/raid1/www/Hosts/bankrupt/TCREUR_Public/230503.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Wednesday, May 3, 2023, Vol. 24, No. 89
Headlines
C Y P R U S
AVIA SOLUTIONS: Fitch Affirms LongTerm IDR at 'BB', Outlook Stable
I T A L Y
BANCA IFIS SPA: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
KEPLER SPA: Fitch Affirms LongTerm IDR at 'B', Outlook Stable
M A L T A
VISTAJET MALTA: Moody's Rates New $500MM Sr. Unsecured Notes 'B3'
R U S S I A
AGROBANK JSC: Fitch Affirms BB- LongTerm IDRs, Outlook Stable
ASAKABANK JSC: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable
JSC NATIONAL BANK: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
MICROCREDITBANK: Fitch Affirms LongTerm IDR at BB-, Outlook Stable
UZBEK INDUSTRIAL: Fitch Affirms 'BB-' LongTerm IDRs, Outlook Stable
S P A I N
CODERE LUXEMBOURG 2: Moody's Appends 'LD' Designation to Ca-PD PDR
T U R K E Y
ARCELIK ASA: Fitch Affirms BB- Foreign Curr. IDR, Outlook Negative
U N I T E D K I N G D O M
ALLIANCE TRANSPORT: Files Second NOI to Appoint Administrators
BLACK SHEEP: Enters Administration, Explores Options
CONTOURGLOBAL LIMITED: Fitch Affirms IDR at 'BB-', Outlook Stable
INTELLIGENT STEEL: Owed More Than GBP6MM at Time of Liquidation
JP MAUGER: Tough Trading Conditions Prompt Liquidation
MAMA DOUGH: Bought Out of Administration, 47 Jobs Saved
METNOR CONSTRUCTION: Owed GBP10M to Creditors at Time of Collapse
PHARMANOVIA BIDCO: Fitch Affirms LongTerm IDR at B+, Outlook Stable
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C Y P R U S
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AVIA SOLUTIONS: Fitch Affirms LongTerm IDR at 'BB', Outlook Stable
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Fitch Ratings has affirmed Avia Solutions Group Plc's Long-Term
Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. Fitch
has also affirmed the 'BB'/RR4 senior unsecured rating of the
USD300 million bonds issued by ASG Finance Designated Activity
Company, which is 100% owned by Avia. The bonds are guaranteed by
Avia and its key divisional subsidiaries accounting for over 90% of
Avia's consolidated revenue.
The affirmation and Stable Outlook reflect its updated assumptions
for the aviation industry as well as Avia's updated business plan,
reflecting strong demand pick-up in some of its businesses. Avia's
credit metrics improved in 2022 compared with 2021, with funds from
operations (FFO)-adjusted gross leverage of 4.0x (after treating
the EUR300 million investment by Certares Management in 4Q21 as
debt), in line with its negative rating sensitivity. Fitch
forecasts the leverage metric will improve in 2023 and remain
commensurate with its rating guidelines after taking into account
the company's growth plans.
The IDR is supported by the diversity of Avia's operations in
various segments of the commercial aviation value chain,
diversification by geography with a focus on Europe and relatively
better revenue visibility than airlines. Key person risk stemming
from majority ownership by one individual is a rating constraint,
despite historically limited dividends.
KEY RATING DRIVERS
Sustained Recovery from Pandemic: Avia's 2022 performance saw
further recovery and growth in revenue (EUR1.9 billion) and
Fitch-defined EBITDA (EUR165 million, 8.9% margin) to well above
pre-pandemic levels. Avia's operations in the different commercial
aviation segments resulted in a varied impact from the pandemic.
However, the company has benefited significantly from strong air
freight rates, which have now moderated, and more recently from the
significantly increased demand for passenger wet-leased aircraft.
Strong Rebound in ACMI: The aircraft wet leasing (ACMI) business,
which was the most affected business in 2020, has rebounded
strongly to reach close to double its pre-pandemic size for Avia
with further growth expected. This is driven by the slight change
in operational strategies of major airlines to increase their
operational flexibility through a larger share of their fleet being
leased in, the ongoing shortage in aircraft availability on the
back of delays in delivery by original equipment manufacturers as
well as shortage of crew.
Well-Diversified Business Model: Avia's operations span most of the
business-to-business segments in the commercial aviation sector,
ranging from aircraft maintenance (MRO), passenger and cargo
charter, leasing, training to aircraft trading. Avia is one of the
leading independent aviation operators in central and eastern
Europe (CEE) with its customers including some of the major
European airlines. Avia continues to generate the majority of its
revenue from the developed markets of Germany, UK, Ireland and the
US, with CEE countries and Asia the other key markets.
Established Market Positions: Avia has strong market positions in
the CEE MRO and ground handling segments, which benefit from
competitive advantages such as limited infrastructure availability
for new entrants, as well as licensing and certification
requirements. The short-term nature of wet-leasing has enabled the
company to manage customer risk, as evidenced by its ability to
reduce leasing costs in line with a decline in revenue. Avia has
also increased its exposure to the cargo and logistics business
following acquisitions and the resilient performance of the segment
in the last few years.
Credit Metrics to Gradually Improve: With continued operational
improvement, FFO gross adjusted leverage declined to 4.0x at
end-2022. Fitch forecasts continued growth in revenues and
Fitch-defined EBITDA (to more than EUR300 million in 2026), driven
by moderately favorable industry trends and management's plan to
increase its fleet size and invest in Aviation Support Services.
However, Fitch expects FFO gross adjusted leverage to improve only
gradually to around 3.0x towards the end of the forecast horizon,
as higher EBITDA will be offset by higher capex and almost doubling
lease debt for fleet expansion.
DERIVATION SUMMARY
Avia's business model is a combination of mostly service-oriented
businesses and, to a lesser extent, more asset-intensive business
of aircraft trading. In contrast to passenger airlines, Avia
operates in the B2B commercial aviation market. Given its
operations in MRO, ground handling and leasing businesses,
Fitch’s view its business profile as more stable than passenger
airlines but similar to or marginally weaker than large pure ground
handling companies. The company operates on a smaller scale and
different portfolio mix than larger, well established lessors such
as AerCap Holdings N.V. (BBB/Stable) or Air Lease Corporation
(BBB/Stable).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Aviation support services (MRO, fueling, logistics, charter and
training) to grow gradually driven by industry demand.
Fitch-defined EBITDA margin to remain in high single digits.
- Continued growth in total aircraft over the forecast horizon.
Most of these aircraft to be lease funded.
- Logistics and distribution revenues driven by number of aircraft
and moderate annual growth in unit revenues.
- Logistics and distribution EBITDAR margin to remain in high
teens.
- Non-lease capex in line with management forecasts to 2026.
- EUR20 million per year dividend payment during the forecast
period.
- IPO is not assumed during the forecasts.
- No cash repayment of the Certares investment before 2026.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FFO-adjusted gross leverage and EBITDAR leverage sustainably
below 3.0x, driven by recovery from 2022 onwards
- Usage of available debt issue proceeds in line with management's
plan, leading to balanced growth of asset-intensive aircraft
leasing and trading business as well as the services-oriented
businesses
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO-adjusted gross leverage and EBITDAR leverage sustainably
above 4.0x due to a prolonged impact from a global economic crisis
or implementation of a more ambitious than expected investment or
dividend policy
- Decline in consolidated Fitch-defined EBITDA margin below 5% due
to the inability to execute new business opportunities, while
maintaining its current debt structure, which was put in place to
support investment-driven growth
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Avia's liquidity at end-2022 consisted of
EUR326 million of cash and equivalents, benefiting from the still
partly unused proceeds from the EUR300 million of preferred equity
injection by Certares in 2021. These funds are being used to fund
investments to support growth. This compares with EUR14 million of
short-term bank debt. Fitch forecasts 2023 free cash flow to be
negative EUR132 million due to an increase in the company's planned
capex, the majority of which is discretionary.
Avia has been repurchasing its USD300 million 2024 bonds in the
market and at end-2022 EUR186 million was outstanding. Fitch
believes that the company could continue its strategy of buying
back the bonds or could look to refinance with another similarly
sized issue in 2024.
ISSUER PROFILE
Avia provides specialists services to the aviation industry in more
than 160 countries across five continents.
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
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ASG Finance
Designated
Activity Company
senior
unsecured LT BB Affirmed RR4 BB
Avia Solutions
Group PLC LT IDR BB Affirmed BB
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I T A L Y
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BANCA IFIS SPA: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
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Fitch Ratings has affirmed Banca IFIS S.p.A.'s Long-Term Issuer
Default Rating (IDR) at 'BB+' with a Stable Outlook and its
Viability Rating (VR) at 'bb+'.
KEY RATING DRIVERS
Specialised Business Model: IFIS's ratings reflect its specialised
business model, with established shares in non-performing loan
(NPL) purchasing and in SME factoring. This helped it navigate the
low-interest-rate environment better than the average of its
commercial banking peers in Italy. The ratings also reflect sound
capitalisation, a higher impaired loan ratio (excluding purchased
NPLs) than domestic averages and its adequately diversified but
price sensitive funding.
Established Niche Franchise: IFIS's business profile is underpinned
by its established franchise across a range of specialist-lending
segments for SMEs and NPL purchasing sector but geographically
focused in Italy. Its earnings generation is driven by its
balance-sheet-intensive debt and trade receivables purchasing
activities, which are sensitive to changes in the economic cycle,
with limited contribution of fee income. Its deposit franchise has
been broadly stable throughout the low-interest-rate period but is
likely to be more price-sensitive in a high-rate environment than
traditional commercial banks.
Moderate Credit Risks, Sovereign Exposure: The bank is exposed to
SMEs, which Fitch views as being of higher risk than other borrower
categories and more vulnerable to an economic slowdown. However,
the short average maturities of both trade receivables and
medium-term secured lending, ownership of leased collateral and use
of state guarantees, mitigate this risk. The securities portfolio
mainly comprises Italian government bonds at amortised cost, which
heightens concentration risks.
Its assessment also considers that IFIS's NPL recoveries have
consistently exceeded estimated remaining collections (ERCs)
through the cycle, reflecting both disciplined purchases, industry
expertise and effective risk controls.
More Challenging Funding Management: Fitch considers that a rising
interest rate environment has made managing the liability structure
and planned business growth more challenging. Fitch expects IFIS
will have to bear higher pass-through rates to deposits to retain
customer funding and possibly increase recourse to short-term
funding sources.
Above-Average Impaired Loans: IFIS's asset quality (excluding
purchased NPLs) has been resilient despite a more challenging
environment, but Fitch expects some deterioration from 2H23. Its
corporate and commercial banking focuses on SMEs, which makes its
asset quality highly sensitive to an economic slowdown. However,
IFIS's strengthening of loan loss reserve coverage and active
approach to manage impaired loans, including through regular
disposals, and prudent underwriting should prevent a meaningful
asset-quality deterioration. Fitch expects IFIS's impaired loans
ratio to remain above the domestic industry average, but well below
pre-pandemic levels.
Manageable Risks on Purchased NPLs: Purchased NPLs have a very low
book value relative to their residual outstanding amount,
reflecting conservative pricing, and an expected recoverable amount
that the bank estimates at about two times that value. Fitch
expects collections to reduce in 2023 due to inflationary pressure
on borrowers' spending, but to remain overall above ERCs. However,
Fitch sees increasing risks if macroeconomic conditions deteriorate
or inflation stays higher than Fitch expects.
Specialised Business Supports Performance: IFIS's operating
profit/risk-weighted assets (RWAs) ratio has been generally higher
than domestic industry averages over the past five years, mainly
reflecting good performance of its debt purchasing business. The
bank is well positioned to benefit from higher interest rates in
its corporate and commercial banking businesses in 2023, which
should offset expected reduction in debt collections, higher
operating and funding costs as well as loan impairment charges.
IFIS's available provisioning overlays can mitigate any downsides
from a more severe economic scenario than Fitch expects.
