/raid1/www/Hosts/bankrupt/TCREUR_Public/220215.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, February 15, 2022, Vol. 23, No. 27
Headlines
B O S N I A A N D H E R Z E G O V I N A
REPUBLIKA SRPSKA: S&P Affirms 'B' Long-Term ICR, Outlook Stable
C R O A T I A
DALEKOVOD: Repays Debts Under Pre-Bankruptcy Settlement
G E O R G I A
GEORGIA CAPITAL: S&P Upgrades ICR to 'B+', Outlook Stable
G E R M A N Y
ADLER GROUP: S&P Downgrades ICR to 'B-', On CreditWatch Negative
KAEFER: Fitch Affirms 'BB' LT IDR, Alters Outlook to Stable
I R E L A N D
ARES EUROPEAN VI: Moody's Affirms B1 Rating on EUR4.7MM F-R Notes
MARLAY PARK CLO: Moody's Affirms B2 Rating on EUR11.6MM E Notes
NEUBERGER BERMAN 3: Moody's Assigns (P)B3 Rating to EUR9MM F Notes
SEGOVIA EUROPEAN 3-2017: S&P Puts Prelim B-(sf) Rating to F-R Notes
I T A L Y
LEATHER SPA: S&P Assigns 'B' Issuer Credit Rating, Outlook Stable
L U X E M B O U R G
LSF11 SKYSCRAPER: Fitch Places 'B+' LT IDR on Watch Positive
S P A I N
PYMES SANTANDER 14: Fitch Affirms CC Rating on Series C Notes
T U R K E Y
ISTANBUL METROPOLITAN: Fitch Corrects December 7 Ratings Release
TURK HAVA: Fitch Affirms 'B' LT IDRs, Alters Outlook to Stable
TURKEY: Fitch Lowers LT FC IDR to 'B+', Outlook Negative
U K R A I N E
UKRAINIAN RAILWAY: Fitch Affirms 'B' LT IDRs, Outlook Now Stable
U N I T E D K I N G D O M
CARDIFF AUTO 2022-1: S&P Assigns B (sf) Rating to Class E Notes
EUROSAIL 2006-3: Fitch Affirms B Rating on Class E1c Notes
INTERNATIONAL GAME: Moody's Ups CFR to Ba2, Outlook Remains Stable
KIDS COMPANY: Government Report Reveals Mismanagement at Charity
MIDAS: Nationwide Explores Options for Oakfield Project
PLAYTECH PLC: Moody's Confirms Ba3 CFR & Alters Outlook to Stable
STUDIO RETAIL: Files Notice to Appoint Administrators
TAILORED CONSTRUCTION: Goes Into Liquidation
TRONOX HOLDING: Moody's Hikes CFR to Ba3, Outlook Remains Stable
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B O S N I A A N D H E R Z E G O V I N A
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REPUBLIKA SRPSKA: S&P Affirms 'B' Long-Term ICR, Outlook Stable
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On Feb. 11, 2022, S&P Global Ratings affirmed its 'B' long-term
issuer credit rating on Republika Srpska, a constituent region of
Bosnia and Herzegovina (BiH; B/Stable/B). The outlook is stable.
Outlook
S&P said, "The stable outlook reflects our view that Republika
Srpska will maintain the existing political structure within BiH,
lowering financial and economic risks to the entity. We expect its
budgetary results will continue improving, mitigating high debt
accumulation. We also anticipate that Republika Srpska will
preserve its access to a diversified pool of investors, including
local banks, multilateral institutions (MLIs), and international
investors."
Downside scenario
S&P could lower the rating if Republika Srpska's liquidity position
weakened, or if its access to external liquidity sources became
less favorable. This could occur if the government implemented
concrete actions toward secession from the sovereign, BiH.
Upside scenario
S&P could raise the rating on Republika Srpska if its upgraded its
sovereign, BiH, and if Republika Srpska demonstrated greater
budgetary performance than it expected, reflected by stronger
operating and capital balances and a reduced debt burden below 120%
of its consolidated operating revenue.
Rationale
S&P said, "The affirmation of the rating of Republika Srpska is
based on our view that its relationship with the central government
of BiH will remain unstable, but without any concrete actions
toward separation. We also continue to observe a strong economic
rebound from a deep recession during the pandemic. This will lead
to higher direct and indirect tax revenue, and will allow Republika
Srpska to reach operating surpluses, mitigating the pressure from
elevated capital expenditure. We believe Republika Srpska will
maintain its wide access to external liquidity sources, mitigating
its high debt and the unfavorable, albeit recently improved,
internal liquidity position.
"The institutional framework in BiH is hampered by a lack of
coordination between the different levels of government, and
disagreements among the country's ethnicities. In our view, this
could put at risk the already unstable political structure in the
country. Since July 2021, Republika Srpska's representatives have
abstained from participation in state-level institutions, hence
blocking the institutions' activity. In December 2021, the national
assembly of Republika Srpska voted for withdrawal from three
state-level institutions (Indirect Tax Authority; High Judiciary;
and the defense and security services), asking the state government
to prepare the laws for the transfer of these responsibilities to
Republika Srpska within six months. As a result, the U.S. imposed
sanctions on Milorad Dodik, the Serb member of the tripartite
presidency of BiH and additional individuals and related legal
entities, but not on Republika Srpska.
"At present, it remains unclear whether Republika Srpska will
eventually seek full autonomy. Our current view, however, is that
the situation will de-escalate and such actions will not be
implemented. Firstly, because the international community may not
support these steps, including the traditional allies such as
Serbia, which will want to avoid harming its path to EU accession.
Secondly, Republika Srpska is highly dependent on financing from
international financial institutions, which could be significantly
reduced in such a case, weakening its liquidity position. Thirdly,
we believe that this rhetoric is also driven by the pre-election
campaign. We are convinced that if the destabilization continued,
it could have negative implications on the institutional setup,
economic development, and consequently on the rating."
The very volatile institutional framework is partially offset by
the greater autonomy that Republika Srpska holds in terms of
managing its own fiscal policies. For example, the government can
set rates for income and corporate taxes, or other charges and
fees, and it is also more autonomous on its spending than many
international peers, in our view. Unlike direct taxes, indirect
taxes, which account for about half of Republika Srpska's revenue,
are set and collected by the central government. The central
government allocates part of this revenue for tax refunds and for
financing central government institutions. The rest is distributed
to the entities, with the first priority being to service the
external debt of each entity. Then, the remainder of the revenue is
distributed back to the entity's different levels of government
budgets.
S&P expects the economic recovery will continue and indicators will
improve
S&P said, "We expect Republika Srpska will continue its recovery
from a deep recession during the pandemic and will improve its
income level, despite its generally low-value-added manufacturing
and limited international competitiveness, and its dependence on
goods imports. The region accounts for around one-third of the
national GDP, and at US$6,600, its expected GDP per capita in 2022
is slightly below the national average. Economic activity will
widen, since we expect local GDP will nominally increase at about
6% on average over the next three years, and GDP per capita will
grow at a faster pace, given the permanent decline in population of
0.5% per year. Demographically, the population is aging due to
younger people leaving the country, which could increase pressure
on Republika Srpska's expenses. In 2021, the economy strongly
rebounded, more than we initially expected, leading to higher tax
revenue.
"We expect unemployment will continue falling, given our strong
economic growth forecast. We also expect inflation will pick up
temporarily in 2022, in line with most peers, putting some pressure
on public spending.
"The elections to BiH's presidency and to the regional assembly
take place every four years, with the next round scheduled for
October 2022, adding some unpredictability to the state's financial
policy." The Assembly of Republic Srpska is the legislative power
and approves the annual budget, as well as debt strategy and public
investment plans. So far, political stability within Republika
Srpska is relatively strong and usually the government can
implement its policies, although they might be challenged
pre-election. The incumbent government is based on a seven-party
coalition, which has been in place since the 2018 elections.
According to the constitution of BiH, Republika Srpska is allowed
to set its own financial policies and plans, which grants it more
flexibility compared with its peers in other countries. Its
financial planning focuses on budgetary results, investment plans,
and debt issuance needs. Budgets are usually conservative and
planned for one year with projections for the next two years, and
may deviate substantially from plans. While the entity has no
formal liquidity policy, debt policy includes borrowing limits that
have not been breached in recent years. S&P understands that
reforms in terms of public enterprise management and public
investment programs are still in an implementation phase and have
not yet led to major changes.
Satisfactory access to liquidity helps to cover deficits, but the
debt burden remains high over the medium term
S&P said, "We expect Republika Srpska to record stronger operating
performance between 2022 and 2024, due to the continuing economic
recovery. We project higher tax revenue in line with projected GDP
growth. Overall, we believe revenue will increase at a faster pace
than expenditure, resulting in operating surpluses starting from
2023. Pension payments are made on a pay-as-you-go basis, and
although they continue to increase, we understand that they
currently do not represent a significant share of budget spending.
On the capital side, we expect higher capital expenditure in
2022-2024, given the large public investment program, which covers
costly projects in the fields of health, energy, and agriculture.
This will lead to overall deficits over our forecast horizon,
although decreasing ones.
"Republika Srpska's liquidity position is weak and depends on its
access to external liquidity sources. We base our liquidity
assessment on relatively low cash levels; existing cash and liquid
assets are far below levels sufficient to cover the next 12 months'
debt service. In general, in case of need to cover temporary
deficits, the government may issue Treasury bills to local banks as
a short-term funding instrument. For other budgetary needs, such as
investment projects, or for refinancing loans, it may issue
long-term bonds. Based on its track record of borrowing from local
and international banks and MLIs, as well as its access to a
diversified pool of investors, we think Republika Srpska continues
to have satisfactory access to external liquidity sources.
"The state's debt is relatively high compared with that of similar
entities we rate. We forecast debt will increase further, given the
large investment plan and low cash levels. According to our
projections, direct debt will peak in 2023 at 140% of the
government's operating revenue and then decline to 132% as revenue
growth outpaces debt accumulation. Tax-supported debt includes the
social security debt and debt of a few government-related entities
that we expect to receive support from Republika Srpska in case of
need. It will reach around 123% of the consolidated operating
revenue in 2024. In our view, Republika Srpska's contingent
liabilities are limited. Under contingent liabilities we include
other public companies and the investments and development bank
owned by the government, as well as the relatively low debt of
municipalities, given that municipalities are self-financed and
more likely to be able to repay their debt. We also include the
state government guarantees, although usually they are not called
upon. Lastly, we include the public companies' payables and the
outstanding lawsuits."
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C R O A T I A
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DALEKOVOD: Repays Debts Under Pre-Bankruptcy Settlement
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Annie Tsoneva at SeeNews reports that Croatian power transmission
equipment manufacturer Dalekovod said it paid off its debts under a
pre-bankruptcy settlement dating back to 2014, following a recent
capital increase of HRK410 million (US$62 million/EUR54 million).
On Feb. 11, Dalekovod settled its debts to creditors whose claims
were determined by a pre-bankruptcy settlement, based on the
remaining senior debt and mezzanine debt or related to them, the
company said in a filing to the Zagreb bourse late on Feb. 11,
SeeNews relates.
According to SeeNews, Dalekovod said last month it raised its
equity capital to HRK412.472 million via a new share issue of 41
million shares becoming one of the few companies in Croatia to
successfully complete the pre-bankruptcy settlement by settling all
credits after an exhaustive business transformation without
additional debts.
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G E O R G I A
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GEORGIA CAPITAL: S&P Upgrades ICR to 'B+', Outlook Stable
---------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit and issue
ratings on Georgia Capital JSC (GC) and its debt to 'B+' from 'B'.
The stable outlook reflects its view that GC's S&P Global
Ratings-adjusted LTV ratio will remain sustainably below 30%,
including amid potential market turbulence and geopolitical
instability, and that it can maintain ample liquidity buffers by
proactively managing its upcoming maturity wall in 2024.
By now, GC's adjusted portfolio value has reached $1.1 billion, up
from about $850 million in the first quarter, benefitting from a
positive asset price environment as well as a progressive
strengthening of the Georgian lari (GEL) against the U.S. dollar.
GC recently sold a 65% stake in Georgia Global Utilities (GGU) to
Spanish water utility FCC Aqualia for $180 million, representing an
internal rate of return (IRR) of 20% in U.S. dollars.
GC's LTV has reached about 20% amid supportive market conditions
and moderate deleveraging in absolute terms after the sale of GGU's
water business.
Over 2021, GC's portfolio value markedly increased owing to a good
rebound in asset prices and GEL appreciation against the U.S.
dollar. For example, Bank of Georgia (19.9% owned by GC and its
only listed asset) is currently trading at about GBP1.55 per share,
which is 40% higher than a year ago. S&P also notes that GC's
private assets experienced the same positive trend. The equity
value of the health care business increased to GEL724 million at
Sept. 30, 2021, up 20% from March 31, 2021. Similarly, the equity
value of the retail pharmacy business increased to GEL618 million,
up 15% from March 31, 2021. As a result, GC's GEL-denominated
portfolio value increased more than 15% to almost GEL3.5 billion
compared with March 31, 2021. The holding has also benefitted from
the GEL's about 15% appreciation against the U.S. dollar compared
with March 31, 2021, at less than GEL3 per $1, providing some LTV
uplift given all its debt is denominated in U.S dollars.
Furthermore, GC sold a 65% stake in GGU to Spanish water utility
FCC Aqualia on Feb. 3, 2022, for $180 million, of which the company
will retain $85 million as cash after providing a shareholder loan
to GGU to refinance its bond in July. As a result, GC's LTV,
pro-forma the net sale, has reached about 20%, down from more than
30% at March 31, 2021.
The recent disposal of 80% of the water utility business highlights
GC's ability to sell assets with good returns.The sale of a 65%
stake in GGU, representing 80% of GGU's water utility business, is
GC's first exit. This solidifies its strategy of investing in,
expanding, and monetizing an asset via a cash exit. The GGU stake
was sold at a premium to its latest valuation as of third-quarter
2021 and almost a 30% premium to its valuation in the first
quarter. The IRR for the deal was 20% if measured in U.S. dollars.
The first stage of the transaction triggered a change-of-control
event under GGU's $250 million bond. As such, bondholders will have
the right to ask for a buyback at 101% of the principal amount plus
accrued coupon. S&P understands that GGU plans to call the bond at
103.875% plus accrued coupon after the noncallable period expires
in July 2022, to complete the planned asset spin-off (otherwise
this is restricted in the bond documentation). Considering the
current bond price is above 101%, we believe that bond redemption
is likely to materialize after July 2022. In line with the
transaction structure, GC and FCC Aqualia have committed to support
the expected redemption of the $250 million bond, which will likely
be split between the renewable energy business ($95 million) and
the water business ($155 million). S&P understand that the exact
terms of such support have yet to be confirmed. In the second stage
of the transaction, expected in third-quarter 2022 and only when
GGU's outstanding bond is fully redeemed, GGU will spin off its
renewable assets. GC will retain 100% of these assets and 20% of
the water utility business. The transaction is expected to include
call/put options with FCC Aqualia that are exercisable in 2025-2026
for the remaining 20% minority stake.
S&P said, "GC's improved financial flexibility and cash buffer
could support more effective leverage and liquidity management. We
calculate GC will have close to GEL0.5 billion in cash, including
almost GEL300 million in hard currency, pro-forma the GGU disposal
and excluding the $95 million shareholder loan earmarked to repay
GGU's bond. In our view, this is particularly important considering
that CG's LTV and liquidity are exposed to foreign exchange risk
and inherent GEL volatility. GC's debt consists of a
U.S.-dollar-denominated $365 million (GEL1.1 billion) bond due
September 2024. Conversely, all its dividend income is
GEL-denominated. Therefore, we believe GC is exposed to risks
related to geopolitical tensions potentially affecting assets
price, or GEL instability, that it cannot fully mitigate. In 2020,
the COVID-19 pandemic caused GC's LTV to rise to more than 40%,
notwithstanding the holding's financial policy to retain an LTV not
exceeding 30%. We therefore believe that some of the cash proceeds
from the GGU transaction will help GC to increase its financial
flexibility and preserve liquidity. In our view, some proceeds
could also be dedicated to capital redeployment, for new early
stage investments, and a residual portion for shareholder
remuneration in the form of share repurchases. GC recently
increased its share buyback program to $15 million, with $5 million
already purchased in 2021.
