Asf Rating Watch On Asf
D XS2240856489 LT BBB-sf Rating Watch On BBB-sf
E XS2240856729 LT BB-sf Rating Watch On BB-sf
F XS2240856992 LT B-sf Rating Watch On B-sf
TRANSACTION SUMMARY
Henley CLO III DAC is a cash flow CLO comprising mostly senior
secured obligations. The transaction is currently in its
reinvestment period, and is being actively managed by Napier Park
Global Capital Ltd. The transaction is being reset. On the reset
closing date, new notes will be issued and the proceeds will be
used to redeem the existing rated notes.
KEY RATING DRIVERS
Transaction Under Reset: The class B to F notes have been placed on
RWE as the reset of the transaction is scheduled to close in
December 2021. If the transaction reset is executed, the existing
rated notes will be paid in full. Otherwise Fitch may upgrade the
ratings, due to the impact of its recently updated CLOs and
Corporate CDOs Rating Criteria when the RWE is resolved within six
months.
Stable Asset Performance: The transaction's metrics indicate stable
asset performance. As per the trustee report dated 15 September
2021, the transaction was 0.24% above target par and was passing
all Fitch-related collateral quality tests, coverage tests and
portfolio profile tests.
'B'/'B-' Portfolio: Fitch assesses the average credit quality of
the transaction's underlying obligors in the 'B'/'B-' category. The
weighted average rating factor (WARF) as calculated by the trustee
was 35.2, which is below the maximum covenant of 36. The WARF as
calculated by Fitch under the latest criteria is 26.8.
High Recovery Expectations: Senior secured obligations comprise
95.9% of the portfolio. Fitch views the recovery prospects for
these assets as more favourable than for second-lien, unsecured and
mezzanine assets.
Diversified Portfolio: The portfolio is well-diversified across
obligors, countries and industries. The top- 10 obligor
concentration is 17.8%, and no obligor represents more than 2.2% of
the portfolio balance.
Cash Flow Modelling: Fitch used a customised proprietary cash flow
model to replicate the principal and interest waterfalls and the
various structural features of the transaction, and to assess their
effectiveness, including the structural protection provided by
excess spread diverted through the par value and interest coverage
tests.
RATING SENSITIVITIES
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- Downgrades may occur if the build-up of credit enhancement
following amortisation does not compensate for a larger loss
expectation than initially assumed, due to unexpectedly high
levels of defaults and portfolio deterioration.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- If the reset is closed, the existing rated notes will be paid
in full, otherwise the class B to F notes may be upgraded when
the RWE is resolved within six months.
-- After the end of the reinvestment period, upgrades may occur
in the event of better-than-expected portfolio credit quality
and deal performance, leading to higher credit enhancement and
excess spread available to cover 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
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
IRELAND: Insolvencies to Spike as Pandemic Supports Removed
-----------------------------------------------------------
Cliff Taylor at The Irish Times reports that Ireland could face a
sharp rise in company insolvencies as government pandemic supports
are wound down, and a higher rate of company failure could persist
for some time, according to a new paper from the National
Competitiveness and Productivity Council (NCPC).
According to The Irish Times, the NCPC says the Government faces a
difficult balancing act as the pandemic supports are wound down,
with the risk that moving too quickly could push some viable
companies to the wall.
The number of insolvent liquidations in 2020 remained lower than in
2019, according to the paper and, after a temporary rise in early
2021, they have since remained broadly in line with pre-pandemic
levels, despite the problems affecting some sectors, The Irish
Times discloses. The paper says a range of government supports and
low interest rates are likely to be the key factor in holding down
the insolvency rate, The Irish Times notes.
The NCPC paper, Firm Dynamism and Productivity, points out that a
Central Bank paper in April 2021 estimated that almost a quarter of
SMEs could be vulnerable to liquidation due to the pressures of the
pandemic, The Irish Times states. It also referred to a Department
of Finance survey that showed almost one in five companies missed
at least one loan repayment in March 2021, compared with just 5% in
March 2019, indicating likely financial pressure, according to The
Irish Times.
The paper says as government supports are withdrawn, more companies
could face difficulties, The Irish Times relays. It notes that
increases in insolvencies can typically take time to appear after a
recession and can be long-lasting, The Irish Times discloses.
=========
I T A L Y
=========
BANCA DEL MEZZOGIORNO: Moody's Cuts Long Term Issuer Rating to Ba3
------------------------------------------------------------------
Moody's Investors Service has downgraded Banca del Mezzogiorno -
MCC S.p.A.'s (Banca del Mezzogiorno) long-term issuer and senior
unsecured debt ratings to Ba3 from Ba1, and the bank's Baseline
Credit Assessment (BCA) and Adjusted BCA to b1 from ba3.
Moreover, Moody's confirmed Banca del Mezzogiorno's Baa3 long-term
deposit and long-term Counterparty Risk Ratings (CRRs) as well as
its Baa3(cr) long-term Counterparty Risk (CR) Assessment. Moody's
also confirmed Banca del Mezzogiorno's short-term deposit ratings
and CRRs at Prime-3 and its short-term CR Assessment at
Prime-3(cr).
The outlook on the long-term deposits, issuer and senior unsecured
debt ratings is stable.
The rating action concludes the review for downgrade on Banca del
Mezzogiorno's ratings and assessments initiated on December 31,
2019 following the Italian government decision to involve Banca del
Mezzogiorno in Banca Popolare di Bari's (BPB) rescue.
RATINGS RATIONALE
BCA and ADJUSTED BCA
The downgrade of Banca del Mezzogiorno's BCA and Adjusted BCA to b1
from ba3 reflects the bank's weakened credit profile following the
transformational acquisition of the failing bank BPB despite a
capital injection and non-performing loan sales as part of the
takeover. Banca del Mezzogiorno's lending book increased to EUR8.6
billion as of June 2021 from EUR1.6 billion as of year-end 2019.
The problem loan ratio as of June 2021 was around 8% of gross loans
for the combined entity compared to an already high 6.65% at
year-end 2020, despite BPB's sale of a significant share of its
non-performing loans prior to its acquisition. The increase in the
cost of risk up to 1.5% of gross loans as of June 2021 from 0.3% in
2020 was mainly driven by BPB's lending book.
The downgrade also reflects Moody's expectation that Banca del
Mezzogiorno will report a loss in 2021 and 2022, mostly driven by a
high level of loan loss provisions and the restructuring costs
related to the acquisition of BPB. Despite the capital injection of
EUR1170 million from the national deposit guarantee fund (FITD) and
EUR430 million from the Italian Ministry of Finance, the bank's
Common Equity Tier 1 capital ratio of 14.6% as of June 2021 will be
materially reduced owing to the aforementioned losses. Against the
backdrop of government policies towards the development of southern
Italy, Banca del Mezzogiorno is encouraged to grow its lending
activity to small companies, which generally exhibit a higher risk
profile thereby weighing on Banca del Mezzogiorno's capital ratios.
Banca del Mezzogiorno's commercial expansion will be supported by
Italy's GDP growth of 6.4% in 2021 and 4.3% in 2022 according to
Moody's.
Banca del Mezzogiorno's liquidity will remain solid thanks to an
excess of deposits over lending needs and extended use of European
Central Bank's (ECB) Targeted Long-Term Refinancing Operations
(TLTRO) programme. As of June 2021, Banca del Mezzogiorno had
redeposited at the ECB 90% of the TLTRO borrowed funds. The
acquisition of BPB has also transformed Banca del Mezzogiorno's
funding structure, which will consist of retail deposits to a large
extent.
The acquisition of BPB has fundamentally changed Banca del
Mezzogiorno's risk profile. Prior to the acquisition, Banca del
Mezzogiorno, was a small specialized entity focusing on secured
lending backed by public guarantees and it has become a universal
bank of a much larger size. The merger of two entities that exhibit
very different business profiles involves management challenges all
the more so since BPB failure revealed numerous shortcomings that
Banca del Mezzogiorno will have to tackle going forward. Lastly,
the new entity will have to outline a new strategy encompassing a
wide range of activities, which will also entail significant
challenges. As a result, Moody's apply a one notch negative
adjustment for corporate behavior, which results in a b1 BCA from
the financial profile of ba3.
SENIOR UNSECURED DEBT AND ISSUER RATINGS DOWNGRADES
The downgrade of Banca del Mezzogiorno's senior unsecured debt and
issuer ratings to Ba3 from Ba1 derives from the downgrade of the
bank's BCA. It also reflects the higher expected loss of these
instruments in a resolution scenario according to Moody's Advanced
Loss Given Failure (LGF) analysis. Following the acquisition of
BPB, which was predominantly retail-funded, the share of senior
debt relative to the combined entity's total assets has materially
reduced, lowering the rating uplift to zero notch from two
notches.
In addition, Moody's assigns a moderate probability of support from
the Italian government to Banca del Mezziogiorno's senior creditors
which now results in a one-notch rating uplift to Ba3 for the
senior unsecured debt rating. The Italian government, which
controls Banca del Mezzogiorno through the national agency for
investment and economic development, Invitalia S.p.A. (Baa3 stable)
expects the bank to support the development of southern Italy. The
Italian government allocated EUR430 million to Banca del
Mezzogiorno for the acquisition of BPB, which is the most important
bank operating in the south of the country.
CONFIRMATION OF DEPOSIT RATINGS, CRRs, CR ASSESSMENT
The confirmation of the Baa3 deposit ratings, CRR and Baa3(cr) CR
Assessment, reflects the one-notch downgrade of the BCA, which is
offset by a one-notch uplift stemming from the assumption of
moderate government support. The loss given failure of deposits
remains unchanged thanks to the increase in junior deposits coming
from BPB. As a result, deposit ratings, CRR and CR Assessment
benefit from a three-notch uplift from the Adjusted BCA of b1.
OUTLOOK RATIONALE
The stable outlook on the long-term deposits, issuer and senior
unsecured debt ratings of Banca del Mezzogiorno reflects Moody's
view that the bank's credit profile will remain broadly unchanged
over the next 12 to 18 months. In particular, the rating agency
considers that the bank's solvency will largely absorb the
restructuring costs of BPB and the deterioration of asset quality
of the combined entity. Moody's also expects that the liquidity
buffers will remain high.
The outlook also factors in the expected stability of the liability
structure of the bank and hence of the loss given failure of all
instruments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Banca del Mezzogiorno's deposit and long-term issuer as well senior
unsecured ratings could be upgraded following an improvement in
asset quality or profitability driving a better solvency.
The issuer and senior unsecured ratings could also be upgraded if
the bank were to issue more bail-in-able debt.
Conversely, Banca del Mezzogiorno's deposit and long-term issuer as
well unsecured debt ratings could be downgraded if the
restructuring of BPB and growth strategy were to result in a
weakening of the creditworthiness of the combined entity, prompted
in particular by a deterioration of its asset quality or
capitalization, or both.
Banca del Mezzogiorno's long-term issuer and senior unsecured debt
ratings could also be downgraded in case the buffer of bail-in-able
debt were to be further reduced.
LIST OF AFFECTED RATINGS
Issuer: Banca del Mezzogiorno - MCC S.p.A.
Confirmations:
Short-term Counterparty Risk Ratings, confirmed at P-3
Long-term Bank Deposits, confirmed at Baa3, outlook changed to
Stable from Ratings under Review
Short-term Bank Deposits, confirmed at P-3
Long-term Counterparty Risk Assessment, confirmed at Baa3(cr)
Short-term Counterparty Risk Assessment, confirmed at P-3(cr)
Downgrades:
Baseline Credit Assessment, downgraded to b1 from ba3
Adjusted Baseline Credit Assessment, downgraded to b1 from ba3
Long-term Issuer Ratings, downgraded to Ba3 from Ba1, outlook
changed to Stable from Ratings under Review
Senior Unsecured Regular Bond/Debenture, downgraded to Ba3 from
Ba1, outlook changed to Stable from Ratings under Review
Outlook Action:
Outlook changed to Stable from Ratings under Review
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks
Methodology published in July 2021.
===================
L U X E M B O U R G
===================
CORESTATE CAPITAL: S&P Places 'BB-' ICR on CreditWatch Negative
---------------------------------------------------------------
S&P Global Ratings placed its 'BB-' long-term issuer credit rating
and 'BB-' issue-level ratings on Corestate Capital Holding S.A.
(Corestate) and its debt on CreditWatch with negative
implications.
The CreditWatch placement reflects the potential for a downgrade by
one or more notches over the next one-to-three months, depending on
how the company decides to address its upcoming debt maturities.
