/raid1/www/Hosts/bankrupt/TCREUR_Public/230510.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 10, 2023, Vol. 24, No. 94
Headlines
B E L A R U S
DEVELOPMENT BANK: Fitch Lowers LongTerm Foreign Currency IDR to 'C'
G E O R G I A
BANK OF GEORGIA: Fitch Hikes LongTerm IDR to 'BB', Outlook Stable
TBC BANK: Fitch Hikes LongTerm IDR to 'BB', Outlook Stable
G E R M A N Y
GRUNENTHAL GMBH: Fitch Gives BB+ Final Rating to Sr. Secured Notes
WEPA: S&P Alters Outlook to Stable, Affirms 'B+' ICR
I R E L A N D
BLACKROCK EUROPEAN XIV: Fitch Gives 'B-(EXP)sf' Rating to F Notes
GEDESCO TRADE 2020-1: Moody's Lowers Rating on 2 Tranches to Ca
I T A L Y
CENTURION BIDCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Negative
N E T H E R L A N D S
NOURYON HOLDING: Moody's Affirms 'B2' CFR, Alters Outlook to Pos.
TMF SAPPHIRE: Moody's Assigns 'B2' CFR, Outlook Stable
P O R T U G A L
LUSITANO MORTGAGES NO. 4: S&P Ups Cl. D Notes Rating to 'BB+ (sf)'
R O M A N I A
ROMANIA: 1,644 Companies Declared Insolvent in 1st Qtr. 2023
S P A I N
BBVA RMBS 3: Fitch Affirms Class C Notes Rating at 'Csf'
CATLUXE SARL: S&P Downgrades LT ICR to 'D' on Recapitalization
S W E D E N
SAMHALLSBYGGNADSBOLAGET I NORDEN: S&P Downgrades ICRs to 'BB+/B'
S W I T Z E R L A N D
VERISURE MIDHOLDING: S&P Upgrades LT ICR to 'B+', Outlook Stable
T U R K E Y
RONESANS GAYRIMENKUL: Moody's Withdraws 'Caa1' Corp. Family Rating
TURK P VE I: Fitch Affirms IFS Rating at 'B', Outlook Negative
U N I T E D K I N G D O M
BUSINESS MORTGAGE 4: Fitch Affirms 'B-sf' Rating on Cl. B Notes
FLOWLINE: Bought Out of Administration by FM Conway
JOULES: FRC Opens Investigation Into Deloitte Over Audit
NORSTEAD: Owes GBP7.2 Million to Unsecured Creditors
ODFJELL DRILLING: Assigns Preliminary 'B+' LT ICR, Outlook Stable
ODFJELL DRILLING: Moody's Assigns 'B2' CFR, Outlook Stable
PURPLEBRICKS: May Run Out of Cash, Seeks to Sell Business
ROBINSON MANUFACTURING: Goes Into Administration
UNIQUE PUB: Fitch Affirms 'B-' Rating on Two Tranches, Outlook Neg.
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B E L A R U S
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DEVELOPMENT BANK: Fitch Lowers LongTerm Foreign Currency IDR to 'C'
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Fitch Ratings has downgraded JSC Development Bank of the Republic
of Belarus's (DBRB) Long-Term Foreign-Currency (LTFC) Issuer
Default Rating (IDR) to 'C' from 'CC'. The bank's Long-Term
Local-Currency (LTLC) IDR has been affirmed at 'CCC'.
KEY RATING DRIVERS
Non-Payment on Eurobond Coupon: The downgrade of DBRB's LTFC IDR to
'C' follows the bank's announcement to bondholders that coupon
payments on the bank's US dollar-denominated Eurobond due on 2 May
2023 and 2 November 2023 will be deferred until 2 May 2024, the
maturity date on the Eurobond.
If the payment on the May 2023 coupon is not made to investors
within the 14-day grace period, Fitch will considers this a
restricted default under Fitch's Bank Rating Criteria and downgrade
DBRB's LTFC IDR to 'RD'.
LC IDR Affirmed: The affirmation of the LTLC IDR reflects Fitch's
view that local-currency debt is not subject to the resolution.
GSR of 'no support': DBRB's Government Support Rating (GSR) has
been downgraded to 'no support' from 'CC' because Fitch now views
that potential support from the government of the Republic of
Belarus ('RD') cannot be relied upon.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
If DBRB does not make the payment on its Eurobond coupon due in May
2023 within the grace period, Fitch will downgrades the bank's LTFC
IDR to 'RD'. The LTLC IDR could be downgraded to 'CC' if the
sovereign defaults on its LC debt, or to 'C' if the bank announces
plans to restructure its LC obligations.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The bank's LTFC IDR could be upgraded if the bank starts making
coupon payments on the Eurobond.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The long-term rating on DBRB's Eurobond has been affirmed at 'C',
which is the lowest level on its rating scale. This rating was
downgraded to 'C' in December 2022 after the previous coupon
payment was transferred to the UK-based paying agent by the bank,
but was not distributed to bondholders due to risks of violating UK
sanctions. Fitch viewed this as uncured default on the bond (see
"Fitch Downgrades Development Bank of the Republic of Belarus's
Eurobond to 'C'; Affirms IDR at 'CC'", dated 13 December 2022). The
bank has informed us that the paying agent has not yet released the
previous coupon to the bondholders.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The rating on DBRB's US dollar-denominated Eurobond could be
upgraded if DBRB resumes making coupon payments on the Eurobond in
the designated currency (US dollars) and these are fully received
by investors.
ESG CONSIDERATIONS
DBRB has the ESG Relevance Score of '4' for Financial Transparency
as the bank has not published its IFRS accounts since end-1H21 and
reduced the scope of information it provides publicly. This has a
negative impact on its 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
----------- ------ -----
JSC Development
Bank of the
Republic of
Belarus LT IDR C Downgrade CC
ST IDR C Affirmed C
LC LT IDR CCC Affirmed CCC
Government Support ns Downgrade cc
senior
unsecured LT C Affirmed C
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G E O R G I A
=============
BANK OF GEORGIA: Fitch Hikes LongTerm IDR to 'BB', Outlook Stable
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Fitch Ratings has upgraded JSC Bank of Georgia's (BOG) Long-Term
Issuer Default Rating (IDR) to 'BB' from 'BB-' and its Viability
Rating (VR) to 'bb' from 'bb-'. The Outlook on the IDR is Stable.
The upgrade of BOG reflects strong performance through the cycle,
including through several economic downturns. Some of the credit
factors, particularly business profile, profitability and
capitalization, proved resilient and are exceptionally strong in
the local context.
Fitch believes Georgia's buoyant economic growth, strengthening
sovereign credit profile and improving external finances, which are
all captured by the Positive Outlook on Georgia's IDRs (for details
see 'Fitch Revises Georgia's Outlook to Positive; Affirms at 'BB''
dated 27 January 2023), would improve the banking sector's
operating environment, and underpin the stability of the local
banks' (including BOG's) key credit metrics. Therefore, Fitch has
revised the outlook on operating environment for banks in Georgia
to positive.
KEY RATING DRIVERS
Intrinsic Strength Drives IDR: BOG's IDRs are driven by the bank's
standalone profile, as captured by its VR. The 'bb' VR reflects the
bank's strong domestic franchise, healthy performance metrics and
high capital ratios. The VR also captures BOG's high, albeit
reducing, balance-sheet dollarisation.
Strong Economic Growth: The military conflict in Ukraine and
subsequent sanctions on Russia have resulted in a large positive
economic shock in the form of sizable immigration and a surge in
remittances. Coupled with a rebound in tourism and strong domestic
demand, these factors have led to a high GDP growth, which Fitch
estimates at 10.3% in 2022, before normalising to 4.5% by 2023.
Fitch expects the boost in economic activity to support the banking
sector's performance and asset quality.
Solid Domestic Franchise: BOG is one of the two largest banks in
Georgia with significant pricing power and a 38% market share in
sector assets as of end-2022. The bank operates a universal
business model, providing loans to corporates, SMEs and micro
enterprises and households (mainly mortgages). Deposits are the
core source of funding, supplemented by wholesale borrowing largely
from international financial institutions (IFIs).
High Dollarisation: Foreign-Currency (FC) lending (45% of loans at
end-2022) remains the key vulnerability to asset quality and an
overall drag on BOG's ratings, despite a moderate decline following
the macro-prudential measures introduced by the National Bank of
Georgia (NBG). FC loans in retail are particularly high-risk, in
Fitch's view, especially given that some of them have floating
interest rates. At end-2022, BOG's FC mortgage loans amounted to
about 45% of Fitch Core Capital (FCC).
Moderate Impaired Loan Ratio: BOG's impaired loans ratio declined
to 3.6% at end-2022 from 4.2% at end-2021, reflecting favourable
economic growth and a strong local currency. Impaired loans were
54% covered by total loans loss allowances (LLAs), reflecting the
bank's reliance on collateral. Fitch believes asset quality will
remain healthy in 2023-2024 as inflationary pressure abates.
Robust Profitability: Operating profit improved to 5.8% of
risk-weighted assets (RWAs) in 2022 from 4.6% in 2021, driven by
wider net interest margins and FC gains. Fitch expects
profitability to remain strong in 2023 as high interest rates will
mitigate moderation of non-interest income. Fitch views BOG's long
record of robust performance, with an average return on equity
(ROE) of 22% over the past decade, as a key rating strength.
Healthy Capitalisation: BOG's FCC ratio amounted to a solid 17.9%
at end-2022, up from 16.1% at end-2021, as internal capital
generation was ahead of credit growth. Regulatory common equity
Tier 1 (CET1: 14.7%) was comfortably above regulatory minimum
requirements. Fitch expects capital ratios to remain strong in the
near term, given strong profit retention and only moderate loan
growth (Fitch expects 12% in 2023).
Strong Deposit Growth: In 2022 the bank experienced a strong inflow
of customer funds (43% adjusted for currency movements), which made
up 76% of non-equity funding and lifted loans/deposits ratio to
94%, from 117% at end-2021.
Non-deposit funding mostly comprises issued debt securities and
funding from IFIs. Refinancing risks are manageable given
sufficient liquidity coverage of upcoming debt maturities, strong
access to IFI funding and committed undrawn long-term loan
facilities.
Extraordinary Support Unlikely: The Government Support Rating (GSR)
of 'no support' reflects Fitch's view that resolution legislation
in Georgia, combined with constraints on the ability of the
authorities to provide support (especially in FC), means that
government support, although still possible, cannot be relied
upon.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
BOG's ratings are primarily sensitive to a significant
deterioration of the operating environment or a severe setback to
its economic growth forecasts.
Negative rating pressure may also stem from a sharp increase in
impaired loan ratio (above 10%), for example, due to a sharp local
currency devaluation. In particular the ratings could be
downgraded, if higher loan impairment charges consume most of the
profits for several consecutive quarterly reporting periods.
A reduction of capitalisation with the FCC ratio sustainably below
15% due to a combination of weaker earnings, faster loan growth and
higher dividend pay-outs, could also be credit-negative.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of BOG's rating is unlikely in the near term. In the
longer term an upgrade would require a significant further
strengthening of the operating environment, material decline in
balance-sheet dollarisation while maintaining consistently robust
financial metrics.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BOG's senior unsecured debt rating is aligned with the bank's
Long-Term IDR, reflecting its view that the probability of default
on these instruments is the same as that for the bank.
The bank's additional Tier 1 (AT1) notes are rated at 'B-', four
notches below BOG's VR. This reflects (i) two notches for the
notes' high loss severity due to their deep subordination; and (ii)
two notches for additional non-performance risk relative to the VR,
given fully discretionary coupon omission.
The AT1 notes will be written down if the CET1 ratio falls below
5.125% or if the bank is subject to intervention by the NBG. The
NBG could also impose restrictions on coupon payments if banks
breach minimum capital ratios including Pillar 1 and Pillar 2
buffers. At end-2022, the minimum required ratios (local
GAAP-based), including all applicable buffers for BOG, were 11.6%
for CET1, 13.8% for Tier 1 and 17.2% for total. At end-2022 the
headroom above those levels was the lowest for the total capital
ratio, but still significant at 253bp.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
BOG's senior unsecured debt rating is sensitive to changes in the
bank's Long-Term IDR, while the AT1 notes' rating is sensitive to
changes in the bank's VR.
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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JSC Bank of
Georgia LT IDR BB Upgrade BB-
ST IDR B Affirmed B
LC LT IDR BB Upgrade BB-
LC ST IDR B Affirmed B
Viability bb Upgrade bb-
Government Support ns Affirmed ns
senior
unsecured LT BB Upgrade BB-
subordinated LT B- Affirmed B-
TBC BANK: Fitch Hikes LongTerm IDR to 'BB', Outlook Stable
----------------------------------------------------------
Fitch Rating has upgraded TBC Bank JSC's Long-Term Issuer Default
Rating (IDR) to 'BB' from 'BB-', and Viability Rating (VR) to 'bb'
from 'bb-'. The Outlook is Stable.
The upgrade of TBC reflects strong performance through the cycle,
including through several economic downturns. Some of the credit
factors, particularly business profile, profitability and
capitalisation, proved resilient and are exceptionally strong in
the local context.
Fitch believes Georgia's buoyant economic growth, strengthening
sovereign credit profile and improving external finances, which are
all captured by the Positive Outlook on Georgia's IDRs (for details
see 'Fitch Revises Georgia's Outlook to Positive; Affirms at 'BB''
dated 27 January 2023), would improve the banking sector's
operating environment, and underpin the stability of the local
banks' (including TBC's) key credit metrics. Therefore, Fitch
revised the outlook on operating environment for banks in Georgia
to positive.
KEY RATING DRIVERS
IDR Captures Intrinsic Strength: TBC's IDRs are driven by the
bank's standalone profile, as captured by its VR. The VR reflects
the bank's market-leading franchise in Georgia, healthy performance
metrics and high capital ratios. The VR also considers TBC's high,
albeit gradually reducing, balance-sheet dollarisation.
Strong Economic Growth: The military conflict in Ukraine and
subsequent sanctions on Russia have resulted in a large positive
economic shock in the form of sizable immigration and surge in
remittances. Coupled with a rebound in tourism and strong domestic
demand, these factors have led to high GDP growth, which Fitch
estimates at 10.3% in 2022, before normalising to 4.5% by 2023.
Fitch expects the boost in economic activity to support the banking
sector's performance and loan quality.
Dominant Domestic Franchise: TBC is the largest bank in Georgia,
with a dominant market share in sector loans (39% at end-2022) and
significant pricing power. TBC operates a universal banking model,
providing loans to all major client segments, including corporates,
SMEs, micro enterprises and consumers (mainly mortgages). Deposits
are the core source of funding, supplemented by wholesale borrowing
largely from international financial institutions (IFIs).
High Dollarisation: Lending dollarisation (47% of loans at
end-2022) remains the key vulnerability to asset quality and an
overall drag on TBC's ratings, despite a moderate decline over the
past few years following the macro-prudential measures introduced
by the National Bank of Georgia (NBG). Foreign-currency (FC) loans
in retail are particularly risky, in Fitch's view, especially given
that some of them have floating interest rates. At end-2022, TBC's
FC mortgage loans amounted to 55% of Fitch core capital (FCC).
Asset-Quality Metrics Improved: TBC's asset-quality metrics have
broadly recovered after the pandemic. Its impaired loans ratio
decreased to 2% at end-2022 from 3% at end-2021 (2020: 6%),
reflecting a favourable economic environment and write-offs. Stage
2 loans also fell to 8% at end-2022 from 11% at end-2021 (2020:
16%).
Risks may stem from the bank's significant exposure to cyclical
sectors, including real estate (9% of gross loans), hospitality
(6%) and construction (6%), which fundamentally reflects the
domestic economy's structure.
Strong Profitability Through Cycle: Operating profit improved to
5.9% of risk-weighted assets (RWAs) in 2022 from 4.8% in 2021, due
to wider margins and stronger non-interest income supported by
strong economic growth. Fitch expects operating profitability in
2023 to remain above TBC's long-term average despite some
moderation compared from 2022. Fitch views TBC's long record of
robust performance, with an average return on equity (ROE) of 21%
over the past decade, as a key rating strength.
Healthy Solvency Metrics: TBC's FCC ratio increased to a solid
18.3% at end-2022 (end-2021: 16.3%) due to retention of strong
profits and low nominal credit growth. TBC's regulatory capital
ratios had comfortable headroom (around 400bp) above regulatory
minimum requirements at end-2022. Fitch expects continuing robust
performance and moderate loan growth to support sound capital
adequacy in the near term.