"About 80% of GC's portfolio is invested in unlisted Georgian
assets, with limited creditworthiness and potential for dividend
payments. This leads us to expect a cash adequacy ratio of about
1.0x in 2021 and 1.3x-1.7x in 2022. GC's key investee companies
enjoy good competitive positions in their respective narrow
markets. At the same time, they are typically Georgian assets with
no or very limited international footprint. As such the weighted
average creditworthiness of GC investee companies is in the 'B'
area. Bank of Georgia is the largest provider of banking services
in the country and has a market share of about 40%. Georgia
Healthcare Group (GHG) is the largest pharmaceutical distributor
and private owner of hospitals in Georgia, with market shares of
35% and 20% in the respective segments. In 2021, Bank of Georgia,
GHG, the insurance companies, and renewable business were the main
dividend contributors. Based on that, we expect dividends will
surge to about GEL75 million in 2021 and more than GEL100 million
in 2022, from GEL30 million in 2020.
"The stable outlook reflects our view that GC's S&P Global
Ratings-adjusted LTV ratio will remain sustainably below 30% for
the next 12 months. In our view, this will remain the case during
potential future market turbulence and geopolitical tensions. We
also expect GC to maintain an adequate liquidity profile and a
material portion of its cash in hard currency, partially hedging
its U.S.-dollar-denominated debt.
"We could lower the rating if GC's LTV rises above 30%.
Alternatively, we could take a negative rating action if its cash
flow adequacy ratio declines to less than 0.7x and the company does
not take immediate remedial measures to restore its credit metrics.
We could also lower the rating if there are any signs that GC's
liquidity is deteriorating. This could materialize if GC does not
proactively address its 2024 maturity well in advance.
"We see rating upside as remote for the next 12-18 months,
considering GC's huge maturity wall in 2024. However, we could
envisage a positive action if GC's portfolio characteristics--such
as liquidity, asset quality, and diversification--materially
improve all else being equal. Alternatively, portfolio valuation
increases or use of potential exit proceeds for deleveraging,
resulting in LTV ratios approaching 15% coupled with management's
strong commitment to a more stringent financial policy and proven
track record to maintain those levels under any market
circumstances, could prompt a positive rating action. An upgrade
would also depend on liquidity remaining adequate."
ESG credit indicators: E-2, S-2, G-3
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G E R M A N Y
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ADLER GROUP: S&P Downgrades ICR to 'B-', On CreditWatch Negative
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S&P Global Ratings lowered its long-term issuer credit rating on
German real estate investor Adler Group S.A. and its subsidiary
Adler Real Estate AG to 'B-' from 'B+' and lowered the issue
ratings on its senior unsecured debt to 'B' from 'BB-'. S&P placed
the ratings on CreditWatch negative.
The CreditWatch placement reflects the high degree of uncertainty
regarding the timing of the publication of Adler's annual accounts,
the outcome of the ongoing forensic investigation, and Adler's
capacity to collect receivables and development proceeds in the
short term.
S&P revised its business risk profile down to fair from
satisfactory following the company's delay in sale of its
nonstrategic development pipeline and recent disposal of high-yield
assets.
S&P said, "This means that the company's exposure to development
activities will likely be significantly higher than we previously
anticipated, at around 35%-40% of the total gross asset value (pro
forma recent disposals) instead of around 20%-25%. We believe that
the development arm continues to underperform (with delays in sale
and project deliveries), increasing uncertainty on the group's
operating performance, cash flow stability, and ability to serve
its financial commitments over the medium term. The company
recently completed a total sale of EUR2.45 billion of yielding
assets and a sale of 7% stake in Brack Capital Properties N.V.
(BCP), the subsidiary of Adler Real Estate, and granted an
irrevocable call option to LEG for all its remaining BCP shares,
which can be exercised until Sept. 30, 2022. However, the plan to
sell nonstrategic development projects has not yet materialized.
"We have revised our financial risk profile down to highly
leveraged from aggressive, reflecting higher cash flow volatility
from Adler's greater dependency on development activities and
recurrent operating delays. Our revised base case does not include
the potential call option of LEG on the remaining shares of BCP.
However, we now foresee a much slower timeline for the disposal of
Adler's nonstrategic development projects, a delay in forward and
condominium projects, and further delay in collecting outstanding
receivables, which will likely pressure its EBITDA generation over
the medium term. As the proportion of Adler's residential real
estate business remains stable, but this is outweighed by its
dependency on the performance of the more volatile development
business as the share of stable rental income decreases. Because we
anticipate weaker EBITDA generation, there is a risk that Adler's
EBITDA interest coverage may remain below 1.3x, and debt to EBTIDA
could be well above 24x." That said, the S&P Global
Ratings-adjusted ratio of debt to debt plus equity remains at about
52%-54%, benefiting from recent disposal proceeds and the company's
efforts to improve its capital structure.
Adler's recent announcement of a likely delay in publishing its
full-year 2021 annual accounts due to a forensic investigation by
KPMG creates further shakiness. S&P understands that Adler's
auditor KPMG is undertaking a forensic investigation and therefore
may not be able to provide an auditor opinion to Adler's financial
accounts for fiscal year 2021 (ending Dec. 31) before March 31,
Adler's previously announced publication date. As a result, there
is a likelihood that the accounts will be delayed into
second-quarter 2022 or later, providing a call option to
bondholders to call their debt in case the company fails to publish
before April 30. S&P said, "Although we do not know whether the
publication will be after April and the outcome of KPMG's
investigation, we believe this creates further shakiness for
Adler's credit profile. We will continue to monitor developments on
the publication of accounts and the auditor's investigation and
will update our analysis accordingly."
Adler's liquidity remains less than adequate. S&P said, "We believe
that the recent sale of yielding assets will help Adler to cover
its liquidity needs for the next 12 months. However, we still see
hurdles in terms of Adler's access to the capital markets. In our
view, to meet its medium- to long-term funding needs, the company
may remain dependent on the successful execution of asset sales or
the receipt of the outstanding receivables."
S&P said, "We have lowered to 'B' our issue ratings on Adler's
senior unsecured debt, including the bonds issued by Adler Real
Estate. The issue ratings remain one notch above the issuer credit
rating. We perform our recovery analysis at a consolidated group
level, including Adler Real Estate AG. Our recovery analysis on
Adler is unchanged and we expect recovery prospects to remain above
70%, reflecting the combined entities' robust yielding asset base
and the limited amount of prior-ranking debt. The recovery rating
remains '2'."
The CreditWatch placement reflects the high degree of uncertainty
regarding the timing of the publication of Adler's annual accounts,
which would grant bondholders the right to accelerate their
payments based on technical default (including the 30-60 day grace
period permitted under various bond indentures). The CreditWatch
placement also reflects uncertainty regarding the outcome of the
ongoing KPMG investigation and the company's capacity to dispose
development projects to ensure positive cash flows over the short
term.
S&P said, "We could lower the ratings on Adler and Adler Real
Estate AG if Adler fails to publish its full-year results within
the debt documentation grace periods and bondholders exercise their
acceleration right, or if the ongoing investigation uncovers any
irregularities that adversely affect our view of the company's
financial position, materially constraining the credit profile or
liquidity of Adler.
"A further delay in disposing nonstrategic development projects
would also increase prospects of a downgrade, in our view.
"We could affirm the ratings on Adler and Adler Real Estate if
Adler manages to publish financial accounts within the required
timeframe, the KPMG investigation closes without any material
adverse implications, and Adler proceeds with the disposal of
nonstrategic development projects and receives outstanding
receivables."
ESG credit indicators: E-2, S-2, G-5
KAEFER: Fitch Affirms 'BB' LT IDR, Alters Outlook to Stable
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Fitch Ratings has revised the Outlook on KAEFER Isoliertechnik GmbH
& Co. KG (KAEFER) Long-Term Issuer Default Rating (IDR) to Stable
from Negative and affirmed the IDR at 'BB' and senior secured
instrument rating at 'BB+'/RR2.
The Stable Outlook reflects Fitch's expectations that KAEFER's
leverage and earnings recovered in 2021 and key ratios are broadly
consistent with the company's 'BB' rating. A strong recovery in key
end-markets in 2021 has led to stronger margins and a clearer
deleveraging path than Fitch previously expected. Fitch now expects
EBITDA and funds from operations (FFO) gross leverage to have
improved to under 3.5x and 4.0x, respectively, at end-2021, and the
EBITDA and FFO margins to have reached around 6% and 4% in 2021.
Fitch believes further improvement in leverage in 2022 and beyond
is likely, driven by accretive acquisitions and the continued
conservative financial policy.
The IDR continues to reflect the group's defensive and diversified
business risk profile, which is firmly in line with the 'BB'
category rating. The company's business profile has been improved
by past acquisitions and Fitch expects the current prudent M&A
policy to continue.
KEY RATING DRIVERS
Focus on Acquisitions Despite Shareholder Changes: Fitch believes
the recently announced strategy for business expansion, combined
with a EUR144 million cash contribution by two new shareholders
underpins KAEFER's current conservative financial policy. Fitch
believes the Koch family, which will remain a 50% shareholder in
KAEFER, together with SMS Group, a strategic family-owned investor,
and Altor Fund, a private equity sponsor, will continue the present
M&A strategy, which emphasises discipline, in order to improve the
company's business profile and financial structure.
Fitch expects KAEFER to continue to make acquisitions with a strong
industry rationale and limited integration risk based on past
experience and expertise of the new investors.
Deleveraging Capacity Provides Rating Headroom: Fitch views
KAEFER's organic deleveraging capacity in 2021-22 as strong while
expected accretive acquisitions will further strengthen the
company's financial profile. With a sustainable rebound in
earnings, Fitch forecasts EBITDA and FFO deleveraging in 2022 to
under 3.5x and 4.0x, respectively, from over 5.0x and 9.0x in
2020.
Fitch expects further deleveraging capacity beyond 2022 from
growing earnings from existing operations, but also from additional
acquired assets, which are expected to contribute meaningfully from
2023. At these levels, Fitch expects leverage to be broadly
commensurate with the 'BB' rating in the medium term. Fitch
believes the cash injected by the new shareholders in 2022 will be
a key source of acquisition funding while any acquisition-related
debt will likely have a limited impact on the leverage profile,
based on management's commitment to a conservative capital
structure.
Volatile FCF Generation Expected to Ease: Fitch expects that the
free cash flow (FCF) margin was around -2% in 2021, driven by high
working capital needs and non-recurring cash outflows. Fitch
forecasts the FCF margin to turn positive in 2022 and remain so
through the medium term, although this depends on working capital
discipline. Fitch expects working capital cash flows to broadly
mirror the company's revenue trajectory following a material
outflow in 2021.
The company will also likely incur additional non-recurring cash
costs in 2022-2023 from restructuring measures, changes in the
shareholder structure, refinancing and acquisition costs. FCF
generation will also depend on capex control, which Fitch expects
the company to tighten to around 2% of revenues.
Low Refinancing Risk: Fitch believes an upcoming revolving credit
facility (RCF) maturity in 2023 and the EUR250 million notes in
2024 represent low refinancing risk. A faster than previously
expected recovery of credit metrics with strong expected debt
servicing ratios such as EBITDA/interest paid of nearly 5.5x in
2022, comfortably within pre-pandemic levels, will facilitate
refinancing options. Fitch expects the refinancing process to start
ahead of maturities. Fitch believes the new strategy and a
continued conservative financial policy will support KAEFER's
refinancing capacity.
Defensive Diversified Business Profile: KAEFER's business profile
benefits from a wide array of services, with around 200 different
offering combinations and industry combinations, across new-build
(30-40% of revenue) and maintenance services (60-70%). It also has
good end-market diversification. There is a strong geographical mix
with a meaningful regional presence. The company also has a
comparatively low-risk contract portfolio, primarily comprising
contracts based on unit rates (2021F: 52%) or reimbursable costs
(17%), which supports strong earnings predictability.
Growth To Accelerate, Scale a Constraint: The new funds injected by
SMS and Altor will facilitate acquisitions in the fragmented market
of insulation, access solutions, surface protection and passive
fire protection, while a focus on LNG projects fits current
decarbonisation trends. Fitch expects acquisitions and new build
projects to accelerate revenue growth in 2023-24.
Fitch forecasts KAEFER's revenue will grow to over EUR2.3 billion
by end-2024, but the company nevertheless remains relatively small
in the context of the broader engineering and construction (E&C)
services sector, which constrains the ratings.
DERIVATION SUMMARY
KAEFER's defensive business model shows strong 'BB' category
attributes, with an emphasis on the company's broadly diversified
operations across geographies, end-markets and customers, which
Fitch views as positive for the credit profile, counterbalancing
the company's lack of scale in the sector.
Fitch benchmarks KAEFER against E&C peers, including Petrofac
Limited (B+/Negative), Bilfinger SE, McDermott Inc., Webuild
S.p.A., (BB/Stable), many of which are considerably larger and, on
average, more profitable with EBITDA margins of 5%-10%. KAEFER's
modest profitability at 5%-6% should be considered in the context
of the company's overall lower contract risk, high share of
recurring revenues and more diversified contract portfolio, which
has historically led to more resilient profitability.
Similarly rated Webuild also reported spike in FFO gross leverage
in 2020 (8x). However, KAEFER's deleveraging capacity is stronger
with expected FFO gross leverage of around 3.8x in 2021-2022 and
below that in the subsequent years. Webuild is expected to report
6.5x in 2021 and around 4x the following years.
Sufficient financial flexibility, expressed by EBITDA/interest paid
of nearly 5.5x in 2022, and KAEFER's less volatile profitability
and cash flows compared with those of peers mitigate the company's
high FFO gross leverage.
KEY ASSUMPTIONS
-- Revenue to increase 14.5% in 2021, reflecting a recovery
across majority of regions and a 12-month contribution of Wood
Group Industrial Services (WGIS). Growth in the following
years driven by acquisitions and new build projects;
-- EBITDA margin to recover to 6.3% in 2021 and be around 6.0%
subsequently;
-- Capex of around 2% of revenues, largely reflecting investments
in scaffolding;
-- Working-capital changes to follow the revenue trajectory with
a significant outflow in 2021 (EUR55 million);
-- Dividend policy to remain stable;
-- Non-recurring costs of EUR20.7 million in 2021;
-- Cash contribution of EUR144 million by new shareholders in
1H22 followed by an acquisition at end 2022;
-- Refinancing of the super senior RCF and senior secured notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- FFO gross leverage improving towards 3.0x;
-- Total debt with equity credit/EBITDA below 2.5x;
-- EBITDA/interest paid above 6.0x;
-- FCF sustained in low single digits; and
-- Further increase in scale and greater diversification outside
Europe due to a growing customer base and lower project
concentration.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- FFO gross leverage remaining materially above 4.0x;
-- Total debt with equity credit/EBITDA above 3.5x;
-- EBITDA/interest paid below 4.0x;
-- Evidence of contract or customer losses or weakening project
implementation leading to a declining order backlog and
revenue, with EBITDA margins weakening to 4% or below; and
-- Sustained negative FCF.
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
Moderate Liquidity: At end-September 2021, KAEFER's liquidity
profile was supported by around EUR57 million of unrestricted cash
on the balance sheet (after deducting EUR30 million of cash deemed
as not readily available for debt service) and the availability of
EUR120 million under the EUR150 million RCF. The equity injection
of EUR144million and liquidity sources provide comfortable headroom
for acquisitions.
Debt Structure: The upcoming debt maturity relates to EUR30 million
drawn under the super senior RCF in 2023 and EUR250 million of
senior secured notes in 2024. Fitch views refinancing risk as low,
given high financial flexibility, a stronger capital structure
after equity injection and the conservative financial policy. Fitch
expects the refinancing process to start ahead of maturities.
ISSUER PROFILE
KAEFER Isoliertechnik is a leading service provider of insulation,
access solutions, surface protection and passive fire protection as
well as aftersales services. KAEFER's operations span Western
Europe, CEE, APAC, Middle East and Latin America and South Africa.