Approaching 2022 and 2023 debt maturities put significant pressure
on Corestate's liquidity. S&P said, "We note there is a EUR300
million debt maturity in April 2023, less than six months after the
EUR200 million notes expire in November 2022. The concentration of
maturities later in 2022 and 2023 will become a pronounced issue
without meaningful asset sales and sufficient cash flow. We have
yet to see net debt on a declining trajectory since the
pandemic-induced recession started, since cash is being constantly
reinvested. With only EUR47 million of unrestricted cash available
as of third-quarter 2021, if we do not see signs of material
liquidity accumulation by the end of the fourth quarter, this would
highlight possible liquidity pressure over our 12-month time
horizon."
Corestate is subject to a debt incurrence limit that may create
some pressure but there are no debt maintenance covenants. This
means the debt-to-EBITDA threshold of 3.5x is only relevant for the
issuance of new debt, which may play a role during a refinancing
process in the near future. In S&P's base-case forecast, asset
sales are reflected in its adjusted leverage ratio of 5x as of
year-end 2021, dropping toward 3x only in 2022. Leverage will
become increasingly important closer to the EUR200 million maturity
in late 2022.
Corestate's revenue remains partially concentrated on large,
one-off, transactions. S&P said, "We see an extension of the
business pipeline with debt asset management (Corestate Bank) as
positive overall. However, it is still to be proven successful and
sustainable over time. We note that from the reported EUR170
million of revenue in the first nine months of 2021, about a half
of the EUR31 million in structuring and underwriting fees were from
one large real estate financing in Berlin, Germany. Overall, asset
management fees comprised just below 60% (or even only 40%, if we
exclude performance-related coupon participation fees from
mezzanine funds) of Corestate's revenue in the first nine months of
2021, indicating further meaningful dependence on volatile earnings
sources."
CreditWatch
S&P said, "We expect to resolve the CreditWatch placement over the
next one-to-three months. We note that the company has continuously
delayed the accumulation of liquidity buffers or postponed assets
sales, despite its large concentration (totaling about EUR500
million) of senior debt maturities in November 2022 and April 2023.
Failing to address these soon may put downward pressure on our
'BB-' rating and we could lower it by one notch or more over the
next 90 days. In our view, expected cash inflows from daily
operations will be insufficient to repay the full amount of
maturing debt. We will assess the rating on Corestate based on its
performance in fourth-quarter 2021 and our expectations for the
company over the next 12 months."
Company Description
Corestate is a niche real estate investment manager, with EUR27.1
billion in assets under management as of Sept. 30, 2021. The
company provides asset, fund, and property management services
along the whole real estate value chain to a mix of institutional,
semi-institutional, and retail clients. It currently invests across
all major real estate asset classes, including residential and
student housing buildings, offices, and retail spaces. Corestate
mainly operates in German-speaking countries, but also
internationally.
LSF11 SKYSCRAPER: Moody's Affirms 'B2' CFR Amid Sika Transaction
----------------------------------------------------------------
Moody's Investors Service affirmed the B2 corporate family rating
and the B2-PD probability of default rating of LSF11 Skyscraper
HoldCo S.a.r.l. (Skyscraper, MBCC Group) as well as the B2 rating
of the senior secured term loan B (B3 and B4) and the EUR150
million senior secured revolving credit facility (RCF). The outlook
on the ratings remains stable. This action follows the announcement
that Sika AG will acquire all shares of Skyscraper.
In case of a successful closing of the transaction and repayment of
Skyscraper's outstanding debt, Moody's expects to withdraw
Skyscraper's ratings.
RATINGS RATIONALE
Moody's has affirmed ratings as the credit quality of Skyscraper
will not be immediately affected by the proposed acquisition of
Sika AG and because Skyscraper's credit metrics continue to be
aligned with Moody's expectations for the B2 rating.
Sika AG on November 11, 2021 announced that it had signed a
definitive agreement to acquire MBCC Group from Lone Star Funds for
a consideration of CHF5.5 billion (EUR5.2 billion). Until the
transaction closes, expected to be in the second half of 2022,
Skyscraper will operate independently of Sika AG. Moody's expects
the transaction to trigger the change of control clause in
Skyscraper's debt documentation that will likely require repayment
of its outstanding term loans and its RCF. Upon repayment of all
rated debt, Moody's expects to withdraw all Skyscrapers ratings.
In affirming ratings, Moody's also considered that Skyscraper's
credit metrics for the last twelve months (LTM) ending June 2021
position the rating strongly and are in line with Moody's
expectations for the B2 CFR. Revenues, up 21% for the group in the
second quarter of 2021, increased in all regions and recovered
strongly year-on-year, following a mixed first quarter due to then
covid restrictions in some regions. EBITDA before special items in
Q2 grew by around 43% to EUR112.8 million, the LTM EBITDA margin
reached 14.2% (13.9% in 2020), Moody's-adjusted debt/EBITDA was
5.0x (2020: 5.3x) and FCF/debt was 12.5% (2020: 11.3%). Performance
appears strong, but Skyscraper will not produce its first audited
annual financial statements until early 2022 for fiscal year 2021.
This as yet limited track record of evidence for the company's
internal controls as a standalone business following the separation
from BASF remains a negative governance consideration.
RATIONALE FOR STABLE OUTLOOK
The outlook is stable and reflects Moody's expectation that
Skyscraper strengthens its EBITDA margins as it takes out its high
legacy costs. The stable outlook assumes that Skyscraper continues
to offset higher raw material prices by selling price increases.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade ratings if (1) debt/EBITDA below 5.0x on a
sustained basis; (2) the EBITDA margin increased sustainably to
above 15%; and (3) FCF/debt consistently in the high single digits
(%). Conversely, ratings could be downgraded if (1) debt/EBITDA
were to approach 6.0x; (2) EBITDA margins were to fall towards or
below 10%; and (3) the company's liquidity profile deteriorated
evidenced by either negative free cash flows or extensive use of
its RCF. All metrics reference is Moody's-adjusted.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemical
Industry published in March 2019.
COMPANY PROFILE
LSF11 Skyscraper HoldCo S.a.r.l., based in Luxembourg and with
operating headquarters in Mannheim/Germany, is a producer of
chemical products for the construction sector. Skyscraper has two
segments, Admixture Systems (AS) and Construction Systems (CS),
representing 46% and 54% respectively of 2020 group sales of around
EUR2.5 billion. The company is controlled by funds managed by Lone
Star Global Acquisitions, Ltd.
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N E T H E R L A N D S
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TELEFONICA EUROPE: S&P Assigns 'BB' Rating to Hybrid Securities
---------------------------------------------------------------
S&P Global Ratings assigned its 'BB' long-term issue rating to the
proposed hybrid securities of up to EUR1.0 billion to be issued by
Telefonica Europe B.V. (BBB-/Stable/--), the Dutch finance
subsidiary of Spain-based telecommunications group Telefonica S.A.
(BBB-/Stable/A-3), which will guarantee the proposed securities.
Telefonica plans to use the securities' proceeds to refinance an
equivalent amount (or slightly more) of hybrids with first call
dates in March 2023, September 2023, and March 2024. S&P said, "The
company plans to repurchase these instruments by way of a tender
offer and we understand that Telefonica does not intend to
permanently increase its stock of hybrids. After completion of the
replacement and liability management transaction, Telefonica
expects the size of the hybrid portfolio to be similar to
previously, or marginally lower (we understand that the decline in
hybrid stock would in any case not exceed 10%) should the amount
issued fall somewhat short of the tendered hybrid. We will
therefore assess as having minimal equity content the share of
existing hybrids that will be called or repurchased."
S&P said, "We calculate outstanding hybrids to S&P Global
Ratings-adjusted capitalization at 13%-15% for 2021-2023, including
the proposed issuance and replacement. This is slightly below the
15% limit on hybrid capitalization that caps the amount of hybrids
that may receive equity content under our criteria.
"We classify the proposed hybrid as having intermediate equity
content until the first reset date (May 24, 2028) because it meets
our criteria in terms of subordination, permanence, and optional
deferability during this period. Consequently, when we calculate
Telefonica S.A.'s adjusted credit ratios, we will treat 50% of the
principal outstanding under the proposed hybrids as equity rather
than debt, and 50% of the related payments on these securities as
equivalent to a common dividend."
The two-notch difference between S&P's 'BB' issue rating on the
proposed hybrid securities and its 'BBB-' issuer credit rating
(ICR) on Telefonica S.A. reflects the following downward
adjustments from the ICR:
-- One notch for the proposed securities' subordination, because
our long-term ICR on Telefonica S.A. is investment grade; and
-- An additional notch for payment flexibility due to the optional
deferability of interest.
The notching of the proposed securities points to S&P's view that
there is a relatively low likelihood that Telefonica Europe will
defer interest payments. Should S&P's view change, it may
significantly increase the number of downward notches that it
applies to the issue rating. S&P may lower the issue rating before
we lower the ICR.
KEY FACTORS IN S&P's ASSESSMENT OF THE SECURITIES' PERMANENCE
Although the proposed securities are perpetual, Telefonica Europe
can redeem them on any date between the first call date (Feb. 24,
2028) and the first reset date (May 24, 2028), and on every annual
coupon date thereafter.
In addition, Telefonica has the ability to call the instrument any
time at a premium through a make-whole redemption option.
Telefonica stated it has no intention to redeem the instrument
prior to the redemption window of the first reset date, and S&P
does not consider that this type of make-whole clause creates an
expectation that the issue will be redeemed before then.
Accordingly, S&P does not view it as a call feature in its hybrid
analysis, even if it is referred to as a make-whole option clause
in the hybrid instrument's documentation.
More generally, S&P understands the group intends to replace the
proposed instruments, although it is not obliged to do so. In its
view, this statement of intent and the group's track record
mitigates the likelihood that it will repurchase the securities
without replacement.
The coupon to be paid on the proposed securities equals the sum of
the applicable swap rate plus a margin. The margin to be paid on
the proposed securities will increase by 25 basis points (bps) not
earlier than 10 years from issuance, and by a further 75 bps 20
years after the first reset date. S&P views the cumulative 100 bps
as a moderate step-up, providing Telefonica Europe with an
incentive to redeem the instruments after at least 26.5 years.
Consequently, S&P will no longer recognize the proposed securities
as having intermediate equity content after the first reset date.
This is because the remaining period until its economic maturity
would, by then, be less than 20 years.
KEY FACTORS IN S&P's ASSESSMENT OF THE SECURITIES' SUBORDINATION
The proposed securities will be deeply subordinated obligations of
Telefonica Europe, and will have the same seniority as the hybrids
issued in 2013, 2014, 2016, 2017, 2018, 2019, 2020, and 2021. As
such, they will be subordinated to senior debt instruments, and are
only senior to common and preferred shares. We understand that the
group does not intend to issue any such preferred shares.
KEY FACTORS IN S&P's ASSESSMENT OF THE SECURITIES' DEFERABILITY
In S&P's view, Telefonica Europe's option to defer payment of
interest on the proposed securities is discretionary and it may
therefore choose not to pay accrued interest on an interest payment
date. However, if an equity dividend or interest on equal-ranking
securities is paid, any outstanding deferred interest payment would
have to be settled in cash.
That said, this condition remains acceptable under S&P's rating
methodology because once the issuer has settled the deferred
amount, it can choose to defer payment on the next interest payment
date.
The issuer retains the option to defer coupons throughout the
securities' life. The deferred interest on the proposed securities
is cash cumulative and compounding.
===========
N O R W A Y
===========
AUTOMATE INTERMEDIATE: S&P Upgrades ICR to B+, Outlook Positive
---------------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit rating on
Norway based automated warehouse technology provider Automate
Intermediate Holdings S.a.r.l and its issue rating on AutoStore's
EUR440 million term loan B (TLB) to 'B+' from 'B'. S&P also
assigned its 'B+' issuer credit rating to AutoStore Holdings Ltd.,
the recently listed entity, which from now will report the group's
consolidated accounts.
The positive outlook reflects the possibility for an upgrade over
the next 12-18 months if AutoStore will achieve and maintain an S&P
Global Ratings-adjusted EBITDA sustainably above 30% and FOCF well
exceeding EUR50 million.
