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/raid1/www/Hosts/bankrupt/TCREUR_Public/221012.mbx T R O U B L E D C O M P A N Y R E P O R T E R E U R O P E Wednesday, October 12, 2022, Vol. 23, No. 198 Headlines B E L G I U M MEUSE FINCO: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable G E R M A N Y GORILLAS: Getir In Talks to Take Over Loss-Making Business [*] GERMANY: Company Bankruptcies Up 34% to 762 in September 2022 N E T H E R L A N D S [*] NETHERLANDS: 8% of Greenhouse Businesses May Face Bankruptcy S L O V A K I A 365.BANK AS: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable U N I T E D K I N G D O M CASCADE GROUP: Enters Liquidation, Deficit Totals GBP505,000 ENTAIN HOLDINGS: Fitch Gives BB+(EXP) Rating on USD750MM Term Loan EUROSAIL-UK 2007-5: Fitch Affirms 'CCsf' Rating on Class D1c Notes IGLOO ENERGY: Placed Into Creditors' Voluntary Liquidation MANSARD MORTGAGES 2006-1: Fitch Hikes 'BB+' Rating on Cl. B2a Notes NEPTUNE ENERGY: Fitch Hikes LongTerm IDR to 'BB+', Outlook Stable WASPS: No Exceptions for Club Avoiding Relegation - - - - - ============= B E L G I U M ============= MEUSE FINCO: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable --------------------------------------------------------------- Fitch Ratings has assigned Meuse Finco SA's senior secured debt a final rating of 'BB' with a Recovery Rating of 'RR2'. It has affirmed Meuse Bidco's (Meuse) Long-Term Issuer Default Rating (IDR) at 'B+' with Stable Outlook. The IDR reflects Meuse's small scale and high concentration relative to that of larger peers operating in large EMEA gaming markets. Rating strengths are a strong free cash flow (FCF) generation capacity that is driven by strong profitability, limited exposure to energy price inflation, as well as moderate forecast capex intensity and financial expenses. The Stable Outlook reflects its expectations that Meuse will maintain its market leadership, with support from favourable regulation, and to continue expansion in Belgium by leveraging its brand portfolio strength in the sector's long-term transition to online. It also reflects our projections that Meuse's total lease-adjusted debt will not exceed 4.0x EBITDAR from 2023. KEY RATING DRIVERS Strong Position in Small Market: Meuse enjoys leading positions in a fairly small Belgian gaming market, both online and land-based. It is also a leader in Portugal's online gaming market. Its estimates show a 10% CAGR for Meuse's gross gaming revenue (GGR) over 2021-2026, primarily driven by further growth of its online brands in Belgium. Fitch believes its local expertise and experience will support its domestic competitive positions, but its growth will still primarily depend on growth of the Belgian online gaming market. Limited Exposure to Economic Slowdown: Fitch forecasts consumer spending in the eurozone to decrease 0.4% in 2023, which coupled with forecast inflation of 9.3% in 2022 and 4.3% in 2023 can lead to more severe cuts in discretionary consumer spending. However, the demonstrated resilience of the gaming industry to financial crises has led to low impact on spending on gaming activities. For online-focused operators like Meuse, this will also be partially supported by structural demand growth for online gaming. However, Fitch has reduced its growth forecast for 2023 by 3%-5% relative to its prior expectations, depending on segment. Omnichannel Gaming Benefits: Meuse provides its gaming services through a wide range of land-based venues and online platforms. Omnichannel capability allows reinforcing brand strength through brand promotion across channels. Online channels operating with recognised brands also helped offset some of the negative impact on land-based venues during the pandemic. Compared with peers, Meuse has lower exposure to sports betting (below 10% of GGR), which faces higher margin volatility. However, it is less prone to regulatory risks and is forecast by Fitch to see stronger growth in the medium term. Regulation Supports Business Profile: Fitch said, "We view the Belgian gaming regulatory environment as stable and supportive of Meuse's business profile. Limited availability and linkage of online licenses to land-based casinos act as strong barriers to entry, and a history of stable regulation since 2011 provides visibility over operational cash flows over the medium term. We do not rule out significant changes to regulation in Belgium that could materially affect Meuse's business and financial profiles. We view them as an event risk and reflect them in fairly tight rating sensitivities." Growth Opportunities Across Europe: Meuse has been active in entering newly regulated online markets in Europe: Switzerland in 2019 and The Netherlands in 2022. Although both markets are fairly small and more competitive than its domestic market, they provide opportunity for long-term growth outside Belgium. Some of those markets have lower barriers to entry and the entry of large operators, like Flutter Entertainment plc or Entain plc, could lead to more aggressive competition and lower contribution from those countries. Fitch does not expect markets outside Belgium to provide meaningful contribution to Meuse's EBITDA over the next three to five years. Solid Leverage Profile: Fitch forecasts that Meuse's total adjusted debt/operating EBITDAR will peak at 4.0x in 2023, before declining to 3.5x in 2024, aided by the gradual recovery of land-based venues (up to 90% of pre-pandemic revenue). Its cash flow projections do not incorporate sizeable debt-funded capex or acquisitions, which could be detrimental to Meuse's credit profile. Strong FCF Generation Potential: Strong forecast operating profitability (pro-forma for the group's reorganisation) is comparable to, or higher than, that of higher-rated peers such as Flutter, Entain or Allwyn International a.s. Fitch assumes moderate effect from an increase in energy costs (within 200bp for 2021-2023) in addition to reasonable margin pressure from wage inflation that will only be partially passed on to customers. Fitch forecasts that Meuse will be able to convert high operating margins into mid-to-high single-digit FCF margins, which would be solid for the rating, assuming modest capex intensity and no dividends over 2022-2024. Group Reorganisation Neutral to Rating: Following the reorganisation Meuse has a fairly complex group structure including sizeable transactions with companies outside of the restricted group, but the same economic shareholders. Its analysis assumes that the group structure would not put negative pressure on the ratings. Fitch expects information quality will improve and audited financial statements will be consistent with the pro-forma financials provided. Further complexity or opaqueness in related-party transactions, or sub-par information standards could be negative for the ratings. DERIVATION SUMMARY Fitch assess Meuse's rating using its Ratings Navigator Framework for Gaming issuers. Meuse has lower geographical diversification and smaller scale than both Flutter (BBB-/Negative) and Entain (BB/Stable). Lack of meaningful geographic diversification and top market positions across the globe is slightly offset by more favourable regulation in its core Belgian market supporting its domestic market position, and justifies the two-to-four-notch rating difference. Compared with Inspired Entertainment, Inc (B-/Positive), Meuse is also slightly larger, less leveraged, and has higher exposure to the fast-growing online market. KEY ASSUMPTIONS - GGR to grow 43% in 2022, mainly driven by land-based venues (up 105%) benefitting from post-pandemic recovery and casino acquisitions completed in 2019-2021 - GGR CAGR of 4.5% for 2022-2026, mainly organic, driven by 4% CAGR in the online B2C segment - EBITDA margins to remain stable at 24%-25% to 2026 - Stable working capital with no sizeable cash outflows to 2026 - Capex averaging EUR17 million p.a. to 2026 - Dividends of EUR30 million from 2025 - Acquisitions of EUR20 million p.a. from 2023 KEY RECOVERY RATING ASSUMPTIONS The recovery analysis assumes that Meuse would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim. The GC EBITDA estimate of EUR60 million reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which Fitch bases the enterprise valuation (EV). Meuse's GC EBITDA assumption includes pro-forma adjustments for cash flows added via acquisition or reduced by asset disposals. An EV multiple of 5.