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.
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ARES EUROPEAN VI: Moody's Affirms B1 Rating on EUR4.7MM F-R Notes
-----------------------------------------------------------------
Moody's Investors Service has upgraded the ratings on the following
notes issued by Ares European CLO VI DAC:
EUR39,250,000 Class B-1 Senior Secured Floating Rate Notes due
2030, Upgraded to Aa1 (sf); previously on Mar 19, 2021 Definitive
Rating Assigned Aa2 (sf)
EUR5,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2030,
Upgraded to Aa1 (sf); previously on Mar 19, 2021 Definitive Rating
Assigned Aa2 (sf)
EUR21,700,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2030, Upgraded to A1 (sf); previously on Mar 19, 2021
Definitive Rating Assigned A2 (sf)
EUR17,300,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2030, Upgraded to Baa1 (sf); previously on Mar 19, 2021
Definitive Rating Assigned Baa2 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR208,150,000 (Current outstanding amount EUR 206.2m) Class A
Senior Secured Floating Rate Notes due 2030, Affirmed Aaa (sf);
previously on Mar 19, 2021 Definitive Rating Assigned Aaa (sf)
EUR20,400,000 Class E-R Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed Ba2 (sf); previously on Mar 19, 2021
Affirmed Ba2 (sf)
EUR4,700,000 Class F-R Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed B1 (sf); previously on Mar 19, 2021
Upgraded to B1 (sf)
Ares European CLO VI DAC, issued in September 2013 and refinanced
in April 2017 and in March 2021, is a collateralised loan
obligation (CLO) backed by a portfolio of mostly high-yield senior
secured European loans. The portfolio is managed by Ares European
Loan Management LLP. The transaction's reinvestment period ended in
April 2021.
RATINGS RATIONALE
The rating upgrades on the Class B-1, B-2, C and D Notes are a
result of the senior notes deleveraging following amortisation of
the underlying portfolio and the improvement in the credit quality
of the underlying collateral pool since the last rating action.
The affirmations on the ratings on the Class A, E-R and F-R Notes
are primarily a result of the expected losses on the notes
remaining consistent with their current ratings after taking into
account the CLO's latest portfolio, its relevant structural
features and its actual over-collateralization (OC) levels.
The Class A notes have paid down by approximately EUR2 million
since the last rating action in March 2021. As a result of the
deleveraging, over-collateralisation (OC) has increased across the
capital structure. According to the trustee report dated January
2022 [1] the Class A/B, Class C, Class D and Class E OC ratios are
reported at 137.1%, 126.2%, 118.7% and 110.9% compared to April
2021 [2] levels of 136.2%, 125.4%, 118.0% and 110.3%,
respectively.
The credit quality has improved as reflected in the improvement in
the average credit rating of the portfolio (measured by the
weighted average rating factor, or WARF) and a decrease in the
proportion of securities from issuers with ratings of Caa1 or
lower. According to the trustee report dated January 2022 [1], the
WARF was 2786, compared with 2873 as of April 2021 [2]. Securities
with ratings of Caa1 or lower currently make up approximately 2.2%
of the underlying portfolio, versus 2.9% observed the in April 2021
[2].
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers.
In its base case, Moody's used the following assumptions:
Performing par and principal proceeds balance: EUR343.9m
Defaulted Securities: nil
Diversity Score: 53
Weighted Average Rating Factor (WARF): 2786
Weighted Average Life (WAL): 4.4 years
Weighted Average Spread (WAS) (before accounting for Euribor
floors): 3.5%
Weighted Average Coupon (WAC): 3.9%
Weighted Average Recovery Rate (WARR): 44.9%
The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2021.
Counterparty Exposure:
The rating action took into consideration the notes' exposure to
relevant counterparties, such as account bank and swap provider,
using the methodology "Moody's Approach to Assessing Counterparty
Risks in Structured Finance" published in May 2021. Moody's
concluded the ratings of the notes are not constrained by these
risks.
Factors that would lead to an upgrade or downgrade of the ratings:
This transaction is subject to a high level of macroeconomic
uncertainty, which could negatively affect the ratings on the note,
in light of uncertainty about credit conditions in the general
economy. In particular, the length and severity of the economic and
credit shock precipitated by the global coronavirus pandemic will
have a significant impact on the performance of the securities. CLO
notes' performance may also be impacted either positively or
negatively by (1) the manager's investment strategy and behaviour
and (2) divergence in the legal interpretation of CDO documentation
by different transactional parties because of embedded
ambiguities.
Additional uncertainty about performance is due to the following:
Portfolio amortisation: The main source of uncertainty in this
transaction is the pace of amortisation of the underlying
portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
beginning with the notes having the highest prepayment priority.
MARLAY PARK CLO: Moody's Affirms B2 Rating on EUR11.6MM E Notes
---------------------------------------------------------------
Moody's Investors Service has upgraded the ratings on the following
notes issued by Marlay Park CLO DAC:
EUR34,000,000 Class A-2A Senior Secured Floating Rate Notes due
2030, Upgraded to Aa1 (sf); previously on Mar 29, 2018 Assigned Aa2
(sf)
EUR10,000,000 Class A-2B Senior Secured Fixed Rate Notes due 2030,
Upgraded to Aa1 (sf); previously on Mar 29, 2018 Assigned Aa2 (sf)
EUR24,800,000 Class B Senior Secured Deferrable Floating Rate
Notes due 2030, Upgraded to A1 (sf); previously on Mar 29, 2018
Assigned A2 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR218,000,000 Class A-1A Senior Secured Floating Rate Notes due
2030, Affirmed Aaa (sf); previously on Mar 29, 2018 Assigned Aaa
(sf)
EUR30,000,000 Class A-1B Senior Secured Fixed Rate Notes due 2030,
Affirmed Aaa (sf); previously on Mar 29, 2018 Assigned Aaa (sf)
EUR20,000,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed Baa2 (sf); previously on Mar 29, 2018
Assigned Baa2 (sf)
EUR23,600,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed Ba2 (sf); previously on Mar 29, 2018
Assigned Ba2 (sf)
EUR11,600,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed B2 (sf); previously on Mar 29, 2018
Assigned B2 (sf)
Marlay Park CLO DAC, issued on March 29, 2018, is a collateralised
loan obligation (CLO) backed broadly by syndicated first lien
senior secured corporate loans. The portfolio is managed by
Blackstone Ireland Limited. The transaction's reinvestment period
will end in April 2022.
RATINGS RATIONALE
The rating upgrades on the Class A-2A, Class A-2B and Class B notes
are primarily a result of the benefit of the shorter period of time
remaining before the end of the reinvestment period in April 2022.
In light of reinvestment restrictions during the amortisation
period, and therefore the limited ability to effect significant
changes to the current collateral pool, Moody's analysed the deal
assuming a higher likelihood that the collateral pool
characteristics would maintain an adequate buffer relative to
certain covenant requirements.
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers.
In its base case, Moody's used the following assumptions:
Performing par and principal proceeds balance: EUR401,845,131
Defaulted Securities: none
Diversity Score: 61
Weighted Average Rating Factor (WARF): 2922
Weighted Average Life (WAL): 5.0 years
Weighted Average Spread (WAS) (before accounting for Euribor
floors): 3.53%
Weighted Average Coupon (WAC): 3.46%
Weighted Average Recovery Rate (WARR): 44.94%
Par haircut in OC tests and interest diversion test: 0.0434% due to
Discount Obligation
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2021.
Counterparty Exposure:
The rating action took into consideration the notes' exposure to
relevant counterparties, such as account bank and swap provider(s),
using the methodology "Moody's Approach to Assessing Counterparty
Risks in Structured Finance" published in May 2021. Moody's
concluded the ratings of the notes are not constrained by these
risks.
Factors that would lead to an upgrade or downgrade of the ratings:
This transaction is subject to a high level of macroeconomic
uncertainty, which could negatively affect the ratings on the note,
in light of uncertainty about credit conditions in the general
economy. In particular, the length and severity of the economic and
credit shock precipitated by the global coronavirus pandemic will
have a significant impact on the performance of the securities. CLO
notes' performance may also be impacted either positively or
negatively by: 1) the manager's investment strategy and behaviour,
2) divergence in the legal interpretation of CDO documentation by
different transactional parties because of embedded ambiguities,
and 3) the additional expected loss associated with hedging
agreements in this transaction which may also impact the ratings
negatively.
Additional uncertainty about performance is due to the following:
Portfolio amortisation: On reaching the end of the reinvestment
period in April 2022, the main source of uncertainty in this
transaction is the pace of amortisation of the underlying
portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
beginning with the notes having the highest prepayment priority.
Weighted average life: The notes' ratings are sensitive to the
weighted average life assumption of the portfolio, which could
lengthen as a result of the manager's decision to reinvest in new
issue loans or other loans with longer maturities, or participate
in amend-to-extend offerings. The effect on the ratings of
extending the portfolio's weighted average life can be positive or
negative depending on the notes' seniority.
NEUBERGER BERMAN 3: Moody's Assigns (P)B3 Rating to EUR9MM F Notes
------------------------------------------------------------------
Moody's Investors Service announced that it has assigned the
following provisional ratings to notes to be issued by Neuberger
Berman Loan Advisers Euro CLO 3 DAC (the "Issuer"):
EUR186,000,000 Class A Senior Secured Floating Rate Notes due
2034, Assigned (P)Aaa (sf)
EUR30,750,000 Class B Senior Secured Floating Rate Notes due 2034,
Assigned (P)Aa2 (sf)
EUR18,750,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)A2 (sf)
EUR20,250,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Baa3 (sf)
EUR15,000,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Ba3 (sf)
EUR9,000,000 Class F Senior Secured Deferrable Floating Rate Notes
due 2034, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in Moody's methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and up to 10%
of the portfolio may consist of senior unsecured obligations,
second-lien loans, mezzanine obligations and high yield bonds. The
portfolio is expected to be 90% ramped as of the closing date and
to comprise of predominantly corporate loans to obligors domiciled
in Western Europe. The remainder of the portfolio will be acquired
during the six-month ramp-up period in compliance with the
portfolio guidelines.
Neuberger Berman Europe Limited will manage the CLO. It will direct
the selection, acquisition and disposition of collateral on behalf
of the Issuer and may engage in trading activity, including
discretionary trading, during the transaction's 4.6-year
reinvestment period. Thereafter, subject to certain restrictions,
purchases are permitted using principal proceeds from unscheduled
principal payments and proceeds from sales of credit risk
obligations or credit improved obligations.
In addition to the six classes of notes rated by Moody's, the
Issuer will issue EUR560,000 of Senior Preferred Return Notes due
2034, EUR410,000 of Subordinated Preferred Return Notes due 2034
and EUR1,000,000 of Performance Notes due 2034 which are not rated.
The Senior Preferred Return Notes and the Subordinated Return Notes
accrue interest in an amount equivalent to a certain proportion of
the senior and subordinated management fees and its notes' payment
is pari passu with the payment of the senior and subordinated
management fee. The Performance Notes accrue interest in an amount
equivalent to a typical incentive management fee in other EMEA
CLOs. The interest amount is first used to repay principal until
the amount outstanding is EUR1. Finally, the Issuer will also issue
EUR26,400,000 of Subordinated Notes which are not rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2021.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in December 2021.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR300,000,000
Diversity Score: 53
Weighted Average Rating Factor (WARF): 2950
Weighted Average Spread (WAS): 3.50%
Weighted Average Coupon (WAC): 3.50%
Weighted Average Recovery Rate (WARR): 44.50%
Weighted Average Life (WAL): 7.5 years
SEGOVIA EUROPEAN 3-2017: S&P Puts Prelim B-(sf) Rating to F-R Notes
-------------------------------------------------------------------
S&P Global Ratings assigned its preliminary credit ratings to
Segovia European CLO 3-2017 DAC's class A-R, B-1-R, B-2-R, C-R,
D-R, E-R, and F-R reset notes. The existing transaction has unrated
subordinated notes outstanding that are unaffected. As part of this
reset, the issuer will issue additional unrated subordinated notes
and unrated class Z notes.
The transaction is a reset of the existing Segovia European CLO
3-2017, which closed in November 2020. The issuance proceeds of the
refinancing notes will be used to redeem the refinanced notes and
pay fees and expenses incurred in connection with the reset.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will switch to semiannual payment.
The portfolio's reinvestment period will end five years after
closing, and the portfolio's non-call period will be two years
after closing.
The preliminary ratings assigned to the notes reflect S&P's
assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
Portfolio Benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,908.64
Default rate dispersion 562.35
Weighted-average life (years) 4.57
Obligor diversity measure 147.63
Industry diversity measure 22.45
Regional diversity measure 1.35
Transaction Key Metrics
CURRENT
Total par amount (mil. EUR) 400.00
Defaulted assets (mil. EUR) 0.54
Number of obligors 179
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 5.70
'AAA' reference portfolio weighted-average recovery (%) 36.29
Reference weighted-average spread net of floor(%) 3.84
Reference weighted-average coupon (%) 4.77
Rating rationale
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary collateral portfolio's credit quality, which has a
weighted-average rating of 'B'. We consider that the portfolio will
primarily comprise broadly syndicated speculative-grade senior
secured term loans and senior secured bonds. Therefore, we
conducted our credit and cash flow analysis by applying our
criteria for corporate cash flow CDOs.
"In our cash flow analysis, we used the EUR400 million performing
amount, the covenanted weighted-average spread of 3.75%, the
covenanted weighted-average coupon of 4.50%, and the reference
pool's weighted-average recovery rates for all rated notes. We
applied various cash flow stress scenarios, using four different
default patterns, in conjunction with different interest rate
stress scenarios for each liability rating category.
"We expect that the transaction's documented counterparty
replacement and remedy mechanisms will adequately mitigate its
exposure to counterparty risk under our current counterparty
criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned preliminary ratings, as the exposure to
individual sovereigns does not exceed the diversification
thresholds outlined in our criteria.
"At closing, we expect that the transaction's legal structure will
be bankruptcy remote, in line with our legal criteria.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B-1-R to D-R notes could withstand
stresses commensurate with higher ratings than those we have
assigned. However, as the CLO is still in its reinvestment phase,
during which the transaction's credit risk profile could
deteriorate, we have capped our assigned preliminary ratings on the
notes. The class A-R, E-R, and F-R notes can withstand stresses
commensurate with the assigned preliminary ratings.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our preliminary
ratings are commensurate with the available credit enhancement for
the class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class A-R to E-R
notes to five of the 10 hypothetical scenarios we looked at in our
publication "How Credit Distress Due To COVID-19 Could Affect
European CLO Ratings," published on April 2, 2020. The results
shown in the chart below are based on the covenanted
weighted-average spread, coupon, and recoveries.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F-R notes."
Environmental, social, and governance (ESG) factors
S&P said, "We regard the exposure to ESG credit factors in the
transaction as being broadly in line with our benchmark for the
sector. Primarily due to the diversity of the assets within CLOs,
the exposure to environmental credit factors is viewed as below
average, social credit factors are below average, and governance
credit factors are average. For this transaction, the documents
prohibit assets from being related to the following industries:
weapons of mass destruction; illegal drugs or narcotics;
pornographic materials or content; payday lending; electrical
utility where carbon intensity is greater than 100gCO2/kWh;
non-recycling of unregulated hazardous chemicals, non-biological
pesticides and hazardous wastes, or ozone-depleting substances;
trades in endangered or protected wildlife; 1% of revenues from
thermal coal or coal based power generation, oil sands or
extraction of fossil fuels from unconventional sources; less than
40% of its revenue from natural gas or renewables or reserves of
less than 20% deriving from natural gas; more than 10% of its
revenue is derived from weapons or tailor-made components and
manufacturing of civilian firearms; more than 5% of revenues from
the production, sale or manufacture of tobacco or tobacco products;
more than 50% of its revenue from trade in, production or marketing
of opioid manufacturing and distribution; more than 50% of its
revenue from the production of non-certified palm oil; and more
than 50% of its revenue from the operation, management or provision
of services to private prisons.