Capitalisation Is a Rating Strength: IFIS had a common equity Tier
1 (CET1) ratio of 15% at end-2022, which compares well
domestically. The bank keeps steady ample buffers over its
Supervisory Review and Evaluation Process requirement, which Fitch
sees as commensurate with its business model. Limited regulatory
headwinds and moderate internal capital generation, should enable
IFIS's CET1 ratio to be maintained in line with current levels and
the bank's medium-term target of about 15%.
Encumbrance by unreserved impaired loans (excluding purchased NPLs)
has been decreasing, and should pose manageable risks also in the
context of expected asset-quality deterioration. The exposure to
Italian sovereign debt remains large relative to CET1 capital,
although it has fallen over the past two years and is likely to
reduce further by 2024, when TLTRO payments become due.
Granular Deposits, Price Sensitive: Funding and liquidity are
underpinned by a granular customer deposits, which constitutes a
significant source of funding. However, IFIS's online-based deposit
franchise is likely to be more price sensitive in a higher-rate
environment than traditional commercial banks, putting pressure on
the cost of funding and loans/deposits ratio (168% at end-2022;
17bp higher than a year earlier). Funding diversification is
commensurate with the bank's profile, with less-established access
to wholesale markets than larger banks, especially during periods
of market stress.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
IFIS's ratings could be downgraded if it increases its risk
appetite, for example, due to a loosening of underwriting standards
to pursue business growth, leading to a material deterioration in
its asset quality, causing operating profitability to weaken and
significant capital erosion. A significant deterioration of the
bank's funding and liquidity, for example, by means of reduced
buffers of liquidity, undue increase in the cost of funding,
tightened access to wholesale markets or continued deterioration in
the loans/deposits ratio, could also put pressure on the ratings.
In particular, the ratings could be downgraded if the organic
impaired loans ratio (excluding purchased NPLs) structurally
increases above 10%, operating profitability falls sustainably
below 1% of RWAs, especially if this results from heightened
pressure on the bank's cost of funding, and the CET1 ratio falls
below 15% without prospects of reversing in the short term.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Given its business profile, rating upside is limited. An upgrade
would require a broader and resilient business model throughout
interest rate cycle, including a strengthened deposit franchise,
that translates into much stronger and sustainable financial
performance without heightening its risk appetite and better
asset-quality metrics.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
IFIS's long-term deposit rating of 'BBB-' is one notch above the
bank's Long-Term IDR to reflect protection offered from
lower-ranking senior preferred (SP) and Tier 2 debt buffers, as
full depositor preference is in force in Italy. The one-notch
uplift also reflects its expectation that these buffers will
increase in the coming years since IFIS plans to issue cumulative
EUR1.5 billion of SP debt by end-2024. The short-term deposit
rating of 'F3' is in line with the rating correspondence table for
banks with a 'BBB-' long-term deposit rating.
The SP debt is rated in line with the Long-Term IDR to reflect that
the buffers of SP and junior debt will continue to exceed 10% of
RWAs, despite IFIS's not having binding resolution buffers in
excess over its ordinary capital requirements.
IFIS's Tier 2 debt is rated two notches below its VR for loss
severity to reflect poor recovery prospects. No notching is applied
for incremental non-performance risk because write-down of the
notes will only occur once the point of non-viability is reached
and there is no coupon flexibility before non-viability.
IFIS's Government Support Rating (GSR) of 'no support' reflects
Fitch's view that senior creditors cannot rely on receiving full
extraordinary support from the sovereign in the event that the bank
becomes nonviable. The EU's Bank Recovery and Resolution Directive
and the Single Resolution Mechanism for eurozone banks provide a
framework for resolving banks that requires senior creditors
participating in losses, if necessary, instead of, or ahead of, a
bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The long-term deposit rating is primarily sensitive to changes in
the Long-Term IDR. It is also sensitive to a reduction in the
buffers of senior and junior debt, if the bank failed to comply
with its MREL.
The SP debt rating is also primarily sensitive to a change in
IFIS's Long-Term IDR. The notes could be downgraded if the bank no
longer maintains its buffers of SP and junior debt at least at 10%
of RWAs.
The subordinated debt rating is primarily sensitive to changes in
the VR, from which it is notched. The rating is also sensitive to a
change in the notes' notching, which could arise if Fitch changes
its assessment of their non-performance relative to the risk
captured in the VR.
An upward revision of the GSR would be contingent on a positive
change in the sovereign's propensity to support the bank. Fitch
believes this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The Asset Quality score of 'bb-' has been assigned above the 'b &
below' category implied score due to the following adjustment
reason: Loan classification policies (positive).
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
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Banca IFIS S.p.A. LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
Viability bb+ Affirmed bb+
Government Support ns Affirmed ns
Subordinated LT BB- Affirmed BB-
long-term
deposits LT BBB- Affirmed BBB-
Senior
preferred LT BB+ Affirmed BB+
short-term
deposits ST F3 Affirmed F3
KEPLER SPA: Fitch Affirms LongTerm IDR at 'B', Outlook Stable
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Fitch Ratings has affirmed Kepler S.p.A.'s (Biofarma) a Long-Term
Issuer Default Rating (IDR) of 'B' with a Stable Outlook.
Concurrently, Fitch has also affirmed Keplers senior secured
instrument rating at 'B+' with a Recovery Rating of 'RR3'/56%.
Biofarma's ratings reflect its established market niche position as
a contract development and manufacturing organisation (CDMO)
specialised in nutraceuticals (non-pharmaceutical enhancers), which
benefits from its well-invested manufacturing platform located in
northern Italy, and from structurally growing demand for its
products. The ratings are constrained by the company's size,
limited diversification and business concentration combined with
material initial leverage following its 2021 private equity
buy-out.
The Stable Outlook reflects Fitch's expectation that Biofarma will
benefit from structural and profitable growth in its specialist
probiotics markets. This will be supported by selective and
targeted M&A, increasing the size and diversification of its
operations and leading to a moderate reduction in leverage over the
rating horizon.
KEY RATING DRIVERS
Specialist CDMO Operations: The ratings reflect Biofarma's
established market positions in the structurally growing niche
nutraceutical market as an innovative outsourcing partner for
pharmaceutical and consumer health companies (CHC), producing
nutraceutical finished dosage form products (NFDFP) for health
supplements, cosmetics and associated medical devices.
Its key area of expertise is growing probiotics, where it holds a
leading market share of around 30% in the EU, which represents a
significant portion of the company's sales and gross profit.
Biofarma operates four manufacturing facilities in northern Italy,
benefiting from specialist knowledge in the innovation and
production of NFDFPs.
Limited Scale, Concentrated Business: Biofarma's limited scale and
diversification are mitigated by the technological content and long
production cycles of its products and moderately high switching
costs for its customers. This protects the business and increases
revenue visibility. Fitch expects that around 55% of 2022 revenues
were derived from specialist and differentiated products. Fitch
views investment in R&D (i.e. product development) and in
state-of-the-art manufacturing as critical to its success as
partner of choice for its larger customers.
Supportive Market Fundamentals: Biofarma benefits from the
supportive fundamentals of the broader pharmaceuticals and CHC
markets. Non-cyclical volume growth is driven by a growing and
ageing population and an increasing focus on health and disease
prevention. In addition, Biofarma is well- placed to capitalise on
a growing outsourcing trend of specialist ingredient manufacturing
processes, particularly in the pharmaceutical and CHC markets.
Fitch expects this to remain a driver of growth for the CDMO
sector.
Resilient Profitability: Fitch views the Biofarma's profitability
as adequate and resilient for a specialist CDMO with its rating
case assuming EBITDA margins improving towards 24.5% over its
four-year rating horizon to 2026. This is driven by the group's
focus on manufacturing excellence, organic toplinegrowth leading to
positive operational leverage, and its greater ability to pass
through inflationary coast pressures in its specialty business
compared to more commoditised peers.
Softer 2022 FCF Margin: Fitch notes a weaker estimated free cash
flow (FCF) margin for 2022. This is based on above average capex
intensity of around 7.5% reflective of investment in and
consolidation of the manufacturing facilities, higher working
capital as observed across the CDMOs peers to manage supply chain
disruption and ingredients inflation, as the interest costs
associated with the buy-out debt raised in FY21.
Fitch estimates FCF will improve as the business matures,
benefiting from growing scale and operating leverage, as well as a
gradual normalisation of the working capital cycle, and medium-term
interest rate hedges.
Moderate Deleveraging Capacity: The Stable Outlook assumes moderate
deleveraging capacity, based on Fitch's operating and cash flow
assumptions, reducing EBITDA leverage from the post buy-out peak of
5.5x to around 4.5x by 2026. High leverage, combined with
Biofarma's limited size and diversification, constrain the rating.
Selective M&A, Moderate Execution Risks: The rating case assumes a
continuation of the company's inorganic growth strategy, focusing
on targeted selective M&A, enhancing its technology base, product
offering, geographical reach and scale. This would lead to
manageable execution risks. Consequently, the rating case assumes
an average annual M&A spend of EUR60 million in 2023-2026,
effectively reinvesting liquidity under the current capital
structure, including cash generated, but without issuing new senior
secured debt.
Fitch would treat higher M&A spend or a less gradual approach to
M&A as event risk, particularly given the current limited scale of
operations. Fitch notes that the recent M&A transaction
diversifying into France was largely financed by additional
payment-in-kind debt, which Fitch treats as equity in its rating
analysis.
DERIVATION SUMMARY
Fitch rates Biofarma under its global Generic Rating Navigator. Its
business profile is supported by resilient end-market demand, the
continued outsourcing trend and moderate entry barriers, with
medium to high switching cost for clients and strong revenue
visibility. The rating is constrained by its overall limited scale
in a fragmented and competitive CDMO market, and somewhat
significant customer concentration.
Fitch regards capital- and asset-intensive businesses such as
Fabbrica Italiana Sintetici S.p.A. (F.I.S., B/Stable), Roar Bidco
AB (Recipharm, B/Stable), European Medco Development 3 S.a.r.l.
(PharmaZell B/Stable) and Financiere Top Mendel SAS (Ceva Sante,
B+/Stable). They all rely on ongoing investments to grow at or
above market and maintain operating margins.
Biofarma's profitability is currently similar to that of
Pharmacell, Ceva and Clinigen Group, and higher than Recipharm and
F.I.S. Nevertheless, Biofarma is considerably smaller in scale than
all of its peers. The 5.5x EBITDA leverage post-acquisition is in
line with that of F.I.S. and Clinigen, lower than that of Recipharm
and higher than PharmaZell.
In Fitch's wider pharmaceutical rated portfolio, generic drug
manufacturing companies Stada (Nidda BondCo GmbH, B/Negative) and
Teva Pharmaceutical Industries Limited (BB-/Stable) are much larger
than Biofarma.
Compared with asset-light niche pharmaceutical companies owning
drug patents but outsourcing manufacturing to CDMOS such as
Cheplapharm (CHEPLAPHARM Arzneimittel GmbH, B+/Stable), Pharmanovia
(Pharmanovia Bidco Limited, B+/Stable) and ADVANZ PHARMA HoldCo
Limited's (B/Stable) are similar in size but have superior
profitability and positive FCF margins in the double digits, which
allow them to have higher leverage.
KEY ASSUMPTIONS
- Revenue growth at 38% in 2022, driven by the integration of HIS
and double-digit organic growth, supported by a strong product
pipeline and cross-selling opportunities arising from the HIS
acquisition;
- Organic revenue growth of 6% in 2023 and 5% in 2024-2025;
- EBITDA margin improving gradually from 23% in 2022 to 24.5% in
2025;
- Interest paid capped by EURIBOR exposure hedged at 1.52% until
August 2025;
- Working capital outflows of EUR5 million-EUR10 million annually;
- Capex at 7.0% of sales in 2022 and 6.5% of sales thereafter;
- Annual acquisitions of EUR50 million-EUR70 million over
2022-2025;
- No dividends.
FITCH'S RECOVERY RATING ASSUMPTIONS
Biofarma's recovery analysis is based on a going-concern (GC)
approach, which according to Fitch's analysis supports a higher
realisable value in a financial distress than a balance-sheet
liquidation. A balance-sheet liquidation will be supported by the
value from its four fully-owned manufacturing plants.
Financial distress could arise primarily from increased costs or
price pressures in a higher-than-expected inflationary environment,
or the loss of key contracts from its top customers, which would
lead to margin contraction and reduced cash flow generation.
