/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/230517.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 17, 2023, Vol. 24, No. 99 Headlines D E N M A R K SAS SAB: U.S. Court Approves Revised Plan to Raise Equity I T A L Y LOTTOMATICA GROUP: Moody's Assigns 'Ba3' CFR, Outlook Stable N E T H E R L A N D S DTEK OIL: Fitch Affirms 'CC' LongTerm Issuer Default Rating SPRINT BIDCO: Moody's Cuts CFR to B2 & Alters Outlook to Negative S P A I N RURAL HIPOTECARIO I: Fitch Affirms 'CCCsf' Rating on Class E Notes S W I T Z E R L A N D VERISURE MIDHOLDING: Moody's Ups CFR to B1 & Unsecured Notes to B3 U N I T E D K I N G D O M ALBA PLC 2005-1: Moody's Lowers Rating on GBP4.1MM E Notes to Ba2 ITEC PACKAGING: Bought Out of Administration by Shalam Packaging JOULES: To Close Chelmsford Store Before End of May M&CO: Plans to Launch Brand New Website by End of June POLARIS PLC 2023-1: Moody's Assigns (P)Ba2 Rating to Class E Notes SHOTLEY PARK: Goes Into Liquidation Amid Financial Pressures WELLINGTON PUB: Fitch Alters Outlook on Class A Notes to Stable - - - - - ============= D E N M A R K ============= SAS SAB: U.S. Court Approves Revised Plan to Raise Equity --------------------------------------------------------- Urvi Dugar, Marie Mannes and Anna Ringstrom at Reuters report that SAS's rescue has moved a step closer after a U.S. court approved a revised plan from the Scandinavian airline to raise equity. The long-suffering airline filed for U.S Chapter 11 bankruptcy protection last year, Reuters recounts. The court approval of the fundraising proposal -- a key element of the "SAS Forward" rescue plan -- means investors may start placing bids for a stake in the airline, Reuters notes. According to Reuters, an SAS spokesperson said the new procedure reflected court concerns in April about a requirement for bidders to accept the participation of Denmark -- the airline's biggest shareholder alongside Sweden -- in the equity raising. "That formal requirement has been removed," Reuters quotes the spokesperson as saying. "But we are clearly stating that the Danish state's support is essential to succeed with SAS Forward and to emerge from the Chapter 11 process." That fact would be taken into account when assessing other bids, she said, adding: "SAS' intention remains clear that we are doing this together with Denmark." In the updated plan, SAS said that without the support of Denmark the emergence from Chapter 11 "will face significant uncertainty, cost, and delay." Earlier this month, sources told Reuters that U.S. asset manager Apollo was considering taking a majority stake in SAS. "The final amount of equity financing raised will depend upon the competitive equity raise process along with the company's ongoing ability to generate additional liquidity," SAS said in a statement late on May 15. According to Reuters, Denmark has said it is willing to increase its stake to around 30% from around 22%, if others investors were to take a majority stake. SAS said in the statement the deadline for bids was around 13 weeks from now, Reuters relates. About Scandinavian Airlines SAS SAB, Scandinavia's leading airline, with main hubs in Copenhagen, Oslo and Stockholm, is flying to destinations in Europe, USA and Asia. Spurred by a Scandinavian heritage and sustainable values, SAS aims to be the global leader in sustainable aviation. The airline will reduce total carbon emissions by 25% by 2025, by using more sustainable aviation fuel and its modern fleet with fuel-efficient aircraft. In addition to flight operations, SAS offers ground handling services, technical maintenance and air cargo services. SAS is a founder member of the Star Alliance, and together with its partner airlines offers a wide network worldwide. On the Web: https://www.sasgroup.net SAS AB and its subsidiaries, including Scandinavian Airlines Systems Denmark-Norway-Sweden and Scandinavian Airlines of North America Inc., sought protection under Chapter 11 of the U.S. Bankruptcy Code (Bankr. S.D.N.Y. Lead Case No. 22-10925) on July 5, 2022. In the petition filed by Erno Hilden, as authorized representative, SAS AB estimated assets between $10 billion and $50 billion and liabilities between $1 billion and $10 billion. Judge Michael E Wiles oversees the cases. The Debtors tapped Weil, Gotshal & Manges, LLP as global legal counsel; Mannheimer Swartling Advokatbyra AB as special counsel; FTI Consulting, Inc. as financial advisor; and Seabury Securities, LLC and Skandinaviska Enskilda Banken AB as investment bankers. Seabury is also serving as restructuring advisor. Kroll Restructuring Administration, LLC is the claims agent and administrative advisor. ========= I T A L Y ========= LOTTOMATICA GROUP: Moody's Assigns 'Ba3' CFR, Outlook Stable ------------------------------------------------------------ Moody's Investors Service has assigned a Ba3 corporate family rating, and a Ba3-PD probability of default rating to Lottomatica Group S.p.A. ("Lottomatica " or "the company"). Concurrently, Moody's has upgraded to Ba3 from B1 the instrument ratings on Lottomatica S.p.A.'s (a subsidiary of Lottomatica) senior secured notes, including the EUR340 million senior secured notes, the EUR300 million senior secured floating rate notes, the EUR575 million senior secured notes all due 2025, and the EUR350 million senior secured notes due 2027. At the same time Moody's has withdrawn the B1 CFR and B1-PD PDR for Lottomatica S.p.A. The outlook on all ratings is stable. The rating action is driven by the completion of Lottomatica's initial public offering (IPO) on the Italian stock market and subsequent debt repayment of EUR500 million. This concludes the review for upgrade initiated by Moody's on April 17, 2023. RATINGS RATIONALE Moody's has decided to withdraw the ratings for Lottomatica S.p.A. for its own business reasons. Following the successful IPO which raised proceeds of around EUR425 million, Lottomatica repaid its outstanding EUR400 million backed senior secured PIK Toggle notes due 2026 issued by Gamma Bondco S.a r.l., and EUR100 million of the EUR300 million senior secured floating rate notes due 2025 issued by Lottomatica S.p.A., thus reducing its gross debt level by EUR500 million. Pro forma for the IPO, adjusted gross leverage for the group is estimated by Moody's to decrease to around 3.0x by the end of 2023 from c. 4.0x in PF2022 (including run-rate for Betflag SPA). Moody's anticipates further de-leveraging in the next 12-18 months driven mainly by strong performance coming from its continued organic and acquisitive revenue growth, and benefiting from positive market trends in the online segment. Moody's expects the company's financial policies will be more conservative going forward as evidenced by a lower net leverage ratio target of 2.0-2.5x. The company has adopted a dividend pay-out ratio of around 30% of distributable profits/proceeds which is a balanced ratio for a public company. Moreover, the IPO has diversified the group's funding structure, providing access to equity capital markets. It has also led to less concentrated ownership, although funds managed by Apollo Global Management, Inc. still continue to own around 73.5% of the company's share capital. The well positioned Ba3 rating for Lottomatica is also supported by: (i) the company's favourable position in the gaming value chain, underpinning the company's resilience to adverse regulatory developments and previous downturns; (ii) its product diversification and increasing presence in the profitable high growth online segment; (iii) good liquidity, supported by consistent strong free cash flow (FCF) generation; and (iv) proven ability to integrate large targets and achieve synergies. However, the rating remains constrained by: (i) Lottomatica's geographical concentration in Italy, which exposes the company to a single regulatory and fiscal regime; (ii) its exposure to concession renewal risks and the related cash outflow, and; (iii) its presence in the mature retail gaming machine segment with limited growth prospects and lower margins than the betting and online segments, although Moody's notes the significant growth in the online segment. ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS Governance considerations have been a key driver of this rating action. Supported by Lottomatica's consistent efforts towards de-leveraging as well as growing the business steadily, Moody's has decided to change its management credibility and track record score to 2 from 3. However, the overall governance score remains at G-4 as the company still needs to demonstrate adherence to its recently conservatized financial policies and increased transparency. While the business is now listed, Apollo Global Management, Inc. currently keeps a high concentration in its ownership. The CIS-4 for Lottomatica continues to indicate that its rating is lower than it would have been if ESG risk exposures did not exist. LIQUIDITY Moody's expects the company's liquidity profile to be good over the next 12-18 months. In addition to consolidated cash balances of around EUR234.8 million as of December 2022, further liquidity cushion is provided by access to a fully undrawn new EUR350 million revolving credit facility ("RCF", unrated) and Moody's expectations of healthy free cash flows in the next 12-18 months. The company's liquidity sources can accommodate smaller bolt-on acquisitions. There are no significant debt maturities before 2025. Moody's notes that the 2025 senior secured notes will be refinanced in the near future, assured by a committed bridging loan facility. The super senior RCF documentation contains a springing financial covenant based on senior secured net leverage set at 8.3x and tested when the RCF is drawn by more than 40%. Moody's expects that Lottomatica will maintain good headroom under this covenant if it is tested. STRUCTURAL CONSIDERATIONS Lottomatica's Ba3-PD PDR is in line with the CFR, given the family recovery rate assumption of 50%, which is consistent with Moody's approach for capital structures that include a mix of bank debt and bonds. Lottomatica S.p.A.'s senior secured notes are rated Ba3, in line with the CFR. RATIONALE FOR STABLE OUTLOOK The stable outlook on the ratings reflects Moody's expectation that the company will continue to perform well in all of its segments, allowing the company's debt/EBITDA (as adjusted by Moody's) to remain below 3.5x over the next 12-18 months. It also assumes that the company will adhere to its plan for a more conservative financial policy going forward. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Upward pressure on the ratings would materialize if the company: (i) establishes a track record of following more conservative governance practices and financial policy, (ii) demonstrates that it is able to maintain Moody's-adjusted leverage below 3.0x on a sustainable basis while exhibiting good liquidity and generating strong positive free cash flow, and; (iii) continues to grow its EBIT margin above 20%. Negative pressure on the rating could occur if: (i) Lottomatica's operating performance weakens or is hurt by a changing regulatory and fiscal regime, including the terms of concession renewal, (ii) Moody's-adjusted leverage increases sustainably to above 3.5x, (iii) free cash flow deteriorates and liquidity weakens, or (iv) the company engages in large transformative acquisitions that could lead to integration risk and increase in leverage. LIST OF AFFECTED RATINGS Assignments: Issuer: Lottomatica Group S.p.A. Probability of Default Rating, Assigned Ba3-PD LT Corporate Family Rating, Assigned Ba3 Upgrades: Issuer: Lottomatica S.p.A. Senior Secured Regular Bond/Debenture, Upgraded to Ba3 from B1 Withdrawals: Issuer: Lottomatica S.p.A. Probability of Default Rating, Withdrawn, previously rated B1-PD LT Corporate Family Rating, Withdrawn, previously rated B1 Outlook Actions: Issuer: Lottomatica Group S.p.A. Outlook, Assigned Stable Issuer: Lottomatica S.p.A. Outlook, Changed To Stable From Ratings Under Review PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Gaming published in June 2021. COMPANY PROFILE Founded in 2006 and headquartered in Rome (Italy), Lottomatica S.p.A. (formerly GAMENET GROUP S.P.A.) is the leader in the Italian gaming market. The company operates in three operating segments: (i) Online: online betting segment, through a wide range of online products including games such as poker, casino games, bingo, horse racing and other sports betting; (ii) Sports Franchise: games and horse-race betting through the retail network; and (iii) Gaming Franchise: concessionary activities relating to the product lines: amusement with prize machines ("AWP"), video lottery terminals ("VLT") and management of owned gaming halls and AWPs ("Retail & Street Operations"). ===================== N E T H E R L A N D S ===================== DTEK OIL: Fitch Affirms 'CC' LongTerm Issuer Default Rating ------------------------------------------------------------ Fitch Ratings has affirmed DTEK OIL & GAS PRODUCTION B.V.'s (DOG) Long-Term Issuer Default Rating (IDR) at 'CC'. Fitch has also affirmed the senior unsecured rating on the notes issued by NGD Holdings B.V. at 'CC' with a Recovery Rating of 'RR4'. The 'CC' rating reflects DOG's high business risks, given its operations in Ukraine, uncertain liquidity (in particular with the company's Eurobond amortisations starting in December 2023) and a currency mismatch between the company's dollar-denominated Eurobond obligations and hryvnia-denominated domestic sales. DOG continues to make its Eurobond coupon payments, but its access to foreign currency is constrained, given the National Bank of Ukraine's (NBU) moratorium on cross-border foreign-currency payments. KEY RATING DRIVERS Eurobond Amortisations Start Soon: DOG continues to service its dollar-denominated USD425 million Eurobond due in 2026, which has a 6.75% coupon paid semi-annually, in June and December (around USD14.3 million each). Payments are currently being made, but Fitch has little visibility on the company's ability to make payments in future due to NBU restrictions. Also, from December 2023 DOG will need to repay USD50 million per year in Eurobond amortisations. Moratorium On Cross-Border Payments: The NBU has introduced a moratorium on cross-border foreign-currency payments, limiting companies' ability to service their foreign-currency obligations. Exceptions can be applied for (e.g. for debt service) but can be difficult to obtain. DOG obtained a permit to repay its 1H22 coupon; but none has been granted for the 2H22 payment. A permit for the 1H23 coupon payment is subject to NBU review. Also, it is difficult to say whether DOG would be able to obtain permission for the Eurobond amortisations. Operations Continue: DOG's production assets in the Poltava region are relatively far away from the current front line and have remained operational amid Russia's invasion. However, DOG shifted its drilling programme for 2022 amid the uncertainty, which resulted in production falling by 7% yoy in 2022 and further declines in 2023. DOG is planning to stabilise production through re-intensifying drilling as demand remains fairly robust. High Natural Gas Prices: DOG's earnings significantly improved in 2022 and should remain high in 2023 and potentially beyond on high natural gas prices, even though the company's domestic realised gas prices have decoupled from European prices, and domestically gas is sold at a discount. Ukraine's gas market remains in deficit as domestic consumption is not fully covered by domestic production. Low Leverage: DOG's leverage in 2021-2022 and Fitch-projected leverage in 2023 is relatively low given strong earnings. Fitch projects net debt to EBITDA to be below 1x in 2023. However, the company's leverage and free cash flow (FCF) could be affected by related-party transactions and high operational risks. DOG also has a limited record of adherence to a conservative financial policy and a complex structure. Complex Group Structure: DOG is part of a larger group, DTEK GROUP B.V., which is a private energy corporation in Ukraine with main subsidiaries including DTEK Energy B.V. (CC), DTEK Renewables B.V. (CC), D. Trading B.V. and other companies. DTEK GROUP B.V. is ultimately owned by SCM. Fitch rates DOG on a standalone basis as Fitch considers the overall linkage between the company and SCM as low. There is also a minority shareholder of the main producing gas asset Naftogazvydobuvannya PJSC (27% share). DERIVATION SUMMARY DOG operates three gas fields in the east of Ukraine in the Poltava region. DOG's 'CC' rating is driven by its constrained access to foreign currency in view of Ukraine's moratorium on cross-border foreign-currency payments. According to Fitch's estimates, the company has the capacity to produce around 2 billion cubic metres (bcm) of gas, or around 30 thousand barrels of oil equivalent per day (kboe/d). Kosmos Energy Ltd. (B+/Stable) and Ithaca Energy plc (B/Stable) have higher production (2022: 71kboe/d for Kosmos and 63kboe/d for Ithaca). DOG's Ukrainian peers include Ferrexpo plc (CCC+), Metinvest B.V. (CCC), and