/raid1/www/Hosts/bankrupt/TCREUR_Public/221123.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, November 23, 2022, Vol. 23, No. 228
Headlines
G E R M A N Y
ADLER: Inflated Balance Sheet by EUR3.9 Billion, BaFin Says
I R E L A N D
ADAGIO X EUR: Fitch Assigns 'B-sf' Rating to Class F Notes
PACKED HOUSE: Enters Administrative Rescue Process
S P A I N
PROMOTORA DE INFORMACIONES: S&P Affirms CCC+ ICR, Outlook Stable
T U R K E Y
IZMIR METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg.
MANISA METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg
MERSIN METROPOLITAN: Fitch Affirms 'B' LongTerm IDR, Outlook Neg.
MUGLA METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg.
TURKIYE: Fitch Affirms LT Foreign Currency IDR at 'B', Outlook Neg.
U N I T E D K I N G D O M
ALBA 2006-2: S&P Raises Class F Notes Rating to 'BB+ (sf)'
BROADWAY STAMPINGS: In administration, Puts Premises Up for Sale
COMET: Fnac Darty Ordered to Pay GBP89 Million to Liquidator
DIXIE DEAN HOTEL: Put Up for Sale Following Administration
WELLESLEY: FCA Working Full-Time on Wind Down Investigation
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G E R M A N Y
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ADLER: Inflated Balance Sheet by EUR3.9 Billion, BaFin Says
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Olaf Storbeck at The Financial Times reports that Adler inflated
its balance sheet by EUR3.9 billion and its earnings by EUR543
million in 2019, according to Germany's financial regulator, which
could have allowed the struggling real estate group to report a
profit for the year.
BaFin on Nov. 17 said that Adler incorrectly consolidated
Luxembourg-based peer ADO Properties despite controlling just a
third of voting rights, which the regulator argued was too low to
guarantee control over the company, the FT relates.
By consolidating ADO Properties' EUR4.4 billion in assets, Adler
inflated its balance sheet by a net EUR3.9 billion, according to
BaFin, the FT notes. Adler's total reported assets in 2019, with
ADO included, were EUR10.7 billion, the FT discloses.
According to the FT, BaFin said as a consequence, Adler's reported
net profit in 2019 was inflated by EUR543 million.
The group reported a net profit of EUR299 million for the year,
implying that without the boost from ADO Properties it could have
potentially made EUR244 million in losses, the FT notes.
Adler, which owns 26,000 flats in Germany and has come under
sustained pressure from short sellers, does not agree with the
regulator's assessment and is appealing against the decision, the
FT states.
It this the second time this year that BaFin has flagged mistakes
in the group's 2019 accounts. In August, the watchdog said that
the sale of a property project in Düsseldorf was booked at roughly
double its fair valuation, inflating Adler's accounts by up to
EUR233 million, the FT recounts.
The new findings deepen Adler's accounting woes as it struggles to
find a new auditor after KPMG refused to sign off the 2021
financial results and then ditched the company as a client earlier
this year, the FT discloses.
Adler was plunged into crisis after short-selling firm Viceroy
Research in October 2021 accused the company of widespread fraud,
inappropriate related-party transactions and accounting
manipulations. Adler denied any wrongdoing, the FT recounts.
The Frankfurt-listed shares of its Luxembourg-based holding company
plunged 85% over the past 12 months even as it has divested large
chunks of its portfolio in an attempt to lower its debt, the FT
states.
BaFin on Nov. 17 also said that Adler's 2019 annual report, which
was signed off by German audit group Ebner Stolz, downplayed the
risks arising from the lack of control over ADO, in particular that
indebtedness could be significantly higher, the FT notes.
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I R E L A N D
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ADAGIO X EUR: Fitch Assigns 'B-sf' Rating to Class F Notes
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Fitch Ratings has assigned Adagio X EUR CLO DAC final ratings, as
detailed below.
Entity/Debt Rating
----------- ------
Adagio X EUR CLO DAC
A XS2463564323 LT AAAsf New Rating
B-1 XS2463565056 LT AAsf New Rating
B-2 XS2463565643 LT AAsf New Rating
C XS2463566450 LT Asf New Rating
D XS2463567342 LT BBBsf New Rating
E XS2463567771 LT BB-sf New Rating
F XS2463567938 LT B-sf New Rating
Subordinated
XS2463568316 LT NRsf New Rating
Z XS2463568159 LT NRsf New Rating
TRANSACTION SUMMARY
Adagio X EUR CLO DAC (the issuer) is an arbitrage cash flow
collateralised loan obligation (CLO) that is being serviced by AXA
Investment Managers US Inc. Net proceeds from the issuance of the
notes are used to purchase a static pool of primarily secured
senior loans and bonds, with a par of EUR330million.
KEY RATING DRIVERS
'B/B-' Portfolio Credit Quality (Neutral): Fitch places the average
credit quality of obligors in the 'B/B-' category. The Fitch
weighted average rating factor (WARF) of the current portfolio is
24.89.
High Recovery Expectations (Positive): Senior secured obligations
make up close to 98% of the portfolio. Fitch views the recovery
prospects for these assets as more favourable than for second-lien,
unsecured and mezzanine assets. The Fitch weighted average recovery
rate (WARR) of the current portfolio is 61.64%.
Diversified Portfolio Composition (Positive): The largest three
industries comprise 34.7% of the portfolio balance, the top 10
obligors represent 12.7% of the portfolio balance and the largest
obligor represents just over 1.4% of the portfolio.
Static Portfolio (Positive): The transaction does not have a
reinvestment period, and discretionary sales are not permitted.
Fitch's analysis is based on the current portfolio and stressed by
applying a one-notch reduction to all obligors with a Negative
Outlook (floored at 'CCC'), which is 15.7% of the indicative
portfolio. After the adjustment for Negative Outlooks, the WARF of
the portfolio would be 26.1.
Deviation from Model-implied Ratings: The class B1, B2, C, D, E and
F note ratings of 'AAsf', 'AAsf', 'Asf', 'BBBsf', 'BB-sf', and
'B-sf' are below their model implied ratings (MIR) of 'AA+sf',
'AA+sf', 'A+sf', 'BBB+sf', 'BBsf' and 'B+sf' respectively. The
deviation from the MIR reflects limited cushion within the stressed
portfolio at their MIRs and uncertain macro-economic conditions
that increase tail-end risk.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
An increase of the default rate (RDR) at all rating levels by 25%
of the mean RDR and a decrease of the recovery rate (RRR) by 25% at
all rating levels in the stressed portfolio would result in
downgrades of up to four notches, depending on the notes.
Downgrades may occur if the build-up of the notes' credit
enhancement (CE) following amortisation does not compensate for a
larger loss expectation than initially assumed, due to unexpectedly
high levels of defaults and portfolio deterioration.
Based on the actual portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of default and portfolio deterioration. Due to the
better WARF of the target portfolio compared with the Negative
Outlook portfolio and the model deviations, the class B1, B2, C and
D notes display a rating cushion of one notch, while class E and F
notes display a rating cushion of 2 notches.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A reduction of the RDR at all rating levels by 25% of the mean RDR
and an increase in the RRR by 25% at all rating levels in the
stressed portfolio would result in upgrades of up to five notches,
depending on the notes.
Except for the tranches rated at the highest 'AAAsf', upgrades may
occur in case of better-than- expected portfolio credit quality and
deal performance, and continued amortisation that leads to higher
credit enhancement and excess spread available to cover losses in
the remaining portfolio.
DATA ADEQUACY
Adagio CLO X DAC
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
PACKED HOUSE: Enters Administrative Rescue Process
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Business Plus reports that media publication and production company
Packed House has sought protection from its creditors with the
appointment of a Process Adviser.
Diarmaid Guthrie of Baker Tilly has been appointed Process Adviser
at two Packed House operating companies, Sortridge Ltd and its
parent company Castleforbes Investments Ltd, Business Plus relates.
Mr. Guthrie has also taken on the PA role at Entertainment Media
Networks Ltd, also owned by Castleforbes Investments, Business Plus
notes.
The companies are availing of Scarp, the Small Companies
Administrative Rescue Process, which has been billed
"examinership-lite", Business Plus states.
Packed House online properties include Entertainment.ie, Beaut.ie,
Familyfriendly.ie and The Sports Chronicle, Business Plus
discloses.
The Sortridge Ltd accounts filing for 2020 disclosed net current
liabilities of EUR3.9 million, of which trade creditors amounted to
EUR770,000, according to Business Plus.
Period-end trade debtors were EUR302,000, down from EUR366,000 a
year earlier, and balance sheet cash was EUR120, Business Plus
relays.
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S P A I N
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PROMOTORA DE INFORMACIONES: S&P Affirms CCC+ ICR, Outlook Stable
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S&P Global Ratings revised its outlook on education and media
company Promotora de Informaciones S.A. (Prisa) to stable from
positive and affirmed its 'CCC+' issuer credit rating.
The stable outlook reflects S&P's view that Prisa's revenue and
earnings growth will slow down in 2023, and leverage will remain
above 10x, assuming gradually improving, albeit negative, FOCF and
adequate liquidity.
The outlook revision reflects S&P's expectation of lower earnings
growth and high leverage for Prisa in 2023.
S&P said, "We expect weaker performance of Prisa's media operations
in 2023 due to exposure to lower economic growth. We also
anticipate higher interest costs due to rising interest rates since
Prisa's debt is at floating rates, and persistently negative FOCF.
This will lead to Prisa's adjusted leverage remaining very high, at
more than 10.0x in 2023.
