/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/221021.mbx T R O U B L E D C O M P A N Y R E P O R T E R E U R O P E Friday, October 21, 2022, Vol. 23, No. 205 Headlines G E R M A N Y NIDDA BONDCO: Fitch Affirms LongTerm IDR at 'B', Outlook Negative NURI: Files for Customers Urged to Withdraw Money Before Dec. 18 I R E L A N D BNPP AM EURO 2018: Fitch Hikes Rating on Class F Notes to 'B+sf' DRYDEN 62 EURO: Fitch Hikes Rating on Class F Notes to 'B+sf' P O L A N D TAURON POLSKA: Fitch Affirms 'BB' LongTerm Rating on Sub. Debt S P A I N AERNNOVA AEROSPACE: Fitch Alters Outlook on 'B' IDR to Stable U N I T E D K I N G D O M BLISS HOTEL: Put Up for Sale Following Administration CATCH: Enters Administration, Halts Operations EVE SLEEP: Benson for Beds Buys Business Out of Administration ST MARY'S COLLEGE: Enters Liquidation, Owes GBP8MM to Creditors VICTORIA PLC: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable X X X X X X X X [*] BOOK REVIEW: Transnational Mergers and Acquisitions - - - - - ============= G E R M A N Y ============= NIDDA BONDCO: Fitch Affirms LongTerm IDR at 'B', Outlook Negative ----------------------------------------------------------------- Fitch Ratings has assigned Nidda Healthcare Holding GmbH's planned issue of EUR500 million exchange senior secured notes, maturing in 2026, an expected 'B+(EXP)' rating with a Recovery Rating of 'RR3'. Nidda Bondco GmbH's (Nidda) Long-Term Issuer Default Rating (IDR) has been affirmed at 'B' with a Negative Outlook. Fitch sees the proposed exchange as a reduction of terms for investors of Nidda's existing 2024 senior secured notes, which will partially be compensated by an expected higher coupon and an upfront fee. However, there is no evidence, to date, of such exchange being conducted to avoid insolvency proceedings or a payment default. Fitch assumes the exchanged debt to account for less than 10% of Nidda's total debt quantum. The 'B' IDR balances Nidda's high leverage with its robust business profile. The Negative Outlook reflects slow deleveraging prospects feeding into increased refinancing risk ahead of debt maturities in 2024-2025. The assignment of a final instrument rating is contingent on the completion of the proposed exchange. KEY RATING DRIVERS Exchange Offer: Nidda is offering a new note maturing in 2026 to the owners of its existing senior secured notes due in 2024. The tender is at par and is conditional on a minimum aggregate amount of EUR500 million. The reduction of terms will partially be compensated by an expected higher coupon and an upfront payment. Fitch expects the participation rate to achieve the minimum amount. Fitch notes the absence of mandatory language and believe that the failure of the proposal will not in itself lead to a form of default of the issuer over its rating horizon. Refinancing Risks Still High: Nidda's high leverage increases the risk of refinancing at more onerous terms. This concerns the entirety of Nidda's capital structure, including its revolving credit facility (RCF) due in 2023, the remaining part of its senior secured notes due in 2024, and the rest of its senior secured and senior debt due in 2025 and 2026. Fitch expects Nidda to address the refinancing of most of its financial liabilities over the next 12 to 18 months. Fitch views the proposed exchange as a mitigating factor of refinancing risk. Fitch understands from management that a process to obtain a maturity extension of the RCF is ongoing. High Leverage Until 2024: Slowing economic growth and increased input costs may exhaust Nidda's leverage headroom. As a result, Fitch expects total debt/EBITDA to trend towards 7.5x in 2023, before easing back to 7.0x in 2024. Economic Slowdown Affects Growth: Fitch forecasts GDP in the eurozone and Germany to contract 0.1% and 0.5%, respectively, in 2023. Consumer spending is forecast to grow modestly in Germany and to contract in the eurozone in 2023. Fitch views the pharmaceutical industry as fairly resilient to consumer spending pressures, which should help support revenue in European markets. Fitch assumes Nidda's revenue growth to slow to low single digits in 2023, before returning to mid-single digits in 2024-2025. Mitigated Energy Inflation Impact: Nidda has geographically diversified production sites, with less than 10% of production in Germany and around 50% in Serbia. This significantly reduces its exposure to energy inflation in the eurozone for the next 12-18 months. Fitch forecasts Fitch-calculated EBITDA margin to soften only by 140bp in 2023, due to favourable gas price terms in Serbia. Aggressive Financial Policy: Nidda had until now prioritised debt-funded expansion over deleveraging. Despite Nidda's healthy cash flow, deleveraging by way of debt prepayment is unlikely, in its view. Fitch expects Nidda to continue making opportunistic bolt-on acquisitions as the European pharmaceutical market offers viable targets. These provide opportunities for large pharma companies to consolidate and streamline their product portfolios. As a result, Nidda's financial risk may increase depending on the size, profitability and margin-dilutive nature of its targets. Self-Sufficient Russian Operations: Fitch does not expect Nidda's exposure to Russia to have a contagion effect on the rest of its operations. Its profitable operations in Russia solely serve the local market. The Russian business is funded by local-currency loans and has limited exposure to imported substances. However, shrinking disposable income of the Russian population, together with drug costs not being reimbursed by compulsory medical insurance, can undermine Nidda's earnings and cash flow generated in Russia. Russian counter-sanctions may also constrain the transferability of cash and profits outside Russia. Healthy Operations Outside Russia: The IDR remains firmly placed at 'B', supported by Nidda's healthy sizeable operations outside Russia with a well-diversified product portfolio and pan-European footprint. Although declining, Fitch-defined EBITDA margin is estimated above 22% in 2023, which is appropriate for the sector. Positive Market Fundamentals: Fitch expects the positive fundamentals for the European generics market to continue as governments and healthcare providers seek to optimise rising healthcare cost stemming from growing ageing populations, increasing prevalence of chronic diseases, and expensive new innovative treatments coming to market and affecting budgets. Fitch sees continued structural growth opportunities, given limited overall generic penetration in Europe versus the US and the increasing introduction of biosimilars. DERIVATION SUMMARY Fitch rates Nidda using its Global Rating Navigator Framework for Pharmaceutical Companies. Under this framework, Nidda's generic and consumer business benefits from diversification by product and geography, with a balanced exposure to mature, developed and emerging markets. Nidda's business risk profile is affected by the lack of a global footprint compared with industry champions such as Teva Pharmaceutical Industries Limited (BB-/Stable) and Viatris Inc (BBB/Stable), and diversified companies, such as Novartis AG (AA-/Stable) and Pfizer Inc. (A/Positive). High financial leverage is a key rating constraint, compared with international peers', and is reflected in the 'B' rating with a Negative Outlook. Nidda ranks ahead of other highly speculative peers such as Care Bidco (B/Stable), and Roar Bidco AB (B/Stable), in size and product diversity. Nidda's business is mainly concentrated in Europe, but it also has a growing presence in developed and emerging markets. This gives Nidda a 'BB' category risk profile. However, its high financial risk, with total debt/EBITDA projected to remain above 7.0x until 2024, is in line with a 'B-' rating in the sector, albeit offset by strong free cash flow (FCF) generation. The rating difference between Nidda and higher-rated peers CHEPLAPHARM Arzneimittel GmbH (B+/Stable) and Pharmanovia Bidco Limited (B+/Stable) reflects their less aggressive leverage and asset-light business models, despite smaller business scale and higher product concentration. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Revenue to reach EUR4 billion by 2026, including Russian operations, due to volume-driven growth of Nidda's legacy product portfolio, new product launches, the acquisition of intellectual property rights and business additions - Fitch-defined EBITDA margin averaging 24% over 2022-2025, underpinned by a normalisation in trading operations combined with further cost improvements and synergies realised from the latest acquisitions. Fitch includes EBITDA from Russia in its rating case given Nidda's demonstrated ability to upstream profits and cash from Russia - Working-capital investments of 1%-2% of revenue p.a. to 2025 - Capex at 2.5% of sales a year to 2024 - M&A estimated at EUR100 million per annum, to be primarily funded from internally generated funds and supported by its EUR400 million RCF, and valued at 10x EBITDA with a 20% EBITDA contribution - EUR500 million equivalent of 2024 senior secured notes to be exchanged at par into 2026 exchange notes - Nidda's upcoming debt maturities in 2024-2025 to be refinanced KEY RECOVERY ASSUMPTIONS Nidda would be considered a going-concern (GC) in bankruptcy and be reorganised rather than liquidated. Fitch estimates a post-restructuring EBITDA of around EUR600 million, which would allow Nidda to remain a GC after distress and assuming implementation of some corrective actions. Its estimate of GC EBITDA includes contribution from Russia. Fitch continues to apply a 6.0x distressed enterprise value (EV)/EBITDA multiple. Fitch assumes Nidda's senior unsecured legacy debt (at the operating company level), which is structurally the most senior, to rank pari passu with its senior secured acquisition debt, including term loans and senior secured notes. This view is based on its principal waterfall analysis and assuming the EUR400 million RCF is fully drawn in a default. Senior notes at Nidda rank below senior secured acquisition debt. For the purpose of its recovery analysis, we expect EUR500 million 2024 notes to be exchanged into the offered 2026 notes. Its principal waterfall analysis, after deducting 10% for administrative claims, generates a ranked recovery for the senior secured debt of 56% in the 'RR3' category, including the announced senior secured exchange notes, leading to a 'B+' rating, one notch above the IDR. Recoveries envisaged for Nidda's senior unsecured notes remain at 0%, in the 'RR6' band, corresponding to a 'CCC+' instrument rating, two notches below the IDR. Its recovery estimates are not affected by the announced exchange. RATING SENSITIVITIES Factors that could, individually or collectively, lead to an upgrade: - Sustained Fitch-defined EBITDA margin in excess of 25% and FCF margin consistently above 5% - Reduction in total debt/EBITDA to below 6.0x on a sustained basis - Maintenance of EBITDA/interest cover above 3.0x Factors that could, individually or collectively, lead to a revision of the Outlook to Stable: - Progress on refinancing upcoming major debt maturities at prevailing market rates - Restoration of total debt/EBITDA to below 7.5x by end-2023 - Stable EBITDA margins of above 18% and mid-single-digit FCF margins - EBITDA/interest cover of at least 2.5x Factors that could, individually or collectively, lead to a downgrade: - Increase in refinancing risk, including operating underperformance, leading to materially more onerous terms - Escalation of western sanctions and Russian-counter sanctions, hampering transfer and convertibility of cash flows from its Russian operations - M&A shifting towards higher-risk or lower-quality assets or weak integration resulting in pressure on profitability and weak FCF margins - Persistent operating weakness, with EBITDA margins declining to below 18% - Diminished prospects of total debt/EBITDA declining to below 7.5x by end-2023 - EBITDA/interest cover below 2.0x on a sustained basis. LIQUIDITY AND DEBT STRUCTURE Comfortable Liquidity: Fitch projects Nidda to close 2022 with EUR231 million cash on its balance sheet, excluding around EUR150 million restricted cash. Fitch projects healthy FCF generation to 2025, which should be sufficient to fund its operations and potential M&A activity. Large Debt Await Refinancing: Nidda's capital structure (pro-forma for the exchange notes) will comprise around EUR1.4 billon senior secured notes due in September 2024, EUR3 billion senior secured term loans due in June 2025, its undrawn EUR400 million secured RCF due in August 2023 (a maturity extension process is ongoing), EUR579 million senior unsecured notes due in September 2025, EUR46 million legacy Stada OpCo debt, a EUR371 million unsecured rouble-denominated local facility, and the proposed EUR500 million senior secured notes due in 2026. Timely and cost-efficient refinancing of its senior secured loans and senior unsecured notes coming due in 2024-2025 will be critical to its rating assessment. ISSUER PROFILE Nidda is an SPV indirectly owning the Germany-based pharmaceutical company Stada, a manufacturer and distributor of generic and branded consumer healthcare products. 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 ---- ------ -------- ----- Nidda BondCo GmbH LT IDR B Affirmed B senior unsecured LT CCC+ Affirmed RR6 CCC+ Nidda Healthcare Holding GmbH senior secured LT B+(EXP) Expected Rating RR3 senior secured LT B+ Affirmed RR3 B+ NURI: Files for Customers Urged to Withdraw Money Before Dec. 18 ---------------------------------------------------------------- Patrick Huston at Bollyinside reports that customers of German cryptocurrency bank Nuri (formerly known as Bitwala) are being urged to withdraw their money before Dec. 18 in order for the "company to be terminated and liquidated." Due to the lengthy crypto bear market and macroeconomic factors, Nuri filed for insolvency in August, Bollyinside relates. According to Bollyinside, trading will be available through November's end. "Over the past three months, we have worked closely with our insolvency administrators on a restructuring plan during the preliminary insolvency proceedings and have looked for a possible acquisition to carry on our story. Sadly, we have not been successful in locating investors," Bollyinside quotes CEO Kristina Walcker-Mayer as saying in a blog post. ============= I R E L A N D ============= BNPP AM EURO 2018: Fitch Hikes Rating on Class F Notes to 'B+sf' ----------------------------------------------------------------- Fitch Ratings has upgraded BNPP AM Euro 2018 DAC's class F notes and revised the Outlooks on the class B-R to E notes to Stable from Positive, as detailed below. Debt Rating Prior ---- ------ ----- BNPP AM Euro CLO 2018 DAC A-R XS2306989299 LT AAAsf Affirmed AAAsf B-R XS2306989539 LT AA+sf Affirmed AA+sf C-R XS2306989885 LT A+sf Affirmed A+sf D-R XS2306990206 LT BBB+sf Affirmed BBB+sf E XS1857679499 LT BB+sf Affirmed BB+sf F XS1857679655 LT B+sf Upgrade Bsf TRANSACTION SUMMARY BNPP AM Euro 2018 DAC is a cash flow collateralised loan obligation (CLO) backed by a portfolio of mainly European leveraged loans and bonds. The transaction is actively managed by BNP Paribas Asset Management France and will exit its reinvestment period on 15 October 2022. KEY RATING DRIVERS Reinvestment Period Near Close: Following the expiry of the reinvestment period, the manager can still reinvest unscheduled principal proceeds and sale proceeds from credit-improved and credit-risk obligations as long as the reinvestment criteria are satisfied. Fitch believes that the manager will be able to reinvest post reinvestment period and as such has assessed the transaction by stressing to their covenanted limits for the Fitch-calculated weighted average rating factor (WARF), Fitch-calculated weighted average recovery rate (WARR), weighted average spread and fixed-asset share. Stable Outlook: The Stable Outlooks on all notes reflect the current uncertain macroeconomic environment, and its expectation that deleveraging will be limited since the transactions can still reinvest. Stable Asset Performance: The transaction's metrics indicate stable asset performance. The transaction is passing all its tests (collateral-quality, coverage and portfolio-profile tests). Exposure to assets with Fitch-derived ratings of 'CCC+' and below is 3.7%, as calculated by the trustee. 