/raid1/www/Hosts/bankrupt/TCREUR_Public/230330.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Thursday, March 30, 2023, Vol. 24, No. 65
Headlines
G E R M A N Y
GRUNENTHAL PHARMA: Fitch Affirms 'BB' LongTerm IDR, Outlook Stable
I R E L A N D
ICG EURO 2023-1: Fitch Gives 'B-sf' Final Rating to Class F Notes
QUINN INSURANCE: High Court Approves Final Winding Up Process
L A T V I A
BALTIC INT'L: Latvijas Banka Submits Application for Liquidation
S P A I N
AYT KUTXA HIPOTECARIO II: S&P Raises Class C Notes Rating to 'BB+'
BANKINTER 13: Moody's Ups Rating on EUR20.5MM Class D Notes to Ba1
MADRID RMBS I: Fitch Hikes Rating on Class D Notes to 'B-sf'
S W I T Z E R L A N D
DUFRY AG: S&P Upgrades ICR to 'BB-', On CreditWatch Positive
T U R K E Y
TURKIYE HALK: Fitch Keeps 'B-' Foreign Curr. IDR on Watch Negative
TURKIYE VAKIFLAR: Fitch Affirms LongTerm IDR at B-, Outlook Neg.
ZIRAAT KATILIM: Fitch Affirms 'B-' Foreign Curr. IDR, Outlook Neg.
U N I T E D K I N G D O M
ARCHANT: Norwich City Council Writes Off More Than GBP64,000
CATH KIDSTON: Next Buys Assets from Administrators for GBP8.5MM
KEMBLE WATER: Fitch Lowers LongTerm IDR to 'B', Outlook Negative
LONDON ROAD: Goes Into Receivership Amid Lender Dispute
MILLER HOMES: Moody's Affirms B1 CFR & Alters Outlook to Negative
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G E R M A N Y
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GRUNENTHAL PHARMA: Fitch Affirms 'BB' LongTerm IDR, Outlook Stable
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Fitch Ratings has affirmed Grunenthal Pharma GmbH & Co.
Kommanditgesellschaft's Long-Term Issuer Default Rating (IDR) at
'BB' with a Stable Outlook. The senior secured instrument rating
has also been affirmed at 'BB+'/RR2.
Grunenthal's 'BB' IDR reflects its niche position and concentrated
product portfolio, making it heavily reliant on the commercial
success of individual drugs. Rating strengths are cash-generative
operations, and management of its organic portfolio decline with
mid-to-larger scale acquisitions of established cash-generative
drugs with low integration risk, in its view.
The Stable Outlook reflects its expectation of a disciplined
approach to acquisitions and adherence to a conservative internal
financial policy leading to EBITDA leverage remaining below 4.0x,
which is consistent with the rating.
KEY RATING DRIVERS
Integrated Business Model: Grunenthal benefits from an integrated
business model with international manufacturing and distribution
capabilities. It has a good mix between mature off-patent drugs and
growing patented drugs, leading to adequate EBITDA margins
estimated at over 20% in the medium term.
Grunenthal has progressively diversified and repositioned its
portfolio and business model through acquisitions, complementing
its R&D-focused niche position as a pain medicines specialist with
a cash generative portfolio of established drugs. The
predictability of established drugs mitigates the impact of
potential R&D failures. The group has demonstrated efficient
capital-deployment and diligence in adding cash generative low-risk
drug rights and leveraging them on its own manufacturing and
distribution networks.
Conservative Financial Policy: The rating is predicated on
Grunenthal's adherence to stated financial policies, covenanted
leverage levels and deleveraging, particularly after any
debt-funded M&A. Unlike sponsor-backed leveraged buyouts with an
opportunistic financial approach, Fitch considers the commitment of
Grunenthal's founding-family shareholders, as reflected in their
target EBITDA net leverage below 2.5x. Departure from the stated
target leverage would signal an increased risk appetite and put the
ratings under pressure.
Adherence to Disciplined M&A: Fitch stresses the importance of
Grunenthal's disciplined selection of M&A targets, including
acquisition economics and asset integration, especially in light of
increasing competition from off-patent branded pharmaceuticals,
rising asset valuations and cost of capital. Given Grunenthal's M&A
pattern, operating needs and financial policy, Fitch projects
opportunistic M&A of up to EUR100 million-EUR200 million a year
over 2024-2026, funded by a revolving credit facility (RCF) and
free cash flow (FCF).
Fitch assumes new products will complement Grunenthal's therapeutic
competences and be compatible with the company's manufacturing and
commercial franchises with low integration risks. Fitch deems its
acquisition economics with enterprise value/EBITDA of up to 6.0x
and EBITDA margin of 50% as reasonable.
Cash-Generative Operations: The ratings are supported by
cash-generative operations, given Grunenthal's focus on established
branded products. The combination of gradually declining but
predictable sales and targeted product acquisitions support annual
EBITDA of around EUR400 million through 2026. The company further
benefits from contained capex needs estimated around 2%-4% of
sales, in turn supporting high single-digit to low-teen FCF
margins.
Concentrated Product Portfolio: Operating risks have a high rating
influence, particularly given the uneven revenue pattern of
Grunenthal's existing portfolio, which is supported by product
acquisitions to mitigate generic market pressures. Despite its
multi-regional presence, its smaller scale than peers and
concentrated product portfolio make it heavily reliant on the
commercial success of individual drugs that can lead to volatile
underlying revenue and operating profitability.
Contained Execution and Operational Risks: Grunenthal's business
development strategy around organic portfolio management
supplemented with selected drug-rights additions carries lower
execution risk and requires fewer resources than the acquisition of
clinical-stage drug candidates and businesses with manufacturing
assets and commercial networks.
Mild Decline Offset By Acquisitions: Its rating case conservatively
assumes negative organic growth from 2023 to 2025 due to the patent
expiry of Palexia, Grunenthal's largest drug accounting for
slightly over 20% of sales, partly offset by growth from Qutenza.
Its rating case does not incorporate the potentially substantial
contribution of late-stage drug candidate RTX, which could be
launched in 2025 and become a blockbuster if clinical trials are
successful. Fitch expects that recent acquisitions of established
drugs will more than offset the near-term negative organic growth.
Recent deals include the EUR494 million acquisition of Nebido and
the entry into a joint venture with Kyowa Kirin for its established
medicines portfolio with the intention to acquire the remaining 49%
stake in 2026. The latter will contribute to sales but not profits
until Grunenthal acquires the remaining 49% stake of the JV in
early 2026. Therefore, it will be dilutive to margins until 2025.
Grunenthal has an ESG Relevance Score of '4' for exposure to social
impact, due to the company's reliance on reimbursement policies in
its countries of operations, which has a negative impact on the
credit profile, and is relevant to the rating in conjunction with
other factors.
DERIVATION SUMMARY
Fitch rates Grunenthal using its Ratings Navigator for
Pharmaceutical Companies. The 'BB' IDR is supported by its
integrated cash-generative business model with a portfolio of
patented and generic drugs with strong financial credit metrics,
reflecting a commitment to conservative financial policies. This
stance offsets the operating risks arising from Grunenthal's
concentrated product portfolio exposed to generic market
pressures.
Grunenthal is rated above asset-light scalable specialist
pharmaceutical companies focused on lifecycle management of
off-patent branded and generic drugs such as CHEPLAPHARM
Arzneimittel GmbH (Cheplapharm; B+/Stable), Pharmanovia Bidco
Limited (B+/Stable) and ADVANZ Pharma Holdco Limited (B/Stable).
Its rating is also above asset-intensive pharmaceutical companies
such as Roar BidCo AB (B/Stable) and European Medco Development 3
S.a.r.l. (B/Stable), due mainly to its much stronger leverage
metrics with EBITDA leverage below 3.5x versus Cheplapharm's and
Pharmanovia's 5.0x, and other peers' 6.0-9.0x.
Its stronger leverage profile is embedded in Grunenthal's
considerably more conservative financial policy and less aggressive
M&A strategy. Grunenthal is larger than most of these peers, but
product concentration remains a risk for the majority of
non-investment-grade pharmaceutical credits given their niche.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Volatile revenue profile reflecting an organic portfolio
declining at low-single digits due to generic and payor pressure.
However, organic revenue declines are offset by revenue from
opportunistic newly-acquired medium-sized targets;
- EBITDA margin maintained at/above 22%-23% to 2026;
- Trade working capital fluctuating with revenues and following
addition of new drugs;
- Sustained maintenance capex at 2%-4% of sales, in addition to
milestone payments related to previous acquisitions over the next
four years;
- Dividend payment of EUR40 million in 2023 and EUR30 million per
year from 2024 to 2026;
- Opportunistic acquisitions of around EUR100-200 million per year
funded through RCF utilisation and FCF (Fitch's assumption);
- Flexible use of RCF to support organic and inorganic growth.
Key Recovery Rating Assumptions
Fitch follows the generic approach for corporates rated 'BB-' or
above in accordance with the Corporates Recovery Ratings and
Instrument Ratings Criteria. Given the senior secured nature of the
entire debt issued by Grunenthal (single debt class) Fitch
classifies its debt as 'category 2 first lien' under the generic
approach for rating instruments of companies in the 'BB' rating
category based on Fitch's Corporates Recovery Ratings and
Instrument Ratings criteria. Therefore, Fitch rates Grunenthal's
senior secured debt one notch above the IDR, leading to a 'BB+'
senior secured notes rating with a Recovery Rating of 'RR2'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- An upgrade to 'BB+' would require an improved business risk
profile through increased visibility of revenue defensibility
combined with stable EBITDA and FCF margins and a more conservative
financial policy with EBITDA leverage trending towards 1.5x (1.0x
net of readily available cash)
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Volatile revenue, EBITDA and FCF margins, signalling challenges
in addressing market pressures or poorly executed M&A with
increased execution risks
- Departure from conservative financial policies and commitment to
deleveraging, leading to EBITDA leverage above 3.5x (3.0x net of
readily available cash).
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch projects total liquidity levels being
maintained in excess of EUR300 million through to 2026. This is
supported by sustained positive FCF generation, albeit subject to
fluctuations in trade working capital, plus performance-related and
milestones payments, which Fitch treats as regular capital
commitments as they relate to the existing product portfolio. Fitch
expects the company will make flexible use of its RCF to top up
liquidity or fund M&A, but also to make voluntary debt prepayments,
based on its record and financial policies. Grunenthal's
medium-term liquidity profile benefits from the recent extension of
its RCF maturity, with its senior secured notes due in 2026 and
2028.
ISSUER PROFILE
Grunenthal is a German family-owned (with 75 years of history)
integrated pharmaceutical company focused on pain therapies and
management of established brands and patented products.
ESG CONSIDERATIONS
Grunenthal has an ESG Relevance Score of '4' for exposure to social
impact, due to the company's reliance on reimbursement policies in
its countries of operations, which has a negative impact on the
credit profile, and is relevant to the rating in conjunction with
other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Grunenthal GmbH
senior secured LT BB+ Affirmed RR2 BB+
Grunenthal Pharma
GmbH & Co.