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganisation EV. The multiple reflects positive industry dynamics, including modest growth prospects, high barriers to entry and a conducive but evolving regulatory environment. The multiple gives credit to its significant inherent intangible value for brand awareness in a regulated and rather captive market. Meuse's revolving credit facilities (RCF) of EUR80 million are assumed to be fully drawn upon default. Its EUR306 million senior secured loan ranks pari passu with the RCF. Its EUR18 million of mortgages are deemed super-senior in the debt waterfall. After deducting 10% for administrative claims, its principal waterfall analysis generates a ranked recovery in the 'RR2' band, indicating a 'BB' instrument rating for its term loan B (TLB). The waterfall analysis output percentage on current metrics and assumptions is 72%, at the low- end of the 'RR2' band. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Continued growth of the business with EBITDAR approaching EUR200 million, through increased geographical diversification into new regulated markets - FCF margin maintained at medium-to-high single digits - Total adjusted debt/operating EBITDAR consistently below 3.5x - FFO fixed charge coverage maintained above 3.0x Factors that could, individually or collectively, lead to negative rating action/downgrade: - Adverse regulatory changes leading to material deterioration in revenue or operating profits - FCF margin in low single digits as a result of operating underperformance, considerable increases in capex or sizeable cash being up-streamed/redistributed to shareholders or to the B2B business, which is outside the restricted group - Total adjusted debt/operating EBITDAR above 4.5x - FFO fixed charge coverage below 2.5x LIQUIDITY AND DEBT STRUCTURE Comfortable Expected Liquidity: Pro-forma for the financing transaction, Fitch expects modest cash on Meuse's balance sheet. However, liquidity will be supported by access to an EUR80 million RCF, further enhanced by expected positive FCF to 2025. Low business seasonality and limited working-capital fluctuations allow Meuse to generate positive FCF throughout the year. The final debt structure includes an EUR306 million TLB, EUR80 million RCF and EUR18 million of mortgages maturing over 2033-2037. ESG CONSIDERATIONS Meuse has an ESG Relevance Score of '4' for customer welfare - fair messaging, privacy & data security due to increasing regulatory scrutiny of the sector, greater awareness around social implications of gaming addiction and an increasing focus on responsible gaming, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Meuse Finco SA senior secured LT BB New Rating RR2 BB(EXP) Meuse Bidco SA LT IDR B+ Affirmed B+ ============= G E R M A N Y ============= GORILLAS: Getir In Talks to Take Over Loss-Making Business ---------------------------------------------------------- Tim Bradshaw at The Financial Times reports that grocery delivery app pioneer Getir is in talks to take over its heavily lossmaking rival Gorillas, according to people familiar with the deal, as investor sentiment cools on one of the pandemic's hottest tech trends. Getir and Gorillas entered into exclusive negotiations in recent days and the start-ups intended to close the acquisition by the end of next month, the people said, although due diligence is still at an early stage and the deal might yet fall apart, the FT relates. Shareholders in Berlin-based Gorillas would receive US$100 million in cash as well as stock worth 12% of the combined entity, in a rescue deal that is likely to value the company far below the US$2.1 billion price tag it was given by investors a year ago, the FT discloses. Istanbul-based Getir and Gorillas were among the first companies promising to deliver a range of groceries and convenience goods in as little as 10 minutes, from a network of small warehouses or "dark stores" dotted around a city, the FT states. But while these delivery apps saw rapid growth during pandemic lockdowns, that has proven harder to sustain in 2022, especially as competition emerged from existing food delivery apps such as Uber and Deliveroo, in addition to well-funded US player GoPuff arriving in Europe, the FT notes. Gorillas was valued at US$2.1 billion just over a year ago, when Delivery Hero invested US$235 million, joining existing investors including Tencent, Coatue and DST, the FT discloses. But as investors' appetite waned over the course of this year for lossmaking ecommerce start-ups, Gorillas has been frantically searching for a buyer before it runs out of funds, according to the FT. The company had talked to several companies about selling some or all of its business before discussions about a full buyout became more serious with Getir earlier this month, people familiar with the situation said, the FT notes. After raising more than US$1.3 billion to build out a network of more than 100 "dark stores" across Europe and into the US, Gorillas has already been forced to pare back its footprint and cut hundreds of staff over recent months, the FT recounts. Getir cut staffing by 14% in May, according to the FT. Gorillas is a German on-demand grocery delivery company with the promise of delivering groceries within 10 minutes of ordering by using dark stores. [*] GERMANY: Company Bankruptcies Up 34% to 762 in September 2022 ----------------------------------------------------------------- Gokhan Ergocun at Anadolu Agency reports that the incidents of bankruptcy claims filed by companies and partnerships in Germany have increased by 34% to 762 year-on-year in September, exceeding forecasts, the economic research institute IWH said on Oct. 10. The institute has predicted a rise of 25% a month ago for September, it added, Anadolu Agency relates. According to Anadolu Agency, Steffen Muller, a director at the institute, said there will be visible increases in bankruptcies in the coming months. For October, IWH's leading indicators signal for a one-third more bankruptcies annually, while in November, even a 40% level can be exceeded, he noted, Anadolu Agency relays. In addition to the "seriously deteriorating economic situation," bankruptcies stemmed from a sharp increase in prices of important factors of production, Mr. Muller, as cited by Anadolu Agency, said. The rises in energy prices related to the ongoing Russia-Ukraine war have also adversely affected the costs, Anadolu Agency discloses. ===================== N E T H E R L A N D S ===================== [*] NETHERLANDS: 8% of Greenhouse Businesses May Face Bankruptcy ---------------------------------------------------------------- Aine Quinn at Bloomberg News reports that Dutch greenhouses are cutting output of food and flowers and almost a 10th expect to be forced into bankruptcy soon by Europe's energy crisis, an industry group survey showed. The recent survey by Glastuinbouw Nederland is one of the latest signs of how the region's energy crunch is making it more expensive to produce goods and commodities, Bloomberg notes. According to Bloomberg, a quarter of the Netherlands' cultivation area has been cut and 8% of greenhouse businesses predict filing for bankruptcy this year. The country is the top flower exporter and one of Europe's largest fresh fruit and vegetable producers, Bloomberg