/raid1/www/Hosts/bankrupt/TCREUR_Public/211214.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Tuesday, December 14, 2021, Vol. 22, No. 243
Headlines
I R E L A N D
CVC CORDATUS XXII: Fitch Assigns Final B- Rating to Cl. F Tranche
HENLEY CLO VI: Fitch Rates Class F Tranche Final 'B-'
HENLEY CLO VI: S&P Assigns B- (sf) Rating to Class F Notes
OAK HILL V: Fitch Gives Final 'B-' Rating to Class F-R Notes
M O N T E N E G R O
KAP: Uniprom Proposes EPCG to Take Over Production Operations
N E T H E R L A N D S
OCI NV: Fitch Raises LT IDR to 'BB+', Outlook Stable
S E R B I A
SERBIA: S&P Affirms 'BB+/B' SCRs, Alters Outlook to Positive
S P A I N
AI CALENDARIA: Fitch Affirms 'BB' LT IDRs, Outlook Stable
[*] SPAIN: Bankruptcies Up 37% in Anadalusia in First 11 Months
S W E D E N
DOMETIC GROUP: S&P Alters Outlook to Positive, Affirms 'BB-' ICR
VOLVO CAR: S&P Affirms 'BB+' ICR on Retained Financial Flexibility
T U R K E Y
ISTANBUL TAKAS: Fitch Affirms 'BB-' LT IDRs, Alters Outlook to Neg.
TAM FINANS: Fitch Affirms 'B' LT IDRs, Alters Outlook to Negative
TURKEY: S&P Affirms 'B+/BB-' SCRs, Alters Outlook to Negative
VOLKSWAGEN DOGUS: Fitch Affirms 'BB-' LT IDR, Alters Outlook to Neg
U N I T E D K I N G D O M
BOOMF: Set to Go Into Administration
GKN HOLDINGS: Fitch Affirms 'BB+' LT IDR, Alters Outlook to Stable
GREENSILL CAPITAL: Gave Coronavirus Loan to Founder's Neighbor
HIGH STREET: Chairman says Administration "Only Way Forward"
TUDOR ROSE 2021-1: S&P Assigns BB (sf) Rating to Class X1 Notes
- - - - -
=============
I R E L A N D
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CVC CORDATUS XXII: Fitch Assigns Final B- Rating to Cl. F Tranche
-----------------------------------------------------------------
Fitch Ratings has assigned CVC Cordatus Loan Fund XXII DAC final
ratings.
DEBT RATING PRIOR
---- ------ -----
CVC Cordatus Loan Fund XXII DAC
X XS2402570845 LT AAAsf New Rating AAA(EXP)sf
A XS2402576966 LT AAAsf New Rating AAA(EXP)sf
B-1 XS2402575729 LT AAsf New Rating AA(EXP)sf
B-2 XS2402571496 LT AAsf New Rating AA(EXP)sf
C XS2402577188 LT Asf New Rating A(EXP)sf
D XS2402576370 LT BBB-sf New Rating BBB-(EXP)sf
E LT BBsf New Rating BB(EXP)sf
F XS2402577345 LT B-sf New Rating B-(EXP)sf
Subordinated XS2402576701 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
CVC Cordatus Loan Fund XXII DAC is a securitisation of mainly
senior secured obligations (at least 90%) with a component of
senior unsecured, mezzanine, second-lien loans and high-yield
bonds. Note proceeds were used to purchase a portfolio with a
target par of EUR440 million.
The portfolio is actively managed by CVC Credit Partners Investment
Management Limited (CVC). The collateralised loan obligation (CLO)
has a 4.5-year reinvestment period and an 8.5-year weighted average
life (WAL).
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch places the
average credit quality of obligors in the 'B'/'B-' category. The
Fitch weighted average rating factor (WARF) of the identified
portfolio is 26.4.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch weighted
average recovery rate (WARR) of the identified portfolio is 61.8%.
Diversified Asset Portfolio (Positive): The transaction has a
concentration limit for the 10 largest obligors of 20%. The
transaction also includes various concentration limits, including
the maximum exposure to the three largest (Fitch-defined)
industries in the portfolio at 40%. These covenants ensure the
asset portfolio will not be exposed to excessive concentration.
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction's
stress portfolio analysis is 12 months less than the WAL covenant
at the issue date. This reduction to the risk horizon accounts for
the strict reinvestment conditions envisaged by the transaction
after its reinvestment period. These include, among others, passing
both the coverage tests and the Fitch 'CCC' bucket limitation test
post reinvestment as well as a WAL covenant that progressively
steps down over time, both before and after the end of the
reinvestment period. When combined with loan pre-payment
expectations, this ultimately reduces the maximum possible risk
horizon of the portfolio.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- An increase of the default rate (RDR) at all rating levels by
25% of the mean RDR and a decrease of the recovery rate (RRR)
by 25% at all rating levels will result in downgrades of no
more than six notches, depending on the notes.
-- 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:
-- A reduction of the RDR at all rating levels by 25% of the mean
RDR and an increase in the RRR by 25% at all rating levels
would result in an upgrade of up to three notches depending on
the notes, except for the class X and A notes, which are
already at the highest rating on Fitch's scale and cannot be
upgraded.
-- After the end of the reinvestment period, upgrades may occur
on better-than-initially expected portfolio credit quality and
deal performance, leading to higher credit enhancement and
excess spread available to cover 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
CVC Cordatus Loan Fund XXII DAC
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
HENLEY CLO VI: Fitch Rates Class F Tranche Final 'B-'
-----------------------------------------------------
Fitch Ratings has assigned Henley CLO VI Designated Activity
Company's final ratings.
DEBT RATING PRIOR
---- ------ -----
Henley CLO VI DAC
A XS2401083212 LT AAAsf New Rating AAA(EXP)sf
B-1 XS2401083485 LT AAsf New Rating AA(EXP)sf
B-2 XS2401083642 LT AAsf New Rating AA(EXP)sf
C XS2401083998 LT Asf New Rating A(EXP)sf
D XS2401084293 LT BBB-sf New Rating BBB-(EXP)sf
E XS2401084459 LT BB-sf New Rating BB-(EXP)sf
F XS2401084616 LT B-sf New Rating B-(EXP)sf
Subordinated Notes LT NRsf New Rating NR(EXP)sf
XS2401084707
TRANSACTION SUMMARY
Henley CLO VI Designated Activity Company is a securitisation of
mainly senior secured obligations (at least 90%) with a component
of senior unsecured, mezzanine, second-lien loans, first-lien,
last-out loans and high-yield bonds. Net proceeds from the issuance
of the notes have been used to fund a portfolio with a target par
of EUR400 million. The portfolio is actively managed by Napier Park
Global Capital Ltd. The transaction has a 4.5-year reinvestment
period and an 8.5-year weighted average life (WAL).
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors to be in the 'B'/'B-' category.
The Fitch weighted average rating factor (WARF) of the identified
portfolio is 26.64.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch weighted
average recovery rate (WARR) of the identified portfolio is
60.54%.
Diversified Portfolio (Positive): The transaction includes two
Fitch matrices: one effective at closing corresponding to a top 10
obligor concentration limit at 20% and a fixed-rate asset limit of
15%; and one that can be selected by the manager at any time from
one year after closing as long as the portfolio balance (including
defaulted obligations at their Fitch collateral value) is above
target par and subject to the same limits as the previous matrix.
The transaction also includes various concentration limits,
including the maximum exposure to the three largest (Fitch-defined)
industries in the portfolio at 40%. These covenants ensure that the
asset portfolio will not be exposed to excessive concentration.
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction's
stress portfolio and matrices analysis is 12 months less than the
WAL covenant at the issue date. This reduction to the risk horizon
accounts for the strict reinvestment conditions envisaged by the
transaction after its reinvestment period. These include, among
others, passing both the coverage tests and the Fitch 'CCC' bucket
limitation and Fitch WARF test post reinvestment as well a WAL
covenant that progressively steps down over time, both before and
after the end of the reinvestment period. This ultimately reduces
the maximum possible risk horizon of the portfolio when combined
with loan pre-payment expectations.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A 25% increase of the mean default rate (RDR) across all
ratings and a 25% decrease of the recovery rate (RRR) across
all ratings would result in downgrades of up to four notches
across the structure.
-- Downgrades may occur if the build-up of the notes' credit
enhancement following amortisation does not compensate for a
large loss expectation than initially assumed due to
unexpected high levels of default and portfolio deterioration.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings would result in an
upgrade of no more than five notches across the structure,
apart from the class A notes, which are already at the highest
rating on Fitch's scale and cannot be upgraded.
-- After the end of the reinvestment period, upgrades may occur
on better-than-expected portfolio credit quality and deal
performance, leading to higher credit enhancement and excess
spread available to cover losses in the remaining portfolio.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Henley CLO VI DAC
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
HENLEY CLO VI: S&P Assigns B- (sf) Rating to Class F Notes
----------------------------------------------------------
S&P Global Ratings assigned credit ratings to Henley CLO VI DAC's
class A, B-1, B-2, C, D, E, and F notes. At closing, the issuer
also issued subordinated notes.
The ratings reflect S&P's assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior-secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which is bankruptcy remote.
-- The transaction's counterparty risks, which are in line with
our counterparty rating framework.
Portfolio Benchmarks
CURRENT
S&P weighted-average rating factor 3,114.28
Default rate dispersion 502.77
Weighted-average life (years) 5.71
Obligor diversity measure 94.63
Industry diversity measure 18.89
Regional diversity measure 1.13
Transaction Key Metrics
CURRENT
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 4.18
Reference 'AAA' weighted-average recovery (%) 34.21
Reference weighted-average spread (%) 4.10
Covenanted weighted-average coupon (%) 4.50
Rating rationale
Under the transaction documents, the rated notes pay quarterly
interest unless a frequency switch event occurs. Following this,
the notes will switch to semiannual payments. The portfolio's
reinvestment period will end approximately 4.5 years after
closing.
The portfolio is well-diversified, primarily comprising broadly
syndicated speculative-grade senior-secured term loans and
senior-secured bonds. Therefore, S&P has conducted its credit and
cash flow analysis by applying its criteria for corporate cash flow
CDOs.
S&P said, "In our cash flow analysis, we used the EUR400 million
target par amount, the reference weighted-average spread (4.10%),
the covenanted weighted-average coupon (4.50%), and the reference
weighted-average recovery rates at all ratings. We applied various
cash flow stress scenarios, using four different default patterns,
in conjunction with different interest rate stress scenarios for
each liability rating category.
"Under our structured finance sovereign risk criteria, we consider
that the transaction's exposure to country risk is sufficiently
mitigated at the assigned ratings.
"Until the end of the reinvestment period on June 10, 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 it compares that with
the current portfolio's default potential plus par losses to date.
As a result, until the end of the reinvestment period, the
collateral manager may through trading deteriorate the
transaction's current risk profile, as long as the initial ratings
are maintained.
"The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under our current counterparty criteria.
"We consider that the transaction's legal structure is bankruptcy
remote, in line with our legal criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe our ratings are
commensurate with the available credit enhancement for the class A
to F notes. Our credit and cash flow analysis indicates that the
available credit enhancement for the class B-1, B-2, and C notes
could withstand stresses commensurate with higher ratings than
those we have assigned. However, as the CLO will be in its
reinvestment phase starting from closing, during which the
transaction's credit risk profile could deteriorate, we have capped
our ratings assigned to the notes.
"The class F notes' current break-even default rate cushion is a
negative 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 can sustain a steady-state
scenario, in accordance with our criteria." S&P's analysis further
reflects several factors, including:
-- The class F notes' available credit enhancement, which is in
the same range as that of other CLOs S&P has rated and that has
recently been issued in Europe.
-- S&P's model-generated portfolio default risk, which is at the
'B-' rating level at 30.53% versus 17.70% if it was to consider a
long-term sustainable default rate of 3.1% for 5.71 years.
-- 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 notes is commensurate with the
assigned 'B- (sf)' rating.
S&P said, "Taking the above factors into account and 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 all the rated classes of notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class A to E notes
to five of the 10 hypothetical scenarios we looked at in our
publication, "How Credit Distress Due To COVID-19 Could Affect
European CLO Ratings," published on April 2, 2020.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
The transaction securitizes a portfolio of primarily senior-secured
leveraged loans and bonds, and is managed by Napier Park Global
Capital Ltd.
