/raid1/www/Hosts/bankrupt/TCREUR_Public/220729.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Friday, July 29, 2022, Vol. 23, No. 145
Headlines
G E R M A N Y
CEREBRO HOLDCO: Moody's Affirms 'B3' CFR, Outlook Stable
DEMIRE DEUTSCHE: Moody's Cuts CFR to B1 & Alters Outlook to Neg.
DOUGLAS GMBH: Fitch Affirms 'B-' IDR, Revises Outlook to Negative
I R E L A N D
PROVIDUS CLO VII: S&P Assigns B- (sf) Rating to Class F Notes
SOUND POINT IX: Fitch Assigns Final BB+ Rating to Class E Notes
I T A L Y
F-BRASILE SPA: Moody's Lowers CFR to Caa1 & Sr. Secured Debt to B1
K A Z A K H S T A N
TECHNOLEASING LLC: Fitch Affirms B- LongTerm IDR, Outlook Stable
L U X E M B O U R G
EP BCO: Fitch Puts BB+ Loan Ratings on Rating Watch Neg.
INEOS GROUP: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
N E T H E R L A N D S
E-MAC NL 2006-III: Fitch Cuts Rating on 3 Tranches to 'B-'
SPRINT BIDCO: Fitch Assigns 'B' Final LongTerm IDR
U K R A I N E
UKRAINE: VR Capital Wants Money Back
U N I T E D K I N G D O M
HARTLEY PENSIONS: Prepares to File for Insolvency
UNITED KINGDOM: Broken Supply Lines Drive Manufacturing Back Home
VENATOR MATERIALS: Moody's Assigns B1 Rating to Extended Term Loan
VENATOR MATERIALS: S&P Alters Outlook to Neg., Affirms 'B-' ICR
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G E R M A N Y
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CEREBRO HOLDCO: Moody's Affirms 'B3' CFR, Outlook Stable
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Moody's Investors Service has affirmed the B3 corporate family
rating and the B3-PD probability of default rating of Cerebro
HoldCo GmbH (Neuraxpharm or the company). Concurrently, Moody's has
affirmed the B3 instrument ratings of the EUR700 million senior
secured term loan B (TLB), which is being upsized by a EUR175
million fungible add-on, and the EUR125 million senior secured
multi currency revolving credit facility (RCF) borrowed by
Neuraxpharm Arzneimittel GmbH. The outlook on all ratings is
stable.
On July 12, Neuraxpharm announced it entered into a definitive
agreement to acquire two product portfolios for CNS disorders, pain
and vascular diseases from Sanofi (A1 stable), for an undisclosed
amount. To fund part of the acquisition and related fees and
expenses, the company is raising a TLB add-on of EUR175 million
which is underwritten, while Permira, the company's sponsor, is
injecting EUR155 million of new equity.
RATINGS RATIONALE
The rating affirmation considers the agency's view that the drug
portfolio acquisition is positive from a business profile
perspective because it adds a complementary portfolio of molecules
in the central nervous system (CNS) area and especially in
psychiatry. Because the portfolio consists of mature drugs there
are limited growth expenses requirements once the technological
transfers and initial costs are incurred. Thus, this portfolio of
drugs should improve the company's earnings recurrence and cash
flow generation over time.
Furthermore, the rating affirmation considers Moody's expectations
that key credit metrics will remain adequately positioned for its
B3 rating once the integration of the products is completed. The
acquisition, which is expected to close in early 2023, will result
in Moody's-adjusted gross leverage of 7.1x in 2023 (including
integration costs of around EUR16 million for that year), similar
to its level for the last twelve months to March 2022 of 7.4x.
However, the agency anticipates that Neuraxpharm's Moody's-adjusted
gross leverage will trend around 6.3x-6.5x from 2024. Moreover, the
agency continues to expect positive Moody's-adjusted free cash flow
(FCF) generation, which should increase towards EUR45-50 million
from 2024, once the acquisition is fully integrated.
Nevertheless, the transaction entails integration risks that could
increase integration costs or delay deleveraging. The company is
acquiring a large number of molecules and brands which are
currently manufactured in several geographies across the world,
which adds a level of complexity to the transfer of the drug
portfolio from the seller to Neuraxpharm. A material delay in
expected deleveraging could exert pressure on the rating or outlook
of the company because of its currently high financial leverage.
The company has a good track record of integration and achieving
planned synergies.
Moody's regards the company's financial strategy and risk
management as a governance consideration under its ESG framework
and it considered positively the funding mix for the acquisition
which includes the injection of EUR155 million of new equity by the
sponsor.
The B3 rating of the company is supported by the company's strong
performance and good market positioning within the CNS market in
Europe; an attractive product pipeline, with prospects of further
organic growth over the next 12-18 months; its well-balanced
geographical diversification across Europe with the potential to
enter new markets; good profitability margins and Moody's-adjusted
FCF; and adequate liquidity.
The rating also considers the company's high leverage; its high
business concentration in the CNS segment; its overall moderate
size; and some degree of acquisition-related event risk because of
the company's external growth strategy.
ESG CONSIDERATIONS
Environmental, social and governance (ESG) considerations are
material to Neuraxpharm's credit quality, with governance being the
most important. Neuraxpharm's governance risks consider its
private-equity ownership structure, which effectively controls the
company, and has high tolerance for leverage and an appetite for
debt-funded acquisitions. However, the company has a good track
record of integrating acquisitions and achieving planned
synergies.
In terms of social risks, the company is exposed to the ongoing
regulatory and legislative efforts aimed at reducing drug prices,
but it benefits from efforts aimed at increasing generics
penetration. Responsible production considerations include product
safety risk, which leads to continued litigation exposures for the
pharmaceutical industry.
RATING OUTLOOK
The stable rating outlook includes Moody's expectations that the
integration of acquired drugs is completed as planned by
Neuraxpharm, with the company's Moody's-adjusted gross leverage
trending towards 6x by 2024. The outlook assumes Neuraxpharm will
not undertake large debt-financed acquisitions or shareholder
distributions until the company has completed the integration of
acquired products and reduced its leverage.
LIQUIDITY
Neuraxpharm's liquidity is adequate and is supported by cash
balances of EUR44 million as of March 31, 2022 and the agency's
expectations of positive Moody's-adjusted FCF generation over the
next 12-18 months driven by earnings growth, the company's access
to a EUR125 million RCF, which is fully undrawn; and substantial
capacity in its springing financial covenant based on net leverage
set at 10.44x and tested only when the RCF is drawn by more than
40%.
STRUCTURAL CONSIDERATIONS
The B3-PD PDR, in line with the CFR, reflects Moody's assumption of
a 50% family recovery rate, typical for covenant-lite secured loan
structures. The B3 rating of the EUR875 million senior secured TLB,
and the EUR125 million senior secured RCF reflects their pari passu
ranking, with upstream guarantees from material subsidiaries and
collateral comprising share, financial securities account, bank
accounts and intragroup receivables pledges.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could develop if Neuraxpharm's strong
operating performance continues and the company successfully rolls
out its new pipeline products, allowing its Moody's-adjusted gross
leverage to move below 5.5x on a sustained basis; and its
Moody's-adjusted FCF/debt increases above 5% on a sustained basis.
Negative pressure on the rating could occur if Neuraxpharm's
Moody's-adjusted gross debt/EBITDA remains above 7x on a sustained
basis; the company generates negative Moody's-adjusted FCF on a
sustained basis, leading to a deterioration in its liquidity
profile; or the company undertakes large debt-financed acquisitions
or shareholder distributions before it has completed the
integration of acquired products.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Pharmaceuticals
published in November 2021.
COMPANY PROFILE
Neuraxpharm was founded in 2016 following the combination of two
pharmaceutical groups, Invent Farma and Neuraxpharm. Since then,
the company has transformed into a pan-European specialist in CNS
disorders with a presence in more than 40 countries. Neuraxpharm
generated net sales of around EUR324 million and company-adjusted
EBITDA of around EUR110 million for the 12 months that ended March
31, 2022. The company has been owned by Permira since 2020.
DEMIRE DEUTSCHE: Moody's Cuts CFR to B1 & Alters Outlook to Neg.
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Moody's Investors Service has downgraded DEMIRE Deutsche
Mittelstand Real Estate AG's Corporate Family Rating to B1 from Ba3
and downgraded the senior unsecured rating of its EUR600 million
notes maturing in 2024 to B1 from Ba3. The outlook on the ratings
has changed to negative from stable.
RATINGS RATIONALE
The downgrade of DEMIRE's ratings reflects the company's heightened
credit risk from a repayment wall under the company's senior
unsecured notes maturing in 2024 combined with much weaker capital
market conditions with increasing interest rates and pronounced
widening of credit spreads. Moody's expect these to meaningfully
elevate the company's future funding costs compared to current
level of 1.66% and thus notably weaken DEMIRE's interest coverage
at the point of refinancing from current level of 3.2x as of LTM
March 2022.
In this context Moody's expect the company to increasingly rely on
alternative funding sources such as more cost-efficient secured
bank lending over the next 12 to 24 months, which Moody's expect
will lead to a subsequent reduction of unencumbered assets and thus
the protection level of unsecured bondholders.
The B1 corporate family rating also reflects the company's main
credit challenges arising from a private-equity-dominated ownership
structure, which has demonstrated an aggressive financial risk
appetite. The company's lower-quality portfolio than that of its
higher-rated peers, without any meaningful environmental
credentials, increases investment needs to respond to changing
occupier preferences and more stringent environmental regulation
while a weakening economic environment will weigh on DEMIRE's
operating performance and vacancy reduction plans.
DEMIRE's CFR remains supported by a relatively small but
well-diversified commercial real estate portfolio, the focus of its
operations in Germany, a historically more liquid real estate
market with a robust funding environment; its integrated business
model and active portfolio management supporting solid earnings as
of the LTM ended March 2022, adequate liquidity as well as solid
credit metrics at this point in time.
RATING OUTLOOK
Over the next 12-18 months, Moody's expect DEMIRE to retain
leverage and coverage metrics that are rather strong for the new
rating category. However, the negative outlook reflects Moody's
expectation of a much tougher funding environment challenging the
company's refinancing strategy and weighing on DEMIRE's fixed
charge coverage ratio, the latest in 2024 when the senior unsecured
notes mature. Moody's expect the company to start shoring up
liquidity and securing alternative financing options to reduce the
refinancing wall in 2024.
The negative outlook further reflects a deteriorating operating
environment for commercial real estate companies across Europe, on
the back of tightening financial conditions, rising cost of capital
leading to subdued commercial real estate investment activity and
the expected negative pressure on capital values. A potentially
sharper economic slowdown could also derive in higher number of
business insolvencies, reduced demand for commercial real estate
and negative pressure on rents.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO A DOWNGRADE
DEMIRE's rating could come under greater negative pressure if an
economic recession would materialize. Other factors that could lead
to a downgrade include:
The company fails to proactively manage its refinancing activities
for the unsecured notes amid the currently disrupted capital
markets, hereby elevating refinancing risk
Moody's-adjusted fixed charge coverage falling significantly below
2x after refinancing of the 2024 bond.