"Prisa's advertising operations will be hit by slower economic
growth, while resilient performance of its educational business
will partly offset it. The economic conditions globally have
worsened during 2022 and we expect economic growth will slow down
significantly in 2023, compared with our previous base case, in
Spain and Latin America (LatAm) where Prisa derives the majority of
its revenue and earnings. Therefore, we expect that Prisa's
advertising revenue--which represents about 35% of the group's
total revenue and more than 75% of the Media division--will remain
flat 2023, after increasing by 4% compared with 2021. Advertising
is highly correlated with GDP growth since expectations for
consumer spending drive advertising budgets. Already in the third
quarter of 2022, Prisa's advertising revenue increased by only 1%
year on year, compared with 3% in the second quarter and 11% in the
first quarter. We continue to expect the education business to
expand by 8%-12% next year, building on the positive momentum from
2022, and partly offset the weaker performance in media. Overall,
we expect Prisa's 2022 performance will be largely in line with its
guidance, with its adjusted EBITDA margin at 15%-17%. This will
translate into reported EBITDA of EUR115 million-EUR125 million in
our base case, which corresponds to S&P Global Ratings-adjusted
EBITDA of EUR85 million-EUR95 million and an adjusted EBITDA margin
of 10%-12%. In 2023, we forecast reported EBITDA at EUR125
million-EUR135 million and S&P Global Ratings-adjusted EBITDA of
EUR95 million-EUR105 million, corresponding to an adjusted EBITDA
margin of 10.5%-12.5%. Next year's improvement in EBITDA will
reflect revenue growth, as well as lower redundancy expenses and
restructuring costs that weigh on EBITDA in 2022."
An expansion of the subscription base in the private teaching
market will fuel growth of the education business in 2023. The
number of subscriptions to Prisa's learning systems rose by 33%
year on year in third-quarter 2022 to 2.6 million and S&P expects
this will continue as the learning market continues transforming
into a subscription model and digitization. Traditional sales of
textbooks and public sales of learning materials will also increase
as schools in LatAm return to normal operations after the
pandemic.
S&P said, "We expect Prisa's FOCF could remain negative in 2023 due
to weaker earnings and higher interest costs. We forecast that
Prisa's reported FOCF after leases (including interest payments)
will be an outflow of about EUR45 million for 2022, reflecting
exceptional costs, increased interest payments, and higher capital
expenditure. In 2023, we forecast that reported FOCF after leases
could remain negative EUR30 million to negative EUR20 million,
instead of breakeven we previously expected. In addition to lower
earnings, we expect higher interest expenses will depress FOCF next
year. We estimate that, because all Prisa's financial debt is at
variable interest rates, rising interest rates could lead its cash
interest payments to exceed EUR70 million in 2023.
"In line with our criteria, we view Prisa's capital structure as
unsustainable.The company remains very highly leveraged, even after
the refinancing in April 2022, due to the high amount of financial
debt of about EUR1 billion relative to its modest adjusted EBITDA.
This makes Prisa dependent on favorable business, financial, and
economic conditions. We expect the company's S&P Global Ratings
-adjusted debt to EBITDA to be very high at 11.5x-12.0x in 2022 and
reduce only modestly toward 11.0x in 2023. At the same time we see
as a risk to the rating Prisa's exposure to foreign exchange risks
and heightened market volatility in Latin America and the mismatch
between the local currencies in which it derives cash flows and its
euro-denominated debt.
"The stable outlook reflects our expectation that Prisa's revenue
and earnings growth will slow down in 2023 and adjusted leverage
will remain above 10x due to weaker macroeconomic conditions, while
good momentum in education will partly offset the weaker
performance in media. The outlook assumes Prisa's FOCF will
gradually improve in 2023 and liquidity will remain adequate."
S&P could lower the rating if it saw an increased risk of default
over the next 12 months. This could occur if:
-- Prisa's operating performance weakened, resulting in
persistently negative FOCF, weakening liquidity and declining
covenant headroom;
-- The group was unable to reduce leverage from very high levels
that we forecast in 2022; or
-- Prisa were to announce a debt restructuring, exchange offer, or
debt buyback that we viewed as distressed and therefore tantamount
to a default.
S&P said, "We could raise the rating if Prisa's operating
performance proved to be more resilient to macroeconomic headwinds
and it generated higher revenue and EBITDA than we forecast,
translating into EBITDA interest cover approaching 1.5x, positive
FOCF in 2023 and beyond, and solid deleveraging. The upgrade would
also hinge on Prisa maintaining adequate liquidity."
Environmental, Social, And Governance
ESG credit indicators: To E-2, S-2, G-2; From E-2, S-3, G-2
S&P said, "Social factors are now a neutral consideration in our
credit rating analysis of Prisa. During the pandemic, the group's
revenue and cash flow deteriorated in both its education and media
businesses, creating a spike in leverage and ultimately a selective
default in January 2021 and debt restructuring in April 2022. The
global pandemic has abated and its impact on Prisa's operations and
credit metrics has diminished. While the pandemic was an extreme
disruption, future local health concerns or illness outbreaks could
still disrupt Prisa's education business."
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T U R K E Y
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IZMIR METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg.
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Fitch Ratings has affirmed Izmir Metropolitan Municipality's
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR)
at 'B' with Negative Outlooks.
Fitch has also revised Izmir's Standalone Credit Profile (SCP) to
'bb-' from 'b+'.
The affirmation reflects Fitch's expectations that Izmir's
operating performance will remain resilient, despite a highly
inflationary operating environment, further lira depreciation and
increased capex investments in the run-up to elections. This is due
to Izmir's well-diversified and buoyant tax revenue base, which
will support coverage of its moderately high debt levels by its
healthy operating balance, leading to debt metrics that are
commensurate with a 'bb' category SCP. Izmir's IDRs are constrained
by the Turkish sovereign ratings (B/Negative).
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
Izmir's 'Vulnerable' risk profile reflects a combination of four
'Weaker' key risk factors (revenue adjustability, expenditure
sustainability and liabilities and liquidity robustness and
flexibility) and two 'Midrange' factors (revenue robustness and
expenditure adjustability).
The assessment reflects Fitch's view of a very high risk relative
to international peers that Izmir's ability to cover debt service
with its operating balance may weaken unexpectedly over the
forecast horizon (2022-2026). This may be due to
lower-than-expected revenue, higher-than-expected expenditure, or
an unanticipated rise in liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
Izmir has a well-diversified and buoyant local economy, with GDP
per capita above the national average by 1.2x, leading to a tax
revenue base with low volatility and robust tax revenue growth
prospects. This makes the city resilient to economic downturns,
which Fitch expects to continue over the forecast horizon in
2022-2026. Fitch expects the city's operating revenue to increase
broadly in line with inflation to about TRY48.4 billion by 2026
from TRY8.1 billion in 2021, leading to robust operating margins on
average of about 33%.
Taxes represent about 78% of operating revenue, with VAT including
special consumption taxes, and international trade tax making up a
large part. Non-tax revenue, such as charges and fees, make up
around 11%. Transfers from central government make up about 11% of
operating revenue, a fairly low share compared with national peers
due to the city's high socio-economic wealth indicators. Fitch
expects the tax collection rate for 2022-2026 to remain robust,
averaging at least 80% of accrued taxes and benefiting from the
increase in taxes collected by the central government within
metropolitan boundaries.
Revenue Adjustability: 'Weaker'
Izmir's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2021, nationally set and
collected taxes comprised 76% of Izmir's operating revenue or 75%
of total revenue. Local taxes over which the city has autonomy were
a low 0.6% of total revenue, implying negligible tax flexibility.
However, this is compensated to some extent by financial
equalisation transfers received by metropolitan municipalities,
which accounted for 11% of total revenue in 2021.
Non-tax revenue such as charges and fees make up around 12%.
However, the city does not have full discretion on non-tax revenue
such are charges, rental income and fees levied on public services,
as the range for charges and fee rates are also set by the central
government.
Expenditure Sustainability: 'Weaker'
Fitch expects that high inflation and further lira depreciation
will weaken control of operating expenditure, which grew broadly in
line with operating revenue in 2017-2021, despite Izmir's
moderately cyclical to countercyclical spending responsibilities.
Rising energy prices are likely to exert pressure on the city's
operating expenditure, especially for its already loss-making
transportation company, ESHOT, as the cost increase will not be
reflected in tariffs. Izmir's planned 19.3km metro line and 11.0km
tram line investments will also reduce its cost control capacity
within the inflationary operating environment. The city's ongoing
metro line investment, 7.2km Fahrettin Altay-Narlidere project, is
expected to have a limited impact on debt metrics as disbursements
for the project were largely completed as of 3Q22.
Expenditure Adjustability: 'Midrange'
Izmir's spending flexibility amid international peer analysis
demonstrates the low share of inflexible costs, accounting for
around 50% on average of its total expenditure. The city's
infrastructure investments which constitute around 50% of total
spending can be cut or postponed because of the relatively good
level of existing socio-economic infrastructure.
Spending flexibility is somewhat counterbalanced by the city's weak
record of balanced budgets due to large swings in capex in
pre-election periods. Fitch expects the city's spending flexibility
to be reduced during 2022-2024 in the run-up to presidential
elections in 2023 and local elections in 2024, and to be restored
gradually thereafter, especially following the city's progress with
the capital-intensive metro line investments.
Liabilities & Liquidity Robustness: 'Weaker'
Izmir faces significant FX risk, as nearly 83% of its total debt is
in euros. Fitch expects FX volatility to increase debt by TRY1.4
billion or roughly about 12%. Izmir faces 20% of its debt stock
coming due year on year. Annual debt servicing pressure is
mitigated by the average life of its debt at four years and the
fully amortising nature of bank loans.
The majority of bank loans (82.0%) are fixed rate, mitigating
interest rate risk. Refinancing pressure is further mitigated by
Izmir's healthy operating balance covering 2.0x of its annual debt
service on average. The city is not exposed to material off-balance
sheet risks.
Liabilities & Liquidity Flexibility: 'Weaker'
Izmir's year-end cash increased to TRY524 million in 2021 from
TRY336 million in 2020 and remained restricted as it is fully
earmarked for the payable's settlement. However, Izmir has good
access to financial markets, so the weak year-end cash position is
mitigated by the city's access to committed credit facilities of
TRY500 million at end-3Q22 from national lenders rated below 'BBB-'
and with shorter tenors.
