/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/230602.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 Friday, June 2, 2023, Vol. 24, No. 111 Headlines C Z E C H R E P U B L I C NET4GAS SRO: Fitch Lowers LongTerm IDR to 'BB-', Outlook Stable G E R M A N Y BIRKENSTOCK: Fitch Hikes LongTerm IDR to 'BB-', Outlook Stable I R E L A N D CVC CORDATUS XXVIII: Fitch Gives Final B-(EXP) Rating on F Notes CVC CORDATUS XXVIII: S&P Assigns Prelim. Bsf Rating on F Notes DRYDEN 59 2017: Moody's Cuts Rating on EUR11.875MM F Notes to B3 N E T H E R L A N D S EMF-NL PRIME 2008-A: S&P Lowers Rating on Class D Notes to Dsf ROOMPOT: S&P Assigns 'B' LT Issuer Credit Rating, Outlook Stable UNITED GROUP: S&P Affirms 'B' ICR & Alters Outlook to Positive VTR FINANCE: Moody's Lowers CFR to Caa1 & Unsecured Notes to Caa3 P O L A N D INPOST SA: Fitch Affirms LongTerm IDRs at 'BB', Outlook Stable S P A I N ROOT BIDCO: Fitch Affirms LongTerm IDR at 'B', Outlook Stable T U R K E Y SISECAM: Fitch Affirms LongTerm IDR at 'B', Outlook Negative U N I T E D K I N G D O M ABRA GROUP: Moody's Assigns First Time 'Caa1' Corp. Family Rating BROADWAY PARTNERS: Goes Into Administration CANARY WHARF: Moody's Cuts CFR to Ba3, Under Review for Downgrade EIDER VF: Enters Administration, Seeks Buyer for Business GREENE KING: S&P Affirms 'BB+(sf)' Rating on Class B Notes ITEC PACKAGING: Bought Out of Administration, 70 Jobs Secured MARSTON'S ISSUER: S&P Affirms 'BB+(sf)' Rating on Class A Notes MITCHELLS & BUTLERS: S&P Affirms 'B+(sf)' Rating on Class D Notes NETWORK DISTRIBUTING: Goes Into Liquidation NORTH HIGHLAND: Goes Into Voluntary Liquidation PIZZAEXPRESS: S&P Lowers LongTerm ICR to 'B-' POLARIS PLC 2023-1: Moody's Assigns Caa3 Rating to Class G Notes POLARIS PLC 2023-1: S&P Assigns CCC Rating on Class G Notes X X X X X X X X [*] BOOK REVIEW: Bankruptcy and Secured Lending in Cyberspace - - - - - =========================== C Z E C H R E P U B L I C =========================== NET4GAS SRO: Fitch Lowers LongTerm IDR to 'BB-', Outlook Stable --------------------------------------------------------------- Fitch Ratings has downgraded Net4gas, s.r.o.'s Long-Term Issuer Default Rating (IDR) to 'BB-', from 'BB+', and senior unsecured rating to 'BB-' with a Recovery Rating of 'RR4', from 'BB+'. The Outlook on the IDR is Evolving. The downgrade reflects its downward revision of Net4gas's transit-related profits in the short-and- medium term. This mainly stems from continuing Russian gas transit towards Ukraine and the Turkish Stream corridor, which limits the transit potential for Net4Gas and is only mitigated by its preliminary expectations of increased regulated revenues. The Evolving Outlook reflects that rating evolution would depend on the above developments, especially on the regulatory part, compared with its central expectations, while liquidity remains adequate for both 2023-2024. KEY RATING DRIVERS Expected Reduction of Alternative Flows: Fitch has materially revised down its expectations of non-Russian gas transited through Net4gas's pipelines to 18 billion-19 billion cubic meters (bcm), including the needs of national demand, from 33bcm forecast in October 2022. This is in light of continuing Russian gas transit through Ukraine and Turkish Stream routes and gas export to Germany from France and Belgium, which directly reduce the gas transit routed through the Czech gas network. Regulatory Upside: Net4gas's discussion with the Czech regulator to "account for the unprecedented change in the transit flows through the Czech gas transmission system" presents upside opportunities that are difficult to quantify. Fitch sees potential for a significant increase of Net4gas's regulatory asset base (RAB) and understand that legal grounds for such an increase exist. However, there is uncertainty over the estimates of the portion of existing infrastructure that would ultimately be included in the RAB. As such, Fitch conservatively factors in only a limited increase in revenue, which is also compatible with its depressed medium-term view of west-to-east alternative flows. Lower, but Increasingly Regulated EBITDA: Its new projections see materially lower EBITDA over 2024-2026 on average, at slightly more than CZK3 billion, versus the CZK5.5 billion in its October 2022 estimates. On the other hand, its current assumptions imply the share of regulated EBITDA at around 70% (historically around 20%-25%), due to the potential increase of regulated revenues and relatively depressed transit estimates. Leverage Peak in 2023: Fitch forecasts 2023 EBITDA at slightly more than CZK2.2 billion, due to limited transit activity, and free cash flow (FCF) to be potentially eroded by large tax advances to be only reversed in 2024 (treated below FFO). This will lead to double-digit funds from operations (FFO) net leverage in 2023, before it stabilises at around 8.5x in the following three years, mainly on EBITDA normalisation and positive annual pre-dividend FCF estimated at more than CZK1.3 billion. Upside and Downside to Forecasts: The key downside to its forecasts is represented by only small positive regulatory developments (potentially in the form of RAB increase), which would impair debt capacity at the current rating and require material equity injections to preserve the rating. On the other hand, higher-than-expected recognition of regulated assets and revenues could sustain a higher rating assessment and potential notching up from the IDR for the senior unsecured rating instruments. A further reduction or even the cessation of Russian gas flow through the Ukrainian and Turkish Stream corridors should benefit Net4gas's gas transit flow, all else being equal. Net4gas may also be entitled to some form of compensation from the filed arbitrations proceedings towards Gazprom, but given the large uncertainty, any development in this respect would represent an upside to its forecast. Solid Regulatory Framework: Gas transmission in the Czech Republic is fully regulated within a transparent and supportive framework and is in its fifth regulatory period until end-2025. Net4gas's regulatory framework shields the company from any reduction in intra-state transmitted volumes arising from warmer temperatures or a lack of supply, through regulatory compensation is with a two-year time lag. Furthermore, in the case of a state emergency, transmission system operators (TSOs) are allowed to ask for compensation in the same year directly from the state budget for any intra-state capacity fees lost. This would also smooth cash flow volatility arising from the risk of gas supply curtailments to Czech industrial sectors. DERIVATION SUMMARY eustream, a.s. (BBB/Negative; 'bbb-' Standalone Credit Profile (SCP)) is Net4gas's closest rated peer, since both companies own and operate gas transit pipelines in Slovakia and the Czech Republic, respectively. eustream's gas transit displays more resilience as one of the few routes still being used by Russia to Europe (even if at much depressed levels), with regular payments as of now. Furthermore, the SCP differential is explained by the historical low leverage of the Slovakian company (net debt/EBITDA below 2.5x). Positively, Net4gas benefits from a higher share of domestic business with more supportive regulation. For both companies, liquidity is adequate, having implemented a zero dividend policy. Net4gas is in a weaker competitive position than fully regulated national TSO peers, such as Snam S.p.A. (BBB+/Stable), REN - Redes Energeticas Nacionais, SGPS, S.A. (BBB/Stable) and pure gas distributor, Czech Gas Networks Investments S.a r.l (BBB/Stable). The latter shares the same country, regulator and a supportive fifth regulatory period as Net4gas, but its almost fully regulated earnings allow for a higher debt capacity than ship-or-pay contracts, especially if the latter are short-term in nature. KEY ASSUMPTIONS - Alternative transit gas flows run on short-term bookings up to 10 bcm in the medium term (on top of domestic consumption) - TSO revenues based on the current regulatory framework, plus upsides related to additional asset recognition into RAB from 2024 - Annual operating expenditure of CZK1.2 billion, assuming some cost rationalisation - Potential cash tax advance payment in 2023 to fully reverse in 2024 - No working capital absorption to 2026 - Cumulative capex of CZK3.7 billion in 2023-2026 (in a decreasing trend), assuming some spending rationalisation - No dividend payments from 2022 onwards RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Evidence of materially improved international gas transit prospects or materially better-than-expected positive regulatory developments - FFO net leverage below 7.7x, with a business mix comprising about 70% of EBITDA from regulated activities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - No materially positive regulatory updates for the domestic gas transport business amid continuously weak alternative gas transit and absent significant shareholder support - FFO net leverage above 8.5x, with a business mix comprising about 70% of EBITDA from regulated activities - Reinstatement of dividend distribution LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: Cash on balance sheet was around CZK6.8 billion at end-2022, which was sufficient to cover 2023 and 2024 operating expenses (of about CZK1.2 billion a year), financial charges (about CZK1.5 billion a year) and expected capex (cumulatively about CZK2.1 billion), even with the sole support of the current TSO business (about CZK2.2 billion in revenues a year). Fitch expects the first significant debt maturity only from mid-2025 at almost CZK10 billion. ISSUER PROFILE Net4gas is the Czech public national gas TSO, and a relevant infrastructure for gas transit to central European markets. With a large bi-directional flow capacity, Net4gas operates a large-scale high-pressure gas transmission and transit system of 3,973 km of pipelines. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- NET4GAS, s.r.o. LT IDR BB- Downgrade BB+ senior unsecured LT BB- Downgrade RR4 BB+ ============= G E R M A N Y ============= BIRKENSTOCK: Fitch Hikes LongTerm IDR to 'BB-', Outlook Stable -------------------------------------------------------------- Fitch Ratings has upgraded BK LC Lux Finco 1 S.a.r.l.'s (Birkenstock) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is Stable. Fitch has also upgraded Birkenstock Group B.V. & Co. KG's EUR375 million term loan B (TLB) and BK LC US Bidco Inc's USD800 million TLB senior secured rating to 'BB+' from 'BB-'. The Recovery Rating is 'RR2'. The upgrade reflects Birkenstock's high revenue and profit growth over FY21-FY22 (year-end to September 2022), coupled with a material reduction in leverage in FY22. This is supported by the company's premium position with a strong brand and unique health attributes offsetting the risks arising from concentration on one brand and a single product category. Fitch regards these operational and financial metric improvements as sustainable, leading to a material increase of free cash flow (FCF) from FY24, once the current capex plan is completed in FY23, and despite increased debt service charges in the current interest rate environment. KEY RATING DRIVERS Sustainably Improved Credit Profile: The upgrade is driven by its expectations of Birkenstock's continuing robust operating performance supporting EBITDA expansion to EUR500 million by FY24, while maintaining strong EBITDA and FCF margins for the rating at 30% and above 10%, respectively. Fitch also believes that the company's intent of exploring various strategic options to support further growth will not result in new debt-raising that would lead to gross debt/EBITDA in excess of 4.5x on a sustained basis. Strong Brand; Effective Distribution: Birkenstock has demonstrated continued rapid revenue growth since 2012 with the brand gaining wide appeal and a loyal customer base in many regional markets, particularly in the US and Europe. This is driven by the product's unique and increasingly appreciated characteristics of comfort, innovation, and an effectively managed distribution model with careful allocation of products across markets and channels, including growing its direct-to-consumer (D2C) online sales channel. The brand's growth has been supported by collaborations with external designers. Its appeal to widely followed celebrities on social media also helps its promotion with minimal marketing costs. Single-Product Concentration: A key rating weakness is the company's narrow product diversification. Around 70% of sales (FY22) are generated from five core models, modestly complemented by other shoe models and an accessory offering. Products are also concentrated on sandals and on the premium end. Gradual Diversification Within Product: Birkenstock is diversifying within its product with a high variety of styles under each model, adapted to meet regional appetite and evolving consumer trends and preferences, plus expansion into both lower- and higher-priced items as well as into closed-toe products (now 17% of sales). Fitch believes the company's growth across a wide geographical footprint, the trend towards casualisation of clothing, including work dress codes post-Covid-19, and increasing consumer health consciousness, could be beneficial for Birkenstock's orthopedic offering, partially reduce risks related to a narrow product portfolio. Strong Post-Pandemic Growth: Fitch expects Birkenstock