Evidence of further deterioration of financial conditions raising
the risk of noncompliance with covenants
Failure to maintain adequate liquidity
Debt-funded shareholder distributions or acquisitions resulting in
DEMIRE departing again from or relaxing its current financial
policy
Moody's-adjusted gross debt/total assets increasing to above 60%,
accompanied by an increasing trend in net debt/EBITDA
FACTORS THAT COULD LEAD TO AN UPGRADE
A rating upgrade is unlikely due to the negative outlook and
increased economic risks. However positive pressure could result
from:
Company's ability to early refinance its debt maturities and
through a diversified mix between secured and unsecured
instruments, so that the coverage of unsecured properties to
unsecured debt does not materially deteriorate
Moody's-adjusted fixed charge coverage at above 2.25x
Company's ability to maintain leverage largely in line with its
financial policy of maximum net loan-to-value (LTV) of 50% in
combination with at least stable net debt to EBITDA levels
Stable operating performance
LIQUIDITY
As of June 2022, DEMIRE had an adequate liquidity position, with
EUR72.5 million available cash and an undrawn committed EUR6
million revolving credit facility (RCF) and Moody's expect the
company to be able to generate funds from operations of around
EUR35 million (Moody's-defined) on an annual basis.
Additionally, a pool of around EUR710 million of unencumbered
investment properties provides a source of alternative liquidity
and refinancing optionality for the senior unsecured notes maturing
in 2024.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
ESG considerations have a highly negative credit impact on DEMIRE.
This reflects exacerbated governance risks due to the aggressive
financial stance of its sponsors favouring shareholder
distributions and leaving the company temporarily outside of
financial policy during 2021. Credit risk is compounded by
company's high exposure to environmental risks which represent
investment requirements to respond to changing occupier preferences
and more stringent environmental regulation and in order to avoid
asset obsolescence risk.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was REITs and Other
Commercial Real Estate Firms Methodology published in July 2021.
COMPANY PROFILE
Headquartered in Langen, Germany, DEMIRE Deutsche Mittelstand Real
Estate AG (DEMIRE) is a publicly listed commercial real estate
company with a focus on offices in secondary locations across
Germany. The company's portfolio currently comprises 64 single
properties, with a total lettable floor space of around 913,000
square metres (sqm) and an aggregate portfolio value of around
EUR1.4 billion.
The company's annualised contracted rent amounted to EUR79 million
as of March 2022, with a 4.7-year weighted average lease term
(WALT). DEMIRE holds an 84.35% stake in Fair Value REIT-AG, which
is fully consolidated and accounted for around EUR340 million in
assets, or around 20% of DEMIRE's total assets, as of March 31,
2022.
DEMIRE is listed on the Frankfurt stock exchange and had a market
capitalisation of around EUR360 million as of July 25, 2022.
Apollo-managed funds and Wecken Group together hold around 90.75%
of DEMIRE's shares.
DOUGLAS GMBH: Fitch Affirms 'B-' IDR, Revises Outlook to Negative
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Fitch Ratings has revised Douglas GmbH's Outlook to Negative from
Stable while affirming the beauty retailer's Long-Term Issuer
Default Rating (IDR) at 'B-'.
The Negative Outlook reflects Fitch's expectation of
leverage-profile deterioration due to increased inflationary
pressure on costs and economic slowdown affecting Douglas's sales.
With no headroom available under the current rating, delayed
deleveraging will also increase refinancing risks. Capacity for
debt reduction well ahead of the refinancing date in 2026 remains
critical to maintaining the current rating.
The 'B-' IDR balances Douglas's continuing high leverage and weak
coverage metrics with a strong operating profile as Europe's
largest beauty retailer with large scale, product breadth,
including the recent entry, though representing a small portion of
sales, in the pharmacy channel, and established multi-channel
distribution capabilities.
Liquidity remains satisfactory, and Douglas may resume a
sustainable deleveraging path in FY23 (ending September 2023)
should trading perform ahead of Fitch's forecasts on full
realisation of its store-optimisation programme (SOP) and
successful inflation pass-through.
KEY RATING DRIVERS
Slower Deleveraging Under New Forecast: Fitch said, "Our updated
forecast for Douglas reflects our expectations of material
inflationary pressure on profitability in FY23, leading to adjusted
gross debt /EBITDAR peaking at above 11x before easing to high
single digits in FY24-FY25. Current leverage metrics continue to be
more commensurate with the 'CCC' rating category. We believe that
reducing leverage considerably by FYE25 is critical to managing
refinancing risk ahead of the majority of its maturities in FY26."
Stagflation Risk Looming: Fitch said, "Our assumptions include the
inflationary impact on wages, energy and logistics costs,
potentially reducing operating profitability by more than 250bp in
FY23 if the company is unable to offset this with lower marketing
expenditure and other savings. This is mitigated by our expectation
that Douglas's market leadership and its focus on the medium- and
premium-price segments would help it pass on a substantial part of
cost inflation to customers."
"Also, we expect a difficult FY23 to be followed by two years of
recovery, with mid-single-digit sales growth supported by sector
dynamics and renewed consumer spending growth for the eurozone,
including Douglas's core markets of Germany and France," Fitch
added.
Transformation Yet to Yield Results: Douglas is close to completion
of its business transformation towards a greater focus on online
operations, including its SOP. Douglas has a record of successful
business restructuring, but its operating profitability will
continue to be challenged by external factors, including inflation,
economic slowdown and increasing competitive pressure in online
markets. As a result, Fitch does not expect Douglas to reach
pre-pandemic profitability until 2025.
Discretionary Consumer Spending on Beauty: Despite being subject to
discretionary consumer spending patterns, beauty retail has been
less susceptible to cyclicality than other retail sub-sectors such
as consumer electronics, furniture or apparel. Douglas has also
been diversifying its business into even less cyclical sectors such
as pharmacy through its recent acquisition of Disapo. This,
together with Douglas's strong market position, should result in
moderate impact from the slowdown in consumer spending growth in
2023 with sales shifting towards lower-priced products
Negative FCF in Medium Term: Fitch-calculated free cash flow (FCF)
has been negative since FY18, which Fitch now expects to extend
into FY24. A high interest burden adds to pressure on Douglas's
operating margins and moderate capital intensity. As a result and
despite scope for some flexibility in planned capex, Fitch expects
FCF margins to remain negative in low single digits until FY25,
when recovery in operating profitability should allow for neutral
FCF.
Tight Coverage Metrics: Assuming interest capitalisation on its
payment-in-kind (PIK) notes, Fitch expects operating
EBITDAR/(interest + rents) below 1.5x until at least FY25, leaving
little headroom for operating underperformance.
Largest European Beauty Retailer: Douglas remains well-placed to
benefit from stable long-term underlying consumer demand. The
growing trend towards premiumisation, which Fitch estimates will
outpace mass-market growth in the coming years, and online
outperformance over store-based beauty sales will all favour
Douglas. It is well-represented in the premium segment with its
extensive product and brand assortment, as well as strong online
and omni-channel capabilities.
DERIVATION SUMMARY
Fitch said, "We assess Douglas's rating using our Ratings Navigator
for Non-Food Retailers. We also derive the rating by comparing the
company's credit profile with predominantly store-based luxury
retailers and online beauty retailers, given Douglas's strong and
growing e-commerce capabilities, as well as with selected branded
beauty-product companies."
Douglas stands out as one of Europe's largest retailers with scale,
product breadth and multi-channel distribution capabilities that
are commensurate with a 'BB' rating category. This is balanced by
an aggressive financial structure and weak financial flexibility
that are inconsistent with the current rating.
The multi-notch difference with 'BBB-' rated luxury, predominantly
store-based retailer Capri Holdings Limited (BBB-/Stable), is due
to its materially stronger operating and cash flow profitability,
as well as lower leverage.
Pure online beauty retailer THG PLC (B+/Stable) is rated two
notches above Douglas, mainly due to a more conservative post-IPO
financial policy with funds from operations (FFO) adjusted gross
leverage projected to improve to 5.2x in 2022 and lower by 2024.
Comparability of Douglas with the Very Group Limited (B-/Stable) is
limited, given the latter's high exposure to consumer-finance
services supporting online retail activities.
The ratings of manufacturers of branded cosmetics Oriflame
Investment Holding Plc (B/Negative) and Sunshine Luxembourg VII
SARL (Galderma, B/Stable) partly reflect similar business risks to
Douglas's, given exposure to consumer sentiment and preferences and
the importance of marketing investments and distribution networks.
At the same time, Oriflame and Galderma benefit from intrinsically
higher operating and cash flow margins, and for Galderma the
medicinal nature of some of its products is supported by in-house
R&D. Such business features, along with scale, and product and
geographic breadth, support Galderma's higher IDR than Douglas's.
Oriflame's one-notch differential with Douglas's rating reflects
the former's potential to return to lower leverage, although the
Negative Outlook reflects our expectation that leverage will remain
high for the rating and potential difficulties to realise savings
from a downsizing of operations.
KEY ASSUMPTIONS
− SOP, excluding Spain, completed by FYE22
− Store-based sales in FY22 to remain at 20% below pre-pandemic
levels (FY19), and contracting 0.6%-1% per year in FY23-FY25
− Online sales reaching 39% of total sales in FY25, up from 25%
in FY20
− Non-recurring cash costs of EUR16 million incurred in FY22 to
implement the cost-optimisation programme
− Fitch-adjusted EBITDA margin of around 7% in FY22, and
gradually improving towards 7.4% in FY25
− Senior notes PIK interest is capitalised
− Capex of EUR100 million-EUR110 million per year until FY25
− Working-capital largely neutral over the forecast period
− Disapo acquisition completed in FY22. No further acquisitions
over the next three years
KEY RECOVERY RATING ASSUMPTIONS
Fitch said, "We assume that Douglas would be considered a
going-concern (GC) in bankruptcy and that it would be reorganised
rather than liquidated.
"In our bespoke GC recovery analysis, we considered an estimated
post-restructuring EBITDA available to creditors of around EUR250
million, lower than our previous estimate (EUR270 million) to
reflect future margin pressure. In our view bankruptcy could come
as a result of prolonged economic downturn combined with more
difficulties in the turnaround of the store network and/or
weaker-than-expected online performance.
"We have used a distressed enterprise value (EV)/EBITDA multiple of
5.5x. This is 0.5x higher than the 5.0x mid-point used for
corporates outside the US, due to the company's exposure to rapid
online sales growth and already developed omni-channel
capabilities, which combined with its leading position in Europe
and high brand awareness, would result in a higher-than-average EV
multiple.
"We assume Douglas's EUR170 million senior secured revolving credit
facility (RCF) would be fully drawn on default. Secured creditor
claims also include its EUR1,305 million senior secured notes and
its term loan B (TLB) for EUR675 million. We assume all senior
secured debt to rank equally among themselves. Its EUR475 million
senior PIK toggle notes are subordinated to senior secured debt.
"After deducting 10% for administrative claims, our principal
waterfall analysis generated a ranked recovery for the senior
secured debt in the 'RR3' category with a waterfall generated
recovery computation (WGRC) of 58%, while the PIK toggle notes'
ranked recovery is in the 'RR6' category with a WGRC of 0%,
reflecting their subordination to a large portion of secured
debt."