Turkish local and regional governments do not benefit from treasury
lines or cash pooling, making it challenging to fund unexpected
increases in debt liabilities or spending.
Debt Sustainability: 'aaa category'
Fitch has revised its debt sustainability (DS) assessment to 'aaa'
from 'aa', based on a robust payback ratio (net adjusted
debt-to-operating balance) in the 'aaa' category (2.8x in 2022-2026
compared with 1.6x in 2017-2021). This is despite an expected fall
in the operating margin to 33% over 2022-2026 from 51% on average
in 2017-2021.
Fitch has lifted the previous downward adjustment due to the city's
capacity to report robust operating balances even during times of
pandemic and inflationary operating environment slowdown
demonstrated by budgetary outturns in 2020 and 2021. Additionally,
over the five-year scenario horizon under the stressed rating case,
a solid actual debt service coverage ratio of 2.0x on average
supports the 'aaa' assessment.
Fitch expects the fiscal debt burden to remain moderate at 94% in
2026 or on average at 89% (compared with 80% in 2017-2021),
corresponding to the 'aa' category.
DERIVATION SUMMARY
High inflation and rising energy costs will pressurize Izmir's
operating performance, especially its transportation company,
ESHOT, which will require increased operational subsidies from the
city for the provision of public transport, as rising costs will
not be reflected in transportation tariffs.
However, despite Fitch's conservative rating case with the
operating margin declining to 33% on average in 2022-2026 from 51%
on average in 2017-2021, debt metrics will remain resilient with a
payback ratio remaining below 5x corresponding to the 'aaa'
category and a debt service coverage ratio at 1.5x in 2026 (or 2.0x
on average in 2022-2026) corresponding to the 'a' category'. The
fiscal debt burden remains below 100%, ('aa' category)
Fitch has revised Izmir's SCP to 'bb-' from 'b+', resulting from a
combination of 'Vulnerable' risk profile and 'aaa' debt
sustainability. The latter is derived from a debt payback in the
'aaa' category and moderate coverage corresponding with 'a'
category. The SCP also factors in the city's favourable comparison
with national and international peers in the same rating category.
National Ratings
Izmir's National Ratings are driven by its 'B' Long-Term
Local-Currency IDRS, which maps to 'AAA(tur)' on the Turkish
National Correspondence Table based on peer comparison. Izmir's
higher notching of its National Long-Term Rating than national
peers reflects its budgetary flexibility, benefiting from a
valuable asset base that can be used to generate additional
liquidity in case of need and the city's very good access to
financial markets.
KEY ASSUMPTIONS
Qualitative Assumptions and Assessments:
Risk Profile: 'Vulnerable'
Revenue Robustness: 'Midrange'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Weaker'
Expenditure Adjustability: 'Midrange'
Liabilities and Liquidity Robustness: 'Weaker'
Liabilities and Liquidity Flexibility: 'Weaker'
Debt sustainability: 'aaa'
Support (Budget Loans): 'N/A'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Sovereign Cap: 'B'
Sovereign Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2017-2021 figures and 2022-2026 projected
ratios. The key assumptions for the scenario include:
- Operating revenue CAGR at 43.1% in 2022-2026 (versus average
20.7% yoy for 2017-2021) due to expected high inflation of 47.7% on
average;
- Tax revenue CAGR of 45.0% in 2022-2026, versus 20.1% in
2017-2021
- Current transfers CAGR of 44.7% in 2022-2026, versus 19.5% in
2017-2021
- Operating expenses of CAGR 52.1% in 2022-2026 (versus average
24.3% yoy for 2017-2021) due to expected high inflation of 47.7% on
average
- Negative net capital balance of TRY13.5 billion in 2022-2026
- Apparent cost of debt to be on average 6.3% (average cost of debt
of 6.1% in 2021) due to the high proportion of FX loans and limited
interest rate exposure compared with other large municipalities
- EUR/TRY (average) assumptions are based on the sovereign's
estimate, 2022: 18.16, 2023: 23.89, 2024: 27.79
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2021 and forecast for
2024, respectively (no weights and changes since the last review
are included as none of these assumptions was material to the
rating action).
Liquidity and Debt Structure
At end-2021, Izmir's negative fund balance increased to TRY242
million from negative TRY170 million at end-2020. Over its rating
case, Fitch expects a negative fund balance resulting from payables
to be netted by new borrowing, as Turkish metropolitan
municipalities can borrow on domestic markets to finance their
current deficit.
Izmir has a wide public sector consisting of two affiliates that
are public entities (IZSU, a sewerage and water management entity;
and ESHOT, the transport system operator, mainly buses) and 12
companies. The increased needs in public services are not
necessarily compensated by an increase in their fees as operators
are not-for-profit entities. With the exception of IZSU, which is
self-funding, Izmir usually supports its companies and its
affiliate, ESHOT via operational subsidies covering operating
losses and capital injections for their investment commitments,
exposing the metropolitan municipality to a material risk from its
contingent liabilities. At end-2021, the total financial debt of
municipal companies including the two public entities accounted for
about TRY2.8 billion.
Izmir guarantees the financial debt of IZBAN (TRY1,229 million),
IZSU (TRY930 million) and ESHOT (TRY311 million).
Other Fitch-classified debt is related to the overdue debt of a
settlement taken over by the city as a result of the enlargement of
its boundaries in 2007. This Treasury-guaranteed debt is
euro-denominated and relates to the settlement's solid waste
project. Izmir has repaid most of the debt; at end-2021, it
accounted for TRY25 million (or EUR4 million) and will be fully
repaid by 2031.
Issuer Profile
Izmir is the third-largest city in Turkiye with 5.3% of the
population and is the major economic hub of the country's Aegean
region. Izmir has a well-diversified and buoyant local economy
dominated by the services sector (43%), followed by industry (35%)
and real estate activities (8%), financial and insurance activities
(3%), professional, administrative and support services sector (5%)
and agriculture (5%). At end 2020, Izmir's GDP per capita was
USD9,945, which is 16% above national GDP per capita (USD8,598),
contributing to 6.1% of the nation's economic output.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of the Turkish sovereign's IDRs or a downward revision
of Izmir's SCP resulting from a debt payback ratio of more than
nine years would lead to a downgrade of the city's IDRs.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A revision of the Outlook on the sovereign to Stable from Negative
would lead to a corresponding revision of Izmir's Outlooks.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Izmir's IDRs are capped by the Turkish sovereign's IDRs.
Entity/Debt Rating Prior
----------- ------ -----
Izmir Metropolitan
Municipality LT IDR B Affirmed B
LC LT IDR B Affirmed B
Natl LT AAA(tur) Affirmed AAA(tur)
MANISA METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg
-------------------------------------------------------------------
Fitch Ratings has affirmed Manisa Metropolitan Municipality
(Manisa) Long-Term Foreign- and Local-Currency Issuer Default
Rating (IDR) at 'B' with Negative Outlooks.
Fitch has also revised Manisa's Standalone Credit Profile (SCP) to
'bb-' from 'b+'.
The affirmation reflects Fitch's unchanged view that Manisa's
operating performance will remain resilient, despite the highly
inflationary operating environment. This is due to Manisa's buoyant
and diversified tax revenue base, built on a well-developed local
manufacturing industry with a particularly strong consumer
electronics and white goods sector generating the vast majority of
the city's exports. This will support solid coverage of Manisa's
moderate debt levels by its operating balance, leading to debt
metrics that are commensurate with a 'bb' category SCP.
Manisa's IDRs are constrained by the Turkish sovereign's IDRs
(B/Negative).
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
Manisa's 'Vulnerable' risk profile reflects a combination of four
'Weaker' key risk factors (revenue adjustability, expenditure
sustainability and liabilities and liquidity robustness and
flexibility) and two 'Midrange' factors (revenue robustness and
expenditure adjustability).
The assessment reflects Fitch's view of a very high risk relative
to international peers that Manisa's ability to cover debt service
with its operating balance may weaken unexpectedly over the
forecast horizon (2022-2026). This may be due to
lower-than-expected revenue, higher-than-expected expenditure, or
an unanticipated rise in liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
Fitch revised this assessment to 'Midrange' from 'Weaker' to
reflect its expectations that Manisa's revenue will grow at least
in line with inflation, over the medium term, mirroring the trend
of the last five years. The assessment factors-in Manisa's dynamic
tax base with growth prospects based on its industrialised economy,
which Fitch expects to grow broadly in line with the 3% national
average.
Taxes represent about 60% of operating revenue and should drive
operating revenue towards TRY9.1 billion by 2026 from TRY1.4
billion in 2021, even under Fitch's conservative rating case. The
rest of operating revenue is made up of transfers from the central
government (24%) and charges and fees (16%).
Revenue Adjustability: 'Weaker'
Manisa's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2021, nationally set and
collected taxes comprised 67% of Manisa's operating revenue or 65%
of total revenue. Local taxes, over which the city has autonomy,
were a low 0.4% of total revenue, implying negligible tax
flexibility. However, this is compensated to some extent by
financial equalisation transfers received by metropolitan
municipalities, which account for 23% of Manisa's total revenue.
Non-tax revenue such as charges and fees make up around 9%.
However, the city does not have full discretion on non-tax revenue
such as charges, rental income and fees levied on public services,
as these are limited by central government.
Expenditure Sustainability: 'Weaker'
Fitch expects high inflation will weaken control of total
expenditure, reversing Manisa's trend of spending growth lagging
revenue growth in 2017-2021 due to its moderately cyclical and
counter-cyclical spending responsibilities. Rising energy prices
are expected to add additional pressure to Manisa's operating
spending; as this will increase transportation sector subsidies.
Expected investment spending of an average 45% of total spending
during the election period will further constrain Manisa's ability
to curb spending.