Stable Funding and Liquidity: TBC is largely funded by customer
deposits (end-2022: 74% of liabilities), of which a material 54%
was in FC. Highly liquid assets, net of wholesale funding maturing
within the next 12 months, covered a reasonable 23% of customer
accounts.
Liquidity risks are well-managed given historically stable funding,
moderate deposit concentrations and uninterrupted access to IFI
funding. The loans/deposits ratio improved to an adequate 102% at
end-2022 (end-2021: 116%) due to an inflow of new deposits.
Extraordinary Support Unlikely: The Government Support Rating (GSR)
of 'no support' reflects Fitch's view that resolution legislation
in Georgia, combined with constraints on the ability of the
authorities to provide support (especially in FC), means that
government support, although still possible, cannot be relied
upon.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
TBC's ratings are primarily sensitive to a significant
deterioration of the operating environment or a severe setback to
its economic growth forecasts.
Negative rating pressure may also stem from a sharp increase of its
impaired loan ratio rising above 10%, for example due to a
significant local currency devaluation. In particular the ratings
could be downgraded, if higher loan impairment charges consume most
of the profits for several consecutive quarterly reporting
periods.
A reduction of the FCC ratio sustainably below 15%, due to a
combination of weaker earnings, faster loan growth and higher
dividend pay-outs, could also be credit-negative.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of TBC's rating is unlikely in the near term. In the
longer term an upgrade would require a significant further
strengthening of the operating environment, material decline in
balance-sheet dollarisation while maintaining consistently robust
financial metrics.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
TBC's senior unsecured debt rating is aligned with the bank's
Long-Term IDR, reflecting its view that the probability of default
on these instruments is the same as that for the bank.
The bank's additional Tier 1 (AT1) notes are rated 'B-', four
notches below its VR. This comprises two notches for the notes'
high loss severity due to their deep subordination and two notches
for additional non-performance risk relative to the VR, given fully
discretionary coupon omission. The rating was affirmed,
notwithstanding the VR upgrade, as the baseline notching for these
instruments increases to four notches for a 'bb' VR and above,
compared with three notches at 'bb-'.
The AT1 notes will be written down if the regulatory CET1 ratio
falls below 5.125% or if the bank is subject to intervention by the
NBG. The NBG could also impose restrictions on coupon payments if
banks breach minimum capital ratios including Pillar 1 and Pillar 2
buffers. At end-2022, the minimum required ratios per NBG
methodology, including all applicable buffers for TBC, were 11.6%
for CET1, 13.8% for Tier 1 and 17.3% for total capital. The
headroom above those levels was significant, at around 400bp, for
all the three capital ratios.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
TBC's senior unsecured debt rating is sensitive to changes in the
bank's Long-Term IDR, while the AT1 notes' rating to changes in the
bank's VR.
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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TBC BANK JSC LT IDR BB Upgrade BB-
ST IDR B Affirmed B
Viability bb Upgrade bb-
Government Support ns Affirmed ns
senior
unsecured LT BB Upgrade BB-
subordinated LT B- Affirmed B-
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G E R M A N Y
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GRUNENTHAL GMBH: Fitch Gives BB+ Final Rating to Sr. Secured Notes
------------------------------------------------------------------
Fitch Ratings has assigned Grunenthal GmbH's EUR300 million senior
secured notes, maturing in 2030, a final rating of 'BB+' with a
'RR2' Recovery Rating, following a review of the financing
execution documentation.
Grunenthal's 'BB' Long-Term Issuer Default Rating (IDR) reflects
its niche position and concentrated product portfolio, making it
heavily reliant on the commercial success of individual drugs.
Rating strengths are cash-generative operations, and management of
its organic portfolio decline with mid-to-larger scale acquisitions
of established cash-generative drugs with low integration risk, in
its view.
The Stable Outlook reflects its expectation of a disciplined
approach to acquisitions and adherence to a conservative financial
policy leading to a Fitch-defined EBITDA leverage of 3.0x, which is
consistent with the rating.
KEY RATING DRIVERS
Integrated Business Model: Grunenthal benefits from an integrated
business model with international manufacturing and distribution
capabilities. It has a good mix between mature off-patent drugs and
growing patented drugs, leading to adequate EBITDA margins
estimated at over 20% in the medium term.
Grunenthal has progressively diversified and repositioned its
portfolio and business model through acquisitions, complementing
its R&D-focused niche position as a pain medicines specialist with
a cash generative portfolio of established drugs. The
predictability of established drugs mitigates the impact of
potential R&D failures. The group has demonstrated efficient
capital-deployment and diligence in adding cash generative low-risk
drug rights and leveraging them on its own manufacturing and
distribution networks.
Conservative Financial Policy: The rating is predicated on
Grunenthal's adherence to stated financial policies, covenanted
leverage levels and deleveraging, particularly after any
debt-funded M&A. Unlike sponsor-backed leveraged buyouts with an
opportunistic financial approach, Fitch considers the commitment of
Grunenthal's founding-family shareholders, as reflected in their
target EBITDA net leverage below 2.5x. Departure from the stated
target leverage would signal an increased risk appetite and put the
ratings under pressure.
Adherence to Disciplined M&A: Fitch stresses the importance of
Grunenthal's disciplined selection of M&A targets, including
acquisition economics and asset integration, especially in light of
increasing competition from off-patent branded pharmaceuticals,
rising asset valuations and cost of capital. Given Grunenthal's M&A
pattern, operating needs and financial policy, Fitch projects
opportunistic M&A of up to EUR100 million-EUR200 million a year
over 2024-2026, funded by a revolving credit facility (RCF) and
free cash flow (FCF).
Fitch assumes new products will complement Grunenthal's therapeutic
competences and be compatible with the company's manufacturing and
commercial franchises with low integration risks. Fitch deems its
acquisition economics with enterprise value/EBITDA of up to 6.0x
and EBITDA margin of 50% as reasonable.
Cash-Generative Operations: The ratings are supported by
cash-generative operations, given Grunenthal's focus on established
branded products. The combination of gradually declining but
predictable sales and targeted product acquisitions support annual
EBITDA of around EUR400 million through 2026. The company further
benefits from contained capex needs estimated around 2%-4% of
sales, in turn supporting high single-digit to low-teen FCF
margins.
Concentrated Product Portfolio: Operating risks have a high rating
influence, particularly given the uneven revenue pattern of
Grunenthal's existing portfolio, which is supported by product
acquisitions to mitigate generic market pressures. Despite its
multi-regional presence, its smaller scale than peers and
concentrated product portfolio make it heavily reliant on the
commercial success of individual drugs that can lead to volatile
underlying revenue and operating profitability.
Contained Execution and Operational Risks: Grunenthal's business
development strategy around organic portfolio management
supplemented with selected drug-rights additions carries lower
execution risk and requires fewer resources than the acquisition of
clinical-stage drug candidates and businesses with manufacturing
assets and commercial networks.
Mild Decline Offset By Acquisitions: Its rating case conservatively
assumes negative organic growth from 2023 to 2025 due to the patent
expiry of Palexia, Grunenthal's largest drug accounting for
slightly over 20% of sales, partly offset by growth from Qutenza.
Its rating case does not incorporate the potentially substantial
contribution of late-stage drug candidate RTX, which could be
launched in 2026 and become a blockbuster if clinical trials are
successful. Fitch expects that recent acquisitions of established
drugs will more than offset the near-term negative organic growth.
Recent deals include the EUR494 million acquisition of Nebido and
the entry into a joint venture with Kyowa Kirin for its established
medicines portfolio with the intention to acquire the remaining 49%
stake in 2026. The latter will contribute to sales but not profits
until Grunenthal acquires the remaining 49% stake of the JV in
early 2026. Therefore, it will be dilutive to margins until 2025.
DERIVATION SUMMARY
Fitch rates Grunenthal using its Ratings Navigator for
Pharmaceutical Companies. The 'BB' IDR is supported by its
integrated cash-generative business model with a portfolio of
patented and generic drugs with strong financial credit metrics,
reflecting a commitment to conservative financial policies. This
stance offsets the operating risks arising from Grunenthal's
concentrated product portfolio exposed to generic market
pressures.
Grunenthal is rated above asset-light scalable specialist
pharmaceutical companies focused on lifecycle management of
off-patent branded and generic drugs such as CHEPLAPHARM
Arzneimittel GmbH (Cheplapharm; B+/Stable), Pharmanovia Bidco
Limited (B+/Stable) and ADVANZ Pharma Holdco Limited (B/Stable).
Its rating is also above asset-intensive pharmaceutical companies
such as Roar BidCo AB (B/Stable) and European Medco Development 3
S.a.r.l. (B/Stable), due mainly to its much stronger leverage
metrics with EBITDA leverage below 3.5x versus Cheplapharm's and
Pharmanovia's 4.0-5.0x, and other peers' 6.0-9.0x.
Its stronger leverage profile is embedded in Grunenthal's
considerably more conservative financial policy and less aggressive
M&A strategy. Grunenthal is larger than most of these peers, but
product concentration remains a risk for the majority of
non-investment-grade pharmaceutical credits given their niche.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Volatile revenue profile reflecting an organic portfolio
declining at low-single digits due to generic and payor pressure.
However, organic revenue declines are offset by revenue from
opportunistic newly-acquired medium-sized targets
- EBITDA margin maintained at/above 22%-23% to 2026
- Trade working capital fluctuating with revenues and following
addition of new drugs
- Sustained maintenance capex at 2%-4% of sales, in addition to
milestone payments related to previous acquisitions over the next
four years
- Dividend payment of EUR40 million in 2023 and EUR30 million per
year from 2024 to 2026
- Opportunistic acquisitions of around EUR100-200 million per year
funded through RCF utilisation and FCF (Fitch's assumption)
- Flexible use of RCF to support organic and inorganic growth.
Key Recovery Rating Assumptions
Fitch follows the generic approach for corporates rated 'BB-' or
above in accordance with the Corporates Recovery Ratings and
Instrument Ratings Criteria. Given the senior secured nature of the
entire debt issued by Grunenthal (single debt class) Fitch
classifies its debt as 'category 2 first lien' under the generic
approach for rating instruments of companies in the 'BB' rating
category based on Fitch's Corporates Recovery Ratings and
Instrument Ratings criteria. Therefore, Fitch rates Grunenthal's
senior secured debt one notch above the IDR, leading to a 'BB+'
senior secured notes rating with a Recovery Rating of 'RR2'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- An upgrade to 'BB+' would require an improved business risk
profile through increased visibility of revenue defensibility
combined with stable EBITDA and FCF margins and a more conservative
financial policy with EBITDA leverage trending towards 1.5x (1.0x
net of readily available cash)
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Volatile revenue, EBITDA and FCF margins, signalling challenges
in addressing market pressures or poorly executed M&A with
increased execution risks
- Departure from conservative financial policies and commitment to
deleveraging, leading to EBITDA leverage above 3.5x (3.0x net of
readily available cash).
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch projects total liquidity levels being
maintained in excess of EUR300 million through to 2026. This is
supported by sustained positive FCF generation, albeit subject to
fluctuations in trade working capital, plus performance-related and
milestones payments, which Fitch treats as regular capital
commitments as they relate to the existing product portfolio. Fitch
expects the company will make flexible use of its RCF to top up
liquidity or fund M&A, but also to make voluntary debt prepayments,
based on its record and financial policies. Grunenthal's liquidity
profile benefits from the recent extension of its RCF maturity and
debt refinancing, with its senior secured notes due in 2026, 2028
and 2030.
ISSUER PROFILE
Grunenthal is a German family-owned (with 75 years of history)
integrated pharmaceutical company focused on pain therapies and
management of established brands and patented products.
ESG CONSIDERATIONS
Grunenthal has an ESG Relevance Score of '4' for exposure to social
impact, due to the company's reliance on reimbursement policies in
its countries of operations, which has a negative impact on the
credit profile, and is relevant to the rating in conjunction with
other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Grunenthal GmbH
senior secured LT BB+ New Rating RR2 BB+(EXP)
WEPA: S&P Alters Outlook to Stable, Affirms 'B+' ICR
----------------------------------------------------
S&P Global Ratings revised its outlook on Germany-based tissue
manufacturer Wepa to stable from negative and affirmed the 'B+'
issuer credit rating. S&P also affirmed its 'B+' issue rating on
the group's EUR200 million floating- and EUR400 million fixed-rate
notes, maturing in 2026 and 2027 respectively, with a '4' recovery
rating.
S&P said, "The stable outlook reflects our expectation that
favorable price and cost trends and positive FOCF will support
deleveraging, with S&P Global Ratings-adjusted leverage approaching
3.0x at year-end 2023 and then normalizing at 4.0x-5.0x from 2024.
"The outlook revision stems from Wepa's stronger-than-expected
performance in 2022 and our expectation that the company will
continue its deleveraging trajectory. In 2022, Wepa was able to
largely pass on to customers surging pulp and energy costs, which
we estimate represented 35%-40% of total revenue, by implementing
four rounds of double-digit price increases. This, in our view, has
been possible thanks to Wepa's leading position in the European
private label consumer tissue market and solid relationships with
retailers. The average price of finished products was up 55% year
on year as of year-end 2022. Given the progressive phasing of the
price increases implemented over 2022, the company's revenue
increased 35.7%, reaching EUR1.6 billion, while reported EBITDA was
close to EUR145 million (8.9% reported EBITDA margin). Despite
higher-than-usual swings in input costs and volatility in energy
prices, margins were further supported by the group's hedging
position covering 56% of energy and 58% of pulp annual requirements
and by the company's efforts to improve its energy efficiency
through supply optimization and standardization of the product
offering. As a result, S&P Global Ratings-adjusted leverage stood
at about 6.0x at year-end 2022, below our previous expectation. We
have revised our base-case scenario and now expect S&P Global
Ratings-adjusted net leverage to remain well below 5x over 2023 and
2024, owing to improved EBITDA and cash flow generation, given our
expectation that the company will closely manage its working
capital and capital expenditure (capex) requirements. The leverage
improvement led us to revise upward our financial risk profile
assessment for Wepa.
Private labels manufacturers like Wepa could benefit from higher
consumer demand and we expect the group's EBITDA margin to benefit
from favorable pricing and easing of some operating costs. S&P
said, "Given current macroeconomic conditions, characterized by
consumers' disposable income being squeezed by inflation, we see
increasing demand for private labels product. Additionally, we are
observing a recovery in the professional business (which accounted
for about 15% of 2022 revenue) on the back of a more normalized
environment following the lifting of COVID-19 restrictions."
Lastly, volumes in 2023 should benefit from a recovery from volumes
lost in 2022 because of production delays caused by the
cyber-attack Wepa suffered during the summer.
According to RISI forecasts, pulp prices should decline 27% and 44%
year on year on average for Northern Bleached Softwood Kraft pulp
(NBSK) and Bleached Hardwood Kraft Pulp (BHKP), respectively, in
December 2023. At the same time, recycled paper and energy prices
should also witness a declining trend. S&P expects this will lead
to a downward revision of sales prices in the second half of 2023.
That said, sales prices are predicted to remain on average higher
in 2023 compared with last year, resulting in a solid improvement
in Wepa's profitability, with an S&P Global Ratings-adjusted EBITDA
margin of 13.5%-14.0% in 2023, up from 8.7% in 2022. S&P however
does not see this level of profitability as sustainable and expect
some normalization from 2024 when it anticipates retailers will ask
for additional price reductions as input costs decline, resulting
in Wepa's EBITDA margin reducing toward 9.5%-10.5%.
S&P said, "We expect Wepa will report annual FOCF above EUR50
million per year over 2023-2024, thanks to the termination of
expansionary projects. Given completion of the latest expansionary
projects (a new paper machine in the U.K. and the start-up of an
additional paper machine in Poland along with converting lines in
several plants across Europe), we expect Wepa's capex will reduce
and stabilize at EUR65 million-EUR75 million per year in 2023-2024,
down from EUR124 million in 2021 and EUR95 million in 2020.
Combined with the expected expansion of its EBITDA base, we believe
Wepa will generate higher-than-historically seen reported FOCF
above EUR50 million in 2023 and above EUR70 million in 2024
(negative EUR9.2 million as of year-end 2022). Our base case
reflects lower working capital outflow in 2023 compared with 2022
due to reduced investments in security stocks and deflationary
impact on inventory, partly compensated by expected lower
utilization of Wepa's asset-backed security (ABS) facility. In our
view, recurring cash flow generation will alleviate financial
pressure from future input cost volatility and accelerate Wepa's
deleveraging.
"In our 'B+' rating, we also take in consideration the inherent
volatility in the tissue industry affecting Wepa's credit metrics
as well as the company's limited track record of positive FOCF
generation. The fluctuations in Wepa's EBITDA margins are primarily
driven by swings in pulp prices and the necessity for tissue
producers to adjust sales prices to preserve profitability. The
very rapid increase in input costs and energy prices in 2022
exacerbated the situation, leading to frequent negotiations,
multiple pricing revisions, and more aggressive price increases.