'B'/'B-' Portfolio: Fitch assesses the average credit quality of the obligors for the transaction at 'B'/'B-'. The Fitch-calculated WARF of the current portfolio as reported by the trustee was 34.43. The Fitch-calculated WARF of the current portfolio using the latest criteria definitions was 25.92. High Recovery Expectations: Senior secured obligations comprise 100% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-calculated WARR of the current portfolio as reported by the trustee was 63.6%. Diversified Portfolio: The portfolio is well-diversified across obligors, countries and industries. The top 10 obligor concentration is 12.94% of the portfolio balance and no obligor represents more than 1.9%. Cashflow Modelling: Fitch used a customised proprietary cash-flow model to replicate the principal and interest waterfalls and the various structural features of the transaction, and to assess their effectiveness, including the structural protection provided by excess spread diverted through the par- value and interest-coverage tests. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: A 25% increase of the mean default rate (RDR) and a 25% decrease of the recovery rate (RRR) across all ratings of the current portfolio would have no impact on the class A-R and B-R notes but would lead to downgrades of no more than two notches for the class C-R to F notes. Based on the current portfolio, downgrades may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of defaults and portfolio deterioration. Due to the better metrics and shorter life of the current portfolio than the Fitch-stressed portfolio, the class B-R, D-R and E notes display a rating cushion of one notch while the class F notes display a three-notch rating cushion. Factors that could, individually or collectively, lead to positive rating action/upgrade: A 25% reduction of the mean RDR and a 25% increase in the RRR across all ratings of the Fitch-stressed portfolio would lead to upgrades of up to three notches for the rated notes, except for the 'AAAsf' rated notes. Upgrades may also occur, except for the 'AAAsf' notes if the portfolio's quality remains stable and the notes start to amortise, leading to higher credit enhancement across the structure. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. The majority of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other nationally recognised statistical rating organisations and/or European securities and markets authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information or information on the risk-presenting entities. 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. DRYDEN 62 EURO: Fitch Hikes Rating on Class F Notes to 'B+sf' ------------------------------------------------------------- Fitch Ratings has upgraded Dryden 62 Euro CLO 2017 B.V.'s B, C, E and F class notes, while affirming the rest. Debt Rating Prior ---- ------ ----- Dryden 62 Euro CLO 2017 B.V. A XS1826185438 LT AAAsf Affirmed AAAsf B XS1826185784 LT AA+sf Upgrade AAsf C XS1826186089 LT A+sf Upgrade Asf D XS1826186592 LT BBB+sf Affirmed BBB+sf E XS1826186832 LT BB+sf Upgrade BBsf F XS1826186758 LT B+sf Upgrade Bsf TRANSACTION SUMMARY Dryden 62 Euro CLO 2017 B.V is a cash flow CLO comprising mostly senior secured obligations. The transaction is actively managed by PGIM Limited and will exit its reinvestment period in January 2023. KEY RATING DRIVERS Resilient Asset Performance: Today's rating actions reflect the transaction's resilient asset performance. The transaction is above par by 0.5%, and the excess par amount cannot be moved to the interest account unless the deal is refinanced. The current portfolio's weighted average life (WAL) is 4.51 years and is marginally in breach of the current WAL test threshold (4.5 years). However, the other collateral quality tests, as well as the portfolio profile tests and the coverage tests were all reported as passing as of 31 August 2022. Exposure to assets with Fitch-derived ratings of 'CCC+' and below is 2.3% as calculated by the trustee. The portfolio had exposure to defaulted assets of EUR3.5 million as of 31 August 2022, and Fitch-calculated exposure to 'CC' and below rated obligors was EUR2 million as of 1 October 2022. Reinvesting Transaction: Given the manager's ability to reinvest, our analysis is based on stressing the portfolio to its covenanted limits for Fitch-calculated weighted average rating factor (WARF), Fitch-calculated weighted average recovery rate (WARR), weighted average spread (WAS), weighted average coupon (WAC) and fixed-rate asset share. Deviation from Model-implied Ratings: The class B notes' 'AA+sf' rating and the class D notes' 'BBB+sf' ratings are respectively one notch and two notches below their model-implied ratings (MIRs), reflecting the limited cushion on these of notes under the Fitch-stressed portfolio. 'B'/'B-' Portfolio: Fitch assesses the average credit quality of the obligors at 'B'/'B-'. The reported WARF of the current portfolio was 33.24 as of 31 August 2022, against a covenanted maximum of 35. High Recovery Expectations: Senior secured obligations comprise 93% of the portfolio as calculated by the trustee. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch WARR reported by the trustee for the current portfolio was at 61.9% as of 31 August 2022, compared with the covenanted minimum of 61.4%. Diversified Portfolio: The portfolio is well-diversified across obligors, countries and industries. The top-10 obligor concentration is 21.7%, and no single obligor represents more than 3% of the portfolio balance, as reported by the trustee. Cash Flow Analysis: Fitch used a customised proprietary cash flow model to replicate the principal and interest waterfalls and the various structural features of the transaction, and to assess their effectiveness, including the structural protection provided by excess spread diverted through the par value and interest-coverage tests. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: A 25% increase of the mean default rate (RDR) and a 25% decrease of the recovery rate (RRR) across all ratings would result in downgrades of one notch for the class E notes and two notches for the class F notes. Downgrades may occur if the loss expectation of the current portfolio is larger than initially assumed, due to unexpectedly high levels of defaults and portfolio deterioration. Due to the better metrics of the current portfolio than the Fitch-stressed portfolio, the class B and E notes display a rating cushion of one notch, while the class D and F notes display a three-notch rating cushion, respectively. Factors that could, individually or collectively, lead to positive rating action/upgrade: A 25% reduction of the mean RDR and a 25% increase in the RRR across all ratings of the Fitch-stressed portfolio would result in upgrades of no more than three notches across the structure, apart from the 'AAAsf' class A notes. Upgrades, except for the class A notes, may occur on better-than-expected portfolio credit quality and deal performance, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. The majority of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other nationally recognised statistical rating organisations and/or European securities and markets authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information or information on the risk-presenting entities. 