S&P Global Ratings believes the new omicron variant is a stark
reminder that the COVID-19 pandemic is far from over. Although
already declared a variant of concern by the World Health
Organization, uncertainty still surrounds its transmissibility,
severity, and the effectiveness of existing vaccines against it.
Early evidence points toward faster transmissibility, which has led
many countries to close their borders with Southern Africa or
reimpose international travel restrictions. S&P said, "Over coming
weeks, we expect additional evidence and testing will show the
extent of the danger it poses to enable us to make a more informed
assessment of the risks to credit. Meanwhile, we can expect a
precautionary stance in markets, as well as governments to put into
place short-term containment measures. Nevertheless, we believe
this shows that, once again, more coordinated, and decisive efforts
are needed to vaccinate the world's population to prevent the
emergence of new, more dangerous variants."
Environmental, social, and governance (ESG) credit factors
S&P said, "We regard the exposure to ESG credit factors in the
transaction as being broadly in line with our benchmark for the
sector. Primarily due to the diversity of the assets within CLOs,
the exposure to environmental credit factors is viewed as below
average, social credit factors are below average, and governance
credit factors are average. For this transaction, the documents
prohibit assets from being related to the following industries:
tobacco, civilian firearms, controversial weapons, thermal coal,
oil sands, fossil fuels, coal mining, and palm oil production; and
where 25% of revenue are from the following industries: endangered
or protected wildlife and payday lending.
"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 INTEREST RATE (%) CREDIT
(MIL. EUR) ENHANCEMENT (%)
A AAA (sf) 232.00 3mE + 1.00 42.00
B-1 AA (sf) 29.00 3mE + 1.70 29.75
B-2 AA (sf) 20.00 2.10 29.75
C A (sf) 33.00 3mE + 2.15 21.50
D BBB- (sf) 27.00 3mE + 3.15 14.75
E BB- (sf) 20.00 3mE + 6.11 9.75
F B- (sf) 12.00 3mE + 8.78 6.75
Sub NR 32.85 N/A N/A
NR--Not rated.
N/A--Not applicable.
3mE--Three-month Euro Interbank Offered Rate.
OAK HILL V: Fitch Gives Final 'B-' Rating to Class F-R Notes
------------------------------------------------------------
Fitch Ratings has assigned Oak Hill European Credit Partners V
Designated Activity Company's refinancing notes final ratings.
DEBT RATING PRIOR
---- ------ -----
Oak Hill European Credit Partners V DAC
A-1R XS2081559119 LT PIFsf Paid In Full AAAsf
A-2 XS1531383898 LT PIFsf Paid In Full AAAsf
A-R XS2411137289 LT AAAsf New Rating
B-1 XS1531384516 LT PIFsf Paid In Full AA+sf
B-2 XS1531384276 LT PIFsf Paid In Full AA+sf
B-R XS2411137875 LT AAsf New Rating
C XS1531385083 LT PIFsf Paid In Full A+sf
C-R XS2411139145 LT Asf New Rating
D XS1531385596 LT PIFsf Paid In Full BBB+sf
D-R XS2411139814 LT BBB-sf New Rating
E XS1531385919 LT PIFsf Paid In Full BBsf
E-R XS2411140150 LT BB-sf New Rating
F XS1531386131 LT PIFsf Paid In Full B-sf
F-R XS2411162048 LT B-sf New Rating
X XS2411133536 LT AAAsf New Rating
Z XS2411165579 LT NRsf New Rating
TRANSACTION SUMMARY
Oak Hill European Credit Partners V Designated Activity Company is
a securitization of mainly senior secured obligations (at least
90%) with a component of senior unsecured, mezzanine, second-lien
loans and high-yield bonds. Refinancing note proceeds were used to
refinance existing notes. The current portfolio has a target par of
EUR400 million. The portfolio is actively managed by Oak Hill
Advisors (Europe), LLP. The collateralized loan obligation (CLO)
has a 4.5-year reinvestment period and an 8.5 year weighted average
life (WAL).
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors to be in the 'B'/'B-' category.
The Fitch weighted average rating factor (WARF) of the identified
portfolio is 24.71.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch weighted
average recovery rate (WARR) of the identified portfolio is
63.27%.
Diversified Portfolio (Positive): The transaction includes two
Fitch matrices: one effective at closing corresponding to a top 10
obligor concentration limit at 18% and a fixed-rate asset limit of
10%; and one that can be selected by the manager at any time from
one year after closing as long as the portfolio balance (including
defaulted obligations at their Fitch collateral value) is above
target par and subject to the same limits as the previous matrix.
The transaction also includes various concentration limits,
including the maximum exposure to the three largest (Fitch-defined)
industries in the portfolio at 40%. These covenants ensure that the
asset portfolio will not be exposed to excessive concentration.
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Neutral): The WAL used for the transaction's
matrix and stress portfolio analysis is 12 months less than the WAL
covenant at the issue date. This reduction to the risk horizon
accounts for the strict reinvestment conditions envisaged by the
transaction after its reinvestment period. These include, among
others, passing both the coverage tests and the Fitch 'CCC' bucket
limitation test post reinvestment as well as a WAL covenant that
progressively steps down over time, both before and after the end
of the reinvestment period. This ultimately reduces the maximum
possible risk horizon of the portfolio when combined with loan
pre-payment expectations.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A 25% increase of the mean default rate (RDR) across all
ratings and a 25% decrease of the recovery rate (RRR) across
all ratings would result in downgrades of up to four notches
across the structure.
-- Downgrades may occur if the build-up of the notes' credit
enhancement following amortisation does not compensate for a
large loss expectation than initially assumed due to
unexpected high levels of default and portfolio deterioration.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings would result in an
upgrade of no more than three notches across the structure,
apart from the class X and A notes, which are already at the
highest rating on Fitch's scale and cannot be upgraded.
-- After the end of the reinvestment period, upgrades may occur
on better-than-expected portfolio credit quality and deal
performance, leading to higher credit enhancement and excess
spread available to cover losses in the remaining portfolio.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Oak Hill European Credit Partners V DAC
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
===================
M O N T E N E G R O
===================
KAP: Uniprom Proposes EPCG to Take Over Production Operations
-------------------------------------------------------------
Radomir Ralev at SeeNews reports that Montenegro's Uniprom, owner
of KAP aluminium smelter, has proposed to state-controlled power
utility Elektroprivreda Crne Gore (EPCG) to take over the
production of primary aluminium at the smelter free of charge for a
year starting January 1, 2022 in order to avoid the plant's
closure, local media reported.
If EPCG rejects the proposal, Uniprom will proceed to the gradual
closure of KAP as of Dec. 15, due to the unfavourable price of
electricity that will come into force at the beginning of 2022,
public broadcaster RTCG quoted Uniprom owner and CEO Veselin
Pejovic as saying in the proposal on Dec. 11, SeeNews notes.
According to SeeNews, EPCG has analyzed the proposal of Uniprom at
an extraordinary meeting of its board of directors, RTCG quoted the
power utility's CEO, Milutin Djukanovic, as saying on Dec. 11.
"The members of the board requested additional time so that they
could make a decision in accordance with their powers," Mr.
Djukanovic noted.
KAP entered bankruptcy proceedings in 2013 and was sold by
Montenegro's government to Uniprom in 2014, SeeNews relates.
=====================
N E T H E R L A N D S
=====================
OCI NV: Fitch Raises LT IDR to 'BB+', Outlook Stable
----------------------------------------------------
Fitch Ratings has upgraded OCI N.V.'s Long-Term Issuer Default
Rating (IDR) and senior secured rating to 'BB+' from 'BB'. The
Outlook on the IDR is Stable. The Recovery Rating is 'RR4'.
The upgrade follows OCI's application of strong cash flow
generation and proceeds from minority stakes to gross debt
reduction, which Fitch forecasts at USD3.2 billion at end-2021 and
USD2.7 billion at end-2022. This supports Fitch's expectations that
OCI will sustainably reduce funds from operations (FFO) net
leverage to below 3.5x, despite resumption of dividends and a
gradual normalisation of fertiliser and methanol prices by 2023
under Fitch's price deck.
The rating also captures OCI's strong global position in the
nitrogen fertiliser and methanol markets, modern industrial
footprint with cost competitiveness, robust profitability and
strong liquidity.
KEY RATING DRIVERS
Significant Debt Reduction: Fitch expects OCI's FFO net leverage to
fall under 2x in 2021 from 5.6x in 2020, following debt reduction
using strong cash generation and cash proceeds from the sale of
minority interests in Fertiglobe and OCI's methanol business. In
Fitch's view, gross debt repayments in excess of USD1 billion in
2021 reflect OCI's commitment to a financial policy that aims at
maintaining net debt to EBITDA at below 2x, and will result in
through-the-cycle FFO net leverage at around 3x, when fertiliser
and methanol prices gradually moderate.
Dividends from 2022: OCI will pay dividends from 2022 but has not
disclosed details regarding the amounts that will be paid. Fitch
assumes that OCI will generate break-even free cash flow (FCF)
after dividends and growth capex from 2022, which leads to broadly
stable net debt at around USD2.3 billion. With a re-leverage to
around 3x FFO net leverage from 2023, based on Fitch's mid-cycle
price assumptions, Fitch believes that this indicates sufficient
headroom under Fitch's rating sensitivities.
2022 Market Still Solid: Fitch expects fertiliser prices to
moderate in 2022 but remain higher than 2018-2020 levels. This
results in EBITDA decreasing to USD1.4 billion in 2022, with a
lower but still strong contribution from Fertiglobe and the US
methanol assets, due to their access to cheaper gas. Fitch
forecasts a weak result from the European methanol asset as high
gas cost prompted a production shutdown since the summer of 2021,
though its contribution to consolidated EBITDA is typically
limited. OCI mitigates the impact of high gas prices on its
nitrogen Europe segment by importing ammonia from its Fertiglobe
assets.
Fertiglobe IPO Rating-Neutral: Fitch estimates that OCI's sale of a
8% stake in Fertiglobe for USD461 million will result in an
increase of dividend leakage on average of about USD30 million. OCI
continues to fully consolidate Fertiglobe as it owns the majority
of shares and appoints six of its 11 board members. Fitch
understands from management that Fertiglobe will pursue a
conservative financial policy with net debt/EBITDA kept below 2x.
Fertiglobe's dividend policy is to distribute substantially all FCF
after growth capex.
Minority Dividend Leakage Intensifies: Fitch expects annual
dividend to minorities on average of USD330 million over 2022-2024,
factoring in the reduced share of OCI in Fertiglobe and in its
methanol division. High expected minority dividends of USD755
million in 2021 are related to a USD850 million special dividend
paid by Fertiglobe prior to its IPO and the payment of dividend
arrears by Sorfert. The payment patterns of dividends to minorities
within Fertiglobe can be irregular, which can create volatility in
OCI's FFO.
Decreasing Debt Cost, Subordination: Senior secured notes at OCI
level have a weak security package, and are structurally
subordinated to significant prior-ranking debt at several operating
subsidiaries. Fitch estimates prior-ranking debt at operating
subsidiaries will amount to about USD2.3 billion at end-2021. Over
the past three years OCI has carried out several transactions to
reduce its cost of debt, extend maturities, and reduce the amount
of prior-ranking debt in its capital structure, and Fitch expects
OCI to maintain efforts to simplify and optimise its debt
structure. As a result, Fitch aligns the senior secured rating with
the IDR with a Recovery Rating of 'RR4'.
Green Focus in Capex: OCI will through Fertiglobe focus growth
capex on cleaner ammonia to take advantage of growing demand for
sustainable fuel (ammonia being a hydrogen carrier). A world-scale
blue ammonia project in Abu-Dhabi with Abu Dhabi National Oil
Company (ADNOC, AA/Stable) could be confirmed in 2022 and
operational in 2025, while feasibility studies to produce green
ammonia on a commercial scale are being conducted. Since the
completion of its major expansionary capex, 52% of OCI's producing
assets were younger than 10 years. The modern asset base and
low-cost position place OCI favourably in a highly competitive
environment, and results in maintenance capex of less than USD300
million per year.