Interpipe Holdings Plc (CCC-), which are rated higher because of better access to foreign currency because of exports (all the three companies) and/or producing assets abroad (Metinvest). Its affiliated companies DTEK Energy B.V. and DTEK Renewables B.V. (both rated CC) share tight liquidity and high operational risks. KEY ASSUMPTIONS - Natural gas sold domestically at a discount to Fitch's TTF prices in 2023-2025 (Fitch's TTF prices are USD20/mcf in 2023-2024, USD10/mcf in 2025, USD5/mcf in 2026) - Natural gas production and sales averaging around 1.5bcm in 2023-2026 - Capex increasing in 2023-2024 to arrest the production decline KEY RECOVERY ANALYSIS ASSUMPTIONS - The recovery analysis assumes that DOG would be reorganised as a going concern in bankruptcy rather than liquidated. - The going concern (GC) EBITDA of UAH3 billion reflects Fitch's view of a sustainable, post-reorganisation EBITDA level and normalised domestic prices. - Fitch uses an enterprise value/EBITDA multiple of 3.0x to calculate a post-reorganisation valuation, reflecting proximity of the company's operations a territory with military conflict. - Fitch assumes that the senior unsecured bonds are pari-passu with the company's deferred consideration. - After deduction of 10% for administrative claims, its waterfall analysis generated a waterfall-generated recovery computation (WGRC) in the 'RR4' band, indicating a 'CC' rating for the senior unsecured notes. The WGRC output percentage on current metrics and assumptions is 44%. RATING SENSITIVITIES Factors That Could, Individually Or Collectively, Lead To Positive Rating Action/Upgrade: - Relaxation of the restrictions on cross-border foreign-currency payments and a stabilised liquidity position would be positive for the rating. Factors That Could, Individually Or Collectively, Lead To Negative Rating Action/Downgrade: - The IDR will be further downgraded to 'C' if a default or default-like event begins. This includes DOG entering into a grace period, or entering a temporary waiver or standstill following non-payment of a financial obligation. LIQUIDITY AND DEBT STRUCTURE Uncertain Liquidity: DOG's liquidity position is uncertain, given its constrained access to foreign currency. At end-2022 its cash balance, according to Fitch's estimates, would not be sufficient to make the Eurobond coupon and amortisation payments in 2023 (around USD80 million in total). While DOG's FCF generation is supported by high natural gas prices and could be sufficient to service its debt, the company's ability to use its cash flows for debt repayments remains subject to foreign-currency payment restrictions. As at end-2022, DOG's debt was dominated by a USD425 million Eurobond (UAH15.5 billion) due in 2026, which was issued in 2021 as part of a restructuring deal. The bond was issued through its wholly-owned FinCo, NGD Holdings B.V., at a 6.75% coupon rate to be paid semi-annually in cash with USD50 million annual amortisation from December 2023 onwards, and a bullet payment of USD275 million at maturity in December 2026. ISSUER PROFILE DOG is a natural gas producer in Ukraine. According to Fitch's estimates, in 2022 the company produced 1.9bcm of gas. SUMMARY OF FINANCIAL ADJUSTMENTS Fitch adds the company's deferred consideration to total debt. ESG CONSIDERATIONS DTEK OIL & GAS PRODUCTION B.V has an ESG Relevance Score of '4' for Group Structure due to a large number of complex related party transactions and complex group structure. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors. DTEK OIL & GAS PRODUCTION B.V has an ESG Relevance Score of '4' for Governance Structure due to influence of the key shareholder, 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 ----------- ------ -------- ----- NGD Holdings B.V. senior unsecured LT CC Affirmed RR4 CC DTEK OIL & GAS PRODUCTION B.V LT IDR CC Affirmed CC SPRINT BIDCO: Moody's Cuts CFR to B2 & Alters Outlook to Negative ----------------------------------------------------------------- Moody's Investors Service has downgraded bike-manufacturer Sprint BidCo B.V.'s (Accell or the company) corporate family rating to B2 from B1 and its probability of default rating to B2-PD from B1-PD. At the same time, Moody's downgraded to B2 from B1 the instrument rating of the EUR705 million backed senior secured term loan B (TLB) due June 2029 and the EUR180 million backed senior secured multi-currency revolving credit facility (RCF) due December 2028, both borrowed by Sprint BidCo B.V. The outlook on all ratings was changed to negative from stable. "The rating downgrade to B2 from B1 reflects Accell's much higher than anticipated financial leverage, as the wide supply chain disruptions experienced in 2022 severely hit the company's profitability and free cash flow generation. This led to a significant deterioration in the company's liquidity position and to higher debt levels to face an extraordinarily high inventory build-up", said Giuliana Cirrincione, a Moody's lead analyst for Accell. As a result, the Moody's-adjusted gross debt to EBITDA ratio was in excess of 7.0x at December 2022, which compares to the 5.6x adjusted starting leverage (pro-forma for the transaction) as estimated when the rating was first assigned last year. Moody's acknowledges that supply chain-related issues, which had an extraordinary negative impact on Accell's cash flow generation over the last two years, were largely outside of the company's control. The rating agency also appreciates the company's ability to secure a new asset-based lending (ABL) credit line to fund its upcoming working capital requirements. However, the rating agency views Accell's liquidity management as aggressive, as high business seasonality, uncertainties over the actual working capital unwinding and the very limited availability under its committed credit lines leave the company exposed to liquidity stress in case of unexpected cash needs. Financial Strategy and Risk Management is a governance consideration under Moody's General Principles for Assessing Environmental, Social and Governance Risks Methodology for assessing ESG risks. RATINGS RATIONALE During 2022 bike supply chain disruptions curbed Accell's sales and earnings growth throughout the year, as bike component orders where either significantly delayed or scaled back by suppliers. Sales grew by just 4% year-on-year – driven by price increases – while the company-reported EBITDA dropped to EUR120 million from EUR131 million in 2021, also due to a number of one-off or larger than expected cost items related to the take-private and IT system upgrade which further depressed profitability by around EUR20 million. In response to the components shortage, Accell invested massively on safety stock, leading to a large cash absorption due to working capital build-up of more than EUR300 million and a negative free cash flow (as adjusted by Moody's) of EUR270 million in 2022. This was partly funded with a drawdown of around EUR160 million on the company's available RCF, which resulted in a Moody's-adjusted gross debt to EBITDA exceeding 7.0x in 2022 based on the company's preliminary results. This is well above Moody's initial expectations, making a reduction towards 5.0x by 2023 built in the original rating extremely unlikely. Moody's expects financial leverage to remain higher for longer and to decline to 5.5x only towards the end of 2024. This assumes a slower than initially anticipated EBITDA growth trajectory as well as sustained debt levels needed to fund the company's ample working capital needs, in light of the still-elevated inventory levels and the significant intra-year swings due to typical business seasonality. According to Moody's forecasts, free cash flow generation will improve from 2022 levels but it will be close to zero in 2023 as excess inventory progressively normalizes, and will then increase to around EUR30 million - EUR40 million annually, which is however not strong enough to support a more marked leverage reduction. Positively, underlying market fundamentals continue to support the rating, as demand for e-bikes has remained strong across most of Accell's core geographies throughout 2022, as well as in the first quarter of 2023. According to the company, there were no order cancellations from dealers, and the current order backlog through 2024 from Central Europe – i.e. Accell's largest business unit – is strong. This provides comfort that Accell will weather the currently difficult market environment in Europe in 2023 thanks to the ongoing increasing penetration of e-bikes compared to traditional