Kommanditgesellschaft LT IDR BB Affirmed BB
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I R E L A N D
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ICG EURO 2023-1: Fitch Gives 'B-sf' Final Rating to Class F Notes
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Fitch Ratings has assigned ICG Euro CLO 2023-1 DAC final ratings,
as detailed below.
Entity/Debt Rating
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ICG Euro CLO
2023-1 DAC
Class A XS2591168211 LT AAAsf New Rating
Class B XS2591168484 LT AAsf New Rating
Class C XS2591169029 LT Asf New Rating
Class D XS2591169292 LT BBB-sf New Rating
Class E XS2591169375 LT BB-sf New Rating
Class F XS2591169706 LT B-sf New Rating
Class Z XS2600105576 LT NRsf New Rating
Sub Notes XS2591169888 LT NRsf New Rating
TRANSACTION SUMMARY
ICG Euro CLO 2023-1 DAC is a securitisation of mainly senior
secured obligations (at least 90%) with a component of senior
unsecured, mezzanine, second-lien loans and high-yield bonds. Net
proceeds from the note issuance were used to fund a portfolio with
a target size of EUR400 million. The portfolio manager is
Intermediate Capital Managers Limited. The collateralised loan
obligation (CLO) envisages a 4.6-year reinvestment period and an
8.5-year weighted average life (WAL) test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors at 'B'/'B-'. The
Fitch-calculated weighted average rating factor of the identified
portfolio is 24.76.
Strong Recovery Expectation (Positive): At least 90% of the
portfolio will comprise senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch-calculated
weighted average recovery rate of the identified portfolio is
62.09%.
Diversified Portfolio (Positive): The transaction includes four
Fitch matrices with two effective at closing. The latter two
correspond to a top-10 obligor concentration limit of 20%, with two
fixed-rate asset limits of 10% and 5%, and an 8.5-year WAL. The
other two, which correspond to a 7.5-year WAL with the same top-10
obligor concentration limit and fixed-rate asset limits at closing,
can be selected by the manager at any time one year after closing
as long as the portfolio balance (including defaulted obligations
at Fitch-calculated collateral value) is above target par.
The transaction also includes various concentration limits,
including the maximum exposure to the three-largest Fitch-defined
industries in the portfolio at 42.5%. These covenants ensure that
the asset portfolio will not be exposed to excessive
concentration.
Portfolio Management (Neutral): The transaction has a 4.6-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
Cash flow Modelling (Neutral): The WAL used for the transaction's
stressed case portfolio is 12 months less than the WAL covenant, to
account for strict reinvestment conditions after the reinvestment
period, including passing the over-collateralisation test, Fitch
'CCC' limit, the WAL test (based on a consistently decreasing WAL
covenant) and the WARF test. In the agency's opinion, these
conditions reduce the effective risk horizon of the portfolio
during stress periods.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A 25% increase of the mean default rate (RDR) and a 25% decrease of
the recovery rate (RRR) across all ratings of the identified
portfolio would have no impact on the class A to D notes, and would
lead to a one-notch downgrade for the class E notes and a downgrade
below 'B-sf' for the class F notes.
Based on the identified portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of defaults and portfolio deterioration. Due to the
better metrics and shorter life of the identified portfolio than
the Fitch-stressed portfolio, the class B, D, E and F notes have a
buffer of two notches while the class C notes have one notch.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
and a 25% decrease of the RRR across all ratings of the
Fitch-stressed portfolio would lead to downgrades of up to four
notches for the rated notes.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would lead to upgrades of up to three notches for the
rated notes, except for the 'AAAsf' rated notes.
During the reinvestment period, based on the Fitch-stressed
portfolio, upgrades may occur on better-than-expected portfolio
credit quality and a shorter remaining WAL test, leading to the
ability of the notes to withstand larger-than-expected losses for
the remaining life of the transaction. After the end of the
reinvestment period, upgrades, except for the 'AAAsf' notes, may
occur on stable portfolio credit quality and deleveraging, leading
to higher credit enhancement and excess spread available to cover
losses in the remaining portfolio.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
QUINN INSURANCE: High Court Approves Final Winding Up Process
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Breakingnews.ie reports that the president of the High Court has
approved moves for the final winding up of Quinn Insurance whose
insolvency cost the taxpayer some EUR1 billion in payments from the
Insurance Compensation Fund (ICF).
Quinn Insurance Ltd was put into administration in 2010 and 23
reports have been presented to the High Court over the years by
joint administrators Michael McAteer and Paul McCann of Grant
Thornton outlining progress on the orderly winding down of its
business, Breakingnews.ie relates.
According to Breakingnews.ie, Mr Justice David Barniville ordered
that, following a resolution, the company be wound up and a formal
petition for the wind up could be presented to the court as part of
the normal liquidation process.
He also approved what was the 23rd and final report presented to
the court by the joint administrators of the firm which included
the setting out their costs and fees for the last year,
Breakingnews.ie notes.
The application to approve the winding up was made by Garvan
Corkery SC, on behalf of the administrators, on an ex parte (one
side only represented) basis, Breakingnews.ie notes.
Counsel said the application was in circumstances where effectively
the administrators had taken on the role of the former Quinn
directors and the court took on the role of the shareholders,
Breakingnews.ie relays.
Counsel said there remained some outstanding matters relating to
accounting and aspects of the insurance which will still be dealt
with by the administrators, but it had been resolved to seek the
winding up, according to Breakingnews.ie.
Counsel read from an affidavit from Mr. McAteer outlining the
course of the administration including the transfer of the various
arms of the business -- general and health insurance -- to Liberty
and Catalina insurance companies, Breakingnews.ie relates.
He said proceedings brought against Quinn auditors Pricewaterhouse
Coopers (PwC) for allegedly negligent auditing of the firm were
ultimately settled, Breakingnews.ie notes. PwC, which was sued for
EUR900 million, had denied the claim.
Quinn maintained its authorisation with the Central Bank, but that
is no longer required and will be withdrawn with the making of the
winding up order, he said, Breakingnews.ie recounts.
The cost of the administration will be of the order of EUR1
billion, the court heard, according to Breakingnews.ie.
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L A T V I A
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BALTIC INT'L: Latvijas Banka Submits Application for Liquidation
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The Baltic Times reports that based on the decision taken by the
European Central Bank (ECB) on the withdrawal of the licence of
Baltic International Bank SE, Latvijas Banka has prepared an
application on the opening of the liquidation proceedings of Baltic
International Bank SE for the court.
On March 15, the application was submitted to the Economic Affairs
Court, also asking the court to rule on the appointment of sworn
advocate Olavs Cers as the bank's liquidator, The Baltic Times
relates.
According to The Baltic Times, the Supervision Committee of
Latvijas Banka takes the decision on the submission of the
application for the liquidation of a credit institution and the
approval of the recommended candidate for the position of a
liquidator to the court.
As announced earlier, on December 12, 2022, the Financial and
Capital Market Commission (FCMC) recognised Baltic International
Bank SE as failing or likely to fail, and decided not to take
resolution action of Baltic International Bank SE, i.e. to
implement no measures to stabilise the bank's operation, The Baltic
Times recounts.
To ensure the stability of Latvia's financial sector and protect
the interests of the bank's customers the FCMC Board, during its
extraordinary meeting of December 12, 2022, decided to suspend the
provision of financial services at Baltic International Bank SE,
The Baltic Times notes. Meanwhile, on March 10, 2023, the ECB took
a decision to withdraw the licence of Baltic International Bank S,
The Baltic Times states. The decision took effect on March 11, The
Baltic Times relays. In turn, pursuant to Section 129, Paragraph
one of the Credit Institution Law, in such a situation Latvijas
Banka has grounds to submit to the court an application for the
liquidation of a credit institution and the appointment of a
liquidator, according to The Baltic Times.
Olavs Cers will become the liquidator of Baltic International Bank
SE if he is approved as such by the court, The Baltic Times
states.
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S P A I N
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AYT KUTXA HIPOTECARIO II: S&P Raises Class C Notes Rating to 'BB+'
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S&P Global Ratings raised to 'BB+ (sf)' from 'B+ (sf)' its credit
rating on AyT Kutxa Hipotecario II, Fondo de Titulizacion de
Activos' class C notes. At the same time, S&P has affirmed its 'AAA
(sf)' and 'AA- (sf)' ratings on the class A and B notes,
respectively.
The rating actions follow its full analysis of the most recent
information that it has received and the transaction's current
structural features.
After applying S&P's global RMBS criteria, the overall effect is a
decrease in its expected losses due to a decrease in our
weighted-average foreclosure frequency (WAFF) and our
weighted-average loss severity (WALS). S&P's WAFF assumptions
decreased due to the decrease in the effective loan-to-value (LTV)
ratio.
In addition, S&P's WALS assumptions have decreased due to the lower
current LTV ratio.
Table 1
Credit Analysis Results
RATING WAFF (%) WALS (%) CREDIT COVERAGE (%)
AAA 14.36 17.06 14.36
AA 9.95 13.30 9.95
A 7.74 7.58 7.74
BBB 5.98 5.06 5.98
BB 4.12 3.57 4.12
B 2.81 2.45 2.81
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
Arrears slightly increased to 1.9% from 1.7%. Overall delinquencies
remain below our Spanish RMBS index.
There are interest deferral triggers in this transaction, based on
cumulative defaults as a percentage of the initial pool balance at
closing, to allow for deferral of interest of junior notes if the
transaction's performance deteriorates. The triggers are set at
10.71% and 7.12% for the class B and C notes, respectively.
Currently, the level of cumulative defaults as a percentage of the
initial pool balance is 5.86%.
S&P said, "Our operational, counterparty, rating above the
sovereign, and legal risk analyses remain unchanged since our
previous review. Therefore, the ratings assigned are not capped by
any of these criteria. Our ratings on the notes continue to be
delinked from our long-term resolution counterparty rating (RCR) on
the swap provider because they pass the credit and cash flow
stresses at the assigned ratings in runs in which we did not give
credit to the swap contract."
The servicer, Kutxabank S.A., has a standardized, integrated, and
centralized servicing platform. It is a servicer for various
Spanish RMBS transactions, and its transactions' historical
performance has outperformed our Spanish RMBS index.
S&P said, "Credit enhancement available in AyT Kutxa Hipotecario II
has increased since our previous review because the notes amortize
sequentially, and the reserve fund is at its required level. The
notes are repaying sequentially as the 90+ days arrears including
defaults trigger for the pro rata amortization has been breached.
We expect that this will continue to be the case.
"Considering the results of our credit and cash flow analysis, and
the available credit enhancement, we have raised to 'BB+ (sf)' from
'B+ (sf)' our rating on the class C notes.