This translated into EBITDA fluctuations in recent quarters. We
expect these volatile conditions will continue to affect Wepa's
credit metrics in the coming years, given potential downward
revision of the sales prices. Therefore, we also believe S&P Global
Ratings-adjusted debt to EBITDA will be subject to swings, moving
temporarily to about 3.0x in 2023, a strong position for the
current rating, before normalizing to 4.0x-5.0x in 2024, a level
that we see as commensurate with our 'B+' rating. That said, we
believe the company's strategy to focus on recycled paper, hybrid
product categories (mix of virgin pulp and recycled fibers) and
alternative virgin fibers (e.g., Miscanthus grass) will ensure
long-term sustainability for its operations, reduce reliance on
price volatile wood-based virgin fibers, and progressively support
lower volatility in credit metrics.
"The stable outlook reflects our view that Wepa's operating
performance will continue to improve, leading to positive FOCF and
stronger credit metrics, such that adjusted debt to EBITDA will be
close to 3.0x by the end of 2023. However, factoring in the
expected normalization of profitability, in 2024 we forecast
adjusted debt to EBITDA remaining well within the 4.0x-5.0x range.
"We could lower the ratings if S&P Global Ratings-adjusted debt to
EBITDA increases well above 5.0x on a prolonged basis. For this
scenario to materialize, we would likely see the group experiencing
higher earnings volatility due to inputs cost fluctuations and
inability to increase prices, with limited ability to control
working capital movements and resulting in negative FOCF.
"We could take a positive rating action if we are convinced that
Wepa has built up a sufficient and sustainable financial cushion to
manage the inherent high volatility of EBITDA that characterize its
business. We would also view positively an established track record
of positive FOCF and ability to reduce adjusted leverage
permanently to the low end of the 4.0x-5.0x range. This could stem
from operational levers like sustained changes in price and product
mix, with a lasting reduction of exposure to volatile virgin pulp
or a more conservative capital structure."
ESG credit indicators: E-2, S-2, G-2
=============
I R E L A N D
=============
BLACKROCK EUROPEAN XIV: Fitch Gives 'B-(EXP)sf' Rating to F Notes
-----------------------------------------------------------------
Fitch Ratings has assigned expected ratings to BlackRock European
CLO XIV DAC as detailed below.
The final ratings are contingent to the receipt of final documents
that are in line with the documents received for the expected
ratings analysis.
Entity/Debt Rating
----------- ------
BlackRock
European
CLO XIV DAC
Class A LT AAA(EXP)sf Expected Rating
Class B-1 LT AA(EXP)sf Expected Rating
Class B-2 LT AA(EXP)sf Expected Rating
Class C LT A(EXP)sf Expected Rating
Class D LT BBB-(EXP)sf Expected Rating
Class E LT BB-(EXP)sf Expected Rating
Class F LT B-(EXP)sf Expected Rating
Subordinated
Notes LT NR(EXP)sf Expected Rating
TRANSACTION SUMMARY
BlackRock European CLO XIII DAC is a securitisation of mainly
senior secured obligations (at least 90%) with a component of
senior unsecured, mezzanine, second-lien loans and high-yield
bonds. Note proceeds will be used to purchase a portfolio with a
target par of EUR400 million. The portfolio will be actively
managed by BlackRock Investment Management (UK) Limited
(BlackRock). The collateralised loan obligation (CLO) will have a
4.4-year reinvestment period and an 8.5-year weighted average life
(WAL) test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors to be in the 'B' category. The
Fitch WA rating factor (WARF) of the identified portfolio is 24.2.
High Recovery Expectations (Positive): At least 90% of the
portfolio will comprise senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch WA recovery
rate (WARR) of the identified portfolio is 62.0%.
Diversified Portfolio (Positive): The transaction has a top 10
obligor concentration limit at 23% and a maximum fixed-rate asset
limit at 12.5%. The transaction also includes various concentration
limits, including the maximum exposure to the three largest
(Fitch-defined) industries in the portfolio at 40%. These covenants
ensure that the asset portfolio will not be exposed to excessive
concentration.
Portfolio Management (Neutral): The transaction will have a
4.4-year reinvestment period and includes reinvestment criteria
similar to those of other European transactions. Fitch's analysis
is based on a stressed-case portfolio with the aim of testing the
robustness of the transaction structure against its covenants and
portfolio guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction
stress portfolio is reduced by 12 months and floored at six years.
This reduction to the risk horizon accounts for the strict
reinvestment conditions envisaged by the transaction after its
reinvestment period. These include, among others, passing both the
coverage tests and the Fitch 'CCC' test post reinvestment as well
as a WAL covenant that steps down progressively. Fitch believes
these conditions would reduce the effective risk horizon of the
portfolio during the stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean default rate (RDR) across all ratings
and a 25% decrease of the recovery rate (RRR) across all ratings of
the identified portfolio would have no impact on the class A to E
notes and would lead to downgrades of class F note to below
'B-sf'.
Downgrades, which are based on the current portfolio, may occur if
the loss expectation is larger than initially assumed, due to
unexpectedly high levels of defaults and portfolio deterioration.
Due to the better metrics and shorter life of the current portfolio
than the Fitch-stressed portfolio, the class D and E notes display
a rating cushion of three and four notches, the class B and F notes
have a rating cushion of two notches with a one-notch rating
cushion for the class C notes.
Should the cushion between the current portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
across all ratings and a 25% decrease of the RRR across all ratings
of the stressed portfolio would lead to downgrades of up to four
notches for the rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would lead to upgrades of up to three notches for the
rated notes, except for the 'AAAsf' rated notes.
During the reinvestment period, upgrades, which are based on the
Fitch-stressed portfolio, may occur on better-than-expected
portfolio credit quality and a shorter remaining WAL test, leading
to the ability of the notes to withstand larger-than-expected
losses for the remaining life of the transaction. After the end of
the reinvestment period, upgrades may occur on stable portfolio
credit quality and deleveraging, leading to higher credit
enhancement and excess spread available to cover losses in the
remaining portfolio.
DATA ADEQUACY
BLACKROCK EUROPEAN CLO XIV DAC
Most of the underlying assets or risk-presenting entities have
ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
Securities and Markets Authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
GEDESCO TRADE 2020-1: Moody's Lowers Rating on 2 Tranches to Ca
---------------------------------------------------------------
Moody's Investors Service has downgraded and also placed under
review for possible downgrade the ratings of Class A, Class B and
Class C Notes, and also downgraded the ratings of Class D, Class E
and Class F Notes in Gedesco Trade Receivables 2020-1 Designated
Activity Company. The rating actions primarily reflect the
significant and rapid increase in defaults observed in March this
year, following the start of the amortization phase in January
2023.
EUR225M (Current outstanding balance EUR131.8M) Class A Notes,
Downgraded to Ba3 (sf) and Placed Under Review for Possible
Downgrade; previously on Jan 23, 2023 Affirmed Aa3 (sf)
EUR15M Class B Notes, Downgraded to B3 (sf) and Placed Under
Review for Possible Downgrade; previously on Jan 23, 2023 Affirmed
Baa2 (sf)
EUR15M Class C Notes, Downgraded to Caa3 (sf) and Placed Under
Review for Possible Downgrade; previously on Jan 23, 2023 Upgraded
to Ba2 (sf)
EUR7.5M Class D Notes, Downgraded to Ca (sf); previously on Jan
23, 2023 Upgraded to B2 (sf)
EUR7.5M Class E Notes, Downgraded to Ca (sf); previously on Jan
23, 2023 Affirmed Caa3 (sf)
EUR15M Class F Notes, Downgraded to C (sf); previously on Jan 23,
2023 Affirmed Ca (sf)
The transaction is a revolving cash securitisation of different
types of receivables (factoring, promissory notes and short-term
loans) originated or acquired by Gedesco Finance S.L. ("Gedesco",
NR) and Toro Finance, S.L.U. (NR) to enterprises and self-employed
individuals located in Spain. The revolving period of the
transaction ended in January 2023. Gedesco's proposal to extend the
revolving period by six months did not receive the required
majority noteholder approval.
RATINGS RATIONALE
The rating actions are prompted primarily by the large and rapid
increase in defaults observed since the end of the revolving period
and the challenges facing Gedesco Services Spain S.A.U. as servicer
to administer the cash flows associated with the receivables in a
timely manner.
In particular, the ratings of the senior Notes reflect Moody's
concerns that (i) most clients have reportedly stopped paying, (ii)
recoveries are likely to be delayed, and (iii) the reserve fund in
the transaction will cover fees and interest only for a limited
period. These elevated risks result in a higher likelihood that
even the senior Notes may face losses.
At closing, Moody's mean default assumption was 10.7% of the
portfolio balance for the life of the transaction. Until December
2022 no defaults were recorded. As per the January 2023 [1]
collateral pool data, defaults of EUR4.1m occurred, equaling
roughly 1.7% of the outstanding portfolio balance. As per the
February 2023 [2] collateral pool data, defaults increased further
to EUR22.8m or around 10% of the outstanding portfolio balance. The
most recent trustee report obtained in April 2023 indicates that
defaults escalated to EUR61.6m in March 2023 [3], representing
around 27.3% of the outstanding balance.
New defaults in March 2023 account for EUR42.3m, which is split by
type of underlying assets into Factoring (61.5%), Promissory Notes
(14.5%), Promissory Note programs (15%) and Loan Agreements
(9.1%).
Cumulative recoveries stand at around EUR7.2m, which represents
around 10.5% of cumulative defaults observed so far.
The rapid increase in defaults has led to a diminished capacity of
Gedesco Services Spain S.A.U. to service the underlying receivables
in a timely and robust manner. These servicing constraints could
add significant volatility to the quantum of both future defaults
and recoveries.
The rating review will focus on updated performance data,
especially the evolution of defaults and recoveries, and any
tangible progress in Gedesco's ability to service and recover
underlying receivables. Moody's expects to conclude the rating
review within a period of 90 days.
Counterparty Exposure
The rating action took into consideration the Notes' exposure to
relevant counterparties, such as servicer and account bank.
The principal methodology used in these ratings was "Moody's Global
Approach to Rating SME Balance Sheet Securitizations" published in
July 2022.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (1) performance of the underlying collateral and
servicing of receivables that is better than current performance
and trends suggest.
Factors or circumstances that could lead to a downgrade of the
ratings include: (1) performance of the underlying collateral and
management of receivables that is worse than suggested by the
current status and trends.
=========
I T A L Y
=========
CENTURION BIDCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Negative
------------------------------------------------------------------
Fitch Ratings has affirmed Centurion Bidco S.p.A. (Centurion)
Long-Term Issuer Default Rating (IDR) at 'B+' with a Negative
Outlook. Fitch also affirmed Centurion's senior secured instrument
rating at 'BB-' and assigned an expected 'BB-(EXP)' rating to
Centurion's newly issued EUR385 million notes. The Recovery Ratings
for the senior secured debt and notes are 'RR3'.
The new notes will be used to refinance Centurion's bridge
facility.
The Negative Outlook on the IDR reflects high leverage, weak
coverage ratios and lower free cash flow (FCF) for Centurion's
rating. It also reflects its view that the relevant metrics will
breach its negative sensitivities for a downgrade to 'B' over the
next 12-18 months. While Fitch believes these metrics will improve
to be in line with the 'B+' rating by mid-2025, the lack of
headroom for delays is underlined by heightened execution risk and
the Negative Outlook.
Centurion is an entity created by private equity funds to acquire
Engineering - Ingegneria Informatica S.p.A. (EII), a leading
Italian IT developer and service provider, in 2020.
KEY RATING DRIVERS
Higher Leverage: Fitch projects Centurion's Fitch-defined EBITDA
leverage at 5.7x by end-2023, higher than the 5.2x Fitch had
expected in its rating action in November 2022. This is due to
higher debt issued in 2022 and a significant increase in factoring
utilisation. EBITDA leverage should ease back to within its 'B+'
threshold by mid-2025, six months later than expected. Thereafter,
Fitch expects leverage to slowly decline to 4.8x by end-2025.
Deleveraging Key to 'B+' Rating: Deleveraging will be driven by
strong revenue growth, which coupled with moderate profitability
increases, will see Fitch-defined EBITDA grow to EUR290 million in
2025 from EUR236 million in 2023. Lower revenue growth and delays
to cost savings may slow deleveraging, potentially leading to a
downgrade.
Interest Rates Rise Faster: Global interest rates have risen more
rapidly than expected, and ECB policy rates are now likely to peak
at a later date and at a higher level than Fitch had anticipated.
Fitch forecasts rising rates to keep Centurion's EBITDA interest
coverage below its sensitivity for a 'B+' rating until 2025.
Poor FCF Generation: Fitch expects FCF margins to be negative in
2023 before they recover to above 1% in 2024 and over 2%
thereafter. Fitch expects the company to spend around EUR66 million
of capex and have around EUR30 million of non-recurring costs in
2023, including acquisition-related expenses. Both capex and
non-recurring items should reduce significantly by 2025. Working
capital can be volatile, as significant investments in client
receivables are key to securing contracts. On average, Fitch
projects FCF margins at around 2% for 2024-2026.
Higher R&D and capex in 2023 on proprietary technologies and
solutions will support Centurion's recurring revenue growth and
profitability growth. However, any delays to the benefits from
these investments would put further pressure on the company's
rating.
Acquisition Completed: Centurion closed the acquisition of Be
Shaping the Future Group (Be) in December 2022. This was followed
by the completion of the squeeze-out procedure that same month,
with EII consequently taking 100% control of Be. Be is a
consultancy focused on the banking sector. Over 70% of mandates are
pure consultancy, including strategic, process and regulatory
engagements, with the balance being system integration of
third-party platforms.
Banking Coverage Increases; Consultancy Added: Financial clients
are now about a third of the combined EII-Be's revenue, followed by
industrial and public administration customers. This provides
higher revenue growth opportunities in finance, but also results in
higher concentration risk. The group will now leverage on Be's
consultancy experience in finance to offer similar services to the
remainder of their business segments.
Moderate Organic Growth: Fitch expects Centurion's revenue growth
to average around 5%-6% for 2023-2026. It trades almost solely in
Italy, where Fitch expectsF slow GDP growth of 0.5% in 2023.
However, incentives for digitalisation under the Italian National
Recovery and Resilience Plan (PNRR) should aid new contract wins.
Fitch expects telecoms customers to remain affected by a tough
domestic competitive environment, slowing down Centurions's new
mandates in this space for 2023. However, sectors such as
healthcare and public administration are set to see growing demand
as they benefit from the PNRR funds. Pricing power will be
challenged by increasing competition between consulting firms.
Slow Accretion in Profitability: Fitch projects Fitch-defined
EBITDA margin to increase to over 14% in 2025 from 12.8% in 2022.
Centurion's revenues are driven by consultancy projects, where
personnel and outsourced technical support make up the majority of
the cost base. Margins are lower than at pure software houses.
Fitch does not expect the profitability of contracts to increase
significantly, as specialised labour cost inflation is compensated
by relocations of part of the workforce to lower labour-cost areas
in the country. Centurion's profitability could see
higher-than-expected gains as investments in proprietary
technologies increase their prevalence as a share of total revenue.
Additionally, Fitch assumes integration and cost synergies to rise
to a total of EUR7.5 million in 2023 and around EUR17 million
cumulatively by 2026.
Accounting Investigation Closed: Centurion disclosed, in its 3Q22
update, a revenue overstatement in its finance division with a net
impact on EBITDA of EUR9.3 million for 9M22. The total negative
impact in 2022 EBITDA was EUR10.9 million. An independent
investigation launched internally concluded with no other findings
in other divisions. The company has put in place a strengthened
internal control and review process to avoid a repeat of the same
mistake. Fitch understands from management that this accounting
error is an isolated incident.
DERIVATION SUMMARY
The combination of EII and Be provides for a strong position in the
Italian IT software and consulting services markets. It benefits
from a diversified client base with increasing coverage of main
Italian banks. Its rating reflects technological knowledge and a
leading market position in Italy, a contract-base revenue model and
high leverage.
Around 25% of revenues will come from internally developed software
solutions, with the rest from consulting and systems integration.
This project-led business model generates a lower-than-sector
average EBITDA margin, although it results in a stable FCF
profile.
Its Fitch-rated LBO peers include IT service companies such as
Cedacri MergeCo S.p.A. (B/Stable) and AlmavivA S.p.A. (BB-/Stable).