S&P said, "The ratings reflect our view of structurally lower
leverage and a new leverage target. We expect AutoStore will retain
an S&P Global Ratings-adjusted leverage of 3.0x-3.5x in 2022, down
materially from 10.2x in 2020. The steep deleverage is mainly
driven by the company's decision to dedicate $236.3 million of the
IPO proceeds to repay $52.8 million of its TLB and $183.6 million
to its EUR165 million second-lien facility (while the remaining
will be dedicated to $39.0 million transaction costs and $33.0
million additional cash for the company). Also, AutoStore has a new
medium-term financial policy of retaining reported net debt to
management's adjusted EBITDA below 2.0x, which we see as credit
positive. We now expect the company's S&P Global Ratings-adjusted
debt will reach 3.0x-3.5x in 2022, with the potential to further
decrease over 2023."
Supportive market conditions will result in a material increase for
sales and EBITDA. According to management, the group will achieve
sales of about $300 million in 2021, increasing to above $500
million in 2022 thanks to strong demand and healthy order intake.
AutoStore declared that the order intake for first-half 2021
reached $282.5 million, up from $101.7 million for the same period
a year earlier. The company has a medium-term sales growth target
of 40% per year supported by a steep increase in the e-commerce.
Based on its disclosure, about 14% of global consumer spending is
represented by the online channel and the company expects this will
surge to 25% by 2025. S&P said, "As a result, under our revised
base-case scenario, we now expect AutoStore's top line to increase
by about 50% on average in 2021-2022 to at least EUR350 million in
2022, from EUR159.6 million in 2019. While 2021 EBITDA will suffer
from one-off costs of $61.9 million and listing costs $39 million
under our revised base-case scenario, we expect an S&P Global
Ratings-adjusted EBTIDA margin of 30%-35% in 2022-2023, translating
into FOCF ranging from EUR45 million-EUR55 million in 2022."
AutoStore's growth strategy carries execution risks in addition to
high one-off costs. To satisfy a materially increasing market
demand and its appetite to further penetrate the Asia-Pacific
market, the company would need to rapidly scale up its organization
and market reach. This carries execution risks in our view, that
could ultimately have an effect on both sales and EBITDA. The
company expects to maintain its run rate EBITDA margin of about
50%, in line with historical levels. At the same time, in
first-half 2021, the company sustained one-off costs of $61.9
million (up from $8.8 million in first-half 2020), which we
consider as part of S&P Global Ratings-adjusted EBITDA. As a
result, AutoStore had negative EBIT of $16.3 million in first-half
2021, compared with $6.6 million for the same period a year
earlier. Under S&P's revised base-case scenario, it estimates
one-off costs of about EUR50 million per year in 2022-2023,
reflecting high consultancy and advisory fees and litigation costs
that the company could sustain.
AutoStore is a niche player specialized in light automated storage
and retrieval systems (AS/RS), particularly focusing on cubic
storage. Ongoing lawsuits with Ocado represent a risk. S&P said,
"We understand that in 2020 and 2021, the company initiated legal
action in U.S. and U.K. for patent infringement against Ocado,
while Ocado filed against AutoStore several claims for patent
infringements and violation of competition law. Regardless of the
outcome, which we regard as uncertain, we continue to expect that
legal and advisory expenses will weigh on our adjusted EBITDA and
ultimately FOCF over 2022-2023. In addition, AutoStore is a small
technological-engineering company that lays its foundation on few
core technologies, sustained by 295 granted patents and 559 pending
applications as of July 1, 2021. To sustain high EBITDA and FOCF
conversion, the group needs to retain its technological hedge and
continue to invest in R&D, which represents about 7% of sales. The
group has a no. 1 market position in cubic storage systems thanks
to its 667 installations, including contracted, but not yet
shipped, installations. The total addressable market of AS/RS is an
estimated $5 billion, where cubic storage represents about $500
million. We regard the company's limited market reach and offering
as relatively weak compared with those of bigger and more
diversified capital goods players."
AutoStore won't shy away from acquisitions, and its dividend policy
is unclear. S&P said, "We assume that the group could consider
strategic acquisitions, which we would consider bolt-on, especially
to increase its market penetration in Asia-Pacific. Currently, 60%
of AutoStore's sales are in Europe. The bulk of the remainder stems
from operations in North America (24%) and Asia (14%). Also, while
the company hasn't enacted a defined divided policy, we have
assumed under our base-case scenario, that some of its FOCF will be
dedicated to acquisitions or dividends, from 2022 onward."
Softbank Vision Fund is now the anchor shareholder.As a result of
the IPO that resulted in about 28.6% free float, SoftBank Vision
Fund now has a 38.3% stake, followed by Thomas Lee Partners (THL)
with 33.1% and EQT with 3.6%. S&P said, "We believe that SoftBank's
investment mandate slightly departs from the typical investment
strategies of private equity firms. As a result, we do not consider
AutoStore as controlled by a financial sponsor, although of its
nine board representatives, three have been elected by SoftBank and
three by THL."
The positive outlook reflects the potential for a higher rating
over the next 12-18 months if AutoStore executes its growth
strategy and maintains an S&P Global Ratings-adjusted EBITDA margin
above 30% and FOCF well exceeding EUR50 million per year.
S&P could revise the outlook to stable if AutoStore's S&P Global
Ratings-adjusted gross debt to EBITDA is higher than 4.0x. This
could occur due to weaker-than-anticipated market conditions were
to affect its top line and underlying EBITDA. An outlook revision
to stable could also follow if the company's legal disputes against
Ocado were to affect its EBITDA or debt metrics; or if AutoStore
were to embark in material debt-funded acquisitions leading to its
debt to EBITDA figure departing from the company's financial
policy.
B2HOLDING ASA: S&P Alters Outlook to Positive, Affirms 'B+' ICR
---------------------------------------------------------------
S&P Global Ratings revised its outlook on B2Holding ASA (B2) to
positive from stable and affirmed its 'B+' long-term issuer credit
rating.
The positive outlook reflects the valuation of B2's secured
nonperforming loans (NPLs) and real estate owned (REO), supported
by the contemplated partnership, and an improving liquidity
profile.
Rating Action Rationale
The contemplated carve-out of the secured book could be a major
strategic overhaul and stabilize financial performance. After
large-scale purchases of secured assets in recent years culminated
in material revaluation losses over 2019-2020, B2's secured asset
franchise weighed on the rating because we saw a risk of further
material revaluation. The revaluation risk also related to the
broader secured collection strategy that led to an increasing
volume of REO-–approximately Norwegian krone (NOK) 1.2 billion,
equivalent to 11% of the book value of purchased loan portfolios as
of Q3 2021. The contemplated carve-out of its secured back book,
along with potential co-investment structures for new investments
in secured assets, implies a strategic re-focus on core unsecured
markets, where B2 has a strong market position in Northern and
Eastern Europe. In our view, this could lead to more stable
financial performance. Similarly, co-investments could result in
more manageable access to secured portfolios, too large for B2 to
manage on its own. The share of more stable servicing revenue could
also increase if B2 continues to service the co-investments. The
final effect on the company's creditworthiness will depend on the
agreed terms, future financial policy, and strategic focus over
2022. S&P notes, however, that this could also reduce B2's
geographic and asset class diversification and reduce its
flexibility to deploy capital on its own book.
B2's financial performance in Q3 2021 was marked by solid
collection performance and cautious portfolio purchases. S&P said,
"With Q3 2021 cash revenue and EBITDA on a similar level to Q3
2020, we expect B2's 2021 financial metrics to post slight
improvements over 2020. However, a stabilization of revenue in 2022
would require increased investment activity. As such, we expect
portfolio purchases of about NOK1 billion over 2021 and a material
uptick in 2022, when we expect market activity to recover.
Purchases in 2022 should also reverse the trend of decreasing
expected remaining collections. B2's cautious investment activity
reduced its debt to EBITDA to 2.4x compared to 3.0x at end-2020. We
expect our S&P Global Ratings-adjusted gross leverage ratio (debt
to cash-adjusted EBITDA) will remain at about 3x over 2022, at the
better end of our peer group. Although total REO increased again in
Q3 2021 as a result of repossessions, we also expect sales activity
to pick up in the coming quarters."
The company's comfortable liquidity profile will support increasing
portfolio purchases over the coming quarters. B2 used its bridge
facility and RCF for the repayment of its October 2021 bond
maturity, although we would expect a new bond issuance to repay the
bridge facility and increase headroom under the RCF. S&P also notes
the continuously improved covenant headroom over 2021, which
increases financial flexibility for future portfolio purchases. The
increased equity ratio of 32.6% as of Q3 2021, sufficiently above
the 25% equity ratio covenant, supports the announced dividend and
share repurchase program totaling about NOK150 million.
The positive outlook reflects improved collection performance on
the company's secured NPLs and REO, combined with an improving
liquidity profile. The proposed deconsolidated co-investment
partnership on B2's secured back book should remove uncertainties
regarding the secured collection performance and potentially
facilitate future co-investments into secured assets. These factors
could lead to a higher rating over the next 12 months.
S&P said, "We could consider an upgrade if the economic recovery
continues to support collateral values in B2's secured book, while
B2 makes progress in disposing its REO at prices above book value.
Confidence on the valuation of the secured assets and REO could
also come from the considered co-investment structure, if it
resulted in B2 showing a more stable collection performance on its
own book going forward, while not harming its flexibility in
deploying capital.
"Although less likely, we could also consider an upgrade if the
future focus on unsecured collections and servicing leads to a
better leverage profile, with an S&P Global Ratings-adjusted gross
leverage improving sustainably to about 2.5x.
"We would revise the outlook back to stable if the partnership does
not materialize or if the new structure would harm B2's competitive
position or financial profile to an extent that would not be
commensurate with a higher rating, considering peer relativities."
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R U S S I A
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GTLK JSC: Fitch Affirms 'BB+' LT IDR, Alters Outlook to Positive
----------------------------------------------------------------
Fitch Ratings has revised the Outlook on JSC GTLK's Long-Term
Issuer Default Rating (LT IDR) to Positive from Stable and affirmed
the IDR at 'BB+'. Fitch has also affirmed JSC Rosagroleasing's
(RAL) LT IDR at 'BB+' with a Stable Outlook.
KEY RATING DRIVERS
The companies' ratings are driven by the moderate probability of
support from the Russian sovereign (BBB/Stable). In assessing
support, Fitch views positively: (i) both companies' 100% state
ownership, represented by the Ministry of Transport (GTLK) and the
Ministry of Agriculture (RAL); (ii) the record of past equity
injections; (iii) the low cost of potential support given the
companies' relatively small size; (iv) the companies' policy roles
(albeit somewhat limited) in the execution of state programmes to
support the transportation (GTLK) and agricultural (RAL) sectors;
and (v) deep integration of the management and the government.
The Positive Outlook on GTLK's ratings reflect Fitch's view of the
company's strengthening policy role in supporting the Russian
transportation sector, evidenced by its growing participation in
state development programmes and closer proximity to Russia's
government after the recent management and board changes. Fitch
believes GTLK's leading position in the Russian leasing sector, as
well as steady government ordinary capital support, underline the
growing importance of GTLK and its policy role to the state.
GTLK
GTLK is the largest Russian leasing company by outstanding lease
portfolio, with leading franchises in the rolling stock, aviation
and maritime leasing sectors in Russia. It has been under the
direct oversight of the Ministry of Transport since 2009. GTLK's
participation in state programmes for the development of the
Russian transportation industry is wide and mostly represented by
the support of Russia-produced civil aircraft, helicopters and
vessels.
The acquisition of JSC VEB-Leasing's (VEBL, BBB/Stable) assets by
GTLK outlined in the roadmap for Russian development institutions'
reform has been deferred, with VEBL's aviation and rolling stock
asset transfer to be determined, given VEBL is to be liquidated.
Fitch believes liquidation of VEBL will support GTLK's increasing
importance to the state, with GTLK becoming the only policy leasing
institution focused on transport in Russia.
This view is supported by the substantial recapitalisation/funding
plans of GTLK and government's plans to support transportation
industry via GTLK. According to public statements made by Russia's
Ministry of Industry and Trade officials (some of which are part of
GTLK's board), GTLK could access sizable funding from the National
Wealth Fund (to be approved in 2H22) between 2022 and 2030, mainly
as part of large development projects in Russia's aviation and
maritime sectors. If this is agreed, Fitch believes it would be a
further indication of GTLK's policy role underpins the Positive
Outlook.
In Fitch's view, GTLK's intrinsic creditworthiness will remain
pressured in the medium to long term, given the slow recovery of
international travel and volatility in the Russian wagon sector.
GTLK's pressured asset quality, single-name concentrations, high
exposure to residual value risk, as well as low profitability
constrain its standalone credibility. However, Fitch believes
GTLK's adequate funding profile, good capital market access and
reasonable liquidity position underpin the company's standalone
profile.