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. =========== P O L A N D =========== TAURON POLSKA: Fitch Affirms 'BB' LongTerm Rating on Sub. Debt -------------------------------------------------------------- Fitch Ratings has affirmed TAURON Polska Energia S.A.'s (Tauron) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook on the IDRs is Stable. The rating affirmation reflects a continuing dominant share of regulated and predictable electricity distribution in Tauron's business profile, solid market position and projected leverage within rating guidelines. Fitch views Tauron's planned divestments of coal-fired power plants and coal mines to the Polish state as credit positive. Tauron's main risk relates to weaker profitability in generation and insufficient compensation from the state's plan for capping retail electricity prices in 2023 at their current level, despite a substantial increase in the cost of electricity production. KEY RATING DRIVERS High Share of Regulated Business: The ratings reflect a high share of regulated electricity distribution with good predictability in Tauron's EBITDA (73% in 2021 and about 60% on average over its forecast period of 2022-2026) and the company's position as the largest electricity distributor in Poland covering southern, densely populated regions. The regulatory framework in Poland is stable and has further improved with the introduction of a regulatory account from 2021, which offsets volume risk. Expected Weaker Profitability for Generation: Fitch expects substantial deterioration in Tauron's 2022 EBITDA in conventional generation mainly due to an increase in fuel prices. This is because most of the electricity sold for 2022 has a price contracted one year before delivery, while the cost of generation, particularly the coal price, has increased considerably in recent months due to a tighter demand-supply balance partly due to a ban on Russian coal. The ban has increased demand for domestic coal while reducing supply for energy groups, with the latter leading to demand for more expensive imported coal. Tauron has set up a PLN943 million provision in its 1H22 financial statements for losses in the generation segment. Nowe Jaworzno Adds Generation Woes: Tauron's new generation unit in Nowe Jaworzno had operational issues resulting in several unscheduled maintenance shutdowns during the year. As the unit's planned generation volumes were sold on the forward market, the missing volumes had to be replaced with purchases on the spot market at significantly higher prices. Losses in generation are only partly offset by profits in the mining segment, driven by increase in coal prices and demand. Supply Under Pressure: Tauron's supply business (averaging 10% of 2017-2021 EBITDA) may come under pressure from 2023, if the company is not allowed to pass on higher purchase costs of electricity to retail customers, as envisaged under the government initiative to cap prices for households in 2023 at their current level, without full reimbursement from the state. The government has announced that it is working on a support mechanism, but important details are yet to be determined. Divestment of Mining Positive: Fitch views the sale of Tauron's three coal mines to the state by end-2022 (for a symbolic amount of PLN1) as positive for Tauron's business mix and financial profile. The sale is also consistent with the company's strategy and in line with the reform of the Polish conventional energy sector. Although the hard-coal mining segment turned profitable in 1H22 due to a sudden increase in coal prices on the global commodity exchanges following an embargo on coal delivered from Russia, it has been structurally loss-making in the last six years and is viewed by Fitch as even a higher-risk segment than coal-fired generation. Advantageous Spin-Off of Coal-Fired Units: Fitch has not included the planned divestments of the company's coal-fired power plants to a state-controlled National Agency for Energy Security (NABE) in its rating case as the key transaction terms, including the price and payment terms, have not yet been agreed on. Fitch believes the divestment will improve Tauron's business profile by eliminating high-risk coal-fired electricity generation from the business mix and allowing Tauron to focus on more predictable, regulated electricity distribution and renewable generation. The transaction is likely to lead to higher debt capacity for the current rating and improved ESG Relevance Scores. Shift to Renewables: Tauron aims to invest in renewables that would increase renewable capacity to 1.6GW in 2025 and 3.7GW in 2030, from 0.6GW at end-2021. It targets mostly investments in onshore and offshore wind, and photovoltaics. Fitch expects the share of renewables in EBITDA to increase to about 10% on average in 2022-2026 from an average of 8% in 2020-2021. Once the spin-off of the coal-fired assets is completed, the renewable segment will become even more important for Tauron's new business model with its EBITDA share growing towards 15% in the medium-to-long term. Rated on a Standalone Basis: Tauron is 30%-owned and effectively controlled by the Polish state (A-/Stable). Based on Fitch's Government-Related Entities (GRE) Rating Criteria, Fitch assesses status, ownership and control links as 'Strong', support record as 'Weak', socio-political impact of a default as 'Moderate', but the financial implications of a default as 'Weak'. Consequently, we do not apply any rating uplift for its links with the Polish state. DERIVATION SUMMARY Tauron's close peer group includes the three other electricity-focused integrated utilities in Poland, which are PGE Polska Grupa Energetyczna S.A. (PGE; BBB+/Stable), ENEA S.A. (BBB/Stable) and Energa S.A. (BBB-/RWP). Tauron and Energa have comparable business profiles benefitting from the large share of regulated distribution in EBITDA, which provides good cash flow visibility. However, Tauron has a greater share of hard-coal fired generation in its business profile, which is currently under pressure. Tauron also controls a mining division, which has been loss-making in the past six years, except for 1H22, and has a negative impact on credit risk. As a result, Fitch assesses that Energa has a more sustainable business profile, which is reflected in its higher debt capacity, with a negative rating sensitivity of 5.0x for its Standalone Credit Profile of 'bbb-' compared with 4.5x for Tauron. Energa's IDR is equalised with that of its parent, PKN ORLEN S.A. (BBB-/RWP). PGE is Poland's largest utility company and has the lowest leverage among the peer group. It derives most of its EBITDA from electricity generation and has a high share of lignite in the generation fuel mix, which provides cost advantage over hard coal-fired peers. Due to a sudden increase in hard coal prices, Tauron and Enea are not able to fully reflect rising generation costs in prices of electricity contracted a year ahead, while PGE is less exposed to this mismatch as it has a high share of lignite-fired generation in its electricity mix. Lignite is priced domestically and has smaller fluctuations of prices. ENEA has a lower share of regulated distribution than Tauron and Energa and at the same time higher exposure to hard coal-fired generation, but controls a profitable mining business. The maximum leverage sensitivity for ENEA's 'BBB' rating is 3.0x. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Following disposal of mining subsidiary a lack of EBITDA contribution from mining in 2023-2026 - Higher CO2, hard coal and gas prices passed on to wholesale electricity prices in Poland - Weighted-average cost of capital (WACC) in the distribution segment at 5.78% in 2022, 6.64% in 2023, 6.8% in 2024, 7.93% in 2025, 7.68% in 2026 (in 2022-2023 WACC includes reinvestment premium at 1.1%) - Capex at PLN23.5 billion over 2022-2026 - No dividend payments in 2022-2026 - The six-month Warsaw interbank offered rate at an average of 6.1% in 2022-2026 RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - FFO net leverage below 3.5x on a sustained basis - A more diversified fuel generation mix, for example through divestment of coal assets to NABE or investments in renewable generation - Increased focus on regulated and quasi-regulated business in capex and overall strategy Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO net leverage above 4.5x and FFO interest cover below 5x on a sustained basis, for example due to higher capex or acquisitions, reinstatement of dividends, unfavourable conditions for the coal assets' spin-off to NABE or problems in getting a waiver for a covenant breach - Weaker EBITDA or working-capital outflows, for example due to economic downturn, under-performance of mining or coal-fired generation, or tariff deficit - Weakening of business profile, for example due to delays in implementation of strategy or increased exposure to higher-risk businesses LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: At end-June 2022 Tauron had PLN702 million of Fitch-calculated readily available cash as well as PLN6,815 million of committed credit facilities. This was against debt maturities of PLN1,779 million in 2H22 and PLN284 million in 2023 as well as Fitch-expected negative free cash flow over 2022-2023, driven by capex. The company has sufficient liquidity until end-2023. Adequate Covenant: Tauron has adequate headroom under the main covenant included in its debt arrangements of net debt-to-EBITDA of up to 3.5x. Its net debt-to-EBITDA increased to 2.9x at end-June 2022 from 2.4x at end-2021, due to deterioration of EBITDA in 1H22. ISSUER PROFILE Tauron is the second-largest electric utility in Poland by EBITDA (after PGE and marginally before ENEA). The company is focused on electricity distribution, which is complemented by electricity generation, supply of electricity and gas and hard-coal mining. ESG CONSIDERATIONS Tauron has ESG Relevance Scores of '4' 'GHG Emissions & Air Quality' and 'Energy Management'. This is due to the dominant share of hard coal in its electricity generation mix, which is carbon-intensive and under regulatory pressure in the EU. These issues have a negative impact on the credit profile, and are 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 ----------- ------ ----- TAURON Polska Energia S.A. LT IDR BBB- Affirmed BBB- ST IDR F3 Affirmed F3 LC LT IDR BBB- Affirmed BBB- LC ST IDR F3 Affirmed F3 Natl LT A(pol) Affirmed A(pol) senior unsecured LT BBB- Affirmed BBB- subordinated LT BB Affirmed BB subordinated Natl LT BBB(pol) Affirmed BBB(pol ========= S P A I N ========= AERNNOVA AEROSPACE: Fitch Alters Outlook on 'B' IDR to Stable ------------------------------------------------------------- Fitch Ratings has revised Aernnova Aerospace S.A.U.'s Outlook to Stable from Negative, while affirming its Long-Term Issuer Default Rating (IDR) at 'B'. While the recovery of Aernnova's operating profitability is slower than expected, Fitch anticipates underlying strong demand from original equipment manufacturers (OEMs) to support a further rebound in Aernnova's backlog, enhancing revenue visibility and cash flow generation. This should help improve its operating profitability and generate sustainable positive free cash flow (FCF), supporting Aernnova's deleveraging capacity. However, Aernnova's recovery risks being adversely affected by inflationary pressures, a negative macroeconomic environment and supply-chain constraints. If profitability in 2023-2024 is below its current expectations Fitch may take a negative rating action. KEY RATING DRIVERS Recovering Profitability: Aernnova's several cost-saving measures have helped improve margins from their pandemic lows, albeit at a slower rate than expected by Fitch, due to current high inflation and supply-chain issues. The aviation industry's recovery since 2H21 also supports profitability improvement. Fitch forecasts EBITDA margins to improve to about 14% by 2024 from about 8% in 2022 and to the high-teens, the pre-pandemic levels, no earlier than 2025. FCF to Improve: Fitch expects improvement in underlying profitability to lift Aernnova's Fitch-defined FCF into positive territory for the first time in three years in 2022. FCF will however be marginal in in both 2022 and 2023 due to inflationary pressures increasing working-capital (WC) needs. In the absence of further severe cost pressure on margins and given expected WC normalisation, Fitch forecasts FCF margin at over 3% from 2024. Leverage to Rebound: Ongoing, albeit lower-than-expected, aircraft deliveries primarily in the single-aisle end-market, should support the group's funds from operations (FFO) and EBITDA generation and, consequently, better leverage metrics. While leverage metric improvement has been slower than previously expected, Fitch anticipates the group's deleveraging capacity to improve materially by 2024. FFO gross leverage and total debt/EBITDA should reach about 5.5x, the 'b' midpoint under Fitch's Navigator for aerospace and defence (A&D), by 2024 versus its previous forecasts of about 4.7x and 4.1x for FFO leverage and net debt/EBITDA, respectively. Exposure to Commercial End-Market: Over 80% of Aernnova's revenue is exposed to the commercial aerospace end-market, which makes the group's operating performance highly vulnerable to the pandemic crisis and currently challenging recovery prospects. The share of defence end-markets has historically been no higher than 10% (except in 2021 when it reached 15%), limiting its exposure to this more stable and less cyclical cash flow generation source. About 25%-30% of revenue is driven by wide-body aircraft, primarily the A350. Demand for these fell sharply during the pandemic and is unlikely to return to pre-pandemic levels in the medium term. This characteristic of Aernnova's end-market weighs on its profitability improvement. High Exposure to Airbus: The group has long-term relationships with OEMs, primarily with Airbus, and participates in some successful programmes, such as A350 and A320. More than half of Aernnova's revenue is exposed to Airbus. This makes the group's performance highly dependent on Airbus's deliveries, which increased 8% yoy in 2021 (-34.4% in 2020). However, due to supply-chain issues in mid-2022, Airbus has revised production rate increases for some programmes, in particular the A320. Fitch expects that Airbus will increase aircraft deliveries by over 10% in 2022 and by about 9.5% in 2023, while deliveries will rebound to 2019 levels only in 2025 rather than in 2024 as previously expected. Healthy Underlying Demand: In 2022, the air transportation industry continued its recovery from the severe pandemic crisis, which is mirrored in a strong rise of aircraft deliveries, primarily in the single-aisle segment. While the expected economic slowdown in 2023 might put pressure on the airline industry and constrain sales, Fitch sees strong demand in the medium term supporting Aernnova's order book and revenue visibility. In addition, Aernnova's participation in numerous successful Airbus programmes and high switching costs in most programmes will support the group's cash flow generation in long term. Portuguese Asset Buy Adds Revenue: Aernnova's new strategic partnership with Embraer resulted in the cash-funded acquisition of Embraer's aerostructures production facilities in Portugal for about EUR154 million in 2022. Fitch views the deal as credit positive as it enhances Aernnova's business profile through production