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to an
upgrade:
- Successful business optimisation, including online operations,
evident in sustained like-for-like sales growth and the FFO
margin trending towards 6% (EBITDA margin above 10%)
- Strengthening credit metrics with FFO adjusted gross leverage
approaching 7.0x and/or adjusted gross debt/operating EBITDAR
below 6.5x
- FFO fixed charge cover above 1.7x and/or operating
EBITDAR/(interest + rents) coverage above 2.0x
- Sustained positive FCF margin in the low- to mid-single digits
Factors that could, individually or collectively, lead to the
Outlook being revised to Stable
- Rating-case outperformance reflected in sales growth, FFO
margin expanding above 4% (EBITDA margin above 8%) translating
into low single-digit FCF margins
- Adequate liquidity with a fully undrawn RCF
Factors that could, individually or collectively, lead to
downgrade:
- Challenges in implementing business optimisation, resulting in
delays to deleveraging or higher-than-expected cash costs and
FFO margin remaining consistently below 4% (EBITDA margin
below 8%)
- Negative FCF requiring a permanently drawn RCF leading to
diminishing liquidity headroom
- No visibility of FFO adjusted gross leverage trending towards
8.5x and/or adjusted gross debt/operating EBITDAR below 8.0x
two years before upcoming debt maturities
- FFO fixed charge coverage tightening towards 1.2x and/or
operating EBITDAR/(interest + rents) coverage tightening
towards 1.4x
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch said, "We view Douglas's medium-term
liquidity as satisfactory, based on low but sufficient internal
cash flow generation from FY23 after years of capital-intensive
business transitioning towards online. End-March cash on balance
amounted to EUR292 million with a fully undrawn committed RCF of
EUR170 million. We expect FCF margins to remain negative in low
single digits in FY22-FY24, putting some pressure on liquidity
under our rating case.
"Following a refinancing in 2021, Douglas benefits from extended
maturities, while maintaining access to bank-loan and public-debt
markets, albeit with a repayment profile concentrated in FY26.
"When assessing the year-end liquidity position, we only consider
readily available cash after deducting EUR65 million of liquidity
we deem necessary to fund intra-year working capital, which
historically is highest in 2Q and 3Q, as well as to account for
cash in stores."
ISSUER PROFILE
Douglas is a German-based leading pan-European beauty and lifestyle
products retailer present in 26 countries, with a number one or two
position in most of its markets.
Rating Action
Debt Rating Prior
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Kirk Beauty SUN GmbH
Subordinated LT CCC Affirmed RR6 CCC
Douglas GmbH
LT IDR B- Affirmed B-
senior secured LT B Affirmed RR3 B
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PROVIDUS CLO VII: S&P Assigns B- (sf) Rating to Class F Notes
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S&P Global Ratings assigned its credit ratings to Providus CLO VII
DAC's class A, B-1, B-2, C, D, E, and F notes. At closing, the
issuer also issued unrated subordinated notes.
Under the transaction documents, the rated notes pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will switch to semiannual payment.
The portfolio's reinvestment period will end approximately five
years after closing, and the transaction's non-call period will end
approximately two years after closing.
The ratings assigned to the notes reflect S&P's assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
Portfolio Benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,827.46
Default rate dispersion 546.45
Weighted-average life (years) 4.95
Obligor diversity measure 110.50
Industry diversity measure 11.97
Regional diversity measure 1.38
Target Portfolio Key Metrics
CURRENT
Total par amount (mil. EUR) 350
Defaulted assets (mil. EUR) 0
Number of performing obligors 151
Portfolio weighted-average rating
derived from S&P's CDO evaluator 'B'
'CCC' category rated assets (%) 1.00
'AAA' weighted-average recovery (%) 34.66
Weighted-average spread (%; net of floors) 3.83
Weighted-average coupon (%) 5.31
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. We consider the portfolio to be well-diversified on the
effective date, primarily comprising broadly syndicated
speculative-grade senior secured term loans and senior secured
bonds. Therefore, we conducted our credit and cash flow analysis by
applying our criteria for corporate cash flow CDOs.
"In our cash flow analysis, we used the EUR350 million par amount,
the covenant weighted-average spread of 3.80%, the covenant
weighted-average spread of 33.74% at the 'AAA' rating only, and the
actual weighted-average recovery rates for all other ratings. We
applied various cash flow stress scenarios, using four different
default patterns, in conjunction with different interest rate
stress scenarios for each liability rating category.
"The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under our current counterparty criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned ratings, as the exposure to individual
sovereigns does not exceed the diversification thresholds outlined
in our criteria.
"The transaction's legal structure and framework is bankruptcy
remote, in line with our legal criteria.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B-1, B-2, and C notes could
withstand stresses commensurate with higher ratings than those we
have assigned. However, as the CLO is still in its reinvestment
phase, during which the transaction's credit risk profile could
deteriorate, we have capped our assigned ratings on the notes. In
our view, the portfolio is granular in nature, and well-diversified
across obligors, industries, and asset characteristics when
compared to other CLO transactions we have rated recently. As such,
we have not applied any additional scenario and sensitivity
analysis when assigning ratings on any classes of notes in this
transaction.
"For the class F notes, our credit and cash flow analysis indicates
that the break-even default rate cushion is negative. Nevertheless,
based on the portfolio's actual characteristics and additional
overlaying factors, including our long-term corporate default rates
and recent economic outlook, we believe this class is able to
sustain a steady-state scenario, in accordance with our criteria."
S&P's analysis further reflects several factors, including:
-- The available credit enhancement for this class of notes is in
the same range as other CLOs that S&P rates, and that have recently
been issued in Europe.
-- The portfolio's average credit quality is similar to other
recent CLOs.
-- S&P's model generated break-even default rate at the 'B-'
rating of 21.86% (for a portfolio with a weighted-average life of
4.97 years), versus if it was to consider a long-term sustainable
default rate of 3.1% for 4.97 years, which would result in a target
default rate of 15.41%.
-- The actual portfolio is generating higher spreads versus what
S&P has modelled in its cash flow analysis.
-- For S&P to assign a rating in the 'CCC' category, it also
assess (i) whether the tranche is vulnerable to nonpayments in the
near future, (ii) if there is a one in two chance for this note to
default, and (iii) if it envisions this tranche to default in the
next 12-18 months.
-- Following this analysis, S&P considers that the available
credit enhancement for the class F notes is commensurate with the
'B- (sf)' rating assigned.
-- Following S&P's analysis of the credit, cash flow,
counterparty, operational, and legal risks, it believes that its
ratings are commensurate with the available credit enhancement for
the class A, B-1, B-2, C, D, E, and F notes.
S&P said, "In addition to our standard analysis, to provide an
indication of how rising pressures among speculative-grade
corporates could affect our ratings on European CLO transactions,
we have also included the sensitivity of the ratings on the class A
to E notes to five of the 10 hypothetical scenarios we looked at in
our publication, "How Credit Distress Due To COVID-19 Could Affect
European CLO Ratings," published on April 2, 2020.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
Environmental, social, and governance (ESG)
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 certain activities in the
following industries (non-exhaustive list): manufacture or trade of
controversial weapons, tobacco or tobacco-related products, nuclear
weapons, mining or electrification of thermal coal, oil sands
extraction, gambling platforms, pornography or prostitution, or
opioid manufacturing and distribution. Accordingly, since the
exclusion of assets from these industries does not result in
material differences between the transaction and our ESG benchmark
for the sector, no specific adjustments have been made in our
rating analysis to account for any ESG-related risks or
opportunities."
Providus CLO VII is a European cash flow CLO securitization of a
revolving pool, comprising euro-denominated senior secured loans
and bonds issued mainly by sub-investment grade borrowers. Permira
European CLO Manager LLP manages the transaction.
Ratings List
CLASS RATING AMOUNT SUB (%) INTEREST RATE*
(MIL. EUR)
A AAA (sf) 208.20 40.51 Three/six-month EURIBOR
plus 1.40%
B-1 AA (sf) 33.80 28.00 Three/six-month EURIBOR
plus 2.40%
B-2 AA (sf) 10.00 28.00 3.50%
C A (sf) 17.50 23.00 Three/six-month EURIBOR
plus 3.85%
D BBB- (sf) 23.60 16.26 Three/six-month EURIBOR
plus 5.70%
E BB- (sf) 16.70 11.49 Three/six-month EURIBOR
plus 7.69%
F B- (sf) 14.00 7.49 Three/six-month EURIBOR
plus 9.97%
Sub. notes NR 21.00 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A--Not applicable.
SOUND POINT IX: Fitch Assigns Final BB+ Rating to Class E Notes
---------------------------------------------------------------
Fitch Ratings has assigned final ratings to Sound Point Euro CLO IX
Funding DAC's notes.
Debt Rating Prior
---- ------ -----
Sound Point Euro CLO IX Funding DAC
A XS2498978258 LT AAAsf New Rating AAA(EXP)sf
B XS2498978415 LT AA+sf New Rating AA(EXP)sf
C XS2498978845 LT A+sf New Rating A(EXP)sf
D XS2498979066 LT BBB+sf New Rating BBB+(EXP)sf
E XS2498979223 LT BB+sf New Rating BB+(EXP)sf
F XS2498979579 LT NRsf New Rating NR(EXP)sf
Sub Notes XS2498979736 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
Sound Point Euro CLO IX Funding DAC is a cash flow collateralised
loan obligation (CLO) that will be serviced by Sound Point CLO
C-MOA LLC. Net proceeds from the issuance of the notes are used to
purchase a static pool of primarily secured senior loans and bonds,
with a target par of EUR402.15 million. The portfolio is fully
ramped and has a weighted average life of 5.6 years
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors to be in the 'B'/'B-' category.
The Fitch weighted average rating factor (WARF) of the identified
portfolio is 24.9.
High Recovery Expectations (Positive): Senior secured obligations
make up close to 100% of the portfolio. Fitch views the recovery
prospects for these assets as more favourable than for second-lien,
unsecured and mezzanine assets. The Fitch weighted average recovery
rate (WARR) of the current portfolio is 63%.
Diversified Portfolio Composition (Positive): The largest three
industries comprise 40.7% of the portfolio balance, the top 10
obligors represent 16.4% of the portfolio balance, and the largest
obligor represents just over 2% of the portfolio.
Static Portfolio (Positive): The transaction does not have a
reinvestment period and discretionary sales are not permitted.
Fitch's analysis is based on the current portfolio and stressed by
applying a one-notch reduction to all obligors with a Negative
Outlook (floored at 'CCC'), which is 5.8% of the current portfolio.
After the adjustment for Negative Outlooks, the portfolio's WARF
would be 25.3.
Cash Flow Modelling (Positive): Fitch has modelled the cash flows
from the static portfolio taking into account the
overcollateralisation test in line with the transaction's waterfall
structure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
An increase of the default rate (RDR) of 25% at all rating levels
of the mean RDR and a decrease of the recovery rate (RRR) of 25% at
all rating levels in the stressed portfolio would result in
downgrades of up to five notches, depending on the notes.
Downgrades may occur if the build-up of the notes' credit
enhancement following amortisation does not compensate for a larger
loss expectation than initially assumed, due to unexpectedly high
levels of defaults and portfolio deterioration.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A reduction of the RDR of 25% at all rating levels of the mean RDR
and an increase in the RRR of 25% at all rating levels in the
stressed portfolio would result in upgrades of up to two notches,
depending on the notes.