Additionally, it is comparable to ERP software-as-a-service
providers TeamSystem S.p.A. (B/Stable) and Unit4 Group Holding B.V.
(B/Stable). Against pure software providers, it is comparable with
Dedalus SpA (B-/Stable).
Centurion has lower leverage than its LBO peers, but generates
lower EBITDA and FCF margins. This is related to the consulting
nature of its business model and its lower share of predictable and
recurring revenues than peers', which have either a stronger
subscription model or pure software content. Its high leverage,
while lower than lower-rated peers', and moderately positive FCF
margins through the cycle, support its 'B+' rating.
However, the current unfavorable financing environment and the
requirement to finance the acquisition of Be, place its FCF,
coverage and leverage ratios under pressure and leave minimal
headroom at the 'B+' rating.
KEY ASSUMPTIONS
- Centurion's organic revenue growth of 6.5% in 2023, followed by
around 6.1% in 2024 and 5.5% in 2025
- Fitch-defined EBITDA margin to rise to around 13.4% in 2023 and
to around 14.2% in 2025, from 12.8% in 2022
- Working-capital outflows of EUR29 million, EUR34 million and
EUR33 million in 2023, 2024 and 2025, respectively
- Capex at around 3.7% of revenue in 2023, and decreasing to around
2.3% by 2025
- Bolt-on acquisitions of EUR12 million a year from 2023 onwards
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Centurion would be considered a
going-concern (GC) in bankruptcy, and that it would be reorganised
rather than liquidated, given the inherent value behind its
contract portfolio, its incumbent software licenses and strong
client relationships.
Fitch has assumed a 10% administrative claim. Fitch assesses GC
EBITDA at about EUR175 million, up from the previously estimated
EUR170 million due to the additional contribution of recent
bolt-ons. Fitch estimates that at this level of EBITDA, after the
undertaking of corrective measures, it would generate neutral FCF.
Financial distress, leading to a restructuring, may be driven by
severe recessionary effects, shrinking the client base as customers
cut back on non-critical consulting and outsourcing. Additionally,
should the company fall technologically behind its competitors, it
may lose its clients' business-critical projects to competition.
An enterprise value (EV) multiple of 5.5x EBITDA is applied to the
GC EBITDA to calculate a post-reorganisation EV. This is in line
with multiples used for other software-focused issuers rated in the
'B' category.
Its recovery analysis includes Centurion's EUR605 million senior
secured notes, a EUR38 million term loan B (TLB) ranking pari passu
with each other, and the new notes of EUR385 million. Fitch assumes
a fully drawn super senior revolving credit facility (RCF) of
EUR195 million, and around EUR100 million of bilateral facilities
and other financial liabilities.
Some EUR173 million of receivables factoring is assumed to remain
available through a potential restructuring. The debt waterfall
analysis results in expected recoveries of 56% for the senior
secured debt, resulting in a 'RR3' Recovery Rating and a 'BB-'
instrument rating.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Evidence of improving leverage and coverage, including EBITDA
leverage below 5.0x and EBITDA/ interest paid above 2.5x by
mid-2025 will lead to the Outlook being revised back to Stable
- EBITDA leverage below 3.5x on a sustained basis
- Cash from operations (CFO) less capex/total debt sustainably
higher than 10%, due to higher contract profitability and improved
working-capital management
- EBITDA/interest paid rising to 4.5x
- Increase of subscription-based recurring sales in the revenue
mix
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- EBITDA leverage above 5.0x due to low profit growth or further
debt-funded acquisitions further delaying deleveraging by mid-2025
- EBITDA / interest paid below 3.0x without any improvement over
the next 24 months
- Worsening FCF margin below 2% through the cycle with increase in
cash outflows from working capital and higher capex requirements
- Deterioration in quality of revenue towards a less recurring,
contract-led revenue model
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Liquidity is underpinned by cash on balance
sheet and by an undrawn amount available under the RCF of around
EUR145 million at end-2022.
ESG CONSIDERATIONS
Centurion has an ESG Relevance Score of '4' for Governance
Structure due to weak internal financial controls, 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 Recovery Prior
----------- ------ -------- -----
Centurion Bidco
S.p.a. LT IDR B+ Affirmed B+
senior secured LT BB-(EXP)Expected Rating RR3
senior secured LT BB- Affirmed RR3 BB-
=====================
N E T H E R L A N D S
=====================
NOURYON HOLDING: Moody's Affirms 'B2' CFR, Alters Outlook to Pos.
-----------------------------------------------------------------
Moody's Investors Service changed the outlook on Nouryon Holding
B.V. (Nouryon or the company) to positive from stable and assigned
B2 ratings to Nouryon Finance B.V.'s amended and extended backed
senior secured bank credit facility consisting of a proposed $2,500
million backed senior secured first lien term loan and a proposed
EUR1,200 million backed senior secured first lien term loan.
Concurrently, Moody's affirmed Nouryon's B2 corporate family rating
and B2-PD probability of default rating, as well as the B2
instrument ratings on all the currently outstanding backed senior
secured term loans and revolving credit facilities issued by
Nouryon Finance B.V.
The proposed transaction seeks to extend part of the existing
backed senior secured first lien term loan by around 2.5 years and
is subject to potential upsizing. The maturity date for the
proposed amended and extended backed senior secured term loans is
2028.
The ratings and outlook incorporate the expectation that the
company will execute the proposed amended and extended transaction
and address any outstanding debt maturity well ahead of the due
date.
RATINGS RATIONALE
The contemplated amend and extend transaction would extend
Nouryon's maturity profile, which Moody's views as credit positive
despite the higher interest costs and transaction-related fees.
Moody's believes that Nouryon can support the additional interest
costs. On a pro-forma basis for the proposed transaction, Moody's
estimates that Moody's adjusted interest coverage, defined as
EBITDA/interest expense, would decrease by around 0.4x to 3.3x in
2022. The impact could change pending the final interest rate and
size of the extension. The company has partly hedged its interest
rate exposure via several interest rate collars and swaps.
Nonetheless, Moody's forecasts that its EBITDA interest coverage,
as defined and adjusted by Moody's, will decline below 3x over the
next 12-18 months.
Moody's estimates that Nouryon's gross leverage, pro-forma for the
$750 million backed senior secured first lien term loan in early
2023 and including full-year contribution of the latest
acquisition, to be around 5.5x for the last twelve months ended
March 2023, which positions the company strongly in its B2 rating
considering its solid business profile. In the first three months
of 2023, Nouryon's company-adjusted EBITDA declined to EUR283
million from EUR325 million during the year-earlier period mainly
due to lower volumes as result of weaker end market demand and
customer destocking activities. Moody's expects earnings to recover
in the second half of 2023 and forecasts gross leverage in the
range of 5.2x to 5.6x over the next 12 to 18 months.
The company's track record of generating Moody's-adjusted free cash
flow (FCF) and Moody's expectation that its FCF generation remains
positive despite higher interest costs supports the rating.
However, uncertainties around Nouryon's financial policy constrain
the rating despite its solid credit metrics for the B2 rating
category. In September 2021, Nouryon announced the confidential
submission of a draft registration with the US Securities and
Exchange Commission (SEC), but the company has not yet proceeded
with the process because of the prevailing weak IPO market
conditions. In April 2023, Nouryon raised $750 million of
incremental debt to distribute $500 million of dividends, via
intercompany loans not included in Moody's FCF definition.
RATING OUTLOOK
The positive outlook highlights the potential that a continued
solid operating trajectory and better visibility on the financial
policy could result in an upgrade. The outlook also incorporates
the expectation that the company will successfully close the
proposed transaction.
LIQUIDITY
Nouryon's liquidity is good. As of end March 2023, the company had
around $222 million of cash on balance. In early 2023, the company
put a new $750 million backed senior secured revolving credit
facility in place and the commitment for the old revolving credit
facility was downsized to $33 million from $637 million. In
addition, the company has access to a receivable securitization
program (on balance sheet) which matures in 2024. In combination
with forecasted funds from operations, these funds are sufficient
to cover capital expenditure, working capital swings and day-to-day
cash.
ESG CONSIDERATIONS
Governance considerations are a key driver in this action,
reflecting the company's proposed actions to extend its debt
facilities and address current debt maturities. Considerations also
include Moody's view on Nouryon's aggressive financial policies,
illustrated by its recent dividend recapitalization transaction and
leveraged capital structure. The company also exhibits weaker
financial reporting disclosures than public companies.
STRUCTURAL CONSIDERATIONS
The B2 rating of the company's backed senior secured term loans and
backed senior secured revolving credit facilities is line with the
CFR. The instrument rating reflects the dominant position of the
backed senior secured instruments in the capital structure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could consider upgrading Nouryon's rating with expectations
for gross leverage comfortably below 5.5x on a sustainable basis
and if the company provides more clarity on its future financial
policy. An upgrade would also require RCF/debt in excess of 10% and
adjusted EBITDA interest coverage to be around 2.5x on a
sustainable basis, and maintenance of a good liquidity profile.
Moody's would consider downgrading Nouryon's rating if adjusted
gross leverage increases above 6.5x for a prolonged period of time
or in case of negative FCF. A more aggressive financial policy
including dividend payouts or debt financed acquisitions would also
be negative for the rating.
LIST OF AFFECTED RATINGS
Assignments:
Issuer: Nouryon Finance B.V.
BACKED Senior Secured Bank Credit Facility, Assigned B2
Affirmations:
Issuer: Nouryon Holding B.V.
Probability of Default Rating, Affirmed B2-PD
LT Corporate Family Rating, Affirmed B2
Issuer: Nouryon Finance B.V.
BACKED Senior Secured Bank Credit Facility, Affirmed B2
Outlook Actions:
Issuer: Nouryon Holding B.V.
Outlook, Changed To Positive From Stable
Issuer: Nouryon Finance B.V.
Outlook, Changed To Positive From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemicals
published in June 2022.
COMPANY PROFILE
Nouryon Holding B.V. (Nouryon) is a Netherlands-based leading
global specialty chemicals business. Nouryon serves a broad range
of end markets. The company's market position is supported by its
advanced technologies and industry know-how, and a global
manufacturing footprint. In 2022, Nouryon generated revenue of
around $5.2 billion.
TMF SAPPHIRE: Moody's Assigns 'B2' CFR, Outlook Stable
------------------------------------------------------
Moody's Investors Service has assigned a B2 long term corporate
family rating and B2-PD probability of default rating to TMF
Sapphire Bidco B.V. There is no change to existing B2 ratings of
the backed senior secured bank credit facilities issued by TMF
Sapphire Bidco B.V. The outlook for TMF is stable.
At the same time, Moody's has withdrawn the B2 CFR, the B2-PD PDR
and the outlook of TMF Sapphire Midco B.V.
The change of the CFR to TMF Sapphire Bidco B.V., the topco of the
restricted group, reflects the fact that the reporting entity will
be moved from TMF Sapphire Midco B.V. to Tucano Topco B.V., which
is an indirect holding company of TMF Sapphire Midco B.V. The
company will provide the reconciliation of audited accounts between
TMF Sapphire Bidco B.V. and Tucano Topco B.V. This change follows
the completion of the refinancing, whereby TMF completed an
amend-and-extend transaction and raised a new USD tranche of backed
senior secured bank credit facility.
RATINGS RATIONALE
TMF's B2 CFR benefits from the company's resilient business model,
with around 90% of recurring revenue, and its low sensitivity to
the business cycle, as shown by moderate growth in its revenues and
high margins during 2008 through 2010 and in 2020. The company has
an established track record of operating in the industry with
long-standing customer relationships, which create barriers to
entry. In addition, because of its global network in 86
jurisdictions, the company is well-positioned to take advantage of
cross-selling opportunities with existing clients to new
locations.
The ratings are constrained by the high Moody's-adjusted
debt/EBITDA (excluding overdrafts) of around 6.4x in 2022 or closer
to 7.0x pro forma for the transaction which Moody's expects to
decrease to around 6.0x by the end of 2023 and low free cash flow
(FCF) generation (FCF / Debt in low single digits percentages) in
the next 12-18 months; and the legal and regulatory risks inherent
in the industry. The event risk of dividends and/or debt financed
acquisitions associated with its private equity ownership, also
weighs on the credit profile. That said, a recent transfer to
another fund within CVC and the entry of Abu Dhabi Investment
Authority as new a minority investor, both with long-term
investment horizons, reduce the risk of re-leveraging in the near
term.
LIQUIDITY
TMF has good liquidity, supported by the cash balance (net of bank
overdrafts) in excess of EUR150 million post closing of the
transaction and its new upsized undrawn EUR181 million backed
Revolving Credit Facility (RCF) due 2028, and Moody's expectation
of continued positive FCF generation.
The RCF has one springing covenant that is tested when the facility
is drawn by more than 40%. Moody's expects the company to be in
compliance with the springing covenant at all times.
OUTLOOK
The stable outlook reflects Moody's expectation that organic
earnings growth together with contribution from bolt-on
acquisitions, will result in Moody's adjusted Debt/EBITDA
(excluding overdraft) reducing below 6.0x by year-end 2024, and
continued positive FCF, with FCF/debt (excluding overdrafts) of
around 2% in 2023/2024. The stable outlook also assumes that TMF
does not undertake material debt-funded acquisitions, return
capital to shareholders, or otherwise change its financial policy
such that leverage is likely to significantly exceed 6.0x Moody's
adjusted Debt / EBITDA (excluding overdrafts) or FCF to turn
negative on a sustained basis. Finally, it incorporates Moody's
expectation that TMF will retain its good liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if strong earnings growth or a shift
to a more conservative financial policy results in adjusted
Debt/EBITDA (excluding overdrafts) sustainably below 5.0x, and
EBITA/Interest sustainably above 2.5x, and Moody's adjusted
FCF/Debt sustainably above 5%.
The ratings could be downgraded with expectations for
Moody's-adjusted debt/EBITDA (excluding overdrafts) remaining
significantly above 6.0x on a sustained basis, or EBITA/ Interest
being sustainably well below 2.0x, or FCF reducing towards zero for
a sustained period of time, or if liquidity deteriorates.
STRUCTURAL CONSIDERATIONS
The B2 rating of the backed senior secured first lien bank credit
facility instrument reflects the recent refinancing and the
repayment of the backed senior secured second lien term loan. This
resulted in the company's capital structure becoming all senior and
pari passu ranking and hence instrument ratings align with the
CFR.
LIST OF AFFECTED RATINGS
Issuer: TMF Sapphire Bidco B.V.
Assignments:
LT Corporate Family Rating, Assigned B2
Probability of Default Rating, Assigned B2-PD
Outlook Actions:
Outlook, Remains Stable
Issuer: TMF Sapphire Midco B.V.
Withdrawals:
LT Corporate Family Rating, Withdrawn, previously rated B2
Probability of Default Rating, Withdrawn, previously rated B2-PD
Outlook Actions:
Outlook, Changed To Ratings Withdrawn From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
COMPANY PROFILE
TMF Sapphire Bidco B.V. (TMF) is a global provider of business
process services for companies (71% of 2022 total revenue),
financial institutions, including funds and capital markets (23%),
and private clients including family offices (6%) in 86
jurisdictions, with reported revenue of EUR744 million and a
company-adjusted EBITDA of EUR235 million in 2022. The company is
majority owned by CVC Strategic Opportunities Fund II, with the Abu
Dhabi Investment Authority acquiring a 34% stake in TMF in March
2023.
===============
P O R T U G A L
===============
LUSITANO MORTGAGES NO. 4: S&P Ups Cl. D Notes Rating to 'BB+ (sf)'
------------------------------------------------------------------
S&P Global Ratings raised its credit ratings on Lusitano Mortgages
No. 4 PLC's class B, C, and D notes to 'AA+ (sf)', 'AA (sf)', and
'BB+ (sf)' from 'AA- (sf)', 'A- (sf), and 'B- (sf)', respectively.
At the same time, S&P affirmed its 'AA+ (sf)' rating on the class A
notes.
The rating actions follow S&P's full analysis of the most recent
information that it has received and the transaction's current
structural features.
S&P said, "After applying our global RMBS criteria, our
weighted-average foreclosure frequency assumptions decreased
because of the transaction's reduced arrears, lower effective
loan-to-value (LTV) ratio, and higher seasoning. In addition, our
weighted-average loss severity assumptions remain in line with our
previous review, as the seasoning of the assets is high, supporting
a low indexed current LTV ratio. The overall credit enhancement
continues to increase, given the presence of a floored reserve
fund."
Credit analysis results
RATING WAFF (%) WALS (%) CREDIT COVERAGE (%)
AAA 10.59 2.00 0.21
AA 7.33 2.00 0.15
A 5.68 2.00 0.11
BBB 4.37 2.00 0.09
BB 2.99 2.00 0.06
B 2.03 2.00 0.04
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
As of the March 2023 investor report, arrears represent 0.71% of
the pool, compared to 0.75% in 2022. Overall delinquencies remain
well below S&P's Portuguese RMBS index.