GTLK's lease book is concentrated, which is typical for Russian
state-owned leasing companies. Fitch notes high largest lessee
exposures for financial and operational leases. The concentration
on Russia's largest airline was high, at around 13% of total lease
portfolio at end-1H21. The other largest leasing exposures were
mostly represented by contracts with Russian rail transportation
companies and secured with rolling stock.
Impaired receivables (Stage 3) increased to 12.3% of total gross
receivables (net investment in lease (NIL), loans and other
receivables) at end-1H21 (10.7% at end-2020, 14% at end-1H20), with
52% covered by reserves. Fitch expects GTLK's asset quality will
remain under pressure given prolonged challenges in the global
aviation market and volatility of the local rolling stock market.
GTLK's tangible leverage had decreased to 7.3x at end-1H21 (7.7x at
end-2020, 7.8x at end-1H20) on slower balance sheet growth.
However, Fitch believes the leverage profile could be pressured by
the company's substantial asset growth plans, reflected by its
participation in transportation sector development programmes in
the medium to long term. The expected budgeted capital support will
support GTLK's capital and leverage positions. In Fitch's view,
GTLK's internal capital generation ability will remain pressured
given the current economic environment and company's policy role.
GTLK's equity-to-asset ratio was 12.1% at end-1H21 (11.6% at
end-2020), providing moderate headroom over the Eurobond-covenanted
level of 10%.
In Fitch's view, GTLK's funding profile is supported by the
company's proven access to capital markets in a stressed economic
environment, with the company placing three Eurobond issued
totalling USD1.7 billion and several local bond issues with
maturities above six years in 2020-2021. This allowed the company
to extend the average tenor of its borrowing and lower near-term
refinancing needs. GTLK retained a solid liquidity buffer. In
Fitch's view, GTLK's funding and liquidity profile is also
underpinned by the company's proximity to the Russian state and
local state banks.
GTLK's rouble-denominated senior unsecured debt ratings are aligned
with the company's LT Local-Currency IDR. The US dollar-denominated
notes issued by GTLK's Ireland-based subsidiary GTLK Europe DAC and
its financing SPV, GTLK Europe Capital DAC, are rated in line with
GTLK's LT Foreign-Currency IDR as they benefit from an
unconditional and irrevocable guarantee from GTLK.
RAL
RAL's agricultural leasing franchise with a focus on subsidised
leases under various state programmes is the largest in Russia. The
subsidised leases are funded via capital injections by the state
into RAL. RAL has also recently tapped the local bond market. Gross
lease receivables increased by around 5% in 1H21, driven by sizable
new origination. Portfolio concentration decreased slightly, with
the 10 largest lessees accounting for 20% of NIL before provisions
at end-1H21 (1H20: 22%).
RAL's asset quality stability was helped by solid performance of
agricultural sector to date. The ratio of problem receivables
(including net investment in lease, debtors, advances and other)
decreased to 23% at end-1H21 (41% at end-2019) driven by sizable
write-offs and solid portfolio growth. Problem receivables were
comfortably covered by reserves at 106% at end-1H21. Fitch believes
RAL's asset quality could be pressured by the still weak
macroeconomic environment, as well as supply chain disruptions and
geopolitical risks. Agricultural leasing bears elevated
operational, market and residual value risks.
RAL remains largely financed by equity (equity-to-asset ratio of
73% at end-1H21), and therefore, in Fitch's view, it is less
sensitive to asset quality deterioration. RAL received RUB18
billion of capital contributions in 2019-2021 and anticipates
further capital injections and subsidies in the medium to long term
to support its growth plans.
RAL placed three five-year unsecured local currency bonds totalling
RUB24 billion (30% of assets at end-1H21) in 2020-2021. The issues
were acquired mostly by local companies and banks. Management
expects further bond issues in 2022-2024. Additionally, RAL has
access to bank credit lines totalling RUB21 billion.
RATING SENSITIVITIES
GTLK's and RAL's IDRs are sensitive to changes in the Russian
sovereign ratings and Outlook.
GTLK
Factors that could, individually or collectively, lead to positive
rating action/upgrade or a narrowing of notching with the
sovereign's rating:
-- Smooth and secured access to government's funding sources
including the National Wealth Fund.
-- Increased sovereign propensity to support the company, as
might be evidenced by (i) increasing ordinary government
support and importance of GTLK as a tool of government's
investment activity in the transport sector; (ii) timely
provision of extraordinary capital sufficient to restore the
company's solvency (if required) and to secure its longer-term
growth momentum.
Factors that could, individually or collectively, lead to negative
rating action/downgrade or widening of notching with the
sovereign:
-- Diminishing of the company's policy role. For example, this
could be reflected in material downscaling of activity, the
exclusion of GTLK from significant investment programmes,
shift of the government's investment activity in the
transportation sector to other state leasing companies or to
alternative tools.
-- A weakening of the financial standing not adequately offset by
incoming support, particularly if it results in (before any
accounting forbearance): erosion of headroom to 10%
equity/assets (Eurobond funding covenant) capital adequacy,
continued decline of lease loss allowance coverage or further
asset-quality deterioration.
-- An indication that extraordinary support might not be provided
in a timely manner, which would trigger a multi-notch
downgrade of the company's IDRs.
RAL
Factor that could, individually or collectively, lead to positive
rating action/upgrade or a narrowing of notching with the
sovereign's rating:
-- An upgrade is currently unlikely, but could occur following a
combination of increasing scale and prominence in the
agricultural sector, a further strengthening of the company's
policy role with respect to implementation of state programmes
to support the Russian agricultural sector, underpinned by
sufficient capital injections.
Factors that could, individually or collectively, lead to negative
rating action/downgrade or widening of notching with the
sovereign:
-- RAL's diminishing policy role or its gradual change in
combination with weaker governance could result in negative
rating action.
-- An indication that extraordinary support might not be provided
in a timely manner would trigger a multi-notch downgrade of
the company's IDRs.
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
GTLK and RAL's ratings are driven by sovereign support from Russia
and linked to Russia's IDRs. The ratings of guaranteed debt issued
by GTLK Europe and GTLK Europe Capital are equalised with GTLK's
Long-Term Foreign-Currency IDR.
ESG CONSIDERATIONS
GTLK has an ESG Relevance Score of '3' for GHG Emissions & Air
Quality due to significant exposure to CO2-emitting leasing
assets.
RAL has an ESG Relevance Score of '3' for Exposure to Environmental
Impacts due to its sizable exposure to the agricultural sector.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
=========
S P A I N
=========
CODERE SA: Fitch Affirms Then Withdraws 'C' IDR
-----------------------------------------------
Fitch Ratings has affirmed Codere S.A.'s Long-Term Issuer Default
Rating (IDR) at 'C', and subsequently withdrawn the rating. Fitch
has also affirmed the instrument ratings of Codere Finance 2
(Luxembourg)'s super senior secured notes at 'CC'/RR3, and senior
secured notes at 'C'/RR4 and withdrawn the ratings.
The affirmation indicates the group is still implementing its
restructuring process, which is expected to be completed before end
of November 2021.
Fitch will not re-rate the group based on business prospects and
the new amended and extended capital structure.
Fitch previously downgraded Codere's IDR to 'C' from 'CC' on 1
April 2021 after it entered into a grace period to defer an
interest payment of the senior secured notes due by end-March 2021.
Subsequently Fitch had affirmed Codere's IDR at 'C' following the
announcement of the restructuring of its capital structure on 22
April 2021.
Fitch Ratings has chosen to withdraw all of Codere's ratings for
commercial reasons. Fitch will no longer provide ratings or
analytical coverage of Codere.
KEY RATING DRIVERS
Grace Periods Addressed: On 30 March 2021, Codere entered a grace
period provided in the indenture documentation to the super senior
notes to defer an interest payment due on 31 March 2021. Under
Fitch's Rating Definitions, these conditions are considered a 'near
default' situation and are commensurate with a 'C' IDR. The grace
period was entered into on 31 March for the super senior secured
notes and 30 April for the senior secured notes. Existing creditors
issued short-term "bridge" notes in April and May 2021, allowing
Codere to settle outstanding interest payments.
On 30 September 2021, the company entered into another 30-day grace
period for the interest payment on the super senior notes, which
was extended to accommodate certain delays in the completion of the
restructuring before 30 November 2021, the extended long-stop date
under the lock-up agreement. The interest payment on the super
senior notes that fell due on 30 September 2021, together with all
subsequent accrued interest, are expected to be paid in cash on
completion of the restructuring.
On 29 October 2021, Codere confirmed the cash and PIK interest
payments on the 2023 senior notes due by end-October 2021 would be
deferred upon completion of the restructuring process. These
interest payments are capitalised together with the interest
accrued up to the restructuring completion, and subsequently
converted into subordinated PIK notes.
Distressed Debt Exchange Restructuring: Codere's announcement of a
proposed restructuring, including a debt to equity swap on the 46%
of the senior secured notes, triggers the definition of a
distressed debt exchange transaction under Fitch's methodology. The
proposed restructuring includes EUR128.9 million of new additional
super senior secured debt, on top of the issuance of EUR103 million
2023 super senior secured bridge notes. In Fitch's view, this
should address the short-term liquidity needs Fitch anticipated in
Fitch's rating case, and alleviates the likelihood of a coupon
payment default post-restructuring.
Restructuring Failure Would Lead to Insolvency: Additional funding
of around EUR103 million bridge notes provided some liquidity
headroom. However, Fitch anticipated that at least an additional
EUR100 million funding would be required before end-2021 due to
slow global recovery and moderate vaccination pace, particularly in
Latam, as assumed in the updated rating case. Fitch believed a
restructuring of the current capital structure would be unavoidable
in the short term in light of a slower recovery towards
pre-pandemic levels.
Failure to successfully implement the proposed restructuring by
end-November would likely result in a payment default before
year-end, unless an alternative liquidity solution is arranged,
which in Fitch's view seems highly unlikely at this stage. This is
mitigated by the late stage of implementation of the restructuring
by way of a consent solicitation approved by around 97% of the
noteholders on 18 October 2021.
Additional funds from the completion of the sale of a minority
stake in Codere Online to DD3 are expected to be kept within the
online perimeter with up to USD30 million potentially injected into
the group for financing corporate purposes.
High Refinancing Risk: Refinancing risk will remain high
post-restructuring as Fitch does not expect full business recovery
until 2023. Intermittent lockdowns, social distancing measures and
point-of-sale closures in multiple operational jurisdictions will
continue to put pressure on upcycle trends. This may continue until
vaccination rollouts are more advanced in the LatAm region.
Codere has an ESG Relevance Score of '4' for Management Strategy,
due to its focus on land-based operations and lack of meaningful
online presence. This factor has a negative impact on the credit
profile, as already reflected in the rating, and is relevant to the
rating in conjunction with other factors.
DERIVATION SUMMARY
Codere's current financial profile allows for little rating
comparability with peers within the gaming industry.
Codere's business profile is currently positioned in the lower
range of Fitch's rated gaming portfolio, with lower diversification
into online business compared with Flutter (BBB-/Stable), Entain
Plc (BB/Positive) and Sazka Group a.s. (BB-/Stable), as well as a
weaker corporate governance score.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
The ratings have been withdrawn and Fitch will no longer revise its
long-term financial forecasts for the company supporting a new
post-restructuring IDR and its corresponding instrument ratings.
Fitch's Key Recovery Assumptions:
-- The recovery analysis assumes that Codere would remain a going
concern in the event of restructuring and that it would be
reorganised rather than liquidated. Fitch has assumed a 10%
administrative claim in the recovery analysis.
-- Fitch assumes a post-restructuring EBITDA of EUR180 million,
on which Fitch bases the enterprise value.
-- Fitch assumes a distressed multiple of 4.5x, reflecting the
group's comparative size, leading market positions and
geographical diversification, with large exposure to Latin
America.
-- Fitch applies a blended Recovery Rating cap to calculate the
final Recovery Rating in line with Fitch's methodology.
Although the company is headquartered in Spain, the group has
exposure to countries with lower Recovery Rating caps, like
Italy and most Latin American countries.
-- Fitch's waterfall analysis generates a ranked recovery for
super-senior creditors in the 'RR3' band, indicating a 'CC'
instrument rating assigned to the super senior debt. The
waterfall analysis output percentage on current metrics and
assumptions is 52% for the super senior notes, as Fitch's
recovery estimates are capped at 'RR3' after applying the
blended cap.
-- Under Fitch's recovery analysis the senior secured notes post
restructuring result in a 'RR4', using a mid-point of 41%
after applying the blended cap, indicating a debt instrument
rating of 'C', in line with the IDR. This reflects their
subordination to the super senior notes.