Except for the tranches rated at the highest 'AAAsf', upgrades may
occur in case of better-than- expected portfolio credit quality and
deal performance, and continued amortisation that leads to higher
credit enhancement and excess spread available to cover losses in
the remaining portfolio.
DATA ADEQUACY
Sound Point Euro CLO IX Funding DAC
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
=========
I T A L Y
=========
F-BRASILE SPA: Moody's Lowers CFR to Caa1 & Sr. Secured Debt to B1
------------------------------------------------------------------
Moody's Investors Service has downgraded the Corporate Family
rating of F-Brasile S.p.A. (Forgital or the group) to Caa1 from B3.
Concurrently the rating agency has downgraded the Probability of
Default Rating to Caa1-PD from B3-PD, the guaranteed senior secured
bank credit facility rating to B1 from Ba3 and the guaranteed
senior secured global notes rating to Caa2 from B3. The outlook on
all ratings remains negative.
RATINGS RATIONALE
The downgrade of Forgital's Corporate family rating to Caa1 from B3
reflects the company's (i) leveraged financial profile with a
remote short term deleveraging path, (ii) significant exposure to
wide body aircraft and cyclical end markets that cloud the recovery
outlook, (iii) material exposure to energy cost inflation with only
limited ability to pass through higher costs to end customers, (iv)
deteriorating liquidity profile as a result of negative free cash
flow generation expected for 2022.
Forgital is very levered with a Moody's adjusted Debt/EBITDA of
around 12.0x as per LTM March 2022. The material margin pressure
that Forgital is currently experiencing alongside limited recovery
in revenue due to wide body exposure points to a very slow
deleveraging path at best over the next 12 to 18 months. This
raises concerns around the sustainability of the company's capital
structure even in light of limited short term debt maturities.
The slow recovery path Moody's expect for Forgital mainly pertains
to the group large exposure to the wide body market. Forgital is
supplying forged parts of aero engines to engine producers. Its
exposure is mainly to wide body engines (Trent XWB, Trent 1000 and
Trent 7000) with wide body engines accounting for 72% of 2021
revenue for the Aerospace business. The wide body market is
expected to recover much more slowly than the narrow body market
(6% of 2021 revenue for the Aerospace business) due to lower
traffic recovery in long haul international travel. Production
rates of wide body aircraft are expected to recover more gradually
than narrow body rates with wide body production rates to remain
below pre-pandemic levels until at least 2025. In addition,
Forgital has exposure to cyclical industrial end markets such as
the oil & gas and general mechanics markets as well as the
transmissions and energy generation markets that are very capital
intensive and subject to capex cycles. The industrial segment of
Forgital could come under pressure in a weakening macroeconomic
environment. All in all the short to medium term growth prospects
for Forgital seem pretty weak.
Forgital's production process is very energy intensive as raw
materials need to be heaten up to be forged. Forgital uses gas and
electricity as energy sources for its production process and is
therefore heavily exposed to the strong increase in gas prices.
Pricing power has proven to be weak in Q1 2022 with a more than
700bps decline in EBITDA margin despite high single digit revenue
growth. The deterioration in margin was solely linked to energy
cost inflation. Forgital has hedged some of its gas exposure for
2022 but remains exposed to spot prices for around 1/3 of its
consumption. The ability to switch from gas to electricity as an
energy source in the short term is not given.
Forgital had EUR45 million of cash on balance sheet and EUR60
million availability under its RCF with ample headroom under its
financial covenant. Moody's expect material negative FCF in 2022
(EUR20 million negative free cash flow in Q1 2022 alone) as the
company's profitability will be under pressure and Forgital needs
to pursue capex investments for growth projects. As a result
Moody's see the risk of a deterioration in the group's liquidity
profile over the next 12 to 18 months.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on Forgital's ratings reflects Moody's
expectation that the company will continue to face a challenging
macroeconomic environment with little prospects for a swift
deleveraging path. The group's cash burn at a time when the company
needs to pursue growth investments to reduce its reliance on the
wide body market will weigh on the liquidity profile.
LIQUIDITY
Forgital had EUR45 million of cash on balance sheet and EUR60
million availability under a EUR80 million guaranteed senior
secured revolving credit facility with ample headroom under its
financial covenant. The group's liquidity profile is also supported
by the absence of short term debt maturities with the senior
secured notes maturing in 2026. Moody's expect Forgital to consume
at least between EUR30 million and EUR50 million of cash during
2022, which will lead to a weakening of the group's liquidity
profile.
STRUCTURAL CONSIDERATIONS
The USD505 million senior secured notes are guaranteed by
subsidiaries accounting for around 80% of the group's consolidated
EBITDA and are secured by certain assets (mainly share pledges and
bank accounts) of the guarantors.
The EUR80 million guaranteed senior secured revolving credit
facility benefits from the same security package and guarantor
coverage as the senior secured notes, but receives enforcement
proceeds in case of liquidation before senior secured noteholders.
Hence, Moody's have ranked the super senior revolving credit
facility ahead of the secured notes.
As a result of the downgrade of the Corporate Family rating to
Caa1, Moody's Loss Given Default for Speculative-Grade Companies
methodology assumes a drawing of 100% of the revolving credit
facility. This means a higher level of structural subordination for
note holders hence the downgrade of the senior notes rating to Caa2
from B3. The notes are now rated one notch below the corporate
family rating whilst being aligned with the Corporate Family rating
before the downgrade. The senior ranking super senior revolving
credit facility is rated B1, three notches above the CFR supported
by the material loss absorption offered to super senior creditors
from the senior secured notes.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While not expected in the short term upward pressure on the ratings
would build if Forgital's (1) leverage would drop to below 7x
Moody's debt / EBITDA, (2) Moody's-adjusted FCF would turn
consistently positive, (3) liquidity position would stabilise and
remain adequate.
Moody's would consider to downgrade Forgital, if (i) the company
continues burning cash, and (ii) its liquidity profile continues
deteriorating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Aerospace and
Defense published in October 2021.
COMPANY PROFILE
Headquartered in Vicenza, Italy, F-Brasile S.p.A. is an
intermediate holding company of the Forgital group, a leading
vertically integrated forging company servicing the commercial and
military aerospace industries and select industrial end-markets.
The group operates nine facilities in Italy, France and the USA
with around 1,000 employees worldwide.
Forgital supplies its products to aerospace (around 57% of group
sales as of LTM December 2021) and various industrial end-markets
(43%). For LTM December 2021, Forgital reported sales of EUR275
million and company-adjusted EBITDA of EUR56 million.
In September 2019, global investment firm The Carlyle Group
(Carlyle) completed the acquisition of Forgital from members of the
founding Spezzapria family and a minority stake held by Fondo
Italiano d'Investimento.
===================
K A Z A K H S T A N
===================
TECHNOLEASING LLC: Fitch Affirms B- LongTerm IDR, Outlook Stable
----------------------------------------------------------------
Fitch Ratings has affirmed TechnoLeasing LLC's (TL) Long-Term
Issuer Default Ratings (IDRs) at 'B-' and upgraded National
Long-Term Rating to 'BB-(kaz)' from 'B+(kaz)'. The Rating Outlooks
are Stable.
KEY RATING DRIVERS
TL is a small leasing company operating in Kazakhstan focused on
leasing of agricultural road construction equipment, as well as
cargo and city-transport vehicles. The ratings reflect TL's modest
franchise, monoline business model, substantial concertation by
lessee and industry as well as its company profile dependent on
funding access, which could be volatile.
The Stable Outlook on the Long-Term IDRs reflects Fitch's view of
only moderate spill over of the current macroeconomic instability
in Kazakhstan, as well as TL's record of adequate performance
during multiple stressed periods.
The upgrade of TL's National Long-Term Rating reflects the
company's record of weathering through economic instability,
keeping asset quality under control and improving funding profile
relative to other Kazakhstan-based issuers.
TL's funding profile has benefited from regaining access to
subsidised funding from JSC Agrarian Credit Corporation (ACC;
BBB-/Stable), as well as stable access to capital markets, bank and
other state funding. The company has managed to stabilise and
diversify its funding profile since 2019, having placed four bond
issues totalling KZT5.5 billion, with two other issues totalling
KZT3 billion having been registered on the local stock exchange.
TL's liquidity position is acceptable, with cash outflows
well-matched against inflows. TL has only limited access to
unsecured committed lines, which constrains its flexibility.
However, the company has a good record of accessing and
diversifying funding under stress scenarios. In our view, TL is
well positioned to repay principal on its first bond in end-2023
totalling KZT2 billion.
TL's asset quality has been acceptable and has shown resilience to
economic stress. The company has been reducing its exposure to
agricultural equipment to around 58% at end-1Q22 from 75% at
end-2019. Nevertheless, Fitch assesses TL's credit risk as high,
given still high exposure to agricultural sector, with the lease
book subject mostly to annual payments, which could lead to sudden
increases in impaired lease assets. Thus, TL's asset quality could
be affected by macroeconomic challenges, agricultural goods prices,
state of harvests and export controls. Overall, the agricultural
sector's performance should be supported by currently increasing
agricultural goods prices, structurally weak local currency, as
well as absence of significant export controls.
TL's reported impaired leases ratio was around 1.7% at end-1Q22.
Low reserve coverage of reported impaired leases (1% at end-1Q22)
is partly balanced by prudent down-payments (20%-30%), and a high
proportion of government-subsidised deals in the lease book (around
60% at end-1Q22).
TL demonstrated stable performance despite economic and other
challenges in 2019-2021. Its annualised pre-tax return on average
assets was 0.8% in 1Q22 (2021: 2.9%), but would have been lower had
TL provisioned more conservatively. In our view, TL's profitability
could come under pressure from narrowing margins, as funding costs
increase. TL's structurally volatile funding access could narrow
margins further down under adverse conditions.
TL's absolute capital level is modest (USD10.3 million-equivalent
at end-1Q22) with debt-to-tangible equity at 3.2x and
liabilities-to-equity at 4x at end-1Q22. Leverage has increased in
2021 from 2.9x at end-2020 as the company generated less tangible
equity and resumed dividend payments, targeted at 20% of net income
annually. Management intend to maintain leverage below covenanted
liabilities-to-equity of 7.5x. At end-1Q22, capital could sustain
additional impairment provisions of around 10% of gross leases
before hitting the covenanted level.
TL's senior unsecured bond rating is equalised with the Long-Term
Local-Currency IDR, reflecting Fitch's view that the likelihood of
default on the senior unsecured obligation is the same as that of
the company, with average recovery prospects reflected in a 'RR4'
Recovery Rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Upside is limited in the medium term by the company's modest
size and narrow business model. Over the longer term, a materially
stronger franchise, more diversified portfolio and larger business
scale relative to both domestic and international peers' together
with a conservative leverage profile and the maintenance of above
peer financial indicators would support an upgrade.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Signs of increased refinancing risks, with funding increasingly
reliant on short-term funding sources and/or an inability to access
liquidity when needed;
- Changes in strategic direction that contributes to a material
increase in risk appetite and/or an increase in leverage with
debt-to-tangible equity above 5x, which would significantly narrow
headroom to covenanted leverage metrics;
- Deterioration in asset quality that affects profitability and
reduces absorption buffers, particularly the availability and
quality of equity.