bikes, underpinned by strong consumer focus on sustainable mobility and improving cycling infrastructure in urban areas. Moody's forecasts Accell will achieve sustained sales growth of around 10% in 2023, mainly driven by a catch-up effect from 2022, while sales growth in 2024 will slow down to around mid-single digit rates in percentage terms, supported by still growing sales volumes of e-bikes and price increases. Improved conditions in the global supply chain as well as lower input cost and freight rates inflation and targeted savings will support earnings recovery over the next 12-18 months. Besides the strong market fundamentals, Accell's B2 CFR is supported by (1) its leading market position in the fragmented European market for bicycles, especially in the e-bikes segment; (2) a broad portfolio of well-known local brands with good geographical diversification and strong historical heritage; (3) track record of passing prices increases to end costumers; (4) sizeable equity cushion. Conversely, Accell's CFR is constrained by: (1) exposure to discretionary nature of demand; (2) high financial leverage and historically volatile free cash flow generation mainly due to swings in working capital; (3) currently tight liquidity due to still high inventory stocks not yet converted into cash and very limited availability under external credit lines; (4) high supplier concentration and execution risk related to the company's plan to optimize working capital management and improve operational efficiency; (5) competitive pressure from new entrants in the fast-growing e-bike segment. RATIONALE FOR THE NEGATIVE OUTLOOK The negative outlook reflects the recent weakening of Accell's liquidity, with very limited availability under its committed credit lines, as well as the risk that the company may undergo additional liquidity stress should cash conversion from the very high inventory stock be slower than expected. The outlook also reflects the expectation that Accell's earnings will recover on the back of continued strong consumer demand, such that financial leverage will decline to 5.5x by the end of 2024 and free cash flow will improve to positive levels. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS An upgrade is unlikely, given the current negative outlook. The ratings could be upgraded if (1) Moody's-adjusted gross debt to EBITDA declines to below 5.0x on a sustained basis in the next 12-18 months; (2) free cash flow generation turns positive on a sustained basis; (3) a good liquidity profile is maintained, including ample availability on external committed lines to fund the company's large working capital fluctuations. The ratings could be downgraded if (1) Moody's-adjusted leverage remains sustained above 6.0x in the next 12-18 months; (2) free cash flow does not improve due to inability of the company to reduce its working capital needs, leading to further deterioration in liquidity; (3) the company pursues an aggressive financial policy. LIQUIDITY PROFILE Accell's liquidity profile is still adequate albeit currently weakened by limited availability on the company's RCF which was recently drawn for seasonal needs. As of December 2022, liquidity was supported by approximately EUR30 million cash on balance sheet and around EUR25 million available under the EUR180 million RCF maturing in 2028. The company has recently negotiated an additional EUR75 million ABL revolving facility expiring in 2028, which the company will fully use in 2023 to fund its working capital needs. Despite improving earnings and manageable capex requirements over the next 12-18 months, Moody's expects free cash flow generation will be strained by still-elevated inventory levels, and will only turn positive in 2024. Due to business seasonality Accell's liquidity is constrained by its ample working capital swings across quarters, mainly driven by inventory build-up in the fourth and first quarter of the year as dealers orders are placed in Q3 and sales mostly occur in the warmer months of the year. Positively Moody's notes that seasonal working capital needs in the first quarter have now been largely covered, with likely release of working capital over the next couple of quarters. The company is subject to one springing covenant of debt to EBITDA which is tested annually when more than 40% of the RCF is drawn. The test level is set at 8.25x. Moody's expect the company to remain in compliance with the covenant over the next 12-18 months. STRUCTURAL CONSIDERATIONS The B2 instrument ratings of the EUR705 million TLB due June 2029 and the EUR180 million RCF due December 2028 are aligned with the CFR, reflecting that these facilities rank pari passu and represent the vast majority of the company's debt structure. Accell has recently negotiated a EUR75 million ABL revolving line due February 2028, to be used to fund its swings in working capital. Given its small size relatively to the company's capital structure, the ABL does not cause any notching down of the TLB and RCF despite its first-priority pledge against eligible receivables and inventory in the Netherlands and Germany. The company's PDR rating of B2-PD is in line with the CFR, reflecting the assumption of a 50% family recovery rate as customary for debt structures with no maintenance covenants and a security package that is limited to share pledges. Further, the rated instruments benefit from guarantees from material subsidiaries representing at least 80% of consolidated EBITDA. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Consumer Durables published in September 2021. CORPORATE PROFILE Headquartered in Heerenveen, The Netherlands, Accell is the largest bicycle manufacturer in Europe and holds the market leader position in e-bikes which represent around 57% of its revenues in 2022. The other market segments in which it operates are: (i) parts and accessories (P&A, ca. 30% of revenues), (ii) traditional bikes (T-bikes, 12%) and (iii) cargo (4%). The company generates approximately 70% of its revenues in Central Europe and Benelux (42% and 27% respectively), with Germany being its largest market (c. 40% of revenues). Other markets include the UK and Ireland, South Europe and the Nordics and account for around 30% of total turnover. ========= S P A I N ========= RURAL HIPOTECARIO I: Fitch Affirms 'CCCsf' Rating on Class E Notes ------------------------------------------------------------------ Fitch Ratings has taken multiple rating actions on two Spanish RMBS transactions, by upgrading one tranche, downgrading one tranche and affirming the rest. Entity/Debt Rating Prior ----------- ------ ----- Valencia Hipotecario 3, FTA Class A2 ES0382746016 LT AAAsf Affirmed AAAsf Class B ES0382746024 LT A+sf Affirmed A+sf Class C ES0382746032 LT A+sf Upgrade Asf Class D ES0382746040 LT CCCsf Affirmed CCCsf Rural Hipotecario Global I, FTA Class A ES0374273003 LT AAAsf Affirmed AAAsf Class B ES0374273011 LT AA-sf Affirmed AA-sf Class C ES0374273029 LT Asf Downgrade A+sf Class D ES0374273037 LT Asf Affirmed Asf Class E ES0374273045 LT CCCsf Affirmed CCCsf TRANSACTION SUMMARY The transactions comprise fully amortising residential mortgages originated and serviced by multiple rural savings banks in Spain with a back-up servicer arrangement with Banco Cooperativo Espanol S.A. (BBB/Stable/F2) for Rural Hipotecario Global 1, and serviced by Caixabank, S.A. (BBB+/Stable/ F2) for Valencia Hipotecario 3. KEY RATING DRIVERS Ratings Capped by Counterparty: The downgrade of Rural Global I class C rating to 'Asf' reflects the excessive counterparty dependency on the transaction account bank (TAB) holding the cash reserve fund. The reserve fund contributed 72% of total credit enhancement (CE) protection for this tranche as of April 2023, which Fitch expects to increase as the transaction continues to amortise while the reserve fund is at its absolute floor. Moreover, simulating the sudden loss of these amounts could now imply a downgrade of 10 or more notches of the notes in accordance with Fitch's Structured Finance and Covered Bonds Counterparty Rating Criteria. The affirmation of Rural Global I class D rating at 'Asf' and the upgrade of Valencia 3 class C rating to 'A+sf' are also capped by excessive counterparty exposure to their respective TABs, as the reserve funds held at the TAB represent the only source of CE for these tranches. Mild Weakening in Asset Performance: The rating actions reflect Fitch's expectation of mild deterioration of asset performance, consistent with weaker macroeconomic conditions linked to inflationary pressures that negatively