to double its sales in FY23 compared with pre-pandemic FY19 levels, on price increases and product mix benefits in both FY21 and FY22, in spite of a more subdued consumer environment. Greater emphasis of its commercial strategy on the online channel, pricing power and product range extension supported revenue growth and contributed to a jump in the Fitch-calculated EBITDA margin to 31.8% in FY22 (FY19: 26.1%). Based on good performance to date, Fitch expects revenue growth to continue in FY23. Capex to Boost Output: New investments in capacity will increase manufacturing capability by up to 50% from FY24, sustaining its growth in the following three years, addressing growing demand and providing scope to strengthen the presence in markets, particularly in Asia, where the company still has a limited presence. Strong Profitability; Operating Cashflow: Birkenstock enjoys high EBITDA and funds from operations (FFO) margins of around 30% and 20%, respectively, which are commensurate with the top end of the investment-grade category for the sector. Strong profitability is predicated on its high operating efficiency with in-house production, a premium product portfolio, and increasing ownership of distribution channels, including the increasing contribution of online sales and direct wholesale distribution channels. While higher interest charges will erode FFO generation from FY23, Fitch projects cash flow from operations (CFO; before capex and dividends) of around EUR220 million-EUR280 million from FY23 onwards. Higher Working Capital: The shift of sales to the online channel has increased working capital absorption to 44% (EUR196 million) of revenues in FY22. This was also exacerbated by efforts to minimise the risk of energy curtailment in winter or of reduced availability of raw materials and semi-finished inputs. Fitch conservatively assumes that as sales growth in the D2C channel continues, working capital will not reduce as a share of sales. Capex Constraint on FY23 FCF: Fitch expects capex will continue to constrain FCF in FY23. However, should capex normalise from FY24, Fitch projects that Birkenstock would be able to generate as much as EUR200 million-EUR250 million of FCF per annum, representing a healthy 12%-15% of revenues. Reducing Leverage, Deleveraging Capacity: After initial EBITDA gross leverage of 5.2x at FYE21, leverage fell significantly to 4.3x in FY22. Fitch estimates a further leverage reduction toward 3.0 x by FY25, supported by robust revenue-and-EBITDA growth and a EUR50 million debt prepayment in FY23. This leverage is consistent with a 'BB' category IDR despite the company's product concentration. In accordance with Fitch's policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different from the original Rating Committee outcome. DERIVATION SUMMARY Birkenstock's rating is two notches above that of its closest peer, Golden Goose S.p.A. (B/Stable), which also has a concentrated portfolio of product offering and similar profitability. Unlike Golden Goose, Birkenstock is not developing its own retail store network, and Fitch, therefore, does not adjust its leverage for leases. The two-notch rating difference reflects Birkenstock's 3x larger scale and product positioning being less subject to fashion risk. Fitch views Birkenstock's credit profile as weaker than that of Levi Strauss & Co (BB+/Stable), which also has a high concentration in one brand but is much greater in scale and more diversified by product. This, together with substantially lower leverage of below 3.5x adjusted for leases, results in a higher rating for Levi Strauss. Birkenstock is smaller, has a less diversified product portfolio and higher leverage than producer of home improvement and personal care products, Spectrum Brands, Inc. (BB/Negative). This justifies a one-notch gap between the two companies despite Birkenstock's significantly higher profitability. Compared with ACCO Brands Corporation (BB/Stable), one of the world's largest designers, marketers and manufacturers of branded academic, consumer and business products, Birkenstock is notably smaller in size but has materially higher profitability. Despite the two companies' comparable leverage, Fitch believes ACCO Brands's larger scale and commitment to maintaining net debt within 2.5x EBITDA warrant a higher rating. Frozen foods company, Nomad Foods Limited (BB/Negative), operates in an essentials category and is, thus, less exposed to changing consumer preferences, which Fitch believes warrants a higher rating despite comparable leverage and a significantly lower EBITDA margin. Fitch views Birkenstock's credit profile as stronger than that of Italian furniture producer International Design Group S.p.A. (IDG; B/ Stable), whose several acquisitions have constrained its deleveraging trajectory. Birkenstock also benefits from a moderately larger scale and more resilient consumer demand, which combined with high profitability, suggest greater visibility over Birkenstock's deleveraging prospects. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Organic growth of 21% in FY23, followed by CAGR of 5.7% in FY24-FY26, driven by both Europe and the Americas - Strong EBITDA margin of 30%-31% until FY26 - Working capital at 44% of sales to FY26 - Capex of around EUR130 million in FY23, normalising to 2%-3.5% of sales over FY24-FY26 - Dividends of EUR20 million p.a. - No M&A to FY26 RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: — Continued successful implementation of business plan, with annual EBITDA above EUR500 million and reliance on its top five models reducing towards 50% of sales — Maintenance of EBITDA margin equal to or above 30%, translating into FCF margin in the high single digits — Maintenance of a financial policy that would be conducive to sustaining gross debt / EBITDA below 3.5x Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: — Failure to implement successfully business plan and maintaining a trajectory for annual EBITDA toward EUR500 million — EBITDA margin dropping below 25% and failing to maintain FCF margin above 5% — Trading under-performance, absorption of resources in connection to growth, or financial policy changes causing gross debt / EBITDA to return above 4.5x LIQUIDITY AND DEBT STRUCTURE Comfortable Liquidity: Over its four-year rating horizon and assuming current financial policies, Fitch expects Birkenstock to maintain a comfortable liquidity position. This comprises Fitch-estimated EUR304 million cash on balance sheet as of September 2022, positive post-dividend FCF generation through FY26 and a EUR200 million-equivalent asset-based lending (ABL) facility to fund inventory build-up during low seasons. Dividend Policy Uncertainty: Birkenstock's dividend policy is unclear. The financing documentation permits distribution up to 50% of consolidated net income under levels of leverage that the company achieved in FY22, and which Fitch has included in its projections. Nevertheless, Fitch believes that given Birkenstock's business potential, the sponsor's priority would likely be with capex or small supply-chain focused M&A over shareholder distributions, and consequently dividends are likely to be put on hold in the next four years. No Immediate Maturities: No maturities are due before FY28 and FY29 other than the ABL facility, which is due in April 2026. The mandatory 1% amortisation of the US dollar senior secured TLB is the only scheduled debt repayment over the rating horizon. ISSUER PROFILE Birkenstock is a German-based manufacturer of branded casual footwear. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Birkenstock US BidCo Inc. senior secured LT BB+ Upgrade RR2 BB- BK LC Lux Finco 1 S.a.r.l. LT IDR BB- Upgrade B+ senior unsecured LT BB- Upgrade RR4 B- Birkenstock Group B.V. & Co. KG senior secured LT BB+ Upgrade RR2 BB- ============= I R E L A N D ============= CVC CORDATUS XXVIII: Fitch Gives Final B-(EXP) Rating on F Notes ---------------------------------------------------------------- Fitch Ratings has assigned CVC Cordatus Loan Fund XXVIII DAC expected ratings. The assignment of final ratings is contingent on the receipt of final documents conforming to information already reviewed. Entity/Debt Rating ----------- ------ CVC Cordatus Loan Fund XXVIII DAC A LT AAA(EXP)sf Expected Rating B LT AA(EXP)sf Expected Rating C LT A(EXP)sf Expected Rating D LT BBB-(EXP)sf Expected Rating E LT BB-(EXP)sf Expected Rating F LT B-(EXP)sf Expected Rating Sub Notes LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY CVC Cordatus Loan Fund XXVIII DAC is a securitisation of mainly senior secured obligations (at least 96%) 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 EUR375 million. The portfolio will be actively managed by CVC Credit Partners Investment Management Limited. The collateralised loan obligation (CLO) will have a reinvestment period of 4.5 years and a seven -year weighted average life (WAL) test. KEY RATING DRIVERS Average Portfolio Credit Quality (Neutral): Fitch places the average credit quality of obligors at 'B'/'B-'. The Fitch weighted average rating factor (WARF) of the identified portfolio is 25.1. High Recovery Expectations (Positive): At least 96% 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 weighted average recovery rate of the identified portfolio is 60.6%. Diversified Portfolio (Positive): Exposure to the 10 largest obligors and fixed-rate assets for assigning the expected ratings is limited at 20% and 12.5% respectively, and the transaction has a seven-year WAL test. 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 the asset portfolio will not be exposed to excessive concentration. Portfolio Management (Neutral): The transaction 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. The transaction could extend the WAL test by one year 12 months after closing if the aggregate collateral balance (defaulted obligations at Fitch-calculated collateral value) is at least at the target par and the transaction is passing all tests. Cash Flow Modelling (Positive): The WAL used for the transaction's stressed portfolio analysis is 12 months less than the WAL test covenant to account for the strict reinvestment conditions envisaged after the reinvestment period. These include passing the coverage tests, Fitch WARF and Fitch 'CCC' bucket limitation, together with a gradually decreasing WAL covenant. In Fitch's opinion, these conditions reduce the effective risk horizon of the portfolio during stress periods. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A 25% increase of the mean default rate (RDR) across all ratings and a 25% decrease of the recovery rate (RRR) across all ratings of the identified portfolio would have no impact to class A notes, would lead to downgrade of one notch for the class D notes, two notches on the class B and C notes, three notches for the class E notes and to below 'B-sf' for the class F notes. Based on the actual portfolio, downgrades may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of default and portfolio deterioration. Due to the better metrics and shorter life of the identified portfolio than the stressed portfolio the class B, D and E notes show a rating cushion of two notches each while the class C notes show a rating cushion of one notch and the class A and F notes display no rating cushion. Should the cushion between the identified portfolio and the stressed-case 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-case portfolio would lead to downgrades of up to four notches for the 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 two notches for the rated notes, except for the 'AAAsf' rated notes, which are at the highest level on Fitch's scale and cannot be upgraded. 