ESG CONSIDERATIONS
TL has an ESG Relevance Score of '4' for Governance Structure due
to a significant dependence in decision-making on the sole
shareholder, which has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.
TL has an ESG Relevance Score of '4' for Exposure to Environmental
Impacts due to its sizable exposure to the agricultural sector,
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.
Rating Action
Rating Prior
------ -----
TechnoLeasing LLC LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B- Affirmed B-
Natl LT BB-(kaz) Upgrade B+(kaz)
senior unsecured LT B- Affirmed RR4 B-
===================
L U X E M B O U R G
===================
EP BCO: Fitch Puts BB+ Loan Ratings on Rating Watch Neg.
--------------------------------------------------------
Fitch Ratings has placed EP BCO's (Euroports) EUR365 million
first-lien term loan B (TLB) and EUR45 million revolving credit
facility (RCF) - both rated at 'BB+' - on Rating Watch Negative
(RWN), and its EUR105 million second-lien TLB -rated at 'B+' - on
Rating Watch Positive (RWP).
RATING RATIONALE
The final Infrastructure & Project Finance Criteria incorporate a
simplified and updated Recovery Rating methodology, with the
indication that, as a general rule, Fitch's instrument ratings must
be solely premised on considerations of vulnerability to default.
Euroports' instrument ratings had been notched up and down from the
Long-Term Issuer Default Rating (IDR), despite having the same
probability of default (due to a cross default clause), based on
the different recovery prospects due to the deep subordination of
the second-lien TLB. This adjustment is not allowed anymore under
the new criteria. Also, the updated methodology would review the
current Recovery Ratings of the instruments.
Fitch expects to resolve the Rating Watch within the next six
months from the publication of the criteria.
KEY RATING DRIVERS
The new Infrastructure and Project Finance Criteria stipulate that
the ratings of individual debt issues must primarily provide a
relative vulnerability to default. In addition, Recovery Ratings
will be assigned on a six-point scale, where 'RR1' is the highest
rating on the scale and 'RR6' the lowest.
For instruments in the 'BB' category and above, Fitch will employ
an approach reflecting generic assumptions about recoveries.
Historical evidence shows that some infrastructure sectors (include
contracted utilities and availability-based projects) may benefit
from above-average recoveries upon default. The criteria allow for
some adjustments, but apply certain caps across the different liens
within the capital structure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- The outcome of the Watch will depend on Fitch's assessment of
Euroports' instrument ratings under the new criteria.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- As above.
Rating Actions
Debt Rating Recovery Prior
---- ------ -------- -----
EP BCo S.A.
EP BCo S.A.
/Senior Secured
Debt/1 LT
LT BB+ Rating Watch On RR2 BB+
EP BCo S.A./
Senior Secured Debt
- Subordinate/2 LT
LT B+ Rating Watch On RR5 B+
INEOS GROUP: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
-------------------------------------------------------------
Fitch Ratings has affirmed Ineos Group Holdings S.A.'s (IGH)
Long-Term Issuer Default Rating (IDR) at 'BB+' with a Stable
Outlook. Fitch has simultaneously affirmed the senior secured debt
issued by Ineos US Finance LLC and Ineos Finance plc at 'BBB-' with
a Recovery Rating of 'RR2'.
The IDR of IGH reflects its position as one of the world's largest
petrochemical producers, with leading market positions in Europe
and the U.S. It manufactures a wide range of olefin derivatives
serving diverse end-markets, operates large-scale integrated
production facilities with partial feedstock flexibility, and
exhibits solid pre-dividend free cash flow (FCF). The ratings are
constrained by funds from operations (FFO) net leverage in the
2x-3x range.
Fitch said, "The Stable Outlook reflects our expectations that
IGH's FFO net leverage will remain within our rating sensitivities
to 2025 despite some expected re-leveraging due to the construction
of Project One (P1) and a moderation of chemical margins. IGH's
integrated value chain and beneficial access to U.S. ethane exports
for its European operation reduce the company's exposure to the
region's increasingly uncertain energy supply."
KEY RATING DRIVERS
Manageable Gas Rationing Risk: Fitch said, "We estimate that about
48% of IGH's capacity run on ethane from the U.S., which includes
its assets in north America and its Norwegian cracker, and is
therefore not exposed to European gas rationing. Although 32% of
capacity is based in Germany, we believe that IGH's cracker in Koln
could run with limited gas supply, although its operating rate
would be a function of the capacity of its integrated downstream
lines, which source more than 90% of their feedstock from the Koln
cracker. IGH's production of ammonia and acrylonitrile is very
likely to be shut down in a rationing scenario, but the related
financial impact would be less than EUR100 million annually of
EBITDA."
Feedstock Flexibility, Capacity Drive EBITDA: IGH's last 12 months
(LTM) EBITDA of EUR3.8 billion as of 2Q22 reflects top-of-the-cycle
margins due to high chemical prices and competitive feedstock cost
as about half of its capacity runs on U.S. ethane, and its Koln
cracker can use up to 30% of butane to mitigate high naphtha
prices. IGH is also regularly increasing its capacity, with recent
additions in oligomers and phenol, which will support higher
absolute profits. Fitch estimates EBITDA of about EUR2.1 billion in
2024 and 2025 under mid-cycle conditions.
Weaker Demand Expected, Higher Costs: Fitch said, "We expect IGH's
EBITDA to moderate in 2022 and fall in 2023 from top -of-the cycle
levels as cost inflation and a weaker demand outlook for olefins
and polymers (O&P) and chemical intermediates in Europe driven by
an economic slowdown weighs on revenue and margins. Despite this,
Fitch forecasts free cash flow (FCF) before dividends on average to
remain positive to 2025."
Project One Drives High Capex: Fitch said, "We expect IGH to
maintain leverage within the rating sensitivities and its financial
policy despite capex increasing to EUR1.4 billion per year from
2023 due to the construction of P1, a new world-scale ethane
cracker in Antwerp, Belgium. Completion is expected by end-2026.
The project will be financed with a combination of debt (70%) and
equity (30%). Once complete, IGH will no longer have to rely on
ethylene purchases from third parties in Europe and will also
realise cost savings from internalising the production margin."
Financial Policy Allows Flexibility: IGH operates under an internal
leverage guideline of 3x net debt/EBITDA through the cycle, which
is less stringent than that of its parent Ineos Limited (including
IGH) at 2x. However, the overlap of earnings pressure with intense
capex or large one-off dividend distributions may result in a
temporary deviation from the target. This was the case in 2019-2020
when a 1Q19 one-off EUR1.45 billion dividend was followed by a
chemical market downturn in 2H19-2020, which together with the
Gemini acquisition, led to a weaker 2019-2020 credit profile.
Notching for Instrument Ratings: About 85% of IGH's total debt at
end-2021 was represented by senior secured notes and loans ranking
pari passu among themselves, and secured by first-ranking liens
including share pledges and mortgages. The noteholders benefit from
negative pledge and cross-default clauses while the debt contains
no financial maintenance covenants. The secured debt is rated one
notch above the IDR to reflect the security package.
Business Profile Mitigates Volatility: The inherent cyclicality of
commodity chemicals exposes IGH to feedstock and end-product price
volatility, driven by market sentiment, demand-supply drivers and
stocking/destocking patterns across the value chain. For instance,
IGH's reported EBITDA bottomed out at EUR261 million in 2Q20 and
peaked at EUR1,062 million in 3Q21. IGH manages volatility by
capitalising on its critical mass as a leading integrated
petrochemical producer, with a large and diverse customer and
supplier base, and by leveraging on feedstock flexibility in its
production sites.
Rated on Standalone Basis: IGH is the largest subsidiary of Ineos
Limited, accounting for almost half its EBITDA, but Fitch rates it
on a standalone basis as it operates as a restricted group with no
guarantees or cross-default provisions with Ineos Limited or other
entities within the wider group.
Corporate Governance: IGH's corporate-governance limitations are a
lack of independent directors, a three-person private shareholding
structure and key-person risk at Ineos Limited, as well as limited
transparency on IGH's strategy around related-party transactions
and dividends. These factors are incorporated into IGH's ratings
and are mitigated by the strong systemic governance in the
countries in which Ineos Limited operates, its record of adherence
to internal financial policies, historically manageable ordinary
dividend distributions, related-party transactions at arm's length,
and solid financial reporting.
DERIVATION SUMMARY
The business profile of IGH reflects its large scale, multiple
manufacturing facilities across north America and Europe, and
exposure to volatile and commoditised olefins and its derivatives.
This is consistent with that of sector peers, such as Westlake
Corporation (BBB/Stable), BASF SE (A/Stable) and sister company
INEOS Quattro Holding (Quattro; BB/Stable).
IGH has stronger market-leading positions, is of larger scale and
has greater diversification and production flexibility than
Westlake, which is a regional petrochemical company. However, IGH
has an overall weaker feedstock position due to its lower-margin
O&P Europe and intermediates business, which translates into EBITDA
margins in the low-to-mid teens compared with 25%-35% at its
lower-cost peers. Its size, diversification and product nature are
similar to Ineos Quattro's, while its leadership position is
stronger. Quattro has a weaker financial profile due to its USD5
billion acquisition of BP assets.
Compared with peers', the structure of IGH is complex as it is part
of the wider Ineos Limited embracing other chemical businesses,
mostly in Europe, with a three-person private shareholding. Ineos
Limited has a record of opportunistic M&A activities, which
translates into a higher risk of IGH paying dividends to cover
Ineos Limited's investment needs, and related-party transactions
across the group, as well as upstreaming unexpected one-off
dividends from its key businesses, as in February 2019, albeit
shortly after strong deleveraging.
KEY ASSUMPTIONS
-- Sales volumes growing in low single digits every year in
2022-2025
-- Weakening demand and prices for petrochemical products from
2H22 and into 2023. Prices to normalise at mid-cycle levels
from 2024
-- EBITDA margin to fall to 15% in 2022 (2021: 18.2%),
normalising at 12%-14% to 2025
-- Capex of EUR1.2 billion in 2022 and EUR1.4 billion in 2023-
2025
-- Dividends at EUR800 million in 2022, EUR600 million in 2023
and EUR400 million in 2024-2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- FFO net leverage being maintained at or under 1.7x or net
debt/EBITDA maintained at or under 1.5x through the cycle and
through the peak of capacity additions would support an
upgrade
-- Corporate-governance improvements, in particular, better
transparency on decisions regarding dividends and related-
party loans, and independent directors on the board
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Aggressive capex or dividends leading to negative FCF and/or
FFO net leverage sustainably over 3.2x or net debt/EBITDA
sustainably over 3x
-- Significant deterioration in business profile such as cost
advantage, scale, diversification or product leadership or
prolonged market pressure translating into EBITDA margin
below 10%
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity Ahead of P1: At June 30, 2022, IGH had EUR2.7
billion cash available against less than EUR0.5 billion debt due
within one year. In addition, it had EUR781 million undrawn under
its EUR800 million securitisation facility, which matures in
December 2024. This provides a comfortable liquidity buffer as IGH
starts the construction of P1, which will lead to high capex over
2022-2026, although aggressive dividend payments could reduce that
buffer. Fitch expects IGH to successfully refinance its EUR3.3
billion term loans due in 2024.