Strong Nitrogen and Methanol Position: OCI is a top-five global
nitrogen fertiliser (74% of capacity) and methanol producer (18%)
by capacity, while also producing melamine or diesel-exhaust fuel
(8% of capacity). Fertiglobe, its 50%-owned JV with ADNOC, is the
largest nitrogen fertiliser in MENA and seaborne exporter globally.
OCI's business profile is supported by the proximity of assets to
end-customers and cost-effective sources of natural gas, allowing
the company to produce and distribute at a competitive cost
compared with its global peers.
DERIVATION SUMMARY
OCI's peers include CF Industries Holdings, Inc (BBB-/Stable),
Eurochem Group AG (BB/Positive), The Mosaic Company (BBB-/Stable),
Methanex Corp (BB/Positive) and ICL Group Ltd (BBB-/Stable).
OCI is smaller than CF Industries, Mosaic and Eurochem, but
comparable to Methanex and ICL. Unlike CF Industries and Mosaic
(100% fertilisers) and Methanex (100% methanol) but similar to ICL,
OCI benefits from market diversification with revenues derived from
nitrogen fertilisers and industrial chemicals such as methanol,
melamine and diesel-exhaust fluid. Its industrial footprint is more
diversified than Eurochem's or ICL's, with assets in Europe, North
America and the Middle East allowing the company to serve all main
fertiliser and methanol markets.
OCI's production assets in the US and MENA are positioned in the
first quartile of the relevant products' cost curves, and projected
margins are comparable with those of peers that also benefit from
favourable feedstock prices.
OCI's projected net leverage in the 2x-3x range is similar to
Eurochem's but higher than Mosaic's (1x-1.5x), CF Industries'
(1.5x-2x), Methanex's (1.5x-2x) or ICL's (2x-2.5x). Compared with
Eurochem, which is involved in capacity projects, OCI is less
exposed to execution risk and exhibits a clearer and conservative
financial policy.
KEY ASSUMPTIONS
-- Fertilisers and methanol prices assumptions derived from
Fitch's price deck;
-- Volumes sold decreasing to 13.2mt in 2021, before growing to
14.5mt by 2024;
-- EBITDA margin increasing to 37% in 2021, before decreasing to
28% in 2022 and 26% in 2023-2024;
-- Capex on average at around 8% of sales over 2021-2024;
-- Break-even FCF from 2022;
-- Dividends paid to non-controlling interests minus dividends
received from associates of USD755 million in 2021, and USD260
million-USD450 million in 2022-2024;
-- Gross debt at USD3.2 billion in 2021 and at around USD2.7
billion over 2022-2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Further gross debt reduction leading to FFO net leverage
sustainably below 2.5x;
-- A record of compliance with a clearly-defined conservative
financial policy including dividend policy;
-- Sustained positive FCF after dividends.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Failure to maintain FFO net leverage below 3.5x, due to
weaker-than-expected results or a more aggressive capital
allocation;
-- Increase in gross debt to above USD3 billion;
-- Negative FCF after dividends on a sustained basis.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: As of 30 September 2021, OCI held USD754 million
in cash and equivalents, a partly undrawn USD830 million revolving
credit facility (RCF) maturing in April 2023 and a USD300 million
RCF at Fertiglobe level maturing in 2026. Fitch expects year-end
cash balance to exceed USD0.8 billion, due to strong operational
cash generation and cash proceeds from the sale of stakes in
Fertiglobe and the methanol division. This, on top of forecast
positive FCF in 2021, provides comfortable liquidity in case of
market weakness. Fitch excludes some other undrawn credit
facilities as they mature in less than a year from Fitch's
liquidity analysis, but which provide additional short-term
uncommitted liquidity.
Proactive Debt Management: Other than Fertiglobe's USD1.1 billion
bridge facility, OCI has no significant debt maturity until 2024,
when the remainder of its EUR700 million 3.125% notes come due, as
it has redeemed in advance most debt due in 2023 and 2024 over the
past 18 months. As a result of the refinancing, Fitch estimates
that cost of debt will decrease below USD150 million from 2022,
compared with USD286 million on average over 2017-2020. Fitch
expects Fertiglobe to successfully refinance the bridge facility in
2022, given its good credit metrics and strong cash generation.
ISSUER PROFILE
OCI is a producer of nitrogen fertiliser and methanol with a
nameplate capacity of 16.7 million tonne across assets in Europe,
Middle East and North America.
SUMMARY OF FINANCIAL ADJUSTMENTS
-- USD292.2 million leases reclassified as other liabilities,
excluded from financial debt; USD8.6 million interest expense
related to leases reclassified to selling, general and
administrative expenses from interest expenses; depreciation &
amortisation (D&A) reduced by USD41.3 million related to
rights-of-use assets D&A.
-- USD148.7 million factoring added to short term debt and trade
receivables; difference between end-2020 factoring and end-
2019 factoring reclassified from working capital to cash flow
from financing.
-- USD39.4 million deposit for maintenance to be used to fund
capex and USD6.7 million held as collateral against letters of
credit and letters of guarantees issued are treated as
restricted cash.
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.
In accordance with Fitch's policies, the issuer appealed and
provided additional information to Fitch that resulted in a rating
action that is different than the original rating committee
outcome.
===========
S E R B I A
===========
SERBIA: S&P Affirms 'BB+/B' SCRs, Alters Outlook to Positive
------------------------------------------------------------
On Dec. 10, 2021, S&P Global Ratings revised its outlook on Serbia
to positive from stable. At the same time, S&P affirmed the 'BB+/B'
long- and short-term foreign and local currency sovereign credit
ratings on the sovereign.
Outlook
The positive outlook reflects S&P's view that Serbia's growth
perspective should remain broadly resilient to the adverse effects
of the pandemic's ongoing wave amid prudent macroeconomic policy
settings. Absent a substantial deterioration in epidemiological
conditions, S&P expects Serbia to achieve relatively high and
balanced growth rates in the medium term. Coupled with the new
(albeit unfunded) policy coordination arrangement with the IMF,
this should support the government's efforts to consolidate public
finances and stabilize the public debt burden. At the same time,
high net FDI inflows should continue to overfund Serbia's current
account deficits (CADs) and help to contain external debt and keep
Serbia's foreign exchange (FX) reserve position strong.
Upside scenario
S&P said, "We could raise our rating on Serbia in the next 12
months should higher FDI inflows or lower CADs than we currently
project further bolster the country's buffers against external
pressures. We could also raise the rating if fiscal consolidation
exceeded our expectations, putting net government debt as a share
of GDP on a firm downward trend. Lastly, we could raise the rating
if the country sustained higher real GDP growth rates over the
medium term than we project, for example because of stronger public
and private investment activity."
Downside scenario
S&P said, "We could revise the outlook to stable if Serbia's growth
prospects proved to be weaker than forecast, derailing the
government's fiscal consolidation plans and pushing public debt up.
Similarly, we could revise the outlook to stable if weaker balance
of payments performance put pressure on FX reserves or resulted in
the buildup of external debt."
Rationale
S&P's rating on Serbia is supported by the sovereign's moderate
public debt and a credible monetary policy framework. The rating is
constrained by the country's relatively weak institutional
settings, comparatively low economic wealth levels, a sizable net
external liability position, and the continued extensive use of
euros in the economy.
Institutional and economic profile: Less stringent lockdown
restrictions and strong policy support have supported a strong
domestic demand-driven recovery
-- S&P expects Serbia's economy will expand by about 7% in 2021
and by over 4% in 2022, following only a shallow contraction last
year.
-- Domestic demand, specifically public investments and private
consumption, will remain an important growth driver.
-- It remains uncertain whether next year's elections will
interrupt the trend of concentration of political power.
Throughout 2021 Serbia's economy has been recovering strongly and
S&P now expects real GDP to expand by 7% for the full year. This
rebound follows an only modest contraction of 1% in 2020, which
means that Serbia's economy achieved its pre-pandemic GDP levels
much quicker than most other countries.
There are several factors explaining this strong performance:
-- Containment measures have been less stringent during the
pandemic and a fast vaccination rollout meant they could be lifted
earlier than elsewhere.
-- Fiscal and monetary policy support was effective in cushioning
the effects of the pandemic, particularly regarding the labor
market.
-- Sectors more affected by the pandemic, such as hospitality and
tourism, are less relevant for Serbia's economy, while more
important sectors, such as manufacturing and construction, were
either not overly affected by the pandemic or benefited from high
government investments.
These factors contributed to buoyant domestic demand this year,
predominantly in the form of private consumption and public
investments, seen in Serbia's construction sector expanding by
almost 16% in the first nine months of 2021 in real terms.
Still, as elsewhere, risks relating to the pandemic remain.
Although Serbia had a strong initial start to its vaccination
campaign, the number of vaccinated people started to stagnate
around the midyear and currently, less than 50% of the population
is fully vaccinated. However, S&P believes that even if the
pandemic resurged more strongly than expected, its economic impact
would be more limited than in 2020. The economy has effectively
adapted to the pandemic, and so lockdown measures, if any, will
likely be more targeted and selective than previously. However,
these risks could affect not just domestic demand, but also
external demand for Serbia's exports, given that the economy is far
more open than it was heading into the global financial crisis more
than a decade ago. Exports now constitute about half of overall
economic output, compared with less than a third in 2007.
S&P said, "Serbia's economic resilience to the pandemic so far is
also the reason why we believe real GDP growth will exceed 4% in
2022. External and domestic demand will remain strong, with the
latter also due to high government investments. Even though
Serbia's long-term growth potential is hampered by several
structural bottlenecks, we consider there is a good chance Serbia
could exceed our 3.5% medium-term growth forecast. On the one hand,
the current public infrastructure investments, for example in
transportation, energy, and utilities, could boost Serbia's
productivity more strongly than we expect. Government investments,
at over 7% of GDP, are twice as high as they were only six years
ago. On the other hand, Serbia's labor market still has room to
grow, given relatively high unemployment and despite what we
generally consider an adverse demographic profile due to aging
population and net emigration."
The last election, in June 2020, saw the victory of the incumbent
Serbian Progressive Party, which won three-quarters of the seats in
parliament. The elections were overshadowed by the boycott by
several main opposition parties and low voter turnout. This
prompted President Aleksandar Vucic to call general elections for
April 2022. S&P believe any new government will also likely try to
advance reforms anchoreds by the recently signed nonfinancing
Policy Coordination Instrument with the IMF, which predominantly
aims to strengthen tax administration and the management of fiscal
risks, tackle the informal economy, and develop capital markets.
S&P said, "At the same time, we continue to believe that the
ongoing centralization of the institutional setup could undermine
long-term policy predictability. This could, in turn, lead to
flagging investor confidence. We also think that slowing the
emigration of Serbia's most educated by creating adequate jobs
across skill levels will remain an important test for subsequent
administrations. Furthermore, relations between Serbia and Kosovo
remain contentious. A broader normalization of relations between
the two, a prerequisite for Serbia's EU accession, is likely to
remain a long-term challenge, in our opinion."
Flexibility and performance profile: Fiscal and external pressures
proved more manageable during the pandemic compared to previous
episodes of stress
-- S&P expects fiscal deficits will narrow, whereas government
funding costs will remain contained.
-- Serbia's CADs will be covered by net FDI inflows over the next
few years.
-- FX reserves are at record highs, despite interventions by the
National Bank of Serbia (NBS) to preserve the dinar's stability.
S&P said, "Due to the renewed extension of support measures and a
stronger-than-expected economic recovery, we expect a fiscal
deficit of around 5% of GDP for 2021. This is mostly a result of
strong tax revenue growth and despite a significant third fiscal
stimulus package, which included additional stimulus worth around
4% of GDP in the form of additional transfers to citizens, business
support, and investment spending. We believe the fiscal deficit
will begin to narrow in 2022 as fiscal support measures are
withdrawn. Political considerations ahead of the April 2022
elections could slow the pace of consolidation, but we believe that
high nominal GDP growth should mitigate these risks. More broadly,
we expect the government will likely revert to its pre-pandemic
conservative fiscal management, which was characterized by tight
spending control and narrow deficits. However, the authorities
intend to continue increasing capital spending to close the
infrastructure gap while aiming to guide public finances toward
balance over the next five years, amid broader economic reforms.