states. Its greenhouses are particularly vulnerable due to the cost of lighting and heating the massive glass structures that cover an area equivalent to 17,000 soccer fields, Bloomberg discloses. While food prices have come down since Russia's invasion of Ukraine roiled grain markets, they're still much higher than usual and any further supply disruptions could fuel more food inflation, according to Bloomberg. =============== S L O V A K I A =============== 365.BANK AS: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable ---------------------------------------------------------------- Fitch Ratings has affirmed 365.bank, a.s.'s Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. Fitch has withdrawn 365.bank'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 September 8, 2022. In line with the updated criteria, Fitch has assigned 365.bank a Government Support Rating (GSR) of 'no support' (ns). KEY RATING DRIVERS 365.bank's IDRs are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of 'bb-'. The VR reflects the bank's reasonable profitability and capital ratios. However, these strengths are balanced with the ongoing evolution of the bank's business model and a weak risk profile of the bank's sizeable legacy corporate loan portfolio (equal to 1.5x IFRS equity at end-2Q22). Fitch views this as a source of heightened credit risk, despite generally reasonable impaired loan ratios. The bank's VR is one notch below its implied VR of 'bb' because of its risk profile. Risk Profile a Weakness: In Fitch's view, the bank's legacy corporate lending weighs on the bank's asset quality, capital and overall credit profile as the associated risks are not fully captured in its credit metrics. Fitch views 365.bank's risk appetite as higher than the industry average. Higher Risks in Corporate Lending: The risk profile of many of the bank's corporate loans is weak, as these are M&A or other project-finance loans with long contractual tenors or bullet repayments, and in some cases issued to holding companies. Single borrower and industry concentrations are high, with significant exposure to real estate and investments. Some of its larger corporate loans are related to the broader J&T Finance Group or its private shareholders. Evolving Loan Book Structure: 365.bank's exposure to legacy corporate lending has been trending down since end-2020. Management plans to reduce it further and bring the share of corporate loans to below 15% (2Q22: 33%), which could be positive for the ratings. Most of its loan growth will be channelled to mortgages, which are generally of reasonable quality, in its view, although planned rapid growth in mortgages in a rather saturated and competitive Slovak market may expose the bank to seasoning risks. Weakening Environment: Fitch believes that the operating environment risks for 365.bank have recently increased. Fitch forecasts 2% real GDP growth in Slovakia in 2022 but Fitch sees significant downside risks to these growth forecasts due to heightened energy-supply risks and strong inflationary pressures. Fitch has revised the outlook on the operating environment in Slovakia to negative from stable. Profitability Should Moderate: 365.bank's pre-impairment profit equalled to an annualised 2.9% of average gross loans in 1H22, providing the bank with a moderate capacity to absorb impairment losses through its income statement. Earnings were particularly strong in 1H22, with an annualised operating profit at 3.2% of risk-weighted assets (RWAs), but these results were inflated by a reversal of loan impairment charges (annualised 0.4% of gross loans), which Fitch views as one-off. High Capital Ratios: 365.bank's capital ratios are high, with a common equity Tier 1 (CET1) ratio of 19.9% at end-2Q22. However, Fitch's assessment of the bank's capitalisation also captures the bank's still significant exposure to legacy corporate lending. In addition, capital adequacy should be viewed in the context of expected moderation of earnings and the bank's appetite for higher dividend pay-outs in the next couple of years. Fitch expects the CET1 ratio to moderate in the medium term but to remain reasonable, likely at around 17%. Reasonable Funding Profile: 365.bank's funding and liquidity profile is a rating strength as it is almost entirely funded by granular customer deposits (96% of total liabilities at end-2Q22) and predominantly sourced from retail customers. Fitch expects the gross loans-to-deposits ratio (end-2Q22: 96%) to increase over the medium term with higher wholesale funding and loan growth. High-quality liquid assets covered 14% of customer deposits at end-2Q22, reflecting an only moderate liquidity buffer. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Higher-than-expected pressures from the deteriorating operating environment, in particular if materially weaker economic growth results in significant sector-wide pressures on asset quality and profitability at the bank would put pressure on the VR and IDRs. -- Larger impairment losses from legacy corporate lending leading to considerable losses for several consecutive reporting periods and material reduction of capital ratios would also be negative for the ratings. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Significant reduction of risks from legacy corporate lending would be positive for the VR and IDRs. An upgrade would likely require a reduction of the legacy corporate loan book to at least 0.5x IFRS equity from a combination of portfolio sales and loan repayments. -- An extended record of a more stable business model and loan book structure and moderation of growth in mortgages would also support an upgrade. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS 365.bank's senior preferred (SP) debt is rated in line with its Long-Term IDR. This reflects Fitch's view that the default risk of SP debt is equivalent to the default risk captured by the IDR and that senior obligations have average recovery prospects in a resolution. Fitch expects the bank to use predominantly SP debt to meet its resolution buffer requirements, and Fitch does not expect the bank to issue and maintain senior non-preferred and more junior debt of more than 10% of the resolution group's RWAs. The bank's GSR of 'ns' reflects Fitch's view that support from the authorities cannot be relied on, given that Slovakia has adopted resolution legislation requiring senior creditors to participate in losses. In its view, although support from 365.bank's majority shareholder, J&T Finance Group, is possible, it cannot be relied upon in all circumstances. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES The SP debt rating will move in tandem with 365.bank's Long-Term IDRs. The SP debt rating could be downgraded to one notch below the Long-Term IDR if Fitch believes that its recovery prospects in a resolution would fall to below average, as would be the case, for example, if Slovakia introduces depositor preference legislation. An upgrade of the GSR would be contingent on a positive change in Slovakia's propensity to support domestic banks. While not impossible, this is highly unlikely, in Fitch's view, in light of the current resolution regime. VR ADJUSTMENTS The earnings & profitability score at 'bb' is below the 'bbb' category implied score due to the following adjustment reason: revenue diversification (negative). The capitalisation & leverage score at 'bb' is below the 'a' category implied score due to the following adjustment reason: risk profile and business model (negative). The funding and liquidity score at 'bb+' is below the 'bbb' category implied score due to the following adjustment reason: deposit structure (negative). ESG CONSIDERATIONS 365.bank, a.s. has an ESG Relevance Score of '4' for Governance Structure due to the presence of related-party lending, 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. Entity/Debt Rating Prior ----------- ------ ----- 365.bank, a.s. 