"Accordingly, since the exclusion of assets from these industries
does not result in material differences between the transaction and
our ESG benchmark for the sector, no specific adjustments have been
made in our rating analysis to account for any ESG-related risks or
opportunities."
Ratings List
CLASS PRELIM PRELIM SUB (%) INTEREST RATE*
RATING AMOUNT
(MIL. EUR)
A-R AAA (sf) 248.00 38.00 Three/six-month EURIBOR
plus 0.95%
B-1-R AA (sf) 30.00 28.00 Three/six-month EURIBOR
plus 1.75%
B-2-R AA (sf) 10.00 28.00 2.30%
C-R A (sf) 28.00 21.00 Three/six-month EURIBOR
plus 2.75%
D-R BBB- (sf) 26.00 14.50 Three/six-month EURIBOR
plus 4.00%
E-R BB- (sf) 20.00 9.50 Three/six-month EURIBOR
plus 6.36%
F-R B- (sf) 11.00 6.75 Three/six-month EURIBOR
plus 9.03%
Z-1 NR 0.10 N/A N/A
Z-2 NR 5.00 N/A N/A
Z-3 NR 0.10 N/A N/A
Sub NR 55.70 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
TBD--To Be determined.
N/A—-Not applicable.
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I T A L Y
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LEATHER SPA: S&P Assigns 'B' Issuer Credit Rating, Outlook Stable
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S&P Global Ratings assigned its 'B' issuer credit and issue credit
ratings to Italy-headquartered Leather S.p.A. (doing business as
Pasubio) and its senior secured notes.
The stable outlook reflects S&P's expectation that the company will
maintain adjusted EBITDA margins in the 18%-20% range, translating
into adjusted debt to EBITDA declining toward 5x in 2022 with
adjusted FOCF to debt at 5%-7%.
Pasubio is a niche auto supplier focused on high-quality leather
for passenger car seating and interiors, benefiting from exposure
to the premium and luxury car segments and high S&P Global
Ratings-adjusted EBITDA margins of 17%-22% in 2019-2022.
Private equity firm PAI Partners acquired the business from CVC
Capital in a leveraged buyout (LBO) transaction that closed as
expected and which S&P estimates will increase Pasubio's adjusted
debt to EBITDA to 6.0x-6.5x in 2021 from 2.5x in 2020.
S&P said, "We expect Pasubio to deleverage below 6x after temporary
EBITDA pressure in the second half of 2021.While Pasubio's sales
volumes were less severely affected by the prolonged chip shortage
than most auto suppliers in third-quarter 2021 (organic sales were
up by 4% year on year), its profitability was not immune to cost
inflation and supply chain bottlenecks. We estimate that this
challenging operating environment will result in a lower S&P Global
Ratings adjusted EBITDA margin than initially anticipated--about
18% in 2021 versus 21.6% in 2020--and lower than the 20% in our
previous base case for 2021. We estimate that higher raw material
prices not immediately passed through, and some bottlenecks at one
of Pasubio's main external tanning suppliers, also weighed on
profitability in the fourth quarter of last year. That said, the
impact on full-year results will be partly offset by the strong
reported EBITDA margin of about 22% in the first half of the year.
In addition, we anticipate progressive cost pass-through to
materialize more firmly in 2022, supporting adjusted EBITDA margins
of 19%-20% and a gradual decline of debt to EBITDA to 5.0x-5.5x in
2022 from 6.0x-6.5x in 2021.
"Expected resilience of the topline and FOCF continue to support
our ratings and outlook on Pasubio. We estimate the company will
report revenue of EUR300 million-EUR320 million for 2021. This
includes a contribution of about EUR10 million from recently
acquired Hewa (consolidated from June 2021) and represents organic
growth of about 10% from 2020 levels. In our view, this favorable
performance compared with global auto production growth of 1%-3% in
2021 primarily stems from Pasubio's positioning in the premium and
luxury car segments. Original equipment manufacturers (OEMs)
prioritized these higher-margin vehicles last year as production
capacities were constrained by the prolonged chip shortage,
ultimately fueling higher-than-average revenue growth for the
company. Overall, Pasubio's somewhat less volatile revenue base
remains a key rating driver, along with FOCF. Although higher raw
material prices and associated inventory buildup will lead to
larger working capital requirements in 2021 than we expected, we
still estimate that Pasubio will have generated positive FOCF for
full-year 2021. We anticipate FOCF of EUR0 million-EUR10 million
despite a EUR20 million working capital outflow, broadly in line
with the reported FOCF for the nine months ended Sept. 30, 2021.
For 2022, we expect FOCF of EUR15 million-EUR25 million, with more
modest working capital requirements of about EUR5 million.
The LBO transaction closed as expected. Private-equity firm PAI
Partners completed its acquisition of Pasubio in the fourth quarter
of 2021. The deal was funded with EUR340 million of floating-rate
secured notes due 2028 and a EUR275 million sponsor contribution,
consisting of EUR146 million common equity and a EUR129 million
shareholder loan that we treat as equity. The final documentation
for these instruments and the company's EUR65 million super senior
revolving credit facility (RCF) was in line with our initial
expectations.
Pasubio is a niche auto supplier favorably positioned in the
premium and luxury car segment. With revenue of EUR336 million for
the 12 months ended Sept. 30, 2021, pro forma Hewa's full-year
contribution, Pasubio is among the smallest rated auto suppliers
globally. Its size is primarily because of the group's narrow focus
on finished leather products for passenger car seats and interiors.
Pasubio specializes in high-quality nappa and full-grain leather,
serving premium and luxury car brands such as Porsche (about 33% of
2020 revenue) and Jaguar Land Rover (18%). Because the premium
brands' end customers focus more on quality and demand is less
elastic to price changes, OEMs tend to earn favorable margins on
leather equipment. S&P said, "We think this reduces price pressure
for Pasubio compared with other auto suppliers. We also view
favorably the premium segment's stronger-than-average growth
prospects. According to LMC Automotive, global luxury and premium
car production is set to increase by compound annual growth rate of
9.5% over 2021-2025 compared with 7.5% for total light vehicle
production, and it faced a less severe decline of 9%, versus 16%
for light vehicles overall during the pandemic in 2020." According
to management's estimates, Pasubio is the third-largest supplier of
auto leather products globally, holding a 10% market share behind
U.S.-based Eagle Ottawa (a division of Lear Corp.) and
Germany-based Bader. The company notably has a strong presence in
Europe supported by full control of the value chain, including
hides selection, tanning, processing, and cutting.
The second LBO of Pasubio will weaken the company's near-term
credit metrics. S&P said, "We anticipate Pasubio's pro forma
adjusted debt to EBITDA at 6.0x-6.5x in 2021 (8.7x if we were to
view the shareholder loan as debt), declining to 5.0x-5.5x in 2022
from earnings growth. We view PAI's financial policy stance as
typical for financial sponsor owners, and do not rule out future
shareholder return maximization or debt-funded acquisitions. Given
Pasubio's financial sponsor ownership, we assess its leverage on a
gross debt basis. We estimate pro forma adjusted debt of EUR356
million, including some nonrecourse factoring, leases, and
postemployment liabilities, while excluding the EUR129 million
shareholder loan that we view as noncommon equity under our
criteria. We believe the company could accommodate small bolt-on
and EBITDA-accretive acquisitions, which could incrementally reduce
leverage if funded from FOCF and cash balances (which totaled
EUR61.7 million as of Sept. 30, 2021) rather than debt."
Pasubio's demonstrated FOCF generation through the cycle supports
the ratings. Rising earnings and limited capital spending
requirements have allowed the company to generate sizable FOCF over
auto market cycles. S&P said, "With little capacity investments
needed at this stage, we anticipate FOCF at EUR15 million-EUR25
million annually in the next two years, implying a solid
FOCF-to-debt ratio for the rating of 5%-7%. This is despite
increasing pro forma cash interest expense of about EUR15 million
and relatively high cash tax rates (EUR17 million paid in 2020), in
addition to annual capex of EUR12 million-EUR18 million. In the
first three quarters of 2021, reported FOCF of EUR6 million was
supported by recovering revenue of EUR241 million and EBITDA
increasing to EUR45 million (a 18.7% margin) despite a EUR20
million working capital outflow. We expect this high working
capital-related outflow to be exceptional, supporting stronger FOCF
from 2022."
Pasubio's solid profitability and flexible cost structure are key
credit strengths. S&P said, "We view favorably the company's
above-average S&P Global Ratings-adjusted EBITDA margins of 17%-22%
since 2019, despite possible temporary swings as noticed in the
second half of 2021. We also factor in its ability to improve
profitability during the 2020 auto market downturn. In addition to
its high-end market position that results in favorable pricing and
progressive cost pass-through, Pasubio's competitive cost structure
further supports its profitability in our view. The company's cost
base has notably benefited from several operating initiatives
launched in 2017 under the ownership of its previous financial
sponsor. Increasing automated processes, from hides selection to
laser cutting, have led to reduced manual work and raw material
scrappage, ultimately allowing the company to expand its adjusted
EBITDA margin to 21.6% in 2020 (about 20% excluding a one-off
bargain purchase of raw materials) from 10.9% in 2018. The company
has identified further efficiencies in processing and finishing
technologies, as well as in water recycling, to maintain margins
above 20% in the next two years. We also believe that Pasubio's
flexible cost structure (less than 20% of fixed costs) reduces the
volatility of its profitability in times of lower or fluctuating
demand." About 65% of its cost base is composed of raw materials
(hides and processing chemicals), and the company has passed
through price inflation to customers, albeit with a lag of up to a
few quarters. In addition, slightly more than 50% of its direct
labor force resides in lower-cost countries such as Serbia and
Mexico.
Pasubio's robust order book provides visibility since the auto
market recovery remains uneven. The company has secured more than
EUR300 million of booked average annual revenue through 2024. With
its recent acquisition of Germany-based Hewa, Pasubio will also add
EUR25 million-EUR30 million of annual revenue while gaining a new
relationship with Rolls Royce. Despite the visibility the order
book provides, actual revenue could be lower because OEMs can
reduce some of the contracted volumes in line with industry
standards. Also, following the bumpy recovery of car production,
linked to issues such as the prolonged semiconductor shortage,
Pasubio's order intake in first-half 2021 declined by 8% to EUR151
million from EUR165 million for the same period a year earlier.
However, S&P believes this to be temporary.
S&P said, "Concentration in terms of product, customer base, and
supply chain constrains our rating.In addition to its small scale,
we view the company's sole focus on leather interior products as a
weakness compared with that of larger, more diversified rated auto
suppliers. Also, Pasubio is mainly exposed to the European auto
market (about 80% of its revenue), and diversification in North
America (about 10%) and Asia (5%) remains very limited. Although
the company targets to increase its activity in the U.S. market in
the next few years, we expect most of its production footprint to
stay in Italy, with the existing Mexican operations mainly
consisting of final products' cutting. We also regard Pasubio's
customer concentration as fairly high for the industry, with its
two largest clients--Porsche, part of Volkswagen AG
(BBB+/Stable/A-2) and Jaguar Land Rover Automotive PLC
(B+/Stable/--)--representing about 50% of revenue in 2020. Also,
the company's relationships with its OEM clients are shorter and
potentially less entrenched than for other auto suppliers. For
instance, Pasubio has had a relationship with Porsche for nine
years, with its share of order volume only picking up materially in
2018. Although Pasubio is the sole supplier for some models (such
as Cayenne and Panamera), most OEM contracts in the segment are
typically to two suppliers. An unforeseen switch to dual sourcing
on models where Pasubio is the sole supplier, or a reduced share of
orders on dual-sourced models, could have a material impact on
earnings and cash flow.
"We assess substitution risk for auto leather as limited in the
near-to-medium term. We view substitution risk for auto leather
products as low because premium car customers continue to identify
the material as a luxury feature. Nevertheless, the
carbon-intensive meat industry is the only supplier of byproduct
hides, and the tanning process requires polluting chemicals such as
chromium. We believe that increasing customer awareness of
environmental considerations and animal wellness could eventually
reduce leather demand. In that regard, Tesla Inc. has made the
strategic choice of only using synthetic materials for its seats
and car interiors. To address potentially changing customer
behaviors, Pasubio is increasingly investing in new materials such
as recycled or cotton-based leather, while reducing its chromium
usage with greener chemicals.
"The stable outlook reflects our expectation that Pasubio's revenue
will exceed prepandemic levels in 2022, while adjusted EBITDA
margins increase to the 18%-20% range. We estimate this will
translate into adjusted debt to EBITDA declining toward 5x and FOCF
of EUR15 million-EUR25 million."
Upside scenario
S&P could raise its ratings on Pasubio if adjusted debt to EBITDA
declined materially below 5x while adjusted FOCF to debt stays well
above 5% on a sustained basis. This could stem from
faster-than-anticipated EBITDA growth and new lucrative contract
wins with OEM customers, or the company allocating its FOCF toward
debt repayment. An upgrade would also be contingent on a firm
financial policy commitment to maintaining such credit metrics.
Downside scenario
S&P could lower its rating on Pasubio if adjusted debt to EBITDA
remains well above 6x and FOCF to debt does not improve beyond 2%
in 2022. This could stem from unforeseen operating setbacks such as
loss of customer contracts, inability to compensate for cost
inflation, or prolonged weakness in demand, leading to
significantly weaker-than-expected EBITDA and FOCF. A more
aggressive financial policy favoring material debt-funded
acquisitions or shareholder returns could also result in ratings
pressure.
Environmental, Social, And Governance
ESG credit indicators: E-2, S-2, G-3
S&P said, "Governance is a moderately negative consideration in our
credit rating analysis of Leather S.p.A. Our assessment of the
company's financial risk profile as highly leveraged reflects
corporate decision-making that prioritizes the interests of the
controlling owners, in line with our view of the majority of rated
entities owned by private-equity sponsors. Our assessment also
reflects their generally finite holding periods and a focus on
maximizing shareholder returns. Environmental and social factors
have a neutral influence on our credit analysis of Leather at this
stage. Its leather products for passenger vehicles' seats and
interiors are used in both ICE cars and electric vehicles, such
that we do not view its product portfolio as exposed to the
powertrain transition. However, leather production relies on CO2
emitting inputs such as hides and chromium, such that we think it
is somewhat more carbon intensive than the average for other auto
parts. That said, we do not think increasing environmental and
animal wellness considerations are likely to affect customers'
demand for leather in the short term."
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L U X E M B O U R G
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LSF11 SKYSCRAPER: Fitch Places 'B+' LT IDR on Watch Positive
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Fitch Ratings has placed LSF11 Skyscraper Holdco Sarl's (MBCC)
Long-Term Issuer Default Rating (IDR) of 'B+' and senior secured
rating of 'BB-' on Rating Watch Positive (RWP).
The rating action follows Sika AG's agreement to acquire MBCC from
Lone Star Funds for around CHF5.5 billion (around EUR5.2 billion).
The RWP reflects Fitch's expectation that the acquisition will
strengthen MBCC's credit profile, leading to a stronger financial
structure and greater financial flexibility. Fitch expects to
resolve the RWP once the acquisition is completed, expected in
2H22.
The 'B+' IDR of MBCC reflects its high leverage as well as its
strong positions in performance solutions for the infrastructure,
commercial and residential construction markets. The rating is
further supported by adequate geographic diversification, limited
customer concentration and leading market positions in the
admixtures business.
Sika is a specialty chemicals company with a leading position in
the development and production of systems and products for bonding,
sealing, damping, reinforcing, and protecting in the building
sector and motor vehicle industry.
KEY RATING DRIVERS
Stronger Financial Structure: Fitch expects the acquisition by Sika
to result in a stronger financial structure of MBCC, given the
former's healthy leverage profile, strong access to capital markets
and a record of prudent financial discipline. MBCC's current rating
is mainly limited by high leverage with total debt/EBITDA estimated
at 5.3x at end-2021, and with fairly limited expected deleveraging
towards 4.5x at end-2024. The transaction is likely to lead to
repayment of MBCC's existing term loans and revolving credit
facility (RCF), due to a change-of-control clause in debt
documentation and Sika's lower cost of funding, which may provide
an economic incentive to arrange financing at the group level.