"Given the improved fiscal outlook, we believe public debt, net of
liquid government assets, will stabilize over the next few years,
at slightly below 50% of GDP. In gross terms, general government
debt will decrease to about 54% of GDP from about 58% because the
government will reduce some of its ample liquid assets that it
accumulated over the past months as a cash buffer. Current
financing conditions have been favorable, and the government has
been able to finance itself in international and domestic markets
at very favorable rates, pushing down the effective interest rate.
In addition, the government plans to monetize this year's
additional allocation of IMF Special Drawing Rights (SDR) in 2022,
close to $880 million (in part or in total), rather than issue debt
in international markets. This will create a long-term financial
obligation of the government toward the IMF at a marginal interest
cost. Still, almost 70% of government debt is denominated in FX,
making it vulnerable to exchange-rate volatility. Furthermore, the
debt of Serbia's state-owned enterprises has been consolidated
under total government debt, which reduces further contingent
liabilities from this source, although the restructuring of
state-owned enterprises has yielded only modest success so far."
Serbia's external vulnerabilities are significantly lower than they
were a decade ago, which was a stabilizing factor during the
pandemic. Serbia has diminished its reliance on more volatile
portfolio inflows compared with the era after the financial crisis,
when these flows were the dominant source of financing for its
large twin deficits. FDI--predominantly in tradeable sectors--has
fully financed Serbia's current account deficits in recent years
and S&P expects this trend to continue. This foreign investment
over the past decade has also rushed into Serbia's manufacturing
sector, strengthening and diversifying export receipts. These
inflows have also aided the NBS' efforts to augment its FX reserve
position.
Similar to fiscal policy, monetary policy support from the NBS was
quickly deployed at the start of the pandemic. The NBS cut the key
policy rate and increased the provision of liquidity to the banking
sector via swap lines and repurchase agreements (repos). The NBS
also stepped up FX-market intervention over the past two years,
both selling and buying FX, to stabilize the dinar. Reserve
accumulation continued, nevertheless, and the NBS' FX reserves
stand at near record highs, at EUR16.3 billion ($18.5 billion) at
the end of October 2021. S&P estimates reserves (net of the
required reserves banks maintain with the NBS against their
domestic FX liabilities) will cover more than four months of
current account payments on average through its forecast to 2024.
Headline price pressures have recently risen in line with global
trends, which has prompted the NBS to start tightening monetary
conditions via raising the average repo rate. At the same time, in
contrast with regional peers, core inflation has remained within
the NBS's target thanks to the stable exchange rate, but also
thanks to broadly anchored inflation expectations on the back of
the institution's effective efforts to keep low and stable
inflation over the last seven years. In October, headline inflation
stood at 6.6%, mainly driven by food and energy prices. S&P expects
average inflation of 4% for full-year 2021, with only moderate
increases in core price growth until the year-end and 3%-4% growth
in 2022. This could mean that headline inflation could converge
back to the NBS' target tolerance band of 3% plus or minus 1.5%
fairly quickly in the second half of 2022 as prices of food and
energy normalize.
The stability of the majority foreign-owned banking sector has
improved, although the euroization of deposits and loans remains
high at almost 60% of total stocks. The system's reported average
capital adequacy ratio was 21.7% as of Sept. 30, 2021, and its
loan-to-deposit ratio is strong, at slightly under 90%. The sector
remains profitable, although returns have declined, and supportive
of economic growth. Nonperforming loans stand at 3.6% of the total
and continue to decline from the peak of 22% in 2015, although S&P
believes that some asset-quality deterioration is likely when
official forbearance and support measures are wound down. The sale
of Serbia's third-largest lender, the previously state-owned
Komercijalna Banka, to Slovenia's Nova Ljubljanska Banka (NLB),
concluded in 2020. NLB now owns 88% of the entity.
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
OUTLOOK ACTION; RATINGS AFFIRMED
TO FROM
SERBIA
Sovereign Credit Rating BB+/Positive/B BB+/Stable/B
Transfer & Convertibility Assessment BBB- BBB-
Senior Unsecured BB+ BB+
=========
S P A I N
=========
AI CALENDARIA: Fitch Affirms 'BB' LT IDRs, Outlook Stable
---------------------------------------------------------
Fitch Ratings' has affirmed A.I. Candelaria (Spain) S.A.'s
Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs)
at 'BB'. The rating action affects USD975 million of notes
outstanding due between 2028 and 2033. The Rating Outlook is
Stable.
A.I. Candelaria's ratings are linked to the credit profiles of
OCENSA (BB+/Stable) and Ecopetrol S.A. (BB+/Stable), which
indirectly own 72.648% of OCENSA, and is A.I. Candelaria's only
source of dividends to service debt. The ratings are constrained by
A.I. Candelaria's moderately high leverage and structural
subordination to OCENSA's creditors.
The ratings also incorporate the significant influence of A.I.
Candelaria on OCENSA's dividend policy, which lessens concerns
regarding the dependence on a sole source of cash flow coming from
its minority interest in OCENSA. The ratings are constrained by
A.I. Candelaria's moderately high leverage and structural
subordination to OCENSA's creditors.
KEY RATING DRIVERS
Adequate Dividend Stream: A.I. Candelaria's ratings are supported
by the quality of the dividends received from its 27.352% stake in
OCENSA. The company participates in a regulated business with
strong cash flows and a good track record of dividends received.
Fitch's base case scenario assumes dividends from OCENSA ranging
between USD180-190 million over the rating horizon, which
incorporates the negative effect of a higher corporate tax rate
prevailing in Colombia from 2022.
A.I. Candelaria benefits from OCENSA's key position as the largest
crude oil transportation company in Colombia, which connects the
most important oil basins with the country's main export terminal
and refineries. This helps OCENSA to remain competitive through
different price cycles.
Moderate Capital Structure: A.I. Candelaria's capital structure is
moderate for its current rating. Gross leverage, as measured by
total debt/dividends received, is expected to reach 5.8x as of YE
2021 following the issuance of USD600 million senior secured notes
due 2033. The proceeds of the issuance were mainly used to pay for
the tender offer of USD375 million of the company's USD750 million
notes due 2028 and to partially finance the acquisition of Darby
Colpatria Capital's (Darby) 5% stake in OCENSA.
Leverage is expected to gradually trend towards 4.5x in the
medium-term, once the company begins the amortization of its
outstanding notes in 2022. The amortized structure of A.I.
Candelaria's notes reduces the company's exposure to refinancing
risk. FFO is expected to cover interest expenses more than 3.0x
over the rating horizon.
Structural Subordination: A.I. Candelaria's outstanding notes will
remain structurally subordinated to OCENSA's USD500 million notes.
A.I. Candelaria is a holding company that depends on dividends it
receives from OCENSA to service its own obligations. Therefore, a
substantial increase in leverage at the OCENSA level could increase
the structural subordination of A.I. Candelaria's creditors. This
risk is mitigated by OCENSA's track record of stable dividend
distributions and A.I. Candelaria's veto right over changes in
OCENSA's dividend policy and capex above USD100 million. Fitch
believes the projected dividend stream would be more than
sufficient to cover interest expense and principal payments
resulting from the issuance.
Strong Minority Rights: The shareholders' agreement gives A.I.
Candelaria significant influence on OCENSA's dividend policy, which
lessens the concerns regarding the dependence on a sole source of
cash flow coming from its minority interest in OCENSA. A.I.
Candelaria has a strong veto right on OCENSA's relevant decisions,
and is entitled to appoint two of the five directors to OCENSA's
board. A 90.1% majority of shareholder votes is required to change
the dividend policy, among other significant business decisions to
protect cash flow and liquidity.
DERIVATION SUMMARY
A.I. Candelaria's ratings rely on the dividend stream received from
OCENSA, which has an investment-grade credit quality. Overall,
assets such as crude and products pipelines, natural gas and other
contractually-supported operations have predictable operating
performance, and consistent earnings and cash flow. OCENSA's credit
profile is linked to that of Ecopetrol, which indirectly owns
72.648% of OCENSA. Fitch believes operational integration and
strategic ties between the entities are important enough to create
economic incentives for Ecopetrol to effectively support OCENSA.
Tolling-based natural gas peers in the region, such as
Transportadora de Gas Internacional S.A. ESP (TGI; BBB/Stable) and
Transportadora de Gas del Peru, S.A. (TGP; BBB+/Stable), benefit
from the cash flow stability afforded by more purely take-or-pay
models, allowing them to support more leverage. OCENSA's stronger
financial profile, with average leverage below 0.5x over the rating
horizon, is offset by a greater exposure to volumetric risk, given
its higher reliance on ship-and-pay contracts relative to peers.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer
include:
-- OCENSA's transported volumes for Ship-and-Pay contracts
declining during the rating horizon;
-- OCENSA's transported volumes for Ship-or-Pay contracts
according to negotiated terms with off-takers;
-- Regulatory tariffs remain through 2023;
-- Dividend pay-out of 100%;
-- Exchange rate forecasted by Fitch's Sovereign Group;
-- Debt service reserve account covers 1.25x the next debt
service payment (interest and principal);
-- Dividends distribution contingent on meeting the required debt
service reserve account.
RATING SENSITIVITIES
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- An upgrade of OCENSA's credit ratings.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A downgrade of OCENSA's credit ratings;
-- Interest coverage (Dividends received/Gross interest) below
2.5x on a sustained basis;
-- A significant additional debt at OCENSA's level, which
increases the structural subordination of A.I. Candelaria;
-- The failure to deleverage below 4.5x over the rating horizon,
which could widen the rating differential with OCENSA.
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
Liquidity Not a Concern: A.I. Candelaria has no liquidity issues.
Liquidity is expected to be strong, considering the company's
forecast for readily available cash and consistently positive FCF
generation. The principal of the notes due 2028 will be payable in
12 consecutive semi-annual instalments beginning in 2022,
equivalent to 70% of the issuance. The notes due 2033 will be
payable in 10 consecutive semi-annual instalments beginning in
2028, equivalent to 75% of the issuance.
The balance will be paid on the maturity dates. The debt service
reserve account to be constituted as part of the collateral will
represent a liquidity buffer over the medium term which must cover
no less than 1.25x of the next debt service payment (interest and
principal).
ISSUER PROFILE
AI Candelaria (Spain S.A.) is a holding company whose main source
of cash is the dividends received from its 27.352% ownership
interest in Oleoducto Central S.A. (OCENSA), the largest crude oil
transportation company in Colombia.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
A.I. Candelaria's ratings are linked to OCENSA's credit profile.
[*] SPAIN: Bankruptcies Up 37% in Anadalusia in First 11 Months
---------------------------------------------------------------
Claire Gordon at EuroWeekly reports that Andalusian bankruptcy has
grown by 37% in the first eleven months of 2021 although this is
still slightly behind the national average of 40% that the data has
shown so far.
According to EuroWeekly, there have been 456 business tenders
leading up to November and in the same period an increase of 19% on
dissolutions bringing that number to 3,288.
The numbers come from a study by Informa D&B SAU (MSE), which is a
Cesce subsidiary company, EuroWeekly notes.
Regarding the month of November, the concursos in Andalusia have
risen by 32%, to 50, and the dissolutions have done so by 8%, to
reach 309, EuroWeekly discloses. The sector with the most
concursos this past month in the community has been Construction
and Activities, with nine, while Commerce leads the dissolutions
with 73, EuroWeekly states. By provinces, Seville and Malaga
concentrate the majority, with 13 and 9 tenders and 62 and 60
dissolutions, respectively, EuroWeekly relays.
There is a very high cumulative turnover amount across the ten top
companies that have started Andalusian bankruptcy proceedings this
month, EuroWeekly states. The total amount across the groups comes
to a total of EUR165 million, according to EuroWeekly.
Andalusia is currently the community with the second-highest level
of tenders and dissolutions in this year so far, EuroWeekly says.
Topping the chart is Madrid, with 6,934, 28% of the total,
EuroWeekly notes. The community in third is Valencia, where they
have grown by 29%, to 2,954, EuroWeekly states. In the country as
a whole, there have been 5,475 concursos and 24,460 dissolutions
since the beginning of the year, with an increase of 40% in the
number of concursos compared to the same period last year and 21%
in dissolutions, according to EuroWeekly.
