/raid1/www/Hosts/bankrupt/TCREUR_Public/221006.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
Thursday, October 6, 2022, Vol. 23, No. 194
Headlines
A N D O R R A
CREDIT ANDORRA: Fitch Affirms 'BB' Rating on Subordinated Debt
I T A L Y
ANDROMEDA FINANCE: Fitch Affirms 'BB+' Rating on Class A2 Notes
K A Z A K H S T A N
KAZTRANSOIL: S&P Upgrades LT ICR to 'BB+', Outlook Negative
L U X E M B O U R G
DANA FINANCING: Fitch Affirms BB+ Rating on Sr. Unsecured Notes
N E T H E R L A N D S
E-MAC PROGRAM 2007-III: S&P Affirms 'CCC' Rating on Class E Notes
P O R T U G A L
BANCO COMERCIAL PORTUGUES: Fitch Alters Outlook on 'BB' IDR to Pos.
CAIXA GERAL: Fitch Affirms 'BB' Rating on Subordinated Debt
S P A I N
AUTONORIA SPAIN 2022: Fitch Assigns 'BB-sf' Rating on Class F Notes
T U R K E Y
ALTERNATIFBANK AS: Fitch Affirms B-/B LongTerm IDRs, Outlook Neg.
BURGAN BANK: Fitch Affirms 'B-/B' LongTerm IDRs, Outlook Negative
TURKLAND BANK: Fitch Affirms 'B-/B' LongTerm IDRs, Outlook Neg.
U K R A I N E
INTERPIPE HOLDINGS: Fitch Affirms LongTerm IDR at 'CCC'
METINVEST BV: Fitch Affirms 'CCC/C' Issuer Default Ratings
U N I T E D K I N G D O M
ENDEAVOUR MINING: Fitch Affirms 'BB' LongTerm IDR, Outlook Stable
HARBOUR ENERGY: Fitch Affirms LongTerm IDR at 'BB', Outlook Stable
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A N D O R R A
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CREDIT ANDORRA: Fitch Affirms 'BB' Rating on Subordinated Debt
--------------------------------------------------------------
Fitch Ratings has revised Credit Andorra SA's (Credit Andorra)
Outlook to Stable from Negative while affirming its Long-Term (LT)
Issuer Default Rating (IDR) at 'BBB-'.
The Outlook revision reflects Fitch's views that Credit Andorra
will continue to improve its profitability, supported by the
acquisition of Vall Banc, while Fitch expects less asset-quality
pressures than initially envisaged. The Outlook revision also
reflects its improved assessment of operating environment for
Andorran banks.
Fitch has withdrawn Credit Andorra's Support Rating of '5' and
Support Rating Floor of 'No Floor' as they are no longer relevant
to the agency's coverage following the publication of its updated
Bank Rating Criteria. In line with the updated criteria, Fitch has
assigned Credit Andorra a Government Support Rating (GSR) of 'no
support' (ns).
KEY RATING DRIVERS
The ratings of Credit Andorra are underpinned by its leading
Andorran retail- and private-banking franchise, which is
strengthened by the acquisition of Vall Banc, complemented by a
profitable international franchise. The ratings also reflect
capital ratios that are likely to weaken as a result of the
acquisition, and weaker asset quality than domestic peers' due to a
higher exposure to Andorra's small and concentrated economy.
Strengthened Domestic Franchise: Credit Andorra's strong position
in Andorra will be further strengthened by Vall Banc's acquisition,
which will result in enhanced domestic market shares and an
improved earnings generation capacity. Credit Andorra's leading
domestic franchise is complemented by its international
wealth-management activities, mainly in Luxembourg, Spain and
Miami, although contribution from these businesses is fairly
limited due to lower pricing power and fierce competition.
Improved Operating Environment: Fitch has upgraded the assessment
of the Andorran operating environment to 'bbb/stable' from
'bbb-/stable'. This reflects the combination of a
better-than-expected performance of the Andorran economy, actions
taken to partially mitigate risks from the lack of a lender of last
resort, and Andorra's sovereign rating upgrade to 'A-'/Stable in
July 2022. Fitch continues to factor in the small and narrow
Andorran economy and its dependence on few key sectors, which
result in less opportunities for growth and to diversify risk
exposures for banks.
Moderate Risk Appetite: Credit Andorra's higher contribution from
commercial lending than its domestic peers' exposes it to the small
and concentrated Andorran economy. The loan book is focussed on
Andorran SMEs and corporates (54% of gross loans at end-2021), with
the main sectors reflecting the composition of the economy and with
notable single-name concentration. Similar to other private banks,
operational and reputational risks are material although these are
well-managed in its view.
Weaker Asset-Quality Metrics than Peers': Credit Andorra has weaker
asset-quality metrics than domestic and international peers',
reflecting a higher contribution from commercial lending and its
credit concentrations. At end-2021, its impaired loan ratio stood
at 6.2% and was highly influenced by a large single-name exposure.
Impaired loan reserve coverage remained sound at 85% at end-2021.
Vall Banc's asset quality is poor, but Credit Andorra has taken
actions to proactively address its problem assets ahead of the
acquisition.
Improving Profitability: Credit Andorra's higher share of retail
lending provides a larger contribution from net interest revenue
than domestic peers'. Fitch expects the contribution of net fee and
commission income to increase as volumes rise. In 2021, operating
profit/risk-weighted-assets stood at 1.4%, slightly above 1.3% in
2020, supported by lower loan impairment charges (LICs) after
frontloading pandemic-related charges in 2020.
Fitch expects material synergies from Vall Banc, together with
higher interest rates and business volumes, to result in improved
earnings generation capacity in the medium term.
Adequate Capitalisation: Capital ratios will be negatively affected
by the integration of Vall Banc. However, Fitch believes that the
bank will restore capital and maintain a fully-loaded common equity
Tier 1 (CET1) ratio above 15% in the medium term, through improved
earnings generation capacity and retention. At end-2021 the bank's
phased-in CET1 stood at 16.4%, after several years of
improvements.
Improved Liquidity Access: Credit Andorra's ratings reflects the
stability of the bank's deposit base that fully funds its loan
book, and liquidity is conservatively managed to mitigate the lack
of a lender of last resort.
Fitch views the establishment of a new, albeit limited, repo line
with the ECB plus the build-up of foreign-exchange reserves as a
positive development, although Fitch does not see this as
equivalent to a fully-fledged lender of last resort.
Fitch does not expect material changes to Credit Andorra's funding
profile as a result of the Vall Banc acquisition. Both banks
benefit from a stable customer deposit base that comfortably funds
their loan books, while liquidity remains sound.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Credit Andorra's ratings could be downgraded on substantial and
prolonged deterioration in the operating environment or in asset
quality than Fitch currently envisages or decreases of the CET1
ratio to below 13% without a credible plan to restore it within a
reasonable period of time. Sustained outflows of assets under
management from a damaged franchise would also lead to negative
pressure on the ratings.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Upside to the ratings in the medium term is limited by the high
concentration on the small Andorran economy. An upgrade would
require a substantially larger scale and a material reduction in
the stock of problem assets.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Credit Andorra's subordinated Tier 2 debt is rated two notches
below the bank's Viability Rating (VR) for loss severity,
reflecting poor recoveries arising from its subordinated status.
The bank's GSR of 'ns' reflect Fitch's view of a low probability of
the bank receiving extraordinary support from the sovereign if
needed. This reflects the current Andorran legislative framework
for resolving banks, which is in line with the EU's Bank Recovery
and Resolution Directive.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Subordinated debt is primarily sensitive to a change in Credit
Andorra's VR. The ratings are also sensitive to a change in
notching should Fitch change its assessment of loss severity or
relative non-performance risk.
An upgrade of the GSR would be contingent on a positive change in
the sovereign's propensity to support Credit Andorra. While not
impossible, this is highly unlikely in Fitch's view considering the
resolution framework.
VR ADJUSTMENTS
The 'bbb' operating environment score is below the 'a' implied
category score due to the following adjustment reason(s): size and
structure (negative) and financial market development (negative).
The 'bbb' business profile score is above the 'bb' implied score
due to the following adjustment reason(s): business model
(positive).
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Prior
---- ------ -----
Credit Andorra SA LT IDR BBB- Affirmed BBB-
ST IDR F3 Affirmed F3
Viability bbb- Affirmed bbb-
Support WD Withdrawn 5
Support Floor WD Withdrawn NF
Government Support ns New Rating
subordinated LT BB Affirmed BB
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I T A L Y
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ANDROMEDA FINANCE: Fitch Affirms 'BB+' Rating on Class A2 Notes
---------------------------------------------------------------
Fitch Ratings has affirmed Andromeda Finance S.r.l.'s class A1
notes' underlying rating at 'BBB' and class A2 notes' rating at
'BB+'. The Outlook is Stable. The class A1 notes' rating benefits
from SACE S.p.A.'s (BBB/Stable) unconditional and irrevocable
guarantee.
KEY RATING DRIVERS
The affirmation reflects the sound operational performance and the
feed-in-premium (FIP) received by the project on top of market
sales under the Italian regulatory framework for solar plants
(Conto Energia), limiting the project's exposure to merchant risk.
The project further benefits from the use of proven technology and
a robust operation and maintenance (O&M) services agreement with
SunPower, the panel manufacturer and an experienced operator of
solar PV plants. The ratings also consider the fairly low
uncertainty of generation due to strong historical production
levels and high availability consistently above 99%.
The project's financial coverage profile, with an annual average
debt service coverage ratio (DSCR) under the Fitch rating case of
1.46x reducing to a minimum 1.23x by 2028 position the rating at
'BB+'.
The class A1 notes' rating benefits from a SACE guarantee and
reflects its rating.
Strong Operator and Established Technology: Operation Risk -
'Stronger'
The mono-crystalline panel technology is well-established and
operating requirements for PV plants are straightforward. SunPower
is the equipment manufacturer and the operator. Renegotiated O&M
contracts are comprehensive, fixed-priced and cover the full life
of debt. Although Fitch regards SunPower as a sub-investment-grade
counterparty, there is a large pool of replacement contractors in
the market. Existing operating cost history shows modest
variability due to some one-off items and costs have been reducing
over time, demonstrating strong cost control.
Strong Production History: Revenue Risk (Volume) - Stronger
The project's operating history for the past 11 years has been
consistent with projections, validating the reliability of the
forecast. The energy production forecast, which was revised in
2015, is supported by several years of operating data showing only
a difference of 6% between P50 and 1YP90 production estimates and
confirming low resource volatility. Andromeda has demonstrated very
high availability of 99.7% on average since 2011 while also
remaining above Fitch's rating case assumption of 98%. The project
is also not overall exposed to revenue losses from grid
curtailment.
Limited Exposure to Merchant Prices: Revenue Risk (Price) -
Midrange
The project has a guaranteed revenue stream through feed-in-premium
(FIP) at EUR318/MWh (approximately 80% total revenue in FY21) under
the Italian regulatory framework for solar plants (Conto Energia)
covering beyond the full debt tenor. In addition, energy production
could be sold at the zonal wholesale (Central-South) energy prices
(20% of total revenue in FY21) through a private power purchase
agreement (PPA).
Senior Debt, Fully Amortising: Debt Structure - Midrange
The transaction is a project-finance structure with some elements
of a securitisation. Project documentation is well-structured and
debt terms are fairly straightforward with two fixed-rate fully
amortising senior tranches ranking pari-passu, no floating
interest-rate risk and no refinancing risk. A debt service reserve
of six months and a lock-up ratio of 1.15x constrain the overall
debt-structure assessment to 'Midrange'.
Financial Profile
Fitch's rating case assumes 1y-P90 production level, increased
expenses, higher degradation of panels, and a conservative market
price assumption, resulting in a DSCR of 1.46x (average) with a
minimum of 1.23x (2028). Metrics improve over the medium term due
to the current soaring energy prices but drop towards the maturity
of the debt with energy prices expected to normalise in the long
term. As per Fitch's Renewable Energy Project Rating Criteria Fitch
compares the Fitch rating case metrics with the DSCR threshold
calculated on the basis of the proportion of the project's
regulated revenue and market sales.
PEER GROUP
Solar Star Funding LLC (BBB-/Positive) is significantly larger than
Andromeda at 579MW. Solar Star has a 'Stronger' assessment for
price risk due to a long-term power purchase agreement with a
strong counterparty. Solar Star has an increasing DSCR profile over
the life of the debt and a 'Stronger' assessment for debt
structure, with a Fitch rating case DSCR that averages 1.47x,
leading to the rating differential with Andromeda.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Class A1 underlying rating and class A2 rating:
- Rating-case DSCR profile consistently below 1.25x
Class A1 rating:
- Downgrade of guarantor SACE
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Class A1 underlying rating and class A2 rating:
- Rating-case DSCR profile consistently above 1.28x
Class A1 rating:
- Upgrade of guarantor SACE
TRANSACTION SUMMARY
The transaction is a securitisation of two project loans
(facilities A1 and A2) under law 130/99 (the Italian securitisation
law). The loan facilities were extended by BNP Paribas and Societe
Generale to Andromeda PV S.r.l. (the project company) to build and
operate two PV plants of 45.1MW and 6.1 MW in Montalto di Castro,
Italy.