Improving Financial Flexibility: Fitch assumes improved financial
flexibility for MBCC post-acquisition, driven by the expected
stronger financial structure and integration into Sika. MBCC's
current liquidity is constrained by concentrated significant debt
maturities in 2027-2028, resulting in refinancing risk in the event
of adverse market conditions or idiosyncratic issues. Fitch expects
MBCC to benefit from Sika's strong capital-market access and
prudent financial discipline, which will increase financial
flexibility.
Continued Supply-Side Challenges: Fitch forecasts a slow
stabilisation of both raw material prices and availability, with
continued high prices and supply bottlenecks throughout 2022. In
recent quarters, the chemical and construction-chemicals sectors
have been facing acute supply shortages in raw materials and a
sharp increase in procurement costs. The supply disruptions led to
MBCC's muted operating profitability and increased working-capital
requirements in 2021. Fitch expects short-term profitability
pressures to be mitigated by strong demand across end-markets and
MBCC's more frequent strategic price adjustments.
Strong and Improving Profitability: Fitch forecasts mid-to high
single-digit free cash flow (FCF) margins in 2022-2024, following
estimated muted FCF generation in 2021. Fitch expects healthy
demand across most end-markets, increasing operating margins on the
back of MBCC's cost savings programme and normalised
working-capital requirement. The margin uplift will mainly be
driven by significant efficiency gains from initiatives in areas of
procurement, manufacturing and logistics. Fitch expects these
savings to improve EBITDA margins to around 14.8% in 2023-2024.
Diversified Customer Revenue: MBCC benefits from a diverse customer
base and adequate geographical spread across Europe, including
Russia, North America, Asia Pacific and the Middle East, with
emerging markets adding growth potential. Revenue comes from more
than 30,000 customers, with the top-10 customers accounting for
only 10% of sales. Customers include concrete manufacturers,
infrastructure builders, roofers, wall and flooring installers,
insulators, windmill farms and underground tunnellers.
Mix of Sales Channels: Fitch expects the mix of direct and indirect
sales to offer strong customer reach to facilitate distribution.
MBCC's admixture products are mainly sold under the Master Builders
brand, with direct sales to large cement and concrete customers
globally as well as local sales to ready-mix concrete plants. Its
construction-systems products are more fragmented, with multiple
brands for different segments and a 40/60 split between direct
sales to professionals and indirect sales through professional and
DIY channels.
Maintenance Sales Mitigate Cyclicality: MBCC supplies products and
solutions for a range of applications across infrastructure,
commercial and residential construction, with around 35% of sales
relating to repair and maintenance. This mitigates sales volatility
from the more cyclical new-build construction, albeit with a fair
share of infrastructure projects. Margins have been stable during
both cyclically weaker periods and at times of high oil prices,
despite raw-materials cost swings.
DERIVATION SUMMARY
MBCC has a solid business profile, which is broadly in line with
that of RPM International Inc. (BBB-/Stable). RPM is about twice
the size of MBCC by turnover and has strong brand recognition in
its niche segments, but lower geographical diversification.
MBCC's margin and profitability are firmly aligned with that of
other building product companies, such as HESTIAFLOOR 2 (Gerflor;
B+/Negative) and some of its concrete customers. The company also
compares well with Winterfell Financing S.a.r.l. (B/Stable) and
Quimper AB (B/Stable), which have lower margins as distributor and
higher expected leverage.
KEY ASSUMPTIONS
-- Revenue of EUR2,757 million in 2021, revenue growth of around
4.6% in 2022 and 3% in 2023-2024;
-- EBITDA margin of 12.9% in 2021, increasing to around 14.8% in
2023-2024 on cost savings;
-- Capex at 2.4% of sales in 2021 and 2.6% annually in 2022-2024;
-- Net working-capital requirement of around 2.9% in 2021,
followed by broadly stable working capital to 2024;
-- Tax rate of 25% to 2024;
-- EUR12.5 million restricted cash, due to working-capital
swings;
-- Holdco loan included as debt, with cash interest serviced by
MBCC.
Recovery Assumptions
The recovery analysis assumes that MBCC would be re-organised as a
going concern (GC) rather than liquidated.
The GC EBITDA estimate reflects Fitch's view of a sustainable, post
reorganisation EBITDA on which Fitch bases the enterprise valuation
(EV). Fitch assumes EUR250 million of GC EBITDA, reflecting
potential raw-material price pressure, a prolonged deep recession
or loss of competitiveness.
A multiple of 5.5x EBITDA is applied to the GC EBITDA to calculate
a post-reorganisation EV, reflecting MBCC's solid market position
and strong profitability.
Fitch has included MBCC's local facilities of EUR7 million at
end-November 2021 as super senior and the impact of the company's
non-recourse factoring of around EUR25 million.
Fitch's waterfall analysis generated a Recover Recovery in the
'RR3' band, indicating a 'BB-' final instrument rating. This was
after 10% deduction from EV for administrative claims, and assumed
MBCC's EUR150 million RCF to be fully drawn, and EUR1,610 million
term loan B (TLB) ranking pari passu. The waterfall analysis output
percentage is 69%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Continued strong business profile and successful
implementation of planned cost savings, leading to higher
EBITDA margin at 17%;
-- Total debt/EBITDA sustainably below 4x;
-- FFO gross leverage sustainably below 4.5x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Total debt/EBITDA sustainably above 6x;
-- FFO gross leverage deteriorating above 6.5x;
-- Deteriorating market position, weak sales growth or margin
pressure;
-- EBITDA margin below 13% for a sustained period;
-- FCF margin deteriorating to below 3%.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: At 30 November 2021, liquidity was supported
by around EUR141 million of readily available cash (excluding
around EUR13 million of cash to cover intra-year working-capital
swings) and access to an undrawn committed EUR150 million RCF. MBCC
has no significant short-term debt maturities and its debt maturity
profile is concentrated in 2027-2028. Fitch expects mid-to-high
single-digit FCF margin and no new acquisitions in 2022-2024.
Fitch expects significant improvement in the liquidity profile
post-acquisition, due to the likely repayment of MBCC's existing
term loans and RCF and an expected stronger financial structure and
integration into Sika.
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.
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S P A I N
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PYMES SANTANDER 14: Fitch Affirms CC Rating on Series C Notes
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Fitch Ratings has upgraded FT PYMES Santander 14, FT's (Santander
14) class B notes and removed them from Under Criteria Observation
(UCO).
DEBT RATING PRIOR
---- ------ -----
FT PYMES Santander 14
Series A ES0305381008 LT A+sf Affirmed A+sf
Series B ES0305381016 LT BBB-sf Upgrade BB+sf
Series C ES0305381024 LT CCsf Affirmed CCsf
TRANSACTION SUMMARY
FT PYMES Santander 14 is a securitisation of loans and credit-line
drawings originated mostly by Banco Santander (A-/Stable/F2) to
Spanish SMEs, micro business and self-employed individuals.
KEY RATING DRIVERS
Robust Performance and Stable Outlook
The rating actions reflect a broadly stable asset performance
outlook, driven by zero exposure to payment holiday loans within
the portfolio. They further factor in a low share of loans in
arrears over 90 days past due (0.4% as of the latest reporting
date), gross cumulative defaults standing at a 0.9% of initial
portfolio balance and a positive macro-economic outlook for Spain,
as described in Fitch's latest Global Economic Outlook. The class B
notes have been removed from UCO where they had been placed since
September 2021.
Rising Credit Enhancement (CE)
The affirmations and upgrades reflect Fitch's view that the notes
are sufficiently protected by credit enhancement (CE) to absorb the
projected losses commensurate with current ratings. Despite the
reserve fund falling below its target at the January 2022 interest
payment date (IPD), CE levels for the class A and B notes have
increased to current 98% and 16.7%, respectively, from 73.8% and
12.9% in the September 2021 review. Fitch expects structural CE for
Santander 14 to keep increasing, due to strictly sequential
amortisation.
Increasing Portfolio Concentration
Rapid amortisation of Santander 14's portfolio has increased the
largest obligor concentration and the share of secured loans in the
portfolio. The largest single borrower group accounts for 2.7% of
the portfolio balance, compared with 2.5% as of September 2021, and
the largest 10 borrower groups account for 14.2%, compared with
13.1% previously.
Fitch views the increasing concentration as a risk in the current
macroeconomic environment for SMEs with the phase-out of
governmental Covid-19 support measures. Fitch has factored this
into its rating analysis, which resulted in the class B notes'
rating below three notches lower than their model-implied rating.
Counterparty Risk Cap
Santander class A notes' rating is capped at 'A+sf' as per Fitch's
Structured Finance and Covered Bonds Counterparty Rating Criteria,
due to the account bank replacement trigger being set at 'BBB' or
'F2'.
Interest Rate Exposure
Santander 14 is exposed to rising interest rate as the portfolio
contains 28% of receivables paying fixed interest rates while the
notes pays a floating coupon and no hedging mechanisms are provided
by the structure. Fitch accounted for this risk in its rating
analysis, and found it sufficiently mitigated by available CE.
RATING SENSITIVITIES
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- A longer-than-expected crisis that weakens macroeconomic
fundamentals and the credit markets in Spain beyond Fitch's
current base case would be negative for the ratings.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- For the class A notes, changes to the account bank's minimum
eligibility rating thresholds to be compatible with 'AAsf' or
'AAAsf' ratings as per the agency Structured Finance and
Covered Bonds Counterparty Rating Criteria would result in
upgrades. This is because the class A notes ratings are capped
at 'A+sf' by the eligibility thresholds contractually defined
at BBB+' or 'F2', which are insufficient to support a 'AAAsf'
or 'AAsf' rating.
-- Increases in CE ratios as the transaction deleverages to fully
compensate the credit losses and cash flow stresses that are
commensurate with higher ratings, all else being equal, would
lead to upgrades.
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.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
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T U R K E Y
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ISTANBUL METROPOLITAN: Fitch Corrects December 7 Ratings Release
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This is a correction of the rating action commentary published on
December 7, 2020 to add Key Assumptions.
Fitch Ratings has assigned Istanbul Metropolitan Municipality's
USD580 million senior unsecured fixed coupon (6.375%) notes
(XS2010029234/ US46522TAA60) due 9 December 2025 a long-term final
rating of 'BB-'.
The final ratings were assigned following the receipt of final
documents conforming to information already received and details
regarding the amount, coupon rate and maturity.
Istanbul's Issuer Default Ratings (IDR) are capped by the
sovereign's IDR (BB-/Negative). The Metropolitan Municipality is
the economic and financial hub of the country with a value-added
contribution to the national economy far above the national average
(contributional share to national GDP is consistently at 30%).
KEY RATING DRIVERS
The notes represent direct, unconditional, unsubordinated and
unsecured obligations of Istanbul and will rank pari passu with all
of its present and future unsecured and unsubordinated obligations,
which are rated in line with its Long-Term Foreign-Currency IDR.
The net proceeds from the notes were used to refinance several of
Istanbul's metro line projects totalling 52 km: the
Kaynarca-Pendik-Tuzla metro line, the
Çekmeköy-Sancaktepe-Sultanbeyli metro line; the Kirazlı-Halkalı
metro line and the Mahmutbey-Bahçeşehir-Esenyurt metro line.
KEY ASSUMPTIONS
Qualitative assumptions:
Fitch assumes the long-term rating of Istanbul's issued senior
unsecured USD notes will remain for the whole maturity of the notes
and is equalised with Istanbul Metropolitan Municipality's
Long-Term Foreign-Currency IDR.
Quantitative assumptions:
Not applicable to this rating action.
RATING SENSITIVITIES
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- An upgrade of Istanbul's IDR would lead to positive rating
action on the senior unsecured notes.
Factor that could, individually or collectively, lead to negative
rating action/downgrade:
-- A downgrade of Istanbul's IDR would lead to negative rating
action on the senior unsecured notes.
COMMITTEE MINUTE SUMMARY
Committee date: 25 November 2020
There was an appropriate quorum at the committee and the members
confirmed that they were free from recusal. It was agreed that the
data was sufficiently robust relative to its materiality. During
the committee no material issues were raised that were not in the
original committee package. The main rating factors under the
relevant criteria were discussed by the committee members. The
rating decision as discussed in this rating action commentary
reflects the committee discussion.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance
and Infrastructure issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of three notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
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.
TURK HAVA: Fitch Affirms 'B' LT IDRs, Alters Outlook to Stable
--------------------------------------------------------------
Fitch Ratings has revised Turk Hava Yollari Anonim Ortakligi's
(Turkish Airlines or THY) Outlook to Stable from Negative and
affirmed the airline's Long-Term Foreign- and Local-Currency Issuer
Default Ratings (IDR) at 'B'. Simultaneously, Fitch has affirmed
Turkish Airline's Bosphorus class A pass-through certificates
series 2015-1A's long-term rating at 'BB'.
The Outlook revision reflects the strong recovery of THY's
performance, supported by rebounding passenger traffic on less
stringent travel restrictions, a surge in cargo business and
reducing demand volatility, which together decrease the likelihood
of further deterioration in the airline's credit profile.
The 'B' rating of THY reflects its high leverage, exposure to a
volatile Turkish lira, and a weak Turkish economy. Rating strengths
are the company's diversified network, strong position on the
domestic market and a highly competitive cost base.
KEY RATING DRIVERS
Strong Recovery since 2H21: THY's revenue passenger kilometre (RPK)
in 2H21 recovered to 71% of 2019 levels, which is a strong rebound
considering the airline's exposure to long-haul intercontinental
traffic - a segment which Fitch expects to recover slower than
short-hauls. THY benefited from less stringent travel restrictions
than other European carriers, especially on the transatlantic
routes, and was able to capture demand amid weaker capacity
deployment from other network carriers. In 2H21, THY's RPK to
Americas exceeded its 2019 level, mitigating much weaker demand in
Far East Asia.
Full Recovery Expected in FY23: Fitch expects a continued recovery
in THY's capacity, which should result in revenue for 2023
exceeding their pre-pandemic levels. This is supported by proactive
route management, a growing fleet and pent-up leisure demand with
Turkey being an attractive holiday destination in Europe. THY's
recovery would be faster than that of other network carriers in the
region and also the broader EMEA market, in Fitch's view. Domestic
demand exceeded pre-pandemic levels during the summer, before
waning in 4Q21, due to the Omicron variant and inflationary
pressure.
Exceptionally High Cargo Rates: THY's cargo business operates 20
freighters and was supportive of overall performance on the back of
exceptionally high cargo rates, which is a combined result of
strained global supply chains, less industry-wide air cargo
capacity and high ocean-to-air conversion. THY's cargo revenue
increased at a CAGR of 53% in 2019-2021 and contributed 37% of
total revenue in 2021 (13% in 2019). Fitch expects its cargo
business to strongly support overall business at least until
passenger traffic sufficiently recovers.
Diversified Network: THY shares similar scale of operations and
network breadth with other major network carriers in EMEA such as
British Airways Plc (BB/Negative), PJSC Aeroflot - Russian Airlines
(BB/Stable). This supports its business profile and provides the
foundation for recovery and future growth. THY's base, Istanbul, is
geographically well-positioned to allow higher usage of lower
unit-cost narrow-body aircraft and serves as a solid transit hub
connecting Europe, Africa and Asia.
Manageable Foreign-Exchange (FX) Exposure: A high share of revenue
is generated in US dollars and euros and limits THY's FX exposure.
During 9M21, THY generated around 60% of revenue in US dollars or
euros with an additional 24% in currencies also correlated with
these major currencies. Despite well-managed FX risk due to a
geographically diversified revenue stream, a volatile lira adds to
demand volatility. A depreciating lira has been a strong, but
unsustainable, draw for foreign tourist demand, in Fitch's view.
Rating on a Standalone Basis: THY is 49.12%-owned by Turkey Wealth
Fund (TWF), which is fully state-owned. Under Fitch's
Government-Related Entities Criteria, Fitch assesses status,
ownership and control, support track record and socio-political
implications of THY's default as 'Moderate', and the financial
implications of THY's default as 'Weak'. This corresponds to the
overall support score of 10 and accordingly, Fitch rates THY on a
standalone basis.