===========
S W E D E N
===========
DOMETIC GROUP: S&P Alters Outlook to Positive, Affirms 'BB-' ICR
----------------------------------------------------------------
S&P Global Ratings revised its outlook on Sweden-based Dometic
Group AB to positive from stable, and affirmed its 'BB-' long-term
issuer and issue credit ratings on the group; the '3' recovery
rating on Dometic's unsecured debt is unchanged, although S&P
revised upward its recovery prospects to 60% from 55%.
S&P said, "Our positive outlook reflects a potential upgrade in the
next 12 months if we believe the group will maintain adjusted
FFO-to-debt above 25% and free operating cash flow (FOCF) to debt
above 15%.
"We anticipate Dometic's credit metrics to materially improve in
2022. We expect the demand for the group's products will continue
to drive organic revenue growth and allow it to sustain adjusted
EBITDA margins of 16.5%-17.5% in 2021 and 2022. Furthermore, the
full-year consolidation of 2021 acquisitions should propel material
improvements of Dometic's credit metrics in 2022, with FFO to debt
of more than 25% and FOCF to debt above 15%. We would view credit
metrics at this level as commensurate with a higher rating."
Dometic's revenue and earnings benefits from strong tailwinds in
the market for outdoor leisure products, with demand exceeding
pre-pandemic levels in 2021 with good market momentum protracted
for 2022. S&P said, "We now expect revenue of about Swedish krona
(SEK) 21 billion for 2021, with acquisitions contributing about
SEK2 billion. We expect cost inflation and restructuring charges to
affect EBITDA in fourth-quarter 2021, resulting in an EBITDA margin
of 17.0%-17.5% for the year. In 2022, however, the group's revenue
and earnings base will increase materially due to the acquisitions'
full-year impacts, with revenues reaching SEK26.5 billion-SEK27.0
billion, and we anticipate its EBITDA margin to be 16.5%-17.5%.
While we expect cost inflation to challenge Dometic's margins in
2022, we anticipate the group will effectively leverage its strong
brands to pass through any cost impacts, thereby maintaining its
EBITDA margin." On a rolling 12-month basis ended Sept. 30, 2021,
Dometic's revenue exceeded SEK20 billion for the first time,
reaching SEK20.2 billion. This was a 27% increase versus the same
period a year earlier, primarily supported by organic revenue
growth of about 20%. The company generated about SEK3.9 billion of
S&P Global Ratings-adjusted EBITDA over the past 12 months,
corresponding to a margin of about 19.2%. This compares favorably
to the SEK2.5 billion in the 12-month period ended third-quarter
2020 (15.6% margin).
Increased M&A activity will temporarily weigh on the group's credit
metrics. In 2021 Dometic will spend about SEK8.5 billion ($1
billion) on acquisitions, following no acquisition spending in 2019
and 2020. In the first nine months of 2021, the group completed or
announced nine acquisitions, the largest of which is the $670
million acquisition of U.S.-based cooler maker Igloo (the
transaction closed in October 2021). To partly absorb the leverage
spike arising from its material M&A activity, Dometic raised SEK3.4
billion in equity during second-quarter 2021. S&P said, "The equity
raise notwithstanding, we expect the elevated acquisition levels to
cause the group's adjusted debt to peak at SEK12.0 billion-SEK12.5
billion, or SEK14.5 billion-SEK15.0 billion including our
assumption of maximum earn out liabilities, from SEK7.6 billion in
2020. Given that the bulk of Dometic's acquisitions will be
completed and consolidated during the second half of the year,
credit metrics will be constrained in 2021, with FFO to debt of
15%-17% when not providing any pro forma effects on the
acquisitions for the first six months of 2021. For 2022 onward, we
expect that FFO to debt will improve markedly, primarily on the
full consolidation of EBITDA from the recently acquired companies.
While we understand that the Front Runner and Igloo acquisitions
include earnout components, we anticipate that any further
liability, which we estimate could range from SEK2.0 billion-SEK3.0
billion in a maximum scenario, and subsequent cash payment would
only be triggered by an improvement in operating performance that
would have a neutral impact on our adjusted credit metrics."
The acquisitions should provide more stability to its top line and
EBITDA. Through intensive acquisition activity in 2021, Dometic has
made material steps in diversifying its revenue base shifting away
from RV and marine original equipment manufacturer (OEM) end
markets and into consumer products segments focused on outdoor
leisure activities. S&P said, "We view this as stabilizing the
group's revenue base as the exposure to "low-ticket" items helps
reducing the level of cyclicality. We estimate that the total
revenue from the acquisitions represent 25%-30% of Dometic's
consolidated pro forma sales." On a rolling 12-month basis ended
third-quarter 2021, the OEM share of the company's revenue was 43%,
down from 61% in third-quarter 2017. Furthermore, through these
acquisitions, the group has gained access to additional
distribution channels, and benefits from the increased revenue
base, product, and brand portfolios.
Dometic's financial targets indicate that the company will continue
to seek out M&A opportunities and distribute shareholder returns
while maintaining reported leverage of about 2.5x The group
recently updated its financial targets to include a reported EBITA
target margin of 18%-19% over the business cycle. Meanwhile, its
targets related to net sales growth (average annual growth of 10%),
net leverage (net debt to EBITDA of around 2.5x) and dividends
(distribute at least 40% of net profit) are unchanged. S&P said,
"We anticipate the group will continue to seek out M&A
opportunities that fit its strategic agenda, while making healthy
distributions to shareholders. We anticipate Dometic will manage
its M&A agenda and dividend payments such that reported net
leverage does not exceed 2.5x."
The positive outlook reflects the potential for an upgrade over the
next 12-18 months if Dometic's credit metrics were to sustainably
improve.
S&P said, "We could upgrade the company if profitability and credit
metrics strengthened, including FFO to debt of at least 25% and
FOCF to debt remaining above 15% sustainably.
"We could revise the outlook to stable it Dometic's FFO to debt
failed to improve to above 25%. This could occur, for instance, if
the group's EBITDA margin were to deteriorate following cost
inflation or a sudden downturn in demand. This could also happen if
Dometic failed to improve its working capital position such that
cash flow is materially hindered and net debt were to build up."
VOLVO CAR: S&P Affirms 'BB+' ICR on Retained Financial Flexibility
------------------------------------------------------------------
S&P Global Ratings affirmed its 'BB+' issuer credit rating on
Sweden-based global carmaker Volvo Car AB (Volvo Cars), as well as
its 'BB+' issue rating and '3' recovery rating on the company's
unsecured debt.
S&P said, "The positive outlook indicates that we could raise our
ratings on Volvo Cars in the next 18 months if the company
successfully implements its EV transformation strategy while
maintaining profitable growth characterized by an adjusted EBITDA
margin at around 8% on a sustainable basis and a comfortable net
cash position.
S&P thinks that Volvo Cars' EV transformation plan is addressing
the regulatory push for cleaner mobility in its key markets. In
Europe, China, and the U.S., where Volvo Cars generates about 84%
of its sales, regulation on CO2 emissions is tightening, although
at different paces, with the U.S. lagging behind Europe and China.
Volvo Cars has been one of the early movers to commit to full
electrification, targeting a battery electric vehicle (BEV) sales
mix of 50% by 2025, and 100% by 2030. This represents a major shift
from its current sales mix that was still skewed toward internal
combustion engine cars (about 97% of its sales as of June 30, 2021,
of which 22% were plug-in hybrid electric vehicles [PHEV]). To that
end, Volvo Cars intends to launch at least one new BEV each year
until 2025. The XC40 Recharge, the company's first BEV was launched
in late 2020 and accounted for about 3% of sales in the first six
months of 2021. The C40 Recharge, its second BEV was launched
during 2021. Volvo Cars has yet to establish itself as a pure EV
player and we think that competition will intensify from incumbent
automakers seeking to grasp a share of the BEV market to comply
with their own CO2 emissions targets as well as from new entrants.
At the same time, over the past decade, Volvo Cars' management has
successfully repositioned the company in the premium segment,
evidenced by a steadily growing market share (from about 5% global
premium market share in 2016 to about 7% in 2020, according to LMC
Automotive), improved price and model mix, and positive free
operating cash flow.
Large investments in Volvo Cars' new generation of BEVs and a
rising EV share in the sales mix will constrain EBITDA margin
expansion. S&P said, "In our base-case scenario, we anticipate that
Volvo Cars' EBITDA margin will hover around 8% in 2022 and 2023,
considering a dilutive effect from the expected step up in
capitalized research and development costs to SEK13 billion-SEK15
billion annually compared with SEK7 billion-SEK9 billion in the
last three years. We reclassify these costs as operating expenses
as per our standard adjustments for automakers reporting under
IFRS." This compares with an S&P Global Ratings-adjusted EBITDA
margin of 8%-9% expected in 2021, supported by favorable pricing in
the context of strong consumer demand and supply constraints from
the ongoing semiconductor shortage. At the same time, contribution
margins on new BEV models will remain below the current portfolio
until at least 2024. With the expected steady increase of these
models to 50% of Volvo Car's sales by 2025, this could create
additional margin headwinds and prevent profitability from
converging toward that observed by other premium carmakers such as
Mercedes-Benz, BMW, or also larger BEV-only players such as Tesla.
The SEK20 billion IPO proceeds will help preserve Volvo Cars' net
cash position despite large capital expenditure (capex) and swings
in working capital that will likely lead to some volatility in free
cash flow generation. For the period 2021-2023, S&P expects weaker
free cash flow generation than in recent years, due to higher capex
to support the development of new BEVs but also due to outflows in
working capital over the next few years related to the targeted
change of distribution model from car dealers to direct sales,
which will move the dealer inventory on to Volvo Cars' balance
sheet. Volvo Cars intends to use about 70% of the IPO proceeds for
the in-house production of electric motors and for investments in
battery supply. Against this backdrop, S&P thinks the IPO net
proceeds of about SEK19.7 billion will help to preserve an S&P
Global Ratings-adjusted net cash position of about SEK15
billion-SEK17 billion in 2022 and about SEK6 billion-SEK8 billion
in 2023, which is a key support to the current rating on Volvo Cars
and cushions the damage on credit metrics from temporary episodes
of volatility in its end markets and operating performance. In
addition, the company's high cash balance and additional credit
facilities bolster liquidity. As of end-June 2021, Volvo had access
to liquidity sources equivalent to about 23% of its last 12 months
sales and reported a net cash position of SEK24 billion; this is in
line with the company's intentions to maintain liquidity sources in
excess of 15% of its sales.
Polestar's cash burn will increase significantly over the next two
years, but this will not necessarily affect Volvo Cars. In
September 2021, Volvo Cars' 49.5% owned affiliate Polestar signed
an agreement to combine its business with Gores Guggenheim Inc.
(Gores), a special-purpose acquisition company listed on the New
York stock exchange, in first half 2022. Polestar is a pure play
BEV company with an ambitious expansion plan, targeting a tenfold
increase in sales to 290,000 vehicles in 2025 from 29,000 expected
in 2021. S&P said, "We think that Polestar is a strategic asset for
Volvo Cars because of the operational ties between the two
companies. Polestar is an asset-light company and relies on Volvo
Cars' manufacturing facilities to produce its cars, and the two
companies are engaged in joint research and development (R&D)
efforts in key areas of EV and digital vehicle technology.
According to its business plan, Polestar will burn cash until 2023.
Considering pro forma cash on balance sheet of about $1.5 billion
post business combination with Gores, we estimate that Polestar's
cash needs will amount to about $1.7 billion over 2022-2023. To
date, Volvo Cars applies equity accounting for its stake in
Polestar. If we were to apply a pro rata consolidation, the cash
flow profile of the combination of Polestar with Volvo Cars would
therefore look much weaker than on a stand-alone basis, with
cumulative free operating cash flow of SEK 5 billion–SEK 6
billion compared with our forecast of SEK13 billion-SEK14 billion
for Volvo Cars on a stand-alone basis. Although we currently do not
apply pro rata consolidation of Polestar, we reflect the risks
inherent in the company's expansion plan, its start-up-like cash
flow profile, and possible calls on Volvo Cars for additional
funding, in a one-notch negative adjustment to the rating.
Nevertheless, we currently do not expect that Volvo Cars will be
forced to make further cash injections into Polestar, as the
company is expected to fund its expansion with fresh equity, and we
note that Volvo Cars could opt out from additional contribution to
Polestar's cash needs in exchange for a further dilution of its
stake in its affiliate."