affect real household wages and disposable income, especially for more vulnerable borrowers like self-employed individuals. These portfolios carry larger-than -average exposures to self-employed borrowers ranging between 28% and 14% for Rural Global 1 and Valencia 3, respectively, which are higher-risk than loans granted to third-party employed borrowers and are subject to a foreclosure frequency (FF) adjustment of 170% in line with Fitch´s criteria. Nonetheless, the transactions have a low share of loans in arrears over 90 days (less than 0.6% as of the latest reporting dates) and are protected by substantial portfolio seasoning of more than 18 years. Credit Enhancement Trends: The rating actions reflect Fitch's view that CE ratios will continue increasing in the short-to-medium term to compensate the credit and cash flow stresses defined for the corresponding ratings. For Rural Global 1, CE build-up is driven by the mandatory sequential paydown of the liabilities that takes place until the final maturity date in line with transaction documentation of a portfolio factor (defined as current notes balance/initial notes balance) less than 10% (currently around 7.8%). For Valencia 3, Fitch expects CE to increase at a slow pace considering its current pro-rata paydown of liabilities and the non-amortising reserve fund; nevertheless, CE build-up will accelerate when the note amortisation switches to fully sequential, when the portfolio factor falls below 10% from 12.8% currently. Geographical Concentration in Valencian Community: The securitised portfolios are exposed to the Region of Valencia, where approximately 70% of Valencia 3 and 50% of Rural Global 1 current portfolio balances are located. Within Fitch's credit analysis, and to address regional concentration risk, higher rating multiples are applied to the base foreclosure frequency assumption to the portion of the portfolios that exceeds 2.5x the population within this region relative to the national total, in line with Fitch´s European RMBS Rating Criteria. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - For note ratings already at 'AAAsf', a downgrade of Spain's Long-Term Issuer Default Rating (IDR) that could decrease the maximum achievable rating for Spanish structured finance transactions. This is because these notes are rated at the maximum achievable rating, six notches above the sovereign IDR - Long-term asset performance deterioration, such as increased delinquencies or larger defaults, which could be driven by adverse changes to macroeconomic conditions and/or borrower behavior, or interest-rate increases. Higher inflation, larger unemployment and lower economic growth than Fitch's current forecast could affect the borrowers' ability to pay their mortgage debt. - For Rural Global 1 class C and D notes, and for Valencia 3 class C notes, a downgrade of the TAB provider's rating, as the notes' ratings are capped at the banks' ratings due to excessive counterparty risk exposure Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - The notes rated at 'AAAsf' are at the highest level on Fitch's scale and therefore cannot be upgraded - For mezzanine tranches, a sustained CE ratio increase as the transactions deleverages to fully compensate the credit losses and cash flow stresses commensurate with higher ratings, all else being equal - For Rural Global 1 class C and D notes, and for Valencia 3 class C notes, an upgrade of the TAB provider's rating, as the notes' ratings are capped at the bank's ratings due to excessive counterparty risk exposure 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ===================== S W I T Z E R L A N D ===================== VERISURE MIDHOLDING: Moody's Ups CFR to B1 & Unsecured Notes to B3 ------------------------------------------------------------------ Moody's Investors Service has upgraded the corporate family rating of leading European monitored alarm company Verisure Midholding AB to B1 from B2, the probability of default rating to B1-PD from B2-PD and the senior unsecured ratings to B3 from Caa1. At the same time Moody's affirmed Verisure Holding AB's B1 backed senior secured ratings. The outlook on all ratings remains stable. RATINGS RATIONALE The ratings upgrade reflects (1) the substantial growth in scale and diversity since Moody's first assigned the B2 CFR in 2015; (2) the rating agency's expectation that the company will sustain its long-standing track record of strong operating performance and low cancellation rates alongside solid growth in subscribers; (3) a strong business model with high barriers to entry; and (4) the company's ability to deleverage through EBITDA growth and generate strong free cash flow (FCF) should it decide to slow annual net customer growth well below the 10% level. Verisure reported strong results for the full year 2022 with organic revenue and company-adjusted EBITDA up by 12.8% and 10% in constant currencies, respectively, from the previous year. This improvement was mainly underpinned by robust growth in the subscriber base to 4.7 million for the year ended December 31, 2022 (up 11.2% organically from the previous year), relatively low level of cancellations (attrition at 7.2% in 2022), and an increase in average monthly revenue per user (ARPU), which was up 2.5% from 2021. EBITDA growth in 2022 was driven by growth in total subscribers, higher ARPU, and the positive impact of operational efficiency initiatives (including renegotiation of contracts and implementation of group-wide purchasing). Moody's expects a further improvement in Verisure's profitability, supported by revenue growth combined with a lower operating leverage. However, the rating agency believes it will become more difficult for the company in the current inflationary environment to fully pass on the additional costs to its customers in fee rises, and thus profitability growth will be limited for the next 12-18 months. The company's Moody's-adjusted gross debt/ EBITDA was 6.5x as of December 31, 2022, and the rating agency expects this ratio to decrease below 6x in the next 18 months. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS ESG considerations Moody's considers include governance risks from the company's tolerance for high leverage and policies that favour shareholders over creditors, as demonstrated by a history of recurring dividend recapitalisations. RATIONALE FOR STABLE OUTLOOK The stable outlook reflects Moody's expectation of sustained deleveraging through EBITDA growth and no sharp increase in cancellation rates. Moody's expects the subscriber base to grow leading to improved cash flow on a steady-state basis before growth in new subscribers. Moody's also anticipates no further material debt-financed dividends until the company has achieved further deleveraging. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive rating pressure could develop if Verisure: -- demonstrates and commits to more conservative financial policies leading to a Moody's-adjusted gross debt/ EBITDA sustained towards 5x, and -- increases steady-state free cash flow (before growth spending) to debt above 10%, with free cash flow (after growth spending) becoming persistently positive, and -- maintains strong operating performance, including stable cancellation rates Downward rating pressure could develop if: -- Moody's-adjusted gross debt/ EBITDA is sustained above 6.5x, or -- steady-state free cash flow (before growth spending) to debt reduces below 5% level, or -- operating performance weakens materially, or cancellation rates materially increase STRUCTURAL CONSIDERATIONS The EUR2.8 billion backed senior secured term loans, the EUR2.9 billion backed senior secured notes and the EUR700 million RCF all rank pari passu and share the same security package. They are all rated B1 which is in line with Verisure's B1 CFR because in Moody's view the subordinated B3 rated EUR1.32 billion equivalent guaranteed senior unsecured notes do not provide a sufficient cushion to justify a one notch uplift, especially in light of likely more senior secured issuance in the future. LIQUIDITY Moody's views Verisure's liquidity as adequate. The rating agency estimates that the company will generate around EUR1,150 million of cash from operations in the 18 months starting January 2023. Together with cash balance of EUR44 million and available RCF of EUR500 million this will be sufficient to cover the company's capital expenditure programme that consists primarily of customer acquisition costs that Moody's estimates will be around EUR1,250 million in the next 18 months. Moody's