Its GC enterprise value calculation yields a post-restructuring
EBITDA of EUR56 million. At this post-restructuring EBITDA, Fitch
believes that the company will be able to continue generating cash,
although it would face high pressure given total debt/EBITDA of
around 7.5x.
The multiple Fitch used is 5.0x EV/EBITDA, which is in line with a
CDMO of Biofarma's scale.
After deducting 10% for administrative claims, and considering
Biofarma's EUR60 million revolving credit facility (RCF) as fully
drawn and which is super senior to the notes, its principal
waterfall analysis of the company generated a ranked recovery in
the 'RR3' category for the EUR345 million floating rate notes, with
56% recoveries, leading to a 'B+' rating, one notch above the IDR.
RATING SENSITIVITIES
Factors That Could, Individually Or Collectively, Lead To Positive
Rating Action/Upgrade
- Successful implementation of growth strategy, including selective
and targeted M&A, leading to increased scale
- EBITDA margin sustained at or above 25% on a sustained basis
- Continued strong cash generation with FCF margins in the high
single digits on a sustained basis
- Fitch-calculated gross leverage sustained at or below 4.5x EBITDA
(gross leverage at or below 5.0x funds from operations; FFO)
- EBITDA interest coverage above 3.0x on a sustained basis
Factors That Could, Individually Or Collectively, Lead To Negative
Rating Action/Downgrade
- Unsuccessful implementation of growth strategy, including an M&A
approach that increases financial and execution risks
- EBITDA margin sustained at or below 20% on a sustained basis
- Weakening cash generation with FCF margins around break-even on a
sustained basis
- Fitch-calculated gross leverage sustained above 6.5x EBITDA
(gross leverage sustained above 7.0x FFO)
- EBITDA interest coverage below 2.0x on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch views the company's liquidity as
adequate, with an estimated year-end freely available cash balance
of EUR25 million until 2026 and full availability under the
company's committed EUR60million RCF. Fitch expects Biofarma will
generate moderate but sustained positive FCF, which Fitch projects
will likely be reinvested in bolt-on M&A in combination with
partial RCF drawdowns.
ISSUER PROFILE
Biofarma is an Italian CDMO specialised in manufacturing health
supplements, medical devices and cosmetics, with a leading position
in the development and production of probiotics.
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
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Kepler S.p.A. LT IDR B Affirmed B
senior secured LT B+ Affirmed RR3 B+
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M A L T A
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VISTAJET MALTA: Moody's Rates New $500MM Sr. Unsecured Notes 'B3'
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Moody's Investors Service has assigned a B3 rating to the $500
million backed senior unsecured notes to be issued by VistaJet
Malta Finance P.L.C. (VistaJet) and co-issued by Vista Management
Holding, Inc. At the same time the rating agency affirmed the B3
corporate family rating and the B3-PD probability of default rating
of Vista Global Holding Ltd. (Vista Global). Concurrently Moody's
upgraded the rating of the existing backed senior unsecured notes
co-issued by VistaJet Malta Finance P.L.C. and Vista Management
Holding, Inc. from Caa1 to B3, as a result of the rising proportion
of senior unsecured debt in the capital structure following the
notes issuance and expected repayment of secured debt. The outlook
on all ratings has been changed to positive from stable.
The proceeds of the planned issuance will be used to refinance
existing secured debt including aircraft financing debt, and the
company's revolving credit facility (RCF) while enhancing Vista
Global's liquidity.
RATINGS RATIONALE
The outlook change to positive from stable was driven by ongoing
performance and cash flow improvements, supported by growth of its
Program membership base by around 36% in 2022 and the contribution
from acquisitions in H2 2022. Moody's further recognizes that the
acquisitions of Air Hamburg Luftverkehrsgesellschaft mbH, Air
Hamburg Technik GmbH and AH Immobilien GmbH & Co. KG, Hamburg
(collectively Air Hamburg) and Jet Edge International Holdings LLC
(Jet Edge) have been successfully completed and integrated into
Vista Global's platform. Furthermore, the contemplated transaction
will improve the debt maturity profile combined with strengthening
Vista Global's liquidity profile.
The B3 CFR reflects the company's strong position in the market for
corporate jet travel; significant contracted revenue from a
diversified customer base; and high aircraft utilisation rates,
which enable a relatively cost-efficient business aviation solution
for its customers. The major constraints to the CFR are Vista
Global's exposure to cyclical demand; a competitive and highly
fragmented market; its high leverage, with Moody's-adjusted
debt/EBITDA at 7.8x in 2022 (7.2x including the impact from
monetization of Put Options); the risk of further debt-funded
growth and the company's liquidity occasionally hampered by
quarterly debt repayments.
The operating performance of Vista Global has materially improved
on the back of a revenue increase by 55%, at $2.5 billion in 2022
from $1.6 billion in 2021, due the combination of a favorable mix
shift towards the structurally more profitable flight solutions
program (FSP) segment and other premium products leading to higher
live yields combined with significant contribution from the
acquisitions of Air Hamburg and Jet Edge, and Vista Global's fleet
expansion including the addition of 11 new GL 7500s and 8 new
Challenger 350s in 2022.
Profitability has also increased on the back of higher revenue
combined with margin expansion across segments as a result of yield
improvements due to strong underlying growth of the FSP segment and
contribution of additional aircraft on Vista Global's fleet,
alongside a higher proportion of ad-hoc demand being serviced on
fleet. Therefore, Moody's adjusted EBITDA has increased to $576
million in 2022 from $337 million 2021 while Moody's adjusted
EBITDA margin has improved to 23.5% from 20.9% for the same period.
Moody's expects further improvement in operating performance,
supported by a broader membership base in 2023. Higher aircraft
utilisation rates and full year contribution effect from additional
aircraft will lead to Moody's-adjusted EBITDA margin improving
towards 29% in the next 12-18 months.
The operating performance improvement in 2022 has been offset by a
significant increase in Moody's adjusted Debt ($4.9 billion in 2022
vs $2.5 billion in 2021), which increased in the context of the Air
Hamburg and Jet Edge acquisitions along with the investment plan of
Vista Global aiming at increasing its total fleet size, leading to
a moderate increase in leverage. Cash flow generation has improved
with Moody's adjusted Retained Cash Flow increasing to $402 million
in 2022 from $245 million in 2021. Moody's adjusted Debt/EBITDA has
increased to 7.8x in 2022 (7.2x including the impact from
monetization of Put Options) from 7.3x in 2021 (6.4x including the
impact from monetization of Put Options).
Moody's expects Vista Global's Moody's-adjusted Debt/EBITDA to
decline to around 5.5x by year-end 2023, supported by contractual
aircraft financing repayments and the absence of new aircraft
orders in 2023 and 2024 along with improved profitability,
positively affected by the addition of Air Hamburg and Jet Edge
combined with increased aircraft utilization rates. The rating
agency expects Vista Global's Moody's-adjusted FCF — calculated
after contractual aircraft financing repayments — to be breakeven
in 2023, after several years of being negative. The rating agency
does not expect any dividend distribution during 2023 and 2024.
OUTLOOK
The positive outlook reflects Vista Global's potential of further
performance and leverage improvements over the next quarters. On
the back of higher revenue, improved aircraft utilization rates and
larger fleet size, the company should be able to further improve
its credit metrics with Moody's adjusted Debt/EBITDA declining to
around 5.5x by year-end 2023. The positive outlook also assumes
that liquidity will improve, as a result of a fully undrawn RCF,
post-transaction closing, along with at least breakeven FCF
generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the ratings could develop if Vista Global is
able to (1) further deleverage its capital structure, such as
Moody's-adjusted debt/EBITDA improving to below 5.5x on a sustained
basis, (2) generate material positive free cash flow in excess of
aircraft debt service leading to an improved liquidity profile and
(3) improve its EBITA margin towards mid-teens in percentage terms
on a sustained basis. In addition, an upgrade would require a clear
commitment to and demonstration of adherence to a conservative
financial policy.
Likewise, downward pressure could exert in case of indications that
the company is unable to (1) maintain debt /EBITDA below 7x on a
sustained basis, (2) maintain utilization rates resulting in
weakening EBITA margins to below double digit in percentage terms
on a sustained basis in the next 12-18 months, (3) sell a
sufficient level of Flight Solution Program hours to secure
meaningful quarterly cash payments for a prolonged period, (4)
generate sufficient free cash flow to meet the scheduled
amortization of its aircraft financings leading to a deterioration
in liquidity, or (5) if it continues to finance its growth with
additional debt leading to weaker credit metrics.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS (ESG)
Vista Global's ESG Credit Impact Score is Highly Negative (CIS-4).
This mainly reflects high exposure to governance risk driven by
private ownership and potential for debt-funded growth, despite
anticipated credit metrics improvement. Vista Global 's CIS also
reflects potential for carbon transition and related social risk
factors to put pressure on the rating over time. That said, given
that current technologies do not support a rapid carbon transition
scenario for aircraft operators and there are limited substitutes
in most markets, the environmental and social credit risks to Vista
Global are long-term in nature.
LIQUIDITY
Vista Global's liquidity is still adequate supported pro forma for
the completion of the transaction with cash on balance sheet
further supplemented by a $145 million fully undrawn RCF maturing
in 2026. Alternative sources of liquidity include the equity values
of the VistaJet aircraft and raising new equity, both of which are
dependent on market conditions if and when needed.
According to Moody's liquidity risk assessment, funds from
operations, and cash on hand, along with undrawn RCF, are
sufficient to cover expected cash outflows over the twelve-months
period to March 2024. The RCF appears to be low compared to the
increased scale and volatility of operations. In the base scenario,
the rating agency expects the company to be compliant with the
springing financial covenant of 6.8x senior net leverage.
LIST OF AFFECTED RATINGS
Upgrades:
Issuer: VistaJet Malta Finance P.L.C. (co-issuer: Vista Management
Holding, Inc.)
Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency),
Upgraded to B3 from Caa1
Assignments:
Issuer: VistaJet Malta Finance P.L.C. (co-issuer: Vista Management
Holding, Inc.)
Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency),
Assigned B3 (LGD4)
Outlook Actions:
Issuer: Vista Global Holding Ltd.
Outlook, Changed To Positive From Stable
Issuer: VistaJet Malta Finance P.L.C.
Outlook, Changed To Positive From Stable
Affirmations:
Issuer: Vista Global Holding Ltd.
Probability of Default Rating, Affirmed B3-PD
Corporate Family Rating, Affirmed B3
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
COMPANY PROFILE
Headquartered in Dubai, Vista Global Holding Ltd. is the holding
company of a leading global business aviation provider that serves
corporates and high net worth individuals. The company offers
flights primarily by membership programs and on-demand charter on
either its own aircraft ("on-fleet") or on a partner's aircraft
("off-fleet") and generated approximately $2.5 billion in revenue
in 2022. Vista Global operates a fleet of 276 aircraft, as of
December 2022, including ultra-long range, large cabin and
super-mid cabin aircraft. The company is owned by majority
shareholder and founder Thomas Flohr and minority shareholders
including Rhone Capital.
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R U S S I A
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AGROBANK JSC: Fitch Affirms BB- LongTerm IDRs, Outlook Stable
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Fitch Ratings has affirmed Joint-Stock Commercial Bank Agrobank's
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
at 'BB-' with Stable Outlooks. The bank's Viability Rating (VR) has
been affirmed at 'b-'. A full list of rating actions is below.
KEY RATING DRIVERS
Support Drives Ratings: Agrobank's Long-Term IDRs reflect Fitch's
view of a moderate probability of support from the government of
Uzbekistan, if needed, as captured by its Government Support Rating
(GSR). The bank has been exempt from privatisation given its
official status as the government's agent for state-sponsored
subsidised lending to the agricultural sector and small family
businesses in rural regions of Uzbekistan.
Emerging, Structurally Weak Economy: Despite recent market reforms
and privatisation plans, Uzbekistan's economy remains heavily
dominated by the state, resulting in weak governance and generally
poor financial transparency. Potential sector risks stem from high
dollarisation, significant exposure to long-term project finance
and reliance on external debt.