capacity diversification and strengthens its market position as a Tier 1 supplier, adding about USD170 million of annual revenue. DERIVATION SUMMARY Aernnova operates as a Tier1/Tier2 supplier in the A&D industry and has a good long-term relationship with its key customer, Airbus. Aernnova is much smaller than higher-rated peers such as MTU Aero Engines AG (BBB/Stable) and Leonardo S.p.A. (BBB-/Stable). Historically, Aernnova's FFO and FCF margins were comparable with those of 'BBB' category peers, including MTU Aero Engines and Leonardo. Due to the pandemic, the group's FFO margin turned negative during 2020-2021 but Fitch expects it to improve to single digits in 2022. Aernnova's path of operating profitability recovery is more constrained than peers' due to its high exposure to the wide-body end-market (about 30% of revenue). Fitch expects FCF to recover to pre-pandemic levels no earlier than 2025. Aernnova's rating is constrained by a historically weaker capital structure than MTU Aero Engines' and Leonardo's. Fitch expects Aernnova's total debt/EBITDA in 2022 and 2023 to remain above 5.5x, the 'b' midpoint under Fitch Navigator for A&D. Signs of recovery in the industry should support gradual improvement of FFO and EBITDA generation, leading to total debt/EBITDA to below 5.5x from 2024. Aernnova's high leverage is not uncommon for companies in the 'B' rating category and compares favourably with that of peers such as Al Convoy (Luxembourg) S.a.r.l. (B/Stable) with net debt/EBITDA of about 6.0x at end-2021. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer - Strong rebound of revenue by about 34.7% yoy in 2022, supported by the aviation industry recovery and by acquired assets that will add about EUR90 million in 2022. Revenue in 2023-2025 to rise about 11% p.a. - Ongoing improvement of profitability, albeit at a slower pace than expected. EBITDA margin to improve to about 18.1% by 2025 from 8.3% in 2022 - Capex of EUR24 million in 2022, followed by EUR20 million in 2023-2025 - Acquisition of assets in Portugal for about EUR154 million in 2022; no M&A activity thereafter - No dividend payments till 2025 Key Recovery Rating Assumptions: - The recovery analysis assumes that Aernnova would be considered a going-concern (GC) in bankruptcy and that it would be reorganised rather than liquidated. This is driven by its long-term operating performance record and sustainable business, long-term relationships with customers, and historically healthy FCF generation - Its GC value available for creditor claims is estimated at about EUR550 million, assuming GC EBITDA of EUR100 million. The GC EBITDA of EUR100 million incorporates a downsized profile of the group following the pandemic and expectation that the industry will recover to pre-pandemic levels in aircraft deliveries no earlier than 2025. In addition, GC EBITDA was revised to EUR100 million from EUR91 million due to the acquisition of the Embraer production assets in Portugal in May 2022 - GC EBITDA is based on its assumption of an EBITDA margin of about 14% on sustained revenue of approximately EUR710 million. The assumption also reflects corrective measures taken in the reorganisation to offset the adverse conditions that trigger default - A 10% administrative claim - An enterprise value (EV) multiple of 5.5x EBITDA is used to calculate a post-reorganisation valuation, and is comparable with multiples applied to other A&D peers. The multiple is based on Aernnova's leading market position in a niche industry, long-term and successful cooperation with its key customer Airbus, high barriers to entry and historically solid profitability observed in the pre-pandemic period. At the same time, the EV multiple reflects the group's smaller scale than some other Fitch-rated peers', as well as concentration in geography and customer base - Fitch deducts about EUR43 million from the EV relating to the group's various factoring facilities - Fitch estimates the total amount of senior debt for creditor claims at EUR697 million, which includes a secured term loan B (TLB) of EUR490 million, a secured revolving credit facility (RCF) of EUR100 million, unsecured bilateral loans of EUR70 million and other loans of EUR37 million - These assumptions result in a recovery rate for the senior secured TLB and RCF within the 'RR3' range to generate a one-notch uplift to the debt ratings from the IDR - The principal waterfall analysis output percentage on current metrics and assumptions is 65% RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - FFO gross leverage below 6x on a sustained basis - Total debt/EBITDA below 5.5x on a sustained basis - FCF margin above 3% on sustained basis - FFO margin above 10% - Increased customer and end-market diversification Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO gross leverage above 7.5x on a sustained basis - Total debt/EBITDA above 7.0x on a sustained basis - Increase in FCF volatility - FFO interest coverage below 2.0x - EBITDA/interest paid below 2.0x - FFO margin under 8% LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: Following the acquisition of the production facilities in Portugal, the readily available cash of Aernnova (adjusted for about EUR7 million by Fitch) fell to EUR29 million as at end-June 2022 from EUR165 million at end-2021. This was not sufficient to cover short-term maturities of about EUR91 million, including amortisation of public-institution debt of about EUR21 million and drawn factoring facilities of about EUR43 million. Fitch forecasts FCF to be marginally positive in 2023, which will provide mild support to the group's liquidity in the short term. With expected gradual recovery of profitability and cash flow generation Fitch believes that Aernnova's liquidity position will return to strong levels in the medium term. The group's liquidity position is supported by an available committed RCF of EUR100 million due in 2026. In addition, as at end-June 2022 the group had undrawn committed bilateral facilities of EUR58 million with variable maturities till 2023-2025. ISSUER PROFILE Aernnova is a leading manufacturer of aero-structures and components such as wings, empennages and fuselage sections as well as secondary components (doors and nacelles). The group also provides engineering solutions for aerospace OEMs with composite and metallic capabilities. 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 Recovery Prior ----------- ------ -------- ----- Aernnova Aerospace S.A.U. LT IDR B Affirmed B senior secured LT B+ Affirmed RR3 B+ =========================== U N I T E D K I N G D O M =========================== BLISS HOTEL: Put Up for Sale Following Administration ----------------------------------------------------- Katherine Price at The Caterer reports that Southport's Bliss hotel has been brought to market after falling into administration and is continuing to trade while a buyer is sought. Paul Davies and Sandra Mundy, partners of James Cowper Kreston, were appointed joint administrators of Waterfront Hotels (Southport) and Waterfront Southport Properties, trading as Bliss Hotel Southport, on September 28, 2022, The Caterer relates. According to The Caterer, Mr. Davies said: "We are continuing to trade the business as usual whilst we look for a buyer for the business as a going concern. At this time we have no plans to make any changes to the team structure and we will be honouring all function bookings." Savills is inviting offers for the hotel, held on a long leasehold with 235 years unexpired, The Caterer discloses. The day-to-day operations remain unaffected as the administrators are continuing to trade the business as a going concern, The Caterer notes. The property has 131 bedrooms, reception, lounge, bar and restaurant and function suites, as well as including a 120-space basement car park. The sale also includes a 50,000 sq