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 Senior preferred LT BB- Affirmed BB- =========================== U N I T E D K I N G D O M =========================== CASCADE GROUP: Enters Liquidation, Deficit Totals GBP505,000 ------------------------------------------------------------ Printweek reports that Cascade Group has gone into liquidation and looks to have closed. The London-based printer had four locations and two production units in London as of 2019. It was registered as Southprint Ltd, and a notice filed on The Gazette said Myles Jacobson of MJ Advisory was appointed as its liquidator on Sept. 16, Printweek relates. The business had an estimated total deficiency of just shy of GBP505,000, according to its statement of affairs filed at Companies House, Printweek notes. Finance companies were owed over GBP215,000 in total while Barclays Bank was owed more than GBP48,000 for a Bounce Back Loan, Printweek states. Trade and expense creditors were owed just under GBP27,500 in total, Printweek discloses. Founded in the 1980s, Cascade Group was a Kall Kwik franchise for nearly 30 years until the end of 2011, but had already made the decision to go it alone shortly before Kall Kwik franchise owner On Demand Communications (ODC) went into administration in December 2011. Its offering included litho and digital print and design including direct marketing, reports, brochures, large-format displays and banners, business cards, and labels. ENTAIN HOLDINGS: Fitch Gives BB+(EXP) Rating on USD750MM Term Loan ------------------------------------------------------------------ Fitch Ratings has assigned Entain Holdings (Gibraltar) Ltd's and GVC Finance LLC's prospective joint USD750 million seven-year senior secured term loan B (TLB) an expected rating of 'BB+(EXP)' and Recovery Rating of 'RR2'. This is in line with its existing senior secured instrument ratings, and follows the affirmation of its parent Entain plc's (Entain) Long-Term Issuer Default Rating (IDR) at 'BB'/ Stable on October 3, 2022. The new debt will be used to fund Entain's SuperSport acquisition. It is issued under the group's existing senior facilities agreement and ranks pari passu with its other senior secured debt. The assignment of final rating is contingent on the receipt of final documents conforming to information already reviewed. The 'BB' rating encapsulates Entain's strong business profile, its retail and digital offerings, diversification, sound profit margins and good cash-generation ability. However, Entain's financial flexibility is somewhat limited, driven by low fixed charge cover ratios, expected drawings under its revolving credit facility RCF to part-fund M&A and some refinancing risks on its GBP400 million Ladbrokes notes due in 2023, along with its EUR1.125 billion term loan B due in March 2024. The Stable Outlook reflects its expectation that Entain would fund its growth strategy with debt, resulting in higher than previously forecast leverage, rather than deleveraging towards its medium-term target. The future rating trajectory will depend on Entain's ability to maintain financial discipline while balancing its external growth strategy. A material unmitigated cash impact from an HMRC investigation, further regulatory settlements or fines or a larger-than-expected regulatory impact would be negative for the rating. KEY RATING DRIVERS Acquisitions Drive up Net Leverage: Fitch expects Entain's net adjusted debt / EBITDAR at around 4.0x during the next two years, which is in line with its current rating. This follows materially higher acquisition spend - around GBP1 billion in 2022 - than expected under the previous rating case, with the SuperSport acquisition funded by additional USD750 million debt. However, the latest acquisitions are EBITDA-accretive and will help improve the group's geographic diversity. Financial Discipline Key to Rating: Fitch expects Entain to operate near their 3.0x leverage soft cap to support its growth ambitions. Its rating case incorporates continued bolt-on M&As, earn-outs and continued investments in the US amounting to around GBP640 million over 2023-2025, in addition to around GBP700 million capex, and some dividends. Larger acquisitions, higher capex or friendlier shareholder policies could be negative for the rating. Manageable Execution Risks: Fitch sees limited execution risks around integration of bolt-on M&As, given Entain's successful record with acquisitions. Execution risk around the HMRC investigation remains; therefore, an unmitigated large regulatory impact would be negative for the rating. Post-pandemic Normalisation: Fitch forecasts incorporate around a 5% decline in online revenue in 2022, which is more than compensated by post-pandemic recovery in retail revenue. Fitch assumes a slower decline in 2H22, following a 7% reduction in 1H22, due to the Netherlands closure impact tailing off from 4Q. Subsequently Fitch expects low- to mid-single-digit growth for its existing online business, with regulation supressing its structural growth. Fitch expects revenue from the retail segment to reach around 90% of pre-pandemic levels by end-2022 and then remain broadly flat. This, combined with recent acquisitions, underpins mid-single-digit growth in revenue to 2025. Sound Profitability: Fitch said, "We forecast EBITDAR to exceed GBP1 billion in 2024, up from around GBP0.9 billion in 2022. We continue to expect good profitability, mapping to 'bbb' metrics, with an average EBITDAR margin of 22% to 2025. Our forecasts incorporate 200bp lower gross margin for the online segment, which is partly offset by recovery in retail operations in 2022. We also expect some operating cost pressure in retail, reflecting higher labour and energy costs, while margin improvement would be aided by Entain's cost-saving programme, under which it expects GBP20 million incremental EBITDA savings in 2023. Average free cash flow (FCF) margin of around 4.5% over 2023-2025 is sound, albeit slightly lower than under the previous rating case due to larger debt and higher interest rates." UK Gambling Act Review Uncertainty: Its rating case incorporates a 17% reduction in online revenue from the UK (around GBP1 billion revenue in 2021). This will shave around GBP45 million off EBITDA by 2023 against 2021, mainly from implementation of responsible gaming measures ahead of the delayed UK Gambling Act review. This compares with an GBP118 million negative impact from the fixed-odds betting terminal maximum GBP2 stake introduction in 2019. The outcome from UK Gambling Act review is yet to be seen; a materially higher-than-expected EBITDA impact could be negative for the IDR but is deemed an event risk. Strong Business Profile: Entain is one of the world's leading gaming operators, albeit smaller than Flutter following its merger with The Stars Group in 2020. Entain benefits from its proprietary technology, multiple leading brands that provide betting and gaming services across over 30 regulated markets in Europe, Latin America and Australia, and its commitment to operating solely in regulated markets by end-2023. Its retail presence provides a competitive advantage by granting higher visibility to its online operations, which drive the growth of the business. Diversification Helps: Diversification into growing and regulating markets should help reduce reliance on and regulatory impact from Entain's main online markets - the UK, Australia, and Italy, which contributed around 70% of revenue in 1H22. Fitch expects Entain to continue investing in its 50:50 joint venture with MGM Resorts International in the US and have assumed around GBP300 million investment but no dividend inflow over the rating horizon. Fitch anticipates US operations to turn profitable in 2024. This is neutral to funds from operations (FFO) under our Corporate Rating