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 in case of stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread available to cover for losses on the remaining portfolio. DATA ADEQUACY CVC Cordatus Loan Fund XXVIII DAC The majority of the underlying assets or risk presenting entities have ratings or credit opinions from Fitch and/or other Nationally Recognized Statistical Rating Organizations 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. CVC CORDATUS XXVIII: S&P Assigns Prelim. Bsf Rating on F Notes -------------------------------------------------------------- S&P Global Ratings assigned preliminary credit ratings to CVC Cordatus Loan Fund XXVIII DAC's class A, B, C, D, E, and F notes. At closing, the issuer will also issue subordinated notes. The preliminary ratings reflect S&P's assessment of: -- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior-secured term loans and bonds that are governed by collateral quality tests. -- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. -- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. -- The transaction's legal structure, which S&P expects to be bankruptcy remote. -- The transaction's counterparty risks, which S&P expects to be in line with its counterparty rating framework. Portfolio benchmarks CURRENT S&P weighted-average rating factor 2,924.59 Default rate dispersion 460.20 Weighted-average life (years) 4.56 Obligor diversity measure 121.30 Industry diversity measure 22.46 Regional diversity measure 1.18 Transaction key metrics CURRENT Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 2.13 Covenanted 'AAA' weighted-average recovery (%) 34.38 Covenanted weighted-average spread (%) 4.10 Covenanted weighted-average coupon (%) 5.00 Class A investor condition The transaction features a condition whereby the issue date class A investor would have to consent, in writing, before certain provisions of the documentation can be used. Some examples include: -- The transaction would not be able to run the class F interest coverage ratio test to avoid interest smoothing unless consent is obtained. -- The carrying value of long-dated restructured obligations in the overcollateralization numerator would be zero without consent but would be the collateral value with consent. -- The principal balance of any workout obligations would be zero without consent, but can be carried at collateral value with consent subject to other conditions. - The cumulative portfolio profile tests for workout obligations are limited to 5% without consent but extend to 10% with consent. -- The portfolio profile tests for uptier priming debt are limited to 0% without consent but extend to 2.5% with consent. -- The class A noteholders can object to modification or amendment of any component of the S&P CDO Monitor scenario default rate (SDR)/break-even default rate (BDR) to make it consistent with the current criteria, provided that consent has not already been given. -- The eligibility criteria would not allow purchasing a step-down and step-up coupon security without consent. -- An interim payment date can only be called with consent. -- There is a minimum S&P weighted-average recovery rate test, which is included in the collateral quality tests unless class A consent is received. -- Asset priming obligations and uptier priming debt. Under the transaction documents, the issuer can purchase asset priming obligations and/or uptier priming debt to address the risk, where a distressed obligor could either move collateral outside the existing creditors' covenant group or incur new money debt senior to the existing creditors. Rating rationale Under the transaction documents, the rated notes will pay quarterly interest unless a frequency switch event occurs. Following this, the notes will switch to semiannual payments. The portfolio's reinvestment period will end approximately four and half years after closing. The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior-secured term loans and senior-secured bonds. Therefore, S&P has conducted its credit and cash flow analysis by applying its criteria for corporate cash flow CDOs. S&P said, "In our cash flow analysis, we used the EUR375 million target par amount, and the portfolio's covenanted weighted-average spread (4.10%), covenanted weighted-average coupon (5.00%), and covenanted weighted-average recovery rates at each rating level. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. "Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned preliminary ratings. "Until the end of the reinvestment period on Feb. 15, 2028, the collateral manager may substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and it compares that with the current portfolio's default potential plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager may through trading deteriorate the transaction's current risk profile, as long as the initial ratings are maintained. "We expect the transaction's documented counterparty replacement and remedy mechanisms to adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "At closing, we expect that the transaction's legal structure and framework will be bankruptcy remote, in line with our legal criteria. "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our preliminary ratings are commensurate with the available credit enhancement for the class A to E notes. Our credit and cash flow analysis indicates that the available credit enhancement for the class B, C, D, and E notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from closing, during which the transaction's credit risk profile could deteriorate, we have capped our preliminary ratings assigned to the notes. "For the class F notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses that are commensurate with a lower rating. However, we have applied our 'CCC' rating criteria resulting in a preliminary 'B- (sf)' rating on this class of notes." The ratings uplift (to 'B-') reflects several key factors, including: -- The available credit enhancement for this class of notes is in the same range as other CLOs that S&P rates, and that have recently been issued in Europe. -- The portfolio's average credit quality is similar to other recent CLOs. -- S&P's model generated BDR at the 'B-' rating level of 23.18% (for a portfolio with a weighted-average life of 4.56 years), versus if it was to consider a long-term sustainable default rate of 3.1% for 4.56 years, which would result in a target default rate of 14.14%. -- The actual portfolio is generating higher spreads versus the covenanted thresholds that S&P has modelled in its cash flow analysis. S&P said, "For us to assign a rating in the 'CCC' category, we also assess (i) whether the tranche is vulnerable to nonpayments in the near future, (ii) if there is a one in two chance of this tranche defaulting, and (iii) if we envision this tranche to default in the next 12-18 months. Following this analysis, we consider that the available credit enhancement for the class F notes is commensurate with a preliminary 'B- (sf)' rating. "Taking the above factors into account and following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe that our preliminary ratings are commensurate with the available credit enhancement for all the rated classes of notes. "In addition to our standard analysis, to provide an indication of how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class A to E notes based on four hypothetical scenarios. "As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F notes." The transaction securitizes a portfolio of primarily senior-secured leveraged loans and bonds, and it is managed by CVC Credit Partners Investment Management. Environmental, social, and governance (ESG) factors S&P regards the exposure to ESG credit factors in the transaction as being broadly in line with its benchmark for the sector. Primarily due to the diversity of the assets within CLOs, the exposure to environmental credit factors is viewed as below average, social credit factors are below average, and governance credit factors are average. For this transaction, the documents prohibit assets from being related to certain activities, including, but not limited to the following: -- Any obligor where revenue is derived from the manufacture or marketing of controversial weapons, anti-personnel mines, cluster weapons, landmines, depleted uranium, nuclear weapons, white phosphorus, blinding laser weapons, non-detectable fragments, incendiary weapons, and biological and chemical weapons. -- Any obligor where more than 10% of revenue is derived from weapons, tailor-made components, or is involved in the manufacturing of civilian firearms. -- Any obligor where revenue is derived from tobacco production such as cigars, cigarettes, e-cigarettes, smokeless tobacco, dissolvable and chewing tobacco, and obligors where more than 5% of revenue is derived from products that contain tobacco. -- Any obligor whose primary business activity is non-certified palm oil production. -- Any obligor that generates revenues from illegal logging operations, trading and processing timber harvested illegally, deforestation and/or tropical rainforest damaging including conversion, clearing of forests with high conservation values or high carbon stocks, and clearing of primary tropical forests. -- Any obligor that derives more than 10% of revenue from the mining of thermal coal or that has expansion plans for coal extraction. -- Any obligor that derives more than 10% of revenue from oil sands extraction or that has expansion plans for unconventional oil and gas extraction. -- Any obligor that is an oil and gas producer that derives less than 40% of revenue from natural gas or renewables or that has reserves of less than 20% deriving from natural gas. -- Any obligor that is an electrical utility where carbon intensity is greater than 100gCO2/kWh, or where carbon intensity is not disclosed it generates more than 1% of its electricity from thermal coal, or 10% from liquid fuels (oil). -- Any obligor that primarily provides predatory payday lending. -- Any obligor that derives more than 5% of revenue from the trade in, production, or marketing of: pornography or prostitution, opioid manufacturing and distribution, hazardous chemicals, pesticides and wastes, ozone-depleting substances as covered by the Montreal Protocol on Substances that Deplete the Ozone Layer (1989), or the extraction of fossil fuels from unconventional sources (including Arctic drilling, tar sands, shale oil, and shale gas) or other fracking activities, or coal mining and/or coal-based power generation. -- Any obligor that derives any revenue from the trade in endangered or protected wildlife, any species described as endangered or critically endangered in the most recent publication of the International Union for Conservation of Nature Red List; or any species subject to protection under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (1973). -- Any obligor that violates the United Nations Global Compact (UN GC) principles, or doesn't take the necessary actions to remedy any known violation, and whose business activity is directly derived from activities that violate the UN GC Ten Principles. Accordingly, since the exclusion of assets from these industries does not result in material differences between the transaction and our ESG benchmark for the sector, we have not made any specific adjustments in our rating analysis to account for any ESG-related risks or opportunities. Environmental, social, and governance (ESG) corporate credit indicators S&P said, "The influence of ESG factors in our credit rating analysis of European CLOs primarily depends on the influence of ESG factors in our analysis of the underlying corporate obligors. To provide additional disclosure and transparency of the influence of ESG factors for the CLO asset portfolio in aggregate, we've calculated the weighted-average and distributions of our ESG credit indicators for the underlying obligors. We regard this transaction's exposure as being broadly in line with our benchmark for the sector, with the environmental and social credit indicators concentrated primarily in category 2 (neutral) and the governance credit indicators concentrated in category 3 (moderately negative)." Corporate ESG credit indicators Environmental Social Governance Weighted-average credit indicator* 2.05 2.14 2.92 E-1/S-1/G-1 distribution (%) 0.00 0.80 0.00 E-2/S-2/G-2 distribution (%) 74.53 68.64 11.97 E-3/S-3/G-3 distribution (%) 4.00 6.27 62.77 E-4/S-4/G-4 distribution (%) 0.00 2.83 1.49 E-5/S-5/G-5 distribution (%) 0.00 0.00 2.29 Unmatched obligor (%) 11.47 11.47 11.47 Unidentified asset (%) 10.00 10.00 10.00 *Only includes matched obligors. Ratings list CLASS PRELIM AMOUNT INTEREST RATE§ CREDIT RATING* (MIL. EUR) ENHANCEMENT (%) A AAA (sf) 228.70 3mE + 1.85% 39.01 B AA (sf) 41.30 3mE + 3.20% 28.00 C A (sf) 18.70 3mE + 4.00% 23.01 D BBB- (sf) 26.30 3mE + 6.20% 16.00 E BB- (sf) 16.90 3mE + 8.40% 11.49 F B- (sf) 13.10 3mE + 10.50% 8.00 Sub notes NR 23.75 N/A N/A *The preliminary ratings assigned to the class A and B notes address timely interest and ultimate principal payments. The preliminary ratings assigned to the class C, D, E, and F notes address ultimate interest and principal payments. §The payment frequency switches to semiannual and the index switches to 6mE when a frequency switch event occurs. NR--Not rated. N/A--Not applicable. 