"Our credit and cash flow results indicate that the available
credit enhancement for the class A and B notes is still
commensurate with our 'AAA (sf)' and 'AA- (sf)' ratings
respectively. The class B notes could withstand stresses at a
higher rating than that assigned. However, we have limited our
upgrade based on the overall credit enhancement and position in the
waterfall, the continuing uncertainty in the macroeconomic
environment, and the various sensitivity analyses, including a
higher starting rate for EURIBOR (Euro Interbank Offered Rate).
Therefore, we have affirmed our 'AAA (sf)' and 'AA- (sf)' ratings
on the class A and B notes, respectively."
BANKINTER 13: Moody's Ups Rating on EUR20.5MM Class D Notes to Ba1
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Moody's Investors Service has upgraded the ratings of eight notes
in three Bankinter Spanish RMBS transactions. The rating action
reflects the increased levels of credit enhancement of the affected
Notes.
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain their current ratings.
Issuer: BANKINTER 9, FTA
EUR656M Class A2 (P) Notes, Affirmed Aa1 (sf); previously on Sep
17, 2021 Affirmed Aa1 (sf)
EUR15.3M Class B (P) Notes, Upgraded to A2 (sf); previously on Sep
17, 2021 Upgraded to Baa1 (sf)
EUR7.1M Class C (P) Notes, Upgraded to Baa3 (sf); previously on
Sep 17, 2021 Upgraded to Ba1 (sf)
Issuer: BANKINTER 10, FTA
EUR1575.4M Class A2 Notes, Affirmed Aa1 (sf); previously on Jun
29, 2018 Affirmed Aa1 (sf)
EUR20.7M Class B Notes, Upgraded to Aa2 (sf); previously on Jun
29, 2018 Upgraded to Aa3 (sf)
EUR22.4M Class C Notes, Upgraded to A1 (sf); previously on Jun 29,
2018 Upgraded to A3 (sf)
EUR19.1M Class D Notes, Upgraded to Ba1 (sf); previously on Jun
29, 2018 Affirmed Ba3 (sf)
Issuer: BANKINTER 13, FTA
EUR1397.4M Class A2 Notes, Affirmed Aa1 (sf); previously on Jun
29, 2018 Affirmed Aa1 (sf)
EUR22.4M Class B Notes, Upgraded to Aa2 (sf); previously on Jun
29, 2018 Upgraded to A1 (sf)
EUR24.1M Class C Notes, Upgraded to A2 (sf); previously on Jun 29,
2018 Upgraded to Baa1 (sf)
EUR20.5M Class D Notes, Upgraded to Ba1 (sf); previously on Jun
29, 2018 Affirmed Ba3 (sf)
Maximum achievable rating is Aa1 (sf) for structured finance
transactions in Spain, driven by the corresponding local currency
country ceiling of the country.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches and increase in reserve fund
replenishments due to higher gross excess spread as mortgage pools
reset to higher interest rates as well as better than expected
collateral performance. Also, decreasing pool factors below 10% of
original balance triggers sequential amortization. Following a
sequential amortization trigger event principal redemptions cannot
leak outside of the transactions thereby further supporting already
increase credit enhancement levels.
Pool factors for all three transactions are low due to seasoning
and are 8.34%, 11.67%, 17.56% for BANKINTER 9, FTA ("BANKINTER 9"),
BANKINTER 10, FTA ("BANKINTER 10") and BANKINTER 13, FTA
("BANKINTER 13"), respectively.
BANKINTER 9 is now in sequential amortization for the remaining
transaction life as pool factor condition is permanently breached.
BANKINTER 10 is expected to have its 11.67% pool factor fall below
the 10% sequential amortization trigger shortly. Currently
BANKINTER 10 is paying sequential given that its reserve fund is
slightly below the target floor.
Moody's rating action takes into account the scenario of the
reserve fund becoming fully funded before the sequential
amortization trigger is met, thereby allowing a one-time depletion
of credit enhancement levels to target levels stipulated in
transaction documents.
BANKINTER 13 amortization is currently paying pro-rata as all
conditions are met. The increase of credit enhancement for affected
tranches is solely driven by the non-amortizing reserve fund amid
on-going pool run-off.
Revision of Key Collateral Assumptions:
As part of the rating action, Moody's reassessed its lifetime loss
expectation for the portfolio reflecting the collateral performance
to date.
The performance of all three transactions has continued to stable
and strong.
Total delinquencies have remained stable in the past year, with 90
days plus arrears currently standing at 0.46%, 0.25% and 0.25% of
current pool balance for BANKINTER 9, BANKINTER 10 and BANKINTER
13. Cumulative defaults currently stand at 0.47%, 0.77% and 2.01%
of original pool balance and unchanged from a year earlier.
Moody's decreased the expected loss assumption to 1.18%, 1.03% and
1.13% as a percentage of current pool balance from 1.10%, 1.63% and
1.49% due to the good performance. The revised expected loss
assumption corresponds to 0.22%, 0.42% and 1.07% expressed as a
percentage of original pool balance for BANKINTER 9, BANKINTER 10
and BANKINTER 13, respectively.
Moody's has also assessed loan-by-loan information as a part of its
detailed transaction review to determine the credit support
consistent with target rating levels and the volatility of future
losses. As a result, Moody's has decreased the MILAN CE assumption
to 6.0% for BANKINTER 13, and maintained the MILAN CE assumption of
BANKINTER 9 and BANKINTER 10 at 6.0%.
Increase in Available Credit Enhancement
All three transactions have non-amortizing reserve funds.
BANKINTER 9:
Sequential amortization, a non-amortizing reserve fund as well as
trapping of excess spread to replenish the reserve fund led to the
increase in the credit enhancement available in this transaction.
For instance, the credit enhancement for Class B(P), the most
senior tranche affected by the rating action increased to 8.45%
from 6.17% since the last rating action.
BANKINTER 10:
Sequential amortization, a non-amortizing reserve fund as well as
trapping of excess spread led to the increase in the credit
enhancement available in these transaction.
For instance, the credit enhancement for Class B, the most senior
tranche affected by the rating action, increased to 13.59% from
8.39% since the last rating action.
Moody's rating action takes into account the scenario of the
reserve fund being fully funded before the sequential amortization
trigger is met, thereby allowing a certain degree of credit
enhancement leakage for the senior notes.
BANKINTER 13:
A non-amortizing reserve fund as well as trapping of excess spread
led to the increase in the credit enhancement available in this
transaction.
For BANKINTER 13, amortization is currently pro-rata following the
reserve fund becoming fully funded in 17/10/2022. As such, the
funds tranches follow the target capital structure foreseen in the
documents. Nevertheless, the increase of credit enhancement for
affected tranches is driven by the non-amortizing reserve fund amid
on-going pool run-off.
For instance, the credit enhancement for Class B, the most senior
tranche affected by the rating action increased to 9.40% from 8.42%
since the last rating action.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
July 2022.
A Request for Comment was published in which Moody's requested
market feedback on potential revisions to its RMBS methodology
framework. However, at this time no associated country-specific
supplement has been published which would be relevant for the
Credit Ratings referenced in this press release.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include (1) performance of the underlying collateral that
is better than Moody's expected, (2) an increase in available
credit enhancement and (3) improvements in the credit quality of
the transaction counterparties and (4) a decrease in sovereign
risk.
Factors or circumstances that could lead to a downgrade of the
ratings include (1) an increase in sovereign risk, (2) performance
of the underlying collateral that is worse than Moody's expected,
(3) deterioration in the notes' available credit enhancement and
(4) deterioration in the credit quality of the transaction
counterparties.
MADRID RMBS I: Fitch Hikes Rating on Class D Notes to 'B-sf'
------------------------------------------------------------
Fitch Ratings has upgraded three tranches of Madrid RMBS I, FTA,
three tranches of Madrid RMBS II, FTA and two tranches of Madrid
RMBS III, FTA and affirmed the other tranches. Fitch has also
removed three tranches of Madrid II and one tranche of Madrid III
from Under Criteria Observation (UCO).
Entity/Debt Rating Prior
----------- ------ -----
Madrid RMBS II, FTA
Class A3 ES0359092022 LT A+sf Affirmed A+sf
Class B ES0359092030 LT A+sf Upgrade Asf
Class C ES0359092048 LT BB+sf Upgrade BBsf
Class D ES0359092055 LT Bsf Upgrade B-sf
Class E ES0359092063 LT CCsf Affirmed CCsf
Madrid RMBS III, FTA
Class A2 ES0359093012 LT A+sf Affirmed A+sf
Class A3 ES0359093020 LT A+sf Affirmed A+sf
Class B ES0359093038 LT BB+sf Affirmed BB+sf
Class C ES0359093046 LT BB+sf Upgrade BB-sf
Class D ES0359093053 LT CCCsf Upgrade CCsf
Class E ES0359093061 LT Csf Affirmed Csf
Madrid RMBS I, FTA
Class A2 ES0359091016 LT A+sf Affirmed A+sf
Class B ES0359091024 LT A+sf Upgrade A-sf
Class C ES0359091032 LT BBsf Upgrade BB-sf
Class D ES0359091040 LT B-sf Upgrade CCCsf
Class E ES0359091057 LT CCsf Affirmed CCsf
TRANSACTION SUMMARY
The transactions comprise residential mortgages serviced by
Caixabank S.A (BBB+/Stable/F2).
KEY RATING DRIVERS
Iberian Recovery Rate Assumptions Updated: In the update of its
European RMBS Rating Criteria on 16 December 2022, Fitch updated
its recovery rate assumptions for Spain to reflect smaller house
price declines and foreclosure sales adjustment, which have had a
positive impact on recovery rates and consequently Fitch's expected
loss in Spanish RMBS transactions. This is reflected in the
upgrades of Madrid RMBS II's class B, C and D notes, and Madrid
RMBS III's class C notes.
Mild Weakening in Asset Performance: The rating actions reflect its
expectation of mild deterioration of asset performance, consistent
with a weaker macroeconomic outlook linked to inflationary
pressures that negatively affect real household wages and
disposable income. The transactions have a low share of loans in
arrears over 90 days (less than 0.5% as of February 2023) and are
protected by substantial seasoning of the portfolios (more than 17
years). Fitch views current and projected credit enhancement (CE)
ratios on the rated notes as strong to mitigate the credit and cash
flow stresses commensurate with the corresponding ratings.
PiR Caps Senior Ratings: The maximum achievable rating for the
three transactions remains capped at 'A+sf' because of unmitigated
payment interruption risk (PiR). The cash reserve funds are not
expected to provide long-term coverage against PiR and could be
depleted by losses. The reserve funds are underfunded in all cases,
standing at around 12%, 14% and 0% of target balances for Madrid I,
II and III, respectively.
As cash collections are transferred to the transaction account bank
within two days and the collection account bank is an operational
continuity bank, the notes' maximum achievable ratings are
commensurate with the 'Asf' category, in line with Fitch's
Structured Finance and Covered Bonds Counterparty Rating Criteria.