Top-Three Bank, Policy Role: Agrobank is the third-largest bank in
Uzbekistan accounting for 10% of sector assets and 11% of sector
loans at end-2022. The bank has been designated as one of the
government's agent banks for subsidised lending in rural regions,
while it has also actively developed a commercial corporate and SME
franchise in recent years.
High-Risk Policy Lending: Underwriting standards on the bank's
policy lending are largely determined by the government,
particularly in the retail entrepreneurship loans (13% of gross
loans at end-2022) which Fitch views as of higher credit risk.
While loan growth has moderated post-pandemic, it still exceeded
the sector average in the last two years (33% vs 19%,
respectively). Additional risks stem from foreign-currency lending
(27% of gross loans at end-2022) although this is smaller compared
with that at larger state-owned banks.
Vulnerable Asset Quality: Impaired loans ratio under IFRS9 equalled
7.8% at end-2021 (the latest available data), unchanged from
end-2020. While problem loans in regulatory accounts reduced to
3.8% at end-2022 from 4.6% at end-2021, its baseline scenario
assumes the impaired loans ratio could reach 10% in 2023 due to
continued seasoning of loans, particularly in the subsidised book.
Operating Costs, LICs Affect Performance: Increased funding costs
mean Agrobank's net interest margin has been trending down and
equalled 4.6% in 2022 under local GAAP. The bank's operating
efficiency is low, with the cost-to-income ratio averaging about
60% in the last four years. Pre-impairment profit (4.8% of average
gross loans in 2022) is only moderate in view of asset quality
risks, as reflected by higher loan impairment charges (LICs) of
3.1% in 2022. Fitch expects the elevated cost of risk to weigh on
the bank's performance in 2023-2024, with the return on equity
remaining in single digits (2022: 6.5%).
Regular State Capital Injections: To finance subsidised lending
growth, Agrobank has received over USD700 million worth in capital
from the state since 2018, which boosted its capitalisation.
Although reducing last year due to loan growth, regulatory Tier 1
and total capital ratios were a high 15.8% and 17.9% at end-2022,
respectively, reasonably above the statutory minimums of 10% and
13%.
Mostly State Funding, Limited Liquidity: State-related funding made
up almost half of Agrobank's total liabilities at end-2022 under
local GAAP, complemented by wholesale debt (32%, mainly long-term
credit lines from international financial institutions and foreign
banks) and non-state deposits (16%). Liquid assets were a low 10%
of total assets at end-2022 while the available foreign-currency
liquidity covered only 0.6x of planned wholesale repayments within
the next 12 months, although Fitch expects maturing borrowings to
mostly be rolled over.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The support-driven IDRs could be downgraded if the Uzbekistan's
sovereign IDR was downgraded, or if Fitch takes the view that the
Uzbek authorities' ability or propensity to support the bank has
weakened.
The VR could be downgraded in case of a material asset-quality
deterioration resulting in large credit losses, and triggering a
breach of minimum statutory capital requirements, if not promptly
compensated by new equity injections from the state.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The IDRs could be upgraded if Uzbekistan's sovereign IDRR was
upgraded.
An upgrade of the VR could stem from significant improvements in
Uzbekistan's operating environment and a sustained record of
improved asset quality and profitability. Material improvements in
the bank's profitability and strengthening of underwriting
standards would also be credit-positive, along with other factors.
VR ADJUSTMENTS
No adjustments are needed to the implied VR scores.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Agrobank's Long-Term IDRs are driven by potential support from the
Uzbekistan government.
ESG CONSIDERATIONS
Agrobank has an ESG Relevance Score of '4' for Governance Structure
as Uzbekistan is highly involved in the bank at board level and in
its business and strategy development. The ESG Relevance Score of
'4' for Financial Transparency reflects delays in IFRS accounts
publications, which are only prepared on an annual basis and with
delays, and has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of '3' - ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
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Joint-Stock
Commercial Bank
Agrobank LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
LC LT IDR BB- Affirmed BB-
LC ST IDR B Affirmed B
Viability b- Affirmed b-
Government Support bb- Affirmed bb-
ASAKABANK JSC: Fitch Affirms LongTerm IDR at 'BB-', Outlook Stable
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Fitch Ratings has affirmed Joint-Stock Company Asakabank's (Asaka)
Long-Term Issuer Default Ratings (IDRs) at 'BB-' with Stable
Outlooks and Viability Rating (VR) at 'b'.
KEY RATING DRIVERS
Support-Driven IDRs: Asaka's IDRs reflect Fitch's view of a
moderate probability of support from the government of the Republic
of Uzbekistan (BB-/Stable) in case of need, as captured by its
Government Support Rating (GSR) of 'bb-'. This view is based on its
majority state ownership, moderate systemic importance, and the low
cost of potential support relative to the sovereign international
reserves.
Midterm Privatisation Plans: According to the bank, an
international financial institution may acquire a minority stake in
the bank's capital in 2H23, with the government then planning to
sell the bank's controlling stake to a strategic investor. However,
the deal is likely to take longer than planned, in Fitch's view,
given Asaka's still ongoing business-model transformation in
preparation for the sale.
Standalone Credit Profile: Asaka's 'b' VR reflects unseasoned loan
book, high balance-sheet dollarisation and dependence on foreign
funding. The VR also captures moderate corporate franchise, a high
share of loans guaranteed by state and good liquidity cushion.
Emerging, Structurally Weak Economy: Despite recent market reforms
and privatisation plans, Uzbekistan's economy remains heavily
dominated by the state, resulting in weak governance and generally
poor financial transparency. Potential sector risks stem from high
dollarisation, significant exposure to long-term project finance
and reliance on external debt.
Business Model Transformation: Asaka is the fourth-largest bank in
Uzbekistan (9% of sector assets at end-2022) with a strong
corporate franchise in some strategic industries. Asaka is
undergoing a pre-sale business transformation aiming to shift from
directed lending to commercial business with a focus on developing
the SME and retail segments.
Lending Growth Halted: Lending growth has slowed down in the past
two years due to capital constraints and business-model change,
with gross loans contracting by 5.9% (FX-adjusted) in 2022. Risks
mainly stem from high borrower and industry concentrations and high
loan dollarisation (70% at end-2022), but these are somewhat
mitigated by state guarantees on some large exposures (equal to
around 30% of gross loans at end-2022).
Asset Quality Metrics to Weaken: The bank's impaired loans under
IFRS9 equalled 7.4% of gross loans at end-2022 (end-2021: 6.5%),
although they were fully covered by total loan loss allowances. The
Stage 2 ratio was a sizeable 14% on the same date and Fitch expects
at least some Stage 2 exposures to become impaired in 2023, which
could drive the impaired loans ratio up to 10%. Non-loan exposures
(18% of total assets at end-2022) mainly comprise cash balances
with the Central Bank of Uzbekistan and government bonds and are of
good credit quality, in its view.
Low Margins Weigh on Profitability: A large share of low-yielding
legacy directed loans weighs on Asaka's net interest margin (3.2%
in 2022), which is lower than other large state-owned banks.
Pre-impairment profit was modest in 2022 (1.4% of average gross
loans) and impairment charges consumed most of it (60%), resulting
in weak net returns.
Modest Capital Cushion: The Tier 1 ratio under local GAAP was equal
to 13% at end-1Q23, improved by 120bp year over year due to the
application of zero risk-weights on state-guaranteed loans in
regulatory accounts and deleveraging and a UZS224 billion capital
injection from the state in 1H22. Fitch expects the Fitch Core
Capital ratio (end-2022: 13.1%) to remain broadly stable this year,
providing a moderate buffer against potential asset-quality risks,
in its view.
High External Liabilities, Moderate Liquidity: Asaka remains
reliant on wholesale debt (46% of total liabilities at end-2022),
which mainly comprises long-term borrowings from foreign banks and
international financial institutions. State-related funding
(through government deposits and subordinated loans) represents
another 22% of total liabilities. Liquid assets (17% of total
assets at end-2022) fully covered external debt maturing in the
next 12 months.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The support-driven IDRs could be downgraded if Uzbekistan's
sovereign IDR was downgraded. The ratings could also be downgraded
if Asaka's controlling stake is sold to a strategic investor with a
lower rating than the sovereign or one without a rating. However,
even after privatisation, Fitch anticipates that the IDRs would
factor in potential support at one notch below the sovereign's
ratings, provided the bank maintains its systemic importance.
The VR could be downgraded in case the bank's capital buffer
reduces below 100bp over regulatory minimum levels on a sustained
basis due to a sharp deterioration in the bank's asset quality
resulting in loss-making performance or higher lending growth.
Deterioration of liquidity buffers, particularly in foreign
currency, as a result of insufficient cash flows being generated by
the loan book could be credit-negative, as well as material
increase in refinancing risk due to the worsening of the bank's
liquidity position.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The support-driven ratings could be upgraded if the Uzbek sovereign
was upgraded. An upgrade of the VR could stem from improvements in
the Uzbek operating environment, a sustained stable asset-quality
performance, an improvement in profitability, a decrease in
balance-sheet dollarisation and an improved funding structure.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Asaka's IDRs and GSR are directly linked to the Uzbekistan
sovereign rating.
ESG CONSIDERATIONS
Asaka has an ESG Relevance Score of '4' for Governance Structure as
the state of Uzbekistan is highly involved in the banks at board
level and in the business. The ESG Relevance Score of '4' for
Financial Transparency reflects delays in IFRS accounts
publications, which are prepared only on annual basis. It has a has
a negative impact on the credit profile, and is relevant to the
rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
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Joint-Stock
Company
Asakabank LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
LC LT IDR BB- Affirmed BB-
LC ST IDR B Affirmed B
Viability b Affirmed b
Government Support bb- Affirmed bb-
JSC NATIONAL BANK: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
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Fitch Ratings has affirmed JSC National Bank for Foreign Economic
Activity of the Republic of Uzbekistan's (NBU) Long-Term Issuer
Default Ratings (IDRs) at 'BB-' with Stable Outlooks and Viability
Rating (VR) at 'b'.
KEY RATING DRIVERS
NBU's 'BB-' IDRs reflect Fitch's view of a moderate probability of
state support, in case of need, as reflected by the bank's 'bb-'
Government Support Rating (GSR). This view is based on full state
ownership, significant systemic importance, important roles in
government economic and social policy, the low cost of potential
support relative to the sovereign international reserves and a
record of capital support to date.
NBU's 'b' VR reflects the bank's strong domestic franchise with
close ties with the state, and reasonable asset quality metrics and
capital ratios. The VR also captures NBU's high reliance on
external funding and weak risk profile. The latter is undermined by
rapid growth in the past, and a lumpy and heavily dollarised loan
book. NBU's VR is one notch below the implied VR of 'b+' due to the
following adjustment reason: risk profile (negative)
Emerging, Structurally Weak Economy: Despite recent market reforms
and privatisation plans, Uzbekistan's economy remains heavily
dominated by the state, resulting in weak governance and generally
poor financial transparency. Risks in the banking sector mostly
stem from high dollarisation, significant exposure to long-term
project finance and high reliance on external foreign-currency
debt.
Largest Bank in Uzbekistan: In Fitch's view, NBU has a strong
domestic franchise, as captured by its 22% market share and
strategic state-ownership, which provides NBU with strong ties with
key state-owned corporates in Uzbekistan. At the same, the high
share of directed lending dampens NBU's margins and translates into
certain structural business model weaknesses.
Moderate Impaired Loans: At end-2Q22, Stage 3 and Stage 2 loans
under IFRS 9 amounted to 4.6% and 9.3% of gross loans,
respectively. Problematic exposures are largely in corporate
lending to the private sector. The loan loss allowance equalled a
moderate 6.6% of gross loans. Despite reasonable IFRS 9 ratios,
Fitch views NBU's loan quality as vulnerable due to elevated
concentrations, significant dollarisation and high exposure to
long-term project finance, which results in seasoning risks.
However, around one-third of NBU's loans is guaranteed by the
state.
Temporary Profit Boost in 2022: Fitch expects NBU's return on
equity (ROE) to be close to 20% in 2022, due to sizeable currency
gains (one-off gains from dealing with the Russian ruble in 1H22).