3mE--Three-month Euro Interbank Offered Rate. 6mE--Six-month Euro Interbank Offered Rate. DRYDEN 59 2017: Moody's Cuts Rating on EUR11.875MM F Notes to B3 ---------------------------------------------------------------- Moody's Investors Service has downgraded the rating on the following notes issued by Dryden 59 Euro CLO 2017 Designated Activity Company: EUR11,875,000 Class F Mezzanine Secured Deferrable Floating Rate Notes due 2032, Downgraded to B3 (sf); previously on Sep 14, 2022 Affirmed B2 (sf) Moody's has also affirmed the ratings on the following notes: EUR294,500,000 (Current outstanding amount EUR284,155,033) Class A Senior Secured Floating Rate Notes due 2032, Affirmed Aaa (sf); previously on Sep 14, 2022 Affirmed Aaa (sf) EUR37,400,000 Class B Senior Secured Fixed Rate Notes due 2032, Affirmed Aa1 (sf); previously on Sep 14, 2022 Upgraded to Aa1 (sf) EUR29,000,000 Class C-1 Mezzanine Secured Deferrable Floating Rate Notes due 2032, Affirmed A1 (sf); previously on Sep 14, 2022 Upgraded to A1 (sf) EUR31,000,000 Class D-1 Mezzanine Secured Deferrable Floating Rate Notes due 2032, Affirmed Baa2 (sf); previously on Sep 14, 2022 Affirmed Baa2 (sf) EUR35,600,000 Class E Mezzanine Secured Deferrable Floating Rate Notes due 2032, Affirmed Ba2 (sf); previously on Sep 14, 2022 Affirmed Ba2 (sf) Dryden 59 Euro CLO 2017 Designated Activity Company, issued in April 2018, is a collateralised loan obligation (CLO) backed by a portfolio of mostly high-yield senior secured European loans. The portfolio is managed by PGIM Limited. The transaction's reinvestment period ended in November 2022. RATINGS RATIONALE The rating downgrade on the Class F notes is primarily a result of the deterioration in over-collateralisation ratios and key credit metrics of the underlying portfolio since the last rating action in September 2022. The over-collateralisation ratios of the rated notes have deteriorated since the rating action in September 2022. According to the trustee report dated April 2023 [1] the Class A/B, Class C-1, Class D-1, Class E and Class F OC ratios are reported at 142.23%, 130.71%, 120.29%, 110.21% and 107.21% compared to July 2022 [2] levels of 142.97%, 131.48%, 121.08%, 111.00% and 108.00%, respectively. Moody's notes that the May 2023 principal payments are not reflected in the reported OC ratios. In addition, some of the key credit metrics of the underlying pool have deteriorated since the last rating action in September 2022. According to the trustee report dated April 2023[1], the reported Weighted Average Recovery Rate deteriorated to 40.40% from 40.70% in July 2022 [2]. The defaults increased to EUR7.37m in April 2023 [1] from EUR3.40m in July 2022 [2]. In light of reinvestment restrictions during the amortisation period, and therefore the limited ability to effect significant changes to the current collateral pool, Moody's analysed the deal assuming a higher likelihood that the collateral pool characteristics would maintain an adequate buffer relative to certain covenant requirements. The key model inputs Moody's uses in its analysis, such as par, weighted average rating factor, diversity score and the weighted average recovery rate, are based on its published methodology and could differ from the trustee's reported numbers. In its base case, Moody's used the following assumptions: Performing par and principal proceeds balance: EUR458.78m Defaulted Securities: EUR7.57m Diversity Score: 63 Weighted Average Rating Factor (WARF): 2966 Weighted Average Life (WAL): 4.04 years Weighted Average Spread (WAS) (before accounting for Euribor floors): 3.98% Weighted Average Coupon (WAC): 4.54% Weighted Average Recovery Rate (WARR): 40.22% Par haircut in OC tests and interest diversion test: none The default probability derives from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The estimated average recovery rate on future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance and a collateral manager's latitude to trade collateral are also relevant factors. Moody's incorporates these default and recovery characteristics of the collateral pool into its cash flow model analysis, subjecting them to stresses as a function of the target rating of each CLO liability it is analysing. Methodology Underlying the Rating Action: The principal methodology used in these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in December 2021. Counterparty Exposure: The rating action took into consideration the notes' exposure to relevant counterparties, such as account bank and swap provider, using the methodology "Moody's Approach to Assessing Counterparty Risks in Structured Finance" published in June 2022. Moody's concluded the ratings of the notes are not constrained by these risks. Factors that would lead to an upgrade or downgrade of the ratings: The rated notes' performance is subject to uncertainty. The notes' performance is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The collateral manager's investment decisions and management of the transaction will also affect the notes' performance. Additional uncertainty about performance is due to the following: Portfolio amortisation: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio, which can vary significantly depending on market conditions and have a significant impact on the notes' ratings. Amortisation could accelerate as a consequence of high loan prepayment levels or collateral sales by the collateral manager or be delayed by an increase in loan amend-and-extend restructurings. Fast amortisation would usually benefit the ratings of the notes beginning with the notes having the highest prepayment priority. Recovery of defaulted assets: Market value fluctuations in trustee-reported defaulted assets and those Moody's assumes have defaulted can result in volatility in the deal's over-collateralisation levels. Further, the timing of recoveries and the manager's decision whether to work out or sell defaulted assets can also result in additional uncertainty. Recoveries higher than Moody's expectations would have a positive impact on the notes' ratings. In addition to the quantitative factors that Moody's explicitly modelled, qualitative factors are part of the rating committee's considerations. These qualitative factors include the structural protections in the transaction, its recent performance given the market environment, the legal environment, specific documentation features, the collateral manager's track record and the potential for selection bias in the portfolio. All information available to rating committees, including macroeconomic forecasts, input from other Moody's analytical groups, market factors, and judgments regarding the nature and severity of credit stress on the transactions, can influence the final rating decision. ===================== N E T H E R L A N D S ===================== EMF-NL PRIME 2008-A: S&P Lowers Rating on Class D Notes to Dsf -------------------------------------------------------------- S&P Global Ratings lowered to 'D (sf)' from 'CCC- (sf)' its credit rating on EMF-NL Prime 2008-A B.V.'s class D notes. At the same time, S&P affirmed its 'BB (sf)', 'BB (sf)', 'B- (sf)', and 'CCC (sf)', ratings on the class A2, A3, B, and C notes respectively. S&P's ratings in this transaction address timely receipt of interest and ultimate repayment of principal for all classes of notes. The downgrade of the class D notes to 'D (sf)' from 'CCC- (sf)' reflects the transaction's ongoing weak performance and follows the missed interest payment due to the noteholders in January and April 2023. S&P believes it is unlikely that full interest -- including full reimbursement of the interest shortfall amount -- will resume and that the issuer will be able to repay this class considering the negative credit enhancement. S&P said, "We performed a full analysis of the transaction based on the most recent information on the current structural features that we have received and applying our criteria. "After applying our global RMBS criteria, the overall effect in our credit analysis results in a decrease in the weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS) assumptions. The decrease in our WAFF assumptions is mainly due to the decrease in the effective loan-to-value (LTV) ratio. Our weighted-average loss severity (WALS) assumptions have also decreased at all rating levels because of a lower weighted-average current LTV ratio." WAFF And WALS Levels RATING LEVEL WAFF (%) WALS (%) AAA 16.03 38.66 AA 12.33 31.90 A 10.37 20.92 BBB 8.63 14.83 BB 6.67 10.59 B 6.23 7.00 WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Credit enhancement has increased for all rated classes of notes since S&P's previous full review, except for the class D notes, where it decreased. Credit Enhancement Levels CLASS CE (%) CE AS OF PREVIOUS REVIEW (%) A2 40.44 25.5 A3 40.44 25.5 B 20.01 11.8 C 4.68 1.6 D (10.64) (8.6) CE--Credit enhancement. Since October 2013, the reserve fund has been fully depleted, making the transaction more sensitive to any potential liquidity stresses, as demonstrated by the interest shortfall experienced by the class D notes on the last two payment dates. Given low excess spread in the transaction, the principal deficiency ledger for the class D notes' amounts has only slightly reduced since S&P's previous review and has an outstanding amount of EUR5.6 million. S&P's operational, legal, and counterparty risk analysis remains unchanged since our previous full review. S&P said, "Our credit and cash flow analysis and the results of our sensitivity analysis indicate that the ratings are sensitive to liquidity stresses due to the depleted reserve fund and very low excess spread. The class A2 and A3 notes achieve a higher cash flow output under our standard cash flow analysis. However, the currently assigned ratings reflect the lack of liquidity, the weak historical performance, and the characteristics of the portfolio. The collateral entirely comprises interest-only loans with a large concentration of maturity dates in just two years, 2037 and 2038. We believe this increases the tail-end risk considering the nonconforming nature of the collateral, and the refinancing difficulties these borrowers might face, and sensitivity analysis results. We therefore affirmed our 'BB (sf)' ratings on these classes of notes. "In our standard cash flow analysis, the class B and C notes do not pass at the 'B (sf)' stress level. For the class B notes, we do not expect the issuer to be dependent upon favorable business, financial, and economic conditions to meet its financial commitment. This is because these notes have positive credit enhancement, and only face a minor technical interest shortfall under a steady-state scenario. Consequently, we affirmed our 'B- (sf)' rating on this class of notes. However, the class C notes continue to face shortfalls under our steady-state scenario. Therefore, in our view, the issuer is dependent upon favorable conditions to meet its financial commitment for this tranche. We therefore affirmed our 'CCC (sf)' rating on the class C notes." EMF-NL Prime 2008-A is a Dutch RMBS transaction, which closed in May 2008 and securitizes a pool of loans secured on first-ranking mortgages in the Netherlands. ROOMPOT: S&P Assigns 'B' LT Issuer Credit Rating, Outlook Stable ---------------------------------------------------------------- S&P Global Ratings assigned its 'B' long-term issuer credit rating to the Dutch holiday park operator's holding company Roompot (Sandy Holdco) and its 'B' issue rating to the senior secured EUR1.05 billion term loan B (TLB) and EUR125 million revolving credit facility (RCF). S&P said, "The stable outlook reflects our view that Dutch holiday park operator Roompot will successfully integrate Landal, with operating performance and credit metrics at least in line with our base case, including forecast leverage at 5.5x-6.0x and positive free operating cash flow (FOCF) after leases of about EUR25 million-EUR35 million in the next 12-18 months. "Roompot completed the financing of the Landal acquisition as per our expectations. The rating reflects the group's successful acquisition of Landal from Awaze Ltd. (B-/Stable/--) in April 2023. The TLB and RCF had been already drawn down prior to the closing of the transaction to repay EUR455 million of financial debt at Sandy Holdco. The remaining amount has been held in escrow, pending the transaction's close. The TLB is due in August 2029 with a spread of 4% initially, while the RCF matures six months earlier in February 2029. The capital structure comprises the EUR1.05 billion TLB, EUR125 million RCF, and other smaller financial debt of about EUR15 million. We expect a pro-forma closing cash balance of about EUR105 million (as of Dec. 31, 2022). EBITDA for the combined group has been above expectations as pricing and utilization benefited from a recovery post lockdowns in 2022. Both Landal and Roompot have seen significant EBITDA growth because demand for holiday rentals has improved following the lifting of COVID-19 restrictions. Awaze reported that its company-adjusted EBITDA (including lease expenses), for Landal increased to EUR113 million in 2022 from EUR86 million in 2021. At the same time, Roompot's reported EBITDA (including lease expenses) increased to EUR109 million from EUR96 million in 2021. Excluding the low-double-digit million EBITDA contribution from the parks to be sold to Dormio and management adjustments, and including our adjustment for leases, pro-forma S&P Global Ratings-adjusted EBITDA stood at EUR230 million-EUR240 million, versus EUR205 million-EUR220 million expected in September 2021. S&P said, "For 2023, we anticipate slight revenue growth from pricing, while utilization is expected to be weaker as demand for vacations abroad increases, seen in the high recovery in outbound air traffic. At the same time, inflation-driven cost increases from, among others, energy and personnel will impact profitability and lead to stagnating EBITDA in 2023. As a result, we expect S&P Global Ratings-adjusted leverage to remain at 5.8x-6.0x in 2023 before it declines to about 5.5x-5.7x in 2024, when we expect a normalization of some operational costs and the partial realization of synergies." S&P Global Ratings-adjusted FOCF (after leases) to debt will remain below 5% in the next two years, due to higher financial expenses, despite the strong EBITDA outperformance. S&P said, "The group's mostly floating rate debt will lead to an increase in financial expenses of more than EUR30 million compared with our initial forecast in 2021. We note that Roompot has capped approximately half of its financial obligations at 3% Euribor, which reduces the impact of potential further rate increases on its financial expenses. With our expectation of capital expenditure (capex) of about 8% of sales (of which we deem 4% as maintenance) reported FOCF after leases should come in at about EUR20 million-EUR30 million in 2023 and improve to EUR40 million-EUR50 million in 2024." S&P said, "The stable outlook reflects our view that Roompot will successfully integrate Landal, with operating performance and credit metrics at least in line with our base case. We forecast leverage at 5.5x-6.0x and positive FOCF after leases of about EUR25 million-EUR35 million in