The terms of the loans effectively mirror those of the rated notes,
with payments under facility A1 and facility A2 servicing the class
A1 notes and class A2 notes, respectively. The class A1 notes'
rating and Outlook reflect the first-demand, irrevocable and
unconditional guarantee provided by SACE. The guarantee provided by
SACE to the issuer is in respect of the project company's
obligations under facility A1 and not on the class A1 notes
directly.
CREDIT UPDATE
Technical performance over the past year has been below P50 levels
by 2.1% due to the low irradiation recorded especially in 1Q21 but
remained above P90 levels. Historically, Andromeda has demonstrated
very high availability of 99.7% on average since 2011. In 1Q22 (the
latest available figures) availability averaged 99.92%.
In the current context of soaring electricity prices, Fitch notes
the upside available for Andromeda from merchant sales may not be
unlimited as electricity prices would be capped and windfall taxes
would be imposed to limit the pressure on end consumers.
FINANCIAL ANALYSIS
Fitch's base case applies a P50 production forecast, degradation in
line with sponsor assumptions at 0.5% a year, 98% availability, and
Fitch's latest Italian CPI assumptions for inflation inputs. The
base case also uses the market advisor's updated central price
forecast with a 10% stress applied. Fitch does not expect Andromeda
to generate tax losses that could be consolidated by the parent
company (ERG S.p.A.) due to the soaring energy prices.
Consequently, Andromeda would not receive tax-saving compensation.
As a result of soaring energy prices, clawback measures introduced
by the regulator fix a reference price that would be received
instead of the high tariffs on the wholesale market. Fitch assumes
a price cap of EUR57/MWh for Andromeda in FY22 until end June 2023.
This is based on the applicable price cap for the Central-south
area based on historical average zonal electricity prices in Italy.
Windfall taxes of 25% have been considered for the reference period
from 1 October 2021 to 30 April 2022. Nonetheless, as Fitch expects
energy prices to moderate in the longer term, the lower DSCR
towards the end of the forecast continues to weigh on the ratings.
Fitch's rating case applies a 1YP90 production forecast,
degradation in line with sponsor assumptions at 0.5% a year until
2020, then an increased degradation of 0.75% a year, a 20% stress
on Sunpower's O&M costs and a 5% stress on remaining operational
and lifecycle costs. The stress on Sunpower's O&M costs reflects
the significant price reduction (approximately 35%) from the 2019
amendment, and that Sunpower is unrated. That means that if the
operator is replaced, it could be at a significantly higher cost.
The rating case also uses an average of the market advisor's
central and low-price forecasts. In the rating case and base case
we have considered the regulatory price cap and the windfall
taxes.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Andromeda Finance S.r.l.
Andromeda Finance
S.r.l./Debt/2 LT LT BB+ Affirmed BB+
/Debt/1 LT LT BBB Affirmed BBB
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K A Z A K H S T A N
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KAZTRANSOIL: S&P Upgrades LT ICR to 'BB+', Outlook Negative
-----------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit rating on
KazTransOil (KTO) to 'BB+' from 'BB'.
The negative outlook mirrors that on the parent.
On Sept. 27, 2022, S&P upgraded KTO's parent KazMunayGas (KMG) to
'BB+' from 'BB' on the consolidation of its KMG Kashagan B.V.
(Kashagan) stake.
S&P said, "The upgrade of parent KMG has improved our assessment of
the group's creditworthiness and lifted rating constraints for
KTO.We raised the rating on KMG to reflect the realization of its
option to buy back a stake in Kashagan, previously sold to
Sovereign Wealth Fund Samruk-Kazyna JSC, at a lower price than we
assumed, which resulted in lower-than-expected leverage. KMG has
control over KTO and influence on dividends, capex, strategies, and
decision-making. Since the group's creditworthiness has improved to
the 'bb+' level, which is in line with the SACP, we upgraded KTO to
'BB+'.
"We expect KTO to remain debt free, despite a one-off EBITDA drop
this year and realization of material investments, supported by
ample cash balances and dividend flexibility.Following January's
civil unrest in Kazakhstan, the government has announced tariff
reductions and material one-off salary increases at
government-owned companies, including KTO. As a result, we expect
EBITDA to drop to about Kazakhstani tenge (KZT) 65 billion in 2022
($145 million), from KZT107 billion ($245 million) in 2021.
Combined with material capex of KZT66 billion to support
infrastructure modernization and dividend distributions of KZT10
billion in the first half, this should lead to negative
discretionary cash flow (DCF) of about KZT22 billion by year-end
2022. We understand that this outflow will be financed with KTO's
comfortable cash balance, which amounted to KZT50 billion at
year-end 2021. We expect future investments to be comfortably
covered by recovering EBITDA, limiting the need for external
financing. The government has cancelled the domestic tariff
reduction implemented in the first half of the year and approved an
export tariff increase of 20% for the next five years until 2025,
which should offset this year's salary hikes and support EBITDA
recovery to KZT95 billion in 2023. Investments should level off at
KZT40 billion–KZT45 billion, which combined with dividend
flexibility, should lead to at least neutral DCF."
S&P thinks KTO might take on new material investment projects,
which are currently not part of its base case. S&P understands the
company is discussing several large programs that might require new
borrowing, including:
-- Modernization of its water pipeline, owned by a subsidiary, to
increase capacity 55%. This has estimated costs of about KZT112
billion and is scheduled for 2022-2023.
-- Further investments in alternative oil export routes, as per
the president's guidance to reduce Kazakhstan's reliance on the
Caspian Pipeline Consortium (CPC), which exports about 80% of the
country's oil.
S&P said, "We do not include these potential projects in our
current projections due to uncertainties regarding their cost,
timing, and financing. However, we note the company's flexibility
to cut dividends to partially finance them. Still, we believe these
projects could weaken the company's financial profile, and reflect
the potential need for new borrowing in our view of KTO's financial
policy as negative.
"Increasing geopolitical tensions between Russia and Kazakhstan
might limit KTO's access to export infrastructure and weaken cash
generation, although we do not envisage this in our base case.
Since late February, there have been multiple disruptions to CPC
operations, including a Russian court ruling in July to stop
loading for 30 days due to alleged violations of the pipeline's oil
spill plan. This was overturned a few days later and replaced with
a minor fine. Although none of these incidents have led to lengthy
disruptions, we see a risk that Russia might limit Kazakhstan's
access to the rest of its infrastructure, including the
Atyrau-Samara pipeline. This pipeline carries Kazakhstani oil
through Russian territory to the ports of Novorossiysk and
Ust-Luga, as well as the Pavlodar refinery. KTO transferred 12.2
million tons, or 30% of total consolidated oil and petroleum
products transshipped in 2021, through it. We understand KTO can
use alternative routes to transport oil from the Atyrau-Samara
pipeline, although those are limited. Any lengthy disruptions to
the Atyrau-Samara pipeline will affect the company's cash
generation to finance its material capex program, although we do
not envisage such a scenario in our base case.
"The negative outlook mirrors that on KTO's immediate parent, KMG.
We do not think that KTO can be insulated from the risks
attributable to the group, and therefore we do not expect to rate
the subsidiary above the parent.
"We will likely downgrade KTO if we lower the rating on KMG.
"We currently see limited risks for KTO's SACP, given that the
company has no debt on its balance sheet. All else being equal,
KTO's SACP would need to deteriorate to 'b+' from the current 'bb+'
to trigger a downgrade, which is far from our base case. A moderate
increase in debt leverage would therefore not lead to a downgrade.
"A material multiple-notch deterioration of the SACP could lead us
to review our assessment of the likelihood of support for KTO from
the state or parent and lower the rating.
"We would revise the outlook to stable in case of a similar action
on the parent."
Environmental, Social, And Governance
ESG credit indicators: E-3, S-2, G-4
The key environmental risks in the oil transportation industry are
related to oil spills, water and land usage, and any other negative
environmental impact during pipeline construction or maintenance.
KTO complies with the applicable environmental regulations, has
never faced any substantial environmental penalties, and aims to
further improve its efficiency. In 2017, SGC Group certified KTO's
compliance with the ISO 14001 standard.
In terms of governance, S&P considers the government's indirect
ownership of KTO through Samruk-Kazyna and KMG as neutral, although
it caps the rating. The energy sector in Kazakhstan has
historically been subject to political interference via the
tariff-setting process and approval of large investment projects.
This affects the company's operating performance and financial
leverage.
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L U X E M B O U R G
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DANA FINANCING: Fitch Affirms BB+ Rating on Sr. Unsecured Notes
---------------------------------------------------------------
Fitch Ratings has affirmed Dana Incorporated's (Dana) Long-Term
Issuer Default Rating (IDR) at 'BB+'. Fitch has also affirmed
Dana's secured revolver rating at 'BBB-'/'RR1', as well as the
'BB+'/'RR4' ratings on the senior unsecured notes issued by Dana
and its Dana Financing Luxembourg S.a.r.l. (Dana Financing)
subsidiary.
Fitch's ratings apply to a $1.15 billion secured revolver and $2.3
billion of senior unsecured notes.
Fitch has revised the Rating Outlook to Negative from Stable.
The revision of Dana's Outlook to Negative from Stable reflects the
company's underperformance relative to Fitch's expectations over
the past year. Dana's EBITDA margin, FCF margin and leverage
metrics have all been weaker than Fitch expected over this time.
However, this underperformance has been primarily due to volatile
customer production schedules, which, along with inflation, has
sharply reduced Dana's profitability.
Industry operating conditions appear to be improving, and Fitch
expects they will improve further over the next two years. If
Dana's credit profile comes back in-line with its rating
sensitivities in this time, Fitch could revise the outlook back to
Stable. However, if Dana's credit profile does not materially
strengthen, despite a more stable production environment, Fitch
could downgrade the company's ratings.
KEY RATING DRIVERS
Recent Margin Pressure: Dana's ratings are supported by the
company's market position as a top global supplier of driveline
components for light, commercial and off-road vehicles, as well as
sealing and thermal products. However, highly volatile customer
production schedules driven by the semiconductor shortage over the
past year, along with inflationary pressures, have severely
affected the company's margins. Fitch expects Dana's EBITDA margin,
according to Fitch's methodology, to decline to around 7.0% in
2022, down from 8.6% in 2021, and well below the 11.5% level
achieved in both 2018 and 2019.
Dana's FCF has also been affected by the volatile production
schedules, as well as its own supply chain concerns. Rising
inventories drove a significant working capital-related use of cash
in 2021 that led to negative post-dividend FCF of $(292) million
and a -3.3% FCF margin.
Fitch expects a partial unwind of inventories to contribute to a
positive post-dividend FCF margin of about 1.5% in 2022, close to
historical levels, but below Fitch's previous expectations for the
year. Fitch expects Dana's margins and FCF will rise over the next
two years on better operating conditions, but there is no headroom
in the ratings for any further underperformance.
Diversified Product Portfolio: The diversification of Dana's
product portfolio across light, commercial and off-highway vehicles
is a credit strength, limiting its exposure to any single end
market. The company's light vehicle business is primarily weighted
toward full-frame pickups and sport utility vehicles in North
America, and the strength of these sales relative to other light
vehicle classes has supported demand for Dana's products throughout
the pandemic.
Electrification Investments: Dana has positioned itself as one of
the top producers of e-propulsion systems for commercial and
off-highway vehicles. These investments are a credit positive, as
they will help to hedge against technological change that could
lead to lower demand for Dana's traditional products. However, the
current market for electrified commercial and off-highway vehicles
is small, and ongoing investments in these technologies will weigh
on margins over the next several years. The company has noted that
its electric-vehicle business will result in about 30 basis points
of adjusted EBITDA margin compression in 2022.
Weakened FCF: Fitch expects Dana to produce positive post-dividend
FCF in 2022, a significant improvement after FCF turned strongly
negative in 2021. The heavy use of cash in 2021 was driven by cash
used for working capital, as volatile customer production schedules
and supply-chain constraints led the company to carry significantly
higher inventory levels during the year. Although this phenomenon
was seen across virtually all auto suppliers, it was particularly
pronounced at Dana. Based on Fitch's methodology, working capital
was a $447 million use of cash in 2021 and equated to 5.0% of the
company's revenue for the year, which was much higher than what has
been seen under typical operating conditions.
Fitch expects Dana's FCF margin over 2022 and 2023 to be around
1.5%, as the company runs off excess inventory and working capital
returns to more typical levels under normalized operating
conditions. Beyond 2023, Dana's FCF margins could potentially rise
above 2%. However, any significant ongoing FCF weakness could
contribute to a potential future downgrade. Fitch expects capex as
a percentage of revenue to run in the mid-4% range over the next
few years, which would be roughly in line with historical levels.
Higher Leverage: Fitch expects Dana's gross EBITDA leverage to rise
a bit in 2022, to around 3.3x, after declining to 3.1x in 2021. The
decline in 2021 was notably lower than the peak of 4.2x at YE 2020,
when Dana's operations were negatively affected by the pandemic.
The slight rise in 2022 is expected to be primarily due to lower
EBITDA, as the company continues to manage through highly volatile
customer production schedules.
Beyond 2022, Fitch expects EBITDA leverage to decline toward the
mid-2x range, and potentially toward the low-2x range in later
years, but this will be driven entirely by increased EBITDA, as the
company's debt, which is comprised almost entirely of senior
unsecured notes, is likely to remain steady for the next few years.