Criteria. Immaterial Inflation or Stagflation Pressure: Gaming companies have limited exposure to inflationary pressure on their retail operations (Entain: 30% of 1H22 revenue). They are well-equipped to pass on increased costs to customers. Also, gaming operators have previously demonstrated resilience against economic downturns - gaming expenses tend to account for an insignificant part of household expenses and are less discretionary than some other forms of leisure. Therefore, Fitch does not incorporate deterioration in revenue per customer from factors other than regulatory changes. DERIVATION SUMMARY Entain's business profile is commensurate with a higher rating category, supported by its sound profitability and large scale. Its close peer Flutter Entertainment Plc (BBB-/Negative) is larger and better diversified than Entain, following its merger with The Stars Group. Flutter has a leading position in the US, lower exposure to UK and wider business & customer segment diversification via higher exposure to peer-to-peer platforms, including poker and betting exchange, as well as lottery. Its peer 888 Holdings Plc (888, BB-/Negative) similarly has strong brands, retail presence in the UK (via acquired William Hill operations) but smaller scale and slightly weaker diversification than Entain. Entain's expected EBITDAR margin at around 21% over the next two years is solid at the midpoint of 'BBB' rating, and above 888's but slightly below Flutter's, when deconsolidating its US operations for comparability. Entain has weaker profitability than Allwyn International a.s. (previously, SAZKA Group a.s., BB-/Stable), and is more exposed to increasingly stringent regulation of sports betting and online betting, but has better diversification. Entain's FFO adjusted net leverage is expected at above 4.0x, higher than Flutter's, once the latter deleverages post-Sisal acquisition to around 3.5x by 2024, towards its more conservative net debt/EBITDA target 1.0x-2.0x vs Entain's medium target of 2.0x. Entain's leverage is lower than 888's after the latter's debt-funded acquisition of William Hill International. Fitch expects 888 to deleverage to just below 6.5x by 2024. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Medium-single digit online revenue decline in 2022, driven by rollout of responsible gaming measures, followed by middle single-digit growth to 2025 - UK online revenue to decline 13% in 2022 and further 5% in 2023 - Retail reaching 90% of pre-pandemic revenue in 2022, followed by flat trend in 2023-2025 - EBITDA margin of 19.3% in 2022, a 70bp decline on 2021's, as an expected 200bp decrease in online gross margin is offset by strong rebound in retail profitability - US operations becoming profitable in 2024, after a one-year lag to management assumptions with no dividends over the rating horizon - Neutral working capital to 2025 - Capex at around 5% from revenue to 2025 - Investment in US operations of GBP300 million in total over 2022-2024 - Dividends of around GBP50 million in 2022 and around GBP100 million-GBP120 million in 2023-2025 - Acquisition spend of around GBP1 billion in 2022, followed by an average of around GBP170 million for bolt-on M&As & earnouts per year to 2025 RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Continued strong profitability with diversification helping to offset tighter gaming regulation, and realisation of planned synergies resulting in an EBITDAR margin above 22% - FFO-adjusted net leverage trending towards 4.0x or adjusted net debt/EBITDAR trending towards 3.5x on a sustained basis - FFO fixed-charge coverage above 3.0x Factors that could, individually or collectively, lead to negative rating action/downgrade: - Weaker than forecast profitability due to increased competition or more material impact from regulation leading to an EBITDAR margin at or below 18% - FFO-adjusted net leverage or adjusted net debt/EBITDAR above 4.5x - Maintaining shareholder-friendly financial policies that limit deleveraging prospects - FFO fixed-charge coverage below 2.5x along with a deteriorating liquidity buffer LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: Entain's liquidity was comfortable at end- 2021 with GBP281 million of available cash (net of GBP206 million cash held on behalf of customers that is treated as restricted by Fitch) and GBP590 million available under RCF. The debt documentation includes a springing covenant, which is tested when the facility is 40% drawn, and set at a maximum net debt/EBITDA of 6.0x until July 2023, before reducing to 5.5x until July 2025 and to 5.0x until maturity in 2026. Fitch expects Entain's financial flexibility to reduce as it draws on its RCF in 2022 to part-fund M&A. Fitch understands that Entain has repaid GBP100 million of Ladbrokes bonds that were due in September 2022, but it is exposed to refinancing of its GBP400 million fixed-rate bonds due in September 2023, along with its EUR1.125 billion TLB due in March 2024 in what will be a higher interest-rate environment. Generic Approach for Senior Secured Instruments: Fitch rates Entain's senior secured instrument ratings, including for the planned TLB, at 'BB+' in accordance with Fitch's Corporates Recovery Ratings and Instrument Ratings Criteria, under which Fitch applies a generic approach to instrument notching for 'BB' rated issuers. Entain's capital structure is characterised by an all-senior debt structure. All debt ranks pari passu, and includes cross-guarantees and share pledges from key group subsidiaries representing at least 75% of group EBITDA. ESG CONSIDERATIONS Entain has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to increasing regulatory scrutiny on the sector, amid greater awareness around the social implications of gaming addiction and increasing focus on responsible gaming. This factor 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. Debt Rating Recovery ---- ------ -------- Entain Holdings (Gibraltar) Limited senior secured LT BB+(EXP) Expected Rating RR2 GVC Finance LLC senior secured LT BB+(EXP) Expected Rating RR2 EUROSAIL-UK 2007-5: Fitch Affirms 'CCsf' Rating on Class D1c Notes ------------------------------------------------------------------ Fitch Ratings has upgraded one tranche of Eurosail-UK 2007-6 NC plc (ES07-6) and three tranches of Eurosail-UK 2007-1 NC plc (ES07-1) and affirmed the others. Fitch has also affirmed Eurosail-UK 2007-5 NP plc (ES07-5). 12 tranches have been removed from Under Criteria Observation (UCO). Debt Rating Prior ---- ------ ----- Eurosail-UK 2007-6 NC Plc Class A3a XS0332285971 LT AAAsf Affirmed AAAsf Class B1a XS0332286862 LT BBB-sf Upgrade B+sf Class C1a XS0332287084 LT B-sf Affirmed B-sf Class D1a XS0332287597 LT CCCsf Affirmed CCCsf Eurosail-UK 2007-1 NC Plc Class A3a XS0284931853 LT AAAsf Affirmed AAAsf Class A3c 298800AJ2 LT AAAsf Affirmed AAAsf Class B1a XS0284932315 LT AAAsf Affirmed AAAsf Class B1c XS0284947263 LT AAAsf Affirmed AAAsf Class C1a XS0284933719 LT A+sf Affirmed A+sf Class D1a XS0284935094 LT BBBsf Upgrade BB+sf Class D1c XS0284950994 LT BBBsf Upgrade BB+sf Class E1c XS0284956330 LT BBsf Upgrade B+sf Eurosail-UK 2007-5 NP Plc Class A1a XS0328024608 LT B-sf Affirmed B-sf Class A1c XS0328025241 LT B-sf Affirmed B-sf Class B1c XS0328025324 LT CCCsf Affirmed CCCsf Class C1c XS0328025597 LT CCCsf Affirmed CCCsf Class D1c XS0328025670 LT CCsf Affirmed CCsf TRANSACTION SUMMARY The transactions comprise non-conforming UK mortgage loans originated by Southern Pacific Mortgage Limited (formerly a wholly-owned subsidiary of Lehman Brothers) and Alliance & Leicester. KEY RATING DRIVERS Off UCO: In the update of its UK RMBS Rating Criteria on 23 May 2022, Fitch updated its sustainable house price for each of the 12 UK regions. The changes increased the multiple for all regions other than North East and Northern Ireland, updated house price indexation and updated gross