the next 12-18 months." S&P could lower the rating in the next 12 months if Roompot were unable to improve credit metrics in line with its base case. A downgrade could occur from one, or a combination of, the following: -- There is a sharper macroeconomic downturn or operational setbacks associated with the integration of Landal, such that adjusted leverage increases beyond 7x on a sustained basis; -- FOCF after leases turns negative; or -- Roompot displays a more aggressive financial policy, reflected in prolonged weaker credit metrics, debt-funded acquisitions, or shareholder returns. An upgrade is unlikely at this stage, given the financial-sponsor ownership. That said, S&P could consider an upgrade if: -- The company successfully integrates Landal with a demonstrated track record of material scale and growth in earnings; -- S&P Global Ratings-adjusted leverage declines below 5x, and S&P Global Ratings-adjusted FOCF after leases to debt increases beyond 5% on a sustainable basis. An upgrade would require a clear commitment from KKR, the financial-sponsor owner, to maintain conservative credit metrics within these parameters for the long term. ESG credit indicators: E-2, S-3, G-3 S&P said, "Social factors are a moderately negative consideration in our credit rating analysis of Sandy Holdco (Roompot). We think lodging operators are inherently exposed to material social risks such as health and safety concerns, cyber risks, terrorism, and geopolitical unrest that could result in business disruption. This surfaced during the pandemic as the temporary closure of parks led to a revenue decline. That said, we acknowledge Roompot has fared better than some peers during the pandemic, thanks to its exposure to domestic customers." Governance factors are a moderately negative consideration, as is the case for most rated entities owned by private-equity sponsors. S&P believes the company's highly leveraged financial risk profile points to corporate decision-making that prioritizes the interests of the controlling owners. This also reflects generally finite holding periods and a focus on maximizing shareholder returns. UNITED GROUP: S&P Affirms 'B' ICR & Alters Outlook to Positive -------------------------------------------------------------- S&P Global Ratings revised its outlook on United Group B.V. (UG) to positive from stable and affirmed its 'B' long-term issuer credit rating. The positive outlook reflects that S&P could raise the rating if UG successfully reduces its S&P Global Ratings-adjusted debt to EBITDA to below 6.0x and maintains at least neutral free operating cash flow (FOCF) after leases and before spectrum and investments in nonrestricted subsidiaries. The tower sale transaction helps address upcoming debt maturities and reduce debt leverage. The transaction has a positive effect on the group's adjusted leverage given that UG is selling its towers at a 20.0x multiple for EUR1.2 billion and we understand the company will use all the proceeds for deleveraging. This includes to prepay the upcoming EUR525 million bonds due 2024 and EUR550 million bonds due 2025, with the remainder to repay a portion of the drawn revolving credit facility (RCF). The reduction in UG's adjusted debt will be partially offset by a net increase in leases of about EUR600 million. S&P said, "Overall, along with about 15% EBITDA growth, we expect adjusted debt to EBITDA to reduce to about 6.0x in 2023 from 7.3x in 2022. In our view, leverage will further reduce to about 5.5x in 2024 and FOCF to debt before leases (but after unrestricted subsidiaries' capital expenditure [capex]) will be marginally positive in 2023-2024. We are mindful that improvement in adjusted debt to EBITDA also relies on the company's capacity to deliver its cost-optimization and revenue growth in Greece. We believe ongoing network investment will continue to constrain FOCF at modest levels." Improvement in credit metrics should be supported by the group's financial policy. UG has primarily expanded through mergers and acquisitions (M&A) but S&P understands the company will focus on organic growth and leverage reduction in the coming years. In addition, the company might also divest some of its noncore assets or a minority stake in its fiber infrastructure to support further deleveraging. S&P said, "We expect UG to post solid revenue growth and improving EBITDA margins, despite macroeconomic headwinds and inflationary pressures. Following the acquisition of Wind Hellas and Optima Telekom in 2022, along with the full contribution from M&A closed in 2022, UG showed strong revenue growth of 38% last year. Revenue is also organically supported by the expanding subscriber base, with migration toward multi-play packages and gradual price increases. The company managed to translate this positive revenue trend into a 28% increase in its EBITDA for the same period (4%-5% organic growth). We expect UG's revenue will expand 6%-8% and its S&P Global Ratings-adjusted EBITDA margin will improve to about 35%-36% in 2023-2024 on the back of synergies and cost cutting, which compares with a 33% margin in 2022. We also expect lower exceptional costs related to M&A will further support margin improvement and cash flow. We acknowledge that UG is operating in geographies that will continue to show sound GDP growth and believe that UG has the capacity to increase prices and will continue to work on its cross-selling strategy." Country-related risks, the focus on relatively small markets--where UG usually lacks leading positions in mobile--and execution risk in Greece constrain the business risk profile. S&P acknowledges that the company has gradually increased its scale and diversification in the past few years through M&A. At the same time, S&P notes that UG's business risk profile remains constrained by: -- Its operations in relatively small markets, where country risks are elevated, including higher price sensitivity than in wealthier markets, exposure to piracy, and grey-market activities. -- The predominance of mobile operations in these markets--accounting for 28% of total revenue--which tend to be more volatile than fixed broadband, and the lack of leading mobile positions in markets where UG offers these services. -- Execution risks in Greece, UG's biggest revenue contributor, where it needs to compete with a dominant incumbent and successfully expand its fixed-line division. The positive outlook reflects the likelihood that S&P raises the rating over the next 12 months if UG successfully improves its credit metrics in line with its base case while maintaining a more conservative financial policy. S&P could raise its rating if UG continues to benefit from strong organic revenue growth of more than 5% and increases its adjusted EBITDA margin to more than 35%, helping it reduce S&P Global Ratings-adjusted debt to EBITDA to below 6.0x and maintain at least neutral FOCF after leases and before spectrum and investments in nonrestricted subsidiaries. S&P could revise the outlook back to stable if it expects adjusted leverage to weaken and remain above 6x. This could result from either operating underperformance compared with its base case or a return to debt-funded M&A. 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 UG, reflecting the group's majority ownership by a private-equity company. Our assessment of the company's financial risk profile as highly leveraged considers corporate decision-making that prioritizes the interests of the controlling owners, as is the case for most rated entities owned by private-equity sponsors. Our assessment also reflects their generally finite holding periods and a focus on maximizing shareholder returns. In addition, we incorporate the company's aggressive M&A strategy, and the challenging situation it faces at subsidiary Vivacom where several lawsuits are outstanding, although related to its previous ownership." VTR FINANCE: Moody's Lowers CFR to Caa1 & Unsecured Notes to Caa3 ----------------------------------------------------------------- Moody's Investors Service has downgraded VTR Finance N.V. ("VTR")'s corporate family rating and VTR Comunicaciones SpA's 4.375% $332 million outstanding and 5.125% $402 million outstanding senior secured notes to Caa1 from B2. At the same time, Moody's has also downgraded the rating of VTR's 6.375% $410 million outstanding senior unsecured notes to Caa3 from B3. The outlook remains negative. Downgrades: Issuer: VTR Comunicaciones SpA Backed Senior Secured Regular Bond/Debenture, Downgraded to Caa1 from B2 Issuer: VTR Finance N.V. Corporate Family Rating, Downgraded to Caa1 from B2 Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 from B3 Outlook Actions: Issuer: VTR Finance N.V. Outlook, Remains Negative Outlook Actions: Issuer: VTR Comunicaciones SpA Outlook, Remains Negative RATINGS RATIONALE This rating action reflects VTR's persistent liquidity erosion and weak credit metrics driven by loss of competitiveness combined with a challenging operating and macroeconomic environment in Chile. The company's limited financial flexibility to invest in capex will bring more difficulties for a material reversal of this trend in the next 12 months to 18 months. The rating action also considers the persistent lack of visibility regarding the JV's final capital structure, strategy, capex plans and potential liquidity levers, if any, including the possibility of parental support. The downgrade of the senior unsecured notes to Caa3 reflects its position in the waterfall and capital structure; and the increasing risk of a restructuring and a higher expected loss for these instruments. The senior secured notes at VTR Comunicaciones SpA rank pari passu with VTR's existing revolving credit facilities (RCFs), and share the same collateral, including pledges over the shares of VTR Comunicaciones SpA and VTR.com SpA. The senior secured notes represent the largest portion of VTR's debt, and the notes' rating is aligned with that of the CFR at Caa1. In turn, the senior unsecured notes at VTR do not benefit from any guarantee from operating subsidiaries and are structurally subordinated to the senior secured notes, RCFs at VTR Comunicaciones SpA, and vendor financing (about $70 million), resulting in the unsecured notes being rated Caa3, two notches below the CFR of Caa1. Credit metrics and liquidity deterioration have been driven by lower ARPU and subscriber losses. For the last twelve months ended December 2022, VTR posted a Moody's adjusted leverage of 11 times and EBITDA margin of 22.1%. Despite potential benefits of consolidation in the market following the execution of the JV, the operating environment will continue to challenge VTR's ability to revert the negative trend and improve credit metrics in 2023-2024. Moody's believes that proforma leverage will remain above 9x with EBITDA margin around 20% in that period. Other Chilean telecom operators have been actively expanding their fiber footprints and divesting infrastructure to make more efficient investments. At the same time, Moody's expects GDP growth in Chile to contract by 1% in 2023 as financial conditions tighten from central bank rate hikes in response to high inflation, consumption growth moderates in the absence of additional pension withdrawals, and as the phasing out of pandemic emergency spending weighs on demand. VTR has around CLP70 billion in vendor financing coming due in the short term, that has historically rolled over. While the company has two committed revolving credit facilities, totaling about $247 million ($200 million due in June 2026, denominated in US dollars; and CLP45 billion due in June 2026 denominated in Chilean pesos); liquidity remains weak. As of December 2022, VTR had CLP40 billion ($50 million) in cash and posted negative free cash flow at CLP79.3 billion ($99 million) for the last twelve months, including Moody's standard adjustments. Moody's expects FFO generation would be very limited, only enough to cover basic costs and interest expenses. Further liquidity pressure arises from the company's capex needs to protect market share, and potential additional outflows related to the four pending class actions requesting compensation related to deficiencies on the quality of the internet service during the pandemic, which are still pending resolution. Governance is a key consideration for this rating action. Considerations include the persistent negative operating track record, liquidity erosion, tolerance to high leverage, reduced financial flexibility and limited visibility into the new company's strategy and final capital structure. The negative outlook reflects the uncertainty around the company's cash flow generation capacity in the current global and domestic environment in Chile, increasing the risk of a distressed exchange or debt restructuring. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The ratings could be downgraded if VTR's liquidity erosion continues, resulting in a debt restructuring with higher than expected losses to creditors. The continued lack of visibility of a detailed strategic plan that includes operational guidance, capital structure, potential parental support and other sources of liquidity, could also put negative pressure on the ratings. Given the negative outlook, an upgrade is unlikely in the short term; however, the outlook could be changed to stable if VTR improves its liquidity profile and financial flexibility. Additionally, positive pressure could arise if the company shares clear details on its strategic plan, including expected synergies, capital structure, financial policies and liquidity management or other considerations that would improve bondholders protection, like explicit support from the shareholders. The principal methodology used in these ratings was Telecommunications Service Providers published in September 2022. Following the execution of the JV on October 6, 2022, the company offers mobile, broadband, pay TV and fixed telephony. As of December 2022, VTR reported 355,400 mobile subscribers and 2.5 million fixed revenue generating units served through its network that passes 4.3 million homes. VTR reported revenue of around CLP499 billion for the 12 months that ended December 2022. =========== P O L A N D =========== INPOST SA: Fitch Affirms LongTerm IDRs at 'BB', Outlook Stable -------------------------------------------------------------- Fitch Ratings has affirmed InPost S.A.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB' with a Stable Outlook and senior unsecured debt at 'BB' with a Recovery Rating of 'RR4'. The ratings are constrained by InPost's small scale and weak diversification relative to large vertically integrated peers' and high execution risk outside its home market in introducing automatic parcel machine (APM) networks. The Stable Outlook reflects its expectation of InPost's increasing EBITDA and operating cash flow, mainly driven by organic growth, which should enable deleveraging to within its rating sensitivities in 2023, in line with its previous expectations. Fitch projects an increase of EBITDA margin in 2023, after a drop in 2022, following favourable contract repricing in 4Q22. Rating strengths are InPost's strong domestic position in Poland, supported by a first-mover advantage, satisfactory integration of Mondial Relay SAS (MR), a pick-up and drop-off (PUDO) delivery business in France acquired in 2021, and high growth potential in the e-commerce market in general. Concentration risk is mitigated by long-term contracts with major customers, which are repriced annually. KEY RATING DRIVERS Expected Improvement of EBITDA Margin: Fitch expects InPost's Fitch-defined EBITDA (after lease-related interest and depreciation) margin to increase to 20.3% in 2023 (2022: 18.9%), following a repricing of contracts in 4Q22. It is also supported by growth of parcels, although at a slower rate due to a tougher macroeconomic environment. Fitch expects EBITDA margin to further improve to about 22.3% in 2026, supported by annual repricing of contracts, the realisation of efficiencies in MR and positive contribution from the international segment (outside of France) from 2024 onwards. Deleveraging on Track: Fitch expects InPost's deleveraging to be supported by volume growth and increases of EBITDA and operating cash flow from 2023. Fitch forecasts funds from operations (FFO) net leverage at about 3x in 2023 and 2.2x in 2024, which is below its negative rating sensitivity of 3.0x. Increasing Competition in Poland: InPost remains a market leader in Poland with 43% market share in 2022 (2021: 40%), which Fitch expects to continue in the medium-to-long term. Competition is growing in the APM segment where its share fell to 67% in 1Q23 (2021: 87%), although its share of lockers is high at 83%. Fitch views this risk as mitigated by competitors' smaller scale of operations and their less integrated delivery model (first to last mile). Fitch expects the e-commerce market in Poland to continue to expand, since it is still underdeveloped in comparison to western European markets, in turn supporting InPost's growth. Competitive Edge in Polish Market: InPost's strategy aimed at customer convenience by offering services through a dense network of APMs that are available 24 hours a day, competitive pricing per parcel, as well as being the first mover on the market provide the company with an advantage over its competitors in Poland. Its view is also supported by a growing base of loyal and frequent customers that InPost enjoys. In 2022 the number of customers increased 13% yoy to 16.8 million, supported by users ordering at least 13 packages on an annual basis. High inflation, pressure on salaries, as well as high energy and fuel costs, have led to rapidly rising costs of deliveries to-door, dominated by InPost's competitors. In contrast InPost's cost of deliveries to automated parcel lockers is well below to-door deliveries. Established Presence in France: In Fitch's view, InPost's well-established PUDO delivery business through MR results in lower execution risk in France than other international businesses, including the UK. MR is the second-biggest PUDO service company in France after state-owned La Poste, with a market share exceeding 40% in the customer-to-customer (C2C) market. InPost is looking to leverage on its APM technology to gradually shift MR's predominantly PUDO delivery service offering towards its APM business, which would enable them to improve profitability. Although InPost is facing some operational challenges post-acquisition, it is on track with APM development, increasing their number to 2,417 in 2022 (2021: 313). International to Break-even in 2024: Fitch forecasts InPost's international business (excluding France) to break-even in 2024. Fitch expects InPost to focus on dense cities in the UK to establish their APM network and partnership with major merchants to mitigate the execution risk of rolling out the APM network. Following operational challenges and capacity shortages in 2022, InPost is considering developing its own logistics network, either organically or by acquisitions, as soon as they reach sufficient scale of operations, which InPost expects by end-2023. Fitch believes these measures could help the UK business break-even in 2024. Cross-border Synergies Gaining Traction: InPost's growing presence in different markets has started to show the benefit of synergies. Its technology leverages on accumulated data and experience to improve their operational efficiency such as cost and delivery times, which ultimately reduce execution risk. Geographic expansion provides flexibility in asset allocation and enhances ties with other pan-European merchants, such as Vinted, Europe's largest C2C fashion marketplace, with whom InPost has signed a pan-European agreement. DERIVATION SUMMARY Fitch assesses InPost's rating using its Generic Ratings Navigator. Despite similarities in the nature of business, comparability with large international logistics operators such as Deutsche Post AG (DP, BBB+/Positive) or La Poste (A+/Stable) is limited. This is due to InPost's significantly smaller scale, weak international presence and lack of service-offering diversification, which is mitigated by its dominant position and solid record of operations in the APM market in Poland. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - InPost's parcel volumes to continue to grow, on average 15% during 2023-2026 on network expansion and fast-growing e-commerce - Contracts to benefit from annual repricing mechanism - International business to gain momentum and break-even in 2024 - Capex (including maintenance capex) on average at PLN1.2 billion annually over 2023-2026 - Acquisitions totaling PLN0.5 billion in 2023-2026 RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Funds from operations (FFO) net leverage below 2.3x or net debt/Fitch-defined EBITDA (after lease) below 2.0x on a sustained basis, supported by a more conservative financial policy - Successful implementation of its international expansion strategy, supporting growth and diversification Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Negative free cash flow (FCF) through the cycle due to lower operating margin, high dividend pay-outs or new acquisitions - FFO net leverage above 3.0x or net debt/Fitch-defined EBITDA (after lease) above 2.7x on a sustained basis - FFO interest coverage below 3.0x or EBITDA interest coverage below 3.5x LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: As of end-2022 InPost had PLN433 million of unrestricted cash, supported by a PLN800 million available revolver facility, of which PLN241 million was drawn at year-end. Fitch expects this to be sufficient to cover short-term debt maturities of PLN339 million and Fitch-forecast negative FCF post-acquisitions of PLN267 million in 2023. In January 2021, InPost entered into an agreement with banks for a PLN1,950 million term loan and a PLN800 million revolving credit facility, which can be drawn in multiple currencies. Both facilities do not have maturities until 2026. ISSUER PROFILE InPost is a leading parcel delivery service in Poland, providing package delivery services through its nationwide network of 'locker-type' APMs as well as to-door delivery and fulfilment services. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- InPost S.A. LT IDR BB Affirmed BB LC LT IDR BB Affirmed BB Natl LT BBB(pol)Affirmed BBB(pol) senior unsecured LT BB Affirmed RR4 BB ========= S P A I N ========= ROOT BIDCO: Fitch Affirms LongTerm IDR at 'B', Outlook Stable ------------------------------------------------------------- Fitch Ratings has affirmed Root Bidco S.a.r.l.'s (Rovensa) Long-Term Issuer Default Rating at 'B' with a Stable Outlook, and downgraded its senior secured rating to 'B' from 'B+'. Its Recovery Rating has been revised to 'RR4' from 'RR3'. The rating is constrained by high EBITDA gross leverage, which Fitch estimates at 6.5x as of June 2023, after adjusting for its debt-funded Cosmocel acquisition in February 2023. However, Fitch expects EBITDA gross leverage to fall below 6x from 2024 on organic EBITDA growth, in line with robust demand growth for bio-nutrition and bio-control solutions; synergies from Cosmocel; and the effect of an increased sales force. The downgrade of the senior secured rating reflects a revision of the Recovery Rating to 'RR4' from 'RR3' due to a higher-than-expected increase in debt to finance acquisitions and a surge in working capital. KEY RATING DRIVERS Debt Rises on Acquisition, Working Capital: Fitch expects gross debt to reach EUR1.1 billion in June 2023, from EUR687 million in June 2022, as Rovensa completed the acquisition of Cosmocel, a highly-strategic and complementary business partly funded by an EUR387 million additional term loan B (TLB). Moreover, increasing inventories due to inflation of production costs and late buying by farmers during this season led to increasing use of credit facilities. In May 2023, Rovensa further increased its TLB by EUR40 million to reduce its use of the revolving credit facility (RCF), which improves liquidity but adds to non-amortising debt. Deleveraging Expected: Fitch expects EBITDA gross leverage to fall to 6x in June 2024 on a 7% like-for-like EBITDA growth, and remain below 6x to 2026. However, EBITDA interest coverage will weaken to about 2.4x in 2024-2026 on higher base rates and the impact of higher-cost debt. FCF to Improve from 2025: Rovensa generated negative free cash flow (FCF) over the past three years partly due to non-recurring costs and growing working capital in line with its growth and acquisitive strategy. Fitch expects FCF to further deteriorate in June 2023, before it improves and turns positive from 2025 as the company focuses on integrating and extracting synergies from Cosmocel, on reducing working capital needs and on keeping costs under control. The increased salesforce will enable the company to grow sales volumes, especially as Cosmocel offers cross-selling opportunities. Reduced M&A Activity: Fitch expects Rovensa to pause material acquisitions in the next 12 to 18 months given its current leverage, and would see any material acquisition during that period leading to a sustained increase in leverage as a lack of financial discipline. Cosmocel Improves Diversification, Scale: The Cosmocel acquisition will significantly bolster Rovensa's overall diversification and market leadership. With combined revenues expected to exceed EUR700 million, it has become the leading global supplier of bio solutions. Moreover, it has significantly expanded its footprint in the Americas given Cosmocel's leading position in Mexico and good market position in the US and its local manufacturing facilities. It has further extended the group's product line and crop exposure, and reduced the weight of Europe to about 50% of revenues. These benefits will be tangible in 2023 as Cosmocel outperforms while its legacy division faces operational challenges, due notably to adverse weather in Iberia. Sponsors Commitment to Financial Structure: Similar to the Oro Agri acquisition in 2021, shareholders have injected significant additional equity in Rovensa to keep the transaction neutral on a net debt/EBITDA basis, after taking into account adjustments and synergies. This mitigates the financial risk of target over-valuation for its credit profile as its transactions have been made on fairly high multiples. Rovensa has been acquisitive over the past four years, acquiring small and medium-sized targets, frequently including earnouts in the transactions. Bio-nutrition Organic Growth Opportunity: Rovensa has reinforced its position in the bio nutrition sector, which is set to experience solid growth on an increasing need for yield improvements as well as demand for sustainable solutions. Rovensa is focused on high-value fruits and vegetables, a more resilient segment compared with other crops. Although