ISSUER PROFILE
IGH is an intermediate holding company within Ineos Limited, one of
the largest chemical companies in the world, operating in the
commoditised petrochemical segment of O&P.
SUMMARY OF FINANCIAL ADJUSTMENTS
- Fitch reclassified EUR978 million of lease liabilities to
other financial liabilities and excluded them from financial
debt
- Fitch reclassified EUR42 million of lease interest expense and
EUR156 million of right-of-use asset amortisation to cash
operating costs, reducing EBITDA and FFO by EUR198 million
- Debt increased by amortised issuance costs of EUR46 million
- Fitch deducted EUR8.9 million of exceptional gains from EBITDA
ESG CONSIDERATIONS
IGH has an ESG Relevance Score for group structure of '4' due to
the complex group structure of a wider Ineos Limited group and of
IGH as the acquired Gemini plant is an unrestricted subsidiary with
material debt and operates under a tolling agreement with the rest
of IGH group. This has a negative impact on its credit profile and
is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Prior
---- ------ -----
Ineos Group Holdings S.A. LT IDR BB+ Affirmed BB+
Ineos US Finance LLC
senior secured LT BBB- Affirmed RR2 BBB-
Ineos Finance plc
senior secured LT BBB- Affirmed RR2 BBB-
=====================
N E T H E R L A N D S
=====================
E-MAC NL 2006-III: Fitch Cuts Rating on 3 Tranches to 'B-'
----------------------------------------------------------
Fitch Ratings, on July 25, 2022, downgraded three tranches of E-MAC
Program B.V. Compartment NL 2006-III. Fitch has also affirmed the
transaction's remaining tranches and all tranches of E-MAC NL
2004-1, 2005-III and 2006-II Dutch RMBS transactions. The Rating
Outlooks are Stable for all tranches rated above 'CCCsf'. Fitch
does not assign outlooks to notes rated 'CCCsf' or below.
Rating Actions
Debt Rating Prior
---- ------ -----
E-MAC NL 2004-1 B.V.
Class A XS0188806870 LT B-sf Affirmed B-sf
Class B XS0188807506 LT B-sf Affirmed B-sf
Class C XS0188807928 LT B-sf Affirmed B-sf
Class D XS0188808819 LT CCCsf Affirmed CCCsf
E-MAC NL 2006-II B.V.
Class A XS0255992413 LT B-sf Affirmed B-sf
Class B XS0255993577 LT B-sf Affirmed B-sf
Class C XS0255995358 LT B-sf Affirmed B-sf
Class D XS0255996166 LT CCCsf Affirmed CCCsf
Class E XS0256040162 LT CCCsf Affirmed CCCsf
E-MAC Program B.V. Compartment NL 2006-III
Class A2 XS0274609923 LT B-sf Downgrade Bsf
Class B XS0274610855 LT B-sf Downgrade Bsf
Class C XS0274611317 LT B-sf Downgrade Bsf
Class D XS0274611747 LT CCCsf Affirmed CCCsf
Class E XS0275099322 LT CCCsf Affirmed CCCsf
E-MAC NL 2005-III B.V.
Class A XS0236785431 LT B-sf Affirmed B-sf
Class B XS0236785860 LT B-sf Affirmed B-sf
Class C XS0236786082 LT B-sf Affirmed B-sf
Class D XS0236786595 LT CCCsf Affirmed CCCsf
Class E XS0236787056 LT CCCsf Affirmed CCCsf
TRANSACTION SUMMARY
The E-MAC transactions are seasoned true-sale securitisations of
Dutch residential mortgage loans originated by GMAC-RFC Nederland
B.V. The servicer is CMIS Nederland B.V.
KEY RATING DRIVERS
Asset Maturity Risks: In all four transactions Fitch identified
assets with maturity dates exceeding those of the notes. These
amounts can reach up to 0.5% of the current pool. Note amortisation
in these transactions is currently pro-rata given satisfactory
performance. In a benign environment it is possible for the
transactions to amortise pro-rata until note maturity. This implies
a loss in all collateralised tranches equal to the balance of the
loans that mature after the notes.
A number of loans, representing between 0.4% and 1.4% of the
current pool balance, mature within two years of the notes' legal
final maturity. The majority are interest-only (IO) loans. These
loans may not have time to be worked out before the notes' final
maturity date in case of default
Amortisation Switches Cause Downgrades: Fitch has downgraded the
2006-III classes A, B and C notes by one notch, because in the
updated cash flow modelling performed for this review, amortisation
switches late in the transaction's life from sequential to
pro-rata. This causes the notes to incur losses at even the most
benign rating stresses. Fitch has downgraded the notes to 'B-sf' to
indicate that they are not able to be paid in full in all 18 of the
Multi-Asset Cash Flow Model scenarios.
Constraint for Excess Spread Notes: Fitch has affirmed the excess
spread notes in the 2005-III, 2006-II and 2006-III transactions at
'CCCsf'. Principal redemption of these notes ranks subordinate to
the payment of extension margins on the collateralised notes in the
revenue waterfall. As the extension margin amounts have been
accruing and remain unpaid, the principal repayment of these notes
via excess spread is unlikely. The class E notes could fully
amortise through the release of the reserve fund if it builds up
after significant performance deterioration, i.e. 90+ arrears
increase above 2% and then fall below 2% again.
Potential Trigger of Sequential Amortisation: All of the
transactions except 2004-1 have breached the sequential
amortisation triggers for between one and nine payment periods.
Since April 2022 all transactions have again fulfilled the
conditions for pro-rata payment. The transactions feature a
mechanism, whereby, in pro-rata amortisation, the class A to D
notes would amortise to achieve and maintain a certain size
relative to each other. This means that the credit enhancement (CE)
built-up during a sequential period is lost when the transaction
switches back to pro-rata amortisation. This feature has been
factored into the rating analysis to the extent that the relevant
pro-rata triggers are captured by Fitch's modelling assumptions.
Counterparty Risks Mitigated: A liquidity reserve and adequate
counterparty ratings mitigate counterparty risks for all
transactions as per Fitch's Structured Finance and Covered Bonds
Counterparty Rating Criteria.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Asset performance deteriorating far beyond our current expectations
could trigger a downgrade of the notes.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Prepayment of the assets with a maturity after the notes' maturity
could lead to upgrades.
SPRINT BIDCO: Fitch Assigns 'B' Final LongTerm IDR
--------------------------------------------------
Fitch Ratings has assigned Sprint BidCo B.V. (Accell Group) a final
Long-Term Issuer Default Rating (IDR) of 'B' with a Positive
Outlook. It has also assigned its EUR700 million term loan B (TLB)
a final senior secured rating of 'B+' with a Recovery Rating of
'RR3'.
The 'B' IDR reflects the company's high reliance on the success of
its e-bikes portfolio as well as certain competitive and
operational challenges. These are balanced by Fitch's view of
modest execution risks in management's strategy under new ownership
and very supportive underlying demand fundamentals, even in the
event of a recessionary environment in its home markets.
Accell initial leverage is lower than peers' with good deleveraging
prospects despite relatively low profit margins. The Positive
Outlook reflects Fitch's confidence in the company's ability to
deleverage swiftly and to address its operational challenges over
2022-2023.
KEY RATING DRIVERS
Wide Bicycle Products Portfolio: The rating reflects Accell's wide
portfolio of bicycles, spanning from traditional bikes to electric
- including a good presence in the newest category of cargo bikes
for family and business use - which it sells across Western Europe.
The portfolio is complemented by the lower-ticket-per purchase
business of distributing parts and accessories, which provides
diversification benefits. Profits are mostly concentrated on
e-bikes (54% of 2021 sales). Moreover, Accell relies more on the
German market (40%), which benefits from strong purchasing power
and one of the highest penetrations of bike ownership in the
continent.
Supportive, rather Resilient Demand: Fitch expects demand for bikes
to rise by high-single digits p.a. over 2022-2026 in the UK,
Holland, France and Germany in value terms, mostly driven by
e-bikes, (with traditional bikes contracting in value). Favourable
demand trends include a generalised increase in sporting activity,
easier access to cycling for senior users in part-electric mode,
commuting use of e-bikes facilitated by new infrastructure (cycling
lanes; possibility to carry bikes on public transport) and fiscal
incentives for purchases. Fitch believes demand drivers would be
fairly unaffected in the event of a recession in Europe affecting
consumer spending power, mainly if driven by the current sharp rise
of energy prices and with e-bikes providing a cheaper
transportation option.
Modest Execution Risks: Under its new ownership the company will be
putting in place a number of initiatives to reduce production costs
(switch production across factories), address the issue of not
having had reliable access to parts, launch its own
direct-to-consumer channel operations, rejuvenate some of the
brands and launch/ expand them beyond their home market. Fitch
expects these initiatives to lead to around EUR25 million-EUR30
million of extra disbursements p.a. over 2023-2025 via a mix of
capex and restructuring costs but should help underpin, if not
improve, profit margins and increase the company's competitive
capability, with limited downside risks in cost overruns or
achievability.
Low-Margin Assembler & Marketer: As a consumer products company,
Accell is characterised by a low-end EBITDA margin of around 9%,
driven by its business model, which focuses on designing and
marketing bicycles assembled in own factories with parts produced
by dedicated suppliers. This leaves part of the added value in
suppliers, to which Accell is exposed given its high concentration.
However, management initiatives should support an EBITDA margin
uplift of around 50bp-100bp by 2025. In addition, since the
pandemic, the industry has suffered from a shortage of parts, which
Accell has partly addressed via an increase in inventory (hence of
working capital) but this has not fully enabled it to satisfy high
underlying demand.
Volatile Working Capital to Normalise: During 2021, Accell's
working capital rose significantly as a result of a decision to
prudently secure and hold a high level of parts to maintain
production flow. Excluding these dynamics, the business is
characterised by high seasonality in production and delivery of
products, whereby working capital pre-pandemic would swing by
approximately EUR75 million to a high of 36% of sales at end-1Q
from a low 30% at year-end. Fitch expects inventory days to start
normalising from 2022 as Accell redesigns products by simplifying
the range of parts, widening the number of suppliers and as large
suppliers increase capacity.
Reliable Cash Flow Generation: Fitch said, "Accell has been able to
pass on higher input costs by increasing prices without eroding
demand. However, we foresee some contraction in EBITDA margin of
20bp-50bp for the 2023 as we do not expect the company to fully
pass on increases in input costs. Over 2023-2025, free cash flow
(FCF) generation will be compressed by disbursements of EUR25
million-EUR30 million p.a. linked to restructuring charges and a
more intense, but still fairly modest, capex plan. Nevertheless, we
project a consistent FCF margin of around 1.5%-2%, or EUR25
million-EUR30 million, which supports financial flexibility."
Moderate LBO Leverage, Deleveraging Capacity: Fitch said, "We
calculate a moderate initial funds from operations (FFO) gross
leverage of 6.0x-6.3x, before dropping below 5.5x in 2024 on
healthy annual FFO growth. Faster growth and/or margin expansion
would result in accelerated deleveraging. Measured as total debt /
EBITDA, leverage is conservative at initially 5.0x-5.2x, before
falling to around 4.4x in 2024."