ft development opportunity adjacent to the hotel with potential for a variety of alternative uses, subject to the necessary consents, The Caterer states. In total, the hotel and development site extends to two acres. CATCH: Enters Administration, Halts Operations ---------------------------------------------- Sarah Fitton at Halifax Courier reports that Seafood restaurant Catch, based in Victoria Mills in West Vale, has closed. A spokesperson for the restaurant told the Courier the firm had gone into administration on Oct. 19. The firm has five branches in total, with others in Holmfirth, Headingley, Moortown and Harrogate, the Courier discloses. These are also understood to now be closed, the Courier notes. EVE SLEEP: Benson for Beds Buys Business Out of Administration -------------------------------------------------------------- Business Sale reports that Eve Sleep's brand, website and intellectual property have been bought out of administration by Benson for Beds. Eve Sleep which is an AIM-listed direct-to-consumer sleep wellness brand, which operates in the UK, Ireland and France, appointed administrators from Kroll this week after it announced the formal sale process in June 2022, Business Sale relates. According to Business Sale, Matt Ingram, managing director of Kroll, said: "Eve Sleep is a well-established brand with huge visibility across the UK, however, it faced a challenging market backdrop over the past year. "The company launched a formal sales process in June 2022 but with UK consumer confidence reaching a record low in August 2022 this process was unsuccessful." Eve Sleep sells its products through a retail partnership with DFS and through its online portal. The board launched a formal sale process after talks with a US investor fell through and received "a number of indicative offers", but was unable to secure a deal, Business Sale notes. According to Business Sale, Cheryl Calverley, chief executive, Eve Sleep said: "It is heartbreaking to have to acknowledge that the best way to preserve value for creditors, those partners and suppliers that have helped us on this journey, is to now terminate the formal sale process and appoint administrators. "Having seen the year start so brightly, with the efforts of the team over the past three years in rebuilding Eve into a business fit for profitable growth coming to fruition, the frustration at the unprecedented downturn in the market over February and March was felt all the more keenly. "Despite monumental efforts to restructure the business and reshape the cost base, the scale of Eve was simply insufficient to withstand the economic tsunami that has gathered momentum over the past six months, and allow it to continue as an independent business." ST MARY'S COLLEGE: Enters Liquidation, Owes GBP8MM to Creditors --------------------------------------------------------------- Billy Camden at FE Week reports that the country's smallest sixth form college has become the third college to ever go through the further education insolvency regime, closing with GBP8 million of debt. St Mary's College in Blackburn shut its doors to students and staff this summer after it failed to find a viable merger partner, FE Week relates. The Catholic-run college, which had been open for almost 100 years, became financially unsustainable due to repeated years of falling student numbers, and has been propped up by emergency government funding since 2020, FE Week discloses. Accounting firm RSM UK has been appointed to handle the insolvency and published its first report on the process last month, FE Week recounts. According to FE Week, a "statement of affairs" revealed that the college owes GBP8.2 million to six creditors. The Local Government Pension Scheme is owed most of the debt -- GBP5 million -- while Barclays Bank is owed GBP2.8 million. The Department for Education is also one of the creditors, owed GBP62,000. The college's property is currently on the market for an undisclosed fee to generate funds to repay the creditors, FE Week relays. But the insolvency practitioners' report suggests a book value of just GBP402,795, according to FE Week. Asked how likely it was that the creditors will be repaid in full, joint liquidator Diana Frangou told FE Week: "Any distribution to creditors in the liquidation will be made from asset realisations which are currently in progress and hence uncertain." The further education insolvency regime came in force in January 2019, from which point it was made possible for colleges to fail and be placed into an insolvency process for the first time, FE Week relates. VICTORIA PLC: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable ----------------------------------------------------------------- Fitch Ratings has affirmed Victoria PLC's Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. Fitch has also affirmed Victoria's senior secured notes at 'BB+' with a Recovery Rating of 'RR2'. Victoria's rating reflects its higher leverage driven in part by its acquisition strategy, which is counterbalanced by the group's strong recent performance. Fitch expects Victoria's lower profit margins in FY22-FY23 (financial year ending 2 April) to be offset by solid cash flows and increased product and geographic diversification. Fitch expects operational synergies from FY24 to drive margin improvements, which together with moderate working capital consumption will drive deleveraging over FY24-FY26. However, the group's ability to manage cost inflation and declining consumer confidence will be key in delivering operating profit improvements. KEY RATING DRIVERS Strong Growth Trajectory: Victoria continues to show strong revenue performance, with an organic like-for-like (lfl) 19.6% growth in FY22, as price increases compensated for higher raw-material and other production costs. Fitch forecasts revenue growth of 37% in FY23, largely driven by Balta and Graniser acquisitions. Despite four price increases instituted in FY22, Victoria still registered solid volume growth of around 6%-7%, reflecting its strong market position and customer relationships. Structural Change, Inflation Hits Margins: Victoria's EBITDA margin declined to 13.5% (FY21: 16.6%), excluding one-off costs, in FY22 reflecting margin dilution from acquisitions and cost inflation. In FY22, Cali Bamboo, a north American-based distribution business, contributed 11% of revenue but with far lower EBITDA margins of 4%-5%. Fitch forecasts EBITDA margins to decline further to around 12% for FY23 on lower-margin acquisitions, before improving on operational synergies to around 13% by FY25. A key challenge for the group will be the ability to institute price increases to address persistent and pervasive cost-inflation challenges, in the face of declining consumer confidence. Underlying EBITDA ( excluding acquisitions) remained broadly flat for FY22 and Fitch expects a similar outcome for FY23. Reduction in M&A: Victoria completed seven acquisitions in FY22-1H23. Fitch believes that management are likely to focus on integrating these acquisitions with the existing group with a more limited pipeline of M&A for FY23-FY26. Successful integration and synergy realisation from M&As may be difficult in a sharp market downturn. However, Fitch believes Victoria's management have the experience and discipline to improve EBITDA margins, with a history of successful integrations and reasonable acquisition-valuation multiples. Improving Diversification: The group's business risk profile has improved as result of recent acquisitions, which increase both its geographical and product diversification. The synergies of the US- based distribution business Cali Bamboo with the rest of the group have yet to be realised but management aim to leverage this route to the US market with existing products. Victoria has also diversified its products, increasing the