also recognises the company's ability to flex its customer acquisition capex to provide further liquidity if required as demonstrated during the COVID-19 pandemic in 2020. The company has a springing net leverage covenant tested at 40% drawing of RCF. Moody's expects the company will remain well in compliance with this covenant. LIST OF AFFECTED RATINGS Upgrades: Issuer: Verisure Midholding AB Probability of Default Rating, Upgraded to B1-PD from B2-PD LT Corporate Family Rating, Upgraded to B1 from B2 Senior Unsecured Regular Bond/Debenture, Upgraded to B3 from Caa1 Affirmations: Issuer: Verisure Holding AB BACKED Senior Secured Bank Credit Facility, Affirmed B1 BACKED Senior Secured Regular Bond/Debenture, Affirmed B1 Outlook Actions: Issuer: Verisure Holding AB Outlook, Remains Stable Issuer: Verisure Midholding AB Outlook, Remains Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Business and Consumer Services published in November 2021. PROFILE Headquartered in Versoix, Switzerland, Verisure is a leading provider of professionally monitored alarm solutions. It designs, sells and installs alarms, and provides ongoing monitoring services to residential and small businesses across 17 countries in Europe and Latin America. The company is also a leading provider of camera video surveillance systems in Europe through Arlo Europe. The company generates around EUR2.8 billion in annual revenues from its 4.7 million subscribers with a high share of recurring revenues at approximately 80% and employs more than 25,000 people. The company was founded in 1988 as a unit of Securitas AB and is majority owned by private equity firm Hellman & Friedman. =========================== U N I T E D K I N G D O M =========================== ALBA PLC 2005-1: Moody's Lowers Rating on GBP4.1MM E Notes to Ba2 ----------------------------------------------------------------- Moody's Investors Service has downgraded the rating of one note in Alba 2005-1 plc. The rating action reflects the deterioration in the levels of credit enhancement for the affected notes. Moody's affirmed the ratings of the notes that had sufficient credit enhancement to maintain their current ratings. GBP105M Class A3 Notes, Affirmed A1 (sf); previously on Oct 18, 2021 Affirmed A1 (sf) Underlying Rating: Affirmed A1 (sf); previously on Oct 18, 2021 Affirmed A1 (sf) GBP21.7M Class B Notes, Affirmed A1 (sf); previously on Oct 18, 2021 Affirmed A1 (sf) GBP13.3M Class C Notes, Affirmed A1 (sf); previously on Oct 18, 2021 Affirmed A1 (sf) GBP6.8M Class D Notes, Affirmed Baa2 (sf); previously on Oct 18, 2021 Affirmed Baa2 (sf) GBP4.1M Class E Notes, Downgraded to Ba2 (sf); previously on Oct 18, 2021 Upgraded to Ba1 (sf) RATINGS RATIONALE The rating action is prompted by increasing drawings from the reserve fund which led to the deterioration in the level of available credit enhancement. Moody's notes that although the WA interest coupon on the underlying loans has been increasing, the higher interest payments to the noteholders as well as the higher than usual expenses and fees over the last year led to the reduction in the reserve fund. Decrease in Available Credit Enhancement For several periods, the interest collections were not sufficient to cover entirely for the payments of the noteholders' interest, which led to the reduction of the reserve fund. Total reserve fund drawings as of February 2023 amount to GBP523,878 compared to a target balance of GBP2,559,000. The reserve fund is hence only funded at 79.5% of its target. As a result, the credit enhancement for the tranche E affected by the rating action decreased to 5.45% from 5.8% since the last rating action. Revision of Key Collateral Assumptions: As part of the rating action, Moody's reassessed its lifetime loss expectation for the portfolio reflecting the collateral performance to date. The performance of the transaction continued to be stable since last year. Total delinquencies more than 30 days in arrears have slightly increased to 8.67% from 6.59% last year, with 90 days plus arrears remaining stable at 3.06% of current pool balance from 2.95%. Cumulative losses currently remain unchanged at 2.46% of original pool compared to a year earlier. Moody's decreased the expected loss assumption to 2.47% as a percentage of current pool balance due to the stable performance. The revised expected loss assumption corresponds to 2.77% as a percentage of original pool balance, down from 2.84% in the last rating action. Moody's has also assessed loan-by-loan information as a part of its detailed transaction review to determine the credit support consistent with target rating levels and the volatility of future losses. As a result, Moody's has maintained the MILAN CE assumption at 15%. The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in July 2022. The analysis undertaken by Moody's at the initial assignment of ratings for RMBS securities may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Factors that would lead to an upgrade or downgrade of the ratings: Factors or circumstances that could lead to an upgrade of the ratings include (1) performance of the underlying collateral that is better than Moody's expected, (2) an increase in available credit enhancement, (3) improvements in the credit quality of the transaction counterparties and (4) a decrease in sovereign risk. Factors or circumstances that could lead to a downgrade of the ratings include (1) an increase in sovereign risk, (2) performance of the underlying collateral that is worse than Moody's expected, (3) deterioration in the notes' available credit enhancement and (4) deterioration in the credit quality of the transaction counterparties. ITEC PACKAGING: Bought Out of Administration by Shalam Packaging ---------------------------------------------------------------- Business Sale reports that the business and assets of Chester-Le-Street-based packing firm iTEC Packaging (Chester-Le-Street) Ltd have been acquired out of administration by Shalam Packaging Group. The company fell into administration last month following a period of difficult trading conditions, Business Sale relates. According to Business Sale, Martyn Rickels, Simon Farr and Allan Kelly of FRP Advisory were appointed as joint administrators and have now secured a sale which will see the firm's 117 staff and all of its assets transferred on a going-concern basis. Following the acquisition, the company will trade as Shalam Thermoforming (UK) Ltd., Business Sale notes. The Shalam group works in plastic packaging manufacturing, operating across a number of sites in four different countries. "The sale of iTEC Packaging to Shalam Packaging in less than a month is a brilliant outcome for all involved. It not only helps with continued production for the customer base, but it also sees 117 jobs saved," Business Sale quotes joint administrator Martyn Rickels as saying. In its accounts for the year ending December 31 2021, iTEC Packaging (Chester-Le-Street) Limited reported revenue of GBP23.3 million and a pre-tax loss of GBP7.2 million, Business Sale discloses. Its net liabilities amounted to GBP16.3 million, Business Sale states. The firm's loss was attributed to the continued impact of COVID-19, as well as the costs associated with closing down iTEC's operations at Stanley and Livingstone, which were transferred to Chester-Le-Street, according to Business Sale. JOULES: To Close Chelmsford Store Before End of May --------------------------------------------------- Ellis Whitehouse at EssexLive reports that fashion retailer Joules has announced it is closing its store in Chelmsford for good. Signs have appeared at the store in Bond Street announcing the venue will be closing for good before the end of May, EssexLive relates. The fashion retailer, which is best known for its colourful wellies and waterproof coats, called in administrators in November 2022, putting 1,600 jobs and the future of its 132 shops at risk, after failing to secure emergency funding, EssexLive recounts. The company owed various creditors more than GBP100 million at the time it collapsed, EssexLive relays, citing a statement of affairs issued by administrators. The following month, around 100 shops and 1,450 jobs were rescued from administration in a GBP41 million deal led by the fashion and homewares retailer Next, which teamed up with Joules' founder Tom Joule, EssexLive states. However, numerous stores have closed and the one in Chelmsford will soon be joining them, EssexLive notes. As part of the takeover deal Next took a 74% stake in the business, with Joules