Deferrals Cap Ratings at Non-IG: Madrid RMBS III's class B to E
interest payments are subordinated by a non-reversible trigger
breach relative to gross cumulative defaults. Due to this
subordination, interest payments are expected to be deferred for a
long period and paid only after full redemption of the senior class
A notes at their current ratings. Due to the length of the interest
deferral period, Fitch does not view these notes as compatible with
investment-grade ratings.
Portfolio Risky Features: The portfolios are highly exposed to the
region of Madrid, each with exposure greater than 60%. To address
regional concentration risk, Fitch applies higher rating multiples
to the base foreclosure frequency (FF) assumption to the portion of
the portfolios that exceeds 2.5x the population within this region
relative to the national total, in line with its European RMBS
Rating Criteria.
Additionally, more than 40% of the portfolios were originated via
third-party brokers, a feature that carries a FF adjustment of 150%
within the agency's credit analysis.
Madrid I, II and III have Environmental, Social and Governance
(ESG) Relevance Scores of '5' for Transaction & Collateral
Structure due to unmitigated PiR, which results in the ratings
being at least one category lower than they would be otherwise.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Long-term asset performance deterioration such as increased
delinquencies or larger defaults, which could be driven by changes
to macroeconomic conditions, interest rate increases or borrower
behaviour.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Improved liquidity protection against a servicer disruption event.
This is because the ratings are capped at 'A+sf', driven by
unmitigated PiR.
For Madrid III's class B to E notes, improved protection to limit
the length of interest deferrals
CE ratios increasing as the transactions deleverage, able to fully
compensate the credit losses and cash flow stresses commensurate
with higher rating scenarios, all else being equal.
DATA ADEQUACY
Madrid RMBS I, FTA, Madrid RMBS II, FTA, Madrid RMBS III, FTA
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pool[s] and the transaction[s]. Fitch has not reviewed the results
of any third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool[s] ahead of the transaction's [Madrid
RMBS I, FTA, Madrid RMBS II, FTA, Madrid RMBS III, FTA] initial
closing. The subsequent performance of the transaction[s] over the
years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Madrid RMBS I, II and III have ESG Relevance Scores of '5' for
Transaction & Collateral Structure due to PiR not being
sufficiently mitigated, which has a negative impact on the credit
profile, and is highly relevant to the rating, resulting in a lower
rating.
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.
=====================
S W I T Z E R L A N D
=====================
DUFRY AG: S&P Upgrades ICR to 'BB-', On CreditWatch Positive
------------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit and issue
ratings on Dufry AG and its senior unsecured debt to 'BB-' from
'B+' and placed them on CreditWatch positive.
Dufry has completed the first stage of its 50.3% majority
acquisition of Autogrill and will soon launch a mandatory tender
offer (MTO) for the remaining 49.3%, with payment to shareholders
in either Dufry shares or cash.
S&P said, "The CreditWatch placement indicates that we could raise
our ratings on Dufry again after the transaction is completed, and
the final capital structure is in place, if we think the group can
sustainably maintain adjusted EBITDA margins of close to 20%,
leverage of well below 4x, and ample FOCF after leases covering at
least 10% of financial debt."
Dufry successfully completed the first step of its Autogrill
majority acquisition. On Feb. 3, 2023, Edizione transferred its
50.3% stake in Autogrill, an Italy-based travel concession catering
provider, to Dufry. S&P thinks the transaction has a sound business
rationale because it will likely enhance Dufry's economies of scale
and diversification in terms of geographical footprint and product
mix. But while Autogrill's business is less cyclical, its operating
profitability is lower than Dufry's, which on a combined basis is
likely to compound the short-term pressure on operating margins
Dufry might continue to face from rising energy and personnel costs
and the phasing-out of concession fee payment relief granted during
the pandemic.
S&P said, "Dufry delivered sound trading performance on the back of
air travel recovery, which we expect will continue in 2023.On a
pro-forma consolidated basis, Dufry achieved revenue of about CHF11
billion in 2022, compared with our estimate of CHF6.8 billion in
2021, while its stand-alone revenue was CHF6.9 billion in 2022
versus CHF3.9 billion in 2021. This was driven by a strong
passenger traffic recovery across all regions, which should
continue into 2023 supported by China reopening. In turn, we
forecast consolidated revenue could reach CHF12.0 billion–CHF12.5
billion this year. Adjusted EBITDA margins stood at 20.2% on a
pro-forma combined basis and 23.2% on a stand-alone basis in 2022
versus 31.7% and 36.4% respectively. We forecast a further
reduction to 18.8% in 2023 amid continued inflationary pressure and
full network opening, before a rebound from 2024 on continued
top-line improvement and business integration."
The cash consideration for the remaining Autogrill shares is yet to
be defined. Dufry will soon launch an MTO for the remaining 49.7%
of Autogrill's shares and the full transaction is expected to close
in second-quarter 2023. As part of the MTO, shareholders are being
offered payment in either Dufry AG shares or cash, for a total
price consideration of about CHF1.2 billion.
Even if the cash consideration payable to Autogrill's minority
shareholders is fully debt financed, credit metrics shouldn't
deteriorate. In 2022, Dufry's stand-alone adjusted debt to EBITDA
improved to 3.7x from 5.6x in 2021 and FFO to debt to 23% from 15%.
S&P said, "We forecast pro-forma leverage of 3.8x and FFO to debt
of 21% in 2023, with improvement to 3.2x and 25% in 2024. Dufry's
stand-alone FOCF after leases reached CHF356 million and we
estimate about CHF625 million for the combined business in 2022,
since capital expenditure (capex) remained relatively low. We
expect capex will normalize from 2023 such that FOCF after
concession payments will weaken to about CHF180 million in 2023 and
about CHF300 million in 2024."
The company's liquidity remains solid. In December 2022, Dufry
successfully refinanced its credit facilities due 2024 with a new
CHF2,085 million revolving credit facility (RCF) maturing in 2027,
maintaining interest expenses. At Dec. 31, 2022, Dufry reported
CHF2.3 billion of available liquidity including CHF855 million of
cash on the balance sheet and CHF1.5 billion of undrawn RCF. S&P
said, "We think the group has ample liquidity to face any scenario
regarding the acquisition of the remaining shares in Autogrill. The
covenant holidays granted during the pandemic will run until June
2023 with first testing in September 2023. We forecast Dufry will
meet the covenant requirement with sufficient headroom."
S&P will review the ratings and resolve the CreditWatch positive
after the transaction is completed and the final capital structure
is in place.
To resolve the CreditWatch, S&P will assess the sustainability of
Dufry's credit metrics on a combined basis and its liquidity.
To raise the rating, this would include maintaining adjusted EBITDA
margins of about 20%, S&P Global Ratings-adjusted debt to EBITDA of
well below 4.0x, and ample FOCF after full concession fee payments
covering at least 10% of financial debt. An upgrade would also rely
on S&P's assessment on the combined group's adequate liquidity and
comfortable covenant headroom.
Any positive rating action will be predicated on Dufry maintaining
a consistent financial policy, supportive of stronger performance
and credit ratios.
ESG credit indicators: E-2, S-3, G-2
===========
T U R K E Y
===========
TURKIYE HALK: Fitch Keeps 'B-' Foreign Curr. IDR on Watch Negative
------------------------------------------------------------------
Fitch Ratings has maintained Turkiye Halk Bankasi A.S.'s (Halk)
'B-' Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR)
and 'B' Long-Term Local-Currency (LTLC) IDR on Rating Watch
Negative (RWN). The bank's Viability Rating (VR) of 'b-' has also
been maintained on RWN.
KEY RATING DRIVERS
Halk's LTFC IDR is driven by its standalone creditworthiness, or
Viability Rating (VR). This reflects its concentration in the
high-risk Turkish operating environment, but also the bank's solid
franchise, underpinned by its state ownership, policy role and
systemic importance. The US legal proceedings constrain its
business profile to some extent.
Halk's 'B' LTLC IDR is driven by state support, reflecting our view
of the sovereign's higher ability to provide support, and a lower
risk of government intervention in LC. Halk's National Rating
reflects our view of the bank's creditworthiness in LC, relative to
other Turkish issuers.
The bank's 'B' Short-Term (ST) IDRs are the only possible option
mapping to LT IDRs in the 'B' rating category.
RWN Reflects US Legal Risks: The RWN on Halk's ratings continue to
reflect Fitch's view of the material risk of the bank becoming
subject to a fine or other punitive measure as a result of the
ongoing US legal proceedings, and uncertainty over the sufficiency
and timeliness of support from the authorities if needed. Fitch
expects to resolve the RWN once there is clarity on the outcome of
the US investigations and the implications this may have for the
bank. Fitch may maintain the RWN longer than six months if the US
investigations are extended for a longer period.
Volatile Operating Environment: The concentration of Halk's
operations in Turkiye exposes it to heightened risks to
macroeconomic and financial stability amid policy uncertainty, high
inflation, and external vulnerabilities, with further uncertainty
stemming from the earthquake and election outcome. Multiple
macroprudential regulations imposed on banks aimed at promoting the
government's policy agenda compound the challenges of operating in
Turkiye.
High Growth Appetite: Halk's growth appetite is high, reflecting
its role as a state bank in supporting the government's economic
agenda. FX-adjusted loan growth (46% in 2022), driven by lira
lending mainly to SMEs, was above the sector average (about 33%).
Rapid growth heightens seasoning risks considering operating
environment pressures, although subsidised cooperative and Turkish
Treasury guaranteed Credit Guarantee Fund-backed lending
(constituting around 18% of gross loans combined) helps mitigate
risks.
Adequate Asset Quality: Halk's impaired loans (NPL) ratio improved
to 2.2% at end-2022 (end-2021: 3.0%) despite operating environment
pressures, supported by high nominal loan growth, collections and
write-offs. Total reserves coverage of NPLs rose to 282%, above the
sector average. Credit risks remain high, given exposure to macro
and market volatility, seasoning risks and FC lending (a
below-sector-average 23%). The earthquake creates additional
downside risks.
Weak Profitability: Halk's operating profit/risk weighted assets
ratio of 2.4% in 2022 remained below the sector average. This
largely reflects its high funding costs due to its higher share of
lira deposit funding, swap costs and high impairment charges
(partly due to increased reserves coverage of problematic loans).
Fitch expects performance to weaken due to slower GDP growth and
margin pressure arising from the macroprudential regulations, with
the earthquakes creating additional risks. It remains sensitive to
asset quality risks.
Thin Capital Buffers: Capitalisation (common equity Tier 1 ratio:
9.99%, including around 180bp uplift from forbearance) remains
sensitive to macro risks, lira depreciation, growth and weak
profitability. Leverage is also high (tangible equity/tangible
assets ratio: 5.5%). Its assessment of capitalisation factors in
ordinary support, reflecting the record of support, including a
recently announced TRY30 billion capital injection, which will
provide around 290bp uplift to the bank's capital ratios.