Cumulative defaults are relatively high at 7.41% of the closing
pool balance, but are stable. The transaction pays pro rata as
performance is good and the reserve fund is at its required level
(EUR5.1 million).
The reserve fund no longer amortizes, providing further credit
enhancement as the notes continue to amortize.
S&P's operational and legal risk analyses remain unchanged since
our previous review. Therefore, the ratings assigned are not capped
by any of these criteria.
S&P said, "Our ratings in this transaction are capped at the
resolution counterparty rating (RCR) on the swap counterparty,
Citibank N.A., London branch ('A+'), which we derive from the
issuer credit rating (ICR) on the parent bank, as the documentation
is not in line with our current counterparty criteria. However, we
do not give benefit to the swap in our analysis of the class A, B,
and C notes and the ratings on these notes are delinked from the
swap.
"The analytical framework in our structured finance sovereign risk
criteria assesses a security's ability to withstand a sovereign
default scenario. These criteria classify this transaction's
sensitivity as low. Therefore, the highest rating we could assign
to the tranches in this transaction is six notches above the
unsolicited sovereign rating on Portugal, or 'AA+'. Therefore,
despite our analysis indicating that the credit enhancement
available for the class A notes is commensurate with a higher
rating, we affirmed our 'AA+ (sf)' rating on this class of notes.
"We raised our ratings on the class B notes to 'AA+ (sf)' from 'AA-
(sf). These notes could withstand stresses at higher ratings than
those assigned. However, they remain capped at 'AA+' by our
sovereign risk criteria.
"We raised our ratings on the class C notes to 'AA (sf)' from 'A-
(sf). These notes could withstand stresses at higher ratings than
those assigned. However, their overall credit enhancement and
position in the waterfall limited our upgrade on the class C
notes.
"Our analysis indicates that the available credit enhancement for
the class D notes is commensurate with a higher rating than that
currently assigned because of improved credit enhancement and lower
credit coverage since the previous review. Therefore, we raised our
rating on the class D notes to 'BB+ (sf)' from 'B- (sf)'. We
limited our upgrade based on their overall credit enhancement and
position in the waterfall. In addition, the most junior tranche
will likely have a longer duration than the senior tranches, so it
is more vulnerable to tail-end risk."
=============
R O M A N I A
=============
ROMANIA: 1,644 Companies Declared Insolvent in 1st Qtr. 2023
------------------------------------------------------------
Iulian Ernst at Romania-Insider.com reports that a total of 1,644
companies in Romania went insolvent in the first quarter of 2023
(Q1), a number similar to the one in Q1 2022, when 1,610 insolvent
companies were registered.
Of the companies that went into insolvency, 23 are impactful
companies, totalling over 1,950 employees, fixed assets worth over
RON589 million (EUR120 million) and a total turnover of RON805
million (EUR163 million), Romania-Insider.com relays, citing an
analysis by CITR, the insolvency and restructuring market leader in
Romania.
"The evolution in the number of insolvent companies will be
strictly influenced by the effect that increased interests or
inflation can have on certain types of businesses unless a profound
change occurs in the state's approach to fiscal debts or in how
banks are dealing with the credit situation. We will probably see
an increase in the number of applications for insolvency, mostly
generated by an increase of debts and the creditors' pressure to
recover their receivables," Romania-Insider.com quotes Paul Dieter
Cîrlanaru, CITR CEO as saying.
Considering the rising inflation, the increased interest rates, the
incapacity to finance existing credits and to face future terms,
companies will have to call upon new restructuring mechanisms to
become efficient or to save themselves, Romania-Insider.com
discloses.
=========
S P A I N
=========
BBVA RMBS 3: Fitch Affirms Class C Notes Rating at 'Csf'
---------------------------------------------------------
Fitch Ratings has upgraded six tranches of BBVA RMBS 1, BBVA RMBS
2, BBVA RMBS 3 and Santander Hipotecario 3. The remaining tranches
have been affirmed. The Rating Outlooks are Stable.
Entity/Debt Rating Prior
----------- ------ -----
BBVA RMBS 1,
FTA
Class A3
ES0314147028 LT A+sf Affirmed A+sf
Class B
ES0314147036 LT A+sf Affirmed A+sf
Class C
ES0314147044 LT BBBsf Upgrade BBsf
BBVA RMBS 2,
FTA
Class A4
ES0314148034 LT A+sf Affirmed A+sf
Class B
ES0314148042 LT A-sf Affirmed A-sf
Class C
ES0314148059 LT BBB+sf Upgrade BBB-sf
FTA, Santander
Hipotecario 3
Class A1
ES0338093000 LT A-sf Upgrade BBBsf
Class A2
ES0338093018 LT A-sf Upgrade BBBsf
Class A3
ES0338093026 LT A-sf Upgrade BBBsf
Class B
ES0338093034 LT C CCsf Affirmed CCCsf
Class C
ES0338093042 LT CCsf Affirmed CCsf
Class D
ES0338093059 LT Csf Affirmed Csf
Class E
ES0338093067 LT Csf Affirmed Csf
Class F (RF)
ES0338093075 LT Csf Affirmed Csf
BBVA RMBS 3, FTA
A2 ES0314149016 LT A-sf Upgrade BBBsf
B ES0314149032 LT CCCsf Affirmed CCCsf
C ES0314149040 LT Csf Affirmed Csf
TRANSACTION SUMMARY
The transactions comprise Spanish mortgages serviced by Banco
Bilbao Vizcaya Argentaria S.A. (BBB+/Stable/F2) and Banco Santander
S.A. (A-/Stable/F2).
KEY RATING DRIVERS
Iberian Recovery-Rate Assumptions Updated: In the update of its
European RMBS Rating Criteria amended on 29 March 2023, Fitch
updated its recovery rate assumptions for Spain. The changes
reduced the house price decline and foreclosure sale adjustment
assumptions, which has a positive impact on recovery rates and,
consequently, Fitch's expected loss in Spanish RMBS transactions.
The upgrades of BBVA 1 and BBVA 2 class C notes, and BBVA 3 and
Santander 3 class A notes reflect the updated criteria. These,
alongside with BBVA 2 class B notes, have therefore been removed
from Under Criteria Observation.
Payment Interruption Risk: Fitch views the transactions as being
exposed to payment interruption risk in the event of a servicer
disruption. In times of economic stress, Fitch expects the
available reserve funds (which remain fully depleted for BBVA 3 and
Santander 3 and do not have a sufficiently robust performance
record for BBVA 1 and BBVA 2) to be insufficient to cover senior
fees, net swap payments and senior notes' interest during the
period needed to implement alternative servicing arrangements. The
notes' maximum achievable ratings are commensurate with the 'Asf'
category, in line with Fitch's Structured Finance and Covered Bonds
Counterparty Rating Criteria.
Counterparty Risk Constraints: For the BBVA deals the derivative
provider has not complied with contractually defined minimum
ratings and remedial actions, resulting in the ratings of each bond
being capped at the higher of the counterparty's applicable rating
(BBVA, Derivative Counterparty Rating A-) and the rating that can
be supported by transaction cash flows on an unhedged basis. This
is in accordance with Fitch's Structure Finance and Covered Bonds
Counterparty Rating Criteria as Fitch views the derivatives as
material for the rating analysis.
Moreover, BBVA 3's class A2 notes are also capped at 'A+sf',
reflecting the absence of counterparty remedial actions when the
transaction account bank (BBVA, which is an operational continuity
bank) failed to meet the contractually defined minimum ratings.
Nonetheless, this rating cap is not a driver of the prevailing
rating as it is higher than the 'A-' cap linked to the derivative
analysis.
Credit Enhancement to Increase: The rating actions reflect Fitch's
view that the notes are sufficiently protected by credit
enhancement (CE) to absorb the projected losses commensurate with
their corresponding ratings. For BBVA 1, Fitch expects CE to
decrease to around 20.3% for the class A notes and 10.7% for the
class B notes (currently at 25.5% and 12.7%, respectively), driven
by the pro-rata amortisation features with a reverse sequential
mechanism until the targeted shares of the notes as a percentage of
the total current note balances are met. Once the targets are met,
CE levels are expected to remain broadly stable as it is the
current situation for BBVA 2. For BBVA 3, Fitch expects CE to
continue increasing given the prevailing sequential amortisation of
the notes.
The negative CE ratios on BBVA 3's and Santander 3's class B and
lower notes, are reflected in the low sub-investment-grade ratings
on the notes.
Mild Weakening in Asset Performance: The rating actions reflect
Fitch's expectation of a mild deterioration of asset performance,
as weaker macroeconomic conditions and inflationary pressures erode
real household wages and disposable income, especially for more
vulnerable borrowers like self-employed individuals.
The transactions have low shares of loans in arrears over 90 days
(less than 0.5% as of the latest reporting dates) and are protected
by substantial portfolio seasoning of more than 15 years.
Nevertheless, rising interest rates may contribute to downside
performance risk as the majority of the loans within the deals are
floating-rate mortgages, which are exposed to payment shocks.
BBVA 1 and BBVA 2 have an Environmental, Social and Governance
(ESG) Relevance Score of '5' for Transaction & Collateral Structure
due to unmitigated payment interruption risk, resulting in a
downward adjustment to the ratings by at least one notch.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Long-term asset performance deterioration such as increased
delinquencies or larger defaults, which could be driven by changes
to macroeconomic conditions, interest-rate increases or borrower
behaviour
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- For the senior notes that remain capped at 'A+sf' due to
unmitigated payment interruption risk, improved liquidity
protection against a servicer disruption event could support
upgrades
- Remedial actions on the transaction account bank and derivative
provider that became ineligible as per contractually defined
triggers
- Increase in CE, as the transactions deleverage, to fully
compensate for the credit losses and cash-flow stresses that are
commensurate with higher ratings, all else being equal
CRITERIA VARIATION
Fitch has applied a 25% haircut to the asset model-estimated
recovery rates for the BBVA RMBS transactions, considering the
record of cumulative recoveries on defaults of about 34% as per the
latest reporting date. This compares against an average of about
65% observed for the rest of Spanish RMBS transactions rated by
Fitch. This is a variation from the European RMBS Criteria and has
a maximum model implied rating impact of minus two notches.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. Fitch has not reviewed the results of
any third- party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pools ahead of the transactions' initial
closing. The subsequent performance of the transactions over the
years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
BBVA 1 and BBVA 2 have an ESG Relevance Score of '5' for
Transaction & Collateral Structure due to unmitigated payment
interruption risk, which has a negative impact on the credit
profile, and is highly relevant to the rating, resulting in a
downward adjustment to the ratings by at least one notch.
In addition, these transactions have an ESG Relevance Score of '4'
for Transaction Parties & Operational Risk due to the breach of the
derivative provider's minimum ratings, which has a negative impact
on the credit profile, and is relevant to the ratings in
conjunction with other factors.
BBVA 3 has an ESG Relevance Score of '4' for Transaction &
Collateral Structure due to the exposure to payment interruption
risk, which has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
In addition, it has an ESG Relevance Score of '4' for Transaction
Parties & Operational Risk due to the breach of the account bank
replacement triggers and the derivative provider's minimum ratings,
which has a negative impact on the credit profile, and is relevant
to the ratings in conjunction with other factors.
Santander 3 has an ESG Relevance Score of '4' for Transaction &
Collateral Structure due to exposure to payment interruption risk,
which has a negative impact on the credit profile, and is relevant
to the ratings in conjunction with other factors.
FTA, Santander Hipotecario 3 has an ESG Relevance Score of '4' for
Transaction Parties & Operational Risk due to the breach of the
account bank replacement triggers, 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.
CATLUXE SARL: S&P Downgrades LT ICR to 'D' on Recapitalization
--------------------------------------------------------------
S&P Global Ratings lowered the long-term issuer credit rating on
Spanish bridalwear designer CatLuxe S.a.r.l. (Pronovias) to 'D'
(default) from 'CC', given the company has completed a
restructuring for a substantial portion of its debt. At the same
time, S&P lowered the issue credit rating on the EUR215 million
senior secured term loan and EUR45 million revolving credit
facility (RCF) to 'D' (default) from 'CC'.
S&P expects to review the ratings on the group once it has
sufficient visibility regarding its business plan and financial
prospects under the new capital structure to support its
forward-looking opinion of its creditworthiness.
The downgrade follows Pronovias' completion of the recapitalization
of its capital structure in April 2023, in line with the
announcement made in December 2022. It concluded the transaction
after receiving full consent from its first-lien and other lenders.
The final agreement includes a reduction of EUR267 million in the
group's total debt amount, compared with the amount outstanding as
of end-2022. The original senior secured debt of EUR215 million and
RCF of EUR45 million were reinstated into new unsecured
payment-in-kind (PIK) notes issued by a new holding company, and a
new senior secured term loan. S&P understands that the new capital
structure includes only a minor portion of the original debt,
represented by about EUR18 million of local facility lines.
After the recapitalization, lenders received less favorable terms
than originally stated in the creditor agreement. Therefore,
consistent with our criteria, S&P considers this restructuring
equivalent to a distressed exchange and tantamount to a default.
The company's capital structure after the restructuring that
resulted in a significant debt reduction comprises the following
instruments:
-- EUR78 million unsecured PIK notes due in 2030, bearing PIK
interest of 3% per year and cash interest of 0.15% per year, with a
PIK toggle option on the cash interest during the first two years.
-- A EUR112 million senior secured term loan due in 2028 that pays
fixed-rate cash interest of 5% and has a PIK toggle option during
the first two years. The PIK interest would be 5% if the toggle
were activated.
-- Existing local facilities of about EUR18 million.
At the same time, as part of the proposed agreement, the majority
ownership in the Pronovias group has been transferred to a
consortium of investors led by Bain Capital as controlling
shareholder (main creditor in the original capital structure).
S&P expects to review the ratings on the group once it has
sufficient visibility regarding its business plan and financial
prospects under the new capital structure to support our
forward-looking opinion of its creditworthiness.
===========
S W E D E N
===========
SAMHALLSBYGGNADSBOLAGET I NORDEN: S&P Downgrades ICRs to 'BB+/B'
----------------------------------------------------------------
S&P Global Ratings lowered our long- and short-term issuer credit
ratings on Swedish landlord Samhallsbyggnadsbolaget i Norden AB
(SBB) to 'BB+/B' from 'BBB-/A-3', its issue ratings on its senior
unsecured debt to 'BB+' from 'BBB-', and its issue ratings on the
subordinated hybrid bonds to 'B+' from 'BB'. S&P also assigned a
recovery rating of '3' to the senior unsecured debt.
The negative outlook reflects the possibility of a downgrade by one
notch over the next six to 12 months if SBB does not secure
sufficient funding sources to meet upcoming short-term financial
obligations in the next few quarters, which would harm its
liquidity position.
SBB's credit metrics remained elevated following the first-quarter
2023 results publication, despite the receipt of SEK8.7 billion
from Brookfield. The results showed S&P Global Ratings-adjusted
debt to debt plus equity remained high at 59.9% versus 63.3% at
year-end 2022. Although the company reduced leverage following the
sale of a 51% equity stake in EduCo, having received about SEK8.7
billion from Brookfield (with a further SEK500 million to be
received in second-quarter 2023), leverage reduction was partially
offset by about 2% of negative property valuations over the
quarter. S&P said, "We take into account the company’s commitment
to deleverage, its intention to undertake a rights issue of
SEK2.637 billion, and potential further asset disposals of SEK6
billion in the next couple of months. However, we believe that SBB
will not be able to reduce debt to debt plus equity to well below
60%. In addition, higher refinancing costs will likely weigh
negatively on the company’s EBITDA interest coverage. At March
31, 2023, the ratio stood at 2.1x (RTM), down from 2.4x at year-end
2022 and 2.9x at Sept. 30, 2022. We understand that the company
aims to refinance short-term debt--the more expensive debt in its
capital structure--which should limit the effect on its overall
interest costs. That said, we expect its total cost of debt to
continue rising to about 2.5%-3.0% this year versus 2.29% at March
31, 2023, and 2.12% at Dec. 31, 2022. The company has about 85% of
its debt exposure at fixed or hedged interest rates, but we note
that about 41% of this debt will mature within the next 24 months.
Therefore, we expect EBITDA interest coverage to remain close to 2x
over the next 12 months."