founder Tom Joule owning the remaining 26%, EssexLive discloses. M&CO: Plans to Launch Brand New Website by End of June ------------------------------------------------------ Olivia Marshall at The Sun reports that the future of a major fashion retailer has been revealed after it plunged into administration and shut all of its 170 stores. M&Co brought the shutters down on all of its shops at the end of April, The Sun recounts. The struggling retailer collapsed into administration last year, but its brand and intellectual property were sold to Yours Clothing, The Sun relates. Now, the company has announced that it plans to launch a brand-new M&Co website by the end of June, and plans for an app, The Sun discloses. The new site will launch with womenswear products, including curve and petite clothing, with new ranges to follow in the future, The Sun notes. But it's bad news if you like browsing clothing rails in person, as you won't be seeing M&Co stores on the high street any time soon, according to The Sun. This is because the deal Yours Clothing struck with the M&Co administrators did not include any of its 170 stores, The Sun says. The final store closures at the end of April marked the end of the brand's name on high stress across the country, according to The Sun. POLARIS PLC 2023-1: Moody's Assigns (P)Ba2 Rating to Class E Notes ------------------------------------------------------------------ Moody's Investors Service has assigned provisional long-term credit ratings to Notes to be issued by Polaris 2023-1 plc: GBP[] Class A Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Aaa (sf) GBP[] Class B Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Aa2 (sf) GBP[] Class C Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)A1 (sf) GBP[] Class D Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Baa2 (sf) GBP[] Class E Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Ba2 (sf) GBP[] Class F Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Caa1 (sf) GBP[] Class G Mortgage Backed Floating Rate Notes due February 2061, Assigned (P)Caa3 (sf) RATINGS RATIONALE The Notes are backed by a static portfolio of UK non-conforming residential mortgage loans originated by UK Mortgage Lending Ltd (not rated), a wholly owned subsidiary of Pepper Money Limited. This is the sixth securitisation from Pepper Money Limited in the UK. The portfolio of assets amount to approximately GBP398.7 million as of April 30, 2023 pool cut-off date. At closing, the liquidity reserve fund will be equal to 1.45% of the Class A notes and total credit enhancement for the Class A Notes will be 17.46%. The ratings are primarily based on the credit quality of the portfolio, the structural features of the transaction and its legal integrity. According to Moody's, the transaction benefits from various credit strengths such as a granular portfolio and a liquidity reserve fund. The liquidity reserve fund will be replenished after payment of interest on class A notes and can be used to cover class A notes interest and senior fees. Prior to the step-up date its target amount will be equal to the higher of the 1.45% of the outstanding principal amount of class A notes and 1.00% of the Class A notes balance at closing, with excess amounts amortising down the revenue waterfall. After the step-up date, the liquidity reserve fund will be equal to 1.45% of the outstanding balance of the class A notes and will amortise in line with these notes; the excess amount is released through the principal waterfall, ultimately providing credit enhancement to all rated notes. However, Moody's notes that the transaction features some credit weaknesses, such as servicing disruption risk given the transaction's lack of back-up servicer. Various mitigants have been included in the transaction to address this. While Pepper (UK) Limited (NR) is the servicer in the transaction, to help ensure continuity of payments in stressed situations, the deal structure provides for: (1) a back-up servicer facilitator (CSC Capital Markets UK Limited (NR)); (2) an independent cash manager (Citibank, N.A., London Branch (Aa3(cr),P-1(cr))); and (3) estimation language whereby the cash flows will be estimated should the servicer report not be available. The liquidity does not cover any class of notes except for the Class A notes in the event of financial disruption of the servicer, capping the achievable ratings of the Class B Notes. The transaction is subject to negative excess spread under Moody's stressed assumptions at closing, given the portfolio's yield relative to its liabilities. However, portfolio yield increases as the fixed rate loans eventually reset to higher margins. There is a principal to pay interest mechanism as a source of liquidity and principal can be used to pay interest on Class A without any conditions. For classes B-F, it can be used provided that either it is the most senior class outstanding or that PDL outstanding on that class is less than 10%. Moody's expect that this mechanism will be used in the first periods given the negative excess spread on day 1 under Moody's stressed assumptions. Additionally, there is an interest rate risk mismatch between the 97.9% of loans in the pool that are fixed rate and revert to the Lender Managed Rate, and the Notes which are floating rate securities with reference to compounded daily SONIA. To mitigate this mismatch there will be a scheduled notional fixed-floating interest rate swap provided by National Australia Bank Limited (NAB, Aa3/P-1; Aa2(cr)/P-1(cr)). Moody's determined the portfolio lifetime expected loss of 2.4% and MILAN credit enhancement ("MILAN CE") of 13.5% related to borrower receivables. The expected loss captures Moody's expectations of performance considering the current economic outlook, while the MILAN CE captures the loss Moody's expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and MILAN CE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the ABSROM cash flow model to rate RMBS. Portfolio expected loss of 2.4%: This is in line with the UK Non-conforming sector average and is based on Moody's assessment of the lifetime loss expectation for the pool taking into account: (i) the portfolio characteristics, including WA LTV of 66.2% and the above average percentage of loans with an adverse credit history (ii) the performance of outstanding Polaris transactions; (iii) the current macroeconomic environment in the UK and the impact of future interest rate rises on the performance of the mortgage loans; and (iv) benchmarking with similar UK Non-conforming RMBS. MILAN CE of 13.5%: This is in line with the UK Non-conforming sector average and follows Moody's assessment of the loan-by-loan information taking into account the following key drivers: (i) the WA LTV of 66.2%; (ii) the originator and servicer assessment; (iii) the 10.9% of the pool made up of Shared Ownership loans and 5.2% Help to Buy loans; (iv) the limited historical performance data does not cover a full economic cycle; and (v) benchmarking with similar UK Non-conforming RMBS. The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in July 2022. Factors that would lead to an upgrade or downgrade of the ratings: Factors that may cause an upgrade of the ratings of the notes include significantly better than expected performance of the pool together with an increase in credit enhancement of Notes. Factors that would lead to a downgrade of the ratings include: (i) an increase in the level of arrears resulting in a higher level of losses than forecast; (ii) increased counterparty risk leading to potential operational risk of servicing or cash management interruptions; or (iii) economic conditions being worse than forecast resulting in higher arrears and losses. SHOTLEY PARK: Goes Into Liquidation Amid Financial Pressures ------------------------------------------------------------ Jim Scott at BBC News reports that a residential home for elderly and vulnerable people is to close amid "unsustainable" pressures and the cost of living crisis. Shotley Park Care Home in County Durham has called in liquidators after it was "unable to meet its financial obligations", BBC relates. The privately-run site, in Shotley Bridge near Consett, is home to almost 40 residents and more than 60 staff. According to BBC, Durham County Council is taking "immediate steps" to ensure residents are "offered alternative" housing. The home, which is due to close in the coming weeks, has informed residents and staff. It said its owners, who are in their 80s and 90s, had tried to keep the business running for years but