If EBITDA remains constrained by production issues, keeping EBITDA
leverage above 2.5x for a prolonged period, Fitch could downgrade
Dana's ratings. Fitch expects Dana to repay the $195 million of
revolver borrowings that were outstanding at June 30, 2022 within
the next 12 months. However, if those borrowings are not repaid,
any additional revolver borrowings, particularly to support further
negative working capital, could also contribute to a downgrade.
DERIVATION SUMMARY
Dana has a relatively strong competitive position focusing
primarily on driveline systems for light, commercial and off-road
vehicles. It also manufactures sealing and thermal products for
vehicle powertrains and drivetrains. Dana's driveline business
competes directly with the driveline businesses of American Axle &
Manufacturing Holdings, Inc. and Cummins Inc.'s Meritor unit,
although American Axle focuses on light vehicles, while Meritor
focuses on commercial and off-road vehicles.
From a revenue perspective, Dana is similar in size to American
Axle, although American Axle's driveline business is a little
larger than Dana's light vehicle driveline business. Compared with
Meritor, Dana has roughly twice the annual revenue overall, and
Dana's commercial vehicle and off-highway vehicle segments combined
are a little larger than Meritor's overall business.
Fitch views Dana's midcycle EBITDA leverage as roughly consistent
with other auto and capital goods suppliers in the 'BB' range, such
as Allison Transmission Holdings, Inc. (BB/Positive) or The
Goodyear Tire & Rubber Company (BB-/Stable). Prior to the pandemic,
Dana's EBITDA margins were relatively high for the 'BB' rating
category and in line with issuers in the low-'BBB' range. However,
its margins have more recently been in line other issuers in the
'BB' category.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Global light vehicle production rises about 3% in 2022,
including an 11% increase in North America, with a further recovery
in production seen in subsequent years;
- The global commercial vehicle and off-highway markets generally
recover in the mid- to high-single digit range in 2022, with an
outlook that varies by region and end-market, and further
production recovery is seen in these markets in subsequent years,
as well;
- Capex runs at about 4.0%-4.5% of revenue over the next several
years, which is relatively consistent with historical levels;
- Post-dividend FCF margins generally run in the 1.5%-2.5% range
over the forecast horizon;
- The company maintains a solid liquidity position, including cash
and credit facility availability;
- Any excess cash is used for small acquisitions or share
repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Sustained EBITDA margin above 12%;
- Sustained gross EBITDA leverage below 2.0x;
- Sustained post-dividend FCF margin above 2.0%.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A lack of meaningful improvement in Dana's credit profile once
operating conditions stabilize;
- A shift in industry dynamics that leads to a meaningful loss of
share for Dana's products;
- Sustained gross EBITDA leverage above 2.5x;
- Sustained FCF margin below 1.0%;
- Sustained EBITDA margin below 10%.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: As of June 30, 2022, Dana had $340 million of
cash, cash equivalents and marketable securities. In addition to
its cash on hand, Dana maintains additional liquidity through a
$1.15 billion secured revolver that is guaranteed by the company's
wholly owned U.S. subsidiaries. The revolver is secured by
substantially all of the assets of Dana and its guarantor
subsidiaries and expires in 2026. As of June 30, 2022, there were
$195 million of borrowings outstanding on the revolver and $21
million of the available capacity was used to back LOCs, leaving
$934 million of available capacity.
Based on the seasonality in Dana's business, as of June 30, 2022,
Fitch has treated $100 million of Dana's cash and cash equivalents
as not readily available for the purpose of calculating net
metrics. This is an amount that Fitch estimates Dana would need to
hold to cover seasonal changes in operating cash flow, maintenance
capex and common dividends without resorting to temporary
borrowing.
Debt Structure: As of June 30, 2022, Dana's debt structure
primarily consisted of senior unsecured notes issued by both Dana
and its Dana Financing subsidiary, as well as the borrowings on its
secured revolver.
ISSUER PROFILE
Dana is an automotive and capital goods supplier focused on the
full-frame light truck, off-highway and commercial truck
end-markets. The company is headquartered in the U.S., and has
operations in North America, Europe, South America and the Asia
Pacific region.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Recovery Prior
---- ------ -------- -----
Dana Financing
Luxembourg S.a r.l.
senior unsecured LT BB+ Affirmed RR4 BB+
Dana Incorporated LT IDR BB+ Affirmed BB+
senior unsecured LT BB+ Affirmed RR4 BB+
senior secured LT BBB- Affirmed RR1 BBB-
=====================
N E T H E R L A N D S
=====================
E-MAC PROGRAM 2007-III: S&P Affirms 'CCC' Rating on Class E Notes
-----------------------------------------------------------------
S&P Global Ratings raised its credit ratings on E-MAC Program B.V.
Compartment NL 2007-III's class B, C, and D notes to 'A+ (sf)' from
'A (sf)', 'A- (sf)' from 'BBB (sf)' and 'B (sf)' from 'B- (sf)',
respectively. At the same time, S&P affirmed its 'A+ (sf)' rating
on the class A2 notes and 'CCC (sf)' rating on the class E notes.
E-MAC Program B.V. Compartment NL 2007-III is a Dutch RMBS
transaction that closed in June 2007 and securitizes first-ranking
mortgage loans originated by CMIS Nederland (previously GMAC-RFC
Nederland).
The rating actions reflect S&P's full analysis of the most recent
information it has and the transaction's current structural
features.
S&P said, "The portfolio collateral performance of this transaction
has remained stable and in line with our expectations since our
previous review on Aug. 28, 2019. As of the July 2022 investor
report, just over 2% of the pool are in arrears and the reserve and
liquidity reserve funds are both fully funded. However, the pool
factor (15%) has reduced significantly in recent years and the
transaction may have to rely on liquidity support as it reduces
further, with fixed fees eroding excess spread. This risk is
largely a longer-term issue, because late in the life of the
transaction the pool factor will be extremely low against the high
fees paid by the special-purpose vehicle (SPV). A swap mechanism
that covers fixed fees is a mitigant for this.
"Our credit analysis shows a decrease in the weighted-average
foreclosure frequency (WAFF) and weighted-average loss severity
(WALS) since our previous full review in August 2019. The WAFF has
decreased mainly due to the loan-to-value (LTV) ratio we used,
which now reflects 80% of the original LTV ratio and 20% of the
current LTV ratio, as well as the reduction in arrears. The current
LTV has fallen to 58.18% from 79.50% in our last review. The pool
continues to benefit from strong seasoning (184 months).
"Our WALS assumptions have decreased at all rating levels because
of higher property prices throughout the Netherlands, which
triggered a lower weighted-average current LTV ratio."
Table 1
Credit Analysis Results July 2022
RATING WAFF (%) WALS (%)
AAA 15.76 29.90
AA 11.23 24.03
A 8.80 15.49
BBB 6.63 11.27
BB 4.19 8.56
B 3.65 6.35
WAFF--Weighted-average foreclosure frequency.
WALS--weighted-average loss severity.
S&P said, "The current ratings assigned are lower than those
derived by our cash flow analysis as, if performance triggers are
not breached, this transaction can pay pro rata for extended
periods. Therefore, there is a risk that credit enhancement may not
build up over time for the higher rated notes, as would be the case
in a sequentially paying structure. Conversely, we also considered
that the amortization schedule of this transaction could switch to
sequentially paying if a target amortization event occurs, namely
if delinquent loans of greater than 60 days exceed 1.5% of the
total pool. This would lead to greater credit enhancement for the
upgraded notes. In any case, we have tested the structure as paying
pro rata for life and the results are conducive with our upgraded
ratings.
"We also consider the small pool size and the high proportion of
interest-only (IO) loans. Over 78% of the pool today are IO loans
with a maturity date in 2037. This leaves the transaction
vulnerable to back ended defaults towards the end of the
transaction's lifespan when the pool factor is extremely low. If
pro rata amortization of the notes is still in place, this risk is
magnified."
Credit Suisse International is the swap counterparty. Under S&P's
current counterparty criteria, it assesses the collateral framework
as weak. Based on the combination of the replacement commitment and
the collateral-posting framework, the maximum supported rating in
this transaction is 'A+'.
===============
P O R T U G A L
===============
BANCO COMERCIAL PORTUGUES: Fitch Alters Outlook on 'BB' IDR to Pos.
-------------------------------------------------------------------
Fitch Ratings has revised Banco Comercial Portugues, S.A.'s (BCP)
Outlook to Positive from Stable, while affirming the bank's
Long-Term Issuer Default Rating (IDR) at 'BB' and Viability Rating
at 'bb'.
The Outlook revision reflects significant progress in organically
reducing problem assets since end-2019, despite the challenges the
pandemic posed to the operating environment in Portugal, and its
expectation that this trend will continue in the near future. The
Outlook change also reflects increased clarity around the
provisioning needed to cover legal risks from Bank Millennium
S.A.'s (BB/Stable/bb) Swiss franc-denominated mortgage loans in
Poland. In Fitch’s view, these large legal costs, which will
continue, will not materially derail BCP's capital trajectory due
to its better pre-impairment profitability than similarly rated
peers.
The Outlook revision also takes into consideration Portugal's sound
economic performance in 2022, and the revision to positive for the
outlook on the 'bbb-' operating environment score for Portuguese
banks in July 2022.
Fitch has withdrawn BCP's Support Rating of '5' and Support Rating
Floor of 'No Floor' as they are no longer relevant to the agency's
coverage following the publication of its updated Bank Rating
Criteria on 12 November 2021. In line with the updated criteria,
Fitch has assigned BCP a Government Support Rating (GSR) of 'no
support' (ns).
KEY RATING DRIVERS
BCP's ratings primarily reflect the bank's improving asset quality,
which however remains weaker than higher-rated domestic peers' and
international averages despite significant progress since 2019.
They also reflect its view that the group's improved capitalisation
is still vulnerable to severe asset-quality shocks and to
assumptions around litigation costs at the Polish subsidiary, which
otherwise has strong underlying performance. These rating
weaknesses relative to peers are mitigated by BCP's resilient
pre-impairment profitability, due to a leading franchise in
Portugal and sound cost efficiency.
Continuing Operating Environment Improvements: The Portuguese
banking sector has made significant progress since 2016, improving
its resilience to shocks. Despite the coronavirus crisis, the
banks' balance sheet clean-up continued and capitalisation metrics
have strengthened further. Leading Portuguese banks have all
continued to restructure to improve their profitability, which
historically lagged European peers and proved highly sensitive to
the low interest-rate environment.
Fitch expects Portuguese banks to greatly benefit from a strong
economic recovery and interest-rate increases in 2022 before
entering a tougher environment in 2023, which however should remain
supportive of the banks' performance and risk profiles.
Leading Franchise in Portugal: BCP is the second-largest Portuguese
bank by assets and is among the top three in the domestic market
with shares of about 18% in loans and deposits. The bank's
multi-channel and more diverse business model than some of its
local peers' support recurring fee income.
BCP runs an efficient and lean retail and commercial business model
with some geographic diversification in Poland and Mozambique,
although the Polish operations have recently led to more earnings
volatility.
Improved Asset Quality: BCP's asset quality improved in 2021 and
1H22. The impaired loans ratio decreased to about 4.3% at end-June
2022, owing to active management of legacy impaired loans,
particularly through sales and write-offs. Legacy assets are less
material for BCP than in the past, and its net problem assets
ratio, including foreclosed real-estate assets, continued to
decrease to about 5.2% at end-June 2022 from 7.5% at end-2020. In
spite of improved metrics, BCP's asset quality remains worse than
at higher-rated Portuguese and southern European peers.
Legal Costs Dampen Profitability: BCP's operating profitability
will remain challenged in 2022-2023, notably from material losses
in Poland, due to large provisions on Swiss franc-denominated
mortgage loans (total exposure of about EUR2.4 billion at end-June
2022, equivalent to about half of BCP's common equity Tier 1 (CET1)
capital).
Fitch expects operating profit to recover in 2023 to over 2% of
risk-weighted assets (RWAs) from less than an estimated 1% in 2022,
supported by higher interest rates and a cost/income ratio below
50%.
Modest Capital Buffers: BCP's capital buffers remain at the low end
of mid-sized southern European peers' and are still vulnerable to
severe asset-quality shocks due to its sizeable unreserved problem
assets (net Stage 3 loans, foreclosed real-estate assets and
restructuring funds).
Fitch estimates exposure to unreserved problem assets at about 40%
of fully-loaded CET1 capital at end-June 2022, which is materially
above higher-rated domestic and international peers'. The phased-in
CET1 and total capital ratios were 11.8% and 15.9% at end-June 2022
(pro-forma for the respective 50bp and 60bp benefits expected from
the application of CRR article 352 on its structural
foreign-exchange position).
Stable Funding, Adequate Liquidity: BCP's funding structure has
been generally stable and its liquidity position has benefited from
substantial loan deleveraging pre-pandemic, resulting in an
adequate loans/deposits ratio well below 100%. BCP's liquidity
profile and access to wholesale funding are adequate but more
sensitive to investor confidence than higher-rated Portuguese
peers'. Its funding and liquidity have benefited from material
targeted long-term refinancing operations (TLTRO) drawings in 2020
and in 2021 and Fitch expects a gradual normalisation from 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Fitch would likely revise the Outlook to Stable or downgrade BCP's
ratings on an unexpected and material drop in BCP's CET1 ratio to
around 10.5%-11% without credible plans to restore it above 12%.
This could come from larger-than-expected legal costs from Bank
Millennium's legacy Swiss franc-denominated mortgage loans or if
the bank is unable to absorb the cost of support package measures
in Poland, resulting in a material erosion of the group's capital
position beyond our baseline expectation of such costs mainly
resulting in earnings pressure.
A sustained breach of capital buffers at Bank Millennium in Poland
would, without credible prospects to restore them over the medium
term, also have negative rating implications for BCP.
A substantial and sustained deterioration in asset quality and
profitability, for instance, from a sharp weakening of the
Portuguese operating environment would also be negative for BCP's
ratings. Fitch would downgrade the bank if this weakening leads to
an increase of the impaired loans ratio to above 8% and an
operating profit/RWAs to below 0.5% with no credible plan to
materially improve these ratios.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of BCP's ratings would be contingent on the Portuguese
operating environment remaining supportive of further improvement
in the bank's financial profile, in particular its asset quality
and capital ratios. This could materialise with the impaired loans
ratio moving closer towards 4% as well as further reductions in its
exposure to foreclosed real-estate assets and restructuring funds.
Stronger capital ratios, with a CET1 ratio firmly above 12.5% and a
higher total capital ratio, would be positive for ratings as this
would further increase BCP's headroom relative to regulatory
requirements. Improved visibility on final legal costs from Bank
Millennium's legacy Swiss franc-denominated mortgage loans would
also be required for an upgrade, provided these can be absorbed
through earnings without leading to instability for BCP.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEPOSIT RATINGS
BCP's long-term deposit rating of 'BB+' is one notch above its
Long-Term IDR, reflecting Fitch's view that depositors would be
protected by the bank's senior preferred instruments, junior debt
and equity buffers in a resolution. This is because Fitch expects
BCP to comply with its minimum requirement for own funds and
eligible liabilities (MREL) with more junior instruments. Full
depositor preference in Portugal also supports its view.
SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT
Fitch rates BCP's senior preferred debt in line with the bank's
IDRs because it expects that the bank will meet its MREL with a
combination of senior preferred and more junior instruments. In
addition, Fitch does not expect the buffer of hybrid, subordinated
and senior non-preferred instruments to exceed 10% of RWAs of the
resolution group headed by BCP. For the same reasons, BCP's senior
non-preferred notes are rated 'BB-' or one notch below the bank's
Long-Term IDR as Fitch sees a heightened risk of below-average
recoveries for this debt class in a resolution.
SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT
Fitch ratings of subordinated debt and additional Tier 1 (AT1)
instruments are all notched down from BCP's VR in accordance with
Fitch's assessment of each instrument's non-performance and
relative loss severity risk profiles. Fitch rates BCP's Tier 2
securities two notches below the VR. The notching reflects the
expected loss severity and poor recovery prospects for those
instruments, given their subordination status.
BCP's AT1 instruments with fully discretionary coupons are rated
four notches below the group's VR. The issues are notched down
twice for loss severity and twice for non-performance risk. The
notching of AT1 notes reflects its expectations that BCP will
maintain moderate capital buffers above regulatory requirements.
BCP had buffers of about 220bp above its total capital requirement
and about 260bp above the CET1 requirement at end-June 2022
(pro-forma for the application of article 352 (2) of CRR concerning
capital requirements for structural foreign-exchange hedging
positions), representing a buffer of about EUR1 billion above
mandatory coupon restriction points.
BCP's 'ns' GSR reflects its view that although external
extraordinary sovereign support is possible it cannot be relied
upon. Senior creditors can no longer expect to receive full
extraordinary support from the government in the event that the
bank becomes non-viable.
The EU's Bank Recovery and Resolution Directive and the Single
Resolution Mechanism for eurozone banks provide a framework for
resolving banks that requires senior creditors participating in
losses, if necessary, instead of or ahead of a bank receiving
sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
BCP's senior preferred, senior non-preferred debt and deposit
ratings are primarily sensitive to changes in BCP's IDRs and will
move in tandem with the latter. In addition, the senior
non-preferred and senior preferred debt ratings could be upgraded
if Fitch expects that BCP will either meet its MREL without
recourse to senior preferred debt or if the buffer of AT1, Tier 2
and senior non-preferred debt will sustainably exceed 10% of the
Portuguese resolution group's RWAs.
BCP's deposit ratings could also be downgraded if Fitch expects the
bank to fail to comply with its MREL requirement, without the use
of eligible deposits.
The ratings on BCP's Tier 2 and AT1 notes are primarily sensitive
to BCP's VR. However, the rating of BCP's AT1 instruments would
likely be downgraded only if the VR is downgraded by more than one
notch given the possibility to apply tighter notching to those
instruments for banks that are rated 'bb-' or below under its
criteria.
Fitch could also downgrade the AT1 instrument's rating if Fitch no
longer expect BCP to maintain moderate buffers above its capital
requirements (typically at least 100bp) or if available
distributable items decline to only modest levels leading to
expectations of higher non-performance risk for these instruments.
GSR
An upgrade of the GSR would be contingent on a positive change in
the sovereign's propensity to support the bank. In Fitch's view,
this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The funding & liquidity score of 'bb+' is below the 'bbb' category
implied score, due to the following adjustment reason: non-deposit
funding (negative).
ESG CONSIDERATIONS
Unless stated otherwise 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 to the way in which they are being
managed by the entity.
Debt Rating Prior
---- ------ -----
Banco Comercial Portugues,
S.A. LT IDR BB Affirmed BB
ST IDR B Affirmed B
Viability bb Affirmed bb
Support WD Withdrawn 5
Support Floor WD Withdrawn NF
Gov't. Support ns New Rating
subordinated LT B+ Affirmed B+
junior subordinated LT B- Affirmed B-
Senior preferred LT BB Affirmed BB
long-term deposits LT BB+ Affirmed BB+
Senior non-preferred LT BB- Affirmed BB-
short-term deposits ST B Affirmed B
Senior preferred ST B Affirmed B
CAIXA GERAL: Fitch Affirms 'BB' Rating on Subordinated Debt
-----------------------------------------------------------
Fitch Ratings has affirmed Caixa Geral de Depositos, S.A.'s (CGD)
Long-Term Issuer Default Rating (IDR) at 'BBB-' and Viability
Rating (VR) at 'bbb-'. The Outlook on the Long-Term IDR is Stable.
KEY RATING DRIVERS
CGD's ratings reflect a leading franchise in retail and commercial
banking in Portugal, resilient operating profitability and capital
metrics with ample buffers above regulatory requirements. They also
incorporate our expectation that CGD's capital ratios will remain
materially above those of other Portuguese and most mid-sized
southern European banks.
The ratings also factor in improving - but above European average -
problem assets and stable funding that builds on CGD's leading
retail-deposit franchise in Portugal.
Continuing Operating Environment Improvements: The Portuguese
banking sector has made significant and continued progress since
2016, improving its resilience to shocks. Despite the coronavirus
crisis, the banks' balance sheet clean-up continued and
capitalisation metrics strengthened further. Leading Portuguese
banks have all continued to restructure to improve their
profitability, which historically lagged European peers' and proved
highly sensitive to the low interest-rate environment.
Fitch expects Portuguese banks to greatly benefit from a strong
economic recovery and interest-rate increases in 2022 before
entering a tougher environment in 2023, which however should remain
supportive of the banks' performance and risk profiles.
Leading Bank in Portugal: CGD is the largest bank in Portugal and
is under full and willing state ownership. CGD had domestic market
shares of about 18% for loans and 24% for deposits at end-May 2022
and is particularly strong with households. This provides the bank
with some pricing power in the highly competitive Portuguese
banking sector, where pricing is tight for lower-risk customers.
Tighter Risk Appetite: The bank's tightened underwriting standards
and improved risk controls are closer to global industry practices.
Similar to some Portuguese peers, CGD has a heightened exposure to
market risks due to its holdings of equities and restructuring and
real-estate funds. Its large defined-benefit pension fund also
exposes CGD to changes in market factors, including interest rates
or wage inflation.
Improved Asset Quality: CGD has successfully improved its asset
quality above the targets outlined in its restructuring plan agreed
with the European authorities in 2017. CGD has further reduced its
stock of impaired loans since end-2019, despite the coronavirus
crisis. It reduced its impaired loans ratio (IFRS9 stage 3) to
about 3.7% at end-June 2022 from 5.4% at end-2019.
Legacy assets are less material for CGD than in the past, and its
net problem assets ratio is now close to its Stage 3 loans ratio
(about 60bp difference as estimated by Fitch). Loan loss allowance
coverage is kept at very high levels and more than covered all
impaired loans at end-June 2022. Its impaired loans coverage is
well above most European banks' and provides a material buffer in
the event of an asset-quality downturn.
Fitch expects CGD's impaired loans ratio to remain close to 4% by
end-2023. CGD's large exposure to loans previously under moratorium
has performed better than anticipated. Fitch expects new impaired
loans resulting from expired moratoria to remain moderate.
Resilient Profitability: CGD's profitability is resilient and
adequate with operating profit at about 2.1% of risk-weighted
assets (RWAs) in 2021, due to good cost control and low loan
impairment charges (LICs), and in spite of tight interest margins.
Operating profit managed to exceed 3.5% of RWAs in 1H22
(annualised), better than most peers', on the back of strong
net-interest income and fee income growth and a large reversal of
provisions booked on Stage 2 and Stage 3 credits that were cured,
recovered or prepaid in 1H22.
Similar to domestic peers', CGD's profitability remains highly
dependent on interest rate levels and is therefore set to benefit
from the ECB's sharp interest-rate rises in the short term.
However, Fitch expects CGD's operating profit/RWAs to gradually
normalise slightly above 2% in 2H22-2023, as Fitch does not expect
reversals of net provisions to repeat.
Adequate and Resilient Capitalisation: CGD continued to increase
its capital buffers as its fully loaded common equity Tier 1 (CET1)
and total capital ratios reached a high 18.5% and 20%,
respectively, at end-June 2022.
Fitch expects the bank's capital ratios will remain resilient, due
to good internal capital generation and a marked reduction in
problem assets. Capital encumbrance from unreserved problem assets
(net of stage 3 loans, holdings of foreclosed real estate,
investment properties and restructuring funds) was about 8% of
fully-loaded CET1 capital at end-June 2022. This compares well with
most domestic and southern European peers', reducing CGD's
vulnerability to severe asset-quality shocks.
Stable Deposit-Driven Funding: CGD's funding is supported by the
bank's stable and leading retail deposits franchise in Portugal.
The loans/deposits ratio decreased to consistently below 70%, due
to deposit growth following lower consumption during lockdowns.
Fitch views the bank's liquidity as comfortable, yet sensitive to
investor confidence. The bank's liquidity profile is supported by
the use of ECB funding. However, CGD has a large liquidity buffer
relative to its limited wholesale debt and central-bank refinancing
maturities.
CGD's utilisation of wholesale debt markets for funding is limited
but the bank has gained better access to unsecured wholesale-market
funding than for most Portuguese banks in recent years, including
for compliance with the minimum requirement for own funds and
eligible liabilities (MREL).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
CGD's ratings could be downgraded if the Portuguese operating
environment experiences unexpected severe and prolonged
deterioration that are likely to translate into weaker financial
metrics for CGD. In particular, Fitch would likely downgrade CGD's
Long-Term IDR and VR on substantial and prolonged deterioration in
asset quality and profitability. For instance, an impaired loans
ratio above 6% and an operating profit/RWAs durably below 1% could
lead to a downgrade.
An unexpected and material decline in CGD's capitalisation could
also lead to negative rating action, notably if the CET1 ratio
drops to 13% or lower for an extended period of time.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade will require both a higher operating-environment score
for Portuguese banks, currently scored 'bbb-' with a positive
outlook, and a material improvement of CGD's financial profile.
This is likely to only materialise if the impact of the European
energy crisis and more restrictive monetary policy remains short
lived and contained in Portugal in 2023-2024.
In particular, Fitch would need to see further asset-quality
improvements, a risk profile more in line with higher rated peers',
and the bank maintaining its resilient profitability. This could be
reflected for instance in an impaired loans ratio of around 2.5%-3%
and an operating profit/RWAs that is consistently above 1.5%, and
with the CET1 ratio remaining materially above 14%.
Increased business diversification towards recurring non-interest
income would also be positive for CGD's ratings, if that translates
into an improved financial profile.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEPOSIT RATINGS
CGD's long-term deposits are rated 'BBB' or one notch above the
Long-Term IDR to reflect Fitch's view that depositors would be
protected by buffers of senior preferred and junior debt and equity
buffers in a resolution, due to full depositor preference in
Portugal and because Fitch expects that CGD will meet its MREL
without using eligible deposits. The long-term deposit rating maps
to a short-term deposit rating of 'F3' under Fitch's Bank Rating
Criteria.
SENIOR PREFERRED AND SENIOR NON-PREFERRED DEBT
CGD's senior preferred debt is rated 'BBB-', in line with the
bank's IDRs because Fitch expects that the bank will meet its MREL
with a combination of senior preferred and junior instruments. In
addition, Fitch does not expect the buffer of hybrid, subordinated
and senior non-preferred instruments to exceed 10% of RWAs of the
resolution group headed by the Portuguese parent company.