Fitch expects NBU's ROE to moderate closer to 10% in 2023, while
longer-term profitability should primarily be sensitive to trends
in asset quality.
Reasonable Capital Ratios: Fitch estimates NBU's Fitch Core Capital
ratio at above 17% at end-2022. Fitch views solid capital ratios in
the context of high asset concentrations and only moderate
recurring profitability. In the past, the state supported NBU's
growth with regular capital injections, so Fitch expects capital
ratios in the near term to remain close to current levels, even
though NBU's loan growth may be ahead of the bank's internal
capital generation.
Significant Non-Deposit Funding: Fitch views NBU's funding profile
as structurally weak due to its high reliance on wholesale funding,
as reflected by a 2.3x ratio of gross loans to deposits at
end-2022. Wholesale funding accounts for around 60% of NBU's total
liabilities at end-2022, albeit without heightened near-term
refinancing risks. At end-2022, NBU's liquidity buffer (mostly
consisting of cash and bank placements) covered a reasonable 29% of
total liabilities.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
NBU's support-driven ratings could be downgraded if the Uzbek
sovereign was downgraded, or if Fitch changes its view on the Uzbek
authorities' ability or propensity to support the bank.
NBU's VR could be downgraded as a result of a sharp deterioration
in asset quality that translates into lossmaking performance,
reducing the bank's capital buffer to less than 100bp over
regulatory minimum levels. However, Fitch currently views this
scenario as unlikely. Deterioration of NBU's liquidity buffers,
particularly in foreign currency, as a result of insufficient cash
flows being generated by NBU's loan book could also be
credit-negative, if not offset by liquidity injections from the
state.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The support-driven ratings could be upgraded if the Uzbek sovereign
was upgraded.
An upgrade of the VR would likely require sustained improvements in
NBU's risk profile, in particular reduced loan concentrations and
lower dollarisation. An upgrade of the VR could also require a
stronger funding profile, with loans/deposits ratio getting closer
to 100%. An improvement of the operating environment for banks in
Uzbekistan could also be credit-positive.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
NBU's USD300 million 4.85% senior unsecured Eurobond matures in
October 2025 and documentation includes a change of control
covenant, under which bondholders will have an option to redeem the
notes at par if the state reduces its shareholding (direct and
indirect) in NBU below 50%+1 share.
Fitch rates the notes in line with NBU's 'BB-'Long-Term IDR, as the
notes represent unconditional, senior unsecured obligations of the
bank, which rank equally with its other senior unsecured
obligations.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
NBU's senior debt ratings are sensitive to changes in the bank's
IDRs.
VR ADJUSTMENTS
N/a
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
NBU's IDRs, GSR and debt ratings are directly linked to the
Uzbekistan sovereign rating.
ESG CONSIDERATIONS
NBU has an ESG Relevance Score of '4' for Governance Structure as
Uzbekistan's authorities are highly involved in the bank at board
level and in its business and strategy development, which has a
negative impact on the credit profile, and is relevant to the
ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
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JSC National
Bank for Foreign
Economic
Activity of the
Republic of
Uzbekistan LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
LC LT IDR BB- Affirmed BB-
LC ST IDR B Affirmed B
Viability b Affirmed b
Government Support bb- Affirmed bb-
senior
unsecured LT BB- Affirmed BB-
MICROCREDITBANK: Fitch Affirms LongTerm IDR at BB-, Outlook Stable
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Fitch Ratings has affirmed Uzbekistan-based Microcreditbank's (MCB)
Long-Term Issuer Default Ratings (IDRs) at 'BB-' with a Stable
Outlook and Viability Rating (VR) at 'b-'.
KEY RATING DRIVERS
Microcreditbank's (MCB) Long-Term Issuer Default Ratings (IDRs) are
driven by a moderate probability of support from the government of
Uzbekistan, as expressed by its Government Support Rating (GSR) of
'bb-'. The bank's 'b-' Viability Rating (VR) reflects its small
franchise in a weak operating environment, involvement in
subsidised lending, limited profitability, moderate capitalisation,
and high reliance on wholesale borrowings.
Policy Role: The Uzbek authorities have a high propensity to
support MCB given its state ownership, status as the agent bank for
subsidised social lending, the low cost of potential support
relative to the sovereign's international reserves, and support
record.
Emerging, Structurally Weak Economy: Despite recent market reforms
and privatisation plans, Uzbekistan's economy remains heavily
dominated by the state resulting in weak governance and generally
poor financial transparency. Potential sector risks stem from high
dollarisation, significant exposure to long-term project finance
and reliance on external debt.
Narrow Franchise: MCB is a small bank in the concentrated Uzbek
banking system, making up 3% of sector assets, gross loans, and
deposits at end-2M23. MCB provides subsidised SME and retail
lending under state development programmes, but also develops
commercial lending.
Moderated Loan Growth, Weak Underwriting: After a rapid lending
growth in 2019-2021 (57% on average), which outpaced 20% sector
average, loan book expansion slowed to 21% in 2022 and was in line
with the banking sector in 1Q23 (2%). Combined with weak
underwriting standards, high loan growth in previous years could
weigh on MCB's asset quality, in its view. At end-1Q23, loan
dollarisation was below 47% sector average, but a still-sizeable
27%.
Worsened Loan Quality: At end-1Q23, regulatory impaired loans were
a moderate 5.4% of gross loans (end-2021: 5.9%), while total
reserve coverage ratio has been weak over the past two years
(end-1Q23: 22%). The bank's Stage 3 loans under IFRS 9 spiked to a
high 13% of gross loans at end-2021 (the latest available data),
due to expiration of pandemic-induced payment holidays and
portfolio seasoning, and Fitch expects them to exceed 10% in 2023.
Limited Profitability: MCB's performance has historically been
weak, with the operating profit below 1% of regulatory
risk-weighted assets under local GAAP in 2019-2022. Due to low
operating efficiency, the annualised pre-impairment profit was only
2% of average gross loans in 1Q23 (2022: 2.4%), providing the bank
with a limited loss-absorption capacity. The bank's annualised loan
impairment charges accounted for a low 0.6% of average loans in
1Q23, but Fitch expects them to increase to 2.5% in 2023.
State-Supported Capitalisation: MCB receives regular capital
contributions from the government to support its policy lending.
New capital injections totalled UZS2.9 trillion (about USD250
million) in 2019-2022. At end-1Q23, the bank's regulatory Tier 1
(18%) and total capital ratios (20%) were comfortably above the
statutory minimums of 10% and 13%, respectively. However, Fitch
expects the buffer to be consumed by loan growth in 2023-2024.
High External Funding, Refinancing Risk: MCB relies on market
borrowings, which made up 54% of total liabilities under local GAAP
at end-1Q23. These were mostly long-term loans from international
financial institutions but interbank deposits were a material 21%
of total liabilities. Cheap state funding accounted for another
24%. At end-1Q23, MCB's liquidity buffer was a limited 11% of total
assets and covered only 0.6x of short-term wholesale debt
repayments which heightens the bank's refinancing risk.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
MCB's support-driven IDRs could be downgraded if Uzbekistan's
sovereign IDR is downgraded. Fitch could also downgrade MCB's IDRs
and notch them off the sovereign IDR should the bank's policy role
or its association with the sovereign markedly weaken. However,
Fitch currently views this as unlikely.
The VR could be downgraded if asset quality deterioration
translates into loss-making performance and capital ratios fall
below regulatory statutory minimums unless compensated by new
common equity injections from the state. Liquidity shortages,
resulting from insufficient cash flows generated by the loan book,
could also be credit negative, if not supported by the state.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The bank's IDRs could be upgraded following an upgrade of the
sovereign IDR.
A VR upgrade could stem from material improvements in the Uzbek
operating environment coupled with a notable enhancement of the
bank's commercial franchise and strengthening of its risk profile.
It would also require higher profitability and reduced reliance on
external funding.
VR ADJUSTMENTS
No adjustments are needed to the implied VR scores.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
MCB's IDRs are equalised to the sovereign IDR of the Republic of
Uzbekistan based on Fitch's view of a moderate likelihood of state
support.
ESG CONSIDERATIONS
MCB has ESG Relevance Score of '4' for Governance Structure as the
state of Uzbekistan is highly involved in the banks at board level
and in the business. It has an ESG Relevance Score of '4' for
Financial Transparency, reflecting delays in IFRS accounts
publications which are prepared only on annual basis. These factors
have a negative impact on the bank's credit profile and are
relevant to the ratings in conjunction with other factors.
The bank also has ESG Relevance Score of '3' for 'Human Rights,
Community Relations, Access and Affordability' given the bank's
focus on social lending to lower-income citizens to decrease
poverty and promote entrepreneurship.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, is a score of '3' - ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Microcreditbank LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
LC LT IDR BB- Affirmed BB-
LC ST IDR B Affirmed B
Viability b- Affirmed b-
Government Support bb- Affirmed bb-
UZBEK INDUSTRIAL: Fitch Affirms 'BB-' LongTerm IDRs, Outlook Stable
-------------------------------------------------------------------
Fitch Ratings has affirmed Uzbek Industrial and Construction Bank
Joint-Stock Commercial Bank's (UICB, also known as Uzpromstroybank)
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
at 'BB-'. The Outlooks are Stable. Fitch has also affirmed the
bank's Viability Rating (VR) at 'b'.
KEY RATING DRIVERS
State Support Drives IDRs: UICB's Long-Term IDRs reflect Fitch's
view of a moderate probability of support from the government of
Uzbekistan (BB-/Stable), if needed, as reflected in its Government
Support Rating (GSR) of 'bb-'. While UICB is expected to be
privatised within the next few years, Fitch still factors in
potential state support while it is majority state owned.
Potential Delays to Privatisation: The government has targeted
selling the bank's controlling stake to a strategic investor by
end-2023. However, the deal is likely to take longer, in Fitch
views, given UICB's still ongoing business-model transformation.
Fitch expects some international financial institutions to acquire
minority stakes at the bank before the change of control takes
place.
Standalone Credit Profile: UICB's 'b' VR reflects its exposure to
the volatile local operating environment, increased asset quality
risks, moderate profitability and capitalisation through the cycle,
as well as a high share of external funding.
Emerging, Structurally Weak Economy: Despite recent market reforms
and privatisation plans, Uzbekistan's economy remains heavily
dominated by the state, resulting in weak governance and generally
poor financial transparency. Potential sector risks stem from high
dollarisation, significant exposure to long-term project finance
and reliance on external debt.
Established Franchise; Commercial Business Aims: UICB is the
second-largest bank in Uzbekistan (12% of sector assets and loans
at end-2022). While it retains a strong corporate franchise in key
strategic industries, UICB has recently focused on developing
commercial SME and retail lending to diversify its operations prior
to privatisation.
Dollarised, Concentrated Loans; Limited Growth: UICB's corporate
lending focus results in elevated concentrations in the loan book,
which is also highly dollarised (64% at end-2022). Lending growth
has moderated to below-sector levels averaging 10% (FX-adjusted) in
the last four years due to capital constraints and tighter
underwriting standards.
Asset Quality Stabilised: The impaired loans ratio was equal to
4.9% of gross loans at end-2022, 130bp down from end-2021 mainly
due to material write-offs. Provisioning of problem loans increased
to 0.8x which Fitch considers adequate. Loan quality risks are also
mitigated by the availability of state guarantees on 14% of gross
loans at end-2022.
Impairment Cost Constrains Profitability: The net interest margin
improved to 5.2% in 2022, but UICB's pre-impairment profit buffer
(4% of average gross loans in 2022) is limited in view of
asset-quality risks. Loan impairment charges (LICs) increased
materially to 2.6% of average loans in 2022 (2021: 1%), resulting
in only modest return on average equity (6% in 2022).
Moderate Capitalisation: UICB's Fitch Core Capital (FCC) ratio
equalled 12% at end-2022 and Fitch expects it to remain around the
same level in 2023 given modest internal capital generation.
Regulatory capital ratios provided 200bp headroom above statutory
minimums, which results in only moderate loss absorption capacity,
in Fitch's view.