RATING SENSITIVITIES
Not applicable
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
Insufficient Liquidity, Unavoidable Restructuring: Additional
funding of EUR103 million together with the deferral of interest
payments on the super senior notes that fell on 30 September 2021,
and the capitalisation of the interest payment on the 2023 senior
notes due on 30 November 2021, provided liquidity headroom to allow
for the completion of the restructuring. As of end-September 2021,
the company reported EUR86 million of cash on balance sheet, which
is expected to be sufficient to allow for the completion of the
restructuring.
A restructuring of the current capital structure is unavoidable in
the short term in light of a slower recovery towards pre-pandemic
levels, triggering a distressed debt exchange under Fitch's
methodology. The additional EUR128.9 million of super senior notes
to be issued at completion of the restructuring will reduce
liquidity pressure in the short term, giving some headroom for
slower business recovery and cash flow generation. Additional
liquidity from proceeds from the completion of the sale of a
minority stake in Codere online scheduled in 4Q21 are expected to
be reinvested in the online business and potentially only USD30
million would be available for financing group's corporate
purposes.
ISSUER PROFILE
Spain-based gaming company Codere is a leading gaming operator in
Latin America (Mexico, Argentina, Colombia, Uruguay and Panama),
Spain and Italy.
ESG CONSIDERATIONS
Codere S.A. has an ESG Relevance Score of '4' for Management
Strategy due to its focus on land-based operations and lack of
meaningful online presence, which has a negative impact on the
credit profile, and is relevant to the rating[s] 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.
===========================
U N I T E D K I N G D O M
===========================
B&M EUROPEAN: Moody's Rates New GBP250MM Sr. Secured Notes 'Ba2'
----------------------------------------------------------------
Moody's Investors Service has assigned a Ba2 rating to B&M European
Value Retail S.A.'s (B&M or the company) new proposed GBP250
million 7-year backed senior secured notes. The company will
initially use the proceeds for general corporate purposes. Moody's
expects the transaction will ultimately increase B&M's leverage
from current levels but within the ranges expected for the current
rating.
The new proposed backed senior secured notes notes will rank pari
passu and will be issued by the ultimate listed parent company of
the group, B&M European Value Retail S.A., which is the same
issuing entity of all other outstanding notes. Security will
consist of share pledges of the guarantors, fixed and floating
charges over substantially all of the guarantors' and issuer's
property and assets in England and pledges over certain bank
accounts.
The company's current Ba2 corporate family rating (CFR), Ba2-PD
probability of default rating (PDR), Ba2 GBP400 million backed
senior secured notes rating and stable outlook are unaffected by
the planned issuance.
RATINGS RATIONALE
B&M's Ba2 CFR reflects the company's focus on fast-growing retail
niche markets, good scale, low-cost propositions and above-average
profitability compared with traditional retailers. B&M's business
model is based on a narrow selection of items across a broad range
of grocery and general merchandise product groups, direct sourcing
and a simple low-cost approach, resulting in selling prices
significantly and consistently below those offered by both
specialist and general retailers. The company's focus on selected
best-selling products through constant monitoring of prevailing
consumer trends, in-house product design capabilities and direct
sourcing process are key to its ability to offer products at
competitive or even disruptive prices.
The rating is constrained by the company's limited size compared
with its larger rated peers, a degree of execution risk related to
its ongoing expansion, also outside its domestic UK market, and the
limited scope for significant debt reduction as management
prioritises growth and shareholder returns. Additionally, the UK
retail industry continues to experience cost inflation and supply
constraints.
Revenue increased by +1.2% year-on-year to GBP2.3 billion in the
first half of fiscal 2022 ending March, with B&M UK fascia revenue
up +1.3%. Reported (company-adjusted) EBITDA amounted to GBP282.2
million on a pre-IFRS16 basis compared to GBP255.7 million in the
prior year on a comparable basis when reflecting the voluntary
charge relating to business rates subsequently made in the second
half of fiscal 2021.
Leverage, measured in terms of Moody's adjusted gross debt to
EBITDA, was around 2.4x in the 12 months to September 25, 2021,
unchanged from fiscal 2021 ended March 27, based on EBITDA of
GBP842.5 million. Pro-forma for the envisaged backed senior secured
bond issuance, leverage is around 2.7x. As at September 25, Moody's
adjusted gross debt of GBP2.05 billion, broadly flat from the end
of fiscal 2021. Debt levels have remained broadly unchanged in the
last two years despite shareholder returns of GBP697 million in
fiscal 2021, including ordinary and special dividends.
Retained cash flow to net debt stood at around 25% when excluding
the special dividends paid over the past 12 months from the ratio.
Stock availability ahead of the Christmas peak season remains good
despite the ongoing general supply chain disruptions, according to
management, having deliberately taken delivery of imported General
Merchandise earlier than normal. Although some uncertainties remain
regards ability of the company to retain all the new customers it
has attracted during the pandemic and all the additional spending
from its customers in general, B&M has an increasing track record
of sustained profitable growth.
Management increased the ordinary half year dividend by 16.3%, to
be paid in December, and continues to evaluate its current leverage
and cash position in line with the company's capital allocation
framework. Moody's currently anticipates leverage of around 3x in
the next 12-18 months, based on Moody's adjusted EBITDA between
GBP770-795 million and gross debt of GBP2.3 billion including the
envisaged backed senior secured notes. This level of leverage will
remain well below the 3.75x-4.5x range expected for the Ba2 rating,
leaving the rating strongly positioned at the current level.
LIQUIDITY
Moody's view B&M's liquidity as adequate, with GBP92 million cash
on balance sheet as at September 25, 2021, a GBP155 million
revolving credit facility, of which GBP20 million was drawn as at
September 25, 2021, and no significant near-term debt maturities.
The rating agency expects the company to generate limited free cash
flow given its ambitious plans to open new stores and continue to
make distributions to shareholders, constraining any improvement in
debt metrics. The envisaged notes issuance will strengthen the
company's liquidity.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Like all consumer facing businesses, the company is exposed to the
risk of reputational damage in the event that its actions harmed
customers or were perceived to harm them. Moodys' understands that
B&M is aware of the importance of quality control and ethical
standards in relation to the activity of its suppliers. B&M's
ability to provide competitive prices also relies on its low-cost
sourcing strategy that often sidesteps distributors to access
manufacturers directly. Around two-thirds of the general
merchandise sold in stores is directly sourced from the Far East,
mostly China. However, this also creates a degree of vulnerability
to any cost inflation in China or product quality and safety
concerns.
Financial policies are clear and balanced between the interests of
shareholders and credit investors. The company is on record with
the statement that it intends to maintain reported leverage below
2.25x (based on pre IFRS 16 figures). B&M's capital policy is to
allocate cash surpluses in the following order of priority: (1) the
roll-out of new stores with a strong payback profile; (2) ordinary
dividend cover to shareholders; (3) mergers & acquisition
opportunities; and (4) returns of surplus cash to shareholders. The
company has a dividend policy which targets a pay-out ratio of
between 30%-40% of net income on a normalised tax basis. Since
listing in 2014, the company has continued to develop its approach
to governance as it grows and matures but remains somewhat weak, in
Moody's opinion.
STRUCTURAL CONSIDERATIONS
The Ba2 rating on the backed senior secured notes, in line with the
CFR, reflects the pari passu capital structure and, hence, the
shared security and guarantee portfolio with the term loan A and
the revolving credit facility, although the latter have slightly
shorter maturities.
RATING OUTLOOK
The outlook on B&M's rating is stable and reflects Moody's
expectations that the company's profitability, cash flow generation
and leverage will remain around current levels over the next 12-18
months, with leverage around 3x.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Positive rating pressure is unlikely to develop over the next 12-18
months as scale, as measured in terms of revenues, and a still
developing governance framework will continue to constrain the
rating. Quantitatively, positive rating pressure could develop if
the company maintains good liquidity, with extended and long dated
debt maturities, leverage remains sustainably below 3.5x measured
in terms of Moody's adjusted gross debt to EBITDA and Retained Cash
Flow to Net Debt sustained in the mid teens, with financial
policies remain consistent with moderate leverage.
Conversely, negative rating pressure could develop if any of the
following occurs: (i) weakening liquidity; (ii) Debt/EBITDA rising
above 4.5x; (iii) a significant weakening in profitability; or (iv)
a more aggressive growth strategy or financial policy. All ratios
mentioned in the factors for an upgrade/downgrade are on a Moody's
adjusted basis.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Retail published
in November 2021.
LIST OF AFFECTED RATINGS
Assignments:
Issuer: B&M European Value Retail S.A.
BACKED Senior Secured Regular Bond/Debenture, Assigned Ba2
COMPANY PROFILE
B&M European Value Retail S.A. (B&M) is a fast growing European
value retailer and discounter competing in both the general
merchandise and grocery markets, through its store brands B&M and
Heron Foods in the UK, and B&M France (formerly Babou). The company
is headquartered in Liverpool and listed on the London Stock
Exchange. The Arora family is the largest shareholder, holding
around 11% of the share capital as well as voting rights.
B&M EUROPEAN: S&P Rates New GBP250MM Senior Secured Notes 'BB'
--------------------------------------------------------------
S&P Global Ratings assigned its 'BB' issue rating and '3' recovery
rating to B&M European Value Retail S.A.'s proposed GBP250 million
senior secured notes. All other ratings on B&M European Value
Retail S.A. (B&M; BB/Stable/--) are unchanged.
The group plans to issue the notes to support its organic growth
plans, extend its debt maturity profile, and for general corporate
purposes. In line with B&M's financial policy and as per the notes
documentation, the group may use the proceeds to pay a special
dividend, although no decision has been made regarding such
payment. The decision will likely depend on the group's performance
over the holiday period, and the payout would be limited to the
amount of the proceeds of the proposed notes.
B&M reported robust results for the first half of financial 2022
(FY; ending March 31, 2022) compared with pre-pandemic levels. S&P
said, "We anticipate a continuation of this trend, building on
B&M's ability to navigate the supply chain disruption and to
partially pass through input cost inflation over the medium term
while maintaining its financial policy consistent with our 'BB'
rating."
S&P said, "The proposed transaction does not affect our long-term
corporate credit rating on B&M. Our ratings continue to reflect the
group's resilience amid macroeconomic headwinds thanks to its
value-oriented offering and the non-discretionary nature of many of
its products.
"We expect that group revenues will contract moderately in FY2022
and grow by 5%-7% annually thereafter given the post-pandemic
normalization of demand. Cost savings achieved during FY2021 and
high sell-through rates of the higher-margin General Merchandise
products will support profitability and cash generation over the
next 18-24 months.
"We estimate that pro-forma for the transaction, S&P Global
Ratings-adjusted credit metrics will remain largely unaffected. B&M
will continue its store expansion and grow sales and profit, after
the rebalancing in FY2022, supporting robust free operating cash
flow generation consistently higher than the lease payments and
EBITDAR cash interest coverage of over 3.0x. At the same time, in
line with the group's track record and stated financial policy, a
large portion of excess cash will likely be returned to
shareholders, making acceleration of deleveraging compared with the
historical trend unlikely."
ISSUE RATINGS—RECOVERY ANALYSIS
Key analytical factors
-- B&M's existing GBP400 million 3.625% senior secured notes due
July 2025 are rated 'BB', in line with the long-term issuer credit
rating (ICR) on B&M. The notes rank pari passu with the group's
GBP155 million revolving credit facility (RCF) and the GBP300
million term loan.
-- The issue rating on the proposed GBP250 million senior secured
notes is in line with the existing rated senior secured notes and
the long-term ICR on B&M of 'BB'. The recovery rating on the notes
is '3', indicating S&P's expectation of meaningful recovery of
50%-70% (rounded estimate: 55%) in the event of a default.
-- The recovery rating is supported by the group's limited
prior-ranking liabilities but constrained by the significant amount
of total debt.
-- S&P said, "We view the security and guarantee package as
relatively weak. Neither Heron Foods nor B&M France guarantee or
provide direct security to the senior secured instruments. That
said, we do give credit in our calculation to the residual equity
claim that B&M's creditors would have over these groups in the
event of default."
-- S&P's hypothetical default scenario envisages a material
decline in B&M's market share, alongside unprofitable store
expansion and unfavorable changes in trade creditor terms, putting
pressure on cash flows.
-- S&P values B&M as a going concern, given its strong store
footprint, established relationships with overseas suppliers, and
solid market positions in several U.K. product categories.