S&P said, "SBB's liquidity has tightened with reduced availability
of undrawn credit facilities and a higher amount of short term debt
maturities in the next 12 months, but we understand it is in
negotiations to secure several liquidity sources.At March 31, 2023,
SBB's unrestricted and unpledged cash on the balance sheet amounted
to about SEK4.3 billion. The company’s committed undrawn credit
lines reduced significantly to about SEK2.6 billion versus about
SEK4.5 billion at year-end 2022. We understand that--as a result of
the Brookfield transaction--credit lines were partially converted
into term loans, resulting in a lower amount of committed lines to
cover obligations. The company's short-term debt maturities stood
at SEK14.3 billion (including commercial paper and the EUR700
million senior unsecured bond, due February 2024) at March 31,
2023, versus SEK10.5 billion at year-end 2022. We understand that
the company intends to complete a rights issue of SEK2.637 billion,
sign additional sales with an annual disposal target of SEK6
billion, and increase its undrawn committed credit facilities.
Therefore, we maintained our liquidity assessment at adequate,
based on our temporary calculation for the next six months and its
sound relationships with banks. We will monitor its success in
obtaining sufficient funding over the next couple of months and may
review our rating if the company cannot secure sufficient liquidity
sources to cover upcoming needs well in advance."
SBB received SEK8.7 billion (out of SEK9.2 billion) of proceeds in
the first quarter after selling a 49% stake in newly created
subsidiary EduCo to an open-ended core infrastructure fund of
Brookfield. Under the deal, announced in October 2022, SBB will
retain the remaining 51% stake. The transferred portfolio comprised
educational assets worth about SEK43 billion (about 33% of SBB's
total portfolio size). EduCo's debt structure comprises about
SEK6.9 billion of outstanding external bank loans attached to the
transferred assets and a SEK14.5 billion intercompany bank loan
provided by SBB, carrying a fixed rate of 3% with a six-year tenor.
S&P said, "Out of the SEK9.2 billion sold minority interest, we
understand that the company has received SEK8.7 billion in the year
to date and that the remaining SEK500 million will be received in
second-quarter 2023. SBB has used the majority of the proceeds to
repay outstanding debt, mainly its bridge facility of EUR750
million due in 2024, which was used to buy back senior unsecured
bonds and hybrid bonds for a cash consideration of EUR631 million
in principal. Therefore, SBB’s gross debt decreased to SEK83.6
billion at March 31, 2023, from about SEK89.3 billion at year-end
2022. Although we view the transaction as positive for SBB's
deleveraging plans, we believe it adds complexity to the corporate
structure given the company does not have full access to EduCo's
cash flows while it fully consolidates it. Due to the lack of
available financial accounts for EduCo at this stage, and in line
with International Financial Reporting Standards, we will keep
consolidating EduCo in SBB's accounts. However, we recognize that
SBB will no longer accrue the full benefits of EduCo’s cash flows
and we anticipate SBB’s credit metrics will be slightly weaker if
proportionally consolidated, given EduCo's lower leverage. That
said, SBB will retain control over the subsidiary and manage the
assets."
S&P said, "We have applied a negative comparable rating analysis
and financial policy modifier, given SBB's high transaction level
and insufficient deleveraging progress.SBB's negative standing in
our comparable ratings analysis reflects the company's limited
track record of maintaining improved leverage ratios and managing
risks related to its growth strategy compared with other
higher-rated real estate peers with more stable portfolios. SBB has
expanded significantly over the past few years with a series of
transformative acquisitions and, particularly over the past 12-24
months, undertook substantial acquisitions and disposals. This
limits transparency on actual earnings capacity and makes it more
challenging to track progress. In addition, the rating reflects the
company’s slow and limited path to deleveraging over the past few
years versus anticipated improvements, occasionally hit by
unexpected events, or increased shareholder distributions.
"We expect operating fundamentals to remain solid for SBB’s
properties, thanks to good demand for community service and
residential assets in its markets.For the first three months of
2023, the company reported strong positive like-for-like rental
income growth of 9.9% as well as a high and slightly improving
occupancy ratio of 95.5%, from 94.3% at year-end 2022, for its
portfolio. Overall, SBB’s portfolio is spread across major Nordic
university cities and capitals with healthy population growth,
solid demand, and limited new supply. Consequently, we expect
positive like-for-like rental growth of 5.0%-6.0% over the next 12
months and about 2.5%-3.0% in the following 12 months, as well as
sustained high occupancy rates of about 95%. Furthermore, we
anticipate that its EBITDA margin will remain at about 62%-64%,
benefiting from indexation-linked rental contracts and about SEK200
million-SEK350 million of annual dividends received from its joint
ventures (JVs). SBB also plans to reduce its capital expenditure
(capex) and limit exposure to development and renovation
activities. We forecast that capex will decline to SEK2
billion-SEK3 billion annually in 2023 and 2024 from SEK4.8 billion
in 2022."
Based on SBB's audited annual accounts for 2022, S&P has updated
its adjustments to its credit metrics.
These include.
-- Accessible cash and liquid investments: SBB started to report
restricted cash for the first time in its 2022 financial accounts,
which we deducted from the company’s available accessible cash
and liquid investments, the latter being netted from our debt
figure.
-- Hybrid capital instruments: After a review of the bond
documentation for the hybrid instrument issued by operating
subsidiary Offentliga Hus in 2021, with an outstanding amount of
SEK297.5 million at year-end 2022, S&P views the instrument as 100%
debt with 100% of its coupon payments allocated to interest
expense. The amendment affects its adjustments to debt, equity, and
interest expense.
-- Capitalized interest: The company reported capitalized interest
for investment in the property portfolio of SEK136 million in 2022.
We add those types of costs to our adjusted interest expenses, in
line with our criteria.
The above adjustments result in an increase in reported debt by
SEK1.2 billion and an increase in interest expense by SEK150
million. The effect of this is immaterial for the 2022 ratios.
The negative outlook reflects the possibility of a downgrade by one
notch over the next six to 12 months if SBB does not secure
sufficient funding sources to meet upcoming short-term financial
obligations in the next few quarters, which would harm its
liquidity position.
In addition, a deterioration of its credit metrics beyond our
forecast could also lead to a downgrade.
S&P could lower the rating if SBB:
-- Is unable to secure sufficient funding sources in the next
couple of quarters to sustainably cover its short-term financial
obligations by at least 1.2x over a 12-month horizon. This could be
due to failure to issue the planned equity of SEK2.637 billion,
make additional sizable sales, and enhance its committed undrawn
credit facilities.
-- Cannot maintain S&P Global Ratings-adjusted debt to debt plus
equity below 60%. This could occur if the company experiences
higher-than-anticipated asset devaluations or further write downs;
or
-- Fails to sustain EBITDA interest coverage above 1.8x, or its
debt to annualized EBITDA materially differs from S&P's forecast.
S&P could revise the outlook to stable if SBB sustainably:
-- Improves its liquidity situation, such that the company secures
sufficient liquidity sources to meet its financial obligations well
ahead of maturities and maintains solid liquidity headroom at all
times;
-- Maintains debt to debt plus equity below 60%;
-- Preserves EBITDA interest coverage above 1.8x; and
-- Keeps debt to EBITDA within its base-case forecast levels, with
the company maintaining a sizable portfolio of resilient asset
classes in favorable locations.
=====================
S W I T Z E R L A N D
=====================
VERISURE MIDHOLDING: S&P Upgrades LT ICR to 'B+', Outlook Stable
----------------------------------------------------------------
S&P Global Ratings raised its long-term issuer credit rating on
alarm monitoring service provider Verisure Midholding AB (Verisure)
to 'B+' from 'B'. S&P also raised its issue ratings on its senior
secured debt to 'B+' from 'B' and on its senior unsecured debt to
'B-' from 'CCC+'.
The stable outlook reflects that S&P expects Verisure to achieve an
annual net subscriber and revenue growth of about 10%, while
keeping attrition and customer acquisition costs similar to 2022
levels, leading to an EBITDA margin above 40%, about break-even
FOCF, and debt to EBITDA comfortably below 7.0x.
Verisure has reached sufficient scale to expand its subscriber base
by about 10% per year. Since 2016, net annual subscribers have, on
average, increased by 13%. This brings Verisure's subscriber base
up to 4.8 million at year-end 2022, from 2 million at the beginning
of 2016. S&P said, "As Verisure is approaching 5.0 million
subscribers, we estimate that the company's portfolio business will
generate revenue of EUR2.7 billion and EBITDA of close to EUR1.9
billion in 2023, compared with EUR1 billion revenue and EUR600
million EBITDA in 2016. In our view, this larger scale will be
sufficient to self-fund a net subscriber and revenue growth rate of
about 10%. This incorporates our expectation that the attrition
rate will remain slightly elevated at about 7.5% (the same as in
2022 but slightly higher than 6.9% in 2021), which is primarily
related to current economic headwinds and inflationary pressure on
households."
S&P said, "We expect Verisure to capture growth opportunities with
limited funding needs. In our view, Verisure has ample growth
opportunities, as the company benefits from its strong market
position (No. 1 in 12 of its 17 markets). It will also gain from
the low penetration rate of the residential monitoring market in
Europe (about 5%) and Latin America, compared with more mature
markets like the U.S. (about 20%). In addition, we expect a
relatively flat cost per acquisition (CPA) in 2023-2024, which will
further bolster Verisure's expansion. We project CPA will remain at
about EUR1,400-EUR1,450 in 2023-2024 (EUR1,407 in 2022), as we
estimate that cost increases stemming from inflationary pressure on
labor and hardware will be balanced by Verisure's ability to raise
prices to its customers and benefit from economies of scale. As
such, we expect that with a net subscriber growth of about 10%, the
S&P Global Ratings-adjusted FOCF will be about break-even in coming
years, despite increasing interest costs and portfolio capital
expenditure (capex). This contrasts with the past six years, when
the company has posted an average annual negative FOCF of EUR120
million.
"About breakeven FOCF presents deleveraging opportunities from
expanding absolute EBITDA. We expect Verisure to keep investing its
entire operating cash flow on gaining customers and equipment
upgrades. Therefore, we expect deleveraging to come from EBITDA
expansion rather than from any repayments of debt. We note that the
owners of Verisure have a history of making dividend payments.
However, we understand there will be no debt-financed shareholder
returns over the forecast period, which is supported in our view,
by the current high interest-rate environment. As a result, as we
expect absolute EBITDA growth of about 13%-17% in 2023-2024 (close
to the annual average of 15% in recent years), and assuming a
stable debt, we assess that Verisure has the capacity to deleverage
toward debt to EBITDA of 5.0x at year-end 2024, from about 6.6x in
2022.
"The stable outlook reflects our expectation that Verisure will
achieve annual net subscriber and revenue growth of about 9%-10%,
while constraining attrition and customer acquisition costs close
to 2022 levels. This should lead to an EBITDA margin above 40%,
roughly breakeven FOCF, and debt to EBITDA comfortably below
7.0x."
Downside scenario
S&P could lower the rating if:
-- Debt to EBITDA exceeded 7.0x, for example due to larger
shareholder returns.
-- FOCF is negative as a consequence of a deteriorating operating
performance, such as loss of market share stemming from increased
competition or unfavorable technological shifts or a sharp increase
in attrition and CPA, resulting in significantly lower revenue
growth and EBITDA margin than in S&P's current base case.
Upside scenario
S&P is unlikely to take a positive rating action at this stage
because of the company's lack of explicit financial policy
commitment to operate sustainably with low leverage. However, it
could raise the rating if it observed:
-- A shift to a more conservative financial policy, with a target
to maintain leverage approaching 5.0x.
-- Positive FOCF generation of at least 5% of debt, while still
posting healthy growth.
ESG credit indicators: E-2, S-2, G-3
S&P said, "Governance factors are a moderately negative
consideration in our credit rating analysis of Verisure Midholding,
as is the case for most rated entities owned by private-equity
sponsors. We believe the company's highly leveraged financial risk
profile points to corporate decision-making that prioritizes the
interests of the controlling owners. This also reflects the
generally finite holding periods and a focus on maximizing
shareholder returns."
===========
T U R K E Y
===========
RONESANS GAYRIMENKUL: Moody's Withdraws 'Caa1' Corp. Family Rating
------------------------------------------------------------------
Moody's Investors Service has withdrawn the Caa1 corporate family
rating of Ronesans Gayrimenkul Yatirim A.S. (RGY), one of the
largest retail focused commercial property companies in Turkey.
The outlook at the time of the withdrawal was negative. The company
currently has no rated debt.
RATINGS RATIONALE
Moody's has decided to withdraw the ratings because there are no
rated obligations outstanding following the successful repayment of
the USD300 million senior unsecured notes (Eurobond) due April
2023.
COMPANY PROFILE
Ronesans Gayrimenkul Yatirim A.S. is one of the largest retail
focused commercial property owners and managers in Turkey with a
total portfolio value of EUR2.2 billion as of December 2022. The
property portfolio comprises of 12 dominant shopping centers of
which three are a 50/50 joint venture with GIC (Government of
Singapore Investment Corporation); and 4 offices. RGY is a
subsidiary of Ronesans Emlak Gelistirme Holding A.S. (100% owned by
Ronesans Holding A.S. which holds investments in construction,
energy and property ownership and development) which holds 74.2% of
RGY and GIC holding 21.4% with employees holding the balance.
TURK P VE I: Fitch Affirms IFS Rating at 'B', Outlook Negative
--------------------------------------------------------------
Fitch Ratings has affirmed Turk P ve I Sigorta A.S.'s (Turk P&I)
Insurer Financial Strength (IFS) Rating at 'B', with Negative
Outlook. Fitch has also affirmed Turk P&I's National IFS Rating at
'A+(tur)' with a Stable Outlook.
The IFS Rating reflects Turk P&I's 'Moderate' company profile
compared with other Turkish insurers', with investment risks skewed
towards the Turkish banking sector, and exposure to the Turkish
economy, in line with the rest of the market. The rating also
reflects Turk P&I's strong earnings and weakened capitalisation.
Given that the majority of Turk P&I's liabilities are in foreign
currencies, its IFS Rating is constrained by Turkiye's 'B' Country
Ceiling to account for transfer and convertibility risk.
The Negative Outlook on the IFS Rating reflects that on the
sovereign rating of Turkiye, which weighs on its assessment of
industry profile and operating environment, and investment risks.
KEY RATING DRIVERS
Rating Constrained by Country Ceiling: Turk P&I's IFS Rating is
capped at the Country Ceiling of 'B' because the company
predominantly settles its liabilities in foreign currency. This
results in transfer and convertibility risk, ie the risk that the
Turkish government may place restrictions on the ability of Turk
P&I to obtain foreign currency.
Turkish Marine Specialist: Fitch assesses Turk P&I based on the
insurer's Standalone Credit Profile, but also considers its
ownership structure, which is equally divided between public and
private interests. Fitch believes ownership, as well as the
company's strategic role in the Turkish economy, are positive for
its credit profile. Turk P&I, which was Turkiye's first protection
and indemnity (P&I) insurance provider, also underwrites hull and
machinery (H&M) insurance, which accounted for 72% of its net
premiums in 2022.
'Moderate' Business Profile: Fitch ranks Turk P&I's business
profile as 'Moderate' compared with other Turkish insurers, despite
its small size, limited history and less established business
lines. This is because its increasing international
diversification, in addition to its ownership and strategic role in
Turkiye, benefits the business profile. Fitch expects Turk P&I's
business volumes to continue to grow strongly in 2023-2024,
supported by new local laws, such as a requirement for compulsory
insurance for tourist boats, as well as strong development of the
international business.
Weakened Capitalisation: The company's capitalisation, as measured
by Fitch's Prism Factor-Based Model (Prism FBM) score based on
end-2022 data, deteriorated to 'Somewhat Weak' from 'Adequate' at
end-2021. Turk P&I's regulatory solvency ratio also weakened to 90%
at end-2022 from 109% at end-2021. This was driven mainly by a
strong increase in net premiums, which grew 143%, while equity
increased only 43% in the same period due to lower retained
earnings. Fitch expects the regulatory solvency ratio to be
restored to over 100% by end-2023 through an increase in paid-in
capital, which is set to be approved by its shareholders.
High Exposure to Banking System: Turk P&I's balance sheet comprises
deposits in Turkish banks, with some concentration on a single
state-owned bank as well as bonds issued by the government and
domestic banks. This indicates a high exposure to the banking
sector in Turkiye, in line with the rest of the Turkish insurance
market.
Currency Volatility Erodes Strong Earnings: Turk P&I's earnings
have been strong over the past five years, and Fitch views
financial performance and earnings as a rating strength. For 2022,
Turk P&I reported net income of TRY42 million (2021: TRY53
million), equivalent to net income return on equity (ROE) of 35%
(81%). Turk P&I's profitability is highly influenced by
foreign-exchange (FX) results.