Bosphorus 2015-1 class A: The class A certificates rating of 'BB'
is achieved through the application of Fitch's bottom-up approach
and incorporates a three-notch uplift from THY's IDR of 'B'. The
notching reflects the medium "Affirmation Factor", presence of a
liquidity facility and solid recovery prospects. Collateral
consists of three 2015 vintage B777-300ERs, which Fitch views as
tier 1 assets. The transaction fails to pass Fitch's 'BB' level
stress test, due to declining asset values. In such cases, Fitch's
EETC criteria state that the rating is achieved through the
bottom-up approach and IDR acts as a rating floor.
DERIVATION SUMMARY
Fitch views Aeroflot as THY's closest peer in business profile,
including scale and diversification. THY has a higher cost base
than Aeroflot, but its yield is also higher and is more profitable.
Aeroflot's 'BB' IDR reflects Fitch's top-down rating approach under
GRE Criteria and its Standalone Credit Profile (SCP) is in line
with that of THY at 'b'. THY's business profile is similar to BA's
(BB/Negative), except for BA's stronger position on more lucrative
transatlantic routes, and is much stronger than that of domestic
rival, Pegasus Hava Tasimaciligi A.S. (BB-/Negative). THY's lower
rating reflects a weaker financial profile and limited deleveraging
capacity with expected negative free cash flow (FCF).
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
-- Capacity deployed in 2022 close to 2019 levels and about 40%
higher than in 2021;
-- Marginal increase in passenger yields in 2022 and thereafter
to 2025;
-- Air freight rates to fall 20% in 2022 and 10% each in 2023,
2024 and 2025;
-- Capex in line with company's guidance for 2022, 2023 and 2024;
-- No dividend payments;
-- Increase in personnel cost in 2022 and 2023, in line with
THY's agreement with employees.
Bosphorus 2015-1 class A:
Fitch's key assumptions within its rating case for THY include a
harsh downside scenario in which the airline declares bankruptcy,
chooses to reject the collateral aircraft, and where the aircraft
are remarketed in a severe slump in aircraft values.
RATING SENSITIVITIES
THY IDR:
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Quicker-than-assumed recovery from the market shock while
improving FFO-adjusted gross leverage to below 6.3x;
-- Strengthening of linkages with the Turkish state could result
in a notching-up of the IDR from the SCP.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- FFO-adjusted gross leverage sustainably above 7.0x;
-- EBITDAR margin below 12% on a sustained basis;
-- Failure to adapt to volatile market conditions with effective
mitigation measures.
Bosphorus 2015-1 class A:
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Positive rating action is not expected in the near term, due
to coronavirus-related pressures on the airline industry and
collateral values;
-- The rating is based on a bottom-up analysis and is notched up
from THY's IDR. An upgrade of THY's IDR or improvement in
collateral values, leading to a top-down analysis-driven
rating could lead to an upgrade.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Downgrade of THY's IDR;
-- Change in Fitch's assessment of the affirmation factor or
recoveries based on decline in collateral values.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: THY's cash position of USD2,984 million at
end-September 2021 and available credit lines of around USD3
billion were sufficient to cover short-term debt maturities of
USD2.8 billion (excluding leases) and expected negative FCF of
around USD590 million for FY22.
THY's credit lines are renewed annually. Similar to other Turkish
and emerging-market corporates the company does not pay commitment
fees. It has been successful in renewing its credit lines and,
given its state ownership, believes those lines will remain
available. THY has informed Fitch that about half of its credit
lines are with local Turkish banks and the other half with foreign
banks in Turkey.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3 - 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: Fitch Lowers LT FC IDR to 'B+', Outlook Negative
--------------------------------------------------------
Fitch Ratings has downgraded Turkey's Long-Term Foreign Currency
Issuer Default Rating (IDR) to 'B+' from 'BB-'. The Outlook is
Negative.
KEY RATING DRIVERS
The downgrade of Turkey's IDRs and the Negative Outlook reflects
the following key rating drivers and their relative weights:
High
Policy-driven financial stress episodes of higher frequency and
intensity have increased Turkey's vulnerabilities in terms of high
inflation, low external liquidity and weak policy credibility.
Fitch does not expect the authorities' policy response to reduce
inflation, including FX-protected deposits, targeted credit and
capital flow measures, will sustainably ease macroeconomic and
financial stability risks.
Moreover, Turkey's expansionary policy mix (including deeply
negative real rates) could entrench inflation at high levels,
increase the exposure of public finances to exchange rate
depreciation and inflation, and eventually weigh on domestic
confidence and reignite pressures on international reserves. The
risk of additional destabilising monetary policy easing or stimulus
policies ahead of the 2023 general elections is high, and there is
an elevated degree of uncertainty about the authorities' policy
reaction function in the event of another episode of financial
stress, as political considerations limit the central bank's
ability to raise its policy rate.
Authorities expect that the introduction of FX-protected deposits
combined with a broader strategy to encourage 'liraisation' of the
financial system will support exchange rate stability and in turn
facilitate a reduction in inflationary pressures. The new
mechanism, expanded from retail depositors to corporates,
non-residents and Turkish citizens abroad, will compensate term
deposit holders if the lira depreciation is greater than the
nominal interest rate. As of 9 February, FX-protected deposits were
TRY313 billion (5.8% of total deposits), and corporates are
expected to increase participation due to tax benefits.
In Fitch's view, the new instrument's capacity to sustainably
improve confidence is limited in an environment of high and rising
inflation, as well as unanchored expectations. Moreover, if the
instrument fails to reduce domestic demand for FX, preserving a
stable exchange rate without the use of interest rates would
require renewed FX intervention or additional capital flow measures
similar to those recently introduced requiring the sale of 25% of
exporters' revenues, as well as tighter controls to monitor that
credit allocations do not add to FX demand. This policy response
could in turn have a negative effect on domestic confidence.
Inflation rose to 48% in January and price pressures remain high,
with PPI close to 94% (partly reflecting international commodity
prices and supply chain disruptions), continued exchange rate
pass-through, rising inflation expectations and utility price and
wage hikes. Fitch forecasts inflation to reach 38% by the end of
the year and average 41% in 2022 and 28% in 2023, the second
highest among all Fitch-rated sovereigns. Backward indexation,
failure of the authorities to rein in expectations and additional
exchange rate volatility represent upside risks to Fitch's
inflation forecasts.
Medium
Turkish FX liquidity buffers are low relative to peers and risks
derived from high financial dollarisation, the vulnerable structure
of international reserves and significant exposure to changing
investor sentiment. After coming under pressures in
November-December, recent figures show an increase in gross
(USD114.7 billion) and net (USD16.3 billion) reserves but the net
foreign asset position of the central bank (excluding FX swaps)
remains negative.
Fitch expects gross reserves to increase to USD118 billion in 2022
(4.2 months of current external payments), as export rediscount
credits, FX conversion of deposits, a new FX swap with the UAE
(equivalent to USD5 billion) and EUR1 billion deposit from
Azerbaijan's Sofaz at the Central Bank will more than offset
continued current account deficits and domestic FX demand, and
limited portfolio inflows.
Although Fitch expects the current account deficit to narrow
further to 1.7% of GDP in 2022 from an estimated 2.2% in 2021 and
4.9% in 2020, external financing needs will remain high. External
debt maturing over the next 12 months (end-November) amounts to
USD167 billion. Access to external financing for the sovereign and
private sector has been resilient to previous episodes of stress,
but is vulnerable to changes in investor sentiment.
Reduced FX volatility in recent weeks and the introduction of the
FX-protected deposits have allowed lira deposits to partially
recover and driven some reversal in dollarisation. The scheme could
mitigate near-term risks to the stability of bank funding, improve
sentiment in the near term and alleviate pressure on capital
ratios. Nevertheless, the combination of deeply negative real
policy rates and rising inflation creates risks for financial
stability, for example if depositor confidence is shaken, and could
potentially jeopardise the until now resilient access of banks and
corporates to external financing. In this negative scenario,
official international reserves would come under pressure, as a
significant portion of banks foreign currency assets is held in the
central bank including FX swaps and reserve requirements.
Turkish banks are vulnerable to FX volatility due to high external
debt payments, the impact on asset quality (41% of loans
denominated in foreign currency) and high deposit dollarisation
(61.5%). In addition, Fitch estimates that 10% depreciation erodes
the sector common equity Tier 1 ratio by about 50bp, although the
regulator has extended regulatory forbearance to cushion the impact
of depreciation on capital ratios.
Turkey's 'B+' IDRs also reflect the following key rating drivers:
Turkey's ratings reflect weak policy credibility and
predictability, high inflation, low external liquidity relative to
high external financing requirements and dollarisation, and
geopolitical risks. These credit weaknesses are set against low
government debt and deficits, manageable sovereign financing needs,
high growth and structural indicators, such as GDP per capita and
Human Development, relative to rating peers.
Public finances are a strength relative to peers. Fitch estimates
that general government debt increased to 42% of GDP at end-2021,
below the 'B' median of 68%, as the depreciation of the lira was
balanced by lower financing needs and net repayments of domestic
foreign currency debt. Debt dynamics will remain vulnerable to
increased currency risks, as 66% of central government debt was
foreign currency-linked or denominated at end-2021, up from 39% in
2017.
Fitch estimates that Turkey's fiscal deficit declined to 3% of GDP
at the general government level and 2.9% at the central government
level in 2021, the latter below the revised 3.5% fiscal target.
Fitch forecasts that the general government deficit will widen to
4.2% in 2022 and 4.5% in 2023. Fiscal risks stem from potential
payments related to the FX protected deposit scheme, fiscal
measures to cushion the impact of inflation on the economy, rising
interest payments and expenditure linked to inflation such as wages
and pension transfers. Government debt amortisations are
manageable, averaging 3.5% of GDP in 2022-2023 and Fitch's baseline
assumption is that the sovereign will maintain access to external
markets based on the record of regular external bond issuance,
despite repeated periods of stress in recent years.
Fitch expects the Turkish economy to slow to 3.2% in 2022 from 11%
in 2021, balancing still favourable external demand dynamics,
recovery in the tourism sector and an accommodative policy stance
against tighter financing conditions, deterioration in consumer
sentiment, and the negative impact of a weaker exchange rate and
high inflation. Despite growth resilience, GDP per capita in US
dollar terms has deteriorated since 2013, falling by almost
USD4,000 to an estimated USD8,633 in 2021, due to the multi-year
weakening of the currency.
On the domestic front, the support for the government continues to
be under pressure as a result of rising inflation and the sharp
depreciation of the lira in 2021. Fitch expects the proximity of
general elections, due by June 2023, to heavily influence policy in
the direction of supporting growth.
Geopolitical tensions have eased over the past year and Turkey has
sought to rebuild relations with countries in the region.
Nevertheless, key foreign policy issues remain unresolved such as
Turkey's 2019 purchase of the S-400 Russian missile system, US
cooperation with the Kurdish People's Protection Units (YPG) in
Syria or the maritime disputes in the Eastern Mediterranean. The
evolution of relations with Russia is uncertain due to Turkey's
support and arms sales to Ukraine.
ESG - Governance: Turkey has an ESG Relevance Score (RS) of '5' for
both Political Stability and Rights and for the Rule of Law,
Institutional and Regulatory Quality and Control of Corruption.
Theses scores reflect the high weight that the World Bank
Governance Indicators (WBGI) have in Fitch's proprietary Sovereign
Rating Model. Turkey has a medium WBGI ranking at 37 reflecting a
recent track record of peaceful political transitions, a moderate
level of rights for participation in the political process,
moderate but deteriorating institutional capacity due to increased
centralisation of power in the office of the president and weakened
checks and balances, uneven application of the rule of law and a
moderate level of corruption.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Macro: Policy initiatives that exacerbate macroeconomic and
financial stability risks, for example an inflation-exchange
rate depreciation spiral or weaker depositor confidence.
-- External Finances: Signs of reduced access to external
financing for the sovereign or the private sector, for example
due to further deterioration of investor confidence, that
would lead to balance of payments pressures including
sustained reduction in international reserves.
-- Structural features: A serious deterioration in the domestic
political or security situation or international relations
that severely affects the economy and external finances.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Macro: A credible and consistent policy mix that stabilizes
confidence and reduces macroeconomic and financial stability
risks, for example by reigning in inflationary pressures.
-- External Finances: A reduction in external vulnerabilities,
for example due to a sustained improvement in terms of the
level and composition of international reserves, reduced
dollarisation and sustained improvement in the current account
balance.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Turkey a score equivalent to a
rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR
scale.
Fitch's sovereign rating committee adjusted the output from the SRM
to arrive at the final LT FC IDR by applying its QO, relative to
SRM data and output, as follows:
-- Structural: -1 notch, to reflect vulnerabilities in the
banking sector due to the significant reliance on foreign
financing and high financial dollarization, and the risk that
developments in geopolitics and foreign relations, including
sanctions, could impact economic stability.
-- Macro: -1 notch, to reflect that risks to macroeconomic and
financial stability are not fully captured by the SRM, as the
current policy mix and potential reaction to shocks could
further weaken domestic confidence, reduce reserves and lead
to external financing and domestic liquidity pressures. Policy
uncertainty also remains elevated due to the risk of
additional monetary policy easing and other stimulus measures
due the proximity of general elections due by June 2023.
-- External Finances: -1 notch, to reflect a very high gross
external financing requirement, low international liquidity
ratio, a weak central bank net foreign asset position, and
risks of renewed balance of payments pressure in the event of
changes in investor sentiment.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within
Fitch's criteria that are not fully quantifiable and/or not fully
reflected in the SRM.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance
and Infrastructure issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of three notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
ESG CONSIDERATIONS
Turkey has an ESG Relevance Score of '5' for Political Stability
and Rights as World Bank Governance Indicators have the highest
weight in Fitch's SRM and are therefore highly relevant to the
rating and a key rating driver with a high weight. As Turkey has a
percentile rank below 50 for the respective Governance Indicator,
this has a negative impact on the credit profile.
Turkey has an ESG Relevance Score of '5' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight. As Turkey has a percentile rank
below 50 for the respective Governance Indicators, this has a
negative impact on the credit profile.
Turkey has an ESG Relevance Score of '4' for Human Rights and
Political Freedoms as the Voice and Accountability pillar of the
World Bank Governance Indicators is relevant to the rating and a
rating driver. As Turkey has a percentile rank below 50 for the
respective Governance Indicator, this has a negative impact on the
credit profile.
Turkey has an ESG Relevance Score of '4[+]' for Creditor Rights as
willingness to service and repay debt is relevant to the rating and
is a rating driver for Turkey, as for all sovereigns. As Turkey has
track record of 20+ years without a restructuring of public debt
and captured in Fitch's SRM variable, this has a positive impact on
the credit profile.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of '3'. This means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or to the way in which they
are being managed by the entity.
=============
U K R A I N E
=============
UKRAINIAN RAILWAY: Fitch Affirms 'B' LT IDRs, Outlook Now Stable
----------------------------------------------------------------
Fitch Ratings has revised the Outlook on JSC Ukrainian Railway's
(UR) Long-Term Issuer Default Ratings (IDRs) to Stable from
Positive and affirmed the IDRs at 'B'.
KEY RATING DRIVERS
The rating actions follow the revision of Ukraine's Outlook to
Stable from Positive. This has a direct impact on UR's Outlook as
Fitch considers it a government-related entity (GRE) of Ukraine
based on Fitch's GRE Rating Criteria.
The affirmation reflects Fitch's unchanged assessment of the
strength of linkage with the Ukrainian government and the
government's incentive to support the UR since Fitch's last review
on 20 December 2021.
DERIVATION SUMMARY
Fitch classifies UR as an entity ultimately linked to Ukraine
sovereign under its GRE Rating Criteria and assesses the GRE
support score at 27.5, reflecting a combination of following
assessment of Key Risk Factors: a 'Very Strong' assessment for
status, ownership and control, a 'Moderate' assessment for support
track record and socio-political implications of default, and a
'Strong' assessment for financial implications of default.
Fitch assesses UR's Standalone Credit Profile (SCP) at 'b-' under
its Public Sector, Revenue-Supported Entities Rating Criteria,
which factors in the company's 'Weaker' assessment for revenue
defensibility, combined with a 'Midrange' assessment for operating
risk and 'Weaker' assessment for financial profile.