share of luxury vinyl tile (LVT), as well broadening its presence in the artificial grass. The diversification should help limit its exposure to cyclicality during market downturns. Low Customer Concentration, Strong Brand: Victoria's customer base is diversified, largely composed of small independent retailers and with limited exposure to third-party distributors. This limits customer concentration, with the top 10 representing less than 20% of sales in FY22 and providing Victoria with some pricing power. Victoria has built a strong brand proposition/loyalty leading to long-term relationship with its customers. Its operational integration and manufacturing flexibility enable the group to quickly produce customisable products, limiting the need to maintain high stock levels for retailers and working capital. High but Declining Leverage: Victoria's leverage remains high with forecast FFO net leverage of 3.9x and EBITDA net leverage of 3.0x for FY22. During FY22 Victoria mostly funded with cash its M&A spend of around GBP300 million, and hence keeping debt levels stable. Higher post-acquisition net debt results in higher Fitch-forecasted EBITDA net leverage of 3.3x in FY23 before moderating to below 3x from FY24 onwards as acquisitions are integrated. DERIVATION SUMMARY Victoria is around one-tenth of the size of Mohawk Industries Inc. (BBB+/Stable), the world's leading flooring manufacturer, is less diversified geographically and exhibits higher leverage metrics. In its view, Victoria exhibits a business profile that is consistent with the 'BB' category with notable strength in diversification and product portfolio for its size. Its profitability has benefitted from the higher-margin ceramic businesses it has acquired over the last five years, although this is being challenged by inflationary pressures and lower margins from the distribution and Balta acquisitions. However, Victoria's end-market is concentrated on residential and less diversified than global manufacturers such as Mohawk or other large building products companies such as Compagnie de Saint-Gobain (BBB+/Stable). This is, however, common among small to medium-sized suppliers such as HESTIAFLOOR 2 (Gerflor; B+/Neg) or Tarkett Participation (Tarkett; B+/Stable), which are mostly exposed to the commercial sector. Gerflor is similar in scale and margins to Victoria, while Tarkett is slightly larger but with weaker margins; however, both have higher leverage resulting in the ratings being a notch lower than Victoria's. KEY ASSUMPTIONS - Revenue to grow 45% in FY23 with significant contribution from the Balta and Graniser acquisitions. Lfl growth in low single digits in short-to-medium term - EBITDA margin to decline to 12% in FY23 before recovering to 13.5% by FY26 - Small working-capital outflow in FY23 due to inflationary environment before moderating in FY24-FY26 - Capex at 4.5%-5.5% of revenue to FY26 - Balta acquisition completed for EUR170 million in 1HFY23 - Stable debt with no short-term refinancing RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Continued improvement in geographical diversification - Total adjusted net debt/EBITDA below 1.5x - FFO net leverage below 2.0x - EBITDA margin above 14% Factors that could, individually or collectively, lead to negative rating action/downgrade: - Total adjusted net debt/EBITDA above 3.0x - FFO net leverage above 3.5x - FCF margin below 2% - EBITDA margin less than 11% - Inability to effectively integrate its acquisitions LIQUIDITY AND DEBT STRUCTURE Strong Liquidity: Victoria's liquidity profile remains strong with no significant short-term maturities and its EUR500 million and EUR250 million bonds maturing only in FY26-FY28. Fitch forecasts neutral to positive FCF generation for FY23-FY26, which together with its upsized revolving credit facility of GBP150 million and cash balance of GBP263.6 million at FY22, should be sufficient to cover working capital or other needs. Victoria has not had to utilise its factoring limits given its prudent working-capital management. 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 ---- ------ ------- ----- Victoria PLC LT IDR BB- Affirmed BB- senior secured LT BB+ Affirmed RR BB+ =============== X X X X X X X X =============== [*] BOOK REVIEW: Transnational Mergers and Acquisitions ------------------------------------------------------- Author: Sarkis J. Khoury Publisher: Beard Books Softcover: 292 pages List Price: $34.95 Order your personal copy today at http://is.gd/hl7cni Transnational Mergers and Acquisitions in the United States will appeal to a wide range of readers. Dr. Khoury's analysis is valuable for managers involved in transnational acquisitions, whether they are acquiring companies or being acquired themselves. At the same time, he provides a comprehensive and large-scale look at the industrial sector of the U.S. economy that proves very useful for policy makers even today. With its nearly 100 tables of data and numerous examples, Khoury provides a wealth of information for business historians and researchers as well. Until the late 1960s, we Americans were confident (some might say smug) in our belief that U.S. direct investment abroad would continue to grow as it had in the 1950s and 1960s, and that we would dominate the other large world economies in foreign investment for some time to come. And then came the 1970s, U.S. investment abroad stood at $78 billion, in contrast to only $13 billion in foreign investment in the U.S. In 1978, however, only eight years later, foreign investment in the U.S. had skyrocketed to nearly #41 billion, about half of it in acquisition of U.S. firms. Foreign acquisitions of U.S. companies grew from 20 in 1970 to 188 in 1978. The tables had turned an Americans were worried. Acquisitions in the banking and insurance sectors were increasing sharply, which in particular alarmed many analysts. Thus, when it was first published in 1980, this book met a growing need for analytical and empirical data on this rapidly increasing flow of foreign investment money into the U.S., much of it in acquisitions. Khoury answers many of the questions arising from the situation as it stood in 1980, many of which are applicable today: What are the motives for transnational acquisitions? How do foreign firms plans, evaluate, and negotiate mergers in the U.S.? What are the effects of these acquisitions on competition, money and capital markets; relative technological position; balance of payments and economic policy in the U.S.? To begin to answer these questions, Khoury researched foreign investment in the U.S. from 1790 to 1979. His historical review includes foreign firms' industry preferences, choice of location in the U.S., and methods for penetrating the U.S. market. He notes the importance of foreign investment to growth in the U.S., particularly until the early 20th century, and that prior to the 1970s, foreign investment had grown steadily throughout U.S. history, with lapses during and after the world wars. Khoury found that rates of return to foreign companies were not excessive. He determined that the effect on the U.S. economy was generally positive and concluded that restricting the inflow of direct and indirect foreign investment would hinder U.S. economic growth both in the short term and long term. Further, he found no compelling reason to restrict the activities of multinational corporations in the U.S. from a policy perspective. Khoury's research broke new ground and provided input for economic policy at just the right time. Sarkis J. Khoury holds a Ph.D. in International Finance from Wharton. He teaches finance and international finance at the University of California, Riverside, and serves as the Executive Director of International Programs at the Anderson Graduate School of Business. ********* 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 * * *