Expenditure Adjustability: 'Midrange'
The assessment reflects Manisa's lower share of inflexible costs at
50% of total spending compared with international peers. The
remainder of its spending is capex, which can be cut and postponed
due to the city's reasonable level of existing infrastructure
Spending flexibility is counterbalanced by the city's weak record
of balanced budgets due to large swings in capex in pre-election
periods. Fitch expects the city's spending flexibility will be
reduced during 2022-2024 in the run-up to presidential elections in
2023 and local elections in 2024, and will be restored gradually
thereafter.
Liabilities & Liquidity Robustness: 'Weaker'
Manisa's predictability of debt liabilities is weakened by the
short weighted average maturity of 2.2 years. Refinancing risk is
high, as 30% of its debt is due within 2023. This is somewhat
mitigated by its amortising bank loans.
Compared with national peers, Manisa has limited unhedged
foreign-exchange (FX) risk with a euro-denominated loan accounting
for only 5.7% of its total debt. All of its loans are at fixed
interest rates except its FX loan.
The city is not exposed to material off-balance sheet risk.
Manisa's contingent liabilities are solely limited to its
wholly-owned water affiliate, MASKI, which is self-funding with a
solid payback ratio and actual debt service coverage ratio at 3.1x
and 1.2x, respectively, in 2021.
Liabilities & Liquidity Flexibility: 'Weaker'
This assessment is weakened by Manisa's cash reserves earmarked for
the settlement of payables, as well as moderate access to
international financial markets with main lenders being state-owned
domestic banks limited by counterparty risk below 'BBB-'and the
short tenor of their loans. It has one international lender,
Skandinaviska Enskilda Banken.
The Weak assessment also factors in that Turkish local and regional
governments do not benefit from treasury lines or cash pooling at a
national level, making it challenging to fund unexpected increases
in debt liabilities or spending peaks.
Debt Sustainability: 'aaa category'
Fitch has revised its debt sustainability assessment to 'aaa' from
'aa', based on an expected stronger payback ratio (net adjusted
debt-to-operating balance) at the upper-end of the 'aaa' category
(1.3x in 2022-2026 compared with 1.9x in 2017-2021). The revision
also reflects the improvement in debt service coverage to 2.4x on
average. This is despite an expected fall in the operating margin
to 41% over 2022-2026 from 58% in 2021 (50% on average in
2017-2021). Fitch also expects an improved fiscal debt burden of an
average 51.7% (compared with 91.0% in 2017-2021).
DERIVATION SUMMARY
Fitch assesses Manisa's SCP at 'bb-', which results from a
'Vulnerable' risk profile and 'aaa' debt sustainability. The latter
is derived from a debt payback at the upper end of the 'aaa'
category and moderate debt levels corresponding with the 'a' and
'aa' category. The SCP also factors in the city's favourable
comparison with national and international peers in the same rating
category.
National Ratings
Manisa's National Long Term Ratings are driven by its 'B' Long-Term
Local-Currency IDR at, which maps to 'AA(tur)' on the Turkish
National Rating Correspondence Table based on peer comparison. The
'AA(tur)' National Long-Term Rating reflects the city's moderately
low risk of default on long-term local-currency obligations,
compared with some local peers.
KEY ASSUMPTIONS
Qualitative assumptions:
Risk Profile: 'Vulnerable'
Revenue Robustness: 'Midrange'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Weaker'
Expenditure Adjustability: 'Midrange'
Liabilities and Liquidity Robustness: 'Weaker'
Liabilities and Liquidity Flexibility: 'Weaker'
Debt sustainability: 'aaa'
Support (Budget Loans): 'N/A'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Sovereign Cap: 'B'
Sovereign Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2017-2021 figures and 2022-2026 projected
ratios. The key assumptions for the scenario include:
- Operating revenues CAGR of 44.9% in 2022-2026 (up on average at
20.0% yoy for 2017-2021 due to expected high inflation of 47.7% on
average in 2022-2026);
- Tax revenue CAGR of 46.8% in 2022-2026, versus 24.1% in
2017-2021
- Current transfers CAGR of 43.6% in 2022-2026, versus 19.3% in
2017-2021
- Operating expenses CAGR of 59.0% in 2022-2026 (up on average at
12.2% yoy for 2017-2021 due to expected high inflation of 47.7% on
average in 2022-2026)
- Negative net capital balance of TRY2.7 billion in 2022-2026
- Apparent cost of debt to be on average 17.0%, around 4% above the
average cost of debt in 2021 due to higher borrowing rates
- EUR/TRY (avg) assumptions are based on the sovereign's estimate,
2022: 18.16, 2023: 23.89, 2024: 27.79
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2021 and forecast for
2024, respectively (no weights and changes since the last review
are included as none of these assumptions was material to the
rating action).
Liquidity and Debt Structure
Manisa's debt solely consists of amortising bank loans, but with a
short weighted-average maturity of about 2.2 years. About 30% of
its debt stock comes due year on year, significantly increasing
refinancing pressure, which Fitch expects to be covered by city's
healthy operating balances of around TRY2.1 billion in 2022-2026
(2021: TRY834 million) covering on average 2.4x of its annual debt
service obligations within the same period.
Compared with its national peers, Manisa has negligible unhedged
foreign-exchange (FX) risk with a euro-denominated loan accounting
for only 5.7% of its total debt. All its loans are at fixed
interest rates excluding the FX loan. The city is not exposed to
material off-balance sheet risk. Contingent liabilities are
moderate and are solely stemming from city's water affiliate,
MASKI, which is self-financing. Although MASKI's borrowing will
continue to increase due to its new investments, Fitch expects
payback to remain sound and operating balance to cover at least 1x
of its annual debt service.
Issuer Profile
Manisa is the second-largest industry and trade hub in the Aegean
region after Izmir. Manisa benefits from a more diverse economic
structure than its neighbouring cities and its local economy is
dominated by the industry sector (49%), followed by services (36%)
and agriculture (15%). Manisa's location supports local economic
development.
The city's GDP per capita in 2020 was USD8,444, just below
Turkiye's average of USD8,598, with the gap narrowing to 2% in 2020
from 7% in 2017.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of the Turkish sovereigns IDRs or a lowered SCP, which
could result from a material deterioration of the debt
sustainability with a debt payback ratio beyond nine years would
lead to a downgrade of Manisa's IDRs
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A revision of the sovereign Outlook to Stable from Negative, would
lead to a corresponding revision of Manisa's Outlooks.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Manisa's ratings are capped by the Turkish sovereign's IDRs.
Entity/Debt Rating Prior
----------- ------ -----
Manisa Metropolitan
Municipality LT IDR B Affirmed B
LC LT IDR B Affirmed B
Natl LT AA(tur) Affirmed AA(tur)
MERSIN METROPOLITAN: Fitch Affirms 'B' LongTerm IDR, Outlook Neg.
-----------------------------------------------------------------
Fitch Ratings has affirmed Mersin Metropolitan Municipality's
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
at 'B' with Negative Outlooks.
The affirmation reflects Fitch's unchanged view that Mersin will
maintain a robust operating balance despite high inflation.
Although debt will increase substantially due to expected public
transportation investments and further lira depreciation, the
city's debt metrics will remain commensurate its 'b+' Standalone
Credit Profile (SCP) and 'b' category SCP peers over the medium
term. However, Mersin's IDRs are constrained by the Turkish
sovereign's 'B' IDRs and the Negative Outlook reflects that on the
sovereign.
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
Fitch has assessed Mersin's risk profile at 'Vulnerable',
reflecting a combination of four 'Weaker' key risk factors (Revenue
Adjustability, Expenditure Sustainability and Liabilities and
Liquidity Robustness and Flexibility) and two 'Midrange' factors
(Revenue Robustness and Expenditure).
The assessment reflects Fitch's view of a very high risk relative
to international peers that Mersin's ability to cover debt service
with its operating balance may weaken unexpectedly over the
forecast horizon (2022-2026). This may be due to
lower-than-expected revenue, higher-than-expected expenditure, or
an unanticipated rise in liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
The revision of its assessment to 'Midrange' from ' Weaker'
reflects expected tax revenue growth prospects, driven mainly by
international trade growing by at least the inflation rate,
following consistently resilient operating performance over the
last five years. Between 2017 and 2021, Mersin's tax revenue growth
of 24.7% surpassed national nominal GDP growth of 22.5%.
Mersin has a buoyant tax revenue base supported by a trade and
manufacturing-driven local economy. This leads to a sound tax
revenue stream, which Fitch expects to rise to TRY12.9 billion in
2026, from TRY1.8 billion in 2021, averaging 68% of operating
revenue. Transfers from the central government and charges and fees
accounted for 20% and 12% on average, respectively, in 2017-2021.
Fitch believes that international trade tax will continue to make
up 50% of Mersin's tax revenues over the medium term, underpinned
by the expected national real economic growth on average 3.0% and
weak local currency. Fitch expects the tax collection rate for
2022-2026 to remain robust, averaging at least 85% of accrued
taxes.
Revenue Adjustability: 'Weaker'
Mersin's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2021, nationally collected
and set taxes comprised 72.4% of Mersin's operating revenue or
72.1% of total revenue. Local taxes with tax rate-setting power
were a low 0.5% of total revenue, implying negligible tax
flexibility. However, this is compensated to some extent by
financial equalisation transfers received by metropolitan
municipalities, and scope for asset sales. For Mersin, the latter
accounted for 17.6% and 9.8% of its total revenue, respectively, in
2021.
Expenditure Sustainability: 'Weaker'
The 'Weaker' assessment reflects the high inflationary environment,
which will lead to faster cost growth than revenue growth and
weaken expenditure control.