had been unable to do so, BBC notes. This included through failed attempts to seek external investment and efforts to sell the business, BBC states. "The directors have put in a tremendous effort to keep the home open over the years," BBC quotes Martyn Pullin of liquidator FRP as saying. "Unfortunately, the pressures on Shotley Park's finances have become too great and unsustainable and the business simply can't continue trading any further". It said that it is working with the Care Quality Commission and council to "ensure a smooth transition" for residents, according to BBC. WELLINGTON PUB: Fitch Alters Outlook on Class A Notes to Stable --------------------------------------------------------------- Fitch Ratings has revised the Outlook on Wellington Pub Company Plc's (WPC) class A notes to Stable from Negative and affirmed the class A notes at 'B-' and class B notes at 'CCC'. Entity/Debt Rating Prior ----------- ------ ----- Wellington Pub Company Plc Wellington Pub Company Plc/ Debt/2 LT LT CCC Affirmed CCC Wellington Pub Company Plc/ Debt/1 LT LT B- Affirmed B- RATING RATIONALE The Stable Outlook on the class A notes is underpinned by the quicker-than-expected improvement in rental revenue, the stabilisation of the liquidity position and improvement in the free cash flow (FCF) debt service coverage ratio (DSCR) to 1.1x under the Fitch Rating Case (FRC). However, the pub sector remains under pressure, particularly from higher inflation reducing consumer spending, as well as increasing wage, utility, and food and drink costs. The class B notes' rating reflects some continued reliance on transaction liquidity to meet debt service payments due to the FCF DSCR being below 1.0x for the next few years. Additionally, the free-of-tie model weakens WPC's ability to collect rent on a timely basis. Direct debit collections averaged 16% in 2023, down from above 40% in 2019 and rents arrears are significantly elevated compared with pre-pandemic levels. KEY RATING DRIVERS Sector in Structural Decline - KRD: 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. 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. Free-of-Tie Model, Under-Invested Estate - KRD: Company Profile - Weaker The free-of-tie model implies limited operational management but reduces visibility of tenants' profitability and increases uncertainty over projected cash flows. Lease renewals remain a major risk as a large portion of the portfolio (47%) is due for renewal over the next five years. Positively, the number of pubs on long leaseholds has been stable for the last few years and the proportion of leases with inflation-linked rents has increased. The company's and tenants' low capex adversely impacts property values and pub profitability. Around 56% of the portfolio is suffering from deferred maintenance and around 10% requires significant capex (more than GBP20,000 per pub). Sub-KRDs: Financial Performance - Weaker; Company Operations - Weaker, Transparency - Weaker; Dependence on Operator - Stronger; Asset Quality - Weaker Structural Issues Drive Weaker Assessment - KRD: Debt Structure - Weaker (class A, B) The class A and B notes are fully amortising, secured and fixed-rate, and the class B notes' debt service is structured to decrease over time. The class B notes rank junior to the class A notes. The security package features first-ranking fixed and floating charges over the issuer's assets. Structural features are weak because of the non-orphan SPV structure, limited contractual provisions, and an inadequate liquidity reserve, which only covers about four months of the class A notes' debt service. Financial covenants providing bondholders with more control through the appointment of an administrative receiver well ahead of a payment default are missing. The subordinated class B notes could deplete the liquidity reserve as it is not tranched among the class A and B notes. The restricted payment condition covenant is set at 1.25x, but in practice a lock-up has never been triggered, despite the DSCR having been below 1.25x, as a surplus cash account is included in the DSCR cash release income cover test. Overall, the weak structural features, combined with the lack of issuer/borrower structure compared with traditional whole business securitisation (WBS) structures, limit the debt structure assessment for both classes of notes to Weaker. Sub-KRDs: Debt Profile - class A: Stronger, class B: Midrange, Security Package - class A: Stronger, class B: Midrange; Structural Features - class A: Weaker, class B: Weaker Financial Profile Under the FRC, projected metrics (FCF DSCR 2023-2028) stand at 1.1x for the class A notes and 0.9x for the class B notes. PEER GROUP WPC is the only Fitch-rated free-of-tie pub transaction. Fitch views tied leased/tenanted pub WBS transactions such as Unique Pub Finance Company plc (class A notes rated 'BB+', and class M & N notes rated 'B-') as peers, albeit with different business models and revenue streams. Compared with Unique, WPC's financial performance has been weaker, and the pubs are significantly less profitable as measured by EBITDA per pub. Fitch perceives asset quality to be weaker than that of Unique, with similar transparency issues. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Continuous impairment of demand, resulting in sustained deterioration of projected coverage metrics. Liquidity deterioration beyond the FRC assumptions as a result of an increase in arrears, pub vacancies or foreclosure rates and slower-than-expected deleveraging increasing the level of credit risk. If the combined portion of WPC's or its affiliates' holdings in the transaction's senior notes exceeds 75% (currently 70.5%), Fitch will withdraw the ratings as the majority noteholder will be able to amend the terms of the notes at its discretion. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Sustained projected FCF DSCR sustainably above 1.1x for the class A notes. - Sustained projected FCF DSCR sustainably above 1.0x for the class B notes. TRANSACTION SUMMARY WPC is a securitisation of rental income from 666 free-of-tie pubs. CREDIT UPDATE Financial Performance Revenue in 2023 was GBP30.6 million (3% above pre-pandemic levels) reflecting a quicker-than-expected recovery. Cash collections also increased, a sign of improved trading conditions. Liquidity Position As of end-April 2023, WPC holds GBP16.0 million cash and a liquidity fund that covers approximately four months of class A debt service. Gross collection on direct debit as at March 2023 was 20% compared with 13.9% the previous year and down from above 40% pre-pandemic (2019). Management prioritises increasing gross collections by direct debit as this grants greater stability in rental income. However, it has expressed difficulty in persuading tenants to revert. WPC reviews leases on a five-year basis. Uplifts for FY23 (ended in March) rental reviews averaged 8.2%, compared with an average uplift in FY20 of 15.7%. The shortfall represents reduced activity within the sector and a hardening of trading conditions. Additionally, WPC conducts annual RPI rent reviews. The average level of RPI uplift in 2023 was 6.2%. Industry Outlook The current inflationary pressures within the pub sector's affects WPC's tenants through rising food, drink and utility costs. Additionally, it impacts consumers' disposal income and trading volumes. This is reflected in higher rent arrears, higher provisions for bad debt and lower direct debit collections compared with pre-pandemic levels. Fitch acknowledges WPC is effectively one level removed from fluctuations in price, trade volumes, and tax rates as income is received from tenants' rental payments. However, WPC is not fully insulated and is exposed when the wider business environment prevents tenants from meeting rent payments under the lease agreement. Purchase of Bonds In April, WPC purchased GBP15.4 million class A bonds. The total amount of class A bonds held by associates of WPC is GBP112.7 million, representing 70.5% of the outstanding class A bonds. FINANCIAL ANALYSIS The FRC assumes a decline in rental revenue in 2023 and 2024 to account for inflationary pressures, decreasing consumer disposable income and cost of living crisis. Fitch assumes revenue to return to grow in 2025 onwards. Additionally, Fitch factors in some cost increase in its forecast. 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. ********* 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- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. 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