Mainly Funded by Wholesale Debt: Long-term external borrowings are
UICB's primary source of funding (63% of total liabilities at
end-2022). Low-cost state funding made up 16% of liabilities while
non-state deposits were another 21%. At end-2022, the bank's
liquidity cushion fully covered planned wholesale debt repayments
in the next 12 months.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The Long-Term IDRs could be downgraded in case of a downgrade of
Uzbekistan's sovereign IDR.
The IDRs could also be downgraded if UICB's controlling stake is
sold to a strategic investor with a lower rating than the sovereign
or an unrated entity. However, Fitch is likely to factor in
potential government support for UICB even after the privatisation
at a level of one notch below the sovereign IDR due to the bank's
moderate systemic importance.
A downgrade of the VR could stem from material asset quality
deterioration translating into loss-making performance or rapid
lending growth so that the bank's regulatory capital ratios have
headroom over minimum statutory requirements of sustainably below
100bps. However, Fitch does not view currently this as likely.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
UICB's Long-Term IDRs would be upgraded following an upgrade of the
sovereign IDR.
An upgrade of the bank's VR would require a tangible expansion of
UICB's commercial franchise and a record of improved asset quality
and profitability, with the FCC ratio improving close to 20% for a
few consecutive years. Material improvements in Uzbekistan's
operating environment would also be credit-positive.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
UICB's senior unsecured debt rating is aligned with the bank's
Long-Term IDRs
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The debt rating would be downgraded following the downgrade of the
bank's IDRs. Conversely, if the IDRs are upgraded, this would
trigger an upgrade of the debt rating.
VR ADJUSTMENTS
No adjustments are needed to the implied VR scores.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
UICB's Long-Term IDRs are driven by potential support from the
government of Uzbekistan (BB-/Stable).
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
----------- ------ -----
Uzbek Industrial
and Construction
Bank Joint-Stock
Commercial Bank LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
LC LT IDR BB- Affirmed BB-
LC ST IDR B Affirmed B
Viability b Affirmed b
Government Support bb- Affirmed bb-
senior
unsecured LT BB- Affirmed BB-
=========
S P A I N
=========
CODERE LUXEMBOURG 2: Moody's Appends 'LD' Designation to Ca-PD PDR
------------------------------------------------------------------
Moody's Investors Service has appended the limited default ("/LD")
designation to Codere Luxembourg 2 S.a.r.l.'s ("Codere" or "the
company") Ca-PD probability of default rating, changing it to
Ca-PD/LD from Ca-PD, to reflect a limited default resulting from
the extension of the grace period on Codere Finance 2 (Luxembourg)
S.A.'s ("Codere Finance 2") EUR495 million (original nominal value
of EUR482 million) backed super senior secured notes due 2026
("Super senior notes"). The grace period on Codere Finance 2's
EUR231 million euro equivalent (split in EUR and USD) (original
nominal value of EUR196 million euro equivalent) backed senior
secured notes due 2027 ("Senior notes") has also been extended.
Moody's will likely remove the /LD designation upon completion of
the company's restructuring transaction.
On March 29, 2023, Codere announced that it will defer its interest
payments due March 31, 2023 and April 30, 2023 in respect of the
Super senior notes and Senior notes, respectively, until the
completion of the restructuring transaction. The company has
secured the extension of the grace periods until the end of June
2023. The initial grace periods on the Super senior notes and
Senior notes ended on April 30, 2023 and May 30, 2023
respectively.
The /LD designation indicates that the company is in default on a
limited set of its obligations. Moody's considers the extension of
the grace periods to be a default because of a non-payment event
within the initial grace period.
The deferral of the interest payments on the Super senior notes and
Senior notes with the extension of the grace periods are part of a
wider proposed restructuring transaction announced by Codere on
March 29, 2023. The key terms of the proposed restructuring
transaction involve the issuance of EUR100 million new
first-priority notes (ranking senior to the Super senior notes, and
all other debt instruments) and amendments to the Super senior
notes and Senior notes interest rates to include a lower cash
component and a larger payment-in-kind (PIK) component.
Headquartered in Madrid, Spain, Codere is an international gaming
operator. The company is present in seven countries where it has
market-leading positions: Spain and Italy in Europe; and Mexico,
Argentina, Uruguay, Panama and Colombia in Latin America. In 2021,
the company reported operating revenue of EUR790.7 million and
company-adjusted EBITDA of EUR99.4 million.
===========
T U R K E Y
===========
ARCELIK ASA: Fitch Affirms BB- Foreign Curr. IDR, Outlook Negative
------------------------------------------------------------------
Fitch Ratings has affirmed Arcelik A.S.'s Long-Term
Foreign-Currency (LT FC) Issuer Default Rating (IDR) at 'BB-' and
Local-Currency (LC) IDR at 'BB+' with Negative Outlooks.
The rating affirmation reflects its expectations that the consumer
goods company will maintain a conservative funding policy
supporting a two-notch IDR uplift above the Turkish Country Ceiling
of 'B'. Fitch maintains the Negative Outlook on the LC IDR of 'B',
given the ongoing economic pressure in Turkey that could further
pressure the company's standalone credit profile (SCP).
KEY RATING DRIVERS
Rating Construction: Arcelik's LT FC IDR and senior unsecured
rating are currently two notches above the Turkish Country Ceiling
of 'B', reflecting the issuer's exporter nature, which provides it
with structural enhancements that are required under its criteria.
The Negative Outlook reflects the likely correlation of future
rating actions with changes to the Turkish sovereign rating,
assuming that the Country Ceiling moves in line with the
sovereign's LT IDR.
Strong International Market Position: Fitch expects Arcelik to
maintain its leading domestic market share, supported by wide
distribution channels and production facilities. Additionally,
Fitch expects strong contributions from Arcelik's Western and
Eastern European markets, which contributed 26% and 15% in 2022,
respectively. Overall, international revenue growth over the past
three years has been strong, averaging 55% as the company
capitalises on its strong marketing and distribution network.
Although growth was sluggish in Western Europe, Arcelik generated
30% growth in revenue (in euros) yoy and was able to gain a market
share in Eastern Europe. Similarly, APAC is an important market to
Arcelik, contributing 14% to revenue in 2022 and the
Arcelik-Hitachi business is expected to benefit from robust growth
in the region.
Arcelik's Global Footprint to Increase: Arcelik's acquisition of
Whirlpool MENA subsidiaries, pending regulatory approvals, is
expected to increase its regional footprint. In January 2023,
Whirlpool agreed to sell its MENA businesses to Arcelik for a EUR20
million cash transaction expected to be finalised in 2H23.
Additionally, Arcelik and Whirlpool agreed to form a European-based
entity 'Newco' that will be majority controlled by Arcelik and
fully consolidated. Fitch expects a dilution in margins in 2024
onwards.
Fitch expects the company to benefit from cost synergies of about
EUR200 million for the European transaction, over the forecast
period of 2024-2026.
Contracted Profitability Margins: Arcelik's margins decreased to a
sustainable 9% in 2022 from 12% in 2021. Fitch forecasts margins to
remain at about 9% in its base case and to be partially offset by
robust revenue growth in Arcelik's key markets. Energy costs and
inflationary raw material prices will have a negative impact on
consolidated profitability margins. The company has raw material
hedging policies in place, partially mitigating the negative impact
of inflationary costs.
Arcelik's competitive position in APAC and Europe does not allow
full pass-on of inflationary pressures to consumers in order to
preserve market share. However, the company has pricing power in
its domestic market relative to peers. Margins could face further
pressure post the consolidation of Whirlpool's subsidiaries.
Negative FCF Under Pressure: Post acquisition, Fitch expect a
further decline in free cash flow (FCF) to negative territory,
pressured by increased working capital (WC) needs, capex and
dividend payments to Fitch-defined FCF of negative TRY10.5 billion
in 2023 (vs negative TRY5.9 billion in 2022). Volatile WC needs
have historically pressured Arcelik's FCF generation. Fitch expects
FCF generation to flatten by 2025, with the expectation of solid
EBITDA generation and eased pressure from WC.
Deteriorating Interest Cover: Arcelik repaid a maturing Eurobond of
EUR500 million in April 2023 from existing funds due to refinancing
constraints and market volatility. The company has a record of
accessing the international debt capital market; Fitch expects it
will issue a Eurobond subject to market conditions. The company had
significant short-term (ST) debt in 2022 of TRY15 billion with
interest cost for ST LC debt reaching as high as 25%.
Fitch forecasts continued deterioration in EBITDA interest cover to
2.6x for 2023/2024 from 3.9x in 2022 following increased cost of
debt. Fitch views refinancing risk as moderate as liquidity in the
local market is still open for Arcelik given continued appetite
from local and international lenders to the issuer. Fitch expects
Arcelik to continue to have the ability to tap the local market for
the refinancing of ST debt.
Financial Services Adjustments: Arcelik's reported leverage is
affected by higher-than-average WC needs, as a significant portion
of durable goods are sold on credit in Turkiye. While this is
partly financed by Arcelik, the dealer credit risk is covered by
banks' letters of credit and mortgages. Fitch assumes about 120
days of domestic receivables come from this business practice in
Turkiye and adjusts debt accordingly to reflect a more accurate
peer comparison. Based on its financial services criteria, Fitch
applies a 2x debt-to-equity ratio for these receivables.
DERIVATION SUMMARY
Arcelik has strong market shares in Turkiye and Europe, which
historically have driven stable through-the-cycle EBITDA (about 9%)
and FFO margins (6%-7%). These financial metrics are broadly
commensurate with the 'BB' rating median in its Capital Goods
Navigator, and are in line with that of higher-rated peers
Whirlpool Corp. (BBB/Negative) and Panasonic Holdings Corporation
(BBB-/Stable). However, these strengths are offset by expected weak
FCF generation, driven by intense capex in new markets, and
structurally high WC needs. Arcelik's leverage metric adjusted for
financial services is below its negative rating sensitivity and
conforms with the 'BB' rating median in its Capital Goods
Navigator, despite the current investment phase.
Arcelik's technological content and R&D capabilities are broadly in
line with those of Whirlpool, Electrolux and the broader white
goods industry. However, Arcelik has a much higher share of revenue
from emerging markets than higher-rated white goods manufacturers.
Arcelik is diversifying away from Turkiye, but remains vulnerable
to macro-economic, political and FC risks in emerging markets.
KEY ASSUMPTIONS
- Double-digit revenue growth for the next four years across
Turkiye and the international markets, supported by continued
expansion into new products, markets and favourable FC impact on
sales
- Both Whirlpool transactions to be completed during 2H23
- Purchase of Whirlpool's MENA businesses for EUR20 million
included in acquisitions for 2023
- Some EBITDA margin dilution from the acquisition of Whirlpool
- Continued successful refinance of upcoming ST maturities; however
at a higher interest rate
- Financial-services adjustment assumes 120 days of domestic
receivables
- Dividends distribution to increase with profitability
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- The ratings could be upgraded if Turkey's Country Ceiling was
upgraded
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A lowering of Turkey's Country Ceiling and/or weakening of FC
debt coverage ratios
Factors that could, individually or collectively, lead to negative
rating action on the LC IDR:
- Substantial deterioration in liquidity or consistently negative
FCF
- Increased risk from Whirlpool's subsidiary acquisition leading to
high opex and further deterioration in EBIT margin below 7%
- FFO margin sustainably below 7%
- Receivables-adjusted FFO net leverage above 3.5x
- Weakening of the SCP due to increased funding cost and FFO
interest cover below 3.0x
LIQUIDITY AND DEBT STRUCTURE
Low Liquidity Score: Historically, Arcelik's liquidity score has
been below 1x, driven by the use of ST debt to finance its high WC
needs. The available cash on balance sheet was TRY21.8 billion at
end-2022.
Fitch believes that liquidity risk is mitigated by Arcelik's
comfortable (uncommitted) lines in the local market from local and
international lenders, which were available even during the global
financial crisis of 2008-2009, and continue to be in place despite
current stress. The banks are well funded, and appetite for Arcelik
is high through bilateral loans where they offer one-year maturity
with favorable prices. Fitch expects the company to be able to tap
the local market for the continuous refinancing of ST debt.