S&P said, "We continue assessing Volvo Cars as a highly strategic
subsidiary of the Geely group.The group parent, Zhejiang Geely
Holding Group Co. Ltd. (BBB-/Stable/--), controls Volvo Cars
through its ownership of 82% of the company's shares. We think that
Volvo Cars and Geely Auto will continue to optimize synergies
through joint-purchasing, joint-development of new technologies and
platform sharing while keeping their own stand-alone operations.
These cost benefits derived from the Geely group balance Volvo
Car's small scale and reliance on a limited number of car
models--the company's three bestseller models (XC40, XC60, XC90)
drive more than 70% of its sales. While Volvo Cars accounts for a
large portion of the Zhejiang Geely's auto volume sales (34% in
2020) and represents a strategic asset to the group, we do not
align our rating on Volvo Cars with the rating on Zhejiang Geely."
This is due to the lack of full integration of Volvo Cars'
operations with the group and because Volvo Cars continues to be
managed independently.
S&P said, "The positive outlook indicates that we could raise our
ratings on Volvo Cars in the next 18 months if the company
successfully implements its EV transformation strategy while
maintaining profitable growth.
"We could raise our ratings on Volvo Cars if the company shifts its
sales mix toward BEV, supported by the successful roll-out of new
models, platforms, and enhanced software and connectivity features,
while maintaining an adjusted EBITDA margin of about 8% on a
sustainable basis and a comfortable net cash position. The upgrade
would also hinge on Geely's rating remaining at 'BBB-'.
"We could change our outlook to stable if we observed missteps with
Volvo Cars' electrification and technology strategy. This could
lead to weaker-than-expected free cash flow generation and make it
difficult for the company to sustain its net cash position.
Missteps in the execution of Polestar's business plan that increase
the pressure on Volvo Cars to make cash contributions to Polestar,
or a more aggressive financial policy through higher shareholder
returns could also lead us to revise our outlook to stable.
Finally, although considered remote at this stage, we could also
change our outlook to stable if we lowered the rating on Geely to
'BB+'."
===========
T U R K E Y
===========
ISTANBUL TAKAS: Fitch Affirms 'BB-' LT IDRs, Alters Outlook to Neg.
-------------------------------------------------------------------
Fitch Ratings has revised Istanbul Takas ve Saklama Bankasi A.S.'s
(Takasbank) Outlook to Negative from Stable and affirmed the bank's
Long-Term Issuer Default Ratings (IDRs) at 'BB-'.
The rating action follows the revision of the Outlook on Turkey's
Long-Term IDR to Negative from Stable.
KEY RATING DRIVERS
The Outlook revision primarily reflects increased risks to the
sovereign's ability to support Takasbank. Takasbank's IDRs, Support
Rating of '3' and Support Rating Floor (SRF) of 'BB-' reflect
Fitch's view of a moderate probability of support from the Turkish
sovereign, in case of need.
Takasbank's SRF is higher than for most commercial systemically
important domestic banks. This is because, in Fitch's opinion,
Takasbank has exceptionally high systemic importance for the
Turkish financial sector. Contagion risk from Takasbank's default
would be considerable, given the bank's inter-connectedness with
the wider Turkish financial sector as Turkey's only central
counterparty clearing house (CCP).
The state's ability to provide extraordinary foreign-currency
support to the banking sector, if required, may be constrained by
limited central-bank reserves (net of placements from banks) and
the banking sector's sizable external debt. However, in Fitch's
view, Takasbank's foreign-currency support needs, even in quite
extreme scenarios, should be low given the bank's minimal
foreign-currency exposure.
The affirmation of the National Long-Term Rating with Stable
Outlook reflects Fitch's view of Takasbank's unchanged
creditworthiness relative to other domestic issuers.
Takasbank's Viability Rating (VR), which is at the same level as
those of most large commercial Turkish banks, is underpinned by the
bank's dominant franchise as the country's only clearing house. In
the context of the weak operating environment, it is further
supported by sound counterparty-risk management, limited direct
credit risk in its CCP activities (supported by sound risk controls
and availability of adequate default-management resources), as well
as high capitalisation and a reasonable liquidity profile. However,
the VR also reflects considerable concentration risk in its CCP
activities and incremental credit risk appetite in its non-CCP
activities, notably its extensive treasury activities with Turkish
counterparties.
At end-3Q21, Takasbank's Tier 1 ratio stood at around 24%
(end-2020: 23%), supported by strong retained profits and no loss
events. Fitch uses its Bank Criteria to assess Takasbank's
capitalisation and leverage metrics given the absence of corporate
debt.
Profitability remained sound, reflected in a return on average
equity ratio of 23% in 2020, primarily driven by treasury interest
income (38% of total revenue) and CCP commissions (25%). Fitch
believes that renewed market volatility in Turkey will support
Takasbank's commission income and will largely balance the adverse
impact of decreasing borrowing rates on Takasbank's profitability.
Takasbank is Turkey's only CCP and is majority-owned by Borsa
Istanbul, Turkey's main stock exchange. Borsa Istanbul in turn is
majority-owned by the Turkey Wealth Fund. It operates under a
limited banking licence, and is regulated by three Turkish
regulatory bodies: Central Bank of Turkey, Banking Regulation and
Supervision Agency and the Capital Markets Board.
ESG Influence:
Takasbank has an ESG relevance score of '4' for governance
structure, reflecting potential government influence over the
board's strategy and governance effectiveness.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Negative rating action on Turkey's sovereign rating would be
mirrored in Takasbank's IDRs;
-- Deterioration in the credit profile of Takasbank's main
commercial-bank counterparties would put pressure on
Takasbank's VR;
-- A material operational loss or a materially increased risk
appetite, for example, in the bank's treasury activities,
particularly to lower credit-quality counterparties, would
also put pressure on Takasbank's VR.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Positive rating action on Turkey's sovereign rating would
likely be mirrored in Takasbank's IDRs;
-- Improvement in the credit profile of Takasbank's main
commercial-bank counterparties could lead to an upgrade of
Takasbank's VR.
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
Takasbank's ratings are linked to Turkey's sovereign ratings.
ESG CONSIDERATIONS
Takasbank has an ESG Relevance Score of '4' for Governance
Structure due to potential government influence over the board's
strategy and governance, which has a negative impact on the credit
profile, and is relevant to the ratings in conjunction with other
factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
TAM FINANS: Fitch Affirms 'B' LT IDRs, Alters Outlook to Negative
-----------------------------------------------------------------
Fitch Ratings has revised Tam Finans Faktoring A.S.'s (TFF) Outlook
to Negative from Stable while affirming the company's Foreign and
Local Currency Long-Term Issuer Default Ratings (IDRs) at 'B'.
KEY RATING DRIVERS
The Outlook change follows a similar rating action on Turkey's
Long-Term IDRs on 2 December 2021 (see 'Fitch Revises Turkey's
Outlook to Negative; Affirms at 'BB-'' at www.fitchratings.com) It
reflects Fitch's expectation of growing downside risks to TFF's
growth prospects and profitability in 2022 in an increasingly
challenging operating environment with lower rates and intensifying
competition.
TFF's ratings reflect the company's small, but growing, franchise,
a largely secured funding profile and a business model focused on
higher-risk small businesses operating in a challenging operating
environment. The ratings also reflect the company's steady record
of contained credit losses for the business model, a granular
portfolio, low market risk, a liquid balance sheet and increasingly
diversified funding sources.
TFF is an independent Turkish factoring company accounting for 2.6%
of sector assets at end-2020. The company has demonstrated its
ability to maintain adequate performance during Turkey's 2018
economic crisis and the pandemic in 2020.
The focus on higher-risk underbanked businesses with short credit
history and of small scale makes TFF vulnerable to macroeconomic
volatility increasing its borrowers' credit risks. The business
model assumes high operating costs, due to small ticket sizes and
the labour-intensive nature of sales that highlights the importance
of scale in the business.
TFF's credit losses are small relative to the sector average. This
is supported by an IT-based scorecard and monitoring tools, which
automatically collect and analyse large amount of data on borrowers
and receivables originators.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Deteriorating operating environment that affects our
assessment of asset quality and earnings, which in turn would
lead to a lower tolerance for leverage. Deterioration in
funding access would also be rating-negative
-- Sharp increase in impaired receivables or deterioration of
profitability to below-sector averages that would increase
solvency risk
-- Deterioration of the above factors relative to domestic peers'
would also lead to downgrade of the National Rating
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- Stabilisation of Turkey's operating environment, coupled with
TFF's resilient performance would likely lead to a revision of
Outlook to Stable.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and
Covered Bond issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
TURKEY: S&P Affirms 'B+/BB-' SCRs, Alters Outlook to Negative
-------------------------------------------------------------
On Dec. 10, 2021, S&P Global Ratings revised the outlook on its
unsolicited 'B+' long-term foreign currency and its unsolicited
'BB-' long-term local currency sovereign credit ratings on Turkey
to negative from stable. At the same time, S&P affirmed the 'B+/B'
and 'BB-/B' unsolicited long- and short-term foreign and local
currency sovereign ratings. S&P also affirmed the unsolicited
national scale ratings at 'trAA+/trA-1+'.
As a sovereign rating (as defined in EU CRA Regulation 1060/2009
"EU CRA Regulation"), the ratings on Turkey are subject to certain
publication restrictions set out in article 8a of the EU CRA
Regulation, including publication in accordance with a
pre-established calendar. Under the EU CRA Regulation, deviations
from the announced calendar are allowed only in limited
circumstances and must be accompanied by a detailed explanation of
the reasons for the deviation. In this case, the reason for the
deviation is a material depreciation of the Turkish lira that has
direct implications for Turkey's fiscal and external metrics. The
next scheduled publication on the sovereign ratings on Turkey will
be in 2022.
Outlook
The negative outlook reflects what S&P views to be rising risks to
Turkey's externally leveraged economy over the next 12 months from
extreme currency volatility and rising inflation, amid mixed policy
signals.
Downside scenario
S&P said, "We could lower the ratings if Turkey's economic policy
mix further undermined the exchange rate of the lira and worsened
the inflation outlook, heightening the risk of banking system
distress and thereby implying potential contingent liabilities for
the government. This could be the case, for example, if domestic
residents dollarized their savings significantly further or
withdrew them from the financial system, or if banks' access to
foreign funding deteriorated. This is not our base-case scenario,
however. Weakened asset quality following several rounds of
large-scale credit stimulus in recent years could also weigh on the
banking system, particularly state-owned banks that saw their
balance sheets expand more rapidly in 2020."
Upside scenario
We could revise the outlook to stable if we observed sustained and
enhanced predictability of public policy and effectiveness of
monetary policy while Turkey's balance-of-payments position
strengthened, particularly the central bank's net foreign-exchange
reserves.
Rationale
Over the past month, Turkey has experienced a significant
depreciation of its exchange rate. Since our last sovereign ratings
publication on Turkey, on Oct. 22, 2021, the lira has lost 30% of
its value vis-a-vis the U.S. dollar, bringing the total weakening
so far this year to 45%. The scale of exchange rate movements is
similar in magnitude to trends experienced during the August 2018
currency crisis.
This fall in the exchange rate happened against the front-loaded
loosening of monetary policy over the past three months, amid high
and rising inflation. In recent years, the Central Bank of the
Republic of Turkey (CBRT) has operated under rising political
pressure to reduce interest rates. Over the last three months, CBRT
has cumulatively reduced the key repo rate by 400 basis points
(bps), even as inflation remained significantly above the 5%
medium-term target. In November 2021, year-on-year consumer price
inflation surpassed 21%, the highest level since October 2018, when
official consumer price inflation peaked at 25% following the
currency crisis at the time.
Although external debt levels remain high, with a 12-month deficit
narrowing and a surplus recorded over August-September 2021,
Turkey's current account is in stronger shape than in August 2018,
when a large deficit preceded an abrupt depreciation. However, in
contrast to some previous rounds of lira volatility--where the
impact on the exchange rate stemmed primarily from the behavior of
nonresidents--we understand that this time, the movements in
exchange rate have been affected by the behavior of Turkish
residents. Although there is no clear underlying uptrend in
published aggregate natural persons' foreign currency deposits
within the banking system (such deposits have stayed broadly
unchanged at close to $160 billion in recent weeks), some
households appear to have stepped up conversions of their lira
holdings to foreign currencies. Given the foreign currency market
mismatch--in particular, the more limited demand for purchasing the
lira--this still contributed to a significant exchange rate
depreciation.