disposable household income. The sustainable house price is now higher in all regions except Northern Ireland. This has a positive impact on recovery rates (RR) and consequently Fitch's expected loss in UK RMBS transactions. Fitch also reduced its foreclosure frequency (FF) assumptions for loans in arrears based on a review of historical data from its UK RMBS rated portfolio. The changes better align the assumptions with observed performance in the expected case and incorporate a margin of safety at the 'Bsf' level. The updated criteria contributed to the rating actions and the removal of the ratings from UCO. Lower Than MIR: Asset performance in non-conforming pools may be subject to performance deterioration as a result of rising inflation and interest rates. An increase in arrears could result in a reduction of the model-implied rating (MIR) in future analysis. In ES07-1 the class C, D and E notes ratings' are constrained to one notch below the respective MIR. In ES07-6 the class B notes' rating is one notch below the MIR to account for the risk. Sequential Payments to Continue: Fitch expects ES07-1 to continue amortising sequentially. Pro rata amortisation is being prevented by number of triggers, such as the cumulative loss trigger, which cannot be cured. The sequential amortisation and non-amortising reserve fund has allowed credit enhancement (CE) to build up for all notes. ES07-6 breached the 90 days plus arrears trigger of 22.5% in June 2020 and given that current arrears are at 23.03%, the transaction has continued to pay sequentially since then. Unmitigated Tail Risk: Fitch believes ES07-5 will be exposed to significant tail risk. In Fitch's back-loaded default distribution scenarios, the transaction is likely to repay principal on a pro-rata basis until the aggregate principal amount outstanding of the notes is less than 10% of the original pool balance. At the same time, the transaction's reserve fund will amortise and the fixed senior costs the transaction must pay will deplete any excess spread available to meet interest payments on the notes, as the pool balance shrinks. Change in Arrears Reporting Methodology: The servicer updated its arrears calculation methodology effective as of 1Q22. Rather than determining the number of months in arrears by dividing a borrower's arrears balance by the payment due, the servicer now refers to number of full monthly payments missed. This resulted in a reduction of the reported number of months in arrears for some borrowers and was incorporated into the analysis. Late-stage arrears have decreased to 22.2% in June 2022 from 25.1% in December 2021 for ES07-1, to 9.5% from 11.9% for ES07-5 and to 18.7% from 20.9% for ES07-6. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: The transactions' performance may be affected by changes in market conditions and economic environment. Weakening economic performance is strongly correlated with increasing levels of delinquencies and defaults that could reduce CE available to the notes. Additionally, unanticipated declines in recoveries could also result in lower net proceeds, which may make certain notes susceptible to potential negative rating action depending on the extent of the decline in recoveries. Fitch tested a 15% increase in the weighted average (WA) FF and a 15% decrease in the weighted average (WA) RR. The results indicate downgrades of up to nine notches. Factors that could, individually or collectively, lead to positive rating action/upgrade: Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and potential upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the WAFF of 15% and an increase in the WARR of 15%. The results indicate upgrades of up to five notches. DATA ADEQUACY Eurosail-UK 2007-1 NC Plc, Eurosail-UK 2007-5 NP Plc, Eurosail-UK 2007-6 NC Plc Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' (Eurosail-UK 2007-1 NC Plc, Eurosail-UK 2007-5 NP Plc, Eurosail-UK 2007-6 NC Plc) initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS Eurosail-UK 2007-1, 2007-5 and 2007-6 have an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to the pool exhibiting an interest-only maturity concentration among the legacy non-conforming owner-occupied loans of greater than 40%, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Eurosail-UK 2007-1, 2007-5 and 2007-6 have an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to a significant proportion of the pool containing owner-occupied loans advanced with limited affordability checks, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. IGLOO ENERGY: Placed Into Creditors' Voluntary Liquidation ---------------------------------------------------------- Southern Daily Echo reports that an energy supplier which collapsed last year with the loss of 226 jobs is being placed into liquidation. Southampton-based Igloo Energy Supply was one of a string of smaller companies which ceased trading as the price of wholesale energy rose rapidly, Southern Daily Echo discloses. Administrators were appointed after the directors told the industry regulator last year that Igloo would be unable to pay its debts as they fell due, Southern Daily Echo recounts. Its 179,000 customers were all transferred to one of the industry's big names, E.ON, Southern Daily Echo notes. The founders of the business said at the time the market was "no longer sustainable" for their company, Southern Daily Echo relays. According to Southern Daily Echo, the final update from joint administrators Rob Croxen and Jonny Marston, of Alvarez Marsal, says the business will now be placed into creditors' voluntary liquidation. Osaka Gas UK, which had first call on the company's assets and submitted a claim for GBP17.8 million, has been paid in full, Southern Daily Echo states. Lightbulb ES Limited, which was Igloo's only shareholder -- and had Igloo founders Matt Clemow and Henry Brown among its directors -- has been paid GBP5.39 million, Southern Daily Echo notes. The company's debts to unsecured trade creditors have previously been estimated at GBP45.36 million, Southern Daily Echo discloses. According to Southern Daily Echo, the administrators' report says: "Based on current estimates, we anticipate that unsecured creditors should receive a dividend. We have yet to determine the amount and timing of this due to uncertainty regarding asset realisations, cost of realisation, adjudication of claims and the outcome of the court directions hearing." In the period covered by the report, administrators have been paid GBP3.4 million in fees, Southern Daily Echo notes. Thirty-nine of Igloo's staff were made redundant soon after administrators were appointed in October last year, Southern Daily Echo recounts. MANSARD MORTGAGES 2006-1: Fitch Hikes 'BB+' Rating on Cl. B2a Notes ------------------------------------------------------------------- Fitch Ratings has upgraded Mansard Mortgages 2006-1 Plc's (MM06-1) class M2a notes and Mansard Mortgages 2007-2 Plc's (MM07-2) class M2a, B1a, and B2a notes. All other classes have been affirmed. All non-'AAAsf' rated tranches have been removed from Under Criteria Observation (UCO). Debt Rating Prior ---- ------ ----- Mansard Mortgages 2007-2 PLC Class A1a XS0333305299 LT AAAsf Affirmed AAAsf Class A2a XS0333306933 LT AAAsf Affirmed AAAsf Class B1a XS0333313988 LT A+sf Upgrade BBB+sf Class B2a XS0333340361 LT BB+sf Upgrade B-sf Class M1a XS0333308475 LT AAAsf Affirmed AAAsf Class M2a XS0333311693 LT AA+sf Upgrade AA-sf Mansard Mortgages 2006-1 PLC A2a 56418MAB5 LT AAAsf Affirmed AAAsf B1a 56418MAE9 LT AAsf Affirmed AAsf B2a 56418MAF6 LT BB+sf Affirmed BB+sf M1a 56418MAC3 LT AAAsf Affirmed AAAsf M2a 56418MAD1 LT AAAsf Upgrade AA+sf TRANSACTION SUMMARY The transactions are backed by residential mortgages originated by Rooftop Mortgages, a non-conforming mortgage lender no longer active in the market. KEY RATING DRIVERS Off UCO: Fitch