Simulated default assumptions
-- Simulated year of default: 2026
-- EBITDA at emergence: GBP120 million (including -10% operating
adjustment to account for the sustainable shift in customer
preferences, as the retail industry evolves post-pandemic)
-- Implied enterprise value multiple: 5.5x (0.5x above the sector
average, given the resilient business model and strategy balancing
groceries and general merchandise)
-- Jurisdiction: U.K.
Simplified waterfall
-- Gross enterprise value at default: GBP659 million
-- Net enterprise value at default (after 5% administrative
costs): GBP626 million
-- Estimated value available to senior secured debt claims: GBP626
million
-- Estimated senior secured debt claims*: GBP1,107 million
-- Senior secured debt recovery rating: '3' (50%-70%; rounded
estimate: 55%)
All debt amounts include six months of prepetition interest.
*Includes GBP155 million RCF assumed 85% drawn at default.
BLUE O TWO: Enters Administration Due to Covid-19 Pandemic
----------------------------------------------------------
Dive reports that Blue O Two, one of the UK's best known and most
highly regarded liveaboard operators, has been put into
administration, leaving many customers uncertain about the future
of the holidays they have booked.
Blue O Two, best known for its Red Sea and Maldives liveaboards,
but which also ran a selection of itineraries around the world with
partner companies such as Master Liveaboards, announced on Nov. 15
that it has been put into administration, Dive relates.
The decision has been made due to the unrelenting financial
pressure placed on tour operators during the Covid 19 pandemic,
Dive states.
The Blue O Two brand, however, will continue to trade under the new
ownership of Scuba Tours Worldwide Limited, Dive notes.
According to Dive, in a statement on the Blue O Two website, owners
Jason Strickland and Nathan Tyler place the blame squarely on the
UK government's strict and constantly changing travel
restrictions.
BRITISH TELECOMMUNICATIONS: Moody's Rates New Hybrid Notes 'Ba1'
----------------------------------------------------------------
Moody's Investors Service has assigned a Ba1 backed long-term
rating to the proposed subordinated USD-denominated Capital
Securities due 2081 (the hybrid securities) to be issued by British
Telecommunications Plc (BT or the issuer, Baa2 negative), a
subsidiary of BT Group Plc. The outlook is negative.
RATINGS RATIONALE
The Ba1 rating on the hybrid securities is two notches lower than
British Telecommunications Plc's Baa2 senior unsecured and issuer
ratings. This reflects the deeply subordinated position of the
proposed hybrid securities in relation to the existing senior
unsecured obligations of the issuer. The proceeds from the
transaction will be used for general corporate purposes.
The proposed hybrid securities, which will be guaranteed by BT
Group Plc on a subordinated basis, are long-dated with a 60-year
maturity. The hybrid securities do not have any cross-default
provisions. The issuer can opt to defer settlement of interest on
the hybrid securities on a cumulative basis. The hybrid securities
are deeply subordinated obligations ranking senior only to common
shares, pari passu with preference shares, and junior to all senior
and subordinated debt and thus qualify for "basket C", i.e. 50%
equity treatment, for the purpose of calculating Moody's credit
ratios (please refer to Moody's cross-sector rating methodology
'Hybrid Equity Credit' dated September 2018).
The new hybrid securities due 2081 will benefit from a change of
control provision. Moody's understands that BT will launch a
consent solicitation process concurrently to the contemplated
hybrid issuance to amend the terms and conditions of the hybrid
securities due 2080 issued by BT in 2020 to include change of
control protection. BT also intends to include within the new
hybrid securities prospectus a non-binding statement of intent for
the issuer to launch a tender offer on the senior securities issued
before 2007 which do not already contain a change of control clause
in the event of a change of control event. The outcome of the
solicitation process does not affect the rating of the existing and
new hybrid securities issued or to be issued by BT, respectively,
nor the other ratings of the issuer.
The hybrid securities' rating is positioned relative to British
Telecommunications Plc's senior unsecured and issuer ratings. Thus
a change in the senior unsecured rating of the issuer or a
re-evaluation of the relative notching could impact the hybrid
securities' rating.
The negative outlook reflects the weak financial performance of
British Telecommunications Plc in fiscal year (FY) 2021 driven
mainly by the impact of COVID-19 with uncertainty related to the
pace of recovery over the next 12-18 months maintaining the
leverage at a high level. The outlook could be stabilized if (1)
BT's EBITDA improves driven by better top line trend and cost
savings, (2) Moody's adjusted gross leverage decreases to below
3.5x, (3) the company shows ability to further ramp up FTTP rollout
while fibre services experience high take-up, and (4) specific
items related to the modernization plan decrease.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward pressure on the rating could arise if underlying operating
performance and cash flow generation substantially improve with
growing revenues and stronger key performance indicators (KPI)
trends leading to a sustainable EBITDA growth trajectory. Credit
metrics that would support a rating upgrade include RCF/adjusted
net debt sustainably above 22% and adjusted gross debt/EBITDA below
2.8x on a sustained basis.
Downward pressure on the rating could arise if operating
performance remains weaker than expected, or the risks arising from
the pension deficit significantly increases as a result of a
widening in the deficit or actions that could be detrimental for
bondholders, e.g. material subordination risks. Credit metrics that
would support a rating downgrade include RCF/adjusted net debt
sustainably falling below 18% and adjusted gross debt/EBITDA
remaining above 3.5x on a sustained basis.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was
Telecommunications Service Providers published in January 2017.
COMPANY PROFILE
BT Group Plc, which operates principally through its 100%-owned
subsidiary British Telecommunications Plc, is the leading provider
of local, long-distance and international telecommunications
services in the UK, and is one of the world's leading providers of
communications solutions and services, operating in more than 180
countries. Following the completion of the acquisition of EE
Limited (Baa2 negative) in January 2016, BT has also become one of
the largest mobile network operators in the UK.
BRITISH TELECOMMUNICATIONS: S&P Rates Sub Hybrid Securities 'BB+'
-----------------------------------------------------------------
S&P Global Ratings assigned its 'BB+' issue ratings to the U.S.
dollar-denominated junior subordinated hybrid securities to be
issued by British Telecommunications PLC, wholly owned subsidiary
of BT Group PLC (BT; BBB/Stable/A-2). The ratings reflect S&P's
notching for subordination and optional interest deferability.
S&P's assess the securities as having intermediate equity content
until the first interest reset date for both tranches.
BT views the issuance of the securities as a strategic and prudent
tool to strengthen its balance sheet, supporting senior creditors
and the issuer credit rating on BT. S&P understands BT intends to
maintain or replace these securities as a long-term form of capital
on its balance sheet.
S&P said, "We categorize the proposed securities as having
intermediate equity content because they are subordinated in
liquidation to all BT's senior debt obligations, cannot be called
for at least 5 years (tranche 1) and 9.75 years (tranche 2), and
are not subject to features that could discourage or materially
delay deferral."
S&P derives its 'BB+' ratings on the securities by notching down
from our 'BBB' rating on BT. The two-notch difference reflects its
deducting:
-- One notch for subordination because S&P's long-term issuer
credit rating on BT is 'BBB-' or above; and
-- An additional notch for the risk of loss absorption or cash
conservation, because of coupon deferability. In this case, coupon
deferral is discretionary and not limited in time.
S&P said, "The notching indicates that we consider the issuer
relatively unlikely to defer interest. Should our view change, we
could increase the number of notches we deduct to derive the issue
ratings.
"In addition, given our view of the intermediate equity content of
the proposed securities, we allocate 50% of the related payments on
the security as a fixed charge and 50% as equivalent to a common
dividend. The 50% treatment of principal and accrued interest also
applies to our adjustment of debt."
FEATURES OF THE HYBRID INSTRUMENTS
S&P said, "We understand the proposed securities and coupons are
intended to constitute the issuer's direct, unsecured, and deeply
subordinated obligations, ranking senior only to its common
shares.
"We note that the first interest reset date will be 5.25 years from
the issue date for tranche 1 and 10 years from the issue date for
tranche 2. BT can redeem the securities for cash up to 90 days
before the first interest reset date, and on every coupon payment
date thereafter. In addition, the company can redeem the
instruments at any time through a make-whole redemption option. We
understand BT does not intend to redeem the instruments before the
redemption window of the first reset date, and we do not consider
that this type of make-whole clause creates an expectation that the
issue will be redeemed before then. Accordingly, we do not view it
as a call feature in our hybrid analysis, even if it is referred to
as a make-whole option clause in the hybrid documentation."
The securities mature 60 years after the issue date, but can be
called at any time for a tax, rating methodology, accounting, or
change of control event, as defined in the instrument's
documentation. If any of these events occurs, BT intends to replace
the hybrids, but is not obliged to do so. In S&P's view, this
statement of intent currently mitigates the issuer's ability to
call or repurchase the securities.
Coupon deferral does not constitute an event of default and there
are no cross defaults with the senior debt instruments. In
addition, the hybrids' terms allow BT to choose to defer interest
payment on the proposed securities--it has no obligation to pay
accrued interest on an interest payment date. That said, if BT
declares or pays an equity dividend or interest on equally ranking
securities, or if it redeems or repurchases shares or equally
ranking securities, it is required to settle any outstanding
deferred interest payment and the interest accrued thereafter in
cash.
S&P said, "We understand that the interest to be paid on the
proposed securities will increase by 25 basis points (bps) 5 years
after the first reset date for tranche 1, and on the first reset
date for tranche 2. The interest will then increase by a further
75bps 20 years after the first reset date for both tranches. We
consider the cumulative increase in interest of 100bps to be
material, providing BT with an incentive to redeem the instruments.
Given that BT has not committed to replacing the instruments after
the second increase, we are unlikely to recognize the instruments
as having intermediate equity content once their economic maturity
falls below 20 years, which would occur on the first reset date for
both tranches.
"We expect to classify the instruments as having intermediate
equity content until the first reset date for both tranches. We
could revise our assessment if we considered the issuer likely to
call the instruments because they were about to lose the
intermediate equity content."
CONSENT SOLICITATION FOR THE EXISTING HYBRID
BT has launched a consent solicitation to include a change of
control protection for the existing EUR500 million hybrid. S&P's
intermediate equity treatment and 'BB+' issue rating for the hybrid
will remain unchanged whether the consent solicitation passes or
not.
BT GROUP: Fitch Rates Proposed Hybrid Securities 'BB+(EXP)'
-----------------------------------------------------------
Fitch Ratings has assigned BT Group plc's (BBB/Stable) proposed
dual-tranche, benchmark long-dated, subordinated capital securities
an expected rating of 'BB+(EXP)'. The proposed securities qualify
for 50% equity credit. The final rating is contingent on the
receipt of final documents conforming materially to the preliminary
documentation reviewed.
The two tranches of notes will have differing non-call provisions
of 5.25 (NC5.25) and 10 (NC10) years respectively. The securities
will be issued by British Telecommunications plc and guaranteed by
BT Group on a subordinated basis. The notes' rating and assignment
of equity credit are based on Fitch's hybrid methodology,
"Corporate Hybrids Treatment and Notching Criteria" published on 12
November 2020.
KEY RATING DRIVERS
Key Hybrid Features: The expected rating is two notches below BT
Group's Long-Term Issuer Default Rating (IDR) and reflects the
highly subordinated nature of the proposed capital securities,
their greater loss severity and heightened risk of non-performance
relative to senior obligations'. The capital securities rank senior
only to the share capital of BT Group and British
Telecommunications plc. The 50% equity credit reflects the
equity-like characteristics of the proposed issue including
subordination, effective maturity of at least five years, full
discretion to defer interest coupon payments, limited events of
default, as well as the absence of material covenants and look-back
provisions.
Effective Maturity Date of Hybrids: BT Group's prospective
securities have a tenor of 60 years. However, Fitch deems the
effective maturity of the two tranches to be 25.25 and 30 years
from issuance, respectively. This coincides with the point when the
company's non-binding, intention to redeem or replace the security
with similar hybrid securities or equity ceases. There will be a
coupon step-up of 25bp from year 10.25 for the NC5.25 and 10 years
for the NC10. There is an additional step-up of 75bp on the date
falling 20 years after the relevant first reset date.
Change-of-Control Clause: The terms of the prospective hybrids will
include call rights in the event of a change of control. If this
event triggers a downgrade to a non-investment grade rating for BT
Group, the company has the option to redeem all of the securities.
If BT Group elects not to redeem the hybrid securities, the then
prevailing Interest rate, and each subsequent interest rate on the
securities will increase by 5%. Change-of-control clauses with call
options that result in a coupon step-up of up to 500bp, if the
hybrid is not called, do not negate equity credit, as per Fitch's
criteria.
Consent Solicitation for Existing Hybrids: BT Group is seeking to
amend the terms of its existing EUR500 million hybrid securities
issued in 2020 to include a change-of-control clause through
consent solicitation. Should BT Group be successful in achieving
the consent, the change-of-control clause as reviewed by Fitch,
would not affect the rating or equity treatment of the hybrids. BT
Group will also provide its intention to launch a tender offer in
relation to its senior notes issued before 2007 should a
change-of-control event occur.
DERIVATION SUMMARY
BT Group has a strong market position across business and consumer
segments and both fixed and mobile product lines. Its regulated
local loop access division, Openreach, accounts for about 40% of
adjusted EBITDA and provides strong support to the company's credit
profile.
Weaker free cash flow (FCF), a more competitive UK market
environment, regulatory pressures and cash contributions to high
pension plan recovery payments mean that downgrade thresholds are
slightly more stringent than its peer group of integrated European
telecom operators that are predominantly focused on their domestic
markets, such as Royal KPN N.V. (BBB/Stable) and Telecom Italia Spa
(BB+/Stable).
Higher-rated peers such as Deutsche Telekom AG (BBB+/Stable),
Orange SA (BBB+/Stable) and Vodafone Group Plc (BBB/Stable) have
greater scale and geographic diversification that can provide some
mitigation to potential weakness in domestic performance. This
diversification also allow the companies to defend financial
metrics in the event of leverage pressure, through asset sales or
minority listings, whereas levers are more limited at BT.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
-- Revenue to decline by just under 1% in FY22 (year-end March),
followed by growth of 0.2%in FY23 and 0.6% in FY24;
-- Fitch-defined EBITDA margin of 31.5% in FY22, gradually
improving to about 33% over the subsequent three years;
-- Cash tax of around GBP467 million in FY22 and GBP490 million
in FY23. This excludes non-recurring cash tax benefits of
GBP392 million in FY22 and GBP431 million in FY23, which are
treated as non-recurring operating items in Fitch's cashflow
analysis;
-- Cash pension and asset-backed fund (ABF) contributions,
included within funds from operations (FFO), of GBP1,080
million in FY22, declining to GBP780 million in FY24;
-- A negative specific-item and other cashflow impact of GBP500
million in FY22 and GBP475 million in FY23;
-- Dividends payment of GBP230 million in FY22 and around GBP800
million in FY23 and growing by 2% a year to FY24.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- FFO net leverage sustainably below 2.5x and cash flow from
operations minus capex/gross debt trending sustainably towards
8%-10% in the medium term;
-- Greater visibility and reduced execution risks on the
implementation of BT Group's restructuring and transformation
programme and FttP deployment, resulting in improved FCF
generation;
-- EBITDA growth reflecting a reduced impact from legacy
products, improved operating performance at core divisions and
strengthened competitive position following increased FttP and
convergent customer-base penetration.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A downgrade to 'BBB-' would be likely if FFO net leverage is
expected to remain consistently above 3.0x;
-- Deterioration in the key operating and financial metrics at BT
Group's main operating subsidiaries, lower-than-expected FCF
generation or significant risk-taking in relation to the
development of BT Consumer's pay-tv offering.
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: At FYE21, BT Group reported unrestricted
cash and equivalents of GBP4.7billion and access to an undrawn
revolving credit facility (RCF) of GBP2.1 billion. This provides
sufficient cover for short-term debt as well as payments due in
FY22. Expectations of negative FCF for the next two to three years
temper an otherwise strong liquidity profile.
Criteria Variation
Fitch has treated BT Group's intention to meet GBP2 billion of its
pension deficit repair plan via an ABF as a pension obligation and
not as financial debt. This treatment constitutes a criteria
variation from Fitch's rating criteria and reflects the purpose of
the ABF and some significant non-debt-like features such as the
ability to switch off payments in the event the deficit is
eliminated earlier than expected. Fitch sees only an extremely
remote possibility that subsidiary EE will not be able to meet an
GBP180 million annual payment and trigger any cross-default with BT
Group debt.
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.
DALE GLOBAL: Director Faces 7-Year Disqualification
---------------------------------------------------
The Insolvency Service on Nov. 16 disclosed that a West London
wholesaler has been struck off as a director for 7 years after he
abused the tax authorities to the value of more than GBP600,000.
Daljit Singh Dale (49), of Hayes, West London, was appointed the
director of Dale Global Limited in March 2011 shortly after the
company was incorporated.
Dale Global traded as an alcohol wholesaler and operated out of
premises in the Heathrow area. The wholesaler, however, entered
into Creditors Voluntary Liquidation in March 2019, triggering an
investigation by the Insolvency Service.
Investigators established that Daljit Dale failed to ensure that
Dale Global Limited submitted accurate returns to the tax
authorities and underdeclared liabilities worth just over
GBP604,000.
Further enquiries found that when the wholesaler went into
liquidation, the tax authorities claimed more than GBP757,000 from
Dale Global. This included the outstanding tax liabilities,
penalties worth just over GBP115,00 and more than GBP38,000 worth
of interest.
In their undertaking, Daljit Dale did not dispute that they had
failed to ensure Dale Global Limited submitted accurate tax returns
to the tax authorities.
The alcohol wholesaler's disqualification starts on November 22,
2021, and means Daljit Dale is banned from directly or indirectly
becoming involved, without the permission of the court, in the
promotion, formation or management of a company.
Lawrence Zussman, Deputy Director of Insolvent Investigations,
said:
"Much of the public service is funded by the correct amount of
taxes being paid. When Daljit Dale failed to properly declare the
alcohol wholesaler's tax liabilities, he not only failed to carry
out his director duties but also deprived the public purse.
"Daljit Dale failed to take his responsibilities as a director
seriously and his 7-year ban means he has been removed from the
business environment for a significant amount of time, which should
serve as a warning to other rogue directors."
DERBY COUNTY FOOTBALL: Accepts 21-Point Deduction
-------------------------------------------------
Sky Sports reports that Derby is facing the prospect of relegation
from the Sky Bet Championship after accepting a 21-point
deduction.
The club's administrators agreed another deduction of nine points,
plus a further suspended three points, for historical financial
breaches under former owner Mel Morris, Sky Sports relates.
It takes the total penalty points to minus-21, after the minus-12
for sliding into administration, leaving the Rams on minus-three
points and marooned at the bottom of the table, Sky Sports
discloses.
According to Sky Sports, Trevor Birch, the EFL chief executive
said: "The EFL's objective throughout this ongoing process has been
to ensure that the principles of the regulations were upheld on
behalf of all clubs.
"In order to assess the sporting sanction that was applicable to
apply to these breaches, previous P&S cases have been carefully
reviewed and guidance taken from them.
"The EFL has also considered the P&S sanction guidelines as well as
mitigation put forward by the club.
"Given the complex circumstances of the case and the various
outstanding regulatory issues between the EFL and Derby County, the
League is satisfied at the agreed outcome and the sensible approach
taken by both parties in negotiating this outcome and in respect of
the appeal withdrawal.
"Our focus is to continue to work with the Joint Administrators to
assist them in securing a long-term future for the club."
About Derby County Football Club
Founded in 1884, Derby County Football Club is a professional
association football club based in Derby, Derbyshire, England. The
club competes in the English Football League Championship (EFL, the
'Championship'), the second tier of English football. The team
gets its nickname, The Rams, to show tribute to its links with the
First Regiment of Derby Militia, which took a ram as its mascot.
Mel Morris is the owner while Wayne Rooney is the manager of the
club.
On Sept. 22, 2021, the club went into administration. The EFL
sanctioned a 12-point deduction on the club, putting the team at
the bottom of the Championship. Andrew Hosking, Carl Jackson and
Andrew Andronikou, managing directors at business advisory firm
Quantuma, had been appointed joint administrators to the club.
DEVON SCHOOL: Accountant Responsible for Liquidation Jailed
-----------------------------------------------------------
BBC News reports that an accountant whose GBP250,000 of thefts
drove a language school into liquidation has been jailed.
According to BBC, a court heard James Perry, 46, created scores of
false payments over six years to siphon off the cash from the Devon
School of English in Paignton.
The company had been run successfully for almost 50 years by the
same family.
Perry, of Ashford, Kent, who admitted fraud while in a position of
trust and theft, was jailed for three years and eight months, BBC
discloses.
Exeter Crown Court heard 19 jobs were lost when the company folded,
BBC relates.
It was told Mr. Perry spent the money he stole on drink, drugs and
gambling, according to BBC.
The Hawthorne family were forced to make staff redundant in an
attempt to survive but the business never recovered and went into
liquidation a year ago, BBC recounts.
It had arranged educational holidays for tens of thousands of
children from all over the world since 1971, BBC relays.
In addition to the loss of 19 permanent and 60 seasonal jobs, the
school also provided income for 1,500 host families for its
students all over south Devon, the court heard, BBC states.
MARKS AND SPENCER: Fitch Affirms 'BB+' IDR, Alters Outlook to Pos.
------------------------------------------------------------------
Fitch Ratings has revised Marks and Spencer Group Plc's (M&S)
Outlook to Positive from Stable, while affirming the Issuer Default
Rating (IDR) at 'BB+'. Fitch has also affirmed M&S's senior
unsecured rating at 'BB+' and Short-Term IDR at 'B'.
The IDR affirmation reflects M&S's well-established position in
clothing and food, improving omni-channel capabilities, notably in
food, and deleveraging capacity supported by a prudent financial
policy. This is balanced against an uncertain near-term outlook for
the highly competitive UK retail market and M&S's continuing
business transformation requirements.
The Positive Outlook reflects initial signs of a strong rebound in
M&S's trading from historical lows due to the pandemic and
comfortable financial flexibility to navigate trading uncertainties
and fund business improvements. The latter will help the company
adapt to sector post-Covid-19 challenges exacerbated by cost
inflation and supply-chain headwinds. Further clarity on capital
allocation, including decision on resumption of shareholder
distributions versus focus on gross debt reduction, will be
critical to determine M&S's rating path back to investment grade.
KEY RATING DRIVERS
Positive, Early Signs of Recovery: 1HFY22 trading signals a strong
recovery in both top line and profitability thanks to the C&H
division returning to slightly below pre-pandemic levels and the
food division continuing to trade above pre-pandemic levels. Fitch
expects a solid performance in the second half of the 2022
financial year (ending April 2022), supporting strong results for
FY22 as a whole despite the normalisation of lockdown-related
pent-up demand and cost inflation pressures.
Fitch considers that the long-standing restructuring initiatives
focused on cost optimisation, store estate management, enhancing
digital capabilities and right-sizing the organisation has
positioned the group well to navigate continued uncertainty for UK
retailers.
Strong Position to Defend: M&S benefits from a strong brand
recognition in food and a well-established market position in
clothing. Many UK consumers associate M&S Food with excellent
quality. Fitch expects management will continue to adapt its
product offer to changing customer demands and towards more
affordable products for families. In addition, M&S remains a market
leader in the GBP35 billion UK clothing market, despite suffering
from continued market shares losses prior to the pandemic.
Leverage Converging with Rating Level: Fitch expects funds from
operations (FFO) net adjusted leverage to stay comfortably within
levels consistent with the rating, edging towards the 3.5x
threshold commensurate with investment grade by FY23 down from 4.9x
in FY21. However, this improvement depends on continued solid
results and dividend policy. The momentum of 1HFY22's performance
and a high cash balance may temporarily drive FFO net adjusted
leverage below 3.5x in FY22.
Nevertheless, Fitch recognises that several unknowns remain,
including levels of pent-up and pull-forward demand, which may have
benefitted 1HFY22 results, and the impact of inflation on both
supply and demand for M&S's products in the next 18-24 months.
Further positive rating momentum would be reliant on better
medium-term visibility on M&S's profits, improved earnings quality
and guidance on how the sizeable cash buffers will be deployed.
Expanded Offering Benefits Food Division: Fitch envisages the food
division to maintain an enlarged presence relative to the
pre-pandemic levels given the more extensive offering, with
competitive range allowing consumers to complete their weekly
groceries solely within M&S. Food division sales are 10% higher in
1H22 compared to 1H20, 17% once the weaker performance of the now
reopened franchise and hospitality sites is excluded.
Fitch believes that M&S's food sales may moderate in FY23 off the
back of a strong FY22, as consumer patterns normalise due to more
people eating out and returning to work in offices. Nevertheless,
food inflation and the resumption of more normal operating
conditions for hospitality sites should underpin the division's
enlarged scale.