Positively, available data so far suggests that confidence in the
Turkish banking sector is maintained, with households choosing to
keep their savings within the banks rather than withdrawing them.
The current sovereign rating affirmation is based on the
expectation that this remains the case. Additionally, Turkish banks
have managed to successfully roll over their sizable foreign debt
coming due during previous episodes of financial market stress.
Nevertheless, balance of payments and related financial stability
risks are rising, in our view. These could in turn present a
contingent liability risk to the government if the government had
to rescue a bank in a downside case, either because of domestic
depositor confidence loss or if foreign creditors' appetite for
rolling over Turkish banks' foreign debt were to reduce.
Bank asset quality could also face further pressure, as about 30%
of loans were denominated in foreign currency (as of December
2020), effectively making this debt more expensive to service
because the lira has depreciated throughout 2021. Loan book quality
risks are particularly pertinent for public banks, in S&P's view,
given that they have been heavily involved in episodes of rapid
credit expansion at low rates in the past, raising questions about
the borrowers' subsequent ability to repay these lines.
S&P said, "We do not expect Turkey to impose capital controls. In
our view, in a downside case, capital controls could be considered
in the form of some limits on Turkish households and corporates if
they started to withdraw from the financial sector or in the form
of limits on the banks' ability to withdraw their foreign currency
holdings at the central bank freely. We do not expect either event
to materialize. Imposing such restrictions could prove politically
challenging and would likely be a measure of last resort. Before
turning to it, in our view, Turkey would first utilize other
available domestic policy tools, as well try to secure bilateral
foreign funding, similar to agreements recently reached between
CBRT and the central banks in the Middle East and Asia.
"The rapid depreciation of the lira will also directly contribute
to a rise in the level of net general government debt. We now
project that it will be 8% of GDP higher this year compared with
our expectations published at the end of October (amounting to 42%
of GDP versus our previous expectation of 34%). At the moment,
about 60% of government debt is denominated in foreign currency, a
marked shift from under 40% pre-2018.
"That said, we still consider that there is fiscal headroom left
for Turkey to utilize. At just over 40% of GDP, net general
government debt looks favorable vis-a-vis some other emerging
markets such as Brazil or South Africa. The underlying fiscal
performance has also surprised on the upside in 2021, with general
government deficit likely coming in significantly below the
government's 3.6% of GDP target. We expect deficits will remain
contained at close to 3% of GDP also over the medium term.
"In our view, inflation will accelerate in the coming months, and
we have revised our annual average inflation forecast for 2022 up
to 20.5% from 12% previously. In monthly year-on-year terms,
reported inflation could peak at 25%-30% in the coming months.
"We consider that the broader impact of recent volatility on
economic outlook remains highly uncertain. While growth so far has
been somewhat stronger than we anticipated, prompting an upward
revision of our 2021 GDP growth forecast to close to 10%, several
forces are pulling in different directions. In the short term,
consumer demand can be bolstered by household purchases of durables
as a hedge against high inflation and lira volatility, which can
nevertheless give way to more cautious spending and saving patterns
afterward. The global spread of the omicron COVID-19 variant also
presents risks. At the same time, we expect goods exports to remain
strong. A faster recovery of tourism could prove supportive,
assuming the omicron variant does not lead to a renewed series of
lockdowns and widespread international travel restrictions.
Overall, balancing these varying risks, we still maintain the view
that the Turkish economy would grow by close to 3% on average over
the medium term.
"Future government policy direction also remains highly uncertain.
The political pressure on the central bank continues, and another
interest rate cut cannot be excluded at the next CBRT announcement
on Dec. 16, 2021. We also think that policy missteps could stem
from the 2023 general elections. Recent opinion polls suggest
declining popular support for the ruling Justice and Development
Party (Adalet ve Kalkinma Partisi; AKP), with the pandemic, high
inflation in food prices, and a hit to real incomes likely to be
contributing factors. In that context, additional policy-stimulus
measures--for example, to boost the availability or reduce the
price of credit--cannot be ruled out in 2022, even though Turkey
still faces lingering imbalances from previous such measures,
including lower useable foreign-exchange reserves and higher
inflation."
Environmental, social, and governance (ESG) credit factors for this
change in outlook:
-- Governance structure
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
RATINGS AFFIRMED
TURKEY
Sovereign Credit Rating
Turkey National Scale |U^ trAA+/--/trA-1+
Transfer & Convertibility Assessment
Local Currency |U^ BB-
RATINGS AFFIRMED; CREDITWATCH/OUTLOOK ACTION
TO FROM
TURKEY
Sovereign Credit Rating
Foreign Currency |U^ B+/Negative/B B+/Stable/B
Local Currency |U^ BB-/Negative/B BB-/Stable/B
|U^ Unsolicited ratings with issuer participation, access to
internal documents and access to management.
VOLKSWAGEN DOGUS: Fitch Affirms 'BB-' LT IDR, Alters Outlook to Neg
-------------------------------------------------------------------
Fitch Ratings has revised the Outlook on Volkswagen Dogus Finansman
A.S.'s (VDF) Long-Term Issuer Default Rating (IDR) to Negative from
Stable and affirmed the IDR at 'BB-'.
KEY RATING DRIVERS
The Outlook revision reflects the heightened risk of a downgrade of
the Turkish sovereign rating and Country Ceiling. The Country
Ceiling captures transfer and convertibility risks as well as
limits on support from Volkswagen Financial Services AG (VWFS) or
Volkswagen AG (VW). VDF is 51%-owned by VW and 49% by Dogus
holding. Dogus is a large Turkish conglomerate and a sole importer
of VW vehicles in Turkey
VDF's IDRs are driven by the support from its controlling
shareholder - VWFS - and ultimately from VW. Given its important
role in supporting the group's car sales in Turkey, VDF is seen as
core to VW and VWFS. VDF's Long-Term IDR is capped by Turkey's
Country Ceiling of 'BB-'.
SUPPORT RATING
VDF's Support Rating of '3' reflects moderate probability of
support from VWFS.
NATIONAL RATING
National Ratings reflect relative creditworthiness in local
currency to other local issuers, which was not affected by the
recent change of the Outlook on the sovereign or by the increasing
challenges in operating environment.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- VDF's Long-Term IDRs are likely to be revised negatively
following a downgrade of Turkey's sovereign IDRs and changes
in the Country Ceiling.
-- Diminished support from VW, for example, as a result of
dilution of ownership in the companies, a loss of operational
control or diminishing of importance of the Turkish market
could also trigger a downgrade.
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- The Outlook on VDF's Long-Term IDRs would be revised to Stable
if the Outlook on the Turkish sovereign IDR was revised to
Stable.
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
VDF's ratings are linked to Turkey's sovereign rating and VW.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
===========================
U N I T E D K I N G D O M
===========================
BOOMF: Set to Go Into Administration
------------------------------------
Richard Eden at The Daily Mail reports that James Middleton's
marshmallow firm, Boomf, is due to go into administration.
Mr. Middleton is the Duchess of Cambridge's brother.
The company, which Mr. Middleton, 34, set up in 2013 to sell
personalised marshmallows, has asked the courts to appoint
administrators, The Daily Mail relates. According to its latest
accounts, Boomf was carrying almost GBP2 million of accumulated
trading losses, with ongoing losses down from GBP3 million, The
Daily Mail notes.
Despite the retained balance sheet losses, the company was GBP1.3
million in the black at the date of the accounts, with GBP3.2
million in share capital offsetting the ongoing losses, The Daily
Mail discloses.
GKN HOLDINGS: Fitch Affirms 'BB+' LT IDR, Alters Outlook to Stable
------------------------------------------------------------------
Fitch Ratings has revised UK-based GKN Holdings Limited's (GKN)
Outlook to Stable from Negative, while affirming the company's
Long-Term Issuer Default Rating (IDR) at 'BB+'. Fitch has also
removed UK-based GKN Aerospace Services Limited's (GASL) IDR from
Under Criteria Observation and upgraded it to 'BB+' from 'BB' as a
result of the application of the new Parent Subsidiary Linkage
(PSL) Criteria. The Outlook for GASL is Stable.
The Outlook change of GKN follows the completion of a number of
disposals in 2021, illustrating the delivery of its 'buy, improve,
sell' strategy, the proceeds of which improve its leverage and
financial flexibility. The advanced nature of the restructuring for
the GKN businesses also firmly places the group in a position to
benefit from improving conditions in its three key subsidiaries,
which will drive improving margins and cash flow generation.
The ratings continue to incorporate a business profile that is
strong for a 'BB+' rating, reflecting strong diversification to
various industries.
KEY RATING DRIVERS
Disposals Display Strategic Strength: The disposal of Nortek Air
Management, Nortek Control and Brush during 2021, for combined
gross sales proceeds of around GBP2.9 billion, underlines owner
Melrose Industries Plc's ability to deliver on their strategic
intentions. The ability to identify undervalued businesses has been
key to this success, but with the difficult operating environment
resulting from the pandemic, Fitch believes the ability to
implement restructuring plans places GKN in a good position to
benefit from already improving automotive and powder metallurgy
conditions and nascent civil aerospace-sector improvements.
Proceeds Improve Leverage and Flexibility: While Melrose has
announced a return of capital to shareholders of GBP729 million on
the back of the disposals, the amount of cash held at 1H21 remains
high, which benefits both the net leverage metrics and
significantly strengthens financial flexibility of the group. While
Fitch now expects leverage metrics to be well within Fitch's
sensitivities from 2022, uncertainty over the magnitude of possible
additional shareholder returns and potential M&A over the medium
term will both determine the available headroom.
Automotive-Facing Businesses Improving: The semi-conductor shortage
continues to present challenges for the automotive sector in
general and the same is true for GKN Automotive and GKN Powder
Metallurgy that both have significant exposure to this segment.
Nonetheless, both divisions have well-advanced restructuring
strategies and management expect to hit their margin targets ahead
of schedule as markets normalise. Automotive remains
well-positioned to benefit from the shift to electric vehicles,
while powder metallurgy has seen strong revenue progress in 1H21
and continues to focus on its core, profitable business to continue
the margin improvement.
Aerospace Challenges Lessening: Aerospace continues to face a
difficult environment with sales declining in 1H21, although the
defence division continues to trade robustly and narrow-body civil
aerospace is starting to see some demand increase from aircraft
manufacturers. However, wide-body is likely to trail in its
recovery as the sector improvement will take longer than for
narrow-body. GKN continues to focus on restructuring the division
with management, operating structure and footprint all undergoing
changes, although Fitch expects margin improvement for this
division to lag the other GKN businesses.
Solid Free Cash Flow (FCF) Expectations: While profitability has
declined for 2020, GKN nonetheless delivered very strong FCF for
2020, on very strong working-capital control as well as cost
efficiencies from an increased focus on restructuring initiatives.
Fitch expects FCF to remain positive for 2021 and 2022 but it will
be weighed down by lower margins, albeit improving from this lower
base, together with more normalised working-capital requirements.
Consolidated Credit Profile Drives Rating: GKN's and GASL's ratings
reflect the consolidated credit profile of the group. Fitch's
business-profile analysis and credit metrics, therefore,
incorporate non-GKN diversified operations and their financial
obligations as well as Melrose plc's debt and liquidity. As such,
actual and forecast financial performance analyses are based on the
consolidated financial statements of Melrose.
Consolidated Approach for GKN: The 'BB+' rating for GKN reflects
Fitch's assessment of the linkage between Melrose and GKN on a
stronger-subsidiary approach under Fitch's PSL Criteria. Fitch
views both 'legal ring-fencing' and 'access and control' factors as
'open' and as a result GKN's ratings reflect the consolidated
credit profile for the group.
The group's debt structure incorporates upstream guarantees from
certain GKN entities, including GASL, to Melrose, and downstream
guarantees from Melrose to GKN's bonds. Melrose's committed bank
facilities contain a cross-default clause referencing any member of
the group. There is no legal ring-fencing impeding intragroup
liquidity movement with cash being channelled to Melrose as much as
possible. Daily operational management is delegated to GKN
divisions' executives, but Melrose has control of GKN's board and
remains responsible for strategy and performance.