updated its UK RMBS Rating Criteria on 23 May 2022 to include its latest sustainable house prices for each of the 12 UK regions. The changes increased the multiple for all regions other than the North East and Northern Ireland, updated house price indexation and updated gross disposable household income. Its sustainable house prices are now higher in all regions except Northern Ireland. This has a positive impact on recovery rates (RR) and consequently Fitch's expected loss in UK RMBS transactions. Fitch also reduced its foreclosure frequency (FF) assumptions for loans in arrears based on a review of historical data from its UK RMBS rating portfolio. The changes better align the assumptions with observed performance in the expected case and incorporate a margin of safety at the 'Bsf' level. The updated criteria contributed to the rating actions. Performance Adjustment Factor: The combination of the UK RMBS criteria changes and a stable constant default rate resulted in a higher performance adjustment factor (PAF) for the transaction, leading to volatility in the weighted average (WA) FF derived for the pool. For this analysis, Fitch capped the PAF for the transactions at the previous review's level, so that the 'Bsf' WAFF more accurately reflected Fitch's default expectations for the pool at that rating level, given the stable transaction performance and pool composition. Credit Enhancement Accumulation: The cash reserve in each transaction is non-amortising due to irreversible trigger breaches. As a result, credit enhancement (CE) for all notes continues to increase and Fitch expects this to continue for the transactions' life, despite the pro-rata amortisation. Since the last review, CE for the senior notes has increased to 92.0% from 90.0% and to 49.5% from 48.0% for MM06-1 and MM07-2, respectively. Uncertain Asset Performance: Fitch expects asset performance in non-conforming pools may be subject to performance deterioration as a result of rising inflation and interest rates. A modest increase in arrears could result in a reduction of the model-implied rating (MIR) in future model updates, in these transactions the small remaining pool balance increases the potential impact of a small number of loans entering arrears. The ratings on MM06-1's class B1a notes and MM07-2's class B2a notes have been constrained at two notches below their MIR to account for this risk. Liquidity Protection Mechanism Beneficial: Both transactions benefit from a static reserve fund and a non-amortising liquidity facility, which is entirely dedicated to cover senior fees and interest shortfalls on all classes of notes. The reserve fund can be used to cover senior fees, interest shortfalls on the class A2 to B2 notes, and for losses. The liquidity facility is available to all classes of notes. For notes below class A the availability is subject to a principal deficiency ledger condition. Basis Swap Unwound: MM07-2's basis risk was hedged via a date adjuster swap contract, where the issuer pays the relevant counterparty a spread of 16bp. As part of the Libor transition this has been unwound at no cost to the issuer. This is beneficial for the transaction's junior notes, as more excess spread is available to remedy principal losses. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: The transactions' performance may be affected by changes in market conditions and economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce CE available to the notes. Fitch conducts sensitivity analyses by stressing both a transaction's base-case FF and RR assumptions, and examining the rating implications on all classes of issued notes. Under this scenario, Fitch assumed a 15% increase in the WAFF and a 15% decrease in the WARR. The results indicate up to six-notch downgrades for the junior tranches. Factors that could, individually or collectively, lead to positive rating action/upgrade: Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and potential upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the FF of 15% and an increase in the RR of 15%. The results indicate an upgrade of up to 10 notches for the junior notes. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transaction's initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS Mansard Mortgages 2006-1 and Mansard Mortgages 2007-2 have an ESG Relevance Score of '4' for "Human Rights, Community Relations, Access & Affordability" due to a significant proportion of the pools containing owner-occupied loans advanced with limited affordability checks, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Mansard Mortgages 2006-1 and Mansard Mortgages 2007-2 have an ESG Relevance Score of '4' for Social Impact due to accessibility to affordable housing and compliance risks including fair lending practices, mis-selling, repossession/foreclosure practices and consumer data protection (data security), 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. NEPTUNE ENERGY: Fitch Hikes LongTerm IDR to 'BB+', Outlook Stable ----------------------------------------------------------------- Fitch Ratings has upgraded Neptune Energy Group Midco Limited's (Neptune) Long-Term Issuer Default Rating (IDR) to 'BB+' from 'BB'. The Outlook is Stable. Fitch has also upgraded Neptune Energy Bondco Plc's senior unsecured notes to 'BB+' from 'BB'. The Recovery Rating is 'RR4'. The issuer is a direct subsidiary of Neptune, which guarantees the notes on a senior unsecured basis. The upgrade of Neptune's IDR to 'BB+' reflects an increase of operational scale to 160-170kboepd, following new wells coming into production in 2023 and its expectation that the company will maintain a conservative financial profile inside its net debt/EBITDAX target of below 1.5x through the cycle. Fitch's rating case assumes net debt of below USD1 billion by year end-2022 with funds from operations (FFO) net leverage at or below 0.5x over the next three years. Fitch expects Neptune to maintain its current absolute reserves (1P: 409mmboe; 2P 604mmboe) or grow them through exploration or bolt-on acquisitions. KEY RATING DRIVERS Strong Financial Profile: Fitch said, "We forecast that Neptune will generate cumulative FFO of around USD6 billion over 2022 and 2023. We expect it to use exceptionally strong cash flow generation to reduce net debt to below USD1 billion on a sustained basis. As a result, we forecast FFO net leverage to remain at or below 0.5x over the next three years, signalling substantial financial flexibility. Neptune has an internal target to maintain a conservative capital structure with net debt/ EBITDAX below 1.5x (as per company definition) through the cycle." Operational Scale Increasing: Production guidance for 2022 is 135-145kboepd (all production numbers include contributions from equity-accounted affiliates). With its projects Njord, Fenja and Seagull coming online in 2023 and restarts of Snovhit and Touat, the group is expected to increase production to around 170kboepd next year, with a production profile of around 160kboepd in the following years. Increasing operational scale reflected in the higher production run-rate of 160-170kboepd improved the company's positioning compared with peers and supported a rating upgrade. Diversified Asset Base: Fitch assesses Neptune's reserve base as fairly diversified. In 2021, its three largest projects, Gjoa in Norway, Cygnus in the UK and Jangkrik in Indonesia accounted for 16%, 11% and 11% of production, respectively. Neptune's diversification across assets and countries reduces the company's exposure to potential technical issues and country risks (eg. exposure to windfall taxes). The share of natural gas, including LNG, is 74% of Neptune's portfolio (based on 2021 production), but its revenue is more diversified by pricing mechanisms as its LNG sales are pegged to oil. Reserve Replacement Important: In 2021, Neptune's proved reserves