For the same reasons, CGD's senior non-preferred notes are rated
'BB+' or one notch below the bank's Long-Term IDR as Fitch sees a
heightened risk of below-average recoveries for this debt class in
a resolution.
SUBORDINATED DEBT
Fitch rates CGD's Tier 2 debt 'BB' or two notches below the VR in
line with the baseline notching for subordinated Tier 2 debt as per
its Bank Rating Criteria. The notching reflects the expected loss
severity and poor recovery prospects for those instruments.
GOVERNMENT SUPPORT RATING (GSR)
CGD's GSR of 'b' reflects Fitch's view of a limited probability of
extraordinary support being provided to CGD by the Portuguese
state, under the provisions and limitation of the Bank Recovery and
Resolution Directive and the Single Resolution Mechanism, without
bail-in of senior creditors. Its view of potential support
available to the bank is based on full and willing state ownership
and CGD's market- leading position in the Portuguese market.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
- CGD's deposits, senior preferred and senior non-preferred debt
ratings are primarily sensitive to CGD's IDRs, which are
currently driven by the VR. Subordinated debt ratings are
primarily sensitive to CGD's VR
- In addition, Fitch could also downgrade CGD's deposit ratings
if it expects that the bank will have difficulties to comply
with its MREL requirement without using eligible deposits
- The senior preferred and senior non-preferred debt ratings
could be upgraded if Fitch expects CGD to comply with its
total MREL requirement solely through the use of senior
non-preferred or more junior instruments, or if the group
explicitly targets a capital and funding structure, where
the buffer of senior non-preferred and subordinated
instruments would sustainably exceed 10% of RWAs of the
resolution group.
An upgrade of the GSR would be contingent on a positive change in
the sovereign's propensity to support the bank. In Fitch's view,
this is highly unlikely, although not impossible.
CGD's GSR would be downgraded if Fitch concludes that the
sovereign's propensity to support CGD has reduced, or if there are
plans to privatise the bank, which Fitch does not expect.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Caixa - Banco de Investimento S.A.'s (Caixa-BI) IDRs are equalised
with those of its parent CGD. The IDRs are driven by potential
support from CGD as reflected in its Shareholder Support Rating
(SSR) of 'bbb-', underlining full ownership, integration within its
parent and its role in the group as the specialised arm offering
investment-banking products to CGD's customer base.
Fitch does not assign a VR to this subsidiary as the agency does
not view it as an independent entity that can be analysed
meaningfully in its own right.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Caixa-BI's ratings are primarily sensitive to CGD's IDRs. In
addition, the ratings are sensitive to a change in CGD's propensity
to support its subsidiary, which is currently not expected.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Caixa - Banco de
Investimento S.A. LT IDR BBB- Affirmed BBB-
ST IDR F3 Affirmed F3
Shareholder
Support bbb- Affirmed bbb-
Caixa Geral de Depositos,
S.A. LT IDR BBB- Affirmed BBB-
ST IDR F3 Affirmed F3
Viability bbb- Affirmed bbb-
Gov't. Support b Affirmed b
subordinated LT BB Affirmed BB
long-term deposits LT BBB Affirmed BBB
Senior preferred LT BBB- Affirmed BBB-
Senior non-preferred LT BB+ Affirmed BB+
short-term deposits ST F3 Affirmed F3
Senior preferred ST F3 Affirmed F3
=========
S P A I N
=========
AUTONORIA SPAIN 2022: Fitch Assigns 'BB-sf' Rating on Class F Notes
-------------------------------------------------------------------
Fitch Ratings has assigned AutoNoria Spain 2022, FT final ratings.
The final ratings for classes D and E are one notch above the
assigned expected ratings. The class F notes' rating is two notches
above its expected rating. This is due to the final note margins
being materially lower than the indicative levels provided to Fitch
prior to the assignment of expected ratings.
Debt Rating Prior
---- ------ -----
AutoNoria Spain 2022, FT
Class A ES0305652002 LT AAAsf New Rating AAA(EXP)sf
Class B ES0305652010 LT AA+sf New Rating AA+(EXP)sf
Class C ES0305652028 LT A+sf New Rating A+(EXP)sf
Class D ES0305652036 LT Asf New Rating A-(EXP)sf
Class E ES0305652044 LT BB+sf New Rating BB(EXP)sf
Class F ES0305652051 LT BB-sf New Rating B(EXP)sf
Class G ES0305652069 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
AutoNoria Spain 2022, FT is a revolving securitisation of a
portfolio of fully amortising auto loans originated in Spain by
Banco Cetelem S.A.U. (Cetelem, the seller and originator, unrated).
Cetelem is a specialist lender fully owned by BNP Paribas S.A.
(A+/Stable/F1).
KEY RATING DRIVERS
Asset Assumptions Reflect Mixed Portfolio: The portfolio includes
loans for the acquisition of cars (new and used), motorcycles and
recreational vehicles. Fitch calibrated asset assumptions for each
product separately, reflecting different performance expectations
and product features. Fitch has assumed base-case lifetime default
and recovery rates of 3.5% and 20.4%, respectively, for the blended
stressed portfolio given Cetelem's historical data, Spain's
economic outlook and the originator's underwriting and servicing
strategies.
Sensitivity to Pro-Rata Period: The class A to G notes will
amortise pro rata if certain principal deficiency ledger and
default-based performance triggers are not breached. The length of
the pro-rata period and therefore outflow of funds to junior
positions on the waterfall is driven by the absolute level and
timing of defaults. Lower defaults with back-loaded timing may lead
to a later switch to sequential note amortisation and could be more
detrimental for the notes than higher defaults with a front-loaded
timing.
Short Revolving Period Limits Risk: The transaction has a six-month
revolving period. Fitch believes revolving periods increase risk,
due to longer exposure to the economic cycle, the possibility of
underwriting standards loosening and potential pool migration
towards riskier asset types. Fitch considered these risks when
setting the 'AAA' default multiple of about 5.2x, and determining
stressed pool composition assumptions. However, the short length of
the revolving period and tight replenishment criteria limit the
potential for adverse migration.
Servicing Disruption Risk Mitigated: Fitch views the cash reserve
as adequate to mitigate payment interruption risk in a scenario of
servicer disruption. It is available to cover senior costs and
class A to F interest for over three months, which Fitch views as
sufficient to implement an alternative arrangement.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Rating sensitivity to increased defaults
Increase base case by 10% / 25% / 50%:
Class A: 'AA+sf' / 'AA+sf' / 'AA-sf'
Class B: 'AAsf' / 'AA-sf' / 'A+sf'
Class C: 'A+sf' / 'Asf' / 'BBB+sf'
Class D: 'Asf' / 'BBB+sf' / 'BBBsf'
Class E: 'BB+sf' / 'BBsf' / 'B+sf'
Class F: 'BB-sf' / 'B+sf' / 'B-sf'
Rating sensitivity to reduced recoveries
Reduce base case by 10% / 25% / 50%:
Class A: 'AAAsf' / 'AAAsf' / 'AA+sf'
Class B: 'AA+sf' / 'AA+sf' / 'AA+sf'
Class C: 'A+sf' / 'A+sf' / 'A+sf'
Class D: 'Asf' / 'A-sf' / 'A-sf'
Class E: 'BB+sf' / 'BB+sf' / 'BBsf'
Class F: 'BB-sf' / 'BB-sf' / 'B+sf'
Rating sensitivity to increased defaults and reduced recoveries
Increase defaults and reduce recoveries by 10% / 25% / 50% each:
Class A: 'AA+sf' / 'AA+sf' / 'A+sf'
Class B: 'AAsf' / 'AA-sf' / 'Asf'
Class C: 'A+sf' / 'Asf' / 'BBB+sf'
Class D: 'A-sf' / 'BBB+sf' / 'BBB-sf'
Class E: 'BBsf' / 'BB-sf' / 'Bsf'
Class F: 'B+sf' / 'Bsf' / 'NRsf'
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Rating sensitivity to reduced defaults and increased recoveries
Reduce defaults and increase recoveries by 10% each:
Class A: 'AAAsf'
Class B: 'AA+sf'
Class C: 'AA-sf'
Class D: 'A+sf'
Class E: 'BBB-sf'
Class F: 'BBsf'
DATA ADEQUACY
Fitch reviewed the results of a third-party assessment conducted on
the asset portfolio information, and concluded that there were no
findings that affected the rating analysis.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
===========
T U R K E Y
===========
ALTERNATIFBANK AS: Fitch Affirms B-/B LongTerm IDRs, Outlook Neg.
-----------------------------------------------------------------
Fitch Ratings has affirmed Alternatifbank A.S.'s Long-Term
Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B-' and
Long-Term Local Currency (LTLC) IDR at 'B'. The Outlooks are
Negative. The agency has also affirmed the bank's Viability Rating
(VR) at 'b-' and National Rating at 'AA(tur)' with a Stable
Outlook.
Fitch also affirmed the Long-Term IDRs of Alternatif Finansal
Kiralama A.S. (Alternatif Leasing) with Negative Outlooks.
KEY RATING DRIVERS
Alternatifbank's IDR is underpinned by its Shareholder Support
Rating (SSR) and VR. Fitch's view of government intervention risk
caps the LTFC IDR and SSR at one notch below Turkiye's rating,
reflecting its view that the likelihood of government intervention
that would impede banks from servicing their FC obligations is
higher than that of a sovereign default. The LTLC IDR reflects the
lower likelihood of government intervention in LC. The Negative
Outlooks mirror those on the sovereign, and for the LTFC IDR,
operating environment pressures.
The bank's 'b-' VR reflects its weak core capitalisation,
notwithstanding ordinary capital support from The Commercial Bank
(P.S.Q.C.) (CBQ; A-/Stable), limited franchise, below
sector-average profitability and high FC wholesale funding but also
adequate asset-quality and FX liquidity.
The National Rating reflects potential support from CBQ. It is in
line with foreign-owned peers.
Shareholder Support: The bank's SSR reflects support from CBQ
considering reputational risks, but also strategic importance,
integration and role within the group.
Operating Environment Pressures: Alternatifbank's operations are
concentrated in the volatile Turkish market, which is characterised
by increased macroeconomic and external risks amid policy
uncertainty, spiralling inflation, external financing weaknesses
due to a widening current account deficit, and weak international
reserves. Multiple new macroprudential regulations imposed on banks
aimed at promoting the government's policy agenda in the absence of
monetary policy further add to the risks and challenges of
operating in Turkiye.
Weak Core Capitalisation: The common equity Tier 1 (CET1) ratio was
a low 8.1% (including forbearance) at end-1H22. Fitch’s view of
capitalisation factors in ordinary support from CBQ, underpinning
compliance with regulatory minimums. The total capital ratio (18.5%
at end-1H22) is supported by additional Tier 1 capital (AT1),
providing a partial hedge against lira depreciation. CBQ has
provided regular capital support to the bank since 2018 (including
CET1 and AT1).
High Wholesale Funding, Adequate FX Liquidity: Customer deposits
comprised 58% of total funding at end-1H22 (54% in FC). The bank's
fairly high loans/deposits ratio (114%) reflects reliance on
wholesale funding (42% of total funding or 36% net of CBQ funding).
FC liquidity covered FC borrowings due within one year and about a
quarter of FC deposits (August 2022) but included high FX swaps
with the Central Bank of Turkey. It could also come under pressure
from prolonged market closure or sector-wide deposit instability,
if not offset by shareholder support.
Adequate Asset-Quality: The non-performing loans (NPLs) ratio
remained stable at 2.8% at end-1H22. Stage 2 loans were a fairly
high 11% of total loans (49% restructured). Credit risks are
heightened due to concentrations (top 25 cash loans comprised 42%
of total loans (4.5x of CET1)) and exposure to the construction
(14%) and energy (8%) sectors. FC lending remains high (42%;
sector: 38%) despite deleveraging, inflated by the lira
depreciation. Total NPL reserves coverage declined to 129% (sector:
183%), including specific Stage 3 coverage of 76%.
Loan Growth: Loans grew by 23% (FX-adjusted basis) in 1H22 (sector:
17%), following below sector-average growth (2019-2021) and FC
deleveraging. Further growth is likely to be conditioned by
operating environment and capital constraints.
Below Sector-Average Profitability: Operating profit/ risk-weighted
assets improved to 2.1% in 1H22 (sector-average; 5.9%), driven
mainly by lira margin expansion and CPI linkers income. Fitch
expects performance to weaken amid lower growth and tighter
margins; it remains sensitive to asset-quality risks and macro and
regulatory developments.
Limited Franchise: Alternatifbank has a limited domestic franchise
(market share below 1%). Lending is concentrated in the corporate
(end-1H22: 61%) and commercial (38%) segments.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of Turkiye's sovereign rating or an increase in its
view of government intervention risk would lead to a downgrade of
Alternatifbank's SSR, leading to negative rating action on its
Long-Term IDRs. Alternatifbank's SSR is also sensitive to Fitch's
view of the bank's shareholder's ability and propensity to provide
support.
The bank's VR could be downgraded due to further erosion of its
core capitalisation, for example due to asset-quality weakening, if
not offset by ordinary support from CBQ. The VR is also sensitive
to a marked deterioration in the operating environment. A weakening
in the bank's FC liquidity due to sector-wide deposit instability
or an inability to refinance maturing external obligations, could
also result in a downgrade if not offset by shareholder support.