Mersin's main responsibilities are urban infrastructure
investments, urban development, improvement of the public
transportation systems, and road construction. These are moderately
counter-cyclical expenditure items providing control over
expenditure growth. The moderately cyclical to countercyclical
nature of spending normally allows the city to resize total
expenditure growth. This is demonstrated via its improved record of
keeping opex growth 4% below operating revenue growth for the last
five years, leading to operating margins of 44% on average. Fitch
expects Mersin to make higher capital investments ahead of the
upcoming elections, particularly in its 13.4 km metro line
investment, construction of which started in 2022.
Expenditure Adjustability: 'Midrange'
Mersin has a low share of inflexible costs versus international
peers at on average less than 65% of its total expenditure. The
city's infrastructure investments can be cut or postponed, aided by
its moderate level of existing socio-economic infrastructure.
Spending flexibility is somewhat counterbalanced by the weak record
of a balanced budget, due to large swings in capex during
pre-election periods. Fitch expects spending flexibility to be
reduced during 2022-2023 in the run-up to presidential elections in
2023 and local elections in 2024, and restored thereafter.
Liabilities & Liquidity Robustness: 'Weaker'
The revised assessment reflects the risks related to Mersin's debt
structure with the recent unhedged foreign currency borrowing as of
2022 due to the city's procurement of compressed natural gas buses.
This investment is expected to raise the share of FX loans in
proportion to total debt to around 20% at the year-end following
delivery of the buses. Additionally, the city's ongoing metro line
investment is expected to raise unhedged FX exposure further over
Fitch's rating case.
Mersin's debt has a short-weighted average maturity at 2.6 years.
In addition, 25% of its debt is due annually, increasing
refinancing risk. This is somewhat mitigated by the debt service
coverage ratio, which will remain at least 1x over the medium term,
and the fully amortising nature of bank loans. Interest rate risk
is mitigated as Mersin's bank loans are at fixed rates as of
end-2021.
Mersin's contingent liabilities are solely limited to its
wholly-owned water affiliate, MESKI, which is self- funding and had
a solid payback ratio and actual debt service coverage ratio at
1.8x and 1.5x, respectively, in 2021. Additionally, the weighted
maturity of its FX debt is long at five years, mitigating repayment
risk. It has a good access to international lenders such as
multilaterals.
Liabilities & Liquidity Flexibility: 'Weaker'
Mersin's year-end cash was fully restricted for the settlement of
the payable at end-2021. The city has a moderate record of
accessing international and national lenders. The former has a
short history and the latter is limited by the counterparty risk
associated with domestic liquidity lines (banks' IDRs) below 'BBB-'
with shorter tenors.
Turkish local and regional governments do not benefit from treasury
lines or national cash pooling, making it challenging to fund
unexpected increases in debt liabilities or spending peaks.
Debt Sustainability: 'aa category'
Under its conservative rating case for 2022-2026, Fitch projects
that Mersin's debt will rise to TRY13.4 billion mainly due to the
18.8km metro line investments under its investment agenda. Fitch
expects the operating balance to reach TRY2.7 billion, leading to a
payback ratio (net adjusted debt to operating balance; the primary
metric of the debt sustainability assessment) to remain below 5x,
in line with a 'aaa' assessment.
For the secondary metrics, Fitch's rating case projects the ADSCR
to weaken to 1.1x from 2.0x in 2021, corresponding to a 'bb'
assessment and the fiscal debt burden (net adjusted
debt-to-operating revenue) increasing but remaining below 100%,
corresponding to a 'aa' assessment. Due to the primary metric being
positioned at the lower end of a 'aaa' assessment and the weaker
ADSCR, Mersin's debt sustainability assessment has been adjusted
down to 'aa'.
DERIVATION SUMMARY
Fitch assesses Mersin's SCP at 'b+', which reflects a 'Vulnerable'
risk profile and a 'aa' debt sustainability score. The notch
specific 'b+' SCP also factors in the city's comparison with
national and international peers in the same rating category. The
city's IDRs are not affected by any other rating factors but are
constrained by the sovereign IDRs.
Short-Term Ratings
The 'B' Short-Term IDR is the only option for a 'B' category
Long-Term IDR.
National Ratings
Mersin's National Long-Term Ratings are driven by its 'B' Long-Term
Local-Currency IDR, which maps to 'AA-' on the Turkish National
Correspondence Table based on a peer comparison. This reflects its
relative vulnerability to default on its Long-Term Local Currency
obligations, which is moderately low compared with some local
issuers in Turkiye.
KEY ASSUMPTIONS
Qualitative assumptions:
Risk Profile: 'Vulnerable'
Revenue Robustness: 'Midrange'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Weaker'
Expenditure Adjustability: 'Midrange'
Liabilities and Liquidity Robustness: 'Weaker'
Liabilities and Liquidity Flexibility: 'Weaker'
Debt sustainability: 'aa'
Support (Budget Loans): 'N/A'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Sovereign Cap: 'B'
Sovereign Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2017-2021 figures and 2022-2026 projected
ratios. The key assumptions for the scenario include:
- Operating revenue CAGR of 46.1% in 2022-2026 (versus an average
of 23.2 yoy for 2017-2021) due to expected inflation of 47.7% on
average
- Tax revenue CAGR of 48.4% in 2022-2026, versus 24.7% in
2017-2021
- Current transfer CAGR of 42.3% in 2022-2026, versus 20.5% in
2017-2021
- Operating expenses CAGR of 51.8% in 2022-2026 (versus an average
of 19.2% yoy for 2017-2021) due to expected inflation of 47.7% on
average
- Negative net capital balance of TRY3.9 billion in 2022-2026
- Apparent cost of debt on average at 11.7%, below the average in
2017-2022 due to the anticipated increase in FX loans
- EUR/TRY (average) assumptions are based on Fitch sovereign's
estimates - 2022: 18.16, 2023: 23.89 and 2024: 27.79
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2021 and forecast for
2024, respectively (no weights and changes since the last review
are included as none of these assumptions was material to the
rating action):
Liquidity and Debt Structure
At end 2021 Mersin's overall debt (direct debt + government-related
entity debt) slightly declined to TRY1.19 billion from TRY1.29
billion in 2020, whereas its year-end cash was stable at around
TRY171 million, which is restricted and allocated for the
settlement of payables. This leads to net adjusted debt of TRY617
million. Mersin's contingent liabilities are moderate and limited
to its wholly-owned water affiliate MESKI.
MESKI is a self-financing public entity and does not require
subsidies from the metropolitan municipality. At end-2021, MESKI's
debt accounted for TRY577 million. Its total debt has an amortising
structure without bullet repayment, while 78% of its debt is
euro-denominated loans, exposing the entity to significant FX risk.
However, the average tenor of its FX debt long at 10 years with an
actual debt service coverage ratio at 1.5x helps mitigate repayment
risk.
Issuer Profile
Mersin has Turkiye's largest and one of the main container ports in
the Mediterranean Region with its transit and hinterland
connections with the Middle East and the Black Sea serving as an
important logistics hub. Trade is a dominant economic sector ,
followed by the services sector (63%), industry (24%) and
agriculture (13%). Mersin's contribution to national GDP has
historically been about 1.8%, with its local GDP per capita at 86%
of the national average, with the gap narrowing towards 10%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of the Turkish sovereigns IDRs or a downward revision
of Mersin's SCP resulting from a weaker debt payback above nine
years would lead to a downgrade of Mersin's IDRs.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A revision of the Outlook on the Turkish sovereign's IDRs to Stable
from Negative would lead to a corresponding revision of Mersin's
Outlooks.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Mersin's IDRs are capped by the Turkish sovereign IDRs.
Entity/Debt Rating Prior
----------- ------ -----
Mersin Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA-(tur) Affirmed AA-(tur)
MUGLA METROPOLITAN: Fitch Affirms LongTerm IDR at 'B', Outlook Neg.
-------------------------------------------------------------------
Fitch Ratings has affirmed Mugla Metropolitan Municipality's
(Mugla) Long-Term Foreign- and Local-Currency Issuer Default
Ratings (IDR) at 'B' with Negative Outlooks.
Fitch has revised Mugla's Standalone Credit Profile (SCP) to 'bb+'
from 'bb'.
The affirmation reflects Fitch's unchanged view that Mugla will
maintain a robust operating balance despite high inflation.
Capex-induced debt will increase substantially under Fitch's
conservative rating case scenario but the debt metrics will be
resilient and commensurate with 'bb' category SCP, resulting from a
'Vulnerable' risk profile and a 'aaa' debt sustainability score.
Mugla's IDRs are constrained by the Turkish sovereign IDRs
(B/Negative).
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
Mugla's 'Vulnerable' risk profile reflects a combination of four
'Weaker' key risk factors (revenue robustness and adjustability,
expenditure sustainability, and liabilities and liquidity
flexibility) and two 'Midrange' factors (expenditure flexibility
and liabilities and liquidity robustness). The assessment reflects
Fitch's view of a very high risk relative to international peers
that Mugla's ability to cover debt service with its operating
balance may weaken unexpectedly over the forecast horizon
(2022-2026). This may be due to lower-than-expected revenue,
higher-than-expected expenditure, or an unanticipated rise in
liabilities or debt-service requirements.
Revenue Robustness: 'Weaker'
Fitch's assessment reflects its expectation that Mugla's tax
revenue growth will moderately match inflation over its rating
case. The tax revenue base is exposed to the cyclicality of the
local economy, which is skewed towards tourism services sector,
mainly dominated by domestic tourists. On average, 65% of operating
revenue stems the nationally collected and allocated taxes, while
23% comes from the financial equalisation system, reflecting its
mid-size socio-economic profile compared with some of its national
peers. Non-tax revenue such as charges and fees make up around 12%
of operating revenue.
Revenue Adjustability: 'Weaker'
Mugla's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2021, nationally collected
and set taxes comprised 68% of Mugla's operating revenue or 65% of
total revenue. Local taxes set by Mugla were a low 0.6% of total
revenue, implying negligible tax flexibility.