Environmental Benefits from Cycling: The use of bicycles as an
alternative means of transportation contributes to containing air
pollution. Consequently, governments and local authorities are
investing in incentives for purchases and infrastructure to use
bicycles. The supportive environment for the company's sales
profile is reflected in Accell's ESG Relevance Score of '4[+]' for
greenhouse gas emissions and air quality; environmental impact.
DERIVATION SUMMARY
Fitch rates Accell under its Consumer Products Navigator. Accell
has lower leverage than skincare company Sunshine Luxembourg VII
Sarl's (B/Stable) 8.0x FFO gross leverage but which has better
visibility of FCF generation. "Both companies enjoy good growth
fundamentals and a degree of complexity in their business, but we
view Accell's business as less complex. Accell is however
significantly smaller, generating less FCF.
Another good comparator is shoe-making company Golden Goose S.p.A.
(B/Stable), which we rate under the Non-Food Retail Navigator.
Golden Goose has materially stronger EBITDA margins (25%) and we do
not view its strategy as having execution risks; however, the
company has a narrow brand and product portfolio and is slightly
smaller. Both companies have a similar leverage trajectory," Fitch
said.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Organic revenues growth of 12%-13% in 2022, supported by
e-bike and parts and accessories segments followed by a
6%-7% growth to 2026
- EBITDA margin of 8%-10% to 2026
- Neutral working capital in 2022 and outflow of EUR25 million-
EUR30 million in the next four years
- Capex at around EUR18 million-EUR20 million in 2022-2023, and
increasing to about EUR30 million-EUR40 million 2024-2026
- No bolt-on acquisitions or shareholder distributions to 2026
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Accell would be reorganised as a
going-concern (GC) in bankruptcy rather than liquidated.
Fitch has assumed a 10% administrative claim.
Accell's GC EBITDA assumption refers to its 2021 EBITDA of EUR122.5
million. The difference between EBITDA and the GC EBITDA assumption
is an output of the analysis, not a starting point or input that
drives the GC assumption.
In its bespoke recovery analysis, Fitch estimates a GC EBITDA
available to creditors of EUR100 million, which reflects Fitch's
view of a sustainable, post-reorganisation EBITDA level upon which
Fitch bases the enterprise valuation (EV). This would follow a
failure from the company to improve its brand perception and supply
chain challenges resulting in pressures on its profitability and a
decline in revenue.
Fitch applies a distressed EV multiple of 6.0x EBITDA to the GC
EBITDA to calculate a post-reorganisation EV, which is aligned with
that of peer consumer companies Sunshine Luxembourg VII Sarl and
International Design Group and takes into accounts the company's
position of industry leader, which should allow it to benefit from
positive market trends, despite some challenges in its supply
chain.
Spring's revolving credit facility (RCF) is assumed to be fully
drawn upon default. The RCF ranks equally with its TLB.
The allocation of value in the liability waterfall results in
recovery corresponding to 'RR3' at 61% for the TLB.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action (upgrade):
- FFO gross leverage below 5.5x sustainably or gross debt/EBITDA
below 4.5x and EBITDA /interest cover approaching 3.5x or above
- Successful execution of its growth and cost simplification
strategy reflected in improving EBITDA of EUR140 million-EUR160
million or EBITDA margin of close to 10%
- Evidence of limited working-capital volatility, and not
affecting the generation of positive FCF
Factors that could, individually or collectively, lead to the
Outlook being revised to Stable
- No visibility of FFO gross leverage falling below 5.5x
sustainably, or gross debt/ EBITDA below 4.5x
- Delays to or lack of visibility over the execution of its growth
and cost simplification strategy, as reflected in EBITDA
not trending above EUR150 million, or if EBITDA margin is not
growing close to 10%
- Working-capital volatility remaining high affecting the ability
to generate positive FCF
Factors that could, individually or collectively, lead to a
downgrade:
- FFO gross leverage increasing above 7.0x sustainably or gross
debt/EBITDA rising above 6.0x and EBITDA /interest cover
dropping below 2.5x
- EBITDA margin dropping below 8% as a result of higher costs or
weak implementation of the company's strategy or inability to
effectively manage input cost inflation
- FCF moving into negative territory as a result of higher-than-
anticipated restructuring costs or working -capital volatility
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: Fitch expects Accell's cash balance to be
around EUR124 million and positive FCF generation of about EUR25
million-EUR30 million per year to 2026 to cover working-capital
requirements and capex. Accell also has access to a fully undrawn
EUR180 million RCF, no plans for dividends and no significant debt
maturing before 2028.
ISSUER PROFILE
Sprint Bidco B.V. is the entity incorporated by private equity
sponsors to complete the buyout of Netherlands-based bicycle
company Accell Group B.V.
ESG CONSIDERATIONS
Accell has an ESG Relevance Score of '4' [+] for GHG emissions &
air quality due to the company's products contributing to reducing
GHG emissions and benefitting from a supportive regulatory
environment, which has a positive impact on the credit profile, and
is relevant to the rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
=============
U K R A I N E
=============
UKRAINE: VR Capital Wants Money Back
------------------------------------
globalinsolvency.com, citing Wall Street Journal, reports that
Ukraine is fighting for its survival and is desperate for cash, but
that isn't deterring London hedge-fund manager Richard Deitz from
demanding money back from an ill-fated investment there.
Mr. Deitz's VR Capital has a long history of making money in
countries going through upheaval, according to
globalinsolvency.com.
His fund paid $123 million in 2019 to buy distressed loans issued
by state-owned Ukrainian Railways, hoping they could work out a
repayment and get a double-digit return, the report notes.
But in May, the Ukrainian government seized the investment as part
of its sweep to nationalize Russian assets within its borders, the
report relays.
The thing is, neither Mr. Deitz nor the asset is Russian, the
report discloses.
The debt that Mr. Deitz bought sits inside a Ukrainian subsidiary
of a Russian bank taken over by Kyiv, the report notes.
The move is just the latest in a series of steps by Ukraine to
stymie the investment, according to VR's legal counsel, the report
relays.
Mr. Deitz sees his case as a test not just for him as an investor
but also for Ukraine. Long before much of the world rallied to
Ukraine's aid, the country was a treacherous place to do business,
he said, the report relays.
It had an unpredictable legal system, heavy state involvement in
the economy and low scores in rankings of transparency and
corruption, the report discloses.
"One day the war will end and the focus will be on rebuilding
Ukraine. Investors will have plenty of goodwill and desire to
participate but this may not be sufficient once they consider the
history of violations of rule of law by the state," said Mr. Deitz,
the report discloses.
"Can the leopard change its spots?" His posture stands in contrast
to others on Wall Street, the report notes.
Ukraine asked bondholders, mostly Western fund managers, to put off
payments on more than $20 billion of outstanding debt, the report
says. BlackRock Inc. and Fidelity International Ltd. are
supportive of the delay, according to a statement from Ukraine's
Ministry of Finance, the report adds.
===========================
U N I T E D K I N G D O M
===========================
HARTLEY PENSIONS: Prepares to File for Insolvency
-------------------------------------------------
globalinsolvency.com, citing Bloomberg News, reports that Hartley
Pensions Limited, which provides retirement products to UK
consumers, is preparing to file for insolvency.
The firm has approached insolvency practitioners in recent weeks to
assess options including administration, the people said, asking
not to be named as the information is not yet public, according to
globalinsolvency.com.
The company is preparing to appoint administrators from UHY Hacker
Young, and could file as soon as today, July 29, the report notes.
"Hartley Pensions is continuing to trade within a number of
voluntary restrictions which have been placed on the business by
agreement with the FCA, the financial services regulator, relating
to accepting new business and instructions from existing clients,"
a spokesperson for the firm said by email, the report notes. "We
are actively seeking to find another business to take over the
operation of Hartley Pensions."
The company has been in the crosshairs of the UK's Financial
Conduct Authority this year, with the firm barred from accepting
new clients in March, the report relays. Further restrictions have
since been imposed, the report notes.
"The requirements have been imposed due to a number of serious
operational and regulatory issues that the firm are attempting to
deal with and is intended to protect all of the firm's customers,"
the FCA said in a notice on its website earlier this month, the
report adds.
UNITED KINGDOM: Broken Supply Lines Drive Manufacturing Back Home
-----------------------------------------------------------------
globalinsolvency.com, citing Reuters, reports that in central
England, birthplace of the industrial revolution, factories are
buzzing anew, hammering out parts for cars, planes and medical
machines that used to be made in Asia.
After two years of global supply-chain disruption, and with dark
clouds on the horizon, manufacturers around Britain's second city
of Birmingham say they are inundated with orders, helped by new and
old domestic clients bringing some production back home, according
to globalinsolvency.com.
For decades, supplier decisions were based largely on price. But
the pandemic and mounting geopolitical tensions have undermined the
mass outsourcing model, prompting some buyers to build alternative
production lines nearer to home, despite it being a lengthy process
that can drive costs higher, the report notes.
In Britain, this "reshoring" trend is also being driven by the
introduction of full border checks following the country's exit
from the European Union, the report adds.
VENATOR MATERIALS: Moody's Assigns B1 Rating to Extended Term Loan
------------------------------------------------------------------
Moody's Investors Service assigned B1 ratings to the extended and
amended tranche of the existing term loan facility of Venator
Materials LLC and Venator Finance S.a.r.l, which are direct and
indirect subsidiaries of Venator Materials plc (Venator), which is
a guarantor on the term loans. The maturity of the extended tranche
is expected to be July 2025 from the current maturity of August
2024. If less than 90% of the existing term loans by amount are not
extended, the company has the option to not proceed with the
transaction. The outlook on the ratings is stable and unchanged.
"The transaction is viewed as moderately credit positive in that it
would address a large portion of the nearest maturities in the
capital structure, despite the expectation of a modest step up in
the borrowing cost of the extended tranche" according to Joseph
Princiotta, Moody's SVP and lead analyst for Venator. "The
transaction is virtually leverage and metric neutral, although some
debt reduction with balance sheet cash will occur as part of the
transaction" Princiotta added.
Assignments:
Issuer: Venator Materials LLC
Gtd Senior Secured Term Loan B, Assigned B1 (LGD3)
RATINGS RATIONALE
On April 22, 2022 Moody's affirmed the ratings of Venator Materials
plc, including the Corporate Family Rating ("CFR") at B2; the
rating outlook was changed to stable from negative. The
affirmations reflect the expectations that 2022 EBITDA will be
higher year on year, as higher TiO2 prices and full year demand
growth will offset margin pressure from higher raw material, energy
and shipping costs and support higher earnings and cash flow going
forward. The stabilization of the rating also anticipates a winding
down of certain cash usage and eventual return to positive free
cash flow.
Venator needs to reduce debt before the next industry downturn.
Fortunately, sustained or flattish demand against the backdrop of
limited new global supply additions in TiO2 support a favorable
multi-year cyclical outlook at this time, assuming the avoidance of
a serious global recession that significantly impacts demand, or a
substantial drop in natural gas available to Venator's European
plants. Tight marlets, low industry inventories and higher prices
offset cost headwinds and softer demand allowing higher sequential
EBITDA in the second quarter of this year, while the rest of the
year could be flatter and challenged by costs headwinds and volume
softness.