The VR is also potentially sensitive to a sovereign downgrade.
The National Rating is sensitive to changes in the bank's LTLC IDR
and its creditworthiness relative to other Turkish issuers with a
'B' LTLC IDR.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of the bank's IDRs is unlikely given the Negative
Outlooks, the Negative Outlook on Turkiye and its view of
government intervention risk in the banking sector.
A VR upgrade is unlikely given heightened operating environment
pressures and risks to its credit profile.
The National Rating is sensitive to changes in Alternatifbank's
LTLC IDR and also to its relative creditworthiness in LC relative
to other Turkish issuers with a 'B' LTLC IDR.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Alternatif Leasing's ratings are equalised with those of the
parent, reflecting Fitch's view that it is a core and highly
integrated subsidiary and the sole provider of leasing products
within the group. Its view of support also considers Alternatif
Leasing's full ownership and shared branding with its parent and
also evidence of ordinary support from the parent. The Negative
Outlooks mirror those on its parent bank.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
The ratings are sensitive to adverse changes in Alternatifbank's
ratings, and in Fitch's view of the willingness of the parent to
provide support in case of need. An upgrade of Alternatifbank would
likely lead to similar action on the subsidiary's ratings.
VR ADJUSTMENTS
The operating environment score for Turkish banks is lower than the
category implied score of 'bb' due to the following adjustment
reasons: Sovereign Rating (negative) and Macroeconomic Stability
(negative). The latter adjustment reflects heightened market
volatility, high dollarisation and high risk of FX movements in
Turkey.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Alternatifbank's ratings are linked to the Turkish sovereign rating
as they are sensitive to its assessment of country risks.
Alternatifbank's ratings are also linked to that of its parent.
Alternatif Leasing's ratings are linked to Alternatifbank's.
ESG CONSIDERATIONS
Alternatif's and Alternatif Leasing's ESG Relevance scores for
Management Strategy have been changed to '4' from '3' reflecting
increased regulatory intervention in the Turkish banking sector,
which hinders the operational execution of management strategy,
constrains management ability to determine strategy and price risk
and creates an additional operational burden for the entities. This
has a moderately negative credit impact on the entities' ratings in
combination 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
---- ------ -----
Alternatif Finansal
Kiralama A.S. LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur) Affirmed AA(tur)
Shareholder Support b- Affirmed b-
Alternatifbank A.S.
LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur) Affirmed AA(tur)
Viability b- Affirmed b-
Shareholder Support b- Affirmed b
BURGAN BANK: Fitch Affirms 'B-/B' LongTerm IDRs, Outlook Negative
-----------------------------------------------------------------
Fitch Ratings has affirmed Burgan Bank A.S.' (BBT) Long-Term
Foreign- (LTFC) and Local-Currency (LTLC) Issuer Default Ratings
(IDR) at 'B-' and 'B', respectively. The Outlooks remain Negative.
The agency has also affirmed the bank's Viability Rating (VR) at
'b-'.
KEY RATING DRIVERS
BBT's LTFC IDR is underpinned by its standalone creditworthiness,
as captured by its VR, and by support from Burgan Bank K.P.S.C.
(BBK; A/Stable), as reflected in its 'b-' Shareholder Support
Rating (SSR).
BBT's LTFC IDR and SSR are capped at one notch below Turkiye's
rating, reflecting its view of a higher likelihood of government
intervention that would prevent banks from servicing their FC
obligations than that of a sovereign default. BBT's LTLC IDR, one
notch above its LTFC IDR, reflects its view of a lower likelihood
of government intervention in LC. The Negative Outlooks on the IDRs
mirror those on the sovereign.
BBT's VR reflects its weak core capitalisation despite ordinary
support, limited franchise, below sector-average profitability,
asset-quality risks but also adequate FC liquidity coverage.
The National Rating reflects potential support from BBK and is in
line with foreign-owned peers' in Turkiye.
Operating Environment Pressures: BBT's operations are concentrated
in the volatile Turkish market characterised by increased
macroeconomic and external risks amid policy uncertainty,
spiralling inflation, external financing weaknesses due to a
widening current account deficit, and weak international reserves.
Multiple new macro-prudential regulations imposed on banks aimed at
promoting the government's policy agenda in the absence of monetary
policy further add to the risks and challenges of operating in
Turkiye.
Small Domestic Franchise: BBT has a small market share (0.5% of
sector assets). Lending is concentrated in the commercial (62%) and
corporate (37%) segments. The bank's strategy is to diversify its
deposit base and expand its product offering through digital
banking.
Concentration Risks: Credit risks are heightened by macro-economic
uncertainty, above-sector-average FC lending (49% at end-1H22;
end-2020: 59%) including long-term project-finance loans (20%) and
sectoral concentration risk. Single-name risk is significant with
the 25-largest cash exposures equal to an exceptionally high 51% of
gross loans (4.3x equity) at end-1H22, including several watchlist
loans and a big-ticket non-performing loan (NPL).
Below Sector Asset-Quality Metrics: NPLs (6.9% of total loans;
sector: 2.5%) are 129% covered by total loan loss reserves, with
average reserves coverage of Stage 2 equal to 21%. Stage 2 loans,
largely legacy exposures in FC and restructured, were 21.2% of
total loans.
Boost to Profitability: BBT's operating profit/risk-weighted assets
of 3.9% in 1H22 was boosted by wider spreads and loan growth amid
high inflation, following muted performance due to higher loan
impairments and thin net interest margins in recent years.
Profitability is sensitive to macro-economic and regulatory
developments given their potential impact on margins, asset quality
and growth.
Ordinary Support Underpins Capitalisation: BBT's common equity Tier
1 (CET1) ratio rose to a still weak 9.3% at end-1H22 (including an
84bp forbearance uplift) following a capital injection from its
parent. Risks to capital are high given sensitivity to lira
depreciation (due to the inflation of FC risk-weighted assets) and
asset-quality and concentration risks. Pre-impairment profit was 4%
of average gross loans in 1H22, providing an adequate internal
capital generation buffer.
High FC Funding: Customer deposits comprise 70% of BBT's funding
base, of which 58% were in FC at end-1H22. Wholesale funding
comprises 30% of total funding, or 9% net of BBT's funding.
Availability of parent funding mitigates refinancing risks, while
FC liquidity (mainly swaps, foreign bank placements and cash) fully
covers wholesale funding due in one year and 14% of FC deposits.
However, FC liquidity could come under pressure from prolonged
market closure or deposit instability.
Shareholder Support: Fitch’s view of BBK's propensity to provide
support reflects its ownership of BBT, BBT's integration with the
BBK group and reputational risk given the banks' shared branding.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of Turkiye's sovereign rating or an increase in
government intervention risk would lead to a downgrade of BBT's
SSR, and consequently, its Long-Term IDR. The bank's SSR is also
sensitive to an adverse change in Fitch's view of its shareholders'
ability and propensity to provide support.
BBT's VR is potentially sensitive to a sovereign downgrade. The VR
could also be downgraded due to further marked deterioration in the
operating environment, in case of a material erosion in the FC
liquidity buffers, for example due to prolonged funding-market
closure or sector-wide deposit instability, or in the capital
buffers, for example through significant deterioration in asset
quality that is not offset by shareholder support.
The National Rating is sensitive to a downgrade in the bank's LTLC
IDR and an adverse change in its creditworthiness relative to that
of other Turkish issuers with a 'B' LTLC IDR.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of BBT's IDRs is unlikely given the Negative Outlooks on
the bank and Turkiye's sovereign ratings and Fitch’s view of
increasing government intervention risk.
A VR upgrade is unlikely given heightened operating-environment
pressures and risks to BBT's credit profile.
The National Rating is sensitive to an upgrade in BBT's LTLC IDR
and also to a positive change in its creditworthiness relative to
that of other Turkish issuers with a 'B' LTLC IDR.
VR ADJUSTMENTS
The 'b-' operating environment score for BBT is lower than the
category implied score of 'bb' due to the following adjustment
reasons: sovereign rating (negative) and macro-economic stability
(negative). The latter adjustment reflects heightened market
volatility, high dollarisation and high risk of foreign-exchange
movements in Turkiye.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
BBT's ratings are linked to the Turkish sovereign rating as they
are sensitive to its assessment of country risks. BBT's ratings are
also linked to that of its parent.
ESG CONSIDERATIONS
BBT's ESG Relevance score for Management Strategy has been changed
to '4' from '3', reflecting increased regulatory intervention in
the Turkish banking sector, which hinders the implementation of
management's strategy, constrains management's ability to determine
strategy and price risk and creates an additional operational
burden for banks, including BBT. This has a moderately negative
impact on BBT's credit profile and is relevant to its ratings in
combination 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
entities, either due to their nature or to the way in which they
are being managed by the entities.
Debt Rating Prior
---- ------ -----
Burgan Bank A.S.
LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur) Affirmed AA(tur)
Viability b- Affirmed b-
Shareholder Support b- Affirmed b-
TURKLAND BANK: Fitch Affirms 'B-/B' LongTerm IDRs, Outlook Neg.
---------------------------------------------------------------
Fitch Ratings has affirmed Turkland Bank A.S.'s (T-Bank) Long-Term
Foreign-Currency (LTFC) and Local-Currency (LTLC) Issuer Default
Ratings (IDRs) at 'B- ' and 'B', respectively. The Outlooks are
Negative.
KEY RATING DRIVERS
T-Bank's IDRs are driven by its expectation of support from its 50%
Jordan-based owner, Arab Bank Plc (AB; BB/Stable), as reflected by
its Shareholder Support Rating (SSR) of 'b-'. The Negative Outlooks
on the IDRs mirror those on the sovereign.
The bank's LTFC IDR and SSR are capped at one notch below Turkiye's
LTFC IDR, reflecting Fitch’s view that the likelihood of
government intervention that would prevent banks in Turkey from
servicing their FC obligations is higher than that of a sovereign
default. The bank's LTLC IDR, one notch above its LTFC IDR,
reflects the lower likelihood of government intervention in LC.
T- Bank's 'ccc+' Viability Rating (VR) reflects its limited
franchise, high unreserved legacy impaired loans that weigh on
capitalisation, reflecting low provision coverage. It also reflects
very weak underlying profitability net of provision reversals, and
weak internal capital generation prospects. T-Bank's high deposit
dollarisation and depositor concentration create risks to FC
funding and liquidity.
T-Bank's National Long-Term Rating reflects potential support from
AB. It is towards the lower end of the scale for issuers with a 'B'
LTLC IDR in Turkiye, reflecting weaker support propensity.
Shareholder Support: Fitch views of support considers T-Bank's
ownership but also its limited role in the AB group, weak
performance and its view that Turkiye is a non-core market compared
with AB's other markets. AB continues to classify T-Bank as an
investment held-for-sale in its financial statements, which, in its
view, indicates a high potential for disposal, and, in turn, limits
reputational risk for AB, reducing its propensity to support
T-Bank.
Operating Environment Pressures: T-Bank's operations are
concentrated in the volatile Turkish market characterised by
increased macroeconomic and external risks amid policy uncertainty,
spiralling inflation, external financing weaknesses due to a
widening current account deficit, and weak international reserves.
Multiple new macroprudential regulations imposed on banks aimed at
promoting the government's policy agenda in the absence of monetary
policy further add to the risks and challenges of operating in
Turkiye.
Capital Pressures: Risks to capitalisation are high despite a
common equity Tier 1 (CET1) ratio of 13.6% at end-1H22 (including a
122bp uplift from forbearance). This is in light of material
unreserved impaired loans (end-1H22: 80.5% of CET1 capital;
end-2021: 90.6%), limited internal capital generation, sensitivity
to lira depreciation (due to the inflation of FC risk-weighted
assets (RWAs)) and also potential asset-quality weakening.
Further capital support is likely to be needed to strengthen the
loss-absorption capacity, particularly given the recent record of
and further planned loan expansion.
Legacy Asset-Quality Weakness: T-Bank's impaired loans ratio
(end-1H22: 24%, down from 30.8% at end-2021, partly owing to loan
growth) reflects concentrated legacy impaired loans. Total reserves
coverage of impaired loans has fallen, largely due to provisions
reversals, and is very low (end-1H22: 37.4%; end-2021: 42.9%),
reflecting reliance on collateral.
Positively, T-Bank's stage 2 loans ratio is fairly low (3%).
Further, new loan origination is to commercial and corporate
customers, short term and in lira. FC lending (end-1H22: 16% of
loans) is far below the sector average (38%).
Weak Profitability: T-Bank has been structurally unprofitable,
reflecting limited economies of scale, while its positive operating
profitability since 2020 reflected mainly provision reversals. It
faces significant risks to profitability amid uncertain
macroeconomic conditions. T- Bank's profitability is also sensitive
to regulatory developments.
Adequate FC Liquidity: T-Bank is nearly entirely funded by customer
deposits (end-1H22: 94%), mitigating refinancing risk. Deposit
dollarisation is high (end-1H22: 61.5% of total deposits), creating
FC liquidity risks in case of deposit instability across the
sector, and the deposit base is concentrated. FC liquidity
comprising cash and placements at foreign banks (equal to 39% of FC
deposits at end-1H22) is adequate.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
T-Bank's IDRs are sensitive to changes in its SSR.