Solid Deposit Franchise: Halk relies on contractually short-term
but stable deposits (end-2022: 77% of total funding), including
from state-related entities (13%). Deposit dollarisation remains
significant (47%), despite declining, creating liquidity risks in
case of deposit instability. Risks are mitigated by limited FC
wholesale funding (13%, mainly concentrated in FC bank deposits)
and adequate FC liquidity. However, a large share of the bank's FC
liquidity comprises foreign-exchange (FX) swaps with the Central
Bank of Republic of Turkiye, access to which could be uncertain
during times of market stress.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
Halk's LTFC IDR is sensitive to a change in its VR. The VR could be
downgraded due to further marked deterioration in the operating
environment, particularly if it leads to an erosion of the bank's
capital buffer, or in its FC liquidity buffer. The VR is also
potentially sensitive to a sovereign downgrade.
The VR could also be downgraded if as a result of the US
investigations, Halk becomes subject to a fine or other punitive
measure that materially weakens its solvency or negatively affects
its standalone credit profile. The removal from RWN is dependent
upon increased certainty that the outcome of the investigations
will not materially weaken Halk's capital, or other aspects of its
credit profile.
The LTLC IDR is sensitive to a sovereign downgrade, a change in the
ability or propensity of the authorities to provide support in LC
and its view of government intervention risk in LC.
The ST IDRs are sensitive to negative changes in their respective
Long-Term IDRs.
The National Rating is sensitive to negative changes in the bank's
LTLC IDR and an adverse change in its creditworthiness relative to
that of other Turkish issuers.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Upgrades are unlikely given the heightened operating environment
risks and market volatility, the Negative Outlook on Turkiye's
sovereign rating and its view of government intervention risk.
The ST IDRs are sensitive to positive changes in their respective
Long-Term IDRs.
The National Rating is sensitive to positive changes in the LTLC
IDR and its creditworthiness relative to other Turkish issuers with
a 'B' LTLC IDR.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Halk's Government Support Rating of 'no support' reflects the
sovereign's weak financial flexibility to provide support in FC,
given its weak external finances and sovereign FX reserves. This is
despite the government's high propensity to provide support given
Halk's state ownership, policy role, systemic importance,
state-related funding and the record of capital support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The GSR could be upgraded if Fitch views the government's ability
to support the bank in FC as stronger.
VR ADJUSTMENTS
The operating environment score of 'b-' for Turkish banks is lower
than the category implied score of 'bb', due to the following
adjustment reasons: sovereign rating (negative) and macroeconomic
stability (negative). The latter adjustment reflects heightened
market volatility, high dollarisation and high risk of FX movements
in Turkey.
The business profile score of 'b-' for Halk is lower than the
category implied score of 'bb', due to the following negative
adjustment reasons: business model (negative) and management and
governance (negative). The business model adjustment reflects the
bank's business model concentration on the high-risk Turkish
market. The management and governance adjustment reflects the high
legal risk of a large fine and the potential government influence
over the bank's strategy and effectiveness in the challenging
operating environment.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Halk's ratings are linked to the Turkish sovereign rating, given
the ratings either rely on or are sensitive to its assessment of
sovereign support or country risks.
ESG CONSIDERATIONS
Halk has an ESG relevance score of '5' for Governance Structure in
contrast to a typical score of '3' for comparable banks. This
reflects the elevated legal risk of a large fine related to the
open court case in the US.
The ESG Relevance score of '5' for Governance Structure and of '4'
for Management Strategy (in contrast to typical Relevance Scores of
'3' for comparable banks), also reflect the potential government
influence over the board's effectiveness and management strategy in
the challenging Turkish operating environment. The ESG Relevance
Score for Management Strategy also reflects increased regulatory
intervention in the Turkish banking sector, which hinders the
operational execution of management strategy, constrains management
ability to determine strategy and price risk and creates an
additional operational burden for the entity. This has a negative
impact on the bank's credit profile and is relevant to the ratings
in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. ESG issues are credit
neutral or have only a minimal credit impact on the entity, either
due to their nature or the way in which they are being managed by
the entity.
Entity/Debt Rating Prior
----------- ------ -----
Turkiye Halk
Bankasi A.S. LT IDR B- Rating Watch Maintained B-
ST IDR B Rating Watch Maintained B
LC LT IDR B Rating Watch Maintained B
LC ST IDR B Rating Watch Maintained B
Natl LT AA(tur)Rating Watch Maintained AA(tur)
Viability b- Rating Watch Maintained b-
Govt Support ns Affirmed ns
TURKIYE VAKIFLAR: Fitch Affirms LongTerm IDR at B-, Outlook Neg.
----------------------------------------------------------------
Fitch Ratings has affirmed Turkiye Vakiflar Bankasi T.A.O.'s
(Vakifbank) Long-Term Foreign-Currency Issuer Default Rating (LTFC
IDR) at 'B-' and Long-Term Local-Currency (LTLC) IDR at 'B'. The
Outlooks are Negative. Fitch has also affirmed the bank's Viability
Rating (VR) at 'b-'.
KEY RATING DRIVERS
VR Drives LTFC IDR: Vakifbank's LTFC IDR is driven by its VR,
reflecting significant risks to the bank's standalone credit
profile from heightened operating environment pressures. The VR
also considers the bank's strong domestic franchise, reasonable
asset quality and profitability, but only adequate capitalisation
and FC liquidity for its risk profile.
Vakifbank's VR is below the 'b' implied VR due to the operating
environment constraint. As it is the second-largest state-owned
bank in Turkiye, Fitch views Vakifbank's capital and FC liquidity
buffers as commensurate with the risks of the Turkish operating
environment. The Negative Outlook on the LTFC IDR reflects that on
the sovereign, as well as operating environment risks.
The bank's 'B' Short-Term (ST) IDRs are the only possible option
for LT IDRs in the 'B' rating category.
Sovereign Support Drives LTLC IDR: Vakifbank's LTLC IDR is driven
by state support and reflects its view of a higher sovereign
ability to provide support and a lower risk of government
intervention in LC. The Negative Outlook reflects that on the
sovereign LTLC IDR.
The affirmation of Vakifbank's National Rating reflects its view
that the bank's creditworthiness in LC, relative to other Turkish
issuers with a 'B' LTLC IDR, is unchanged.
Volatile Operating Environment: The concentration of the bank's
operations in the Turkish market exposes it to heightened risks to
macroeconomic and financial stability amid policy uncertainty, high
inflation, and external vulnerabilities, with further uncertainty
stemming from the earthquake and election outcome. Multiple
macroprudential regulations imposed on banks aimed at promoting the
government's policy agenda compound the challenges of operating in
Turkiye.
Refinancing and FC Liquidity Risks: Vakifbank's high FC wholesale
funding (end-2022: 21% of total non-equity funding, i.e., including
hybrid capital accounted for as debt) exposes it to refinancing
risks, given exposure to investor sentiment amid market volatility,
although the bank has maintained its record of external market
access. FC wholesale funding is reasonably diversified by source,
instrument and tenor. High deposit dollarisation (end-2022: 40% of
customer deposits) also creates FC liquidity risks in case of
sector-wide deposit instability.
FC liquidity, which includes a high reliance on the Central Bank of
the Republic of Turkiye via FC reserves held under the reserve
option mechanism, unrestricted balances, and foreign-exchange (FX)
swaps, could also come under pressure from prolonged market
closure.
Capitalisation Only Adequate: Vakifbank's common equity Tier 1
(CET1) ratio increased modestly (end-2022: 10.8%; 9.7% excluding
forbearance; end-2021: 10.0%, or 8.4%, respectively) despite the
authorities' TRY13.4 billion capital injection in March 2022.
Leverage is high, as reflected in its equity/assets ratio of 6.2%
at end-2022. Its assessment of capitalisation factors in ordinary
support given the record of support - including a TRY32 billion
capital injection announced (3.4% uplift to reported bank only
capital ratios at end-2022, Fitch estimates).
Capitalisation is supported by solid pre-impairment operating
profit buffers (2022: 9.8% of average loans, but set to fall), full
total reserves coverage of non-performing loans (NPL) and
additional loss-absorption buffers via increased free provisions
(1.9% of risk-weighted assets; RWAs), but is sensitive to the macro
outlook, Turkish lira depreciation (due to the inflation of FC
RWAs), asset quality risks and growth.
Asset Quality Risks: Vakifbank's NPL(impaired loans) ratio has
continued to improve (end-2022: 2.1%; end-2021: 3.1%), largely
reflecting high nominal loan expansion. Credit risks are heightened
due to macroeconomic and market volatility, loan seasoning, FC
lending (end-2022: 31% of gross loans) amid lira weakness and Stage
2 loans (end-2022: 11%; average reserves coverage:18%). The
earthquakes create additional risks, although exposure to the
worst-affected cities appears limited.
Boost to Profitability: Vakifbank's operating profit/RWAs ratio
increased (3.9% in 2022; 1.0% in 2021), largely due to a higher net
interest margin underpinned by gains on consumer price index-linked
securities, and loan growth. Free provisions eroded profitability
(23% of pre-impairment operating profit). Performance could weaken
due to slower GDP growth, the impact of the macroprudential
measures, while the impact of the earthquake creates additional
risks. Profitability remains sensitive to asset quality risks and
macroeconomic and regulatory developments.
Robust Domestic Franchise: Vakifbank is the second-largest bank in
Turkiye by total assets at end-2022 (market share of around 12% of
total banking sector assets on an unconsolidated basis) and is a
domestic systemically important bank. The bank's solid domestic
franchise is underpinned by its size, geographical footprint and
historical state affiliation. However, the concentration of the
bank's operations in the volatile Turkish operating environment
create risks for its business profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
The VR is potentially sensitive to a sovereign downgrade. The VR
could also be downgraded due to further marked deterioration in the
operating environment, or in the case of a material erosion in the
bank's FC liquidity buffer, for example, due to prolonged
funding-market closure or deposit instability, or erosion of its
capital buffer.
The LTFC IDR is sensitive to a change in the VR, Fitch's view of
government intervention risk in the banking sector and potentially
to a sovereign downgrade.
The LTLC IDR is sensitive to a change in the ability or propensity
of the authorities to provide support in LC, its view of government
intervention risk in LC, and to a sovereign downgrade.
The ST IDRs are sensitive to negative changes in their respective
Long-Term IDRs.
The National Rating is sensitive to negative changes in the LTLC
IDR and its creditworthiness relative to other Turkish issuers with
a 'B' LTLC IDR.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
Upgrades are unlikely given the heightened operating environment
risks and market volatility, the Negative Outlook on Turkiye's
sovereign rating and its view of government intervention risk.
The ST IDRs are sensitive to positive changes in their respective
Long-Term IDRs.
The National Rating is sensitive to positive changes in the LTLC
IDR and its creditworthiness relative to other Turkish issuers with
a 'B' LTLC IDR.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Vakifbank's senior debt ratings are aligned with its IDR and the
'RR4' Recovery Rating reflects average recovery prospects in case
of default.