Excluding the recent litigation award that benefited Venator by $85
million, free cash flow is expected to improve but is likely to
remain negative this year. Beyond 2022, the expected tapering of
cash usage for restructuring, Pori work, pensions and other cash
costs, against the backdrop of possibly higher EBITDA, could begin
to support the generation of positive free cash flow, which,
together with litigation proceeds and the possibility for asset
sales offer opportunities to reduce debt and bolster the balance
sheet ahead of the next trough.
Venator's credit profile benefits from its market position among
the world's leading titanium dioxide producers, strong presence in
specialty products, and modest earnings diversity from the
Performance Additives segment. Prospective benefits from a business
improvement program and adequate liquidity also support its current
credit position.
As evidenced over the last decade, the rating incorporates
expectations for significant fluctuations in market conditions and
key credit metrics in this cyclical industry. Moody's has a
favorable fundamental view for TiO2 markets over the next two
years, at least, and expects sustained or flattish demand growth
against the backdrop of limited global supply additions to underpin
favorable fundamentals, allowing price support or increases in all
or most major regions.
Leverage has been stressed for the rating, with adjusted gross
debt/EBITDA peaking at roughly 9x in 2020 when covid weighed on
markets and the issuance of $225 million in notes increased
leverage, but also provided additional liquidity. Net leverage was
roughly a turn and a half lower at 7.6x. Gross and net debt to
EBITDA improved to 6.9 and 6.0x, respectively, at December 31, 2021
and are expected to improve further in 2022. Moody's expects higher
TiO2 prices and EBITDA this year will reduce negative free cash
flow, which can potentially turn positive in the near term as
certain cash usage, wind down.
ESG Considerations
The action is not directly driven by ESG factors. Waste and
pollution risks are considered very high for commodity chemical
companies, and that includes TiO2 producers, as environmental
exposure and costs can be meaningful and can have economic and
credit and implications. Roughly two-thirds of Venator's TiO2
production use the sulfate process; one-third uses the chloride
route. The chloride process is continuous, has lower energy
requirements, produces less waste and is less environmentally
harmful than the sulfate-based production process, although both
have significant water usage, environmental exposure and GHG
emissions.
Venator expects to incur additional environmental costs into 2024
related to the remediation and closure of the Pori facility. The
company expects to spend about $25 million on Pori in 2022 and has
environmental reserves of $10 million and $8 million as of December
31, 2021 and YE 2020, respectively, relating to pending
environmental cleanup, site reclamation, and closure costs. In
addition, the company has identified capital expenditures for
Environmental, Health and Safety (EHS) matters of $20 million and
$13 million, respectively.
Social risks for Health & Safety are considered high for
commodities in general and TiO2 specifically. Responsible
Production risks are also high, reflecting in part the EU
commission's change in the classification of TiO2 to a Category 2
Carcinogen, effective in October 2021. Tightening regulations over
chemical products, and increased public awareness can increase the
industry's operating costs. Overall governance risks are considered
high due to balance sheet leverage, despite some mitigating factors
as Venator adheres to public company financial reporting and
supported by good communication and financial policies in-line with
the rating category. The 39% ownership by SK Capital doesn't add to
risk but could if SK exercises its option to increase its ownership
stake to 50% or higher.
Liquidity
The SGL-2 Speculative Grade Liquidity Rating ("SGL") indicates good
current liquidity to support operations in the near-term with $109
million in cash and about $232 million in revolver availability as
of June 30, 2022. Moody's estimates that free cash flow will be
negative again this year but could switch to positive next year on
rising TiO2 prices and declining cash usage in the targeted
'buckets' identified. Venator has access to an $330 million
asset-based revolving credit facility, which matures in October
2026. The borrowing base was reported to be approximately $278
million as of June 30, 2022, less $45 million letters of credit
issued and outstanding, as well as a portion of the borrowing base
reserved for $45 million of letters of credit available to be
issued by one of the lenders, of which $40 million has been
utilized at June 30, 2022; resulting in revolver availability of
$232 million.
The credit agreement contains a springing fixed charge coverage
ratio test that does not become effective unless excess
availability falls below 10% of the facility. Moody's does not
expect the covenants will be tested in the near-term and believe
that the covenant lite structure is well-aligned with the
cyclicality of the company's business over a longer horizon. An
asset sale, would help improve liquidity.
Rating outlook
The stable outlook incorporates expectations for extended favorable
conditions in TiO2 markets as well as declining cash usage for
restructuring, pensions and Pori remediation and closure, allowing
for return to positive free cash flow and debt reduction ahead of
the next industry downcycle. Failure to restore positive free cash
flow during these favorable market conditions and begin to reduce
debt will pressure the rating and would likely result in a
downgrade.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's is unlikely to consider an upgrade until balance sheet debt
is reduced and positive free cash flow is comfortably restored and
robust enough to allow further debt reduction. If debt were to be
meaningfully reduced below $600 million ahead of the next down
cycle, Moody's would consider an upgrade.
Evidence of the cycle weakening in TiO2 before the company
meaningfully reduces debt would likely trigger consideration for a
ratings downgrade. Also, failure to maintain gross adjusted
leverage below 5.5x, or liquidity falling below $200 million before
positive free cash flow is restored could also have negative rating
implications.
Headquartered in the United Kingdom, Venator Materials plc is the
world's fourth-largest producer of titanium dioxide pigments used
in paint, paper, and plastics, and a producer of performance
additives for a variety of end markets. Venator was created through
an IPO transaction from Huntsman Corporation in 2017. Venator
generated approximately $2.2 billion in revenues for the twelve
months ended December 31, 2021.
The principal methodology used in this rating was Chemicals
published in June 2022.
VENATOR MATERIALS: S&P Alters Outlook to Neg., Affirms 'B-' ICR
---------------------------------------------------------------
S&P Global Ratings revised its outlook on U.K.-based titanium
dioxide (TiO2) and pigments producer Venator Materials PLC to
negative from stable. S&P affirmed the issuer credit rating on
Venator at 'B-'.
S&P said, "We assigned our 'B' issue rating and '2' recovery rating
to the proposed term loan B, indicating our expectation of
substantial recovery (70%-90%; rounded estimate: 85%) in the event
of default. We affirmed the 'B' issue rating and '2' recovery
rating on the existing $225 million senior secured notes due 2025
(70%-90%; rounded estimate: 85%). We also affirmed our 'CCC+' issue
rating and '5' recovery rating on the $375 million senior notes due
2025, indicating our expectation of modest recovery (10%-30%;
rounded estimate: 10%).
"Our negative outlook captures the risk of a deterioration in
Venator's credit metrics due to natural gas supply shocks and
persistently high energy prices, which could disrupt production and
weaken earnings and cash generation beyond what we factor into our
base case."
Venator is proposing to reprice and extend its existing $357
million term loan B due in 2024 for refinancing flexibility
purposes and to extend its maturity profile. As part of the
transaction, the company intends to repay $20 million of the term
loan B, utilizing cash from its balance sheet.
S&P said, "The 'B' issue rating on the term loan B largely reflects
our expectation of substantial recovery for secured lenders in the
event of a default scenario. We affirmed the 'CCC+' issue rating on
the $375 million unsecured notes, but revised down recovery
prospects on the notes due to our view that the non-guarantor
enterprise value will be split proportionally across the deficiency
claims and the total unsecured debt claims on the term loan B and
senior secured notes. We note that our 10% recovery estimate for
the unsecured notes is at the lower end of the 10%-30% threshold
for a modest recovery. There is therefore a risk that we could
lower the issue rating if our assumptions on the EBITDA at
emergence or enterprise value at emergence change.
"We believe the proposed notes issuance will improve Venator's
maturity profile. The company intends to reprice and extend
existing $357 million term loan B due in 2024. The proposed term
loan B has a targeted maturity in July 2025, coterminous with the
$225 million senior secured notes.
"We forecast a decrease of S&P Global Ratings-adjusted debt to
EBITDA to approximately 6.6x in 2022. This is due to the lower
level of gross debt, as Venator intends to use $20 million of cash
on balance for debt repayment. We do not deduct cash from debt in
our calculation of leverage, owing to the company's weak business
risk profile.
"We understand that the proposed repriced and extended $337 million
term loan B will benefit from guarantees and collateral that are
substantially similar to the existing term loan facility. We note
that the definition of change of control is modified to allow for
an entity to hold up to 50% (from 40%) of the aggregate ordinary
voting power for the election of directors. We understand that this
change aims to make allowance for SK Capital's options. As of Dec.
31, 2021, SK Capital owns just under 40% of Venator's ordinary
shares, with a 30-month option, starting from December 2020, to
acquire an additional 9% of Venator's ordinary shares."
On April 6, 2022, the Superior Court of Delaware issued a ruling in
favor of Venator for $75 million in its lawsuit against Tronox. The
lawsuit arose following Tronox's refusal to pay a $75 million break
fee over the sale of Cristal's North American TiO2 business. The
Superior Court rejected Tronox's counterclaim for damages. On April
25, Venator announced that it received $85 million in cash from
Tronox following their settlement agreement, which includes an
additional $10 million of value representing a negotiated amount of
interest. Venator is utilizing $20 million of cash received to pay
down debt, and will retain the remaining amount on its balance
sheet, thereby strengthening its liquidity.
The negative outlook captures the risk of natural gas supply shocks
and persistently high energy prices. S&P thinks that Venator's
capital structure is currently sustainable, with adequate liquidity
of about $89 million in cash (pro forma for the paydown in debt),
$232 million availability under its asset-based loan (ABL) facility
as of June 2022, and no material debt maturities until 2025.
However, natural gas supply shocks and persistently high energy
prices could disrupt production and volumes and weaken earnings and
cash generation beyond what it factors into its base case.
S&P said, "Recently, we have seen lower gas flows from Russia to
Germany and Europe overall. Countries across Europe have begun
implementing emergency plans that could ultimately see supply
rationing for certain consumers. Venator's TiO2 manufacturing
facilities in Germany account for 26% of its annual nameplate
capacity and facilities in Europe overall account for 78%. While
our base case assumes that EBITDA margins will come under pressure
in the second half of 2022, a potential disruption due to gas
rationing is difficult to incorporate into our forecasts. This is
due to the multifaceted impact rationing would have on supply and
prices, economic activity and demand, and the unknown length of a
potential disruption.
"The negative outlook captures the risk of a deterioration in
Venator's credit metrics in the event of a disruption in the supply
of natural gas. This could impact the company's operations,
production volumes and ultimately its earnings and cash generation.
In our base-case scenario, we expect credit metrics to improve,
with the weighted-average S&P Global Ratings-adjusted debt to
EBITDA at 6.0x-7.0x and funds from operations (FFO) to debt of
about 10%."
S&P could lower its rating on Venator if it thinks its credit
metrics and free operating cash flow (FOCF) will deteriorate beyond
our expectations over the next 12 months. This could occur if:
-- Venator's operating performance is weaker than anticipated,
leading to larger-than-expected cash outflows, for example due to a
temporary shutdown in the production of TiO2 or performance
additives as a result of gas supply rationing;
-- The company's liquidity position deteriorates materially; or
-- Venator incurs additional debt, leading to risks to the
sustainability of its capital structure.
S&P could revise its outlook to stable if Venator successfully
maintains a track record of keeping its debt-to-EBITDA ratio below
7.0x over the next 12 months and risks of a natural gas shortage
dissipate without negative impacts on its business and credit
metrics.
ESG credit indicators: E-3, S-3, G-2
*********
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