Ocado JV Critical for Omnichannel: M&S launched its food product
range online with Ocado (operational from September 2020) supported
by the introduction of new product lines. Fitch views this
joint-venture (JV) channel as vital for M&S, both to withstand
fierce competition in the UK and to maintain its position given
secular shift in customer shopping preferences towards online since
the onset of the pandemic.
While Fitch does not expect sizeable net cash inflows from the JV
over the rating horizon due to planned investments in expanding
capacity, the JV has unlocked the online channel for M&S food
products at a crucial time, providing format diversification and a
stronger competitive position.
Disciplined Financial Policy: M&S continues to demonstrate good
financial discipline by suspending dividends despite strong 1HFY22
performance, in light of some trading uncertainty and its objective
to return to an investment-grade rating. The dividend suspension,
combined with the UK government support received (e.g. furlough
payments and business rate relief) has contributed to a large
accumulation of cash on balance sheet, supporting the company's
financial flexibility.
Fitch expects the high cash balance to slightly unwind in 2HFY22
due to the debt repayments and a gradual normalisation of working
capital. Nevertheless, Fitch assumes that M&S will operate with
comfortable levels of liquidity into FY23, even if dividends were
potentially reinstated by then.
DERIVATION SUMMARY
M&S's IDR is at the same level as Spain-based El Corte Ingles, S.A,
(ECI; BB+/Negative), reflecting a similar scale, diversified offer
and multi-channel capabilities. ECI's performance has been more
affected by the pandemic and it is significantly more exposed to
discretionary spending, although less to online competition. ECI's
FFO adjusted net leverage is expected to be higher than M&S's in
FY22, with a slower normalisation of business trends and margins,
but leverage of both issuers could converge in FY23 or FY24 as ECI
will receive EUR1.1 billion in proceeds from a new strategic
partnership.
M&S is rated one notch higher than US department stores Macy's Inc.
(BB+/Stable) and in line with Dillard's, Inc. (BB+/Positive). While
both US peers were initially more affected by the pandemic than
M&S, expectations for both to sustain their recoveries from the
pandemic are underlined by positive trading momentum, cost
reduction and omnichannel initiatives.
KEY ASSUMPTIONS
-- Revenue to increase by about 15% in FY22 driven by a sharp
recovery of the clothing and home (C&H) activities and mid
single-digit growth of the UK food division.
-- Revenue to decline by low-to-mid-single digits in FY23 due to
a mid-single-digit decline in the UK. Revenue to increase at
low single digits in FY24 and FY25.
-- EBITDA margins of about 9% over the rating horizon.
-- Capex of about GBP250 million in FY22 and about GBP350 million
thereafter.
-- Return to paying dividends in FY23.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Sustained improvement in like-for-like sales for both Food and
C&H segments underpinned by continued execution of the group's
turnaround plan, without reducing profitability;
-- Clear intention to maintain a financial policy commensurate
with sustaining FFO adjusted net leverage below 3.5x and FFO
fixed-charge cover above 3.0x;
-- Stabilisation of FFO margin above 7% in tandem with an
improvement in quality of earnings.
Factors that could, individually or collectively, lead to the
stabilisation of the rating:
-- Reversal in positive like-for-like sales and margins dynamics
in light of cost inflation challenges and a highly competitive
UK retail environment leading to FFO margins below 7.0x;
-- Aggressive capital allocation policy that prioritises
shareholder returns over prudent balance-sheet management
consistent with an investment-grade rating;
-- FFO adjusted net leverage sustainably remaining above 3.5x and
FFO fixed-charge cover below 3.0x.
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
Comfortable Liquidity: M&S's unrestricted cash available for
debt-servicing was GBP900 million in end-1HFY22 (after restricting
GBP50 million of cash due to intra-year working capital movements),
up from GBP259 million in the previous year. In addition, the
group's liquidity is supported by an undrawn GBP1,100
million-equivalent revolving credit facility maturing in April
2023. The strong liquidity position stems from the group's decision
to suspend dividends, the strong recovery in trading and
pandemic-related support from the UK government.
Fitch expects the high cash balance to partially unwind in 2HFY22
due to the debt repayments (remaining portion of November 2021 bond
and liability to pension partnership) and a gradual normalisation
of working capital by March 2022. Nevertheless, M&S should be able
to operate with comfortable levels of liquidity into FY23, subject
to future decision over dividends.
ISSUER PROFILE
M&S is a long-established UK food and fashion retailer operating in
the premium range UK food market and the mid-range men and ladies
UK clothing market. Its main operations are in the UK, but the
group retains an international presence.
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.
NEON REEF: Ceases Trading Amid Soaring Gas Prices
-------------------------------------------------
BBC News reports that two more energy suppliers with a combined
total of 35,500 customers have ceased trading amid a backdrop of
high wholesale gas prices.
Neon Reef and Social Energy Supply have stopped trading, BBC
relays, citing the energy regulator Ofgem.
Neon is the larger of the two with 30,000 domestic customers.
It means that more than 20 suppliers have now ceased operations
since August, affecting more than two million customers overall,
BBC notes.
Those households have been moved to new suppliers, but generally on
more expensive tariffs, BBC states.
Suppliers are under pressure from high wholesale gas prices, and
also by their inability to pass on extra costs to customers
protected by fixed tariffs, or the regulator's price cap, BBC
discloses.
Wholesale gas prices in the UK surged by almost 10% earlier on Nov.
16 after the German energy regulator suspended the approval process
for a new Russian pipeline, BBC relates.
SATUS 2021-1: S&P Assigns Prelim B- (sf) Rating to F- Dfrd Notes
----------------------------------------------------------------
S&P Global Ratings assigned its preliminary credit ratings to Satus
2021-1 PLC's (Satus 2021-1) asset-backed floating-rate class A, B,
C-Dfrd, D-Dfrd, E-Dfrd, and F-Dfrd notes. The required liquidity
reserve will be initially funded through unrated class Z notes,
which will be repaid from excess interest.
Satus 2021-1 is the first public securitization of U.K. auto loans
originated by Startline Motor Finance Ltd. (Startline), the
seller.
Startline is an independent auto lender in the U.K., with a focus
on used-car financing for near-prime customers.
The underlying collateral will comprise U.K. fully amortizing
fixed-rate auto loan receivables arising under hire purchase (HP)
agreements granted to private borrowers resident in the U.K. for
the purchase of used vehicles. There will be no personal contract
purchase (PCP) agreements in the pool. Therefore, the transaction
will not be exposed to residual value risk.
Collections will be distributed monthly with separate waterfalls
for interest and principal collections, and the notes amortize
fully sequentially from day one.
At closing, only the class A and B notes will have the support of
the liquidity reserve fund, which will be sized at 1.0% of the
aggregate outstanding balance of the class A and B notes and will
amortize as those notes' notes' principal balance is repaid,
subject to a floor of 0.5% prior to the full repayment of the class
B notes and 0.3% of the original collateral balance thereafter (the
senior reserve fund available amount). The seller will fund a
liquidity reserve fund through issuance of the class Z notes.
Following the repayment of the class B notes, the class C-Dfrd,
D-Dfrd, E-Dfrd, and F-Dfrd notes will have the support of the
liquidity reserve fund to an amount set at the junior liquidity
reserve fund required amount, which is set at 0.2% of the original
collateral thereafter (the junior reserve fund available amount).
A combination of note subordination, the cash reserves, and any
available excess spread will provide credit enhancement for the
rated notes.
Commingling risk is partially mitigated by sweeping collections to
the issuer account within two business days, and a declaration of
trust is in place over funds within the collection account.
However, due to the lack of minimum required ratings and remedies
for the collection account bank, we have assumed one week of
commingling loss in the event of the account provider's
insolvency.
The seller is not a deposit-taking institution, there are
eligibility criteria preventing loans to Startline employees from
being in the securitization, and Startline has not underwritten any
insurance policies for the borrowers. Therefore, in our view,
setoff risk is mitigated.
Startline will remain the initial servicer of the portfolio. A
moderate severity and portability risk along with a moderate
disruption risk initially caps the maximum potential ratings on the
notes at 'AA' in the absence of a back-up servicer. However,
following a servicer termination event, including insolvency of the
servicer, the back-up servicer, Equiniti Gateway Ltd., will assume
servicing responsibility for the portfolio. S&P said, "We have
therefore incorporated a three-notch uplift, which enables the
transaction to achieve a maximum potential rating of 'AAA' under
our operational risk criteria. Therefore, our operational risk
criteria do not constrain our ratings on the notes."
The assets pay a monthly fixed interest rate, and all notes receive
compounded daily sterling overnight index average (SONIA) plus a
margin subject to a floor of zero. To mitigate fixed-float interest
rate risk, the notes will benefit from an interest rate swap.
Interest due on all classes of notes, other than the most senior
class of notes outstanding, is deferrable under the transaction
documents, without resulting in an event of default. Once a class
becomes the most senior, current interest is due on a timely basis,
while any outstanding deferred interest is due either at the
maturity date or when the relevant class of notes is repaid.
However, although interest can be deferred on the class B notes
while the class A notes are outstanding, S&P's preliminary ratings
on the class A and B notes address timely receipt of interest and
ultimate repayment of principal. These classes of notes have the
support of the liquidity reserve fund while they are outstanding,
thereby mitigating any liquidity stress that may arise from a
temporary disruption in collections.
In contrast, the class C-Dfrd to F-Dfrd notes will not have any
liquidity support until after the class B notes are repaid, and the
timely payment of interest on those classes of notes could be
affected by a temporary disruption in collections until the class B
notes are repaid. Therefore, our preliminary ratings address the
ultimate payment of interest and principal on the class C-Dfrd to
F-Dfrd notes.
The transaction also features a clean-up call option, whereby on
any interest payment date when the outstanding principal balance of
the assets is less than 10% of the initial principal balance, the
seller may repurchase all receivables, provided the issuer has
sufficient funds to meet all the outstanding obligations.
Furthermore, the issuer may also redeem all classes of notes at
their outstanding balance together with accrued interest on any
interest payment date on or after the optional redemption call date
in November 2024.
S&P said, "Our preliminary ratings on the transaction are not
constrained by our structured finance sovereign risk criteria. The
remedy provisions at closing will adequately mitigate counterparty
risk in line with our counterparty criteria. We expect the legal
opinions to adequately address any legal risk in line with our
criteria."
Preliminary Ratings
CLASS PRELIM PRELIM AVAILABLE LEGAL
RATING* AMOUNT CREDIT INTEREST FINAL
(MIL. GBP) ENHANCEMENT MATURITY
(%)§
A AAA (sf) TBD 28.81 Daily
compounded AUG 2028
SONIA plus
a margin
B AA- (sf) TBD 19.81 Daily
compounded AUG 2028
SONIA plus
a margin
C-Dfrd A (sf) TBD 11.5 Daily
compounded AUG 2028
SONIA plus
a margin
D-Dfrd BBB+ (sf) TBD 7.5 Daily
compounded AUG 2028
SONIA plus
a margin
E-Dfrd BB+ (sf) TBD 4.5 Daily
compounded AUG 2028
SONIA plus
a margin
F-Dfrd B- (sf) TBD 0 Daily
compounded AUG 2028
SONIA plus
a margin
Z NR TBD 0 N/A AUG 2028
Note: This presale report is based on information as of Nov. 9,
2021. The ratings shown are preliminary. Subsequent information may
result in the assignment of final ratings that differ from the
preliminary ratings. Accordingly, the preliminary ratings should
not be construed as evidence of final ratings. This report does not
constitute a recommendation to buy, hold, or sell securities.
*S&P's preliminary ratings on the class A and B notes address the
timely payment of interest and ultimate payment of principal, while
those assigned to the class C-Dfrd, D-Dfrd, E-Dfrd, and F-Dfrd
notes address the ultimate payment of interest and principal.
§Available credit enhancement comprises subordination and the a
bifurcated repenishable cash reserve, with a senior liquidity
reserve fund available for the class A and B notes and a junior
liquidity reserve fund available for the class C-Dfrd, D-Dfrd,
E-Dfrd, and F-Dfrd notes, each with a floor expressed as a
percentage of the closing balance. However, the junior liquidity
reserve fund required amount is zero while the B notes are
outstanding and is not reflected in the available credit
enhancement for those classes of notes. In addition, the notes will
benefit from excess spread, if available.
TBD--To be determined.
SONIA--Sterling Overnight Index Average.
N/A--Not Applicable.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
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Editors.
Copyright 2021. All rights reserved. ISSN 1529-2754.
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