Vakifbank's Government Support Rating of 'ns' reflects the
sovereign's weak financial flexibility to provide support in FC,
given its weak external finances and sovereign FX reserves. This is
despite the government's high propensity to provide support given
the bank's state ownership, systemic importance, state-related
funding and the record of capital support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The senior debt ratings are primarily sensitive to changes in
Vakifbank's IDR.
The GSR could be upgraded if Fitch views the government's ability
to support the bank in FC as stronger.
VR ADJUSTMENTS
The operating environment score of 'b-' for Turkish banks is lower
than the category implied score of 'bb', due to the following
adjustment reasons: sovereign rating (negative) and macroeconomic
stability (negative). The latter adjustment reflects heightened
market volatility, high dollarisation and high risk of FX movements
in Turkey.
The business profile score of 'b' is below the implied 'bb'
category implied score, due to the following adjustment reason:
business model (negative). This reflects the bank's business model
concentration on the high-risk Turkish market.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Vakifbank has ratings linked to the Turkish sovereign rating, given
the ratings either rely on or are sensitive to its assessment of
sovereign support or country risks
ESG CONSIDERATIONS
Vakifbank has an ESG Relevance Score of '4' for Governance
Structure and Management Strategy (in contrast to typical Relevance
Scores of '3' for comparable banks), due to potential government
influence over the board's effectiveness and management strategy in
the challenging Turkish operating environment. The ESG Relevance
Score for Management Strategy also reflects the increased
regulatory intervention in the Turkish banking sector that hinders
the operational execution of management strategy, constrains
management's ability to determine strategy and price risk, and
creates an additional operational burden for the bank. This has a
negative impact on the bank's credit profile and is relevant to the
ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Turkiye Vakiflar
Bankasi T.A.O. LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur)Affirmed AA(tur)
Viability b- Affirmed b-
Govt Support ns Affirmed ns
senior
unsecured LT B- Affirmed RR4 B-
senior
unsecured ST B Affirmed B
ZIRAAT KATILIM: Fitch Affirms 'B-' Foreign Curr. IDR, Outlook Neg.
------------------------------------------------------------------
Fitch Ratings has affirmed Ziraat Katilim Bankasi A.S.'s (ZKB)
Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) at 'B-'
and Long-Term Local-Currency (LTLC) IDR at 'B'. The Outlooks are
Negative.
Fitch has assigned ZKB a 'b-' Viability Rating (VR), reflecting the
bank's fast-growing operations in the strategically important
participation banking segment in Turkiye, and increasing
independence in terms of business and franchise from its 100%
owner, Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi (Ziraat;
B-/Negative).
KEY RATING DRIVERS
ZKB 'B-' LTFC IDR is driven by its standalone creditworthiness, or
VR, and Shareholder Support Rating (SSR). The Negative Outlook on
the LTFC IDR reflects that on the parent and operating environment
risks.
The VR reflects the bank's growing participation banking franchise
(end-2022: 1.4% share of banking sector assets, ranked second among
participation banks) and moderate profitability for its risk
profile, balanced by its exposure to Turkish operating environment
risks, rapid growth, still fairly short record of operation and
high concentration.
Its view of support from Ziraat, the largest state-owned commercial
bank in Turkiye (as reflected in ZKB's 'B-' SSR, equalised with its
parent's rating) considers its core role as the sole provider of
Islamic banking products for the Ziraat group in a sector of
strategic importance to the Turkish authorities, high, although
declining integration, and shared branding. The 'B' LTLC IDR is
also driven by shareholder support, reflecting a higher ability to
provide support and lower intervention risk in LC, while the
Negative Outlook mirrors that on the sovereign.
The affirmation of ZKB's National Rating reflects its view that the
bank's creditworthiness in LC, relative to other Turkish issuers
with a 'B' LTLC IDR, is unchanged.
The bank's 'B' Short-Term (ST) LC and FC IDRs map to the LT IDRs.
Volatile Operating Environment: The concentration of the bank's
operations in the Turkish market exposes it to heightened risks to
macroeconomic and financial stability amid policy uncertainty, high
inflation, and external vulnerabilities, with further uncertainty
stemming from the earthquake and election outcome. Multiple
macroprudential regulations aimed at promoting the government's
policy agenda compound the challenges of operating in Turkiye.
Rapid Growth Strategy: ZKB has grown rapidly since its
establishment, from a low base, in line with the government's
strategy to grow the market share of Islamic banking assets. Gross
financing grew by 96% (FX-adjusted basis) in 2022, significantly
above the sector average, creating seasoning risks. Growth was
largely driven by LC financing (up 160%), while FC financing (up
15%) was mainly leasing and investment financing.
Asset-Quality Risks: ZKB's non-performing financing (NPF) ratio
improved to 1.4% at end-2022 (end-2021: 2.5%), with total NPF
reserves coverage of 146% (sector: 226%). Nonetheless, credit risks
are heightened by rapid growth and concentration risks, including
to the risky construction sector. ZKB also has a higher than sector
average share of loans in the earthquake zone, which could result
in new problematic exposures after the six-month loan deferral
period expires.
Boost to Profitability: The bank's net income/average total assets
ratio rose to 2.5% in 2022, reflecting gains on CPI linkers, a
widening in core spreads and high financing growth. Fitch expects
performance to weaken due to tighter margins, weakening GDP growth
and the macroprudential measures, while it also remains sensitive
to asset quality weakening.
Adequate Capitalisation: ZKB's common equity Tier 1 (CET1) ratio
rose to 11.5% at end-2022 (including 200-250bp uplift from
forbearance, 250-300bp uplift from alpha effect; Fitch estimates).
Our assessment of capitalisation factors in ordinary support given
the record of support, including a recently announced TRY4.7
billion capital injection (4.6% uplift to reported capital ratios,
Fitch estimate). Capitalisation remains sensitive to lira
depreciation, concentration, asset quality risks and growth.
Leverage is high reflected in a tangible equity/tangible assets
ratio of 4.9%.
Low Refinancing Risk: ZKB is largely deposit-funded (end-2022: 88%
of non-equity funding; 40% in FC). Wholesale funding is moderate
(12% of funding, 63% in FC). FC liquidity, largely comprising
unblocked FC government securities, FC reserves held under the
reserve option mechanism and FC placements in foreign banks, is
adequate but could come under pressure from FC deposit instability
or prolonged funding-market closure.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
ZKB's LTFC IDR is sensitive to a change in its VR. A downgrade of
the VR would only result in negative action on the LTFC IDR if the
bank's SSR was simultaneously downgraded.
ZKB's LTFC IDR is also sensitive to a change in its SSR and a
weakening in its view of the ability and propensity of Ziraat to
provide support.
The bank's VR could be downgraded due to marked deterioration in
the operating environment, particularly if it leads to erosion of
the bank's FC liquidity or capital buffers. The VR is also
potentially sensitive to a sovereign downgrade.
ZKB's LTLC IDR is sensitive to a weakening in its view of the
ability or propensity of Ziraat to provide timely support in LC, an
increase in the likelihood of intervention risk in the banking
sector in LC and a downgrade of the sovereign LTLC IDR.
The ST IDRs are sensitive to negative changes in their respective
Long-Term IDRs.
The National Rating is sensitive to negative changes in the bank's
LTLC IDR and its creditworthiness relative to other Turkish
issuers.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of ZKB's IDRs is unlikely given the Negative Outlooks on
the bank, its view of government intervention risk and the Negative
Outlook on Turkiye's sovereign rating.
An upgrade of the VR is unlikely given operating environment risks
and the Negative Outlook on the bank.
An upgrade of the SSR is unlikely given the Negative Outlook on
Ziraat and its view of government intervention risk in the banking
sector.
The National Rating is sensitive to positive changes in ZKB's LTLC
IDR and its creditworthiness relative to other Turkish issuers with
a 'B' LTLC IDR.
VR ADJUSTMENTS
The operating environment score of 'b-' for Turkish banks is lower
than the category implied score of 'bb', due to the following
adjustment reasons: sovereign rating (negative) and macroeconomic
stability (negative). The latter adjustment reflects heightened
market volatility, high dollarisation and high risk of FX movements
in Turkiye.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
ZKB's ratings are linked to its shareholder Ziraat's ratings and
the Turkish sovereign rating, given the ratings either rely on or
are sensitive to its assessment of shareholder support or country
risks.
ESG CONSIDERATIONS
ZKB has an ESG Relevance Score of '4' for Governance Structure and
Management Strategy (in contrast to typical Relevance Scores of '3'
for comparable banks), due to potential government influence over
the board's effectiveness and management strategy in the
challenging Turkish operating environment. The ESG Relevance Score
for Management Strategy also reflects increased regulatory
intervention in the Turkish banking sector, which hinders the
operational execution of management strategy, constrains management
ability to determine strategy and price risk and creates an
additional operational burden for the entity. This has a negative
impact on the bank's credit profile and is relevant to the ratings
in conjunction with other factors.
ZKB's ESG Relevance Score of '4' for Governance Structure also
reflects its Islamic banking nature (in contrast to a typical ESG
Relevance Score of '3' for comparable conventional banks). The
bank's operations and activities need to comply with sharia
principles and rules, which entail additional costs, processes,
disclosures, regulations, reporting and sharia audit. This has a
negative impact on its credit profile and is relevant to the
ratings in conjunction with other factors.
ZKB has an ESG Relevance Score of '3' for Exposure to Social
Impacts (in contrast to a typical ESG Relevance Score of '2' for
comparable conventional banks), which reflects certain sharia
limitations being embedded in Islamic banks' operations and
obligations, although this only has a minimal credit impact on
Islamic banks.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Ziraat Katilim
Bankasi A.S. LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur)Affirmed AA(tur)
Viability b- New Rating
Shareholder Support b- Affirmed b-
===========================
U N I T E D K I N G D O M
===========================
ARCHANT: Norwich City Council Writes Off More Than GBP64,000
------------------------------------------------------------
David Sharman at HoldtheFrontPage.co.uk reports that a city council
has written off more than GBP64,000 that was owed to it by a
regional publisher.
Norwich City Council has formally made the move over the debt,
worth GBP64,308.21, which had been owed to the authority by Archant
in 2020, HoldtheFrontPage.co.uk relates.
The council was legally bound to write off the debt because Archant
had entered into a Company Voluntary Arrangement as part of its
takeover by investment firm Rcapital Partners,
HoldtheFrontPage.co.uk notes.
The move led to the group's defined benefit pension scheme move
into the Pension Protection Fund, a "lifeboat" scheme set up by the
government to provide pension benefits to members of schemes whose
sponsoring employers have become insolvent, HoldtheFrontPage.co.uk
states.
Archant was subsequently taken over by fellow regional publisher
Newsquest last year after RCapital put the business up for sale,
HoldtheFrontPage.co.uk recounts.
According to the Eastern Daily Press, a report to the council's
cabinet said the CVA was worth 5.1p per pound, with GBP6,244.44
being paid back from the total amount as a dividend to the
authority.
The debt covered a period in the coronavirus pandemic, between July
2020 and March 2021, when newspaper sales were at their lowest,
HoldtheFrontPage.co.uk discloses.