Based on this assessment Fitch applies a top-down approach under
its GRE Criteria, which combined with UR's SCP assessment of 'b-'
(fewer than three notches away from the government's rating), leads
to rating equalisation with the Ukraine sovereign IDR.
RATING SENSITIVITIES
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- An upgrade of Ukraine's sovereign rating, provided there is no
deterioration in the company's SCP or scoring under GRE
criteria.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A downgrade of Ukraine's sovereign rating.
-- Dilution of linkage with the sovereign resulting in the
ratings being further notched down from the sovereign.
-- Maintenance of net debt to EBITDA above 4x and deterioration
of the company's liquidity position.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance
and Infrastructure issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of three notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
ISSUER PROFILE
UR is Ukraine's integrated railway group with core operations in
domestic freight segment. It also manages national railway
infrastructure, provides dispatching and passenger transportation
services.
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
===========================
CARDIFF AUTO 2022-1: S&P Assigns B (sf) Rating to Class E Notes
---------------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Cardiff Auto
Receivables Securitisation 2022-1 PLC's (CARS 2022-1's)
asset-backed fixed-rate class A, and floating-rate class B, C, D,
and E notes. At closing, CARS 2022-1 also issued unrated fixed-rate
class S notes.
Our ratings address timely payment of interest and ultimate payment
of principal on the class A, B, C, D, and E notes, although
interest on the class B, C, D, and E notes is deferrable.
This is the second U.K. ABS transaction with receivables originated
by Black Horse Ltd. that we've rated. In total, this is the
originator's fifth transaction.
Black Horse is one of the largest independent auto lenders in the
U.K. and has partner relationships with several auto manufacturers,
with Jaguar Land Rover being the largest by origination volume.
Black Horse lends on a mix of new and used vehicles with a focus on
prime customers. It is not a deposit taking institution in the
U.K.
The underlying collateral comprises U.K. auto loan receivables
arising under Personal Contract Purchase agreements for the
purchase of new and used vehicles by retail customers. Only
borrowers with the highest internal credit score from Black Horse
were eligible for inclusion in the securitized pool.
All the receivables contain a final optional balloon payment, which
represents, in aggregate, 66.1% of the securitized pool.
The pool cut off is February 2022.
The transaction is static and amortizes from the closing date.
Collections are distributed monthly according to separate interest
and principal waterfalls, paying strictly sequentially.
The assets pay a monthly fixed interest rate. The class A notes pay
a fixed rate and the rated class B, C, D, and E notes pay
compounded daily Sterling Overnight Index Average (SONIA) plus a
margin, subject to a floor of zero. To mitigate fixed-floating
interest rate risk, the rated class B, C, D, and E notes benefit
from a balance guaranteed interest rate swap. Since the swap
provider, Black Horse, does not currently meet its counterparty
criteria to support 'AAA' ratings, Lloyds Bank PLC provides a swap
guarantee in line with its guarantee criteria.
Ratings
CLASS RATING* AMOUNT (MIL. GBP)
A AAA (sf) 414.8
B A (sf) 65.5
C BBB (sf) 32.0
D BB (sf) 30.5
E B (sf) 21.3
S NR 45.7
*S&P's ratings address timely payment of interest and ultimate
payment of principal on the class A, B, C, D, and E notes.
NR--Not rated.
EUROSAIL 2006-3: Fitch Affirms B Rating on Class E1c Notes
----------------------------------------------------------
Fitch Ratings has upgraded four tranches of Eurosail 2006-3 NC PLC
(ES06-3) and affirmed the rest. It has also removed the class E
notes from Rating Watch Negative (RWN).
DEBT RATING PRIOR
---- ------ -----
Eurosail 2006-3 NC Plc
B1a XS0271946054 LT AAAsf Affirmed AAAsf
C1a XS0271946484 LT AA+sf Upgrade AA-sf
C1c XS0271946641 LT AA+sf Upgrade AA-sf
D1a XS0271946724 LT BBBsf Upgrade BBB-sf
D1c XS0271947029 LT BBBsf Upgrade BBB-sf
E1c XS0271947375 LT Bsf Affirmed Bsf
TRANSACTION SUMMARY
The transaction comprises UK non-conforming and buy-to-let (BTL)
mortgage loans originated by Southern Pacific Mortgages Limited and
Southern Pacific Personal Loans Limited (formerly wholly owned
subsidiaries of Lehman Brothers).
KEY RATING DRIVERS
Credit Enhancement Accumulation
Credit enhancement (CE) has increased in the transaction as it
continues to amortise sequentially, due to a late-stage arrears
trigger breach, which is not expected to cure. Fitch expects
sequential amortisation to continue for the remaining life of the
transaction.
CE available for the senior notes has increased to 67.9% currently,
from 63.4% as at the last rating action in July 2021. The build-up
in CE for the class C and D notes has allowed the notes to be able
to withstand higher stresses, resulting in today's upgrade.
Increasing CE provided by a non-amortising reserve fund also drives
the affirmation of the class E notes and their RWN resolution.
Persistently High Arrears
Total and late-stage arrears in ES06-3 have stagnated since the
last rating action in July 2021 at 32% and 27%, respectively, of
the pool. The moratorium on repossessions implemented during the
Covid-19 pandemic has led to a modest increase in late stage
arrears so far.
Increased Senior Fees
A detailed analysis of senior fees reported in the investor reports
indicates ES06-3 has been incurring increased senior fees for an
extended period driven by professional services expenses. If this
trend continues Fitch may adjust its fixed fee assumptions used for
analysing the transaction, which may adversely affect the junior
notes in the structure.
Foreclosure Frequency Macroeconomic Adjustment
Fitch applied foreclosure frequency (ff) macroeconomic adjustments
to the UK non-conforming sub-pool of the transaction because of the
expectation of a temporary mortgage underperformance (see Fitch
Ratings to Apply Macroeconomic Adjustments for UK Non-Conforming
RMBS to Replace Additional Stress). With the government's
repossession ban ended, there is still uncertainty regarding the
borrowers' performance in the UK non-conforming mortgage sector
where many borrowers have already rolled into late arrears over
recent months. Borrowers' payment ability may also be challenged
with the end of the coronavirus job retention and self-employed
income-support schemes. The adjustment is of 1.58x at 'Bsf' while
no adjustment is applied at 'AAAsf' as assumptions are deemed
sufficiently remote at this level.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- A resurgence of coronavirus and return to significant
restrictions and lockdowns could result in further
deterioration in the performance of the mortgage pools due to
declining economic activity. Additionally, the ratings may be
sensitive to the to the transition of the notes from LIBOR to
SONIA.
-- For example, if material basis risk is introduced or if the
net asset yield is materially lower, ratings may be negatively
affected. A 15% increase in the weighted average (WA) FF and a
15% decrease in the WA recovery rate (RR) would result in
downgrades of up to five notches for the junior notes in the
structure
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- Improving asset performance driven by declining delinquencies
and defaults would lead to increasing CE and, potentially,
upgrades. Fitch tested an additional rating sensitivity
scenario by applying a decrease in the FF of 15% and an
increase in the RR of 15%. This would result in upgrades of
the class C and D notes by up to two notches.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool ahead of the transaction's closing. The
subsequent performance of the transaction over the years is
consistent with the agency's expectations given the operating
environment and Fitch is therefore satisfied that the asset pool
information relied upon for its initial rating analysis was
adequately reliable.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
ES06-3 has an ESG Relevance Score of '4' for Customer Welfare -
Fair Messaging, Privacy & Data Security, due to poo exhibiting an
interest -only maturity concentration of legacy non-conforming
owner-occupied loans of greater than 20%, which has a negative
impact on the credit profile, and is relevant to the ratings in
conjunction with other factors.
ES06-3 has an ESG Relevance Score of '4' for Human Rights,
Community Relations, Access & Affordability due to a significant
proportion of the pools containing owner-occupied loans advanced
with limited affordabiltiy checks, which has a negative impact on
the credit profile, and is relevant to the ratings in conjunction
with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
INTERNATIONAL GAME: Moody's Ups CFR to Ba2, Outlook Remains Stable
------------------------------------------------------------------
Moody's Investors Service upgraded International Game Technology
PLC's ("IGT") Corporate Family Rating to Ba2 from Ba3, Probability
of Default Rating to Ba2-PD from Ba3-PD, and existing rated senior
secured notes to Ba2 from Ba3. The company's Speculative Grade
Liquidity rating was upgraded to SGL-2 from SGL-3 and the outlook
is stable.
The upgrade to Ba2 CFR reflects the strong performance of the
company's resilient lottery segment, continued recovery in the
company's gaming operations, and growing contribution from the
company's digital and sports betting business. The strengthened
performance, coupled with debt reduction largely facilitated by the
sale of the company's business to consumer Italian gaming business
and prudent expense management have resulted in a reduction in
debt-to-EBITDA leverage, which Moody's expects to be at or below
4x, supportive of the Ba2 rating.
Upgrades:
Issuer: International Game Technology PLC
Corporate Family Rating, Upgraded to Ba2 from Ba3
Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD
Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3
Senior Secured Regular Bond/Debenture, Upgraded to Ba2 (LGD3) from
Ba3 (LGD3)
Issuer: International Game Technology
Senior Secured Regular Bond/Debenture, Upgraded to Ba2 (LGD3) from
Ba3 (LGD3)
Outlook Actions:
Issuer: International Game Technology PLC
Outlook, Remains Stable
Issuer: International Game Technology
Outlook, Remains Stable
RATINGS RATIONALE
International Game Technology PLC's Ba2 CFR reflects the
improvement of the company's operations and debt reduction, which
have resulted in debt-to-EBITDA leverage expected to be maintained
at or below the 4x range. Debt-to-EBITDA leverage was approximately
4.2x at September 2021 (assuming full consolidation of majority
owned Lotto game and Scratch & Win instant lottery games in Italy,
and about .3x higher if EBITDA is reduced by minority interest cash
dividends). The credit profile benefits from IGT's large and
relatively stable revenue base during normal operating periods,
with more than 80% achieved on a recurring basis, and high barriers
to entry. Further support is provided by the company's vast
gaming-related software library and multiple delivery platforms, as
well as potential growth opportunities in IGT's digital, mobile
gaming, sports betting, and lottery products. IGT, through its
joint venture with minority partners, is concessionaire of the
world's largest instant ticket lottery (Italy) and Italy's draw
based lottery and holds facility management contracts with some of
the largest lotteries in the US. The lottery contracts provide a
stable and recurring source of free cash flow with strong
resilience demonstrated during the pandemic. IGT is constrained by
its exposure to soft slot replacement demand trends in the US.
Revenues are largely tied to the volume of gaming machine play and
lotteries. Gaming is cyclical and dependent on discretionary
consumer spending. The company can reduce spending on game
development and capital expenditures when revenue weakens, but the
need to retain a skilled workforce to maintain competitive
technology contributes to high operating leverage.
IGT is focused on accelerating growth by investing in various
lottery contract extensions and in digital and betting. Lottery
renewals require capital and some significant upfront cash payments
(Italian contracts). These factors along with the company's
shareholder dividend and minority interest dividends will create
considerable uses of cash over the next two years. Free cash flow
is likely to be lower than it has been on an LTM basis, with an
expectation for improvement as earnings grow and returns on
investments made are realized.
The company's speculative-grade liquidity rating was upgraded to
SGL-2 from SGL-3, reflecting the repayment of revolver borrowings
and improving covenant cushion. IGT's good liquidity reflects
unrestricted cash of approximately $435 million as of September 30,
2021, with a fully undrawn revolver of approximately $1.8 billion
that expires in 2024. As of the quarter ended September 2021, the
company is subject to a 6.25x net leverage covenant (with
step-downs) and an EBITDA to total net interest costs ratio of
3.0x. Moody's projects the company will have good cushion within
the covenants.
The coronavirus outbreak and the government measures put in place
to contain it continue to disrupt economies and credit markets
across sectors and regions. Although an economic recovery is
underway, the recovery is tenuous, and continuation will be closely
tied to containment of the virus. As a result, a degree of
uncertainty around Moody's forecasts remains. Moody's regards the
coronavirus outbreak as a social risk under Moody's ESG framework,
given the substantial implications for public health and safety.
IGT also remains exposed to discretionary consumer spending that
leave it vulnerable to shifts in market sentiment in these
unprecedented operating conditions.
Additional social risks include changing consumer preference
related to consumer entertainment preferences and population
demographics that may move in a direction that does not favor
traditional casino-style gaming. At the same time, the younger
generation may not be spending as much time playing casino-style
games as previous generations. Additionally, while traditional
casino games remain popular, consumer spending on such nonessential
entertainment has proven to be highly discretionary.
Governance risks are moderately negative and linked primarily to
financial policy with some risk related to leverage and
distribution policies. Concentration in ownership (50% with De
Agostini S.p.A.) is partially mitigated by the company's
credibility and track record. The company has a publicly stated
target of maintaining leverage in the 2.5-3.5x net leverage level
over the investment cycle.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook considers Moody's expectation that the recovery
in the company's business exhibited in 2021 will continue over the
next few years. The stable outlook also incorporates the company's
good liquidity and Moody's expectation for debt-to-EBITDA leverage
to be maintained at or below the 4x level.
Ratings could be downgraded if liquidity deteriorates, if Moody's
anticipates IGT's earnings to decline or there are reductions in
discretionary consumer spending. Debt-to-EBITDA leverage sustained
over 4.5x (with EBITDA reduced by minority cash dividends) could
result in a downgrade.
The ratings could be upgraded if operations continue to improve
such that debt-to-EBITDA leverage is sustained below 3.5x (with
EBITDA reduced by minority cash dividends). Consistent and
meaningfully positive free cash flow while maintaining good
reinvestment levels that generate solid returns would also be
required for an upgrade.
International Game Technology PLC is a global leader in gaming,
from Gaming Machines and Lotteries to Sports Betting and Digital.
The publicly traded company operates under three business segments:
Global Lottery, Global Gaming, and Digital & Betting. The company
is publicly traded and consolidated revenue for the last
twelve-month period ended September 30, 2021 was approximately $3.9
billion. International Game Technology has corporate headquarters
in London, and operating headquarters in Rome, Italy; Providence,
Rhode Island; and Las Vegas, Nevada.
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
KIDS COMPANY: Government Report Reveals Mismanagement at Charity
----------------------------------------------------------------
Martin Robinson at MailOnline reports that Kids Company was
disastrously managed and may even have survived if bosses had saved
chunks of the reported GBP42 million poured into it by the taxpayer
instead of handing some children and families GBP1,700-a-month, a
damning Government report has found.
The charity run by founder Camila Batmanghelidjh and seven former
directors including Alan Yentob went into liquidation in 2015, just
weeks after it was handed a GBP3 million grant by David Cameron's
government, MailOnline relates.
It operated a "high risk business model", according to the Charity
Commission report published on Feb. 10, which said there was
mismanagement and records were destroyed, MailOnline notes.
Investigators found that some of the charity's records were
destroyed at the time of its collapse -- but those that survived
showed that Kids Company was handing 25 people an average of more
than GBP1,700 per month in 2014, MailOnline discloses.
In 15 years, Kids Company took a reported GBP42 million from the
taxpayer, including GBP3 million from the Conservative government
in 2015 -- on the eve of its collapse, MailOnline states.
Last year, The Insolvency Service (TIS) brought court proceedings
against them over the alleged financial mismanagement of the former
children's charity that collapsed after having GBP42 million of
taxpayers' money poured into it over a decade, MailOnline
recounts.
MIDAS: Nationwide Explores Options for Oakfield Project
-------------------------------------------------------
William Telford at BusinessLive reports that the developer behind a
GBP50 million housing scheme placed in limbo by the collapse of
South West construction giant Midas Group Plc says it is now trying
to work out how to finish the project.
The Nationwide Building Society's 239-home eco-friendly Oakfield
scheme, in Swindon, was being delivered by Mi-space, the housing
arm of Exeter-based Midas, BusinessLive discloses.
Work began in 2021 and was scheduled for completion by Spring 2022,
BusinessLive notes. It was progressing until Midas hit the rocks
and has now gone into administration with the loss of 303 jobs,
BusinessLive relates.