The liquidity score below 1x is not adequate for the current
rating, but the risk is partly mitigated by customer receivables
financing that are deemed self-liquidating. Arcelik repaid a EUR500
million bond in April 2023 from existing funds, but was unable to
refinance due to market volatility. The company has a record of
accessing international debt capital market, and Fitch expects it
to issue a Eurobond once market conditions permit.
ISSUER PROFILE
Arcelik, owned by Koc Group, is the largest white goods and
consumer electronics manufacturer in Turkiye and is the
second-largest in Europe (in terms of unit sales). The company has
30 different production facilities in nine countries (Turkey,
Romania, Russia, China, Thailand, Bangladesh, Pakistan, India and
South Africa), and offers its goods and services to more than 150
countries through its 13 brands (which include Arcelik, Beko and
Grundig).
Arcelik comfortably commands leading market share of the Turkish
domestic white goods market. International revenue currently
accounts for about 70% of the company's total revenue, increasing
steadily over the past 10 years. The reportable segments of Arcelik
have been organised by management into white goods, consumer
electronics and other.
The white goods segment comprises washing machines, dryers, dish
washers, refrigerators, ovens, cookers and provides the after sales
services for these products.
The consumer goods segment comprises televisions primarily with
flat screens, computers, cash registers, other electronic devices
and provides the after sales services for these products.
The other segment comprises revenue from air conditioners, home
appliances, furniture and kitchen gadgets.
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
----------- ------ -------- -----
Arcelik A.S. LT IDR BB- Affirmed BB-
LC LT IDR BB+ Affirmed BB+
Natl LT AAA(tur)Affirmed AAA(tur)
senior
unsecured LT BB- Affirmed RR4 BB-
===========================
U N I T E D K I N G D O M
===========================
ALLIANCE TRANSPORT: Files Second NOI to Appoint Administrators
--------------------------------------------------------------
Sam Metcalf at TheBusinessDesk.com reports that a private
equity-backed transport technology firm, based in Derby, has edged
closer to falling into administration after it filed a second
notice of intention (NOI) to appoint administrators on April 27.
Clowne-based Alliance Transport Technologies (ATT) received a
multimillion-pound investment from BGF last year, but on Thursday,
April 27, the firm again posted a NOI, which will protect it from
creditor action for a period of 10 days, TheBusinessDesk.com
relates.
Companies can only post two NOIs before they either have to call in
administrators, or continue to trade.
ATT's latest accounts, made up to December 30, 2021, show a profit
of just over GBP911,000 for the year. At the time, the company
employed 51 people -- up from just five in 2020,
TheBusinessDesk.com discloses.
A spokesperson for BGF told TheBusinessDesk.com that it remains a
"small minority" investor in ATT, but would make no further
comment, TheBusinessDesk.com notes.
BLACK SHEEP: Enters Administration, Explores Options
----------------------------------------------------
Darren Greenwood at The Press reports that North Yorkshire's Black
Sheep Brewery has announced it is going into administration,
blaming "a perfect storm" of Covid-19 and rising costs.
The move follows the brewery saying it has launched a "review of
its strategic options" on April 11, which included a potential
sale, The Press notes.
Then, on April 27, the Masham-based business said its shares were
no longer for sale, but a sale of the business and assets would be
considered, The Press relates.
According to The Press, on May 2, Black Sheep said its board has
resolved to file a notice of intention to appoint Kristian
Shuttleworth and Clare Boardman of Teneo Financial Advisory Limited
as administrators to the Company and BSB Retail Limited.
The Board is taking this action to protect the interests of its
creditors, The Press discloses.
No shares will be traded on Asset Match until further notice and an
auction scheduled for Wednesday, May 24, has been suspended, The
Press relays.
CONTOURGLOBAL LIMITED: Fitch Affirms IDR at 'BB-', Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has affirmed ContourGlobal Limited's (CG) Long-Term
Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook and
removed it from Rating Watch Negative (RWN). Fitch has
simultaneously affirmed ContourGlobal Power Holdings S.A.'s (CGPH)
senior secured notes rating at 'BB+'/'RR2' and super senior secured
revolving credit facility (RCF) rating at 'BB+', upgrading the
recovery rating of the latter to 'RR1' from 'RR2'. The debt ratings
were removed from RWN and also from Under Criteria Observation
(UCO).
The IDR affirmation with a Stable Outlook reflects its expectations
of an unchanged business profile and the holding company (holdco)
capital structure being commensurate with the rating following the
acquisition by funds advised by global investment firm KKR & Co.
Inc. and its affiliates (collectively referred to as KKR,
'A'/Stable). Fitch forecasts funds from operations (FFO) leverage
to average 4.3x in 2024-2025, which results in limited rating
headroom. Leverage is supported by the expected asset refinancing
operations in 2023 and steadily increasing operational
distributions from the portfolio companies. Fitch expects the
significant maturities in 2024 and 2025 to be partially refinanced
at higher cost of debt.
KEY RATING DRIVERS
Post-Acquisition Capital Structure: The affirmation reflects the
holdco capital structure following the acquisition by KKR being
consistent with the rating. Fitch projects that holdco debt will
increase by about USD300 million in 2023 to USD1.5 billion. Thanks
to solid cash distributions from planned asset refinancing
operations in 2023, CG will repay about USD250 million of the
GBP445 million (USD540 million) bridge loan pushed down from
Cretaceous Bidco Limited (bidding company or bidco).
Fitch does not expect significant changes to the capital structure
with only moderate increase in leverage in 2024-2025 due to lower
total distributions than in 2023. Fitch forecasts FFO leverage to
average 4.3x in 2024-2025, which results in limited rating
headroom.
Fitch assumes that cash flows to the holdco from operating
subsidiaries will be supported by successful recontracting of
assets and increasing operational cash flow available for debt
service (CFADS) at the holdco level.
Asset-Level Refinancing in 2023: CG has publicly said that it
expects to extract about USD340 million from project companies
related refinancing operations over the short term. Fitch forecasts
a lower amount of close to USD270 million in 2023, still sufficient
to repay USD250 million of acquisition debt. The significantly
higher refinancing prospects are due to the operational
overperformance of specific assets and the supportive price
environment.
The management has established a good record of origination and
asset recontracting across the economic cycle, with distributions
from releveraging averaging USD90 million a year over the past four
years.
Higher Investments: Annual investments in existing assets and
acquisitions should average close to USD400 million over the
forecast horizon as the company continues to invest in efficiency
and carbon-capture projects for its existing thermal assets, while
accelerating the expansion of its low-carbon intensity portfolio.
Under its rating case, the investments will be supported by the
higher CFADS, moderate increase in holdco debt and no dividend
payments. Fitch would expect to see a slower increase in leverage
in a scenario of fewer acquisitions.
Unchanged Operating Profile: CG's business model continues to focus
on long-term inflation-indexed contracted assets, with cost
past-through clauses where relevant, and mostly investment-grade
offtakers. While the company will maintain a diversified portfolio
in terms of geographies and technologies, it will focus on low-risk
countries and low carbon-intensity assets. Investments in the
existing thermal fleet will support the target of 40% decrease in
carbon intensity by 2030 and net zero by 2050.
CG's contracted assets have an average contract life of eight years
and over 80% of 2022 revenue was contracted. The decrease in
contracted revenue (from over 90% in 2021) is due to the temporary
merchant positioning of some assets. The average credit quality of
the offtakers was 'BBB' before political risk insurance.
Deconsolidated Approach: Fitch rates CG using a deconsolidated
approach. The main credit metric is holdco-only FFO leverage which
Fitch calculates as the recourse debt (excluding project finance
debt at subsidiaries) divided by holdco-only FFO before interest
paid (dividends from subsidiaries excluding one-off transactions,
and proceeds from sell downs of minority stakes in projects less
holdco operating expenses and taxes).
A material deviation from the current financing structure, with a
significantly higher share of holdco debt or inclusion of
cross-default clauses at the asset level could lead to a change in
the analytical methodology.
No Impact from Parent Linkage: Fitch rates CG on a standalone basis
as it that considers its Parent and Subsidiary Linkage Rating
Criteria does not apply to CG, due to its full ownership by a
financial investor. CG is wholly owned by KKR Global Infrastructure
Investors IV, which is part of funds advised by KKR. This global
investment firm is a long-term investor in CG, with the company
being part of KKR's infrastructure investments.
Recovery Rating Change: The super senior Recovery Rating was
upgraded to 'RR1' from 'RR2' and removed from UCO where it was
placed following the publication of the new Country-Specific
Treatment of Recovery Ratings Rating Criteria on 3 March 2023.
Under the new criteria, Luxembourg (where most of CG's intermediate
holdcos, which provide the guarantees and pledge on shares for
holdco's secured and super senior creditors, are located) was moved
to a group A from group B countries.
The rating was previously constrained at 'RR2' due to the cap for
group B countries. The instrument ratings are still capped at two
notches higher than the IDR under the Corporates Recovery Ratings
and Instrument Ratings Criteria notching grid, meaning there is no
change to the instrument rating. The senior secured notes rank
equally with the super senior secured RCF debt and letters of
credit at CGPH in respect of payment obligations but junior to them
upon enforcement.
DERIVATION SUMMARY
Fitch rates CG using a deconsolidated approach as the company's
operating assets are largely financed with non-recourse project
debt. CG's operating scale is comparable with that of TerraForm
Power Operating, LLC (TERPO; BB-/Stable), NextEra Energy Partners,
LP (NEP) and Atlantica Sustainable Infrastructure Plc (both
'BB+'/Stable).
Fitch views TERPO and NEP's US-dominated portfolio of renewable
assets as superior to that of CG, which is 37% renewables with the
remaining generation mainly thermal and carries re-contracting risk
and political and regulatory risks in emerging markets. Fitch also
views Atlantica's portfolio of assets as superior to that of CG,
given Atlantica's focus on renewables (largely solar, about 67% of
power-generation capacity), longer remaining contracted life
(fifteen years versus eight) and better geographical split (largely
North America and Europe). This is mitigated by the larger size of
CG's portfolio.
KEY ASSUMPTIONS
Fitch's Key Assumptions within Its Rating Case for the Issuer:
- Operational distributions increasing towards USD500 million in
2026 from about USD300 million in 2023, boosted by the growth
investments and asset recontracting.
- Cash extraction from refinancing activities in 2023 at 80% of the
publicly communicated target with no other significant refinancing
proceeds throughout the forecast horizon.
- Holdco overheads decreasing towards USD30 million due to a
lighter corporate structure.
- Interest rates on new debt of 7.5% to 8%, with holdco debt
increasing towards USD1.8 billion in 2026, partially supporting the
expansion efforts.
- USD250 million acquisition debt repayment in 2023 and USD750
million refinancing only in 2024, ahead of the maturity of the
bridge loan A tranche and refinancing facility with further EUR400
million holdco refinancing in 2025.
- No dividends paid by holdco in 2023-2026.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Holdco-only FFO leverage below 3.5x on a sustained basis and FFO
interest coverage higher than 5x.
- Reduced reliance on top five projects/contributors to cash flows
to holdco leading to a higher diversification.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Holdco-only FFO leverage above 4.5x on a sustained basis and FFO
interest coverage lower than 3x.
- Major PPAs experiencing unexpected and material price reduction
or termination.
- Material deterioration of the business profile due to materially
worse recontracting terms, major political interference,
significant investment overruns or financial stress at the asset
level, or more speculative investments leading to a share of
contracted revenues below 60%.
- A material increase in the super senior revolving credit facility
and equally ranking letters of credit facilities could be negative
for the senior secured rating.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: At end-2022, CG had sufficient liquidity at
the holdco level despite the USD145 million maturity in 2023. At
the holdco level, there is a significant maturity wall in 2024 due
to the pushed-down acquisition debt and refinancing facility.
Project-finance debt maturities at operating subsidiaries,
comprising the vast majority of consolidated debt, are evenly
balanced due to debt amortisation.
Holdco level cash was USD94 million at end-2022 together with
EUR120 million available under an undrawn RCF expiring in December
2023.