A downgrade of Turkiye's sovereign rating or an increase in its
view of government intervention risk would lead to a downgrade of
T- Bank's SSR and consequently its Long-Term IDRs. T- Bank's SSR is
also sensitive to an adverse change in Fitch's view of the
shareholder's ability and propensity to provide support.
T-Bank's VR could be downgraded due to an erosion in the capital
buffer, for instance through significant deterioration of asset
quality and profitability, or a weakening of its FC liquidity
position due to sector-wide deposit instability, if not offset by
ordinary shareholder support.
The National Rating is sensitive to adverse changes in T-Bank's
LTLC IDR and also to its creditworthiness relative to that of other
Turkish issuers with a 'B' LTLC IDR.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of the bank's IDRs is unlikely given the Negative
Outlooks on the IDRs and on Turkiye and Fitch’s view of the risk
of government intervention in the banking sector.
A VR upgrade is unlikely given the bank's weak capitalisation and
risks to asset quality amid heightened operating-environment
pressures.
The National Rating is sensitive to positive changes in T- Bank's
LTLC IDR and also to its creditworthiness in LC relative to that of
other Turkish issuers with a 'B' LTLC IDR.
VR ADJUSTMENTS
The operating-environment score of 'b-' is below the 'bb' category
implied score due to the following adjustment reasons:
macroeconomic volatility (negative), which reflects heightened
market volatility, high dollarisation and high risk of foreign
exchange movements in Turkiye, and sovereign rating (negative).
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
T-Bank's LTFC and LTLC IDRs are linked to ratings of AB.
ESG CONSIDERATIONS
Fitch has revised T-Bank's ESG Relevance Score for Management and
Strategy to '4' from '3' to reflect an increased regulatory burden
on all Turkish banks. Management ability across the sector to
determine their own strategy and price risk is constrained by
increased regulatory interventions and also by the operational
challenges of implementing regulations at the bank level. This has
a moderately negative impact on the credit profile and is relevant
to the rating in combination 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.
Entity/Debt Rating Prior
----------- ------ -----
Turkland Bank A.S. LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT A(tur) Affirmed A(tur)
Viability ccc+ Affirmed ccc+
Shareholder Support b- Affirmed b-
=============
U K R A I N E
=============
INTERPIPE HOLDINGS: Fitch Affirms LongTerm IDR at 'CCC'
-------------------------------------------------------
Fitch Ratings has affirmed Ukraine-based Interpipe Holdings Plc's
(Interpipe) Long-Term Issuer Default Rating (IDR) and senior
unsecured rating at 'CCC-'. The Recovery Rating on the senior
unsecured debt is 'RR4'.
Interpipe's rating reflects Fitch's expectation that the company
will be able to maintain sufficient liquidity headroom to pay its
upcoming coupon in November 2022 and meet its other (limited)
financial obligations as they become due going into 2023.
The company has restarted operations and should be able to generate
some operating cash flow in the coming quarters once restocking of
inventories is complete. As its facilities have not been materially
damaged it is better placed than some of its Ukrainian peers to
increase capacity utilisation once the logistical bottlenecks are
resolved and operational risks subside. All this should support
sustainability of cash flow generation and, potentially, positive
rating momentum.
KEY RATING DRIVERS
Operations Back Online: All of Interpipe's key production
facilities remain operational and have been restarted, after the
initial shutdown in the immediate aftermath of the Russian invasion
(February-April). Its facilities are running at lower levels of
capacity utilisation due to disruption of logistical channels,
while Black Sea ports remain closed and rail and truck export
routes are severely constrained.
Cash Flows Uncertain: Interpipe's business has generated robust
earnings with shipped volumes since relaunching operations.
However, working-capital requirements are high and mostly
neutralise cash flow generation for now due to restocking of
inventories and payment terms with suppliers and customers. Steel
price moderation is expected to reduce working-capital build-up
going into 4Q22. We expect free cash flow (FCF) to be positive in
2023.
At the same time, Interpipe's operations and critical
infrastructure it relies on remain at high risk from the war
through potential occupation or attacks, a prospect that will
persist going into 2023.
DERIVATION SUMMARY
Interpipe's Ukrainian peers include Ferrexpo plc (CCC+) and
Metinvest B.V. (CCC).
Ferrexpo is a pellet producer that continues to operate its mines
and ship products to European markets through barges and rail. The
company continues to generate operating cash flow, albeit at
reduced capacity utilisation due to rail network constraints, and
has no outstanding debt.
Metinvest is a metals and mining company with some geographic
diversification, including mining operations in the US and rolling
facilities in Europe. Following Russian occupation of Mariupol, the
bulk of earnings comes from mining activities in the US and
Ukraine. The group is funded beyond 2022, aided by cash flow
generation from a diverse asset base, few near-term maturities and
its existing cash position.
Interpipe's assets are more concentrated than those of Metinvest.
All of its key assets remain operational and run at reduced
capacity utilisation linked to procurement and export logistics
constraints. The company has no near-term maturities and is funded
beyond 2022.
KEY ASSUMPTIONS
- Capacity utilisation above 50% for the rest of 2022 and 2023
- Significant reduction of capex
- No dividends
RECOVERY ANALYSIS ASSUMPTIONS
The recovery analysis assumes that Interpipe would be considered a
going concern (GC) in bankruptcy and that it would be reorganised
rather than liquidated.
Interpipe's GC EBITDA of USD75 million is below a mid-cycle
estimate of USD170 million-USD180 million and reflects war-related
disruption to exports and local operations, assuming that
procurement and export routes will gradually re-open as the
conflict recedes or moves to other parts of the country. Much of
Ukraine's transport infrastructure has been damaged so we do not
expect a swift rebound in Interpipe's earnings capacity even though
production has resumed.
Fitch uses an enterprise value/EBITDA multiple of 3.0x to calculate
a post-reorganisation valuation, reflecting the concentrated nature
of key manufacturing assets in a territory with military conflict.
Taking into account our Country-Specific Treatment of Recovery
Ratings Rating Criteria and after a deduction of 10% for
administrative claims, its waterfall analysis generated a
waterfall-generated recovery computation (WGRC) in the 'RR4' band,
indicating a 'CCC-' instrument rating for the company's senior
unsecured notes. The WGRC output percentage on current metrics and
assumptions is 50%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- De-escalation of the war in Ukraine, facilitating the re-
opening of logistics routes and reducing operating risks
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Default of some kind appearing probable or near default, eg.
decision not to pay coupon or inability to service debt
- Material damage to key production assets by war
LIQUIDITY AND DEBT STRUCTURE
Constrained but Sufficient Liquidity: Interpipe is maintaining in
excess of USD100 million of cash balances. This should be
sufficient to meet upcoming maturities of around USD10 million over
the next 12 months linked to a domestic loan facility, a coupon
payment of USD12.56 million in November 2022, a performance-sharing
fee payable in October 2022 and increased interest payments.
ISSUER PROFILE
Interpipe is a Ukrainian producer of high value-added steel
products, mostly pipes and railway wheels.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Recovery Prior
---- ------ -------- -----
Interpipe Holdings Plc LT IDR CCC- Affirmed CCC-
senior unsecured LT CCC- Affirmed RR4 CCC-
METINVEST BV: Fitch Affirms 'CCC/C' Issuer Default Ratings
----------------------------------------------------------
Fitch Ratings has affirmed Metinvest B.V.'s Long-Term Foreign- and
Local-Currency Issuer Default Ratings (IDR) and senior unsecured
rating at 'CCC'. The Recovery Rating is 'RR4'.
Metinvest's ratings reflect that the company is sufficiently funded
over the next six months, aided by cash-flow generation from an
international asset base, few material near-term maturities and its
existing cash position. It also reflects the heightened operating
risk for the company following Ukraine's military invasion by
Russia, including the occupation or damage of some of its assets,
as well as severe logistical constraints. Around one-third of the
company's 2022 EBITDA will be generated by its international
assets.
KEY RATING DRIVERS
Some Assets Damaged, Utilisation Falls: Metinvest's operations have
been significantly impacted by Russia's invasion. Its production
facilities in Ukraine located in Mariupol and Avdiivka are damaged
or not operational at the moment. Other assets in Ukraine,
including Kamet Steel and iron ore and coking coal assets remain
operational but under-utilised. Metinvest's international assets
remain operational but benefit less from vertical integration with
the group's assets in Ukraine.
Near-Term Cash Flows Uncertain: Rapid developments in Ukraine have
resulted in uncertainty over Metinvest's cash flows. However, we
estimate that the group should be able to generate positive
pre-dividend free cash flow (FCF) over 2022-2025, helped by reduced
capex and international assets.
Business, Financial Profiles Under Review: Metinvest's longer-term
cash flow forecasts are also uncertain at this stage, given damage
to some of its key production facilities and unclear duration and
severity of the war with Russia. Fitch will re-assess its business
and financial profiles once it has more certainty about the extent
of the damage to the company's assets, its capex programme and
other factors.
Access to Ports Constrained: Proximity to the Black Sea and Sea of
Azov ports traditionally allowed Metinvest to benefit from cheaper
steel and iron ore exports and seaborne coal import logistics, but
its access to ports is now constrained. The company now has to
primarily rely on rail exports, which may be subject to logistical
bottlenecks.
DERIVATION SUMMARY
The 'CCC' rating reflects Metinvest's heightened operational and
financial risks. Ferrexpo plc is rated higher at 'CCC+' due to the
absence of financial debt. Metinvest's business profile benefits
from producing assets outside the Ukraine, supporting its rating
above Interpipe Holdings plc (CCC-), which has assets fully
concentrated in Ukraine.
KEY ASSUMPTIONS
- Fitch's iron ore price deck: USD115/t for 2022, USD85/t for
2023, USD75/t for 2024 and USD70/t thereafter;
- Fitch's met coal price deck: USD370/t in 2022, USD200/t for
2023, USD140t for 2024 and thereafter;
- Sales volumes at around 50% of normalised levels in 2022, with
a gradual recovery assumed between 2023-2025.
RECOVERY ANALYSIS ASSUMPTIONS
The recovery analysis assumes that Metinvest would be considered a
going concern (GC) in bankruptcy and that it would be reorganised
rather than liquidated.
Metinvest's GC EBITDA of USD1,000 million reflects war-related
disruption to exports and local operations, assuming that
procurement and export routes will gradually re-open as the
conflict recedes or moves to other parts of the country.
Fitch uses an enterprise value/EBITDA multiple of 3.0x to calculate
a post-reorganisation valuation, reflecting the presence of key
manufacturing assets in a territory with military conflict.
Taking into account Fitch's "Country-Specific Treatment of Recovery
Ratings Rating Criteria" and after a deduction of 10% for
administrative claims, Fitch's waterfall analysis generated a
waterfall-generated recovery computation (WGRC) in the 'RR4' band,
indicating a 'CCC' instrument rating for the company's senior
unsecured notes. The WGRC output percentage on current metrics and
assumptions is 50%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- De-escalation of Russia's military operations reducing
operating risks and relaxed foreign exchange and cross-border
payment controls.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Increased signs of a probable default event, for instance from
liquidity stress, inability to service debt or failing
operations and cash flows.
LIQUIDITY AND DEBT STRUCTURE
Limited Liquidity: Metinvest holds most of its existing cash
balance offshore. The company continues to generate significant
cash at its US metallurgical coal assets, while also generating
some reduced levels at its European steel mills and iron ore and
steel assets in Ukraine. This has served to offset working capital
outflows in recent months.
Metinvest has negligible upcoming maturities in 2022; its next
material maturity amounts to USD176 million due in April 2023
related to its bond repayments.
ISSUER PROFILE
Metinvest is a vertically integrated Ukrainian mining and steel
company, with operations in Ukraine (steel, iron ore and met coal
assets), Europe (re-rolling facilities in UK, Italy and Bulgaria)
and the US (met coal assets).
ESG CONSIDERATIONS
Metinvest has an ESG Relevance Score of '4' for Group Structure due
to sizeable related-party transactions, which has a negative impact
on the 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.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Metinvest B.V. LT IDR CCC Affirmed CCC
ST IDR C Affirmed C
LC LT IDR CCC Affirmed CCC
LC ST IDR C Affirmed C
Natl LT AA+(ukr) Affirmed AA+(ukr)
Natl ST F1+(ukr) Affirmed F1+(ukr)
senior unsecured LT CCC Affirmed RR4 CCC
===========================
U N I T E D K I N G D O M
===========================
ENDEAVOUR MINING: Fitch Affirms 'BB' LongTerm IDR, Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has affirmed west-African gold mining company
Endeavour Mining plc's Long-Term Issuer Default Rating (IDR) and
senior unsecured rating at 'BB'. The Outlook on the Long-Term IDR
is Stable. The Recovery Rating is 'RR4'.
Endeavour's 'BB' Long-Term IDR balances strong financial and
business profiles with a weaker operating environment, reflecting
the group's focus on west African countries with diversification
across Senegal, Burkina Faso and Cote d'Ivoire. The applicable
Country Ceiling is Cote d'Ivoire's (BB).
Endeavour's business and financial profile otherwise compares
favourably with higher rated peers', with meaningful scale of
production (2022: estimated 1.3 million-1.4 million ounces), a
favourable cost position, a reserve life of 12 years and a
conservative financial policy of maintaining net debt/EBITDA below
0.5x through the cycle.