In 2022, Turk P&I's underwriting performance deteriorated as
reflected in a combined ratio of 124% (2021: 114%) due to the lira
depreciation and the accounting impact of the time lag between the
booking of earned premiums and incurred claims. However, on a US
dollar basis the combined ratio remained very strong at 82% at
end-2022 (2021: 78%). Turk P&I receives most of its premium income
and pays most of the claims in hard currencies.
Business Profile Constrains National Rating: The National IFS
Rating of 'A+(tur)'/Stable reflects Turk P&I's consistently strong
regulatory solvency level, and its strong earnings. Its weak
business profile, mainly due to its size and scale compared with
peers', constrains the rating.
RATING SENSITIVITIES
IFS Rating:
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A downgrade of Turkiye's Country Ceiling
- Business-risk profile deterioration due to, for example, a sharp
deterioration in the maritime trade environment
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of Turkiye's Country Ceiling, although currently
unlikely given the Negative Outlook on Turkiye's sovereign rating
National IFS Rating
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Business profile deterioration
- Regulatory solvency ratio below 100% for a sustained period
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Sustained profitable growth with a regulatory solvency ratio
comfortably above 100%
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
----------- ------ -----
Turk P ve I
Sigorta A.S. LT IFS B Affirmed B
Natl LT IFS A+(tur)Affirmed A+(tur)
===========================
U N I T E D K I N G D O M
===========================
BUSINESS MORTGAGE 4: Fitch Affirms 'B-sf' Rating on Cl. B Notes
---------------------------------------------------------------
Fitch Ratings has affirmed 16 tranches of the Business Mortgage
Finance (BMF) series and upgraded two tranches, as detailed below.
Entity/Debt Rating Prior
----------- ------ -----
Business
Mortgage
Finance 4 Plc
Class B
XS0249508754 LT B-sf Affirmed B-sf
Class C
XS0249509133 LT CCsf Affirmed CCsf
Class M
XS0249508242 LT AAAsf Affirmed AAAsf
Business
Mortgage
Finance 6 PLC
Class B2
XS0299447507 LT Csf Affirmed Csf
Class C
XS0299447846 LT Csf Affirmed Csf
Class M1
XS0299446442 LT CCCsf Affirmed CCCsf
Class M2
XS0299446798 LT CCCsf Affirmed CCCsf
Business
Mortgage
Finance 7 Plc
Class A1 –
Detachable
Coupon
XS0330212597 LT AAAsf Upgrade AA-sf
Class A1
XS0330211359 LT AAAsf Upgrade AA-sf
Class B1
XS0330228320 LT Csf Affirmed Csf
Class C
XS0330229138 LT Csf Affirmed Csf
Class M1
XS0330220855 LT CCCsf Affirmed CCCsf
Class M2
XS0330222638 LT CCCsf Affirmed CCCsf
Business Mortgage
Finance 5 PLC
B1 XS0271325291 LT CCsf Affirmed CCsf
B2 XS0271325614 LT CCsf Affirmed CCsf
C XS0271326000 LT Csf Affirmed Csf
M1 XS0271324724 LT BBsf Affirmed BBsf
M2 XS0271324997 LT BBsf Affirmed BBsf
TRANSACTION SUMMARY
The BMF transactions are securitisations of mortgages to SMEs and
to the owner-managed business community, originated by Commercial
First Mortgages Limited. Fitch has analysed the performance of the
transactions using its SME Balance Sheet Securitisation Rating
Criteria.
KEY RATING DRIVERS
High Senior Fixed Fees: Over the past three years, the transactions
have had a considerable increase in senior expenses, mainly
represented by legal fees and Libor transition costs. While the
Libor transition was completed as of August 2022 and litigation
have also been concluded, fees in the most recent interest payment
date (IPD) have remained high. The special servicer has confirmed
there is uncertainty on when this exceptional level of legal
expenses would taper off. In light of the recent trend observed,
Fitch has made assumptions on a stabilised level of senior fixed
costs.
Portfolio Underperformance: Late stage arrears, despite reductions
observed in the last year across all four transactions, remain high
with three months plus arrears at 10.61%, 12.10%, 8.23% and 8.87%
as of February 2023 in BMF 4, 5, 6 and 7, respectively. While for
BMF5, BMF6 and BMF7 early stage arrears have also been on a
decreasing trend, for BMF4 has seen a 4pp increase in early stage
arrears. Properties under repossessions currently represent between
5.7% and 11.5% of the collateral balance across the four
transactions and this exposure could increase further in an adverse
macroeconomic scenario.
The uptick in three-year average of late stage arrears for BMF5 has
led to an increase in Fitch's one-year PD assumed in the portfolio
credit model (PCM) across the four transactions compared with the
last review.
Robust Credit Enhancement (CE) Levels: The deals have deleveraged
substantially and their current senior notes' CEs are between
46.87% (BMF 5) and 93.4% (BMF 4), while for BMF6 the class A notes
have recently repaid in full, leading to the class M notes being
the most senior note with negative CE.
Higher-than-expected prepayment rates over the past year has led to
a CE build up for BMF7 class A1 notes to 90% from 71%, resulting in
its upgrade.
Secondary Quality Collateral: The pools comprise owner-occupied
commercial real estate, which is likely to be more affected by a
deterioration in the economic sentiment, especially due to the
secondary quality of the collateral properties which leave the pool
exposed to tail risks in case of an economic downturn.
Junior Notes Mostly Under-Collateralised: The combination of past
cumulative large losses and insufficient excess spread has led to
the depletion of reserve funds and increasing principal deficiency
ledgers (PDL). Specifically, the outstanding PDLs in BMF 5, 6 and 7
have been increasing and account for 24%, 36% and 33% of the
current notes balance, respectively. The debited PDLs, together
with the presence of other loans in litigation but still not
provisioned for, leave the junior notes in serious distress. These
distressed notes are rated from 'CCC' to 'C' depending on each
class level of subordination and each transaction recovery
prospects.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The transactions' performance may be affected by changes in market
conditions and economic environment. Weakening asset performance is
strongly correlated to increasing levels of delinquencies and
defaults that could reduce CE available to the notes. Fitch tested
a WAFF increase by 25% the mean rating default rate (RDR) and a 25%
decrease in recovery rates (RR). The results indicate no impact for
BMF 4, BMF6 and BMF7, and a four-notch downgrade for BMF 5.
Further losses and increases in PDLs beyond Fitch's stresses could
lead to negative rating action, particularly on the mezzanine and
junior notes. Given the secondary quality of the collateral, a
downturn of the economic cycle is likely to affect the series
performance more than other UK SF transactions.
Should the exceptional level of legal fees continue for a longer
period than expected, further erosion on transaction excess spread
would affect the whole structure.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Stable to improved asset performance driven by stable delinquencies
and defaults would lead to increasing CE levels and potential
upgrades. Fitch tested an additional rating sensitivity scenario by
applying a decrease in WAFF by 25% of the mean RDR and an increase
in the RR of 25%. The results indicate no impact for BMF 4 and
BMF7, a two-notch upgrade for BMF 5 and a three-notch upgrade for
BMF 6.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. Fitch has not reviewed the results of
any third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool[s] ahead of the transaction's [Business
Mortgage Finance 4 Plc, Business Mortgage Finance 5 PLC, Business
Mortgage Finance 6 PLC, Business Mortgage Finance 7 Plc] initial
closing. The subsequent performance of the transactions over the
years is consistent with the agency's expectations given the
operating environment and Fitch is, therefore, satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
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
entities, either due to their nature or the way in which they are
being managed by the entity.
FLOWLINE: Bought Out of Administration by FM Conway
---------------------------------------------------
Grant Prior at Construction Enquirer reports that FM Conway has
bought Essex based drainage specialist Flowline out of
administration saving the jobs of 164 staff.
Flowline was placed in the hands of administrator PwC on May 5 when
it was also renamed as F (Realisations) 2023 Limited, Construction
Enquirer relates.
According to Construction Enquirer, Pwc said: "Immediately
following their appointment, the joint administrators successfully
completed the sale of predominantly all of the Company's business
and assets, to FM Conway Limited.
"The sale has secured the ongoing employment of all of the
Company's c.164 employees who have transferred to the new business
as part of the sale and the Company will continue to trade and
operate as normal."
JOULES: FRC Opens Investigation Into Deloitte Over Audit
--------------------------------------------------------
Greg Noble at Accountancy Age reports that the Financial Reporting
Council has opened an investigation into Deloitte over its audit of
clothing retailer Joules, which went into administration in the
previous year.
The accounting regulator has initiated the inquiry into Deloitte
LLP's audit of the Joules Group's consolidated financial statements
for the year ending May 30, 2021, Accountancy Age relates.
An investigation will be completed by the FRC's enforcement
division under the audit enforcement procedure, Accountancy Age
discloses.
According to Accountancy Age, a spokesperson for Deloitte said: "We
will co-operate fully with the Financial Reporting Council's
investigation and remain committed to the highest standards of
audit quality."
Joules Group plc, which went into administration in November 2022
was subsequently acquired by Next, saving 1,450 employees and
approximately 100 stores, Accountancy Age recounts. In December,
as a condition to rescue the retailer, the founder Tom Joule, who
established the company in 1989, acquired a 26% share in the
business, Accountancy Age notes.
NORSTEAD: Owes GBP7.2 Million to Unsecured Creditors
----------------------------------------------------
Will Ing at Construction News reports that Newcastle-based Norstead
collapsed owing GBP7.2 million to unsecured creditors,
administrator FRP Advisory has revealed.
The mechanical & engineering specialist contractor, which turned
over GBP20.3 million in 2021, was forced to make 52 staff redundant
before entering administration at the end of February, Construction
News relates.
ODFJELL DRILLING: Assigns Preliminary 'B+' LT ICR, Outlook Stable
-----------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' long-term issuer
credit rating to Oslo Stock Exchange-listed offshore drilling
company Odfjell Drilling Ltd.
S&P said, "We also assigned our preliminary 'BB' issue and '1'
recovery ratings to Odfjell Drilling's proposed $390 million senior
secured first-lien bond. The '1' recovery rating indicates our
expectation of very high (90%-100%; rounded estimate: 95%) recovery
of principal in the event of a payment default.
"The stable outlook reflects our view that Odfjell Drilling's
credit measures will remain commensurate with the ratings over the
next 12 months, with debt to EBITDA below 3x, supported by a
continued gradual pick-up in offshore drilling and robust cash flow
visibility over the coming years."
Odfjell Drilling will likely remain a small-scale driller with
significant asset concentration. With only four rigs of its own,
along with four managed rigs, S&P sees Odfjell Drilling as exposed
to risks arising from its dependence on a high share of EBITDA from
each unit. This is a key negative consideration for Odfjell
Drilling compared to its larger peers, since unforeseen events that
hampered Odfjell Drilling's ability to operate one or more rigs
would have a material impact on its cash flows.
Above-average operating efficiency and profitability support the
ratings. While Odfjell Drilling's fleet is small, S&P believes that
it is very well managed, with an overall utilization rate of close
to 99% over the past few years. This, combined with the rigs' high
technological specifications, allows the company to contract the
rigs more often and at higher day rates than peers. This supports
Odfjell Drilling's superior profitability, with EBITDA margins over
40% on average.
Activity in the drilling markets continues to pick up. S&P said,
"We expect that the current commodity prices, supply and demand
fundamentals for crude oil, and a renewed focus on global energy
security will support a continued gradual increase in offshore
drilling spending and activity. Over the longer term, we believe
the energy transition will challenge the offshore drilling sector
because customers may become less willing to commit capital to
multi-year greenfield projects due to the risk of waning oil
demand. However, with operations in Norway largely encouraged by
the state, we believe Odfjell Drilling is in a relatively strong
position."
S&P said, "With a backlog of $2.3 billion, of which $1.7 billion is
firm, we think that Odfjell Drilling can generate EBITDA of about
$350 million in the coming two-to-three years. This will provide
ample headroom for capital expenditure (capex) and potential
dividends. Odfjell Drilling's strong customer relationships,
notably with Equinor and Aker BP, lead us to believe that the
company has a superior ability to contract the rigs, even at low
points of the cycle."
Odfjell Drilling takes a prudent approach to its balance sheet in
the context of high industry volatility. Despite drilling being a
boom-and-bust type of industry, Odfjell Drilling is less prone to
great EBITDA variations, thanks to its long-term contracts with
clients, as well as the harsh environmental conditions in Norway,
which limit the number of rigs that can work there. Odfjell
Drilling went through the previous industry downturn without
experiencing a default or distressed exchange. S&P therefore
believes that its prudent leverage target of net debt to EBITDA of
2.5x over the cycle, and the absence of dividend payments if debt
to EBITDA is above 3.0x, support the rating.
S&P said, "The stable outlook reflects our expectation that Odfjell
Drilling will reduce its leverage amid supportive market
conditions, providing it with the scope to face headwinds at lower
points in the cycle. We believe that Odfjell Drilling's fleet of
rigs will continue to achieve above-average utilization and
efficiency rates. We anticipate debt to EBITDA in the 2x-3x range,
which is commensurate with the 'B+' rating."
S&P could lower its ratings on Odfjell Drilling if it anticipates
weaker credit measures, such as debt to EBITDA consistently above
3x or funds from operations (FFO) to debt below 30%. This could
occur if:
-- Weaker commodity prices impair demand for offshore drilling
services, making it more challenging for the company to re-contract
its rigs at favorable day rates; and
-- Odfjell Drilling adopts a more aggressive financial policy on
dividends and capital spending.
S&P views rating upside as limited in view of Odfjell Drilling's
asset and geographic concentration. Such upside is linked to
increased scale and cash flow generation, with less dependence on
individual assets. Rating upside could also arise if the company's
financial policy targets were to become much more stringent, for
example, with a capital structure that was close to being free of
net debt so that debt to EBITDA would be below 1.5x at all points
of the cycle.
Environmental, Social, And Governance
ESG credit indicators: E-4, S-2, G-2
S&P said, "Environmental factors are a negative consideration in
our credit rating analysis of Odfjell Drilling due to our
expectation that the energy transition will reduce the demand for
offshore drilling rigs and services, as accelerating adoption of
renewable energy lowers the need for fossil fuels. In view of
Odfjell Drilling's exposure to the offshore drilling market, the
company faces higher environmental risks than onshore rig
contractors due to its susceptibility to operational interruptions
and damage to its equipment in its harsh operating environments.
However, we believe that Odfjell Drilling's operational track
record in Norway partly mitigates these risks. Social factors are a
neutral consideration in our ratings on Odfjell Drilling thanks to
the company's safety record and presence in very low-risk
countries, notably Norway. Governance factors are a neutral
consideration for Odfjell Drilling due to its historically
conservative approach to leverage and long track record of
successful operations."
ODFJELL DRILLING: Moody's Assigns 'B2' CFR, Outlook Stable
----------------------------------------------------------
Moody's Investors Service assigned new ratings to Odfjell Drilling
Ltd. (ODL), including a B2 corporate family rating, a B2-PD
probability of default rating and a B2 instrument rating to the
proposed $390 million backed senior secured notes (Nordic bond) due
2028 to be issued by ODL's indirectly wholly-owned subsidiary
Odfjell Rig III Ltd. The ratings outlook is stable.
Net of transaction costs, proceeds from the bond issuance will be
used to refinance a portion of ODL's existing debt and for general
corporate purposes.
RATINGS RATIONALE
The assigned B2 CFR reflects ODL's (i) established position as a
provider of offshore drilling services with a long operational
track record; (ii) high-quality and young rig fleet with
significant collateral value and competitive advantages; (iii)
exposure to improving deep-water drilling market conditions, as
evidenced by increased day-rates given growing demand for drilling
services vis-á-vis tight supply side; (iv) firm backlog of $1.7
billion as of May 2023 which provides good medium term revenue and
cash flow visibility; (v) pro-forma gross leverage (defined as debt
to EBITDA, Moody's-adjusted) of 3.0x, which is moderately high but
expected to decline over time through a combination of earnings
growth and debt amortisation. The CFR also reflects the expectation
of ODL's continued adherence to its stated conservative financial
policy, including holding net leverage below 2.5x as well as
prudently managing shareholder distributions and growth spending.
Concurrently, ODL's CFR is constrained by the company's (i)
reliance on volatile upstream oil and gas spending given the
exclusive focus on drilling services, potentially conducive to
fleet re-contracting risk; (ii) small fleet of 8 units; (iii) high
geographic and customer concentration, given that the owned fleet
is currently entirely contracted to support Norwegian operations of
two customers, Equinor ASA (Aa2 stable) and Aker BP ASA (Baa2
stable) and (iv) some uncertainty with regards to future regular
dividend policy, yet to be established.