ISSUER PROFILE
CG is a holding company that operates 6.2 gigawatts of gross
generation capacity with about 129 thermal and renewable power
generation assets across 20 countries, through its subsidiaries and
affiliates. CG's cash flows in project companies are supported by
long-term contracts, regulated capacity or regulated
cost-of-service payments.
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
----------- ------ -------- -----
ContourGlobal
Limited LT IDR BB- Affirmed BB-
ContourGlobal
Power Holdings
S.A.
senior secured LT BB+ Affirmed RR2 BB+
super senior LT BB+ Affirmed RR1 BB+
INTELLIGENT STEEL: Owed More Than GBP6MM at Time of Liquidation
---------------------------------------------------------------
Ian Weinfass at Construction News reports that Intelligent Steel
Solutions owed more than GBP6 million when it began the process of
liquidation last month, it has emerged.
A statement of the structural steel supplier's affairs, published
on Companies House last week, shows it owed GBP6.2 million to
unsecured creditors, notes the report.
JP MAUGER: Tough Trading Conditions Prompt Liquidation
------------------------------------------------------
Jersey Evening Post reports that another local building firm has
gone into liquidation -- citing tough trading conditions as the
reason for its collapse.
JP Mauger has become the second local construction business to go
into liquidation this year, following the collapse of Camerons at
the end of February, Jersey Evening Post relates.
The contractor was a significant player in the Jersey construction
sector, particularly in the building of luxury homes.
It has cited tough trading conditions as the reason for its
collapse, making it "increasingly difficult for the construction
industry in Jersey", Jersey Evening Post notes.
A total of 51 staff have been made redundant, Jersey Evening Post
discloses.
MAMA DOUGH: Bought Out of Administration, 47 Jobs Saved
-------------------------------------------------------
Katherine Price at The Caterer reports that South London pizza
chain Mamma Dough has been sold out of administration, with five of
the seven sites and 47 jobs saved.
Stephen Katz and David Birne of Begbies Traynor were appointed as
joint administrators to the company on December 20, 2022, after
soaring inflation and energy bills, combined with the impact of the
cost-of-living crisis and train strikes on consumer spend and
footfall, pushed the business into administration, The Caterer
relates.
According to The Caterer, Mr. Katz said: "We are delighted to have
successfully secured a positive outcome for the majority of the
staff at Mamma Dough and to enable this previously growing business
to continue to operate following one of the toughest periods to be
a consumer-facing business."
METNOR CONSTRUCTION: Owed GBP10M to Creditors at Time of Collapse
-----------------------------------------------------------------
Joshua Stein at Construction News reports that Newcastle-based
Metnor Construction owed creditors GBP10 million when it fell into
administration in February.
The group owed dozens of development companies, material companies
and subcontractors, Construction News relays, citing documents
released by its administrators Steven Ross and Allan Kelly of FRP
Advisory.
The administrators said that all creditors will receive at least
some return on what they are owed, with the company having
"sufficient funds available to make a distribution to unsecured
creditors in due course", Construction News relates.
However, the duo said "it is not possible" to predict how much the
firm's supply chain will receive, as the amount will depend on
liquidation costs, Construction News notes.
Lloyds Bank, Metnor Construction's single secured creditor, was
already paid what it was owed before FRP got involved, Construction
News discloses. Former employees of the firm are owed GBP90,000,
which should also be paid in full, while parent company Metnor
Group, which is also in administration, is owed GBP290,000,
Construction News states.
Metnor Construction owed HMRC around GBP50,000 of national
insurance contributions, VAT and PAYE, which it should get back in
full, Construction News discloses.
The firm worked across sectors including leisure, healthcare and
student accommodation, with jobs ranging up to GBP50 million.
However, it became insolvent following contract losses and "rising
input, labour and raw material prices, and supply issues against
fixed-price contracts", according to the administrators,
Construction News relates.
PHARMANOVIA BIDCO: Fitch Affirms LongTerm IDR at B+, Outlook Stable
-------------------------------------------------------------------
Fitch Ratings has affirmed Pharmanovia Bidco Limited's (formerly
Atnahs) Long-Term Issuer Default Rating (IDR) at 'B+' and senior
secured instrument rating at 'BB-'/RR3/61%.
The proceeds from the recently issued EUR160 million fungible term
loan B (TLB) will be used for general corporate purposes, including
refinancing EUR105 million of revolving credit facility (RCF) debt
and support Pharmanovia's stated acquisition strategy, which Fitch
expects to accelerate during 2023.
Pharmanovia's IDR balances its limited scale and diversification,
and moderate leverage with strong profitability and cash
generation. The Stable Outlook reflects Fitch's expectation that
Pharmanovia will maintain its disciplined approach to M&A, aimed at
strengthening defined strategic therapeutic areas, with consistent
EBITDA leverage of 4.0x through to the financial year ending March
2026 (FY26).
KEY RATING DRIVERS
Expected Stable Profitability: Fitch anticipates that the company's
greater focus on selective therapeutic areas supported by dedicated
marketing capabilities will lead to the Fitch-defined EBITDA margin
remaining strong at 45% through to FY26. The decision to bring some
marketing and distribution functions in-house and inflation has
weighed on profitability, but higher-margin product acquisitions
and successful new market expansions should allow the company to
absorb cost increases.
Strong Free Cash Flow: The IDR remains anchored on Pharmanovia's
strong free cash flow (FCF), which Fitch forecasts at about 15% of
revenue. This is lower than historical levels due to milestone
contingent payments to the Patel family and Roche for acquiring the
commercial rights of Rocatrol in China.
Nevertheless, Fitch views Pharmanovia's strong internal liquidity
as positive for its credit profile, as it allows the company to
self-fund much of its growth to sustain operating cash flow and
maintain adequate financial flexibility. Fitch expects FCF to be
reinvested in product additions and portfolio expansion, rather
than towards debt prepayment or distribution to shareholders.
Moderate Financial Leverage: Fitch expects EBITDA leverage to
improve towards 4.0x in FY24 on strong performance recovery and IP
drug acquisitions, although the TLB add-on yields marginally higher
leverage than Fitch originally expected. The TLB add-on proceeds
should be used to refinance the outstanding revolver debt and
create additional financial flexibility for continuing M&A
activities. In its view, EBITDA leverage remains moderate compared
with industry peers, counterbalancing the company's smaller size
and more concentrated product portfolio.
Focus on Balanced Growth: Fitch expects Pharmanovia to increase its
focus towards organic growth on its defined therapeutic areas,
driven by its efforts in product redevelopment and new market
launches, as further evidenced by entering in-licensing agreement
to market and further develop Sunosi, a treatment for excessive
daytime sleepiness.
This strategy complements the M&A driven growth and diversification
strategy and has gained momentum since the pandemic, but still
needs to demonstrate its ability and resilience to expand
organically on a sustained basis. Therefore, Fitch conservatively
expects a moderate decline of its established off-patent drug
portfolio, subject to active life-cycle management.
Execution Risks Broadened and Manageable. In its view, bringing
some functions in-house, such as marketing and distribution, has
broadened execution risks compared with outsourcing, but Fitch
believes this enables management to have greater control over sales
and has created an adequate platform to support growth, which is
reflected in the Stable Outlook. The business model is also
supported by inorganic growth, where exercising the same level of
discipline previously shown when targeting product acquisitions
will be key to maintaining the company's credit profile.
Constrained by Scale: Compared with Fitch-rated sector peers,
Pharmanovia's size constrains its rating, despite recent product
additions. As a result, Fitch does not expect an upgrade over the
rating horizon to FY26 until the business materially gains scale
(e.g. sales above GBP1 billion), even if leverage is reduced.
Similarly, Fitch also views the company's narrow product portfolio
as a rating constraint, although Fitch expects this to improve as
it continues to grow through medium to large acquisitions.
DERIVATION SUMMARY
Fitch rates Pharmanovia based on, and conducts peer analysis using,
its global navigator framework for innovative pharmaceutical
companies. Fitch considers Pharmanovia's 'B+' rating against other
asset-light scalable niche pharmaceutical companies such as
CHEPLAPHARM Arzneimittel GmbH (B+/Stable), ADVANZ PHARMA HoldCo
Limited (B/Stable) and Nidda Bondco GmbH (STADA, B/Negative).
Lack of business scale and a concentrated brand portfolio, albeit
benefiting from growing product and wide geographic diversification
within each brand, constrain the IDR to the 'B' rating category.
Pharmanovia and Cheplapharm traditionally have had almost equally
high and stable operating and cash flow margins. Both companies
have been operating an asset-light business model. However,
Cheplapharm has greater rating headroom derived from its robust
operating performance, combined with stronger liquidity and
moderate financial risk.
The difference with lower-rated ADVANZ PHARMA is mainly due to the
latter's refocused strategy to actively develop and market targeted
specialist generic drugs, driving overall weaker profitability and
cash flow generation.
Pharmanovia has a weaker business risk profile than STADA due to
its significantly smaller size and scale, although this is
compensated by a less aggressive financial policy.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Sales of existing branded legacy portfolio to decline 3%-4% to
FY26
- M&A of product IP and commercial infrastructure assets at GBP50
million-GBP70 million a year during FY24-FY26 (funded with
internally generated FCF), with targets acquired at an enterprise
value (EV)/sales of 3.5x, as assumed by Fitch
- EBITDA margin stable at around 45% through to FY26
- Trade working-capital outflow of GBP10 million-GBP35 million
through to FY26
- Maintenance capex at 2%-3% of revenue each year to FY26
- No dividend payments.
Key Recovery Rating Assumptions
Pharmanovia's recovery analysis is based on a going-concern (GC)
approach, reflecting the company's asset-light business model
supporting higher realisable values in a distressed scenario
compared with balance-sheet liquidation. Potential distress could
arise primarily from material revenue contraction following volume
losses and price pressure given Pharmanovia's exposure to generic
pharmaceutical competition, possibly also in combination with an
inability to manage the cost base of a rapidly growing business.
Fitch increases its post-restructuring GC EBITDA estimate to GBP120
million from GBP100 million to reflect EBITDA contributions from
the Sunosi in-licencing agreement and its expectation of further
reinvestments financed by additional liquidity post-TLB add-on.
Fitch continues to apply a 5.0x distressed EV/EBITDA multiple in
line with Pharmanovia's estimated threshold for drug acquisitions,
which would appropriately reflect the company's minimum valuation
multiple before considering value added through portfolio and brand
management.
Its principal waterfall analysis generated a recovery rating of
'RR3' for the all-senior secured capital structure after deducting
10% for administrative claims, comprising the senior secured TLB of
EUR832 million and the RCF of about EUR173 million, which Fitch
assumes to be fully drawn before distress, and ranking equally
among themselves. This indicates a 'BB-'/RR3 instrument rating for
the senior secured debt with an output percentage based on current
metrics and assumptions at 61%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Fitch does not envisage an upgrade to the 'BB' rating category in
the medium term until Pharmanovia reaches a more sector-critical
size with revenue greater than GBP1 billion, combined with
conservative EBITDA leverage at or below 4.0x and FCF remaining
strong.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Unsuccessful management of individual pharmaceutical IP rights
leading to permanent material loss of revenue and EBITDA, with
EBITDA margins trending towards 40%
- EBITDA leverage above 5.5x on a sustained basis, signalling a
more aggressive financial policy, departure from current
acquisition principles or operational challenges
- FCF margin below 10% on a sustained basis
- EBITDA interest coverage below 3.0x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: Fitch forecasts cash on balance sheet to be
around GBP30 million (excluding GBP5 million which Fitch considers
as not readily available) in March 2024. Pro forma for the term
loan issuance, the company has full access to its EUR173 million
RCF (about GBP152 million) and benefits from consistently positive
FCF generation, leading to comfortable liquidity.
Pharmanovia also benefits from absence of near-term debt
maturities, albeit concentrated with an EUR832 million TLB (about
GBP730 million) maturing in August 2026.
ISSUER PROFILE
Pharmanovia is a UK-based specialty pharma focused on acquiring and
managing branded off-patent drugs. Main therapeutic areas are
cardiovascular, endocrinology, neurology and oncology.
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
----------- ------ -------- -----
Pharmanovia
Bidco Limited LT IDR B+ Affirmed B+
senior secured LT BB- Affirmed RR3 BB
*********
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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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
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