KEY RATING DRIVERS
Conservative Financial Profile: Fitch forecasts almost USD1.2
billion EBITDA for 2022. Endeavour is now in a net cash position,
which Fitch expects to reach more than USD200 million by end-2022.
Even though the group is likely to incur negative free cash flow
(FCF) in 2023 and 2024 due to expansion projects, its rating case
sees funds from operations (FFO) net leverage and net debt/EBITDA
remaining at or below 0.2x. Endeavour's financial policy aims for
net debt/EBITDA below 0.5x (as per company's definition), even in a
lower gold price environment and during construction of new
assets.
Clear Capital Allocation Priorities: Endeavour aims to preserve a
prudent balance sheet through the cycle before pursuing organic
growth with capex based on a minimum of 20% after tax internal rate
of return (at a gold price of USD1,300/oz) and discovery costs at
or below USD25/oz for exploration activity. Shareholder returns are
the next priority as long as leverage remains below target. As a
result, distributions could be substantial at high gold prices, but
decline materially when gold prices moderate.
Challenging Burkina Faso: In January 2022 a coup d'etat took place
in Burkina Faso, with the military putting in place a temporary
government with the intent to improve security and new elections
are envisaged after a 24-month transition period. In August a
convoy was attacked by militants along the access route to the
Boungou mine in Eastern Burkina Faso. Endeavour management are
engaging with the authorities and the military on a regular basis.
The group has been able to operate its assets in the ordinary
course of business and meet production guidance so far in 2022,
while closely monitoring the security situation to adapt its
security protocols over time.
Organic Growth on the Way: Construction of its Sabodala-Massawa
extension commenced in April 2022, which will add 135,000 oz of
production on average over 10 years (around 195,000 for the first
five years of operations) per annum (capex of USD290 million), with
first gold production in 1H24. The group is expected to conclude
its definitive feasibility study of Lafigue in 3Q22, a greenfield
project in Cote D'Ivoire, so that a final investment decision can
be made before end-2022.
Diversification is Key: Endeavour operates four mines across
Burkina Faso, which would limit the impact of disruptions at one
mine on overall earnings. The group has adequate property and
business interruption insurance to cover operations in case of an
incident at one of the mines. Further, Senegal (Sabodala-Massawa
extension) and Cote d'Ivoire (if Lafigue receives the green light)
will increase the earnings contributions of those more benign west
African countries to above two thirds over the medium term.
Strong Cost Position: Guidance for all-in-sustaining costs (AISC)
of USD880-USD930/oz in 2022 firmly places Endeavour's portfolio in
the second quartile of the global cost curve. This is confirmed by
CRU data for 2022, with Sabodala-Massawa in the first quartile,
Ity, Hounde and Mana in the second quartile, Boungou and Wahgnion
in the third quartile. CRU expects Sabodala-Massawa to further
improve cost performance in 2023 and beyond, as volumes increase
once the capacity extension is complete. As this asset contributes
almost one third of production it will support profitability for
the long term.
Cote d'Ivoire Country Ceiling Applies: While a large proportion of
earnings are generated in Senegal and Burkina Faso, Fitch applies
Cote d'Ivoire's Country Ceiling (BB) in its analysis as Endeavour's
cash flow generated in Cote d'Ivoire covers at least 3x
hard-currency gross interest expense (on a forward-looking basis).
This is more than the required comfortable coverage at 1x or above
under Fitch's Non-Financial Corporates Exceeding the Country
Ceiling Rating Criteria.
DERIVATION SUMMARY
Endeavour has larger scale at 1.3 million-1.4 million oz production
guidance for 2022 compared with Yamana Gold Inc. (BBB-/RWP) at 1
million gold-equivalent oz (combined gold and silver production),
slightly better cost position (both on average in the second
quartile based on AISC) and longer reserve life at 12 years
compared with seven years for Yamana. Endeavour also has a more
conservative capital structure, but higher country risk. The weak
operating environment in west Africa constrains the rating.
KEY ASSUMPTIONS
- Gold price in line with Fitch's price deck at USD1,800/oz in
2022, USD1,600/oz in 2023, USD1,400/oz in 2024 and USD1,300/oz
in 2025
- Gold production of 1.3 million-1.4 million oz in 2022,
increasing to 1.6 million oz over the medium term, in line
with management guidance
- AISC for 2022 in line with management guidance of
USD880-USD930/oz and at or below USD930/oz over the
medium term
- Capex of USD373 million for 2022, USD575 million for 2023,
USD525 million for 2024 (2023 and 2024 higher capex linked
to expected investment at Fetekro and capacity expansion
at Sabodala-Massawa) and then moderating to below
USD300 million
- Dividends of USD200 million in 2022, with further
absolute step-ups in the coming years subject to
financial flexibility. Current dividend policy is based
on gold prices at or above USD1,500/oz. Endeavour wants
to maintain net debt/EBITDA as reported at or below
0.5x even during construction phase
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Additional diversification of geopolitical risks across
countries in west Africa together with the majority of
FCF from countries with a stronger operating environment
- Ability to maintain reserve life above 10 years and
AISC in the second quartile
- FFO gross leverage below 1.5x on a sustained basis
- FFO interest coverage above 9.0x on a sustained basis
- EBITDA margin above 40% and positive FCF on a sustained
basis
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Negative rating action on Cote d'Ivoire sovereign
- EBITDA margin below 30% on a sustained basis
- FFO gross leverage above 2.5x (or net leverage above 2.0x) on
a sustained basis
- FFO interest coverage below 6.5x on a sustained basis
- Political risks, labour disputes or other operational
disruptions negatively affecting cash flow generation
for an extended period
- Sustained negative FCF due to dividends or share buybacks
- Failure to address major refinancing needs at least
nine months in advance
LIQUIDITY AND DEBT STRUCTURE
As of end-June 2022 Endeavour held USD1.1 billion of cash and
USD450 million of (undrawn) revolving credit facility commitments
available until September 2025. Near-term maturities include a
USD330 million convertible bond due in February 2023 and the
deferred purchase consideration of USD50 million (assuming average
gold price between March 2020 and March 2023 is above USD1,600 per
oz) payable in March 2023 linked to the Massawa acquisition.
Even though Endeavour may incur negative FCF in 2023 and 2024 due
to the Sabodala-Massawa extension and Lafigue development projects,
it is funded beyond 2024 under Fitch's conservative gold price
assumptions.
SUMMARY OF FINANCIAL ADJUSTMENTS
For December 2021
- Leases of USD51.2 million excluded from the debt amount.
Right-of-use asset depreciation of USD13.1 million and
interest for leasing contracts of USD1.2 million treated
as operating expenditure, reducing EBITDA
- Deferred financing fees of USD7.2 million not deducted
from gross debt
- The USD500 million senior unsecured bond reflected at
face value, disregarding the issue premium. Under
Fitch's criteria the debt should reflect the amount
payable on maturity
- The USD330 million convertible notes included within
gross debt at a value of USD364.6 million, including
the option value and disregarding the issue premium.
The company will settle the USD300 million nominal
amount in cash and any applicable option premium in
equity.
- The USD48.2 million contingent, deferred purchase
consideration payable to Barrick Gold Corporation in
March 2023 linked to the acquisition of Massawa
(Jersey) Limited by Teranga added to the debt quantum
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Recovery Prior
---- ------ -------- -----
Endeavour Mining plc LT IDR BB Affirmed BB
senior unsecured LT BB Affirmed RR4 BB
HARBOUR ENERGY: Fitch Affirms LongTerm IDR at 'BB', Outlook Stable
------------------------------------------------------------------
Fitch Ratings has affirmed Harbour Energy PLC's Long-Term Issuer
Default Rating (IDR) at 'BB' with a Stable Outlook.
Harbour's low reserve life, fairly high cost of production and
large decommissioning obligations are counterbalanced by low
financial leverage and strong cash flows. Harbour should be able to
maintain broadly stable production from the current asset base in
the medium term though its longer-term performance will depend on
its ability to pursue M&A opportunities or transfer contingent
resources (2C) into reserves.
Harbour's USD500 million senior unsecured notes (BB/RR4) are rated
in line with the IDR and using a generic approach for 'BB' category
issuers, which reflects the instrument ranking in the company's
capital structure, in accordance with its Corporates Recovery
Ratings and Instrument Ratings Criteria.
KEY RATING DRIVERS
Largest UKCS Producer: Harbour is the largest UK Continental Shelf
(UKCS) producer by output. The company's current production (1H22:
211 thousand barrels of oil equivalent per day, kboe/d) is focused
mainly on the UK (more than 90%) but well-diversified by hubs.
Harbour operates over two-thirds of its projects, which makes its
capex fairly flexible, and its portfolio is well-balanced between
liquids (53% of production) and natural gas (47%).
Low Reserve Life: Harbour's reserve life is lower than peers'. Its
2P reserve life (based on projected 2022 production and end-2021
reserves) amounted to seven years, lower than Aker BP ASA's
(BBB/Stable, 10 years) and Neptune Energy Group Midco Limited's
(BB/Stable; 12 years). This is mitigated by Harbour's conservative
leverage, which should allow for acquisitions, and substantial
resources (2C), a significant share of which is close to assets in
production or under development.
While Harbour should be able to maintain fairly stable production
in the medium term from the current reserve base, its production
potential over the longer term will depend on its ability to
replenish reserves organically and through acquisitions.
Strong Cash Flows: Harbour's current cost position of around
USD15/boe is fairly high, albeit typical for UKCS, and could put
the company at a disadvantage in a consistently low oil-price
environment. However, Fitch expects Harbour to generate
exceptionally strong cash flows in 2022-2025, driven by high oil
and natural gas prices despite the temporary windfall tax
introduced by the UK government.
Conservative Financial Policies: Harbour targets maintaining net
leverage (defined as net debt/ EBITDAX) below 1.5x through the
cycle. Its projected funds from operations (FFO) net leverage below
1.0x over 2022-2026, even after allowing for large acquisitions, is
commensurate with the company's target.
Addressing Energy-Transition Risks: Fitch said, "We assume that at
least in the next three to five years the impact of energy
transition on oil and gas companies will be limited. However, over
the long term, industry participants, and in particular pure
upstream producers, may be subject to more vigorous regulations,
and their margins could be affected by carbon taxes and other
regulatory measures. We view positively Harbour's target to become
net-zero on the Scope 1&2 basis by 2035 through minimising
emissions and investments in carbon offsets."
Material Decommissioning Obligations: Harbour's decommissioning
liabilities at end-2021 were high at around USD5.4 billion
(pre-tax, excluding a refund from Shell), or around USD11/boe per
2P reserves. Most decommissioning-related cash outflows are long
term and tax-deductible. Fitch's approach is not to add
decommissioning liabilities to debt, but to deduct them from
projected operating cash flow as they are being incurred. Fitch
assumes that over the forecast horizon Harbour's gross
decommissioning expense will average around USD300 million per year
on a pre-tax basis.
DERIVATION SUMMARY
Harbour's level of production (1H22: 211kboe/d) is comparable with
that of Aker BP ASA (195kboe/d) and higher than that of Neptune
(132kboe/d). Its 2P reserve life of seven years is low relative to
peers' (compared with Neptune's 12 years and Aker BP's 10 years)
but counterbalanced by substantial 2C resources and low leverage,
after allowing for acquisitions.
KEY ASSUMPTIONS
- Brent oil price of USD100/bbl in 2022, USD85/bbl in 2023, and
USD65/bbl in 2024, USD53/bbl in 2025-2026
- Title transfer facility (TTF) gas price of USD45/mcf in
2022-2023, USD20/mcf in 2024, USD10/mcf in 2025 and
USD5/mcf in 2026
- Production volumes averaging around 190 kboe/d to 2026
- Capex (excluding decommissioning) averaging approximately
USD850 million per year to 2026
- Around 50% of post-dividend free cash flow (FCF) is
spent on M&A
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Material improvement in the business profile (eg much
higher proved reserve life and lower production costs)
while maintaining a conservative financial profile (FFO
net leverage below 1.5x and net debt to EBITDA below 1.2x
on a sustained basis)
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO net leverage consistently above 2.0x and net debt to
EBITDA consistently above 1.7x
- Falling proved reserve life
- Falling absolute level of reserves
- Consistently negative FCF after dividends
LIQUIDITY AND DEBT STRUCTURE
Strong Immediate Liquidity: Harbour's strong liquidity profile is
represented by an unutilised reserve- based lending (RBL) facility
portion of USD1.3 billion and unrestricted cash of USD845 million
as of June 2022. Readily available liquid assets and strong FCF
expected under the favourable energy price trend are deemed
sufficient to cover small short-term debt and its share repurchase
programme.
Harbour's overall liquidity position is subject to annual RBL
re-determinations and possible major acquisitions in the coming
years given its low reserve life.
ISSUER PROFILE
Harbour is a medium-scale independent oil and gas producer with
assets mainly in the UKCS.
ESG CONSIDERATIONS
Harbour has an ESG Relevance Score of '4' for Exposure to
Environmental Impacts due to high decommissioning obligations,
which has a negative impact on the credit profile, and is relevant
to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Debt Rating Recovery Prior
---- ------ -------- -----
Harbour Energy PLC LT IDR BB Affirmed BB
senior unsecured LT BB Affirmed RR4 BB
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2022. All rights reserved. ISSN 1529-2754.
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