According to BusinessLive, although the building services division
of Mi-space (UK) Ltd, also now in administration, was acquired by
Bell Group, which has bases in Plymouth and Taunton, the
construction arm of Mi-space had been transferred to another Midas
subsidiary, Midas Construction Ltd, which is also now in the hands
of administrators.
It means that work on the brownfield development is now in limbo
and Nationwide has been in urgent talks with Midas' administrators
at global business advisory firm Teneo Financial Advisory Ltd.,
BusinessLive states.
But the building society said it is committed to the Oakfield
project and hopes to be able to restart work, BusinessLive notes.
Meanwhile, a Manchester-based law firm said it has been contacted
by former Midas employees who claim they were not properly
consulted during the redundancy process and are looking to pursue
legal action, BusinessLive relays.
PLAYTECH PLC: Moody's Confirms Ba3 CFR & Alters Outlook to Stable
-----------------------------------------------------------------
Moody's Investors Service has confirmed Playtech Plc's (Playtech or
the company) Ba3 corporate family rating and Ba3-PD probability of
default rating. Concurrently Moody's has also confirmed the Ba3
instrument rating on the EUR530 million backed senior secured notes
due 2023 and EUR350 million backed senior secured notes due 2026.
The rating outlook was changed to stable from ratings under
review.
This concludes the review for upgrade initiated on November 2,
2021.
The rating confirmation and the outlook change follow Playtech'
announcement on February 2, 2022 that there were no sufficient
shareholders votes in favor of the offer made by Aristocrat Leisure
Ltd (Aristocrat, Ba1 stable) to acquire the business.
RATINGS RATIONALE
"The confirmation of the rating with a stable outlook reflects (1)
the fact the company will continue to operate on a stand-alone
basis following the rejection of the Aristocrat Leisure Ltd's
offer; (2) the improving operating performance of the company in
1H2021 and Moody's expectation that performance will continue to
improve over the next 12-18 months supported by SNAITECH S.p.A.
(Snaitech) re-opening its retail network in Italy and (3) Moody's
expectations that adjusted gross leverage will improve from an
elevated level of 4.8x as of LTM June 2021 to 4.2x by end of 2021
positioning it well within the leverage guidance for the rating",
said Stefano Cavalleri Vice President -- Senior Analyst and the
lead analyst for Playtech.
However the rating also reflects (1) a high degree of customer
concentration and some exposure to unregulated markets; (2) a
highly competitive operating environment, with new companies and/or
technologies as well as market consolidation and insourcing trends
and (3) uncertainty regarding the future scope and scale of the
business in light of the company's public guidance indicating that
it will evaluate M&A proposals for both B2B and B2C division in
order to maximize shareholder value.
Moody's expects EBITDA to grow in 2022 albeit still below
pre-pandemic levels. Playtech's performance has been negatively
affected by government imposed restrictions to movement throughout
the pandemic because of its retail operations. The ease of
restrictions over the last few months is likely to support growth
in Snaitech's retail betting revenues in Italy. The latter company
reported a significant drop in revenues as of June 2021 partly
offset by strong growth in revenues from online. Furthermore, the
B2B business has delivered good growth especially in the Americas
which Moody's expect to continue.
LIQUIDITY
Moody's considers Playtech's liquidity position to be good. Uses of
cash include capex and R&D of around EUR155 million and dividends
which are likely to resume from 2022 although they have not been
reinstated yet. Liquidity is supported by (1) cash (excluding cash
in assets held for sale and cash held on behalf of clients) on
balance sheet of more than EUR410 million as at June 30, 2021; (2)
Availability under the EUR317 million RCF (EUR164 million
outstanding as of July 31, 2022 after EUR150 million were repaid in
2021) which has a 3x net debt / Adjusted EBITDA covenant and a 4x
Adjusted EBITDA / interest cover covenant; and (3) no material debt
maturities until October 2023.
STRUCTURAL CONSIDERATION
Using Moody's Loss Given Default methodology, the Ba3-PD PDR is
aligned to the Ba3 CFR. This is based on a 50% recovery rate, as is
typical for transactions including both bonds and bank debt. The
Ba3 instrument rating assigned to the EUR530 million and EUR350
million backed senior secured notes is in line with the corporate
family rating. The backed senior secured notes and the RCF rank
pari-passu and are secured mainly against share pledges of certain
companies of the group. The RCF is guaranteed by material
subsidiaries representing at least 75% of consolidated EBITDA and
55% of gross assets, and this extends to the notes via the
inter-creditor agreement for as long as the RCF remains in place.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects the expected improving underlying
performance of the business that would bring Moody's adjusted gross
leverage at year end 2022 to pre-Covid levels.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive pressure on the ratings could develop if Playtech
demonstrated a solid recovery to pre Covid-19 levels. This would
need to be combined with a reduction in Moody's adjusted
Debt/EBITDA sustainably below 3.5x and FCF/Debt above 5%, while
maintaining good liquidity. Greater clarity on the company's M&A
strategy would also be required.
Conversely, negative pressure on the ratings could arise if (1) the
Moody's-adjusted debt/EBITDA exceeds 5x on a sustained basis; (2)
the company becomes less diversified as a result of M&A activity;
or (3) its profitability further deteriorates owing to competitive,
regulatory and fiscal pressure.
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
Headquartered in the Isle of Man, Playtech is a leading technology
company in the gambling industry and the world largest online
gambling software and services supplier. Founded in 1999 by an
Israeli entrepreneur, Teddy Sagi, it has grown through a
combination of organic growth and acquisitions. Employs around
6,400 people across 24 countries. Listed on the London Stock
Exchange in 2012, it has a market capitalisation of about GBP2
billion (Jan-Feb 2022). For the financial year 2020, the group,
generated EUR1.2 billion of revenue and EUR310 million of
company-reported adjusted EBITDA.
STUDIO RETAIL: Files Notice to Appoint Administrators
-----------------------------------------------------
Ashley Armstrong at The Times reports that Studio Retail, a listed
online retailer that counts Mike Ashley as its biggest investor,
has filed notice to appoint administrators after failing to secure
a new working capital loan.
The company, formerly known as Findel, announced that it had
suspended its shares on London's stock exchange as it was in the
process of hiring administrators, The Times relates.
At the start of this month, shares in Studio Retail had tumbled
after its second profit warning in two months on the back of higher
shipping costs and transport delays, The Times discloses. The
company said that as a result of distorted stock levels its working
capital was being eroded, The Times notes.
The company said on Feb. 14 that it had requested a short-term
GBP25 million loan from its banks to fund the surplus stock, The
Times recounts.
TAILORED CONSTRUCTION: Goes Into Liquidation
--------------------------------------------
Tom Bristow at Eastern Daily Press reports that a building business
left thousands of pounds of work unfinished after collapsing into
liquidation.
The company's liquidator said Tailored Construction Ltd went into
liquidation because of "difficult trading conditions, and rising
materials prices", Eastern Daily Press relates.
According to Eastern Daily Press, Tailored Construction director
Stewart Wright said that the second company he set up to finish the
job faced similar problems and was also now going into liquidation.
He said it had left him in debt and he had not taken a salary or
dividend from either company, Eastern Daily Press discloses.
TRONOX HOLDING: Moody's Hikes CFR to Ba3, Outlook Remains Stable
----------------------------------------------------------------
Moody's Investors Service upgraded Tronox Holding Plc's (Tronox)
Corporate Family rating to Ba3 from B1 and Probability of Default
rating to Ba3-PD from B1-PD. The upgrade reflects strong
performance and good progress in debt reduction and expectations
that the company achieves its $2.5 billion debt level target, which
corresponds to Moody's upgrade trigger, in the near term. Moody's
also upgraded the ratings on Tronox Finance LLC's senior secured
term loan and cash flow revolver to Ba2 from Ba3; and the ratings
for Tronox Incorporated's senior secured global notes to Ba2 from
Ba3 as well as the senior unsecured global notes to B1 from B3.
Debt has been reduced from $3.3 billion at year end 2020 to $2.7
billion for the quarter ending September 30, 2021, as stronger
industry prices in TiO2 pigment and the company's feedstock
advantage have supported EBITDA and cash flow growth. The SGL-2
liquidity score is unchanged and the outlook on the ratings remains
stable.
"The company continues to benefit from its strong global asset base
and industry leading back-integration into raw materials allowing
industry leading margins," according to Joseph Princiotta, SVP and
Moody's lead analyst for Tronox. "Moreover, the targeted completion
of the company's Atlas Campaspe and NewTRON projects by year end
2022 and 2023, respectively, are expected to contribute further to
the company's strong cost position and margins," Princiotta added.
Issuer: Tronox Holdings Plc
Corporate Family Rating, Upgraded to Ba3 from B1
Probability of Default Rating, Upgraded to Ba3-PD from B1-PD
Upgrades:
Issuer: Tronox Finance LLC
Gtd Senior Secured Term Loan, Upgraded to Ba2 (LGD2) from Ba3
(LGD3)
Gtd Senior Secured Revolving Credit Facility, Upgraded to Ba2
(LGD2) from Ba3 (LGD3)
Issuer: Tronox Incorporated
Gtd Senior Secured Global Notes, Upgraded to Ba2 (LGD2) from Ba3
(LGD3)
Gtd Senior Unsecured Global Notes, Upgraded to B1 (LGD5) from B3
(LGD5)
Outlook Actions:
Issuer: Tronox Holdings Plc
Outlook, Remains Stable
Issuer: Tronox Finance LLC
Outlook, Remains Stable
Issuer: Tronox Incorporated
Outlook, Remains Stable
RATINGS RATIONALE
Tronox Holdings Plc's credit profile reflects the benefits from the
company's market position as one of the world's largest titanium
dioxide producers, industry leading vertical integration and
co-product production, actual and prospective benefits from Cristal
acquisition, which provided good operating cost synergies and
roughly doubled the company's pigment production capacity and
scale, and good liquidity. Tronox is the most back integrated into
TiO2 raw materials and the impact of rising feedstock costs will be
muted relative to peers. The credit profile also reflects heavy
exposure to the cyclical titanium dioxide industry, which Moody's
believes is still in the early stages of a volume and pricing
upcycle.
Moody's has a favorable outlook for TiO2 markets and expects strong
demand growth against the backdrop of modest global supply
additions to underpin favorable fundamentals, at least through
2022, allowing price support or further upward pressure on prices
through the year and in all major regions. Low industry inventories
combined with strong product demand and production closures in
China have allowed for rising TiO2 pigment prices in all major
regions in 2021 and into this year. There is some uncertainty as to
the status and possible restart of the closed Chinese capacity, but
a restart of this capacity is not expected to upset the upcycle
conditions in TiO2 pigment.
The credit profile and ratings also anticipate the impact on
margins, cash flow and metrics from the next downcycle in the TiO2
space, which, although inevitable, is currently not anticipated for
a while give the current favorable industry conditions and outlook.
Trough conditions would result in metrics outside the normal
boundaries for the rating category and concerns about free cash
flow in the trough. Reduced debt levels, lower costs, improved
profitability, back-integration and important projects underway
should allow for performance superior to the last downcycle,
according to Moody's.
The combined benefits from the successful completion of the NewTRON
and Atlas Campaspe projects should improve the company's already
favorable industry cost position. The NewTRON project, expected for
completion by year end 2023, focuses on the company's global
digital transformation strategy and targets enhanced benefits of
vertical integration, digitization and process optimization of the
company's global assets. The company is targeting $100-150 per ton
cost improvement from this project.
The Atlas Campaspe mining project in Austrialia is intended to
replace capacity lost by operations at the Snapper Ginkgo mine,
which is reaching the end of its useful life, and is expected to
provide mining capacity in natural rutile, zircon, and high-grade
ilmenite suitable for synthetic rutile or slag processing or for
direct use in making pigment. The company expects $300 per ton
support from this project compared to high grade feedstock prices.
ESG CONSIDERATIONS
ESG risks and exposures are not a factor in today's rating action
and are not a significant factor in the company's ratings at this
time. Environmental exposure and costs for commodity companies can
be meaningful, and even more so for TiO2 players. Approximately 87%
of Tronox's TiO2 production use the chloride process, which is a
continuous process with lower energy requirements, produces less
waste and is less environmentally harmful than the sulfate-based
process. In July of 2021 the company set net zero GHG emissions and
zero waste to landfill targets by 2050.
Tronox assumed additional environmental exposure and costs as part
of the Cristal acquisition and has booked a $56 million provision
for environmental costs related to the remediation of residual
waste mud and sulfuric waste deposited in a former TiO2
manufacturing site operated by Cristal from 1954 to 2011. The
provision is significant but related expenditures are likely to
spread over many years.
Social risks are moderate but potentially increasing as the ongoing
hearings between the EU Commission and the industry may result in
tighter regulation for TiO2, the scope of which is not yet clear as
there is still debate over the carcinogenicity of TiO2. As a public
company, governance issues are viewed as modest and supported by
what has thus far been communication of reasonable financial
policies for the ratings category. The company targets unadjusted
debt-to-EBITDA leverage in the 2-3 times range, which it has
achieved ahead of its original schedule.
Liquidity
The SGL-2 rating reflects good liquidity including $309 million
cash balances and $455 million available under the revolving credit
agreements as of September 31, 2021. In October 2021, the company,
through its South African subsidiary -- Tronox Mineral Sands
Proprietary Limited -- entered into an amendment and restatement of
a new credit facility with Standard Bank which provides R1 billion
(approximately $66 million at September 30, 2021 exchange rate)
revolver due October 2026 and R1.5 billion term loan (approximately
$$99 million at September 30, 2021 exchange rate) facility due
November 2026. The cash flow revolver contains a springing maximum
first lien leverage ratio of 4.75:1.00 which will trigger if
utilization exceeds 35% (less undrawn LCs and cash collateralized
LCs). The term loan and bonds do not have any financial covenants.
Moody's expect Tronox to generate free cash flow in 2022.
The stable outlook assumes TiO2 prices and volumes remain strong
and support at least modest improvement in EBITDA and metric trends
and positive free cash flow for the year, sufficient to fund and
complete its projects underway. The stable outlook also assumes
that the Cristal transaction continues to facilitate synergies and
operational benefits and good liquidity is maintained.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Further progress towards improving the company's performance ahead
of the next industry downcycle, which could include further gross
debt reduction to $2.0 billion, supported by an improved cost
position from successful completion of the NewTRON and Atlas
Campaspe projects, could support a higher rating. An upgrade would
also be considered if expectations are for positive margins and
free cash flow in the next trough, continued favorable trends and
realization in acquisition benefits, and confidence that the
company will maintain strong available liquidity.
Moody's would consider a downgrade if expectations or actual
results show substantive fundamental weakening resulting in
negative free cash flow anytime over the industry cycle. Moody's
would also consider a downgrade if the cycle in TiO2 turns down
before the company is able to complete its projects, further reduce
debt, if the company fails to realize or sustain a meaningful
portion of operating synergies, or if adjusted financial leverage
spikes to 5.0x, or if available liquidity falls below $300
million.
Tronox Holdings Plc (Tronox), re-domiciled in United Kingdom in
March, 2019. Including the acquisition of Cristal, Tronox is the
world's second largest producer of titanium dioxide (TiO2) and is
the most backward integrated among the leading western pigment
producers into the production of titanium ore feedstocks. It also
co-produces zircon, pig iron and other products. The company
operates nine pigment plants and eight mineral sands facilities
globally. On February 23, 2021, Tronox announced that Exxaro
Resources Limited ("Exxaro") offered for sale 17 million shares
(about 10% of the outstanding shares of Tronox as of December 31,
2020) in a secondary offering. At around that time Tronox also
issued about 7 million shares to Exxaro in exchange for Exxaro's
26% shareholding in the company's South African operating
subsidiaries which hold Tronox's mining licenses. On March 1, 2021,
Exxaro sold its entire share ownership in Tronox totaling about 22
million ordinary shares in an underwritten public offering.
Tronox's revenues were $3.47 billion for the twelve months ended
September 30, 2021.
The principal methodology used in these ratings was Chemical
Industry published in March 2019.
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