GASL's IDR Equalised: Under Fitch's new PSL Criteria, GASL's rating
has been upgraded to 'BB+' to equalise with immediate parent, GKN,
reflecting Fitch's stronger-parent approach to assess their
linkage. Fitch views both 'legal incentive' and 'strategic
incentive' as 'medium', while 'operational incentive' as 'high'.
The 'high' operational incentive reflects GASL as a key part of
GKN's aerospace business, with integrated management decisions,
plus core capabilities in aerospace products and services. The
'medium' strategic incentive reflects GASL's key role in GKN's
European aerospace supply chain and development, contributing
around 7% of the group's sales. GASL is a guarantor of both
Melrose's committed bank facilities and GKN's bonds, and relies on
the cash pooling system of the group for external liquidity needs,
underlining the 'medium' legal incentive.
DERIVATION SUMMARY
Fitch views GKN as a leading tier 1 aerospace and automotive
supplier, but mostly in manufacturing of components rather than
complete systems. Its business profile is characterised by its
exposure to several end-markets, in contrast to less diversified
peers like MTU Aero Engines AG (MTU; BBB/Stable) and Allison
Transmission Holdings, Inc. (BB/Positive). Nevertheless, its
diversified business profile is constrained by a somewhat high
exposure to cyclical industries similar to Rolls-Royce plc's
(BB-/Stable), MTU, Meritor, Inc.'s (BB-/Positive), Allison
Transmission, Faurecia S.E.'s (BB+/Stable) and Dana Incorporated's
(BB+/Stable). While GKN's geographical diversification compares
well with that of General Electric Company (BBB/Stable),
Rolls-Royce and Dana Incorporated, its business profile is weaker
than these peers', which benefit from higher technology content,
greater R&D investment and a larger share of aftermarket service
revenue, which is typically more stable during crises.
GKN's financial profile was materially negatively affected during
the pandemic. GKN's EBIT margin is weaker than that of most peers;
however, its FFO margin is comparable with Dana Incorporated's and
Rolls-Royce's. The group's financial profile benefits from
sustainably positive FCF generation, albeit in the low single-digit
range, which is similar to Faurecia's, Dana Incorporated's and
MTU's, but weaker than General Electric's and Allison
Transmission's.
GKN continues its restructuring initiatives and has redeemed a
material part of its debt in 2021, following the several disposals.
Fitch forecasts that positive FCF generation should support the
group's deleveraging capacity. Fitch expects FFO gross leverage to
remain above Fitch's negative sensitivity of 3.5x at end-2021, but
Fitch expects it to improve towards 3.2x in 2022.
Fitch applied its PSL Criteria and assessed that GKN can be rated
on a consolidated basis. GASL's rating is also based on Fitch's PSL
criteria and is equalised with the rating of the immediate parent
entity, GKN. No country-ceiling or operating environment aspects
affect the ratings.
KEY ASSUMPTIONS
-- Revenue to fall by mid-teens in 2021 following the disposal of
Nortek Air Management, Brush and Nortek in 1H21, with
associated gross sale proceeds of about GBP2.9 billion;
-- Continued aerospace difficulties will result in single-digit
yoy revenue decline for the division for 2021;
-- Revenue in automotive sector has started to rebound in 2021,
while being constrained with supply- chain issues. Fitch
forecasts revenue to increase in low single-digits in 2021;
-- Mid-to-high single-digit yoy revenue rebound for 2022-2024;
-- Gradual FFO margin improvement towards 6% in 2021 and 8.5% in
2022;
-- Annual capex at 4.5% of revenue in 2021 and at 5% during 2022-
2024
-- Dividends payout of about GBP71 million in 2021, GBP115
million in 2022, GBP144 million in 2023 and GBP163 million in
2024;
-- Return to shareholders of GBP729 million in 2021;
-- M&A or shareholder's return of GBP400 million in 2022-2023 and
GBP350 million in 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Consolidated FFO gross leverage below 2.5x, supported by
consistent long-term funding policy;
-- Consolidated FFO margin above 8.5%;
-- Consolidated FCF margin above 2%;
-- Weaker linkages between GKN and Melrose, with GKN consisting
of at least the aerospace and automotive divisions, without
material re-leveraging of GKN.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
GKN
-- Consolidated FFO gross leverage above 3.5x;
-- Consolidated FFO margin below 7%;
-- Consolidated FCF margin below 1%;
-- Disposals of material assets without adequate deleveraging.
GASL
-- Weaker ties between GKN and GASL.
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
Solid Liquidity: GKN has access to Melrose's liquidity. Following
the divestments of three business units GKN has materially reduced
its debt obligations. As at end-June 2021 Fitch-defined readily
available cash was GBP1.2 billion, adjusted for about GBP116
million treated as restricted to cover potential working- capital
swings. This is more than sufficient to cover short-term debt
repayments. Moreover, expected positive FCF on a sustained basis
will provide additional liquidity support.
Debt Structure: At end-June 2021, Melrose's debt comprised two
bonds of GBP450 million (maturing 2022) and GBP300 million
(maturing 2032), together with a multi-currency term loan
(denominated GBP100 million and USD960 million, maturing in April
2024) that was fully drawn. The group also has a multi-currency
revolving credit facility (denominated GBP1.1 billion, USD2 billion
and EUR0.5 billion, maturing January 2023), which was undrawn.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
ISSUER PROFILE
Melrose is a UK industrial buy-out group focused on acquiring
manufacturing business with good fundamentals, improving
performance through investment or changed management focus and
selling them on. Its three current major business come from its
acquisition of GKN plc, comprising GKN Aerospace, GKN Automotive
and GKN Powder Metallurgy, with only Ergotron remaining as the only
non-GKN business.
SUMMARY OF FINANCIAL ADJUSTMENTS
Amortisation of intangible assets acquired in business combinations
and restructuring costs are viewed as an operating item by Fitch.
Impairment of goodwill is viewed as non-operating item by the
agency.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
GKN linkage with its 100% owner Melrose and GASL linkage with its
immediate parents GKN and Melrose are detailed in the Key Rating
Drivers section.
GREENSILL CAPITAL: Gave Coronavirus Loan to Founder's Neighbor
--------------------------------------------------------------
Robert Smith at The Financial Times reports that Greensill Capital
gave a government-guaranteed coronavirus loan to a business owned
by a neighbour of founder Lex Greensill, after the two men jointly
lobbied their local council to adopt its controversial supply-chain
finance model.
Greensill Capital is under investigation for allegedly abusing a
Covid-19 lending scheme for larger companies, leading the
state-owned British Business Bank to suspend government guarantees
on GBP400 million of loans extended to companies linked to metals
magnate Sanjeev Gupta, the FT discloses.
The now-collapsed finance company also provided GBP18.5 million
worth of loans to smaller businesses under another emergency
funding scheme last year, including a GBP5 million loan to Special
Needs Group, a private business that provides services for people
with learning disabilities, the FT notes.
The Chester-based company is owned by local businessman Barnabas
Borbely, who lives around the corner from Lex Greensill in the
Cheshire village of Saughall, the FT relays, citing corporate
filings. Mr. Borbely is the same age as Greensill, who turns 45
later this month, and the two men are both trained solicitors.
Greensill Capital has previously drawn scrutiny for the amount of
financing it extended to obscure businesses such as Special Needs
Group, which is small enough to qualify for an exemption allowing
it to file unaudited accounts, the FT states. Details of the
government-backed loan, which have not previously been reported,
were released this year under EU transparency rules, according to
the FT.
Special Needs Group's owner Borbely was involved in efforts by
Greensill to persuade his local council to make use of his
company's financial products, the FT discloses.
The two men set up a meeting in 2018 to "discuss the potential
benefits of the supply chain finance model being promoted by
[Greensill's] companies", the FT says, citing documents released by
Cheshire West and Chester Council.
While the council never adopted the proposed scheme -- determining
it offered "no benefits" -- Greensill Capital last year announced
it had developed a "revolutionary funding model" with Special Needs
Group that could reduce "the financial burden on local
authorities", the FT recounts.
"Greensill is able to use fintech to identify and factor in future
cash flows from local authorities and central government to their
suppliers rather than working with historical data," the company,
as cited by the FT, said in the September 2020 announcement.
While traditional supply-chain finance involves providing credit
against invoices, Greensill pushed further and began lending
against hypothetical future bills, a risky practice that
contributed to the finance group's downfall, the FT notes.
Greensill, the FT says, also provided financing to Special Needs
Group through Credit Suisse's now-stricken US$10 billion of
supply-chain finance funds, which have exposed some of the Swiss
bank's richest clients to potentially billions of dollars in
losses.
An update that Credit Suisse provided to investors this month
showed the bank's main fund had about US$20 million of exposure to
Special Needs Group, the FT relates. This debt is among a cluster
of smaller exposures the Swiss bank is hoping to achieve an agreed
schedule for repayment, the FT relays, citing a person familiar
with the matter.
HIGH STREET: Chairman says Administration "Only Way Forward"
-------------------------------------------------------------
Graeme Whitfield at BusinessLive reports that the boss of
controversial development company High Street Group has said a plan
to go into administration is the "only way forward" for the
company.
According to BusinessLive, the Newcastle company, which is
responsible for building Hadrian's Tower, the city's tallest
building, is applying this week to go into administration after a
turbulent period which has seen it face heavy criticism from
investors, customers and contractors.
In a video sent to investors, chairman Gary Forrest admitted that
"mistakes have been made", particularly in the way the company
communicated as it hit a serious of issues, BusinessLive relates.
But he is hoping a plan to go into administration will allow it to
work with other development groups on realising cash to pay back
its investors in five or six years, BusinessLive notes.
According to BusinessLive, in the video, he said: "The only way
forward that makes any sense is the recovery plan."
Mr. Forrest, as cited by BusinessLive, said the group had GBP1.3
billion worth of projects under development before the pandemic,
but had been hit by the loss of funding from investment groups
after Covid hit.
He said the group last year suffered from a rush of investors
wanting early redemptions which was "burning cash" within the
company, BusinessLive relays. He also blamed "noise on social
media" for some of the problems surrounding the company, according
to BusinessLive.
He said property developments either taken on by Hadrian Real
Estate -- a company that was originally part of High Street Group
but is now owned by a former senior executive -- or joint ventures
with third parties should create cash to pay loan note holders
within the next five or six years, BusinessLive notes.
TUDOR ROSE 2021-1: S&P Assigns BB (sf) Rating to Class X1 Notes
---------------------------------------------------------------
S&P Global Ratings has assigned credit ratings to Tudor Rose
Mortgages 2021-1 PLC's class A, B-Dfrd, C-Dfrd, D-Dfrd, RFN-Dfrd,
and X1-Dfrd notes. At closing, Tudor Rose Mortgages 2021-1 also
issue unrated X2 notes, Y certificates, and residual certificates.
At closing, the issuer purchased the beneficial interest in a
portfolio of U.K. BTL residential mortgages from the seller, using
the proceeds from the issuance of the rated and unrated notes. This
same portfolio had been purchased initially from the originator.
The issuer is an English special-purpose entity (SPE), which S&P
assumes to be bankruptcy remote for our credit analysis.
The notes pay interest quarterly on the interest payment dates in
March, June, September, and December, beginning in March 2022. The
class A to RFN-Dfrd notes pay interest equal to compounded Sterling
Overnight Index Average (SONIA) plus a class-specific margin with a
further step-up in margin following the optional call date in
December 2024. All of the notes reach legal final maturity in June
2048.
The transaction has an optional redemption date. On each of the
first optional redemption date in December 2024, and the second
optional redemption date in March 2025, the call option holder may
exercise its call option.
There are no rating constraints in the transaction under our
counterparty, operational risk, or structured finance sovereign
risk criteria. S&P considers the issuer to be bankruptcy remote.
Ratings
CLASS RATING CLASS SIZE (MIL. GBP)
A AAA (sf) 224.0
B-Dfrd AA (sf) 16.7
C-Dfrd A+ (sf) 7.1
D-Dfrd BBB (sf) 9.7
RFN-Dfrd B (sf) 5.2
X1-Dfrd BB (sf) 9.0
X2 NR 5.2
Y certs NR N/A
Residual certs NR N/A
N/A--Not applicable.
NR--Not rated.
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S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
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