CATH KIDSTON: Next Buys Assets from Administrators for GBP8.5MM
---------------------------------------------------------------
Business Sale reports that clothing retailer Next has agreed to
acquire the brand name, domain names and intellectual property of
retailer Cath Kidston from administrators in a deal worth GBP8.5
million.
According to Business Sale, the deal will see administrators from
PwC trade down stock at Cath Kidston's four remaining UK stores --
in London, York, Ashford and Cheshire Oaks -- before closing them
permanently. The cathkidston.com domain will also be licensed back
to administrators for a period of up to 12 weeks, as they seek to
clear stock before the website is relaunched under Next's
ownership, Business Sale discloses.
Founded in 1993, Cath Kidston is known for its homeware featuring
distinctive floral prints. Prior to the COVID-19 pandemic, the
business had a strong high street presence, but was already
suffering from cashflow issues, reporting a GBP10.5 million EBITDA
loss in the year to March 25 2018, Business Sale notes.
These issues were then compounded by COVID-19 and lockdown, leading
to a pre-pack administration in which all of the firm's 60 high
street locations were closed, leaving its UK business trading
online and through a handful of wholesale and franchise outlets,
Business Sale states.
The company was subsequently acquired by Hilco Capital -- known for
its investments in ailing retail brands including HMV and Homebase
-- in 2022. Last month, it was reported that Hilco Capital was
seeking to sell the brand and it was then placed into
administration again, Business Sale recounts.
KEMBLE WATER: Fitch Lowers LongTerm IDR to 'B', Outlook Negative
----------------------------------------------------------------
Fitch Ratings has downgraded holding company Kemble Water Finance
Limited's (Kemble) Long-Term Issuer Default Rating (IDR) to 'B'
from 'B+' and senior secured debt rating to 'B' from 'B+'. The
Outlook on the IDR is Negative. The Recovery Rating remains 'RR4'.
The downgrade and Negative Outlook reflect increased pressure on
Kemble's credit profile as key ratios are not commensurate with the
previous rating, particularly its cash post-maintenance interest
cover ratio (PMICR) and dividend cover capacity are weak also for a
'B' IDR.
In addition, the recent decision by the UK water regulation
authority (Ofwat) to tighten the distribution lock-ups for UK water
operating companies (opcos), in its opinion, increases the risk to
Kemble's only source of cash flows for debt service as Thames Water
Utilities Limited (TWUL, opco owned by Kemble) is implementing an
eight-year transformation plan aimed at turning around its
operational and environmental performance.
KEY RATING DRIVERS
Limited PMICR; Dividend Headroom: In its updated rating case for
Kemble, Fitch expects average cash and nominal PMICR at about 0.7x
and 1.2x, respectively, over the five-year price control period
ending in March 2025 (AMP7). The cash PMICR is below its revised
negative sensitivity of 1.05x, while nominal PMICR is marginally
above its negative sensitivity of 1.15x, reflecting the benefit of
regulated capital value (RCV) inflation indexation compared with
the overall cost of debt, including accretion. Fitch forecasts
dividend cover capacity at 1.3x, which is also weak versus its
negative rating sensitivity at 1.5x.
Fitch estimates dividend cover capacity using opco's additional
distribution capacity (as a percentage of RCV), calculated as the
difference between TWUL approaching dividend lock up covenant (1%
below the 85% covenant level), and Fitch's forecast of adjusted net
senior gearing (including accretion and swap re-couponing) at TWUL
at end-AMP7. This updated approach takes into account recent
developments such as swap re-couponing being added to Fitch
adjusted net debt to RCV and represents its conservative view of
the additional dividend capacity at TWUL. On a covenant basis, TWUL
net debt to RCV excludes swap re-couponing adjustments.
Tighter Licence Conditions: Fitch believes Ofwat's decision to
increase opco's minimum rating requirement for licence to 'BBB' (or
equivalent) from 'BBB-' (from 1 April 2025) and to link dividends
directly to operational performance on service delivery for
customers and the environment (from 17 May 2023) increase the
vulnerability of Kemble and its creditors, as it relies on
dividends from TWUL to service its debt. In addition to the tighter
licence conditions, TWUL's dividends to Kemble are subject to
documentary covenants, which Fitch views as more manageable for the
company.
Option for CMA Referral: Fitch expects clarity over a potential
referral to the Competition and Markets Authority (CMA) by water
opcos against Ofwat's licence modifications by 18 April 2023. If a
referral to the CMA occured, the timeline for licence modifications
is likely to be protracted and subject to CMA's final decision, in
Fitch's view.
TWUL Outlook Change a Risk: Ofwat monitors credit ratings across
two credit rating agencies for TWUL, both of which are at 'BBB' (or
equivalent) with a Stable Outlook, implying limited rating headroom
before a cash lock-up is triggered under Ofwat's new licence
condition from April 2025. Lock-up would follow an Outlook change
to Negative by just one rating agency - with a three-month grace
period before enforcement, subject to Ofwat's review of financial
resilience. Application, exemption, or extension of grace period
are three possible outcomes of Ofwat's review.
Weak Operations May Restrict Dividends: Fitch views weak
operational performance with outcome delivery incentives (ODI)
penalties from customer measure of experience (C-Mex), and internal
sewer flooding as a risk of Ofwat restricting dividend distribution
from TWUL to Kemble. Fitch rating case assumes about GBP180 million
(nominal) net ODI penalties in FY23-FY25 (financial year
end-March). TWUL lagged behind other regulated UK water companies
in Ofwat's overall performance category.
Covenant Cash-Lock Up Mitigated: TWUL's documentary cash-lock up is
mitigated by proactive steps taken by management to avoid a trigger
event, including GBP1.5 billion of equity (GBP0.5 billion received
at FYE23), with the remaining conditional equity expected before
FYE25.
Kemble creditors benefit from cash-lock-up trigger at 92.5% net
debt to RCV on a covenant basis, without any Fitch-adjustments.
Fitch assumes no external dividends.
TWUL Covenant Protections: Kemble creditors are structurally
subordinated to TWUL secured creditors who benefit from various
credit-enhancing features, which include but are not limited to an
effective cash-lock up set at 85% net debt to RCV, with a trigger
event at 75% net debt to RCV for class A debt, and 90% senior net
debt to RCV (class A and class B). TWUL interest cover ratios
(ICRs) trigger event for class A debt is 1.3x and senior adjusted
ICR for class A and B debt is 1.1x.
Sufficient Gearing Headroom: Fitch expects sufficient gearing
headroom with Kemble's adjusted net debt to shadow RCV at about 90%
by FY25 against the revised negative sensitivity of 93.5%,
benefiting from inflation and mostly equity-funded total
expenditure (totex) increase. However, gearing headroom is not
sufficient to offset weak cash-PMICR and dividend cover capacity.
Totex Underperformance Expected: Fitch expects TWUL to overspend
totex by about GBP2 billion above Ofwat's allowance for AMP7. These
investments are largely associated with customer and environmental
outcomes, focused on reducing ODI penalties.
Standalone Assessment under PSL: Fitch rates Kemble on a standalone
basis using the stronger subsidiary/weaker parent approach under
its Parent and Subsidiary Linkage (PSL) Rating Criteria. This
assessment reflects 'insulated' legal ring-fencing as underlined by
a well-defined contractual framework, and tight financial controls
imposed by Ofwat and designed to support TWUL's financial profile.
Fitch views access and control as overall 'porous' as TWUL operates
with separate cash management and a mixture of external and
intercompany funding.
DERIVATION SUMMARY
Kemble's ratings reflect its highly geared, secured covenanted
capital structure, compared with its peer Osprey Acquisitions
Limited (OAL; IDR BB+/Stable; senior secured BBB-). OAL's negative
sensitivity for adjusted net debt to RCV is 79% compared with
Kemble's 93.5%.
Fitch forecasts dividend cover capacity for Kemble at 1.3x, below
its negative sensitivity, while OAL's dividend cover capacity is
considerably stronger at 5.1x, comfortably above its positive
sensitivity of 4.0x. OAL's Stable Outlook is supported by
year-on-year improvement in PMICRs - especially at the end of
AMP7.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Ofwat's final determinations financial model used as main
information source
- Allowed wholesale weighted average cost of capital (WACC) of
1.92% (RPI-based) and 2.92% (CPIH-based) in real terms, excluding
retail margins
- Fifty per cent of RCV is RPI-linked and another 50% plus capital
additions is CPIH-linked, since FY21
- RPI of 10.8% for FY23, 8% for FY24 and 3.9% for FY25
- CPIH of 8.5% in FY23, 6% in FY24 and 2.8% in FY25
- Fitch case assumes totex underperformance of about GBP2 billion
across AMP7 with 70% from capex and remaining 30% from operating
expenditure
- Net nominal cash ODI penalties of around GBP180 million for AMP7
- Equity injections from Kemble to TWUL of GBP1.5 billion in
2023-2025
- Fitch case assumes no external dividends
- No-cash lock up, and a continuation of dividend stream from opco
to service debt at Kemble
Key Recovery Rating Assumptions
- Kemble's recovery analysis is based on a going-concern approach
- RCV would be fully recoverable at default, with a 10%
liquidation-value administrative claim, reflecting the negative
mark-to-market value on index-linked swaps
- Default at Kemble due to the dividend lock-up at TWUL (85% net
debt to RCV)
- Kemble's net debt to RCV assumed at about 10%, including a full
draw-down of its liquidity facility
- Its waterfall analysis output percentage on current metrics and
assumptions is 50%, corresponding to 'RR4' for senior secured debt
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
A rating upgrade in the near term is unlikely. Fitch may revise the
Outlook to Stable on:
- Improvement in operational and environmental performance reducing
the risk of a cash-lock up
- Cash PMICR sustained above 1.05x
- Dividend cover capacity sustained above 1.5x
- Maintaining nominal PMICR and adjusted net debt to RCV above
their negative sensitivities
In the longer term, an upgrade to 'B+' could be considered if
Kemble's financial profile is consistent with:
- Adjusted net debt to RCV consistently below 92%
- Dividend cover capacity sustained above 2.0x, cash PMICR above
1.1x, and nominal PMICR above 1.2x
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Adjusted net debt to RCV above 93.5%
- Dividend cover capacity below 1.5x, cash PMICR below 1.05x, and
nominal PMICR below 1.15x
- Exhausted headroom under TWUL's documentary covenants
- Cash-lock up of TWUL including due to breach of both documentary
covenants and license conditions
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: As at FYE22, Kemble held about GBP250 million
(excluding TWUL cash balance) of unrestricted cash and cash
equivalents and undrawn committed revolving credit facility (RCF)
of GBP110 million. The RCF has been upsized to GBP150 million in
FY23, and now expires in November 2027 (currently fully undrawn)
sized to cover 18 months of interest payments, while Kemble's
documentation requires it to maintain on a reasonable endeavours
basis liquidity sized for 12 months of interest payments.
Kemble is fully reliant on dividends from TWUL for its cash flows,
including debt service and operational costs. In FY23, Kemble
repaid its GBP115 million July 2022 bond maturity with available
cash, with the next significant debt maturity due in FY25 for
GBP190 million.
ISSUER PROFILE
Kemble is the holding company of TWUL, the largest of
Ofwat-regulated, regional monopoly providers of water and
wastewater services in England and Wales, based on its RCV of about
GBP16.6 billion as of FYE22. TWUL provides water and wastewater
services to over 15 million customers across London and the Thames
Valley.
SUMMARY OF FINANCIAL ADJUSTMENTS
- Statutory cash interest reconciled with investor reports
- Statutory total debt reconciled with investor reports
- Capex and EBITDA net of grants and contributions
- Cash PMICRs adjusted to include 50% of the accretion charge on
index-linked swaps with five-year pay-down, and 100% of the
accretion charge on indexed-linked swaps with less than five-year
pay-down
ESG CONSIDERATIONS
Kemble has an ESG Relevance Score of '4' for customer welfare -
fair messaging, privacy & data security due to large penalties
expected for the customer service performance measure in AMP7 (over
GBP70 million in nominal terms). This has a negative impact on the
credit profile, and is relevant to the ratings in conjunction with
other factors.
Kemble has an ESG Relevance Score of '4' for group structure due to
its debt being contractually and structurally subordinated to TWUL,
which has a negative impact on the credit profile, and is relevant
to the ratings in conjunction with other factors.
Kemble has an ESG Relevance Score of '4' for exposure to
environmental impacts due to the impact severe weather events could
have on its operational performance and financial profile. These
are colder winters, heavy rainfalls and extreme heat during summers
which cause higher leakage and mains bursts, as well as higher
internal sewer flooding and pollution incidents. Although severe
weather events are unpredictable in nature, they have the potential
to significantly increase operating costs and lead to additional
ODI penalties, which has a negative impact on the credit profile,
and are relevant to the ratings in conjunction with other factors.
Kemble has an ESG Relevance Score of '4' for water & wastewater
management due to TWUL's significantly weaker-than-sector average
leakage performance and the sizeable penalty of GBP120 million (in
2018/2019 prices) it received from Ofwat for failing its leakage
performance targets in AMP6 and forecast fines under AMP7. This has
a negative impact on the credit profile, and is relevant to the
ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Thames Water
(Kemble) Finance
Plc
senior secured LT B Downgrade RR4 B+
Kemble Water
Finance Limited LT IDR B Downgrade B+
senior secured LT B Downgrade RR4 B+
LONDON ROAD: Goes Into Receivership Amid Lender Dispute
-------------------------------------------------------
BBC News reports that Peterborough United say it is "business as
usual" despite the firm which owns their ground going into
receivership.
London Road Peterborough Properties Ltd (LRPPL) has taken the step
because of an "ongoing dispute with its primary lender", a club
statement said, BBC relates.
Both the club and LRPPL are owned by Darragh MacAnthony, Dr Jason
Neale and Stewart Thompson.
The lender is Thompson's OKR Financial Ltd, which is looking to
recover an outstanding debt of GBP6.6 million, BBC discloses.
According to BBC, the club and LRPPL are "separate legal entities"
and Peterborough say they are "fully compliant" with the terms of
their Weston Homes Stadium lease, which runs until 2039.
"We are advised that the owners of LRPPL continue to negotiate with
its primary lender and are confident that a solution can be found,"
BBC quotes the club statement as saying.
"We look forward to our upcoming home fixture against Oxford United
and the exciting League One run-in."
In a message to supporters on Twitter before the receivership
announcement, MacAnthony said: "FYI club is all good and fine.
Nothing changes re club from the news. All will be excellent in
time. Don't panic or speculate."
And in response to a question, MacAnthony added that the club would
"never" go into administration while he is an owner, BBC notes.
Insolvency specialists Begbies Traynor have been appointed as
receivers by investment group OKR, which made a GBP5.2 million loan
to the club two years ago, secured against the 15,000-seater
stadium and adjoining land, BBC relates.
"The receivers are now responsible for the London Road ground and
the other secured assets, with the aim of recovering OKR
Financial's debt of GBP6.6 million, which remains outstanding
despite ongoing efforts to recover the overdue loan payments since
October 2022," BBC quotes a statement as saying.
"The appointment does not apply to Peterborough United Football
Club Ltd as a business, which continues to occupy the stadium under
the terms of its lease.
"The appointed receiver has a legal responsibility to act in the
best interests of the lender, doing all that is possible to recover
the money owed in a timely manner. They have the power to force a
sale of the property, and they can collect rent on the property and
forward this to the lender."
A statement by OKR [Old Kent Road] said it had been left with "no
other option" and continued: "Ideally, this action will culminate
in a successful settlement where no further action is required,
with regard to the multiple loans the club has outstanding," adds
the report.
MILLER HOMES: Moody's Affirms B1 CFR & Alters Outlook to Negative
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Moody's Investors Service has affirmed the corporate family rating
of Miller Homes Group (finco) PLC (Miller Homes or the company),
the indirect parent company of UK homebuilder Miller Homes group,
of B1 and probability of default rating of B1-PD. Concurrently,
Moody's has affirmed the B1 instrument ratings of the company's
GBP425 million backed senior secured fixed rate notes due 2029 and
EUR465 million backed senior secured floating rate notes due 2028
issued by the company. The outlook on all ratings is changed to
negative from stable.
RATINGS RATIONALE
The change in outlook to negative from stable reflects the risk
that Miller Homes' key ratios will deteriorate and remain weaker
than expected for the B1 rating category. This is in an environment
of a slowdown of the UK homebuilding market with higher mortgage
rates, lower house prices and expectations of decreasing number of
sold houses in 2023. Moody's expects Miller Homes' Moody's adjusted
EBIT interest cover to deteriorate to around 2x in 2023 before
recovering to around 2.5x in 2024 from approximately 2.7x in 2022
pro-forma for the new capital structure. The company's Moody's
adjusted debt to EBITDA will increase to around 6x in 2023 from
approximately 4.1x in 2022.
Under an updated base case Moody's expects a low to mid-single
digit decline in average selling price and a double-digits decline
in the number of completions in 2023 amid higher mortgage rates
which more than doubled over the course of 2022 This is will result
in the company's Moody's adjusted EBITDA decreasing to around
GBP140-150 million in 2023 before recovering towards GBP200 million
in 2024 compared with approximately GBP220 million achieved in
2022. More positively, Moody's notes that the company has a
relatively good level of revenue visibility with GBP481 million
forward sales secured at the end of 2022, which represents 41% of
the year's revenue.
Miller Homes' Moody's adjusted debt / book capitalisation has been
gradually improving thanks to its growing retained earnings:
approximately 61% in 2022 from around 65% pro-forma estimated in
2021. Moody's expects that Miller will generate approximately GBP50
million net income on average in 2023 and 2024 which will allow the
company to de-lever towards 55% over the next two years.
Moody's also expect Miller Homes to maintain solid liquidity.
Following company's strategic decision to reduce investments in
land in the second half of 2022 the company accumulated GBP190
million cash on balance sheet. The company's free cash flow will
likely breakeven at best in 2023 and 2024 as investment volumes and
construction activity will be gradually recovering, however, the
pace of investment remains largely discretionary and should be
sufficiently covered from the company's internal sources.
Miller Homes' B1 CFR is constrained by: (1) relatively smaller
scale and weaker access to capital compared to the larger UK peers,
although with a much closer competitive position in the regions
where Miller Homes is present; (2) high leverage and weak interest
cover; (3) macroeconomic and geopolitical uncertainty, which under
a downside scenario may result in a prolonged decline in consumer
confidence and ongoing negative impact on housing market.
The CFR is supported by: (1) Miller Homes' solid track record of
growing the business while maintaining healthy margins; (2) Miller
Homes' focus on the UK regions with relatively better affordability
rates, providing a degree of resilience to demand; (3) its
strategic landbank and established land acquisition strategy which
supports sustainable business growth; (4) solid liquidity, which
benefits from counter-cyclical working capital movements.
ESG CONSIDERATIONS
Miller Homes is owned by funds managed by Apollo. Moody's regards
PE ownership structures to be more prone towards more aggressive
financial policies, such as high tolerance for leverage and
potentially high appetite for shareholder-friendly actions.
LIQUIDITY
Moody's considers Miller Homes' liquidity to be adequate. The
group's internal cash sources comprise around GBP190 million of
cash on balance as of December 2022, as well as access to GBP180
million super senior revolving credit facility (RCF), which Moody's
expects to remain largely undrawn. All these funds will comfortably
cover all expected cash needs in the next 12-18 months.
The company has one springing minimum inventory covenant attached
to the new RCF which is set with significant headroom.
STRUCTURAL CONSIDERATIONS
The notes are guaranteed by material subsidiaries of the group
which own more than 90% of the group's assets and EBITDA. The notes
are also secured by a floating charge over Miller Homes assets and
share pledges. Moody's assumes a standard recovery rate of 50%,
which reflects the covenant lite nature of the debt documentation.
The B1 instrument ratings of the notes - in line with the CFR -
reflects the company's capital structure which consists of the
backed senior secured notes as the main class of debt. Moody's
excludes the land payables from its loss-given-default (LGD) model
which the rating agency uses to determine ranking, because these
obligations are effectively fully covered by the fixed charge over
the respective value of land.
RATING OUTLOOK
The negative outlook reflects the elevated risk of decline in
topline and profitability over the next 12 to 18 months, which
could lead to credit metrics no longer commensurate with a B1 CFR.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade Moody's could upgrade the
company's rating if: (1) revenue grows above $2.5 billion while the
company maintains a gross margin around current levels; (2) debt to
book capitalisation is sustained below 45%, with debt to EBITDA
below 4x coupled with substantial cash on balance sheet; (3) EBIT
interest coverage improves towards 4x; and (4) stable economic and
homebuilding industry conditions in the UK remain. An upgrade would
also require Miller Homes to generate strong free cash flow while
maintaining a good liquidity profile.
Factors that could lead to a downgrade: downward pressure could
materialise if (1) debt to book capitalisation is sustained above
60% or debt to EBITDA is sustained above 5x (assuming significant
cash balance); (2) EBIT / interest reduces below 2.5x for a
prolonged time; (3) gross margin falls meaningfully below current
levels; (4) Miller Homes fails to maintain an adequate land bank in
line with current levels; (5) the company uses debt to fund
substantial land purchases, acquisitions or shareholder
distributions; or (6) the company's liquidity profile
deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Homebuilding
and Property Development published in October 2022.
PROFILE
Miller Homes is a UK homebuilder. The company delivered 3,970 units
in 2022, generating GBP1,169 million of revenue and approximately
GBP220 million of Moody's adjusted EBITDA. The company is
headquartered in Edinburgh and operates Midlands, South and North
of England as well as in Scotland. The company is owned by Apollo
funds which acquired it from Bridgestone in March 2022.
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