The high inflexibility of tax-setting powers is compensated to some
extent by the financial equalisation transfers under the current
transfers received by the metropolitan municipalities and the
flexibility on charges and fees levied for public services. For
Mugla, this accounted for 22.0% and 8% of its total revenue,
respectively, in 2021.
Expenditure Sustainability: 'Weaker'
Fitch expects high inflation will weaken control of total
expenditure growth. Fitchs expects high inflation will reverse
Mugla's trend of spending growth lagging revenue growth in
2017-2021, due to its moderately cyclical and counter-cyclical
spending responsibilities. Rising energy prices are likely to exert
pressure on the city's operating expenditure in addition to its
investment spending, which is expected to rise to 46% of its total
spending in the run-up to elections. This will further constrain
Mugla's ability to curb spending in the inflationary operating
environment over the medium term.
Expenditure Adjustability: 'Midrange'
Compared with international peers, Mugla has a low share of
inflexible costs, at around 55% on average of its total
expenditure. Capex constitutes the remaining 45%, which can be cut
back or postponed given the city's reasonable level of existing
infrastructure. Fitch expects the city's spending flexibility to be
reduced during 2022-2024 in the run-up to presidential elections in
2023 and local elections in 2024, and to be restored gradually
thereafter.
Liabilities & Liquidity Robustness: 'Midrange'
Mugla has the lowest leverage among its Fitch-rated peers and no
unhedged FX exposure. Total debt consists of Turkish
lira-denominated bank loans with fixed interest rates. Mugla's
relatively short debt tenure profile (weighted average maturity of
2.7 years) exposes the city to refinancing risk, but Fitch expects
this to be fully mitigated by its strong actual debt service
coverage ratio of 40.4x on average in 2022-2026 and fully
amortising debt structure. Additionally, its sound year-end cash
reserves (TRY533 million) cover 15.7x of its annual debt
obligations.
As of end-2021, Mugla's contingent liabilities were mainly from
wholly-owned water affiliate, MUSKI. A large proportion of debt
(transferred from the newly-joined districts after the Local
Municipal Act in 2014) has been repaid during 2022 from the city's
operating cash flow. Therefore, Fitch does not expect the city to
be exposed to material off-balance sheet risk during the forecast
horizon. MUSKI is expected to service remaining debt from its own
budget with operating balance covering at least 1x of its annual
debt service.
Liabilities & Liquidity Flexibility: 'Weaker'
Mugla's counterparty risk associated with its domestic liquidity
providers rated below 'BBB-' and with short tenor of loans limits
this factor assessment to 'Weaker'. The city has well-developed
relationships with local banks. The assessment is further
underpinned by the unavailability of treasury lines or cash pooling
at the national level, which makes it challenging to fund
unexpected increases in debt liabilities or spending.
Debt Sustainability: 'aaa category'
Under Fitch's conservative rating case for 2022-2026, Mugla's
operating balance will increase to about TRY2.0 billion from TRY650
million in 2021 with direct debt totalling TRY2.6 billion in 2026.
This leads to a very strong payback ratio (net adjusted
debt-to-operating balance) at 1.3x, well below 5.0x, in line with a
'aaa' assessment and supported by a sound actual debt service
coverage ratio at 3.6x in 2026 (2021: 19.1x), corresponding to a
'aa' category.
This is despite an expected fall in the operating margin from an
average 51% in 2017-2021 to 41% in 2022-2026. Mugla's leverage
remains the lowest among its peers, with a fiscal debt burden (net
adjusted debt-to-operating revenue) below 50%, in line with a 'aaa'
assessment.
DERIVATION SUMMARY
Fitch has revised Mugla's SCP to 'bb+' factoring in comparison with
national and international peers in the same rating category, which
results from a 'Vulnerable' risk profile and a 'aaa' debt
sustainability score. The latter is derived from a payback ratio at
the higher end of the 'aaa' category and healthy secondary debt
metrics with coverage corresponding to 'aa' and low fiscal debt
burden corresponding to a 'aaa' assessment. The city's IDRs are not
affected by any other rating factors but are constrained by the
sovereign IDRs.
Short-Term Ratings
The 'B' Short-Term IDR is the only option for a 'B' category
Long-Term IDR.
National Ratings
Mugla's National Ratings are driven by its 'B' Long-Term
Local-Currency IDR, which maps to 'AAA' on the Turkish National
Correspondence Table based on national peer comparison. This
reflects the city's lower vulnerability to default on its long-term
local-currency obligations.
KEY ASSUMPTIONS
Qualitative assumptions:
Risk Profile: 'Vulnerable'
Revenue Robustness: 'Weaker'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Weaker'
Expenditure Adjustability: 'Midrange'
Liabilities and Liquidity Robustness: 'Midrange'
Liabilities and Liquidity Flexibility: 'Weaker'
Debt sustainability: 'aaa'
Support (Budget Loans): 'N/A'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Sovereign Cap: 'B'
Sovereign Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2017-2021 figures and 2022-2026 projected
ratios. The key assumptions for the scenario include:
- Operating revenue CAGR at 40.7% in 2022-2026 (versus average
21.2% yoy for 2017-2021) due to expected inflation of 47.7% on
average
- Tax revenue CAGR of 42.5% in 2022-2026, versus 23.2% CAGR in
2017-2021
- Current transfers CAGR of 40.0% in 2022-2026, versus 20.2% CAGR
in 2017-2021
- Operating expenses CAGR of 55.5% in 2022-2026 (versus average
11.5% yoy for 2017-2021) due to expected inflation of 47.7% on
average
- Negative net capital balance of TRY2.0 billion in 2022-2026
- Apparent cost of debt on average 22.5%, 12% above 2021's level,
due to higher borrowing rates
- EUR/TRY (average) assumptions are based on Fitch sovereign's
estimates - 2022:18.16, 2023: 23.89, and 2024: 27.79
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2020 and forecast for
2022, respectively (no weights and changes since the last review
are included as none of these assumptions was material to the
rating action).
Liquidity and Debt Structure
At end-2021, Mugla's fund balance improved to TRY540 million from
TRY285 million in 2020, with strong unrestricted year-end cash of
TRY533 million. In its rating case, Fitch forecasts cash will be
depleted.
As of 2021, Mugla's direct debt declined to TRY34 million from
TRY63 million in 2020. The city's debt stock consists of
local-currency loans with fixed interest rates.
The city is not exposed to material off-balance sheet risk. The
contingent liabilities (TRY880 million) are moderate and largely
stemming from MUSKI, which no longer requires subsidies from the
metropolitan municipality as a large portion of debt has been
already repaid during 2022 in relation to the company's debt
guaranteed by the Treasury and transferred from the newly-joined
district pursuant to Local Municipal Act in 2014. Fitch expects
MUSKI's payback ratio to remain sound and operating balance to
cover at least 1x of its annual debt service.
Issuer Profile
Mugla is located in south-western Turkiye has a population of 1.0
million accounting for 1.2% of nation's population, with an
increased population during summer seasons.
Mugla's local economy is dominated by the services sector (62%)
driven largely by tourism, followed by industry (22%) and
agriculture (16%). The city also has large mineral and mining
resources and is an important marble centre, making it one of the
largest employers in the region. With GDP per capita of USD8,228,
Mugla accounts for 96% of the national average.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of the Turkish sovereign's IDRs or a downward revision
of Mugla's SCP resulting from a debt payback ratio of more than
nine years would lead to a downgrade of the city's IDRs.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A revision of the sovereign Outlook to Stable from Negative would
lead to a corresponding revision of Mugla's Outlooks.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Mugla's IDRs are capped by the Turkish sovereign IDRs.
Entity/Debt Rating Prior
----------- ------ -----
Mugla Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
Natl LT AAA(tur) Affirmed AAA(tur)
TURKIYE: Fitch Affirms LT Foreign Currency IDR at 'B', Outlook Neg.
-------------------------------------------------------------------
Fitch Ratings has affirmed Turkiye's Long-Term Foreign-Currency
Issuer Default Rating (IDR) at 'B' with a Negative Outlook.
KEY RATING DRIVERS
Credit Fundamentals, Negative Outlook: Turkiye's 'B' rating
reflects weak external finances, growing economic distortions due
to increasingly interventionist and unconventional policies as well
as political and geopolitical risks. These factors are set against
Turkiye's large and diversified economy, relatively low levels of
government debt and a manageable sovereign debt repayment profile.
The Negative Outlook reflects the government's continuation of a
policy stance aimed at maintaining high growth and employment
despite rising macroeconomic imbalances and deteriorating external
demand and financing conditions. In Fitch's view, this policy mix
will maintain FX demand and depreciation pressures on the lira,
weaken international reserves, maintain inflation at a high level
and limit capital inflows as well as increasing their cost.
Monetary Easing, Interventionist Policies: The central bank resumed
monetary easing, and in line with President Erdogan's statements,
Fitch expects the central bank to cut rates by a total of 500bp to
9% in 2022. In addition to maintaining capital flow management
measures, authorities have increasingly resorted to targeted
measures to lower domestic financing costs, manage the allocation
and pace of credit, and ease pressures on the lira by controlling
FX demand and lowering financial dollarisation.
Fitch sees the risk that future policies could undermine depositor
confidence, reduce access to external financing or build up risks
in the until now resilient banking sector, compounding risks to
macroeconomic and financial stability from the extremely loose
monetary policy stance. Regulations introduced by the authorities
require banks to increase their sovereign debt holdings if, for
example, they do not comply with soft interest caps for commercial
credit or reduce financial dollarisation. Given the highly
accommodative policy stance in recent years, Fitch has assigned a
Macro-Prudential Indicator (MPI) Score of '3' to Turkiye,
indicating high vulnerability due to rapid credit and house price
growth in 2020-2021.
High Inflation, Slowing Growth: Annual inflation rose to 85.5% in
October and will average 72.5% in 2022, the highest of Fitch-rated
sovereigns. Fitch expects inflation to remain elevated, averaging
59% in 2023, reflecting the government's focus on supporting growth
and employment in the run-up to the general elections and inflation
inertia, while backward indexation, rising expectations and
additional lira depreciation, as the exchange rate pass-through has
increased in both speed and magnitude, remain upside risks.
Despite expected increases to minimum wages, public sector salaries
and pensions, domestic demand will likely slow given high
inflation, a weaker exchange rate and fragile domestic confidence.
Fitch forecasts growth to reach 5.6% in 2022, but to slow to 2.9%
in 2023-2024, reflecting tighter financing conditions and slower
global growth.
Reduced Pressure on Reserves, Weak Composition: International
reserves (USD117 billion) have recovered since July, but their
structure remains vulnerable with the central bank's net foreign
asset position significantly negative (minus USD57.5 billion) when
excluding FX swaps. Fitch forecasts international reserves to
decline to USD105 billion by end-2022, bringing reserve coverage of
current external payments to three months, below the forecast 'B'
median of 3.9 months. Reserve coverage is weak given high financial
dollarisation (52%; 69% when including FX-protected deposits) and
large external financing requirements. FX protected deposits (USD75
billion in early November) not only create fiscal costs and FX
linked contingent liabilities for the sovereign, but could also add
to domestic FX demand in the event of reduced rollovers. External
debt maturing over the next 12 months (end-September) amounts to
USD185.3 billion.
Higher External Deficit: Greater-than-expected tourism revenues and
continued export growth have helped contain the energy-driven
increase in imports. Fitch forecasts the current account deficit to
widen to 6.1% of GDP (USD50.2 billion) of 2022 and decline to a
still high 4.3% (USD37.5 billion) in 2023 reflecting still weaker
external demand, still high energy prices and real appreciation of
the lira. Net errors and omission have been the main source of
financing reaching 66% of the current account deficit in 9M22. The
limited visibility on their nature and resilience highlights the
risk of additional pressure on international reserves.
Resilient but Costly External Financing: Access to external
financing for the sovereign and private sector has a record of
resilience, but remains vulnerable to changes in investor
sentiment, especially given tighter global financing conditions and
Turkiye's increased funding costs. The sovereign re-entered
international markets in 4Q22 (total USD9 billion year to date) and
faces external bond amortisations of USD5.7 billion and USD9
billion in 2023 and 2024, respectively. The private sector has also
maintained external market access, although banks' roll-over of
syndicated loans has fallen below 100%, partly reflecting high
costs and reduced demand for FX loans.
Low Government Deficits, Debt: High inflation and continued growth
are boosting revenue and improving debt metrics. Fitch forecasts
the central government deficit to reach 3.1% of GDP in 2022 (3.3%
general government), outperforming the 3.4% budget target. Turkiye
is increasingly relying on the budget to reduce FX demand, for
example through FX-protected deposits, and mitigate the impact of
high inflation on the economy. The impact of weaker economic
activity on revenues, expenditure pressures related to adjustment
of salaries and pensions due to high inflation, rising interest
bill and potentially larger transfer to state-owned enterprises,
most notably those in the energy sector, will lift the central
government deficits to an average 4.2% of GDP (4.5% general
government) in 2023-2024.
Fitch forecasts general government debt to decline to 34.4% in
2022, significantly below the forecast 57% for the 'B' median. Debt
is vulnerable to currency risk, as 66% of central government debt
was foreign-currency-linked or denominated at end-September, up
from 39% in 2017. Interest payments to revenues, at 7.7% for 2022,
remain lower than 'B' peers (10.8%).
Elections Approaching, Challenging Diplomatic Balance: General
elections are due to take place by June 2023, and government
policies are geared towards maintaining high growth and employment
creation, while avoiding a repeat of recent episodes of financial
stress. A material number of undecided voters, the perceived
evolution of the economy, issues such as refugees and foreign
policy and the incumbent's capacity to set the political agenda
will influence the electoral race.
Turkiye has continued to play an active diplomatic role regarding
the war in Ukraine. The country has facilitated an agreement
between Ukraine and Russia to allow a 'grain corridor' and prisoner
exchanges. Although Turkiye has maintained its support for the
territorial integrity of Ukraine, it has not joined in US and EU
sanctions against Russia and bilateral economic relations with
Russia have increased.
ESG - Governance: Turkiye has an ESG Relevance Score (RS) of '5'
for both Political Stability and Rights and for the Rule of Law,
Institutional and Regulatory Quality and Control of Corruption.
Theses scores reflect the high weight that the World Bank
Governance Indicators (WBGI) have in its proprietary Sovereign
Rating Model. Turkiye has a medium WBGI ranking at 35 reflecting a
recent track record of peaceful political transitions, a moderate
level of rights for participation in the political process,
moderate but deteriorating institutional capacity due to increased
centralization of power in the office of the president and weakened
checks and balances, uneven application of the rule of law and a
moderate level of corruption.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- External Finances: Increased balance of payments pressures,
including sustained reduction in international reserves, for
example due to reduced access to external financing for the
sovereign or the private sector and/or sustained widening of the
current account deficit.
- Macro: Continuation of a policy mix that increases macroeconomic
and financial stability risks, for example, an inflation-exchange
rate depreciation spiral, weaker depositor confidence and/or
increased vulnerabilities in banks' balance sheets.
- Structural Features: A serious deterioration in the domestic
political or security situation or international relations that
severely affects the economy and external finances.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Macro: A shift towards a credible and consistent policy mix that
stabilises confidence, improves predictability and reduces
macroeconomic and financial stability risks.
- External Finances: A reduction in external vulnerabilities, for
example due to sustained narrowing of the current account deficit,
increased capital inflows, improvements in the level and
composition of international reserves and reduced dollarisation.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Turkiye a score equivalent to a
rating of 'BB' on the Long-Term Foreign-Currency (LT FC) IDR
scale.
Fitch's sovereign rating committee adjusted the output from the SRM
to arrive at the final LT FC IDR by applying its QO, relative to
SRM data and output, as follows:
- Structural: -1 notch, to reflect vulnerabilities in the banking
sector due to the significant reliance on foreign financing and
high financial dollarisation, and the risk that developments in
geopolitics and foreign relations, including sanctions, and as well
as of domestic social unrest, could impact economic stability.
- Macro: -1 notch, to reflect that risks of potential additional
macroeconomic and financial stability are not fully captured by the
SRM, as the current policy mix and potential reaction to shocks
could further weaken domestic confidence, reduce reserves and lead
to external financing and domestic liquidity pressures.
- External Finances: -1 notch, to reflect a very high gross
external financing requirement, low international liquidity ratio,
a weak central bank net foreign asset position, and risks of
renewed balance of payments pressures in the event of changes in
investor sentiment.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within its
criteria that are not fully quantifiable and/or not fully reflected
in the SRM.
ESG CONSIDERATIONS
Turkiye has an ESG Relevance Score of '5' for Political Stability
and Rights as World Bank Governance Indicators have the highest
weight in Fitch's SRM and are therefore highly relevant to the
rating and a key rating driver with a high weight. As Turkiye has a
percentile rank below 50 for the respective Governance Indicator,
this has a negative impact on the credit profile.
Turkiye has an ESG Relevance Score of '5' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight. As Turkiye has a percentile rank
below 50 for the respective Governance Indicators, this has a
negative impact on the credit profile.
Turkiye has an ESG Relevance Score of '4'for Human Rights and
Political Freedoms as the Voice and Accountability pillar of the
World Bank Governance Indicators is relevant to the rating and a
rating driver. As Turkiye has a percentile rank below 50 for the
respective Governance Indicator, this has a negative impact on the
credit profile.
Turkiye has an ESG Relevance Score of '4' for International
Relations and Trade, as bilateral relations with key partners have
been volatile, including threats of US sanctions and periodic
tensions with the EU. This turbulence hurts investor confidence,
brings risks to external financing and can impact trade
performance, which has a negative impact on the credit profile, is
relevant to the rating and a rating driver.
Turkiye has an ESG Relevance Score of '4+' for Creditor Rights as
willingness to service and repay debt is relevant to the rating and
is a rating driver for Turkiye, as for all sovereigns. As Turkiye
has a track record of 20+ years without a restructuring of public
debt and captured in its SRM variable, this has a positive impact
on the credit profile.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of '3'. This means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or to the way in which they
are being managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Turkiye LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Country Ceiling B Affirmed B
senior unsecured LT B Affirmed B
Hazine Mustesarligi
Varlik Kiralama
Anonim Sirketi
senior unsecured LT B Affirmed B
===========================
U N I T E D K I N G D O M
===========================
ALBA 2006-2: S&P Raises Class F Notes Rating to 'BB+ (sf)'
----------------------------------------------------------
S&P Global Ratings raised to 'A- (sf)' from 'BBB (sf)' and to 'BB+
(sf)' from 'B+ (sf)' its credit ratings on ALBA 2006–2 PLC's
class E and F notes, respectively, and lowered to 'A (sf)' from 'A+
(sf)' its credit ratings on both the class A3a and A3b notes. At
the same time, S&P affirmed its 'A (sf)' ratings on the class B, C,
and D notes.
On Nov. 1, 2022, S&P Global Ratings lowered its long- and
short-term issuer credit ratings on Credit Suisse International,
which provides the currency and interest rate swaps in this
transaction. S&P said, "We also lowered to 'A' from 'A+' our
long-term resolution counterparty rating (RCR) on Credit Suisse
International. Under our counterparty criteria, our collateral
assessment is weak, and considering the downgrade language in the
swap documents and the current RCR on Credit Suisse International,
the maximum supported rating on the notes is lowered to 'A (sf)'
from 'A+ (sf)'. Today's rating actions reflect this change on the
maximum supported rating. They also address our full analysis of
the most recent transaction information we have received and the
transaction's structural features."
Total arrears (7.6%) in the transaction decreased slightly and have
been consistently below our non-conforming index (10.9%). Although
the notes amortize pro rata, the nonamortizing reserve fund has led
to a slight increase in credit enhancement for the notes.
S&P said, "We applied our global RMBS criteria to our analysis of
this transaction. Compared with our previous review, the
weighted-average foreclosure frequency (WAFF) decreased at all
rating levels. This is mainly due to the lower loan-to-value (LTV)
ratio we used for our foreclosure frequency analysis--which
reflects 80% of the original LTV ratio and 20% of the current LTV
ratio--an approximate 3% decrease in arrears, and a lower
proportion of buy to let (BTL) borrowers.
"Our weighted-average loss severity assumptions slightly decreased
at all rating levels, owing mainly to a lower LTV ratio and a lower
repossession market value decline."
Credit Analysis Results
RATING LEVEL WAFF (%) WALS (%)
AAA 23.37 35.81
AA 16.50 28.11
A 12.74 16.64
BBB 9.15 10.31
BB 5.27 6.71
B 4.40 3.89
S&P said, "The overall effect of our credit analysis results is a
decrease in the required credit coverage for all rating levels.
"Available credit enhancement in this transaction has slightly
increased since our previous review, due to a nonamortizing reserve
fund. The transaction is currently paying both principal and
interest pro rata because all of the pro rata conditions in the
transaction documents have been met.
"We determined that our assigned ratings on this transaction's
classes of notes should be the lower of (i) the rating as capped by
our counterparty criteria, or (ii) the rating that the class of
notes can attain under our global RMBS criteria. We also performed
sensitivity analysis for deterioration in credit performance such
as an increase in defaults and a longer recovery period. The
assigned ratings remain robust in our sensitivity analysis.
"Our credit and cash flow results indicate that available credit
enhancement for the class A3a, A3b, B, C, and D notes is
commensurate with higher ratings than those currently assigned.
However, our ratings on all these classes are capped by our
counterparty risk criteria. We have therefore lowered to 'A (sf)'
from 'A+ (sf)' our ratings on the class A3a and A3b notes and
affirmed our 'A (sf)' ratings on the class B, C, and D notes.
"Under our credit and cash flow analysis, the class E and F notes
can withstand our stresses at higher rating levels than those
currently assigned. However, our ratings of these classes also
consider their subordinated position in the payment
structure--which is sequential with pro rata conditions currently
met--and their lower credit enhancement than the more senior notes.
This means they are more vulnerable to any adverse movement in
collateral behavior if the U.K. macroeconomic environment weakens
compared to our baseline expectations. We also considered that the
nonconforming borrowers in this transaction will generally have
lower resilience to current inflationary and interest rate
pressures. Additionally, we considered the transaction's tail-end
risk, given that the pool factor is below 20% and there is a high
proportion of interest only loans in the portfolio. Taking all of
these factors into account, we raised to 'A- (sf)' from 'BBB (sf)'
and to 'BB+ (sf)' from 'B+ (sf)' our rating on the class E and F
notes, respectively."
The current U.K. macroeconomic outlook remains uncertain and has
recently been subject to significant changes in short timeframes.
In addition to the increases in energy costs and the overall cost
of living, rate rise expectations remain fluid, occurring against a
backdrop of stagnating macroeconomic conditions. The ratings
assigned reflect this market uncertainty and our overall analysis
considers the implications of further deterioration in credit
conditions.
ALBA 2006-2 is backed by a mortgage pool of nonconforming
first-ranking residential mortgages in England, Wales, Scotland,
and Northern Ireland.
BROADWAY STAMPINGS: In administration, Puts Premises Up for Sale
----------------------------------------------------------------
Sally Murrer at MKCitizen reports that a well-known MK company
that's been trading for 46 years has gone into administration and
put its massive premises on the market.
Broadway stampings and Dyson Diecastings employed 319 people at
their factory and warehouse in Bletchley's Denbigh Industrial
estate.
Suppliers to the automotive industry, they were among the last
family-owned independent pressed and sheet metal component
manufacturers and die casters in the UK.
But over the past two or three years, they have battled against a
string of problems which have affected the UK automotive supply
chain, the Citizen relates. These include the impact of Brexit and
COVID-19, escalating raw material and energy costs, supply chain
disruption and shortages of both essential components and labour,
the Citizen notes.
In August, the Citizen reported that administrators had been
appointed and were battling to save the company and keep it
trading.
However, this month the premises are up for sale with offers of
more than GBP12 million invited, the Citizen discloses.
According to the Citizen, strategic real estate advisor Avison
Young has been instructed to market the property, which consists of
a total of 189,473 sq ft across a number of units on more than six
acres.
COMET: Fnac Darty Ordered to Pay GBP89 Million to Liquidator
------------------------------------------------------------
Jonathan Eley at The Financial Times reports that the UK's high
court has ordered Fnac Darty, the French electricals chain, to pay
GBP89 million plus interest and costs to the liquidator of Comet
relating to an intercompany loan made before the UK retailer went
bust.
According to the FT, Justice Sarah Falk said Comet was insolvent
before its then-owner, Kesa Electricals, sold it as a going concern
to a group of investors including OpCapita, Greybull Capital and
Elliott Advisors for a token GBP2 in February 2012.
She ruled that Simon Enoch, Kesa's general counsel at the time, and
others "had a desire to ensure repayment" of a GBP115 million
intercompany loan when they agreed the terms of the sale in
November 2011 "and had in contemplation the possibility of an
insolvent liquidation of Comet", the FT relates.
"Whether or not they formed the view that Comet was solvent at the
point of disposal, they undoubtedly knew that there was a risk of
an insolvency process," she said, adding that the decision to repay
the facility was made by Kesa on Comet's behalf at the time the
sale agreement was struck.
The repayment of the loan was financed by the special purpose
vehicle that acquired Comet, which then took a charge over all the
assets in the business to protect its own interests in the event of
insolvency, the FT discloses.
Towards the end of 2012, Comet did become insolvent with the loss
of more than 7,000 jobs, the FT notes. The earlier repayment of
the intercompany loan meant that Kesa avoided becoming an unsecured
creditor, the FT states.
Following the sale, Kesa changed its name to that of its more
successful French operation, Darty, though it kept its listing in
London, the FT relays.
Fnac Darty, as cited by the FT, said in a statement that it "has
vigorously challenged from the beginning the merits of the claim"
and would seek to appeal against the judgment. It was not informed
about the matter of the intercompany loan when it acquired Kesa in
2016, it has said. The legal proceedings were issued by Geoff
Carton-Kelly, Comet's additional liquidator, in 2018, the FT
recounts.
According to the FT, Michael Walters, the former company secretary
of Comet and a critic of the sale and the subsequent
administration, said he was "very pleased that [Carton-Kelly] has
pursued the interests of Comet's unsecured creditors" and that the
judge's ruling "confirmed my concerns about the way that the
disposal of Comet was structured".
"It is regrettable that it has taken 10 years to reach this
position," he added, referring to the shortcomings of the original
Comet administration, which was handled by Deloitte.
The ruling, if upheld, means that the three investors that acquired
Comet could receive a further distribution, the FT says. Despite
putting up just GBP2 in equity, they are believed to have recouped
more than GBP100 million from the acquisition of Comet including
loan repayments and interest before its insolvency and about GBP63
million in distributions following the administration and
liquidation, according to the FT.
However, the liquidator's last progress report in October 2021
stated that their GBP140 million claim would not be repaid in full
even if the legal action against Fnac Darty was successful, the FT
discloses. The outcome for unsecured creditors is entirely
dependent on the action, the FT notes.
DIXIE DEAN HOTEL: Put Up for Sale Following Administration
----------------------------------------------------------
News Desk reports that the Dixie Dean hotel in Liverpool has been
put up for sale after falling into administration.
According to News Desk, CBRE is marketing the property, which
opened in 2020 and is named after former Everton FC player William
Ralph "Dixie" Dean.
The boutique hotel includes 45 themed bedrooms, a 120-cover bar and
restaurant and is located within Liverpool city centre, News Desk
discloses.
A CBRE brochure said the site had "proven to be a strong performer"
in the hotel market and that it had "strong forward bookings" going
into 2023, News Desk relates. The asking price has not been
disclosed, News Desk notes.
The Dixie Dean's parent company Signature Eden Limited entered
administration in August, when the hotel employed 44 people, News
Desk recounts.
It was one of around 60 firms which traded as part of the Signature
Living family of companies. The wider Signature Living group
entered administration in April 2020, leaving a number of its
associated hotel projects in limbo, News Desk notes.
WELLESLEY: FCA Working Full-Time on Wind Down Investigation
-----------------------------------------------------------
Kathryn Gaw at Peer2Peer Finance News reports that the Financial
Conduct Authority (FCA) is working "full-time" on an investigation
into the wind down of former mini bond provider Wellesley.
According to Peer2Peer Finance News, the City regulator said that
the Wellesley investigation is a "very important priority", after
receiving a number of complaints from investors, led by the
Wellesley Investor Action Group (WIAG).
During the FCA's recent annual general meeting, Neil Taylor, chair
of the WIAG, asked the FCA's executive director of oversight and
enforcement, Mark Steward, for an estimated timeframe for the
completion of the investigation into Wellesley Group, Peer2Peer
Finance News relates.
Mr. Steward responded, saying that the Wellesley investigation is a
"very important priority" for the enforcement team and teams are
working full-time on the case, Peer2Peer Finance News notes.
"We're very conscious of the losses that investors have suffered,"
Mr. Steward added. "We are currently in the process of preparing a
survey of investors to gauge information that we need in that
particular investigation, which is about to be made public."
In September 2020, Wellesley held a creditor vote on entering into
a company voluntary arrangement (CVA), Peer2Peer Finance News
recounts. However, investors claim that they were not given enough
information ahead of the vote, and have challenged the company's
decision to opt for a CVA, Peer2Peer Finance News discloses.
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