ODL's financial metrics are strong for the B2 rating category. The
focus on remunerative harsh environment drilling activities coupled
with sustained high rig utilization resulted in Moody's-adjusted
EBIT margins consistently above 17% on a historic basis. Absent
major contract cancellations and assuming successful replacement of
work rolling off with new profitable awards, ODL's profitability is
expected to remain healthy through the medium term as increasing
days-rates offset some margin dilution arising from the recently
enlarged portion of managed units in the fleet. Under Moody's base
case, ODL shall continue to generate strong positive free cash flow
(FCF) despite peak capital investments of $75 million and $105
million in 2023 and 2024, comfortably meeting its debt amortisation
requirements while retaining cash availabilities commensurate with
the business requirements.
ODL's pro-forma leverage of 3.0x is modest but expected to quickly
decline towards 2.0x – 2.5x in the next 12-18 months, assuming
moderate but continued increase in revenue and earnings as well as
around $200 million of cumulative scheduled debt reduction through
the end of 2024.
While high energy prices and increased demand for offshore rigs
have raised day-rates and lifted rig values globally since late
2021, Moody's expects the re-contracting environment to remain
competitive as the offshore industry continues to recover from a
prolonged downturn. Oil and gas prices need to stay high to attract
continued upstream investment and ODL will have to successfully
recontract at higher day-rates to sustain and improve its credit
profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
ODL's ratings could be upgraded if the company:
Achieves larger scale as well as longer duration of contracts in a
healthy industry environment
Sustains a track record of strong profitability at least in line
with current levels and
Maintains a strong balance sheet with leverage trending towards
1.5x, sustained strong positive FCF generation and prudent
shareholder distributions
Conversely, ODL's ratings would be downgraded if the company's:
Earnings and backlog deteriorate materially, leading to gross
leverage sustainedly in excess of 3.0x and EBITDA / Interest
expense falls below 3x
FCF generation turns negative, as a result of weaker operating
performance or more aggressive than currently anticipated financial
policies or
Liquidity position weakens
LIQUIDITY
ODL's liquidity is good, assuming the comprehensive refinancing of
the company's capital structure concludes successfully as planned.
Under Moody's base case, ODL's cashflow generation is projected to
cover all basic funding needs over the next 12-18 months including
scheduled debt amortisation of $45 million in the second half of
2023 and $145 million in 2024. Additionally, the company will have
access to a $160 million senior revolving credit facility (RCF)
secured by the Deepsea Stavanger, which is expected to remain
largely undrawn. Finally, Moody's expects ODL to maintain good
headroom under its financial covenants including maintenance of (i)
unrestricted cash balances above $50 million; (ii) equity to total
assets above 30% and (iii) current assets to current liabilities
(excluding those related to financial debt) above 1x.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that ODL will
maintain strong credit metrics by successfully re-contracting its
rigs, generating sufficient free cash flow to satisfy debt
servicing requirements. The stable outlook also reflects Moody's
expectation of ODL maintaining a prudent approach towards capital
allocation, including shareholder remuneration and growth
spending.
ESG CONSIDERATIONS
ODL faces high exposure to carbon transition, given that its
earnings are entirely generated from oil and gas customers.
Moreover, given the high breakeven costs for offshore exploration
and production, the company is more susceptible to carbon
transition risk than the land based OFS companies. ODL faces
moderate exposure to physical climate risk stemming from its focus
on harsh environment operations. Other environmental risks are
moderate as they are largely indemnified by their producer
customers.
Similar to most oilfield services companies, ODL faces high
exposure to social risks ultimately attributable to increasing
demographic & societal pressures to reduce hydrocarbon production.
Growing public concern around climate change, including air and
water quality could lead to stricter future regulations and/or
higher costs for producers limiting demand for oilfield services.
This risk is partially offset by the company's low to moderate
exposure to other social risk factors such as human capital,
customer relations, responsible production and health and safety.
Governance risks represent a source of risk with a moderately
negative impact on ODL's ratings. Key considerations include the
company's conservative financial policies, credible track record
and strong liquidity position, partially offset by its concentrated
ownership structure with one major shareholder holding over 60% of
ODL's capital and a somewhat complex organizational structure.
STRUCTURAL CONSIDERATIONS
The B2 instrument rating of the $390 million backed senior secured
Nordic bond to be issued by ODL's indirectly wholly-owned
subsidiary Odfjell Rig III Ltd. is in line with ODL's CFR. This
reflects the notes' (i) first lien claim on the assets of ODL's
subsidiaries that own and operate the Deepsea Aberdeen and the
Deepsea Atlantic semi-submersibles and (ii) ranking pari passu with
other secured obligations of the issuer. The B2 instrument rating
also reflects the absence of material claims ranking behind the
company's secured obligations.
LIST OF AFFECTED RATINGS
Assignments:
Issuer: Odfjell Drilling Ltd.
Probability of Default Rating, Assigned B2-PD
LT Corporate Family Rating, Assigned B2
Issuer: Odfjell Rig III Ltd.
BACKED Senior Secured Regular Bond/Debenture, Assigned B2
Outlook Actions:
Issuer: Odfjell Drilling Ltd.
Outlook, Assigned Stable
Issuer: Odfjell Rig III Ltd.
Outlook, Assigned Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Oilfield
Services published in January 2023.
COMPANY PROFILE
Odfjell Drilling Ltd. (ODL) provides offshore contract drilling
services to the oil and gas industry. The company operates a modern
fleet of eight 6th-generation semi-submersibles (four owned, four
under management) with harsh environment capabilities and an
average age of 8.5 years. In 2022, ODL generated revenue of $650
million and Moody's-adjusted EBITDA of $302 million. Founded in
1973, ODL is 60.37% owned by Odfjell Partners Holding LTD while the
rest is free float listed on the Oslo Stock Exchange. As of May 1,
2023, ODL had a market capitalisation of $555 million.
PURPLEBRICKS: May Run Out of Cash, Seeks to Sell Business
---------------------------------------------------------
Melissa Lawford at The Telegraph reports that Purplebricks warned
it could soon run out of cash.
In a trading update on Tuesday, May 9, the troubled estate agent
said that falling numbers of properties on its books meant its
earnings and revenue for the year were looking weaker than
anticipated, The Telegraph relates.
Instructions fell by nearly half in the last three months of 2022,
dropping from 10,964 a year earlier to just 5,672, The Telegraph
discloses.
The struggling business, which is seeking to sell itself in a
rescue effort, warned it may run down its cash reserves as a
result, The Telegraph discloses.
Purplebricks has GBP9.1 million in the bank and the board no longer
expects to return to profit this financial year, The Telegraph
notes.
The company said that a payment provider it works with had been
withholding some funds as a result of its precarious position,
according to The Telegraph.
The board is now focusing on efforts to sell the business to stave
off a cash crunch, The Telegraph states.
According to The Telegraph, a "small number" of parties are in
talks about buying Purplebricks and negotiations are ongoing.
However, the estate agent warned that the sale was likely to value
Purplebricks at "materially below the company's current share
price", The Telegraph notes.
The online estate agent started looking for a buyer in February
after a turbulent 18 months of scandals, a profit warning, and
shareholder calls for the sacking of its chairman, Paul Pindar, The
Telegraph recounts.
Purplebricks' value has plunged by nearly 90% since the start of
this year, The Telegraph relays.
ROBINSON MANUFACTURING: Goes Into Administration
------------------------------------------------
Aaron Morby at Construction Enquirer reports that timber frame and
roof truss specialist Robinson Manufacturing Ltd has been placed
into administration.
The Northamptonshire headquartered business turned over more than
GBP35 million according to last published accounts and operated out
of several branches across the south, Midlands and Wales,
Construction Enquirer relates.
Despite challenges posed by Covid and timber prices, the firm had
been expanding and bought Cardiff-based Castleoak Offsite
Manufacturing from administrators just 18 months ago, Construction
Enquirer discloses.
The firm is understood to employ over 200 staff, Construction
Enquirer notes.
The roof truss manufacture was set up in 1986 by Tim Robinson as a
division of Hilton Timber.
Administrators from Teneo Restructuring have taken over the running
of the business after being formally appointed on May 4,
Construction Enquirer states.
UNIQUE PUB: Fitch Affirms 'B-' Rating on Two Tranches, Outlook Neg.
-------------------------------------------------------------------
Fitch Ratings has affirmed Unique Pub Finance Company plc's class
A4 notes at 'BB+', class M notes at 'B-' and class N notes at 'B-'.
The Outlook on the class A notes remains Stable while the Outlooks
on the class M and N notes remain Negative.
Entity/Debt Rating Prior
----------- ------ -----
Unique Pub
Finance
Company Plc
Unique Pub
Finance
Company Plc
/Debt/2 LT LT
Class A4
Fixed Rate
Notes
XS0154960537 LT BB+ Affirmed BB+
Unique Pub
Finance
Company Plc
/Debt/3 LT LT
Class N
Fixed Rated
Notes
XS0154961188 LT B- Affirmed B-
Unique Pub
Finance
Company Plc
/Debt/4 LT LT
Class M
Fixed Rate
Notes
XS0096146054 LT B- Affirmed B-
RATING RATIONALE
The Stable Outlook on the class A4 notes reflects the
quicker-than-expected recovery from Covid-19 and the reduced
uncertainty of further containment measures related to the
pandemic. However, the Negative Outlooks on the class M and N notes
signal the susceptibility of their ratings to the challenging
trading environment, including inflationary pressures and falling
real disposable income during the elevated amortisation of the
class M notes until March 2024. Under the Fitch rating case (FRC),
the repayment of the class M notes relies on the drawing under the
available liquidity facility and available cash. Fitch also expects
that any further unexpected shortfalls to be covered by Stonegate
Pub Company Limited (B-/Negative) given the value of the estate.
KEY RATING DRIVERS
Structural Decline but Strong Culture - Industry Profile: Midrange
The UK pub sector has a long history, but trading performance for
some assets showed significant weakness even before the pandemic.
The sector has been structurally declining for the past three
decades due to demographic shifts, greater health awareness and the
growing presence of competing offerings. Exposure to discretionary
spending is high and revenues are therefore linked to the broader
economy. The cost of living crisis has reduced consumers'
disposable income and suppressed confidence. Competition is keen,
including off-trade alternatives, and barriers to entry are low.
The recent pub closures have removed some excess capacity, while
pandemic-related supply-chain issues have been gradually easing,
improving confidence in the sector. Despite the contraction, Fitch
views the sector as sustainable in the long term, supported by a
strong pub culture.
Sub-KRDs: Operating Environment - Weaker; Barriers to Entry -
Midrange; Sustainability - Midrange.
Experienced Operator, Well-Maintained Estate - Company Profile:
Midrange
Unique is wholly owned by Ei Group (acquired by Stonegate Group in
2020), a large and experienced UK pub operator with economies of
scale but limited use of branding. As the estate is substantially
leased or tenanted, insight into underlying profitability is weak.
Operator replacement would be difficult, but possible within a
reasonable period. Centralised management of the estate and common
supply contracts result in close operational ties between the
securitised and non-securitised estates.
Fitch views the pubs as reasonably well maintained and over 90% of
the estate is held on a freehold or long-leasehold basis. Over
recent years, management has reinvested disposal proceeds into
improving the existing estate. There is no minimum capex covenant,
but upkeep is largely contractually outsourced to more than half of
tenants on full repair and insuring leases. The secondary market is
liquid and there is value in the estate on alternative use, such as
residential property and mini-supermarkets.
Sub-KRDs: Financial Performance - Weaker; Company Operations -
Midrange; Transparency - Weaker; Dependence on Operator - Midrange;
Asset Quality - Midrange
Weaker Debt Features - Debt Structure: Class A - Midrange; Class M
and N - Weaker
Debt is fully amortising but there is concurrent amortisation
between the class A4 and M tranches and debt service is high until
2024. Favourably, the debt is fully fixed-rate, which avoids
floating-rate risk and senior-ranking derivative liabilities. The
security package comprises comprehensive first-ranking fixed and
floating charges over the borrower's assets.
Structural features include a debt service reserve account and a
liquidity facility, which decreases in line with amortisation. The
reduction of the liquidity facility is a significant credit
negative. In its view, the special-purpose vehicle (SPV) is not a
true orphan SPV as the share capital is owned by a subsidiary of
Unique and most of its directors are not independent.
Sub-KRDs: Debt Profile: Class A - Midrange; Class M and N - Weaker;
Security Package: Class A - Stronger, Class M and N - Midrange;
Structural Features - Weaker
Financial Profile
The FRC's projected metrics (minimum of both the average and median
FCF DSCRs) between 2023 and 2027 are 2.1x, 0.9x and 1.5x,
respectively. In 2023-2024, the coverage for class M and N is below
1.0x, driven by the elevated amortisation of class M.
Liquidity Erosion
Under the FRC, Fitch assumes a GBP20 million-GBP25 million
cumulative deficit in debt service in 2023-2024. This deficit is
fully covered by drawing under the liquidity facility and available
cash. Fitch prudently does not assume any deferral of the class N
notes' debt service. Its calculations exclude cash balances on
tenant deposit account and disposal account of GBP16.2 million.
PEER GROUP
Unique's closest peer is Wellington Pub Company Plc. The company
(class A notes rated 'B-' with a DSCR of 1.0x and class B notes
rated 'CCC' with a DSCR of 0.9x) has a different business model as
it is a free-of-tie pub transaction. Wellington's financial
performance has been historically weaker than Unique's, and the
pubs are significantly less profitable as measured by EBITDA. Fitch
also perceives asset quality to be weaker than that of Unique.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Deterioration of the FRC-projected profile FCF DSCRs to below 1.3x
for the class A notes. For the class M and N notes, the depletion
of debt service reserves in excess of Fitch's expectation could
increase the chance of further negative rating action as it would
indicate a weakening of the current credit profile. The class N
notes' rating is also capped by that of the class M notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of the class A notes is unlikely due to structural
features of the securitisation, which allow flexibility in cash
upstreaming unless further debt prepayments or improved cash
generation significantly improve FRC-projected profile FCF DSCRs.
An improved cash generation supporting a sustained recovery and
leading to higher margin of safety on the full and timely repayment
of class M notes in 2024 could lead to a revision of the Outlook to
Stable.
TRANSACTION SUMMARY
Unique is a whole business securitisation of a portfolio of 1,769
tenanted pubs in the UK, ultimately owned and operated by Stonegate
Pub Company. The proceeds raised by Unique are on-lent to the
borrower, Unique Pub Properties (UPP).
CREDIT UPDATE
Use of Liquidity to Service Junior Notes
The securitisation's borrower UPP reported unadjusted cash flow of
GBP116.5 million in the year to end-1Q23, an increase of 8% year on
year helped by the inflation-linked growth in rent roll. The
cashflows per pub improved compared with pre-pandemic levels due to
disposal of weaker performing pubs.
However, the debt service has been part-funded by the reserve
account (GBP15 million balance available in March 2022 was fully
used) and the liquidity facility (GBP6 million used, with GBP100
million remaining) as the transaction did not generate sufficient
cash flows to cover the increase in amortisation.
Financial Health of Publicans Recovering
All restrictions on trading due to the pandemic containment
measures were lifted on 19 July 2021 in England and pubs have been
allowed to trade fully both indoors and outdoors. Unique's
publicans remain affected by the high energy bills and cost
inflationary pressures hampering margins on top of reduction in
consumer spending with the contraction in disposable income.
Inflationary Pressures
The current inflationary pressures represent recovery challenges,
given the sector's sensitivity to consumer discretionary spending
and may challenge margins. Fitch expects these stresses to be
offset by price increases, menu engineering or operational
productivity. Rising utility bills and wages are the main
challenge.
Selling Non-Core Pubs
The securitisation has continued to dispose of non-core pubs. In
the 12 months to end-1Q23, Unique disposed of 25 properties with
total proceeds of GBP21 million. The funds will either be used for
capex or pre-payments.
Liquidity
At end-1Q23, the borrower held GBP18.2 million of cash (including
tenants deposits of GBP8.9 million and GBP7.3 million at disposals
account) as well as the GBP100 million of an undrawn liquidity
facility.
FINANCIAL ANALYSIS
The updated FRC assumes that profitability will return to
pre-pandemic levels by end-2026. Fitch has conservatively assumed
some lease abandonments and delays in renting out vacant premises
due publicans being severely affected the high inflation. Costs are
assumed to increase faster than income. Higher inflation will
continue to put pressure on consumers' disposable incomes and could
lead to less consumption in pubs. Unique's publicans as they are
exposed to pressure on wages, utility costs as well as food and
drinks costs, despite some short-term protections.
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.
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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.
Copyright 2023. All rights reserved. ISSN 1529-2754.
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