of 409mmboe (604mmboe on a 2P basis) improved incrementally, resulting in a reserve life of eight years (12 years on a 2P basis; both calculated based on 2022 guidance). Neptune's absolute reserves are in the lower range of what Fitch views as commensurate with the 'BB' rating category, although this is partly mitigated by the company's low leverage, which should allow for bolt-on acquisitions and exploration. Strong Environmental Credentials: Neptune's assets demonstrate strong performance in carbon and methane intensity, with potential to electrify some additional assets/hubs. The company plans to take a leading role in energy transition with a net zero target (Scope 1, 2 and 3) by 2030; its aim is to store more carbon in depleted fields than is emitted from operations and the use of its products. Plans for carbon storage in the Netherlands are well-advanced and Neptune is working on other projects for carbon storage as well as green hydrogen production across its asset portfolio. DERIVATION SUMMARY Neptune's level of production (135-145kboepd guidance for 2022) is smaller than that of Murphy Oil Corporation (BB+/Stable; 168-176kboepd guidance for 2022) and Harbour Energy PLC (BB/Stable; 200-210kboepd guidance for 2022). Harbour Energy has a similarly strong financial profile as Neptune, but its producing asset base for now is concentrated in the UK and absolute reserves are among the lowest in the 'BB' peer group with 488mmboe for 2P (1P not publicly disclosed), which constrains the rating to 'BB'. The low level of absolute reserves is reflected in higher capex and may lead to larger acquisitions over the medium term to sustain the production profile. Murphy Oil has significantly larger 1P reserves of 699mmboe, diversification of producing assets across the US and Canada (onshore and offshore) and higher capex. The company is equally focusing on debt reduction following strong earnings generated in the current market. KEY ASSUMPTIONS - Brent oil price at USD100/bbl in 2022, USD85/bbl in 2023, USD65/bbl in 2024, and USD53/bbl in 2025 - Title transfer facility (TTF) gas price at USD45/mcf in 2022- 2023, USD20/mcf in 2024, USD10/mcf in 2025, and USD5/mcf in 2026 - Production (excluding equity-accounted affiliates) of around 132kboepd in 2022, ramping up to above 150kboepd in 2023, and then settling around 150kboepd to 2026 - Capex, including capitalised exploration, around USD600 million on average over 2022-2025 - Dividends of USD1,100 million in 2022 and 100% of free cash flow (FCF) before dividends in subsequent years RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Meaningful improvement in the business profile, either through rising production levels together with higher absolute levels of 1P and 2P reserves or through adding revenue streams that moderate Neptune's exposure to the commodity-price cycle while maintaining conservative financial profile Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO net leverage consistently above 2.5x - Large debt-funded acquisitions or dividends - Falling 1P or 2P reserve life or absolute level of proved reserves - Delays at the largest projects leading to cost overruns and falling production LIQUIDITY AND DEBT STRUCTURE Strong Liquidity: As of end-June 2022 Neptune held USD229 million of cash and USD1.5 billion remained available under its reserve base lending (RBL) facility due in May 2024. Cash flow generation in 2H22 has been exceptionally strong linked to the energy crisis in Europe, which is unlikely to change going into 2023. Fitch forecasts net debt at end-2022 of below USD1 billion. The agency expects Neptune to refinance its RBL facility in 2023, which will support considerable financial flexibility over the medium term. ISSUER PROFILE Neptune is a private medium-scale exploration and production (E&P) oil and gas producer. The company's portfolio is predominantly natural gas, including the production of LNG, with assets mainly in Europe as well as Algeria, Egypt and Indonesia. SUMMARY OF FINANCIAL ADJUSTMENTS - Leases of USD131.7 million excluded from the debt amount. Right-of-use asset depreciation of USD52.7 million and interest for leasing contracts of USD5.7 million treated as operating expenditure, reducing EBITDA - Loans advanced to the parent company of USD455.3 million were classified as dividends 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 ---- ------ -------- ----- Neptune Energy Group Midco Limited LT IDR BB+ Upgrade BB Neptune Energy Bondco Plc senior unsecured LT BB+ Upgrade RR4 BB WASPS: No Exceptions for Club Avoiding Relegation ------------------------------------------------- Bobby Bridge at CoventryLive reports that former England hooker Brian Moore believes there can be "no exceptions" when it comes to Gallagher Premiership clubs being relegated if they go into administration. His comments came after Wasps legend Lawrence Dallaglio claimed his former club should be spared from exiting the top tier of English rugby should the club enter into administration, CoventryLive notes. With HMRC chasing payment for an unpaid tax bill, and GbP35 million owed to bondholders, Wasps Holdings Limited has twice filed a notice of its intention to appoint an administrator, CoventryLive recounts. League rules are clear that any team entering into administration will be punished with relegation, CoventryLive states. However, should Wasps enter into administration, they could avoid relegation if the insolvency event "would not have occurred but for an event or circumstance which was beyond the control and without the fault or negligence of the affected club", CoventryLive discloses. Listed among the "no fault" reasons are events such as riot, war and invasion -- but more appropriately, a national-level pandemic, according to CoventryLive. Mr. Dallaglio had previously used his platform with BT Sport to explain the uniqueness of the Wasps business model, which includes banqueting, conferencing, hosting events, hotel and a casino -- all of which would've been detrimentally impacted by Covid-19, CoventryLive discloses. The England World Cup winner's latest comments reaffirmed the point that Wasps are not in administration, but should that eventuality occur, the RFU "will have some decisions to make", adding "do you want to lose one of the biggest brands in club rugby, in world rugby and one of the brands that's been one of the most successful sides in the Premiership. Let's hope it doesn't come to that", CoventryLive relates. Mr. Dallaglio's comments came in BT Sport's coverage ahead of the Gallagher Premiership round five clash between Wasps and Northampton Saints, CoventryLive notes. At a similar time, Sky News broke its exclusive story that former Wasps chief executive David Armstrong, who was present at Sunday's game, was spearheading a takeover with the assistance of Termimum Capital, CoventryLive relays. The report claimed the deal is worth GBP50 million with a further GBP12 million earmarked for working capital and that the bid included a request being made to Premiership Rugby Limited, the league's administrator, and the Rugby Football Union, the sport's governing body, that a deal executed through an administration process should not result in the club's relegation, CoventryLive disclsoes. According to CoventryLive, he wrote: "This looks to me very much like a 'pre-pack' deal, where companies agree with a potential administrator what deal will be done immediately when the company goes into administration. This means the company continues to trade but it does nothing for those creditors who lose out and it means the buyer gets to buy cheaper than if they bought a going concern." ********* 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- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. 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. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *