/raid1/www/Hosts/bankrupt/TCREUR_Public/230404.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
Tuesday, April 4, 2023, Vol. 24, No. 68
Headlines
A Z E R B A I J A N
AZERBAIJAN: Fitch Affirms Foreign Curr. IDR at BB+, Outlook Pos.
F R A N C E
BANIJAY GROUP: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable
TARKETT PARTICIPATION: Fitch Affirms IDR at 'B+', Outlook Stable
K A Z A K H S T A N
JSC HOME CREDIT: Fitch Assigns 'BB-' LongTerm IDR, Outlook Stable
L U X E M B O U R G
INTELSAT JACKSON: Fitch Affirms LongTerm IDR at 'B+', Outlook Pos.
S W E D E N
REN10 HOLDING: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable
U N I T E D K I N G D O M
BCP V MODULAR III: Fitch Affirms LongTerm IDR at B, Outlook Stable
BONAR YARNS: Unsustainable Cash Flow Issues Prompt Administration
BRITISHVOLT: Recharge's Bid to Buy Site at Risk of Collapse
BULB: Large Energy Suppliers Lose Legal Challenge Against Sale
CD&R GALAXY UK: Fitch Affirms 'B' LongTerm IDR, Outlook Now Neg.
CINEWORLD: To Raise New Funding, Drops Plan to Sell Businesses
DETRAFFORD SKY: Owed Almost GBP40 Mil. at Time of Administration
ECO MODULAR: Spatial Initiative Completes Acquisition
LOTUS SANCTUARY: Slips Into Arrears After Voluntary Administration
- - - - -
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A Z E R B A I J A N
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AZERBAIJAN: Fitch Affirms Foreign Curr. IDR at BB+, Outlook Pos.
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Fitch Ratings has affirmed Azerbaijan's Long-Term Foreign-Currency
Issuer Default Rating (IDR) at 'BB+' with a Positive Outlook.
KEY RATING DRIVERS
Rating Fundamentals, Positive Outlook: The rating is supported by
Azerbaijan's very strong external balance sheet, the lowest public
debt in its peer group, and financing flexibility from large
sovereign wealth fund assets. Set against these factors are weak
governance indicators, lack of predictability of economic
policy-making, high banking sector dollarisation, heavy dependence
on the hydrocarbon sector, and geopolitical risk of conflict with
Armenia.
The Positive Outlook reflects strengthening external and fiscal
buffers due to high energy prices, as well as greater expenditure
restraint than was the case in previous energy sector windfalls,
which would be reinforced by consistent implementation of the
reinstated fiscal rule.
Strengthening External Position: The current account surplus rose
an estimated 14.6pp in 2022 to 29.7% of GDP, and Fitch projects a
narrowing to average 17.6% in 2023-2024, in line with moderating
energy prices, but still the highest in the 'BB' category. Oil and
gas now comprise close to 93% of Azerbaijan's total exports.
Sovereign foreign-currency assets grew by USD5.9 billion in 2022 to
USD58.0 billion, 85% of which is held by the sovereign oil fund
(SOFAZ) where higher energy revenues more than offset a 5.2% loss
on its investment portfolio. Fitch projects Azerbaijan's net
sovereign creditor asset position grows 10.9pp in 2023-2024 to
68.7% of GDP, comfortably the highest in the rating peer group.
Further Large Fiscal Surpluses: The general government surplus rose
2pp in 2022 to 6% of GDP (and compares with a deficit of 6.5% in
2020) driven by a 27% increase in revenue. Expenditure rose 14.5%
in 2022, well below nominal GDP growth (which was boosted by a 37%
deflator) and the non-energy primary fiscal deficit fell to 22.7%
of non-energy GDP, outperforming the fiscal target of 25%. Fitch
forecasts the general government surplus narrows to 4.8% of GDP in
2023 and 4.2% in 2024.
Fiscal Rule Helps Public Finances: Fiscal rules reintroduced last
year target a further narrowing in the non-energy primary deficit
to 17.5% in 2026, and cap public debt at 20% of GDP, but they lack
institutional underpinnings. Moderating nominal GDP growth will
make the deficit target more challenging, and its consistent
adherence would provide greater confidence that Azerbaijan's strong
public finances will be preserved. Fitch forecasts general
government debt, which fell 4.5pp in 2022 to 11.6% of GDP, ends
2024 at 7.9% of GDP.
Moderate Contingent Liability Risk: Government on-lending and
guarantees fell 9pp in 2022 to 16.6% of GDP, and 80% relate to the
2017 restructuring of International Bank of Azerbaijan, and the
Southern Gas Corridor project where there has been a reduction in
contingent liability risk. Lack of transparency and weak corporate
governance in the large state-owned enterprise sector hinder public
financial management and efforts to diversify the economy, although
measures have been taken to centralise their oversight and
reporting at Azerbaijan Investment Holdings.
Macro-Policy Framework Lacks Predictability: There remains a lack
of policy predictability, institutional independence, and clarity
of mandates for the Central Bank of Azerbaijan (CBA) and SOFAZ
within the broader exchange rate framework, increasing the risk of
a disruptive adjustment to a very severe shock. Recent progress has
been made in broadening the CBA's liquidity tools, including use of
one-day standing deposit and lending facilities. Fitch considers
there is still a strong political prioritisation to maintaining the
1.7 AZN/USD de facto exchange rate peg, despite the authorities'
stated aim of allowing greater flexibility over the medium term.
Inflationary Challenge: Inflation moderated to 14.1% in February
from a peak of 15.6% in October 2022, partly reflecting a 4pp
easing of food price inflation to 17.1%. There is a somewhat
greater domestic component than early last year, with nominal wages
growing close to the headline rate. Fitch forecasts inflation falls
to an average 10.3% in 2023 and 7.3% in 2024 on moderating global
commodity prices, easing supply chain disruption and the stronger
real effective exchange rate, but still above the CBA target (4%
+/-2pp).
The main policy interest rate was raised only 100bp over the last
year to 8.5% and there is relatively weak monetary policy
transmission, although other measures have been taken to absorb
banking sector liquidity, including through reserve requirements.
Weak Trend Growth: The economy expanded 4.6% in 2022, from 5.9% in
2021, driven by 9.1% growth in the non-energy sector. Energy sector
GDP contracted 2.7%, with a 5.6% fall in oil production partly
offset by 7.3% growth in gas output. Fitch forecasts GDP growth
slows to an average 2.1% in 2023-2024, close to the trend rate, as
terms of trade weaken, the pandemic reopening base effect falls
out, and there is a slight decline in energy production. Sizeable
new investment in the gas sector, potentially supported by the deal
to near double EU exports by 2027, will take many years to feed
through to production.
Continuing Geopolitical Risk: Tensions with Armenia have increased
over the last year. The closure of the Lachin corridor to Armenia
has exacerbated frictions, and followed September's more severe
fighting that broadened the conflict from areas in and around
Karabakh. Azerbaijan's relationship with Russia appears more
strained, and the EU has adopted a limited monitoring role in
Armenia.
Its base case is that Russia will retain its peacekeeping forces at
least until the end of the committed period in late 2025, and that
a peace agreement will be reached and ultimately lead to a deal on
improved trade and connectivity. However, there could well be
further sporadic clashes, and downside risk has increased since
early last year.
Banking Sector Fundamentals Steadily Improve: The Azerbaijan
banking sector has improved in recent years, but is still fairly
weak, reflected by Fitch's Banking System Indicator score of 'b'.
The non-performing loan ratio fell to 2.9% at end-2022, from 6.1%
at end-2020, helped by strong loan growth. Return on average equity
was 17.3% in 2022 and is likely to remain above 15% this year, Tier
1 capital is adequate at 15.2%, and there is low Russian presence
in the sector. The deposit dollarisation ratio fell to 48% at
end-2022, from 60% at end-1H20, but is well above the peer group
median of 19%, and Fitch views regulatory oversight as improving
but still with several weaknesses.
ESG - Governance: Azerbaijan has an ESG Relevance Score (RS) of '5'
for both Political Stability and Rights and for the Rule of Law,
Institutional and Regulatory Quality and Control of Corruption, as
is the case for all sovereigns. Theses scores reflect the high
weight that the World Bank Governance Indicators (WBGI) have in its
proprietary Sovereign Rating Model. Azerbaijan has a low WBGI
ranking at the 32nd percentile, reflecting very poor voice and
accountability, relatively weak rights for participation in the
political process, uneven application of the rule of law and a high
level of corruption.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Public Finances: Weaker confidence that fiscal reserves will be
preserved, for example, due to sizeable fiscal loosening
- External Finances: Lower energy prices sufficient to have a
material negative impact on external buffers
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Public Finances: Greater confidence that the strong public
balance sheet will be preserved, for example, due to continued
expenditure restraint in line with the fiscal rule, or prolonged
high energy prices
- External Finances: Further strengthening of the external balance
sheet, for example, due to sustained high energy prices
- Macro: Improvements in the effectiveness and predictability of
Azerbaijan's policy framework, including exchange rate policy, to
manage external shocks and reduce macro volatility
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Azerbaijan a score equivalent to a
rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR
scale.
Fitch's sovereign rating committee adjusted the output from the SRM
score to arrive at the final LT FC IDR by applying its QO, relative
to SRM data and output, as follows:
- Macro: -1 notch, to reflect relative weakness in Azerbaijan's
macro-framework, including from the lack of institutional
independence, policy predictability and clarity of mandates for the
CBA and SOFAZ within the broader exchange rate framework, and a
weak record of preserving the fiscal and external balance-sheet
gains from previous energy windfalls. In addition, part of the
improvement in the SRM score over the last year was due to
temporary macroeconomic factors boosting GDP growth, whereas Fitch
assesses trend GDP growth as much lower and a relative rating
weakness.
- External Finances: +1 notch, to reflect large SOFAZ assets, which
underpin Azerbaijan's exceptionally strong foreign-currency
liquidity position and the very large net external creditor
position of the country.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within its
criteria that are not fully quantifiable and/or not fully reflected
in the SRM.
ESG CONSIDERATIONS
Azerbaijan has an ESG Relevance Score of '5' for Political
Stability and Rights as WBGI have the highest weight in Fitch's SRM
and are therefore highly relevant to the rating and a key rating
driver with a high weight. As Azerbaijan has a percentile rank
below 50 for the respective governance indicator, this has a
negative impact on the credit profile.
Azerbaijan has an ESG Relevance Score of '5' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
WBGI have the highest weight in Fitch's SRM and are therefore
highly relevant to the rating and are a key rating driver with a
high weight. As Azerbaijan has a percentile rank below 50 for the
respective governance indicators, this has a negative impact on the
credit profile.
Azerbaijan has an ESG Relevance Score of '4' for Human Rights and
Political Freedoms as the Voice and Accountability pillar of the
WBGI is relevant to the rating and a rating driver. As Azerbaijan
has a percentile rank below 50 for the respective governance
indicator, this has a negative impact on the credit profile.
Azerbaijan has an ESG Relevance Score of '4'[+] for Creditor Rights
as willingness to service and repay debt is relevant to the rating
and is a rating driver for Azerbaijan, as for all sovereigns. As
Azerbaijan has a recordof 20+ years without a restructuring of
public debt, which is captured in its SRM variable, this has a
positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of '3'. This means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or to the way in which they
are being managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Azerbaijan LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
LC LT IDR BB+ Affirmed BB+
LC ST IDR B Affirmed B
Country Ceiling BB+ Affirmed BB+
senior
unsecured LT BB+ Affirmed BB+
===========
F R A N C E
===========
BANIJAY GROUP: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable
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Fitch Ratings has affirmed Banijay Group SAS's (Banijay) Long-Term
Issuer Default Rating (IDR) at 'B+' upon its recently launched Term
Loan B (TLB) amend and restate (A&E) transaction. Fitch further
expects to rate the new EUR895 million equivalent (EUR/USD) term
loan facilities at 'BB-(EXP)'/'RR3'. The Rating Outlook is Stable.
Fitch has also affirmed the company's existing senior secured loans
and notes at 'BB-'/'RR3' and the senior unsecured notes at
'B-'/'RR6'.
The proceeds from the new TLBs will be used to repay the existing
term loans in full together with related transactions fees and as
such the transaction is leverage neutral. Fitch expects to finalise
the assigned instrument ratings upon consummation of the A&E
transaction.
Banijay's 'B+' IDR reflects its approach for stronger parent - FL
Entertainment N.V (FLE) - and weaker subsidiary - Banijay - where
Fitch applies a bottom-up assessment with a single notch uplift
from Banijay's Standalone Credit Profile (SCP) of 'b'.
The Stable Outlook reflects Fitch's view that Banijay's EBITDA
leverage, interest cover and FCF will remain consistent with a 'b'
level in 2023-2024, adjusted for a higher interest rate environment
and including higher dividend payout to its parent.
KEY RATING DRIVERS
PSL Approach: In applying Fitch's PSL Criteria Fitch assesses the
legal and operational incentives for FLE to support Banijay as
'Low' with no operational overlap between the parent and
subsidiary. There are no cross defaults or guarantees between FLE
and Banijay. Fitch views strategic incentives to support as
'Medium', as Banijay represents around two thirds of FLE's
consolidated EBITDA. This assessment leads to an overall bottom-up
approach where Banijay's 'B+' IDR is lifted one notch above its 'b'
SCP.
Stronger Parent/Weaker Subsidiary: Fitch views the consolidated
business profile of FLE as broadly corresponding to the low-to-mid
'bb' range. FLE's larger scale and business diversification is
partly constrained by material regulatory oversight in the online
gaming subsidiary Betclic. The consolidated profile, however,
benefits from a stronger financial structure and financial
flexibility, with an estimated Fitch-defined EBITDA net leverage
around 4.0x in 2022, which Fitch forecasts to decline in 2023.
Deleveraging is further supported by FLE's financial policy at
below 3.0x group-defined net debt/EBITDA, at 3.1x end-2022.
'b' SCP: Banijay's 'b' SCP reflects a robust business model with
increasing scale and diversification that is balanced by leverage
(gross and net) and interest cover metrics in the 'b' category.
Fitch forecasts that earnings and FCF will remain resilient through
the economic cycle. In 2022 it saw some margin pressure from higher
staff cost, but also a mix effect from more scripted content
(around 24% of revenues in 2022, up from 20% in 2021), with
structurally lower margins. Fitch expects some continued margin
pressure into 2023 owing to inflation and higher staff cost.
Fitch expects EBITDA gross and net leverage metrics to remain
consistent with the 'b' level in 2023-2024. Banijay has hedged its
floating-rate exposure and as such EBITDA interest cover should
remain around 3.0x for 2023-2024.
Deleveraging Aims: Fitch expects FCF and interest cover to remain
at 'b' also in a higher interest-rate environment, and despite a
higher dividend payout from Banijay (around EUR60 million per year,
increasing in line with earnings) to part-fund FLE's dividend
policy. Banijay aims to deleverage further, to below 4x
company-defined EBITDA leverage in two years, from 4.5x at
end-2022, which if achieved, may create upward rating pressure over
the next 18-24 months.
Underlying Secular OTT Growth: Fitch expects Banijay to grow above
the market with mid-single-digit revenue growth in 2023 (including
2022 M&A). It is well-positioned to grow with streamers and digital
platforms at broadcasters in the over-the-top (OTT) niche,
currently representing around 18% of its production and
distribution revenues (from 13% in 2021). Its focus on strong local
content should benefit from demand from streamers facing
jurisdictional local content regulation in Europe. This is further
supplemented by Banijay's cost-efficient non-scripted content in
times of weaker consumer purchasing power and broadcasters'
cost-cutting.
Continued growth in the global TV market will be driven by OTT
growth at streaming platforms, but also via digital platforms
developed by traditional broadcasters. Fitch expects extraordinary
content spend in 2020-2022, predominantly by streamers, to slow
towards 2% annual growth in 2023, owing to fewer large budget
productions and economic pressure on consumer spend and
advertising.
DERIVATION SUMMARY
Banijay is the largest independent TV production firm globally. Its
primary competitors are ITV Studios, Fremantle Media and All3Media.
It has a greater proportion of non-scripted content than its peers,
although the company has increased its scripted content towards 24%
(public guidance to remain under 25%).
Fitch covers several UK and U.S. peers in the diversified media
industry such as TFCF Corporation (Twenty-First Century Fox; Inc.;
A-/Stable; owned by Disney) and NBC Universal Media LLC (A-/Stable;
owned by Comcast). These are much larger and more diversified,
occupy stronger competitive positions in the value chain and are
less leveraged than Banijay. Compared with these investment-grade
names, Banijay's profile is more consistent with a 'B' rating
category.
KEY ASSUMPTIONS
Key Assumptions In Its Rating Case for the Issuer:
- Revenue growth of 6% in 2023, followed by around 2% in 2024;
- Fitch-defined EBITDA margin of 13% in 2022 (14.1% in 2021),
before falling towards 12.1% in 2023 (Fitch adjusts for leases and
around EUR13 million of recurring outflows related to staff
incentive programmes and restructuring costs);
- Working-capital outflows below 1% of revenue in 2023-2024;
- Capex at around EUR50 million in 2023 and EUR60 million in 2024;
- Common dividends of around EUR60 million per year from 2023;
- Due to lack of visibility no M&A is assumed.
KEY RECOVERY RATING ASSUMPTIONS
- Fitch assumes Banijay would be reorganised as a going concern in
distress or bankruptcy rather than liquidated;
- Post-restructuring EBITDA estimated at EUR325 million (including
acquired EBITDA), reflecting weaker demand for non-scripted formats
and increasing price pressure from both broadcasters and streaming
platforms;
- A distressed enterprise value multiple of 5.5x to calculate a
post-restructuring valuation;
- Fitch deducts 10% for administrative claims and allocate the
residual value according to the liability waterfall. Fitch first
deducts EUR145 million of factoring and EUR152 million of local
facilities ranking prior to Banijay's senior secured debt. Fitch
expects its EUR170 million revolving credit facility (RCF) to be
fully drawn in a default, ranking pari-passu with its EUR457
million and USD423 million term loans, and EUR582 million and
USD385 million senior secured notes. Thereafter Fitch deducts its
lowest-ranking EUR400 million senior unsecured notes;
- Based on current metrics and assumptions, the waterfall analysis
generates a ranked recovery at 67% in the 'RR3' band for the senior
secured loans and notes, and 0% in 'RR6' for the senior unsecured
notes. Upon consummation of the TLB A&E transaction, based on
current metrics and assumption, Fitch expects a ranked recovery at
66% for both the new TLBs and the existing senior secured notes.
These indicate a 'BB-' senior secured instrument rating for the
senior secured term loans and notes, and a 'B-' unsecured
instrument rating for the EUR400 million notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- EBITDA net leverage sustainably below 4.8x, together with
visibility regarding the use of high cash balances (and less
divergence between gross and net leverage metrics), will be a key
consideration for an upgrade;
- Continued growth of EBITDA and FCF, with continued demand for
non-scripted and scripted content without significant increase in
competitive pressure;
- Stronger legal, strategic or operational incentives for
consolidated FLE to support the credit profile of Banijay;
- EBITDA interest cover sustained above 3.3x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Total EBITDA net leverage sustainably above 5.8x (and/or greater
divergence between gross and net leverage metrics);
- EBITDA interest coverage sustained below 2.8x;
- Deterioration of EBITDA because of failure to renew leading
shows, increase in competition or inability to control costs;
- Weaker linkages between FLE and Banijay, with reduced incentives
to support Banijay's SCP.
- An overall weaker consolidated credit profile of FLE, such that
the parent's consolidated credit profile is no longer stronger than
Banijay's SCP.
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Banijay's cash equivalent stood at EUR396
million at end-2022. In addition, Banijay has access to a EUR170
million undrawn RCF. Fitch forecasts positive FCF post-dividends in
2023-2024, which combined with its cash position and undrawn RCF,
provides satisfactory liquidity for working-capital requirements,
earn-outs and growth M&A.
Manageable Refinancing Risks: Banijay's existing senior secured
loans and notes mature in March 2025, and the unsecured notes in
March 2026. Fitch expects refinancing to be manageable, based on
its current and expected leverage profile, FCF and interest cover
remaining at a 'b' level, adjusted for a higher interest-rate
environment.
ISSUER PROFILE
Banijay is the largest independent content producer and distributor
globally; home to over 130 production companies across 21
territories, and a multi-genre catalogue boasting over 160,000
hours of original standout programming.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Banijay
Entertainment SAS
senior secured LT BB-(EXP)Expected Rating RR3
senior secured LT BB- Affirmed RR3 BB-
Banijay Group SAS LT IDR B+ Affirmed B+
senior
unsecured LT B- Affirmed RR6 B-
Banijay Group US
Holding, Inc.
senior secured LT BB-(EXP)Expected Rating RR3
senior secured LT BB- Affirmed RR3 BB-
TARKETT PARTICIPATION: Fitch Affirms IDR at 'B+', Outlook Stable
----------------------------------------------------------------
Fitch Ratings has affirmed Tarkett Participation's Long-Term Issuer
Default Rating (IDR) at 'B+' and secured debt at 'BB-'. The Outlook
on the IDR is Stable.
The rating is supported by Tarkett's leading market positions
across a number of product segments and markets combined with
strong diversification, a sound split between renovation and
new-build, and a presence in both the commercial and private
residential end-customer segments. The rating remains weighed down
by a weak financial profile mainly due to more volatile
profitability versus the sector. Liquidity is expected to remain
comfortable through the rating horizon to 2026.
Fitch sees near-term rating pressure from weak EBITDA despite some
pass-through of sharply rising raw material costs. This has led to
leverage metrics outside the negative sensitivities for the rating
in both 2022 and forecast 2023. However, Fitch expects a recovery
to within the sensitivity levels in 2024 as Tarkett gradually
improves its margins, supported by its high exposure to the more
stable renovation flooring segment.
KEY RATING DRIVERS
Leverage Remains High: Tarkett's EBITDA gross leverage was 7.1x in
2022 (versus 6.3x forecast a year ago), exceeding the negative
rating sensitivities, largely due to additional drawings on its
revolving credit facility (RCF) to cover rising working capital.
This was largely due to the inflationary effects on inventories.
Tarkett managed to compensate rising raw materials prices by
raising its prices leading to a high 20% revenue increase.
Fitch expects Tarkett to reduce leverage to about 6.0x EBITDA in
2023, in line with the negative 6.0x sensitivity for a downgrade
but comfortably improving to 5.7x by 2024.
Margins Below Industry Peers: Tarkett's margins continue to lag its
Fitch-rated building products sector peers, which Fitch views as a
weakness for the rating. EBITDA margins weakened to 5.5% in 2022
from around 7%-9% (Fitch-adjusted) in 2019-2021, due to
inflationary pressure and internal inefficiencies, but in absolute
terms EBITDA remained stable. Fitch forecasts a slow but gradual
improvement of EBITDA margins, reaching 7% by 2025 as inflationary
pressures ease and ongoing efforts to reduce the cost base and
improve efficiency crystallise. A lack of improvement will be
negative for the rating.
FCF to Stabilise: Fitch expects gradually higher EBITDA and funds
from operations (FFO) to support improved free cash flow (FCF)
generation. Highly negative FCF in 2022 (FCF margin at -5.0%)
reflects FFO and further pressure from inflated working capital
items as well as higher levels of inventory when customer demand
slowed in the second half of the year. Cash flow generation is
expected to turn positive in 2023 as inflationary pressure ease on
working capital and from the company's efforts to cut down on
stock-keeping units.
Gradually Improving Market: Customer demand weakened in several of
Tarkett's markets in 2H22 and Fitch remains cautious about its
rebound. In particular the European market saw slowing demand with
lower residential activity and more importantly, a number of
commercial segments. Fitch expects continued subdued activity in
2023 as higher interest rates will affect households' disposable
incomes as well as investment activity from certain commercial
segments.
Fitch believes Tarkett's sound diversification with high exposure
to renovation and to more resilient commercial education and
healthcare flooring will soften the impact, but Fitch expects
further pricing pressure this year as prices of raw materials have
already declined strongly. The North American market has been more
stable and the company has gained from a strong US dollar while
some internal inefficiencies have weighed on margins.
Russian Operations Contained: Sanctions imposed by the West at the
outbreak of the Russian war last year put pressure on Tarkett's
profitable Russian operations. While the Russian business is mainly
produced and sourced locally, Fitch expected the weakening economy
and declining rouble to affect demand. Both the demand and value
from a volatile rouble has stabilised and continue to generate
fairly strong EBITDA margins. The limitations on repatriating cash
from Russia is not a material concern as to date cash flow
generated has been retained in Russia to manage local operations.
Raw Material Sensitivity: Tarkett is exposed to raw-material cost
swings, notably of oil-based derivatives PVC, plasticisers and
vinyl. It suffers from a fairly long lag in passing on cost
inflation to its customers. Commercial projects can have up to one
year between order and delivery as floor installation is at a late
stage of project construction.
Tarkett offset the inflation impact on raw materials until end of
2022. Fitch believes the current easing of crude oil and freight
costs, purchase optimisation and tight cost control will support
margin recovery. Overall, Fitch deems Tarkett to have reasonable
pricing power, having raised prices several times in 2022.
Balanced End-Market Diversification: Tarkett's business profile
benefits from an 80/20 split between the more stable renovation
market versus the potentially more volatile new-build market. The
flooring renovation cycle is quite frequent, with office space in
particular generally changing flooring with every new tenant or
lease contract. Its 72/28 split between commercial and private
residential allows Tarkett to benefit from different demand
drivers.
However, Fitch expects residential flooring volumes to suffer in
the next months from declining household incomes and commercial
flooring volumes, notably offices, from economic uncertainty.
Offsetting this, sport flooring has been recovering since pandemic
restrictions were lifted.
DERIVATION SUMMARY
Tarkett's closest rated peer is HESTIAFLOOR/Gerflor (B/Stable),
which has fairly similar product offerings of vinyl and linoleum
flooring for primarily commercial end-customers. Gerflor is
smaller, about a third in turnover with fairly high exposure to
France, but has better EBITDA margins (13%-14%) than Tarkett
(6-7%). Victoria plc (BB-/Stable), which targets the residential
flooring segment mostly in Europe, is also smaller and generates
higher EBITDA margins (around 12%-13%) than Tarkett.
Other peers include the largest flooring company globally, US-based
Mohawk Industries (BBB+/Stable) and building products company Masco
Corporation (BBB/Stable). These companies are more than twice
Tarkett's size, and have higher exposure to residential
end-customers. Mohawk is large also in ceramic tiles and Masco's
offering spans a portfolio of home-improvement building products.
Tarkett's EBITDA gross leverage of 6.1x-5.7x in 2023-2024 is
somewhat weaker than that of lower rated Gerflor's 6.0x-5.4x and
similarly rated PCF's GmbH (B+/Negative) with EBITDA gross leverage
of 6.2x-5.1x in the same period.
KEY ASSUMPTIONS
- Revenue to decline by 1.7% in 2023 and 0.5% in 2024 on weaker
demand supported by low single digit growth of sport flooring
before it starts growing at low single digits from 2025
- EBITDA margin at 6.1% in 2023, 6.3% in 2024 and 7% in 2025
- Capex at around 2.7% of sales
- No dividends assumed over the rating horizon
- No buyback of the remaining 9.6% of shares
- Gradual gross debt reduction through repayment of the outstanding
RCF
RECOVERY ASSUMPTIONS:
- The recovery analysis assumes that Tarkett would be reorganised
as a going concern in bankruptcy rather than liquidated
- A 10% administrative claim
- The RCF is fully drawn in a post-restructuring scenario according
to Fitch's criteria. Factoring line is ranked super senior. Senior
unsecured debt consists of overdraft facilities and other bank
loans which rank behind senior secured debt.
- The going-concern EBITDA estimate of EUR155 million reflects its
view of a sustainable, post-reorganisation EBITDA upon which Fitch
bases the valuation of the company
- An enterprise value multiple of 5.5x is used to calculate a
post-reorganisation valuation. It reflects Tarkett's leading
position in its niche markets (such as sport or resilient flooring
and commercial carpets in western Europe or wood flooring in the
Nordics), long-term relationship with clients and an 80% revenue
share in the renovation segment, limiting its exposure to more
volatile new-build projects
- The waterfall analysis output for the senior secured debt (around
EUR900 million term loan B) generated a ranked recovery in the
'RR3' band, indicating an instrument rating of 'BB-'. The waterfall
analysis output percentage on current metrics and assumptions was
53%.
Climate Vulnerability Considerations
The FY22 revenue-weighted Climate Vulnerability Score (Climate.VS)
for Tarkett Participation for 2035 is 35 out of 100, suggesting low
exposure to climate-related risks in that year. For further
information on how Fitch perceives climate-related risks in the
engineering and construction sector see Building Materials and
Construction - Long-Term Climate Vulnerability Scores.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- EBITDA margin above 8% on a sustained basis
- FCF margins sustainably above 2% on a sustained basis
- EBITDA gross leverage below 5.0x on a sustained basis
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- EBITDA margin below 6%
- Negative FCF
- EBITDA gross leverage above 6.0x
- EBITDA interest coverage below 3.0x
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: At end-2022 the company had EUR170 million
of Fitch-adjusted cash and EUR215 million of the undrawn RCF with
maturity in 2027. The company's liquidity position is supported by
no dividend payments, limited M&A activity, modest capex
requirements and no major debt amortisation scheduled before its
bullet maturity in 2028. Fitch forecasts positive FCF generation at
around 1.0%-1.3% in the next three years and Fitch believes Tarkett
will prioritise gradual RCF repayment from own cash to improve
leverage and alleviate the interest payment burden.
ISSUER PROFILE
Tarkett is a leading flooring and sports surface manufacturer
offering solutions to the healthcare, education, housing, hotels,
offices, commercial and sports markets. Products include vinyl,
linoleum, carpet, rubber and wood flooring as well as synthetic
turf and athletics track.
ESG CONSIDERATIONS
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 to the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Tarkett
Participation LT IDR B+ Affirmed B+
senior secured LT BB- Affirmed RR3 BB-
===================
K A Z A K H S T A N
===================
JSC HOME CREDIT: Fitch Assigns 'BB-' LongTerm IDR, Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has assigned Kazakhstan-based JSC Home Credit Bank
(HCBK) a Long-Term Issuer Default Rating (IDR) of 'BB-', and
Viability Rating (VR) at 'bb-'. The Outlook on the IDR is Stable.
KEY RATING DRIVERS
HCBK's IDR is driven by the bank's intrinsic strength, as reflected
in its VR of 'bb-'. The VR is constrained by the bank's weaker
funding profile compared with domestic peers, and its fairly
limited and niche franchise of consumer lending, which could
translate into volatility of its asset quality and performance
through the credit cycle. However, risks are balanced by HCBK's
high capital ratios and a record of robust profitability to date.
HCBK's National Long-Term Rating of 'BBB+(kaz)' corresponds to the
'BB-' Long-Term Local-Currency IDR and reflects the bank's
creditworthiness relative to peers in Kazakhstan.
External Shocks Manageable: Kazakhstan's economy and financial
sector have proved resilient to the initial impact of the
Russia-Ukraine military conflict. Fitch forecasts GDP to grow by
2.9% in 2022 and 3.6% in 2023 (2021: 4.1%). Given the country's
close links with Russia, downside risks stem from potential
disruptions to energy exports, weakening of the local currency,
higher inflation and steeper interest rates. However, Fitch expects
the banking sector to be resilient to external shocks due to strong
performance and high capital and liquidity buffers.
Niche Franchise, Monoline Business Model: HCBK is a small bank with
a 1.3% share in Kazakh system assets, specialising in retail
unsecured lending. Its business model features greater-than-market
volatility in balance-sheet growth and exposure to riskier assets.
However this is compensated by higher-marginal lending products.
Fast Loan Growth: HCBK has demonstrated a heightened risk appetite
in recent years, with double-digit growth in unsecured retail
lending, except in 2020 due to pandemic-related lockdowns and
restrictions. All retail lending is in local currency, while part
of HCBK's funding is in foreign currency (FC), resulting in a short
FC on-balance sheet position. The position is closed predominantly
with FC swaps with sister banks within the PPF Group.
Asset Quality Risks Crystallise: The ratio of impaired (defined as
Stage 3 loans under IFRS9) loans grew to 12.9% at end-3Q22 from
9.8% at end-2021, driving the cost of risk to a four-year high 3.6%
in 9M22 (annualised, close to 1% in 2020-2021). Coverage of the
impaired loans by total loan loss allowances remained weak at 38%
at end-3Q22 (37% at end-2021), affected by a record of successful
recoveries, and a significant share of non-overdue loans in the
Stage 3 bucket.
Core Profitability Compensates for Risks: Operating
profit/regulatory risk-weighted assets (RWAs) decreased to 4.7% in
9M22 (annualised) from 6.6% in 2021 on the back of higher cost of
risk. However, Fitch views the bank's pre-impairment profit (11.8%
of average loans in 9M22, annualised) as a resilient buffer to
absorb potential further increase in cost of risk.
Strong Capitalisation: HCBK's Fitch Core Capital (FCC) ratio stood
at a high 19.4% of regulatory RWAs at end-3Q22. Its assessment of
HCBK's capitalisation captures the bank's consistently strong
profitability (return on average equity of 35% on average for the
last four years) and high RWAs density (RWAs to total assets ratio
of 129% at end-3Q22), but also potential for fast lending expansion
in the medium term. This could consume part of the available
capital buffer, particularly if HCBK resumes dividend pay-outs that
were suspended in 2022-2023.
Price-Sensitive Funding, Moderate Liquidity: HCBK's funding profile
is almost equally split between customer deposits and wholesale
borrowings, driving the loans-to-deposits ratio to a high 184% at
end-3Q22. HCFB's funding costs (9.8% in 2022) are the highest in
the banking sector, and this may undermine the stability of the
funding base, especially in the context of potentially high
sensitivity of retail depositors to pricing. Liquid assets (cash
and short-term interbank placements, net of short-term interbank
borrowings) covered a reasonable 29% of total customer funding at
end-3Q22.
No Support: HCBK's Government Support Rating (GSR) of 'no support'
reflects Fitch's view that support from the Kazakhstan authorities
is unlikely given the bank's limited systemic importance.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
A downgrade of HCBK's VR, Long-Term IDRs and the National Rating
could result from a material weakening of the bank's profitability,
either due to a sharp increase in the cost of risk, or due to a
margin squeeze, resulting in operating profit/regulatory RWAs
falling below 2% for several consecutive reporting periods.
A downgrade could also result from a diminishing capital buffer
(e.g. FCC ratio falling below 12%) due to a combination of fast
growth of RWAs and bulky dividend pay-outs. A material weakening of
HCBK's funding profile, as expressed by a sharp increase in
loans/deposits ratio, could also result in a downgrade.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
An upgrade of HCBK's ratings would require a more diverse business
model, and a considerable improvement in its funding profile. The
latter could be evidenced by a significantly stronger
loans/deposits ratio (approaching 100%) and a reduction of HCBK's
funding costs closer to the sector-average.
HCBK's Government Support Rating could be upgraded if there was an
increase in HCBK's systemic importance, which could be evidenced by
a material increase of its deposit market share.
VR ADJUSTMENTS
The earnings & profitability score of 'bb+' has been assigned below
the 'bbb' category implied score because of the following
adjustment reason: revenue diversification (Negative).
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
JSC Home Credit
Bank LT IDR BB- New Rating WD
ST IDR B New Rating WD
LC LT IDR BB- New Rating WD
LC ST IDR B New Rating
Natl LT BBB+(kaz)New Rating WD(kaz)
Viability bb- New Rating WD
Government Support ns New Rating
===================
L U X E M B O U R G
===================
INTELSAT JACKSON: Fitch Affirms LongTerm IDR at 'B+', Outlook Pos.
------------------------------------------------------------------
Fitch Ratings has affirmed Intelsat Jackson Holdings S.A's
Long-Term Issuer Default Rating (IDR) at 'B+' and has assigned
Intelsat S.A. a 'B+' Long-Term Issuer Default Rating (IDR). The
Rating Outlook is Positive.
In addition, Fitch has upgraded Intelsat Jackson Holdings' $500
million senior secured super-priority revolving credit facility to
'BB+'/'RR1' from 'BB'/'RR2' and the senior secured first-lien term
loan and notes to 'BB+'/'RR1' from 'BB-'/'RR3'. Per Fitch's updated
criteria there is no longer a soft cap on recoveries of +2 above
the IDR as the company is incorporated in Luxembourg.
The rating reflects anticipated delevering following the
reimbursement of certain C-Band spectrum clearing expenses in 2022
and 2023, and the anticipated receipt of accelerated relocation
payments to be received in early 2024 following the clearing of
additional spectrum by YE 2023. Concerns include the secular
pressure on legacy revenues and execution risks around further
spectrum clearing and capitalizing on strong tailwinds with respect
to in-flight connectivity.
KEY RATING DRIVERS
Scale and Contractual Revenue Benefits: Intelsat is one of the
largest fixed satellite service (FSS) operators, with a fleet of 53
satellites providing service on a global basis. The company's
revenue is derived from customers in media, mobility, network
services and government. Intelsat's backlog, which provides some
insight into future revenues, declined modestly in 2022 to $5.2
billion at Sept. 30, 2022 from $5.4 billion at the end of 2021.
In December 2020, Intelsat acquired GoGo Inc.'s commercial aviation
business for $400 million in cash. An installed base of more than
3,000 aircraft positions Intelsat's commercial aviation business as
one of the largest inflight connectivity (IFC) and wireless
in-flight entertainment providers. A portion of the company's
ongoing investment program in next generation software defined
satellites and related ground infrastructure support the expansion
of the IFC business. These services have strong tailwinds as
passengers and airlines put increased emphasis on being connected
in-flight.
Post-Emergence Delevering: The rating incorporates the company's
long-term leverage target of 2.5x (EBITDA leverage) and the
potential for the company to reach its target range in 2024, when
it receives up to $3.7 billion in accelerated relocation payments
in early 2024 for clearing its C-Band spectrum. Fitch will assess
the Positive Outlook at that time and consider the level of debt
repayment, operating environment, and potential other uses of
proceeds to strengthen the operating profile. Fitch believes
provisions in the credit agreement will strike a balance between
significant debt repayment requirements while maintaining a fair
degree of financial flexibility.
Fitch believes the risk of major U.S. wireless carriers acquiring
C-Band spectrum not fulfilling their obligation to make clearing
payments very low, as the carriers are highly incentivized to make
the payments in order to begin deploying the spectrum. Intelsat
received the anticipated $1.2 billion of accelerated relocation
payments associated with Phase I of the clearing plan in December
2021 and January 2022.
C-Band Spectrum Source of Funds: The FCC's final order for the
C-Band auction provided for accelerated incentive payments to all
C-band operators of up to $9.7 billion, of which Intelsat would
receive $4.87 billion, in two tranches in 2022 (approximately $1.2
billion has been received) and 2024. The order also provided for
cost reimbursements.
Execution Risk: Intelsat must clear the second portion of the
spectrum by December 2023 to receive the next accelerated
relocation payment in early 2024. To clear the spectrum, the
company was required to build seven satellites and thus far six
have been launched, with the seventh planned for 2023. The
satellites and the related ground structure (teleports and
antennas) are expected to cost of approximately $1.4 billion,
nearly all of which will be reimbursed. Additional satellites, not
related to C-Band spectrum clearing, will be launched beyond 2023.
The payment declines over time if the clearing becomes delayed
after the December 2023 target date. The company has contingency
plans in place for unforeseen circumstances regarding the launch
plans for the seven satellites.
Revenue Trends: Intelsat has experienced secular pressure on
certain revenue streams, particularly the media and network
business, while the government business has been relatively stable.
The mobility business, particularly the commercial aviation
business, is expected to be a significant driver of growth,
potentially offsetting pressures in other areas of business. There
are a number of other segments within mobility, including wholesale
transponders, maritime and other managed services under the Flex
brand.
EBITDA Margins: Projected EBITDA margins are expected to be lower
than historical margins given the expansion of managed services in
the product portfolio and the addition of the commercial aviation
business. The opportunity to expand margins in the latter will
arise as Intelsat consolidates capacity onto its own satellites,
including new software defined satellites.
Capital Spending Higher: Intelsat's post emergence business plan
incorporates additional satellites beyond the seven satellites
needed for C-Band clearing. Certain satellites are nearing the end
of their life cycle, and by the middle of the decade Intelsat is
planning to launch four advanced software defined satellites that
will have greater throughput and flexibility, thus over time
leading to a smaller satellite fleet.
Revenue Concentration: Intelsat's 10 largest customers provided
slightly more than 40% of its revenues through the third quarter of
2022. No single customer accounted for more than 11% of revenue in
the same period.
Low Earth Orbit Competition: Several low earth orbit (LEO)
constellations are being deployed, adding a significant amount of
capacity to the satellite industry, and LEOs constellations in
particular will have the advantage of lower latency, which could
prove attractive in certain applications.
DERIVATION SUMMARY
Intelsat's rating reflects the company's capital-intensive business
model, with significant barriers to entry due to the limited number
of orbital slots and the material costs associated with
constructing and launching a satellite fleet. The company's
business incorporates long-term contracts, up to 16 years, in its
media business, its largest source of revenue. The mobility line of
business is also an avenue for growth, and the government business
is stable with high rates of renewal. The media and network
businesses are exposed to secular pressures.
In the satellite services business, as a provider of communications
infrastructure, comparable businesses to Intelsat would be Eutelsat
Communications (BBB/Negative), Viasat Inc. (B+/Positive), Telesat
Canada and SBA Communications Corp. Eutelsat and Telesat are the
most directly comparable companies, given that they, along with
Intelsat, are three of the top four global fixed satellite services
providers.
Fitch expects Eutelsat to maintain a conservative financial policy
with funds from operations (FFO) net leverage not exceeding 3.3x
after its OneWeb investment, in line with its intention to maintain
an investment-grade rating and its target of 3x net debt/EBITDA
(company definition) leverage ratio in the medium term - this
broadly corresponds to Fitch's 3.2x FFO net leverage.
Unlike Intelsat, Eutelsat and Telesat or the tower companies,
Viasat provides services directly to consumers in its satellite
services segment, is vertically integrated as a satellite services
provider/manufacturer and has other business lines. SBA, a tower
company, leases space on towers and ground space to wireless
carriers, and is a key part of the wireless industry
infrastructure.
KEY ASSUMPTIONS
- Revenues grow modestly in the forecast period, with growth
projected to be flat to up slightly in 2023, then reach 3% annually
in toward the end of the 2023-2026 forecast period. Growth is aided
by the continued expansion in the mobility line of business,
including commercial aviation;
- Capital spending is expected to aggregate about $2 billion over
2023-2026, including the remaining spending on the clearance of the
C-band and satellite expansion/replacement capacity;
- EBITDA margins in the mid-40% range over 2023-2026. The
commercial aviation business and managed services business
expansion have somewhat lower margins than the historical
business;
- Fitch has included anticipated accelerated relocation payments
from the C-Band spectrum plan to be allocated to Intelsat. Intelsat
is expected to receive a total of $4.87 billion in proceeds in
early 2022 and early 2024 should it meet spectrum clearing goals;
- Fitch has assumed the proceeds from the accelerated relocation
payments are used to repay senior secured debt per the scenarios
presented by the company;
- Interest rates on the floating term loan approach 8.5% in 2023,
before declining slightly in 2024.
KEY RECOVERY RATING ASSUMPTIONS
Fitch's recovery analysis assumes the enterprise value of Intelsat
is maximized in a going-concern scenario rather than liquidation.
Fitch has assumed a 10% administrative claim.
Going-Concern (GC) Approach
Fitch contemplates a scenario in which default is the result of one
or a combination of a number of scenarios, such as revenue and
EBITDA pressure from new or existing competitors, delays in
satellite launches, or an inability to offset secular declines in
existing businesses. Fitch assumes Intelsat would be successfully
reorganized.
Under this scenario, Fitch estimates a going-concern EBITDA
run-rate of $750 million, which is moderately below projected
EBITDA for 2022. Expectations 2022 and 2023 currently include
continued improvement for its inflight connectivity (IFC) business,
moderate growth in the government business and continued secular
declines in the media and networks business lines.
The FCC's Order provided for accelerated relocation payments to
provide an incentive to encourage incumbent licenses to voluntarily
clear the lower C-Band spectrum as soon as possible. The payments
were designed to encourage entities with the right to broadcast in
the C-band to relinquish that right by specific early deadlines.
Fitch notes the Phase I accelerated relocation payment of $1.2
billion was received prior to emergence.
Fitch's recovery assumes the company received the full value of
cost reimbursements for C-Band spectrum clearing projected for 2022
and the value of the Phase II accelerated relocation payment to be
obtained in 2024, reduced 30%. Fitch reduced the 2024 payment 30%,
per the schedule in the FCC order, to allow for a hypothetical
six-month delay in clearing.
Clearing the spectrum in the second relocation phase requires the
launch of seven satellites (of which now six have been launched vs.
none in Fitch's prior analysis). Intelsat has back-up plans with
respect to potential launch failures, but Fitch believes it
appropriate to build into its assumptions the potential for some
delay with respect to recovery.
Fitch assumes Intelsat will receive a going-concern recovery
multiple of 5.5x EBITDA under this scenario. In Intelsat's
bankruptcy case, the company had a midpoint valuation of $11
billion. This includes the full value of the Phase I and Phase II
accelerated payments the company will receive upon the clearing of
the portion of C-Band spectrum that has been licensed to the
wireless operators. Excluding these payments, the company's
operating assets are valued at approximately $4.125 billion. Based
on the estimated 2022 adjusted EBITDA in the company's second and
amended disclosure statement of approximately $900 million, Fitch
estimates Intelsat's operating assets are valued at a 6.8x
multiple.
Additionally, recovery is supported by the following:
Comparable Reorganizations: The 2022 Telecom, Media and Technology
Bankruptcy Enterprise Values and Creditor Recoveries case study
includes SpeedCast International Limited, a satellite
communications and network service provider. SpeedCast emerged from
bankruptcy in early 2021 with a multiple of 8.7x. SpeedCast has a
less diversified revenue stream than Intelsat, as a significant
percentage of its customers are in the maritime and oil and gas
industries, and faced headwinds and impacts from the coronavirus
pandemic that greatly affected its liquidity position. Intelsat is
a supplier to SpeedCast.
The 2022 Industrial, Manufacturing, Aerospace and Defense
Bankruptcy Enterprise Values and Creditor Recoveries case study,
Fitch noted that the three aerospace and defense defaulting
companies had exit multiples between 4.8-6.9x. The number of
samples is too small to draw broad conclusions on exit multiples
for the sector. Four of five sector defaulters were smaller
companies lacking negotiating power with contract counterparties
and product diversity.
Fitch forecasts a going-concern valuation of $6.8 billion,
including the value of the accelerated relocation payments, which
results in a post-reorganization enterprise value of $6.1 billion,
after the deduction of expected administrative claims. Fitch
assumes a fully drawn revolver.
The instrument rating for Intelsat Jackson's super-priority RCF is
'BB+'/'RR1' with 100% recovery based on the 'B+' IDR; the 1st lien
senior secured debt is 'BB+'/'RR1' with 95% recovery.
Fitch's notching as detailed in the March 2023 Country-Specific
Treatment of Recovery Ratings Criteria no longer applies a soft cap
to Luxembourg, which is now in Country Group A.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- EBITDA leverage sustained below 3.5x, combined with a resumption
of revenue and EBITDA growth in the low single digits could lead to
a positive rating action;
- Completion of a significant portion of the C-Band satellite
construction and launch program.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- EBITDA leverage sustained above 5.0x, could be a cause for a
negative action, with the higher leverage stemming from weaknesses
in sales/EBITDA, debt-funded shareholder returns, or a significant
increase in capex, leading to increased debt action issuance;
- Delays in the construction and launch of the C-Band satellites,
introducing uncertainties in the amount and timing of the Phase II
accelerated relocation payment anticipated for 2024.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: The company has a fully available $500 million,
super priority first-lien senior secured revolver. Additional
liquidity has been provided by reimbursements for C-Band clearing
costs to be received in early 2022. Fitch expects the partial
repayment of debt, beyond any drawings on the revolver, from the
receipt of the Phase II (expected in 2024) accelerated relocation
payment. The nearest maturity following emergence is expected in
approximately five years.
Capital Structure: The company emerged with a five-year, $500
million super-priority first-lien RCF (S+275) maturing in February
2027, a seven-year, $3.19 billion first-lien term loan B (S+425)
maturing in February 2029 and $3 billion of eight-year, 6.5%
first-lien notes due in 2030.
Maturities: The earliest maturity is the RCF in 2027.
ISSUER PROFILE
Intelsat provides service through a global fleet of 53 satellites
and 27 teleports, and is the largest fixed services satellite (FSS)
operator in the world, covering 99% of the world's populated
regions.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Intelsat Jackson
Holdings S.A. LT IDR B+ Affirmed B+
senior secured LT BB+ Upgrade RR1 BB-
super senior LT BB+ Upgrade RR1 BB
Intelsat S.A. LT IDR B+ New Rating
===========
S W E D E N
===========
REN10 HOLDING: Fitch Affirms LongTerm IDR at 'B+', Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has affirmed Ren10 Holding AB's (Renta) Long-Term
Issuer Default Rating at 'B+' with a Stable Outlook. Fitch also
affirmed Renta's senior secured debt rating at 'B+'/RR4.
KEY RATING DRIVERS
Small but Growing Franchise: The Long-Term IDR reflects Renta's
small but growing equipment rental franchise and solid EBITDA
margin. The rating also considers Renta's leverage, reliance on
wholesale-market funding, weak net profitability to date and its
exposure to the cyclical construction sector.
Limited Economies of Scale: Since 2016 Renta has grown both
organically and via acquisitions to reach a market share of 11% in
Finland, 5% in Sweden and 4% in Norway, with a smaller presence in
other markets. However, its size remains modest and it benefits
from only limited economies of scale when compared with
higher-rated peers, which acts as a rating constraint.
Equipment Rental Benefits Growing Penetration: The equipment-rental
sector offers growth opportunities, as an increasing proportion of
end-users are choosing to rent equipment rather than own it,
particularly during macroeconomic instability. Multi-site
operators, such as Renta, have advantages over independents in the
volume and range of equipment they can provide to their customers.
Large Exposure to Construction Sector: Around three quarters of
Renta's revenue is drawn from infrastructure, renovation and new
construction end-markets, to which the company rents a wide range
of equipment including lifts, earth-moving equipment, site modules,
power and heating equipment and scaffolding. Ancillary services
such as installation, maintenance and transportation are provided
together with equipment rental and not as independent services, and
form a significant part of Renta's revenue stream (around 35% in
2022).
Modest Client Concentration: Renta's core clientele consists of
local companies, reducing revenue concentration. Its business model
is decentralised (other than its centrally coordinated
procurement), with around 135 depots across its locations. Renta
usually retains equipment for its useful life, but presently has a
low average fleet age of around four years.
Steady EBITDA, Losses in 9M22: Renta reported an EBITDA/revenue
ratio of 35% in 9M22 (36% in 2021). Renta's revenue was supported
by solid utilisation rates and addition of new locations, which may
yield scale benefits in future. Renta's weaker performance in 9M22
(pre-tax income/average assets: -0.1%; 2021: 2.6%) was largely
driven by increased financing expenses and Fitch believes that
higher interest rates and uncertainty in the Nordic construction
sector could weigh on profitability in the medium term.
Acceptable Leverage: Renta's gross debt/EBITDA has increased
(end-9M22: 4.5x; end-2021: 3.0x) following the issuance of senior
secured notes in 1Q22. Fitch believes Renta's leverage could
increase in the short term driven by the company's substantial
expansion, involving roll-out of new locations and bolt on
acquisition, supported by the new term loan issued in 1Q23.
The debt issuance will therefore lead to an increase in gross
leverage and delay Renta's previously communicated deleveraging
plan, but its gross debt/EBITDA ratio should remain comfortably
below Fitch's previously stated downgrade trigger of 5x.
Stable Funding, Acceptable Liquidity: The EUR350 million senior
secured notes issued in 1Q22 and EUR200 million senior secured term
loan issued in 1Q23 comprise Renta's core funding source,
supplemented by a EUR100 million super senior revolving credit
facility used for general corporate purposes.
Renta's lease liabilities relate mostly to equipment and facilities
financed with leasing contracts and so are treated as a form of
debt finance. Fitch regards liquidity as adequate, supported by
predictable operational cash generation coupled with some capex
flexibility. Interest coverage metrics were healthy with
EBITDA/interest expense at 4.8x in 9M22 (7.6x in 2021).
Prudent Depreciation: Rental assets are susceptible to market-value
movements, which could give rise to valuation impairment.
Profitable asset disposals in 2020-2021 support the appropriateness
of Renta's residual-value risk management and equipment
depreciation policy. However, Renta has only a short record, with
modest volumes of asset sales in this period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A reduction in EBITDA that leads Fitch to expect a meaningful
delay to Renta's anticipated deleveraging; for example, if gross
debt-to-EBITDA rises above 5x
- Insufficient liquidity or access to funding to support the capex
required to maintain an attractive fleet
- Material erosion of earnings, due to fleet-valuation impairments
or losses on the disposal of used equipment
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Material strengthening of the company's franchise, if in
conjunction with scale benefits that feed into material
profitability
- Gross debt to EBITDA below 3.5x on a sustained basis without
deterioration in other financial metrics and in conjunction with a
materially enlarged franchise
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
Debt Rating Aligned With IDR: The senior secured debt rating is
aligned with Renta's Long-Term IDR, reflecting Fitch's view that
the likelihood of default is materially identical. The debt is
guaranteed by group subsidiaries that account for a substantial
majority of Renta's consolidated assets, net sales and EBITDA. The
'RR4' Recovery Rating reflects average recovery expectations. The
senior secure note and term loan's ratings rank pari passu with
each other and junior to Renta's super senior revolving credit
facility.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SENIOR SECURED DEBT
The senior secured debt rating is primarily sensitive to a change
in Renta's Long-Term IDR. Should the company introduce any debt
ranking above rated instruments (or a subordinated tranche below
them), Fitch could notch the debt ratings down (or up) from the
Long-Term IDR, on the basis of weaker (or stronger) recovery
prospects.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Ren10 Holding AB LT IDR B+ Affirmed B+
senior secured LT B+ Affirmed RR4 B+
===========================
U N I T E D K I N G D O M
===========================
BCP V MODULAR III: Fitch Affirms LongTerm IDR at B, Outlook Stable
------------------------------------------------------------------
Fitch Ratings has affirmed BCP V Modular Services Holdings III
Limited's (Modulaire) Long-Term Issuer Default Rating (IDR) at 'B'
with a Stable Outlook.
Fitch has also affirmed the senior secured debt ratings of BCP V
Modular Services Finance II PLC (BCP Finance II) and Modulaire
Group Holdings Limited (MGHL) at 'B+'/RR3 and the senior unsecured
debt rating of BCP V Modular Services Finance PLC's (BCP Finance)
at 'CCC+'/RR6.
KEY RATING DRIVERS
Growing Franchise; High Leverage: Modulaire's Long-Term IDR
reflects its significant franchise within European modular leasing,
where it has achieved increasing penetration for its value-added
products and services (VAPS; such as furnishings and system
installations) alongside sound utilisation rates for its core
assets. However, the IDR is constrained by the company's high
leverage.
Leading Position; Niche Sector: Fitch views Modulaire's franchise
in the European modular leasing sector as well-established, and
VAPS (56% penetration in 9M22) as offering improved pricing power
relative to the more homogenous modular market. Around 30% of
revenues are from the construction industry, but potential
volatility of demand is mitigated by diversification into other
markets such as healthcare and education, which are less
susceptible to economic swings.
Important Infrastructure Provider: Utilisation rates have
historically been sound (at around 85%) and continue to be
supported by the critical nature of the modular offering (often
serving as a critical infrastructure component) as well as a high
disincentive for temporary withdrawal, given the associated costs
and logistical relocation requirements.
Sound EBITDA: Modulaire benefits from good revenue visibility via
effective contract length (on average 21 months actual lease
duration including out of term leasing), stable utilisation
patterns and extended lead times for delivery and installation
(typically three to four months). The company recorded a pre-tax
loss in 9M22, but its EBITDA margin (excluding IFRS 16 impact; on a
run rate basis) was adequate at 29% as of end-September 2022,
assisted by increasing VAPS penetration and the realisation of
procurement cost efficiencies. Capex requirements benefit from some
discretion in the event of reduced demand.
High Leverage: Gross cash flow leverage (as measured by its gross
debt/adjusted EBITDA ratio excluding IFRS 16 impact; on a run rate
basis) was 6.5x as of end-September 2022. On a pro-forma basis,
with the inclusion of its most recent tap issuance in October 2022,
Fitch estimates gross cash-flow leverage to be around 7.0x (with no
EBITDA accretion from debt take up), which is at Fitch's current
gross leverage downgrade sensitivity. However, Fitch notes
medium-term deleveraging potential as Modulaire fully capitalises
on recently concluded transactions, including Mobile Mini UK.
Adequate liquidity: Modulaire's principal sources of liquidity are
existing cash, cash generated from operations and borrowings under
notes and facilities. As of 30 September 2022, the group had total
liquidity of EUR289 million consisting of EUR94 million of cash and
EUR195 million of drawings available under the revolving credit
facility. Modulaire faces no significant near-term debt maturities,
with the nearest maturity of the senior secured debt coming due in
2028.
Weaker Coverage: At end-September 2022 (pro forma) around EUR1.7
billion of Modulaire's debt was floating, partially exposing it to
rising interest rates, mitigated by some parallel movement in lease
rates. However, EUR825 million of this was hedged in March 2023,
bringing the total proportion of the group's debt at fixed rates to
almost 70%. Interest coverage has historically been weak, on
account of the high debt level, and remained modest at around 2x as
of September 2022 (pro-forma).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Sustained cash flow leverage (gross debt/ EBITDA ratio excluding
IFRS 16) in excess of 7x, whether because of weakened cashflow
generation or increased debt;
- Deteriorating pre-tax profitability, e.g. from declining asset
utilisation metrics or rental margins, thereby undermining debt
service and limiting capital accumulation;
- Evidence of increased risk appetite, e.g. from weakening of the
corporate governance framework, dilution of risk control protocols
or prioritisation of upstreaming earnings over longer-term
deleveraging.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A sustained reduction in gross cash flow leverage (gross
debt/EBITDA ratio excluding IFRS 16) towards 5x, or a demonstrated
improvement in the interest cover ratio towards 4x;
- Significantly enhanced franchise or business model
diversification, within the broader modular space sector.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR SECURED AND UNSECURED DEBT - BCP FINANCE, BCP FINANCE II AND
MGHL
Fitch estimates recoveries for senior secured debtholders to stand
at around 60%, resulting in a long-term rating of 'B+'/'RR3', one
notch above Modulaire's Long-Term IDR.
In view of the group's volume of higher-ranking senior secured
debt, estimated recoveries for BCP Finance's senior unsecured debt
are zero , resulting in a rating two notches below Modulaire's
Long-Term IDR, at 'CCC+'/RR6.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
BCP FINANCE II and MGHL - SENIOR SECURED DEBT
- The ratings of the senior secured debt issued by BCP Finance II
and MGHL are primarily sensitive to a change in Modulaire's
Long-Term IDR, from which they are notched.
- Changes leading to a material reassessment of recovery prospects,
for example movements in equipment valuation, could trigger a
change in the notching either up or down.
- A shift in the balance of Modulaire's total debt between senior
secured and senior unsecured sources, could also trigger a change
in the notching either up or down.
BCP FINANCE - SENIOR UNSECURED DEBT
- The rating of the senior unsecured debt issued by BCP Finance is
primarily sensitive to a change in Modulaire's Long-Term IDR, from
which it is notched.
- Changes leading to a material positive reassessment of recovery
prospects, for example movements in equipment valuation, or a
decline in the proportion of Modulaire's total debt drawn from
higher-ranking senior secured sources, could reduce the notching
between Modulaire's IDR and BCP Finance's unsecured debt
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
BCP V Modular
Services
Finance II PLC
senior secured LT B+ Affirmed RR3 B+
Modulaire Group
Holdings Limited
senior secured LT B+ Affirmed RR3 B+
BCP V Modular
Services Holdings
III Limited LT IDR B Affirmed B
BCP V Modular
Services
Finance PLC
senior
unsecured LT CCC+ Affirmed RR6 CCC+
BONAR YARNS: Unsustainable Cash Flow Issues Prompt Administration
-----------------------------------------------------------------
Aistair Houghton at Insider.co.uk reports that a high-tech yarns
business in Dundee has gone into administration after suffering
"unsustainable cash flow issues".
Bonar Yarns, which was founded more than a century ago, makes
advanced polypropelene yarns used in carpets, floor coverings and
even sports pitches.
Michelle Elliot and Callum Carmichael, partners with FRP Advisory,
have now been appointed joint administrators and say they are
looking to trade it in the short term with all staff until a buyer
is found, Insider.co.uk relates.
Bonar Yarns, which is based at the Caldrum Works in Dundee, was
acquired by a management buyout team in 2020. It has a turnover of
around GBP6.5 million and employs 61 people.
Its products include flame retardant yarns for the travel flooring
market, UV stabilised yarns for the outdoor flooring market and
yarns made from recycled polypropelene for the artificial sports
turf market.
According to Insider.co.uk, joint administrator Michelle Elliott
said: "Bonar Yarns Limited can trace its history back to the
foundation in 1903 of the famous Low & Bonar business that
specialised in the manufacture of technical textiles.
"Following a management buyout, the business focused on developing
and marketing innovative yarns for a variety of different floor
covering and artificial sports turf markets.
"We will continue to trade the business in the short term whilst
marketing the business and assets for sale with immediate effect
and would urge interested parties to contact us as soon as
possible."
BRITISHVOLT: Recharge's Bid to Buy Site at Risk of Collapse
-----------------------------------------------------------
Harry Dempsey at The Financial Times reports that Recharge
Industries' attempt to buy the Britishvolt site is at risk of
collapse due to a dispute between the Australian company and
administrator EY over a power supply contract signed by the failed
battery start-up, according to people familiar with the matter.
According to the FT, the Geelong-based business bought
Britishvolt's intellectual property -- 23 staff and its prototype
battery technology -- for GBP8.6 million last month and under
exclusive rights had until Friday, March 31, to pay for the coveted
land in Blyth, north-east England.
Recharge has yet to pay the GBP9.7 million for the land despite the
deadline passing, and the deal is in jeopardy after the two sides
hit an impasse over payments related to transferring a grid
connection contract with National Grid, the FT relays, citing two
people familiar with negotiations.
The setback adds to the scrutiny that EY is coming under for its
dual role as strategic adviser to the firm during its life --
resulting in it becoming the battery company's fifth-largest
creditor -- and administrator upon its collapse, the FT discloses.
EY, as cited by the FT, said in a statement that the administrators
"are not requesting that Recharge make any additional payments
beyond those contractually agreed as part of the sale. The company
will only retain funds, including any received from third parties,
to which it is entitled to."
Recharge believes it is entitled to receive a refund made by
National Grid to the EY-controlled Britishvolt bank account since
it must pay the equivalent amount to the UK electricity system
operator, according to one person, the FT notes.
Founded in 2019, Britishvolt entered administration in January
after limping between financing rounds without firm customer orders
and running out of cash to build its envisaged GBP3.8 billion
battery plant.
The people said Recharge Industries, which is run by former PwC
partner David Collard, has threatened to walk away from buying the
site if there is uncertainty over the status of its access to a
grid connection, the FT relates.
BULB: Large Energy Suppliers Lose Legal Challenge Against Sale
--------------------------------------------------------------
Jane Croft at The Financial Times reports that three of Britain's
largest energy suppliers on March 31 lost a legal challenge against
the UK government over its handling of the high-profile sale of
Bulb, the power supplier that was quasi-nationalised and sold to
Octopus with billions of pounds in taxpayer support.
Centrica, Iberdrola SA's Scottish Power and Eon had brought a
judicial review against the UK government, alleging its
decision-making had been unlawful in allowing the Bulb sale to go
ahead, the FT relates.
The Bulb transfer last October was originally estimated to cost the
taxpayer as much as GBP4.5 billion, making it the largest state
bailout since the 2008 financial crisis, the FT notes. The final
cost is not yet known, but the Office of Budget Responsibility
(OBR) in March revised down its estimate to GBP3 billion due to
lower energy prices, the FT states.
Bulb collapsed in November 2021, when wholesale prices spiked above
the regulator's price cap, forcing it to sell energy at a loss, the
FT recounts. The energy company was temporarily nationalised, then
sold to Octopus in a sale process run on behalf of the government,
the FT discloses.
According to the FT, the three energy companies brought a legal
challenge to the High Court over the government's decisions to
approve the Bulb sale and provide "very substantial" state funding
for the transfer. They argued ministerial decision-making had been
"flawed" and "unlawful" as the Bulb auction process had been unfair
and the government had breached state subsidy rules.
In a recent court hearing, Centrica argued that if it had known
state subsidies were on offer, it would likely have made a bid for
Bulb, the FT notes. Centrica accused the government of a "lack of
transparency". Eon claimed it was never given any indication that
"anything like the scale of subsidy" eventually made was available,
according to the FT. Scottish Power claimed the Bulb sale decision
was "product of a fundamentally unfair process", the FT relays.
The government defended its handling of the sale and warned
unpicking the Bulb transaction would "cause chaos", the FT
discloses.
On March 31, the High Court dismissed the lawsuit and ruled in
favour of the UK government, saying the case had been brought with
"undue delay", the FT recounts.
Lord Justice Rabinder Singh and Mr Justice David Foxton ruled on
March 31 that they were "entirely satisfied" that the government
"was reasonably entitled to conclude" that the sale process had
been conducted as an "open, non-discriminatory and competitive
bidding process", the FT relates.
The judges also rejected arguments that the government's decision
had involved the grant of an unlawful subsidy saying that it was "a
proportionate response to a national or global economic emergency,
namely the Russian invasion of Ukraine", the FT notes.
The Department of Energy Security welcomed the ruling. "The court
has confirmed the robustness and legality of the Secretary of
State's actions in respect of the sale and administration of Bulb,"
it said.
CD&R GALAXY UK: Fitch Affirms 'B' LongTerm IDR, Outlook Now Neg.
----------------------------------------------------------------
Fitch Ratings has affirmed the Long-Term Issuer Default Rating
(IDR) of Galaxy US Opco Inc., CD&R Galaxy Luxembourg Finance
S.a.r.l. and CD&R Galaxy UK Intermediate 3 Limited, collectively
Vialto Partners, at 'B'. The Rating Outlook is revised to Negative
from Stable.
Vialto Partners became a newly branded entity in April 2022 after
its acquisition from Pricewaterhouse Coopers (PwC) by Clayton,
Dubilier & Rice (CD&R) in 1H22. The transaction closed just as
interest rates began a rapid climb, and Vialto now has materially
higher interest expense than its original projections. Fitch has
revised the Outlook to Negative given the company's lower interest
coverage, which Fitch expects to be below 2.0x for at least the
next 18 months.
Vialto has a strong presence in the workforce tax solutions space
for companies with mobile employees that work across borders
(countries or states). Fitch's ratings for Vialto reflect the
company's strong and stable market position, solid EBITDA margins,
high mix of recurring revenue, and diverse geographic and customer
mix.
KEY RATING DRIVERS
Solid Market Position: Fitch views Vialto's strong and stable
competitive position in corporate tax solutions for mobile
workforces as a credit positive. This is a fairly sticky business
that includes multi-year contracts and should provide earnings
visibility over time. Workforce tax solutions constitutes nearly
all of Vialto's revenue and profitability, although the company is
growing in adjacent areas including immigration services,
cross-border payroll/compensation-related issues and other HR
compliance related services. The company has a significant market
share in its core end market and competes with the Big-4 accounting
firms. It also competes with law firms, relocation management
companies and other services businesses.
Stable Revenue Base: Fitch views the business as highly recurring
and benefiting from meaningful customer diversification across
regions. Vialto generates a majority of its revenue from
multi-year, cross-border tax services contracts with a client base
of more than 2,000 customers across numerous industries
(technology, energy, manufacturing, and others). Average tenure of
its top 100 clients is 12 years, and Fitch believes there is a
meaningful amount of stickiness inherent in the business due to
taxes being a required annual service. There is also no material
geographic concentration, with the U.S. and Mexico being its
largest exposure at 27% of CY 2021 revenue.
Elevated Leverage: Vialto's projected financial leverage is a key
limiting factor with respect to the IDR, especially in a higher
interest rate environment. Fitch projects leverage (debt/EBITDA)
will be above 7.0x at the end of this fiscal year (June 2023) but
should decline below 7.0x next year as the cost-savings initiatives
take effect. Fitch believes the largely recurring nature of the
company's revenue provides some support for higher leverage, and
Fitch expects leverage will decline as the company grows EBITDA in
the coming years and allocates some available FCF to reduce its
debt. However, management could also pursue M&A that could impact
the leverage profile over time. The company's debt service
constrains the rating until the coverage ratio improves
significantly.
Limited FCF in Near-Term: Vialto had meaningful separation and
employee retention costs in 2022-2023 that absorbed most of the
company's cash. Although the company had sufficient liquidity, the
sponsor stepped in with an additional $200 million of equity
infusion. This is a credit positive in that it shows the sponsor's
commitment to the transaction and no additional debt was issued,
but the cash burn was clearly greater than anticipated. Cash costs
required to achieve projected cost savings and interest expense
will continue at least through June 2023. Fitch believes cash flows
will improve in FY 2024 and beyond and, this will provide
additional financial flexibility. Fitch believes the company's
liquidity position will be sufficient and is supported by an
undrawn $200 million revolving facility that can be used for
liquidity needs.
Separation from PwC: Fitch views the separation from PwC as neutral
to the IDR, as the benefits of being a pure-play brand and entity
are somewhat offset by risks that come with high leverage at
separation and no longer being under the PwC brand. Management
envisions more than $50 million of potential cost savings post
spin-off, or approximately 7% of its projected cost base. Cost
savings will come from various initiatives largely including
offshoring of certain functions, elimination of certain processes
and some headcount reduction. Customer retention was high
historically, and this has continued through the first year as a
stand-alone firm. But there may be a risk of increased customer
churn without the PwC brand.
Limited Scale & Diversification: Despite Vialto's strong market
presence in its core mobile tax solutions end market, the company
lacks scale. It also has limited business mix diversification, with
94% of its revenue from workforce tax solutions and
immigration-related services (e.g., compliance and consulting
services for work permits, visas). Fitch believes these markets
should continue to grow over time as workforces increasingly become
more mobile and global in a post-COVID world.
DERIVATION SUMMARY
Vialto Partners is a leading provider of tax-related global
mobility solutions for corporate employees working across borders.
The company has a strong global market presence and is one of the
leading providers for cross-border corporate tax services. Fitch
reviews the issuer versus other business service companies and
considers a range of qualitative and financial factors in deriving
the rating. Relative to Fitch-rated peers, Vialto is well
positioned in terms of its market presence, diversity of offerings,
and stability of its business. However, it has relatively smaller
scale and lower margins versus certain Fitch-rated business
services peers. Following the LBO, Vialto has relatively high
leverage and low coverage.
The company is meaningfully smaller than certain Fitch-rated
business services peers including S&P Global Inc. (A-/Stable),
Moody's Corporation (BBB+/Stable) and Verisk Analytics, Inc.
(BBB+/Stable). Vialto has limited diversification of services
versus other issuers in the business services space. Given small
EBITDA scale, high gross leverage and limited business
diversification, Fitch believes the company is well positioned at
the 'B' IDR rating category.
KEY ASSUMPTIONS
- Revenue grows by 3% to 4% over the ratings horizon.
- EBITDA margins benefit from incremental flow-through from higher
revenue and savings realized from various planned cost saving
initiatives.
- Gross leverage declines in the next few years due to EBITDA
expansion and modest debt reduction (amortization).
- FCF is negative through FY 2023 due to one-time separation costs
from PwC and costs to achieve various cost saving initiatives.
- Fitch has not modelled M&A into our forecast but acknowledge
Vialto could seek inorganic growth over time.
KEY RECOVERY RATING ASSUMPTIONS
For entities rated 'B+' and below, where default is closer and
recovery prospects are more meaningful to investors, Fitch
undertakes a tailored, or bespoke, analysis of recovery upon
default for each issuance. The resulting debt instrument rating
includes a Recovery Rating or published 'RR' (graded from RR1 to
RR6) and is notched from the IDR accordingly. In this analysis,
there are three steps: (i) estimating the distressed enterprise
value (EV); (ii) estimating creditor claims; and (iii) distribution
of value. Fitch assumes Vialto would emerge from a default scenario
under the going concern (GC) approach versus liquidation.
Fitch's GC EBITDA is in the range of $150 million, which is an
output of the analysis not an input. This envisions meaningful
pullback from some of Vialto's largest clients as a result either
of macro issues or lack of execution as a stand-alone entity.
Revenue contraction of 20%-25% with some cost-cutting would result
in EBITDA in this range.
An EV multiple of 7x EBITDA is applied to the GC EBITDA to
calculate a post-reorganization enterprise value. This is in-line
with recovery assumptions used for certain other business services
companies rated by Fitch.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Gross leverage sustained below 5.5x.
- Vialto increases scale and/or further diversifies its mix of
services.
- (CFO-capex) to total debt with equity credit sustained above 3%.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Gross leverage sustained above 7.5x.
- Interest coverage (EBITDA/Interest Paid) sustained below 2.0x.
- Fundamentals deteriorate, including sustained revenue, margin or
FCF pressures.
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity: Fitch expects the company to end the fiscal year
in June 2023 with more than $60 million of cash on the balance
sheet and an undrawn $200 million senior secured revolving credit
facility in place. Fitch also expects positive FCF in the coming
fiscal year, but the high interest expense from a sizable debt
offering and increase interest rates are a concern.
Debt Profile: Vialto's debt structure includes: (i) a $950 million
first lien term loan B (seven-year maturity), (ii) a $400 million
second lien term loan (eight-year maturity), and (iii) a $200
million first lien secured revolver (five-year maturity) that is
currently undrawn.
ISSUER PROFILE
CD&R Galaxy UK Intermediate 3 Limited (dba, "Vialto Partners") is a
leading provider of tax-related global mobility solutions for
corporate employees working across borders. Vialto also provides
ancillary corporate HR-related services including immigration
compliance for work permits and visas, cross-border payroll
reporting & tracking solutions and various other services.
ESG CONSIDERATIONS
CD&R Galaxy UK Intermediate 3 Limited has an ESG Relevance Score of
'4' for Governance Structure due to its current ownership structure
including a private equity owner controlling the company, which has
a negative impact on the credit profile, and is relevant to the
rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Galaxy US Opco Inc. LT IDR B Affirmed B
senior secured LT BB- Affirmed RR2 BB-
CD&R Galaxy
Luxembourg Finance
S.a.r.l. LT IDR B Affirmed B
senior secured LT BB- Affirmed RR2 BB-
CD&R Galaxy UK
Intermediate 3
Limited LT IDR B Affirmed B
CINEWORLD: To Raise New Funding, Drops Plan to Sell Businesses
--------------------------------------------------------------
BBC News reports that Cineworld has said it will raise new funding
as it dropped plans to sell its businesses in the US, UK and
Ireland after failing to find a buyer.
According to BBC, at the same time, Cineworld said it had struck a
deal with its lenders to restructure its substantial debt and exit
bankruptcy.
Like other cinemas, Cineworld was hit hard by the pandemic, BBC
notes.
Many theatres were forced to close for extended periods during
lockdowns, or had to operate at a reduced capacity due to social
distancing rules.
They also continue to face tough competition from streaming
services.
Cineworld, which is the world's second-largest cinema chain, filed
for bankruptcy in the US in August last year as it struggled under
the weight of US$5 billion (GBP4 billion) in debt, BBC recounts.
The firm, which employs more than 28,000 people across 740 sites
globally, said it now plans to raise US$2.26 billion of new
funding, BBC discloses.
According to BBC, the company said it would continue to consider
proposals for the sale of its business outside the US, UK and
Ireland.
In 2020, a row broke out when Cineworld and rival AMC, which owns
the Odeon Cinemas chain, criticised Universal Pictures for
releasing Trolls: World Tour online at a time when cinemas were
forced to close because of coronavirus.
Cineworld subsequently signed a deal with Warner Bros to show films
in theatres before they are streamed, BBC recounts.
About Cineworld Group
London-based Cineworld Group PLC was founded in 1995 and is the
world's second-largest cinema chain. Cineworld operates 751 sites
with 9,000 screens in 10 countries, including the Cineworld and
Picturehouse screens in the UK and Ireland, Yes Planet in Israel,
and Regal Cinemas in the United States.
According to The Guardian, the Griedinger family, including Mooky's
brother and deputy chief executive, Israel, have struggled to
maintain control of the ailing business but have been forced to
reduce their stake from 28% in recent years. Cineworld's top five
investors include the Chinese Jangho Group at 13.8%, Polaris
Capital Management (7.82%), Aberdeen Standard Investments (4.98%)
and Aviva Investors (4.88%).
The London-listed Cineworld, which has run up debt of more than
$4.8 billion after losses soared during the pandemic, is pinning
its hopes on a meatier slate of movies in 2022 to bounce back from
a two-year lull.
Cineworld Group plc and 104 affiliates sought Chapter 11 protection
(Bankr. S.D. Texas Lead Case No. 22-90168) on Sept. 7, 2022,
estimating more than $1 billion in assets and debt. Judge Marvin
Isgur oversees the cases.
The Debtors tapped Kirkland & Ellis, LLP and Jackson Walker, LLP as
bankruptcy counsels; PJT Partners, LP as investment banker;
AlixPartners, LLP, as restructuring advisor; and Ernst & Young, LLP
as tax services provider. Kroll Restructuring Administration, LLC
is the claims agent.
The U.S. Trustee for Region 7 appointed an official committee of
unsecured creditors in the Debtors' Chapter 11 cases on Sept. 23,
2022. The committee tapped Weil, Gotshal & Manges, LLP and
Pachulski Stang Ziehl & Jones, LLP as legal counsels; FTI
Consulting, Inc., as financial advisor; and Perella Weinberg
Partners, LP as investment banker.
DETRAFFORD SKY: Owed Almost GBP40 Mil. at Time of Administration
----------------------------------------------------------------
Jon Robinson at Manchester Evening News reports that the company
behind an apartment building on the edge of Manchester city centre
racked up almost GBP40 million in debt as it collapsed into
administration, it has been revealed.
The business was behind the 13-storey Sky Gardens development in
Chester Road which includes 166 flats. BDO was appointed to
oversee the process at DeTrafford Sky Gardens earlier this year,
Manchester Evening News recounts.
According to Manchester Evening News, in a newly-filed document
with Companies House, BDO revealed that secured creditor Daiwa was
owed GBP25.1 million while Maslow was owed GBP11 million. Other
secured creditors were also owed GBP249,000, Manchester Evening
News discloses. Unsecured creditors were owed GBP2.4 million, the
document also shows, Manchester Evening News notes.
BDO added that it's estimated that Daiwa will be the only creditor
to receive any or part of their money back, Manchester Evening News
relates. That is currently forecast to be just GBP8.5 million,
according to Manchester Evening News.
The company was set up in 2014 and is owned and controlled by Gary
Jackson, DeTrafford's founder and chief executive. The special
purpose vehicle was created for the development of the apartment
block in Chester Road, Castlefield.
The property includes 166 flats, two commercial units and basement
car parking. It does not have any employees.
When BDO was appointed, 36 of the apartments had not been sold. In
December 2016, Daiwa provided a loan facility of GBP28 million to
the company to fund the development, Manchester Evening News
relays.
Shortly before BDO was appointed, DeTrafford Sky Gardens entered
into negotiations with a third-party investor to purchase the
remaining 36 apartments, the parking spaces and the two commercial
units, Manchester Evening News states.
However, a winding up petition was filed against the company by a
creditor with an outstanding debt of GBP120,000, Manchester Evening
News discloses. The hearing was due to take place on January 31,
2023, according to Manchester Evening News.
"The company was unable to negotiate acceptable payment terms, had
insufficient funds to settle the petition debt and insufficient
time to complete a refinance. Accordingly, Daiwa sought to appoint
administrators to the company to take control of the assets and
protect its position," Manchester Evening News quotes BDO as
saying.
BDO said the total sales value of the 36 unsold flats was GBP9.96
million prior to its appointment, Manchester Evening News notes.
It added that its property agents estimate that if a bulk sale of
all the units was completed, "the total amount realised may be
subject to a significant reduction".
According to Manchester Evening News, BDO said: "The company
received an offer for a bulk sale of the remaining units before the
appointment of the joint administrators, which is currently being
explored. There has also been additional interest since our
appointment."
The two commercial units are leased to Tesco and a pizza restaurant
and have an estimated value of up to GBP2.3 million, Manchester
Evening News discloses.
It was the fourth DeTrafford company to enter administration after
St George's Gardens, City Gardens and Wavelength, Manchester
Evening News notes.
ECO MODULAR: Spatial Initiative Completes Acquisition
-----------------------------------------------------
Business Sale reports that integrated construction firm Spatial
Initiative Limited has completed the acquisition of an off-site
modular construction business out of administration.
Eco Modular Buildings Ltd and its parent company Rawson Brook Group
Holdings Ltd fell into administration on March 24, 2023, Business
Sale recounts.
Jane Steer, Tim Higgins and Peter Dickens of PwC were appointed as
joint administrators to the companies and completed a sale of the
business and its assets to the Manchester-based Spatial Initiative,
Business Sale relates.
According to Business Sale, the administrators said that the sale
was the best option available to the companies' creditors, given
the severely limited timescales after the businesses fell into
administration. The majority of the 65 employees transferred to
Spatial Initiative as part of the deal, Business Sale notes.
Rawson Brook Group Holdings was incorporated in 2016, with its 100
per cent owned subsidiary Eco Modular Buildings incorporated in
2010. Both companies are based in Hull and operated as an off-site
modular construction group, primarily working in the education
sector.
Despite significant revenue growth following its founding, the
group began to experience challenges from 2020, meaning it required
additional funding, Business Sale states. It continued to
experience delays on projects throughout 2022, resulting in
operating losses that eroded its available working capital,
Business Sale relays.
The group engaged PwC in August 2022 to review its cash flow and
carry out an independent review of the businesses, Business Sale
recounts. Following the review, management concluded that a sale
process was the best available option, with PwC retained to manage
the process, ultimately closing a sale of the business and its
assets to Spatial Initiative, Business Sale discloses.
"Particularly during the current testing economic climate, the
completion of this transaction provides much needed certainty to
over 50 members of staff after a period of understandable concern
following the group's challenges over the past months," Business
Sale quotes joint administrator Jane Steer as saying.
In the year to December 31 2021, Rawson Brook Group Holdings
reported turnover of GBP3.6 million and a GBP439,134 pre-tax
profit, Business Sale notes. At the time, the business' fixed
assets were valued at GBP2.5 million and total assets less
liabilities at GBP1.9 million, Business Sale discloses. Net assets
amounted to GBP944,665, according to Business Sale.
LOTUS SANCTUARY: Slips Into Arrears After Voluntary Administration
------------------------------------------------------------------
William Farrington at Proactive, citing City A.M., reports that
crisis-struck real estate investment trust Home REIT's largest
tenant has officially slipped into arrears four weeks after
entering voluntary administration.
Lotus Sanctuary, a provider of housing to vulnerable tenants that
comprises 12.5% of Home REIT's total rental income, slipped into
administration at the start of March after failing to secure a
tax-advantaged exempt housing status.
Lotus chief Gurpaal Judge also runs two other tenants of Home REIT-
Wolverhampton-based Eden Safe Homes and Tipton-based Redemption
Project, according to the report.
The shareholder said a change of leadership "is needed at Home
REIT", Proactive relates.
According to Proactive, Home REIT has faced pressure following a
27-page report by short-selling specialist Viceroy in November
2022, which raised concerns over its financial health, quality and
diversity of its major tenants.
Home REIT denied allegations that its net asset value was
artificially inflated and criticised Viceroy for disclosing
addresses of certain properties owned by the company, Proactive
notes.
However, since the report's publication, Home REIT's rent
collection has deteriorated, while around 67% of its portfolio also
requires refurbishment at a cost of up to GBP20 million, Proactive
discloses.
Shares have been suspended from the London Stock Exchange since
Jan. 3, Proactive states.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
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Editors.
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