purchasing has been delayed in the 2022-2023 fiscal year ending in June, Fitch believes that fairly high food prices will continue to incentivise farmers to preserve yields despite increased input costs, and that demand for organic solutions will continue to grow dynamically in the coming years. High-Margin Products: The niche products of Rovensa support its competitive position, stable cash flow generation and pricing power, which allow it to defend its high margins versus macro-nutrient and commoditised fertiliser companies. As crop protection and crop nutrition account for a significantly low share of costs for growers of fruit and vegetables, Rovensa has strong capabilities to pass on potential increases in raw material prices. Barriers to Entry: An evolving regulatory environment, the knowledge-intensive nature of the business as well as the diversified and evolving registration process serve as barriers to entry. The agrochemical market, though, remains seasonal and characterised by stiff competition from sizeable producers with strong R&D capabilities. Despite breadth of products and a solid niche position Rovensa has limited diversification, with its focus on agrochemicals within a limited geography, exposing the business to regional market disruption and unfavourable weather patterns. DERIVATION SUMMARY Fitch compares Rovensa with private equity-owned chemical producers Nouryon Holding B.V. (Nouryon, B+/Stable), Nobian Holding 2 B.V. (Nobian, B/Stable), Italmatch Chemicals S.p.A. (B/Stable), Lune Holdings S.a.r.l. (Kem One, B/Stable) and Roehm Holding GmbH (Roehm, B-/RWN). Rovensa's focus on specialty solutions, which provides price and cash flow visibility as well as steady growth is comparable to Nouryon's. However, Rovensa is significantly smaller and less diversified than Nouryon. Moreover, Rovensa has higher leverage due to its acquisitive strategy. Italmatch has similar scale and focus on specialty solutions as Rovensa and a diversified industrial footprint. While Rovensa has less diversified end-markets, the specialty crop nutrition industry growth is stronger than Italmatch's markets, and more resilient. Nobian's commodity exposure makes it more exposed to volatility in feedstock and selling prices than Rovensa; however, both companies have maintained high margins. Rovensa is smaller and lacks Nobian's vertical integration but is more geographically diversified. Rovensa's leverage is also higher than Nobian's. Although its leverage is significantly higher, Rovensa demonstrates more stable cash flows and higher margins that are supported by the essential nature of its products for crop growth and its strategic focus on niche products in comparison to Kem One. Roehm's and Rovensa's leverage are similar but Roehm's cash flow profile is more cyclical than Rovensa's due to its exposure to the construction, automotive and industrial sectors, as well as to commodity prices. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer - Revenue growth of 33% in 2023 and 25% in 2024, driven by price increases and acquisitions, before easing to mid-single digits in 2025-2026 - Stable EBITDA margin of 20%-21% in 2023-2026 - No acquisitions in 2024 and 2025, and resuming from 2026 at EUR50 million per year - Capex of about 5% of sales to 2026 - Negative changes in working capital per year due to acquisitions and growth - No dividends Recovery Analysis Assumptions The recovery analysis assumes Rovensa is reorganised as a going-concern (GC) rather than liquidated in bankruptcy. Fitch uses a GC EBITDA of EUR120 million, which reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which Fitch bases the valuation of the company. Its assumption takes into account the acquisition of Cosmocel but reflects significant deterioration in market conditions followed by a modest recovery. Fitch uses a multiple of 5.5x to estimate a GC enterprise value for Rovensa to reflect its leadership position in the fast-growing niche bio-solutions market, significant barriers to entry due to technical expertise and its increased geographical diversification and scale. Rovensa's revolving credit facility (RCF) is assumed to be fully drawn. Its TLB ranks pari passu with the RCF. Fitch assumes that Rovensa's factoring programme will be replaced by a super-senior facility. After deducting 10% for administrative claims, its analysis generated a waterfall-generated recovery computation (WGRC) in the 'RR4' band, indicating a 'B' TLB rating. The WGRC output percentage on current metrics and assumptions is 48%. The Recovery Rating of 'RR4' compared with the previous 'RR3' reflects a higher-than-anticipated debt quantum. RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Increase in scale driven by organic and/or inorganic growth while reducing EBITDA gross leverage to below 4x on a sustained basis - EBITDA interest cover above 3x on a sustained basis - FCF margin consistently above 5% Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Ambitious debt-funded acquisitions, dividend payments and/or weaker-than-expected market dynamics leading to EBITDA gross leverage above 6.5x on a sustained basis - EBITDA interest cover below 2x on a sustained basis - Negative FCF generation through the cycle LIQUIDITY AND DEBT STRUCTURE RCF Provides Ample Liquidity: Rovensa's liquidity is supported by a large RCF of EUR165 million that Fitch expects to be mostly undrawn following an EUR40 million tap issue on the TLB in 2023. Fitch believes that this provides sufficient liquidity to fund seasonal fluctuations in working capital, which are significant in agricultural markets. It could also provide funding for opportunistic bolt-on acquisitions. Limited Refinancing Risk: Rovensa's refinancing risk is limited with main debt maturities only in 2027. The company also has a factoring programme and uncommitted bilateral credit facilities. ISSUER PROFILE Rovensa is a producer of bio-nutrition, bio-control and off-patent crop protection products with a particular focus on high-value crops, such as fruits and vegetables, with dual headquarters in Portugal and Spain. It is owned by private equity sponsors Bridgepoint and Partners Group. SUMMARY OF FINANCIAL ADJUSTMENTS Depreciation of rights-of-use assets of EUR7.5 million and lease-related interest expense of EUR1.1 million reclassified as cash operating costs. Lease liabilities of EUR23 million removed from financial debt. Use of EUR80.7 million factoring added to financial debt. Change in working capital (outflow) and change in short-term debt (inflow) adjusted by EUR19.3 million. Factoring interest of EUR3.6 million reclassified to interest paid. Shareholder loans excluded from financial debt. Capitalised borrowing costs of EUR14.3 million added back to financial debt Non-recurring costs of EUR18.8 million added back to EBITDA. Capitalised internal R&D costs of about EUR7 million deducted from EBITDA. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Root Bidco S.a.r.l. LT IDR B Affirmed B senior secured LT B Downgrade RR4 B+ =========== T U R K E Y =========== SISECAM: Fitch Affirms LongTerm IDR at 'B', Outlook Negative ------------------------------------------------------------ Fitch Ratings has affirmed glass manufacturer Turkiye Sise ve Cam Fabrikalari AS's (Sisecam) Long-Term Issuer Default Rating (IDR) and senior unsecured at 'B'/RR4. The Outlook on the IDR is Negative. The ratings are constrained by Sisecam's strong exposure to the Turkish economy, without sufficient mitigating factors that would drive its Foreign-Currency IDR above the 'B' Turkish Country Ceiling. Rating strengths are material shares in the glass industry in its domestic market and certain export markets in eastern Europe, diverse end-market exposure, and a strong financial profile. The Negative Outlook reflects the likely correlation of future rating actions with changes to the sovereign rating, assuming that the Country Ceiling moves in line with the sovereign IDR. KEY RATING DRIVERS Diversified Business Profile: Sisecam's business model consists of both cyclical and defensive industries. The company saw robust growth in turnover in 2022 (197% y-o-y) across all segments despite varying cyclicality in its major industries. Chemicals and architectural glass were the major contributors to revenues and EBITDA at 56% and 70%, respectively, in 2022. It has 45 production facilities across 14 countries. Concentration in Core Markets: Fitch expects reduced geographical concentration to Sisecam's domestic market following overseas expansion in the US. In 2022, the share of domestic sales was 37% versus 63% generated overseas. Europe sales contributed 20% in 2022 and while the US made its first contribution at 13%. Sustained EBITDA Margins: Fitch expects energy and raw material price increases to drive EBITDA margins lower in 2023 before they gradually increase from 2024 onwards. Overall, Fitch expects Sisecam to continue to be able to pass on cost increases to end-customers and sustain EBITDA margins above 20% to 2027. The company has implemented cost control in the past to reduce pressure on margins, while its product mix enabled it to prevent margin dilution in 2022. Segments like chemical saw increased gross profit margins in 2022 to 38% from 35% previously, while flat glass and glass packaging were hardest hit by increased raw material prices. Capex Intensity to Rise: The company plans on allocating a majority of its capex towards greenfield and brownfield projects in architectural glass and glass packaging. Fitch expects capex to gradually increase towards 10% of sales in 2023-2024 from 8% in 2022. Sisecam's investments in the US are pending regulatory environmental permits and fall outside Fitch forecast period of 2023-2026. However, Fitch expects diversification and profitability to improve once the construction of its US natural soda ash plant is completed. PSL Considerations: Fitch continues to rate Sisecam on a standalone basis under its Parent Subsidiary Linkage (PSL) Criteria. Turkiye Is Bankasi A.S. (B-/Negative) owns 51% of Sisecam. Fitch applied the criteria using the 'stronger subsidiary' approach. Fitch assesses legal ring-fencing factors as 'insulated' and access & control factors as 'porous', resulting in a standalone approach. This reflects Fitch's general approach towards Turkish banks and their industrial subsidiaries. Comfortable Leverage; Moderate FX impact: Fitch forecasts continuous deleveraging capacity with funds from operations (FFO) net leverage falling below 1x in 2025. Sisecam has a conservative leverage profile and ample headroom under its bank covenants. Foreign-exchange (FX) exposure has moderate impact on profitability. The company benefits from strong export revenues and hard-currency generation through international sales, which limits FX volatility risk. DERIVATION SUMMARY Sisecam has a strong financial profile, which is comparable with higher-rated peers such as Compagnie de Saint-Gobain (SGO), Arcelik A.S. (BB-/ Negative) and significantly better than lower-rated peers such as HESTIAFLOOR 2 (B/Stable). Fitch expects Sisecam to maintain average FFO net leverage of 1.1x in 2023 and 2024 compared with 1.7x, 2.6 and 6.3x for SGO, Arcelik and Hestiafloor 2, respectively. Sisecam also has a higher FFO margin than its peers due to its low-cost base and leading position in its core markets (Turkey, Russia and Eastern Europe). Sisecam recorded an FFO margin of 23.8% in 2022, significantly higher than SGO's 9.6% and Arcelik's 11.7%, and Ardagh Group S.A.'s 11% (B/Stable). In Fitch's view, Sisecam has healthy geographical diversification and exposure to several industries such as construction, auto, and healthcare. However, the company is still significantly smaller in size than SGO, Arcelik and Ardagh and generates the majority of its revenue from emerging markets, notably Turkiye. KEY ASSUMPTIONS - Double-digit revenue growth for the next four years across Turkiye and overseas, supported by added capacity, new products and markets and favourable FX impact on sales - EBITDA margin to decrease in 2023 due to energy and raw material price increases before gradually increasing from 2024 onwards - Higher capex due to new greenfield and brownfield projects - Dividends distribution to increase with profitability - Share buy backs to continue as per company buyback programme RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Fitch does not expect the ratings to be upgraded while they are constrained by Turkiye's Country Ceiling Factors That Could, Individually or Collectively, Lead to Downgrade: - A downgrade of Turkiye's Country Ceiling - FFO margin below 8% - FFO net leverage above 4.5x on a sustained basis LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: At end-2022, Sisecam had TRY18.3 billion of cash available, after restricting TRY1.9 billion to account for intra-year working-capital swings. Available cash is insufficient to cover its forecast negative FCF for 2022 of around TRY7.4 billion and debt maturities of TRY18.2 billion, although this can be covered by uncommitted bank lines of USD750 million. Cash balances stood at TRY19.6 billion at end-1Q23. As Sisecam is a national blue-chip entity with strong bank relations Fitch believes uncommitted bank lines with Turkish banks would remain available for the company in a stress scenario. This is similar to other Turkish blue-chip companies, which suffer from an absence of committed revolving credit facilities and have a high dependency on short-term funding. ISSUER PROFILE Sisecam is a Turkish-based multinational industrial corporation with manufacturing operations in 14 countries. It is one of the world's top two producers in glassware, and among the top five global producers in glass packaging and flat glass. Şişecam is also the second-largest soda ash producer and a world leader in chromium chemicals. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Turkiye Sise ve Cam Fabrikalari AS LT IDR B Affirmed B senior unsecured LT B Affirmed RR4 B =========================== U N I T E D K I N G D O M =========================== ABRA GROUP: Moody's Assigns First Time 'Caa1' Corp. Family Rating ----------------------------------------------------------------- Moody's Investors Service has assigned a first-time Caa1 corporate family rating to Abra Group Limited (Abra) and Caa1 ratings to the $953 million senior secured notes and $458 million senior secured exchangeable notes due 2028 issued by Abra Global Finance in March 2023 and unconditionally and irrevocably guaranteed by Abra. The outlook for all ratings is stable. Issuer: Abra Group Limited Corporate Family Rating, Assigned Caa1 Assignments: Issuer: Abra Global Finance Backed Senior Secured Regular Bond/Debenture, Assigned Caa1 Outlook Actions: Issuer: Abra Group Limited Outlook, Assigned Stable Issuer: Abra Global Finance Outlook, Assigned Stable RATINGS RATIONALE Abra's Caa1 rating reflects the group's size, scale, market position and good business profile of its main subsidiaries Gol Linhas Aereas Inteligentes S.A. ("Gol", Caa2 negative) and Avianca Group International Limited ("Avianca", B3 stable), with significant cross-selling, network and loyalty program coordination synergies, and increased connectivity and geographic diversity within Latin America. The Abra group will offer over 1,700 daily flights with over 100 billion in annual ASKs, with a fleet of over 300 aircrafts, serving 155 destinations and with over 80 million passengers transported and 30 million of members in its loyalty programs. The company's adequate liquidity at the holding level also supports the rating. The rating is constrained by the credit profile of Gol and Avianca, and by Abra's dependence on cash from the subsidiaries to cover interest payments at the holding level. Gol's weak liquidity and its dependence on debt roll overs to remain solvent constrain Abra's rating. The company's evolving corporate governance standards as a recently created company, and the current lack of track record of realized synergies also constrain the rating. The Caa1 ratings of Abra's senior secured notes and senior secured exchangeable notes due 2028 reflect the instruments' collateral package, which includes a first priority lien on the subsidiaries that hold 100% of the equity interests of Avianca, including Avianca's convertible debt investment in SKY (which converts into 41% of the equity interest in SKY) and 100% economic interest in Viva Colombia; a first priority lien on the subsidiaries that hold 54% of the equity in Gol; a first priority lien on Gol's secured notes due 2028 held by Abra and when replaced on Gol's exchangeable senior secured notes due 2028; and a first priority lien on the cash accounts at Abra and a pledge of any intercompany loans at Abra. The secured notes comprise the totality of the debt issued at Abra's holding level. LIQUIDITY Abra has an adequate liquidity profile, with an estimated uncommitted cash position of about $100 million as of May 2023, and only two debt instruments maturing in 2028. The company's main source of cash relates to the cash payments from Gol's secured notes due 2028, and management fees from Gol and Avianca, which provides good coverage for the cash interest payment at Abra, despite Moody's expectations of no dividend payments from Gol or Avianca at least for the next 2 years. Moody's estimates that Abra's sources of cash will cover its cash interest expense by 2x-2.5x. Abra's main cash outflows relate to its notes interest payments and annual expenses at the holding level of approximately $20 million this year. On a consolidated basis, Abra has an estimated $1.1 billion cash position and $1.0 in debt maturing through the end of 2024. RATING OUTLOOK The stable outlook reflects Moody's expectations that Abra's operating and financial performance will remain relatively stable overtime, supported by the performances of its main subsidiaries, Gol and Avianca. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS An upgrade of Abra's rating would require an improvement in the credit profile of Gol or Avianca. Additional sources of cash that improves its coverage of cash interest could also lead to an upgrade of its rating. Abra's rating could be downgraded if the credit profile of Gol or Avianca deteriorates, or if its liquidity profile at the holding level deteriorates, with coverage of cash interest below 1x on a sustained basis. ESG CONSIDERATIONS Abra's CIS-5 indicates that the rating is lower than it would have been if ESG risk exposures did not exist and that the negative impact is more pronounced than for issuers scored CIS-4. Abra faces high environmental risk (E-4) due to carbon transition. This will primarily depend on evolving global decarbonization policies and regulations which may increase operating costs for airlines. Further, the desire to reduce carbon emissions may lead to reduced travel, in particular for business purposes, much of which can effectively be done virtually, as demonstrated during the pandemic. Abra faces high industry-wide social risks (S-4) related to demographic and societal policies moving to reduce carbon emissions. Abra also has exposure to governance factors (G-5) mainly related to its subsidiaries' liquidity and capital structure. Abra is a privately-held company. The company's main shareholder is Gol's founding family through its 31.9% indirect stake, followed by Avianca's post-exit Chapter 11 shareholders (minority shareholders (21.3%), South Lake One LLC (14.3%), Elliott International LP (11.5%), United Airlines, Inc. (Ba1 stable) (8.4%), Kingsland (6.9%) and Viva Air Ltd. (5.7%)). Abra's board of directors currently has 8 members, of which 4 are appointed by Gol's founding shareholders and 4 are appointed by Avianca's shareholders. The company intends to add 1 independent member to its board in the next few months. COMPANY PROFILE Created in 2022 and incorporated in the UK, Abra is the platform company that holds 54% of the equity in Gol Linhas Aéreas Inteligentes S.A., one of Brazil's leading domestic low-cost carrier, 100% of Avianca Group International Limited, a leading Latin American airline serving the domestic markets of Colombia, Ecuador and Central America and international routes in North, Central and South America, Europe and the Caribbean, as well as a financial investment in SKY Airline ("SKY"), a Chilean low-cost domestic carrier, and a non-controlling 100% economic interest in VIVA Air ("VIVA"), a Colombian low-cost domestic carrier. In 2022, Moody's estimates that Abra's reported pro forma consolidated revenue of $7.0 billion. The principal methodology used in these ratings was Passenger Airlines published in August 2021. BROADWAY PARTNERS: Goes Into Administration ------------------------------------------- Matt Jones at Powys County Times reports that hope that some of Powys' most isolated areas could get speedier internet hang in the balance after the broadband provider tasked with implementing the networks was placed in administration. Broadway Partners has been working on eight community schemes in the county with the aim of bringing ultrafast fibre connections to more homes in rural areas, Powys County Times discloses. It had also been expected to become the supplier for several others that were still at the stage of assessing demand, Powys County Times states. Customers in this area have been advised by the company and its administrators, Teneo, that its network is still functioning and its usual customer service channels remain open, Powys County Times notes. According to Powys County Times, Powys County Council says it is keeping a close eye on developments. There are hopes that a buyer may be found during the administration process, but, if necessary, the council will look to work with the affected communities to source an alternative provider, Powys County Times relates. CANARY WHARF: Moody's Cuts CFR to Ba3, Under Review for Downgrade ----------------------------------------------------------------- Moody's Investors Service has downgraded to Ba3 from Ba1 and placed on review for further downgrade the long term corporate family rating and the senior secured instrument ratings of Canary Wharf Group Investment Holdings plc (CWGIH or the company). The outlook remains unchanged at ratings under review. RATINGS RATIONALE Moody's downgraded the company because of (1) the difficult operating and funding environment for real estate companies that the rating agency expects will persist for at least the next twelve months and will make it difficult for CWGIH to improve its already weak credit metrics (2) elevated refinance risk given the more than GBP1.4 billion of debt that needs to be refinanced in 2024 and 2025, and (3) the likely high reliance on disposals (and potentially more shareholder support) to deleverage and refinance or repay upcoming maturities amid still constrained UK real estate investment markets with cautious investor appetite leading to low transaction volumes and making it difficult to sell assets without offering substantial discounts. The recent banking turbulence has negatively impacted sentiment and softened the availability of funding for the sector, delaying a recovery of investment markets and putting further downward pressure on values. However there is no credit crunch and secured bank lending remains functional, representing an economically attractive refinancing alternative to the bond market, which is currently dislocated. In Moody's view, the company has been somewhat aggressive in managing its refinance risk by overly prioritising obtaining the best covenant lite structure over refinancing debt well before its due date. More positively (1) all the upcoming secured debt maturities in 2024 and 2025 are in ringfenced SPVs with no recourse to CWGIH and (2) the company continues to benefit from strong shareholder support including lending GBP150m of residential proceeds into the CWGIH group to date (mostly to fund development capital spend). CWGIH's Moody's adjusted fixed charge coverage remains weak and stood at 1.1x as of December 31, 2022 and is not expected to improve over the next 18 months. The capacity under the fixed charge coverage ratio of the bond incurrence covenant has reduced and the ratio stood at 1.33x as of December 31, 2022 versus a minimum level of 1.25x until June 30, 2023, 1.30x until June 30, 2024, and 1.35x thereafter. However, if the bond incurrence covenants are not met under the bond documentation (1) the company is still able to refinance existing debt as long as the amount, security and collateral remain broadly unchanged and (2) CWGIH is able to raise additional debt under various buckets totaling up to GBP450 million. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS Governance considerations the rating agency considers include the company's tolerance for leverage, and its approach to managing its liquidity and upcoming debt maturities. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS An upgrade is unlikely given the ratings are on review for downgrade. The review will focus on (1) the company's plans to refinance upcoming maturities and any mitigating actions the company takes to protect its balance sheet and liquidity including potential asset disposals and support from shareholders to maintain its financial policy target of keeping net LTV below 50% and (2) the potential impact of the worsening operating and funding environment on CWGIH's credit metrics. STRUCTURAL CONSIDERATIONS The senior secured notes, which Moody's views as unsecured because they do not benefit from a direct fixed charge security over any properties, could be downgraded if there is a deterioration in the quality of the unencumbered pool or a weakening of unencumbered asset coverage for unsecured creditors. In line with Moody's REITs and Other Commercial Real Estate Firms methodology, CWGIH's Ba3 CFR references a senior secured rating because secured funding forms most of the company's funding mix. Moody's rates CWGIH's senior secured notes, which it views as unsecured, at the same level as the CFR because the company's unencumbered asset pool is of sufficient quality and provides adequate asset coverage to unsecured creditors. However, there is a risk the company may pledge currently unencumbered assets to either raise new secured debt or to aid it in refinancing upcoming secured debt, which would weaken the credit standing of unsecured creditors. The company had GBP1.15 billion of unencumbered investment property assets (excluding land) as of December 31, 2022. LIST OF AFFECTED RATINGS Issuer: Canary Wharf Group Investment Holdings plc Downgrades, Placed On Review for further Downgrade: LT Corporate Family Rating, Downgraded to Ba3 from Ba1 Senior Secured Regular Bond/Debenture, Downgraded to Ba3 from Ba1 Outlook Actions: Outlook, Remains on Ratings Under Review PRINCIPAL METHODOLOGY The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2022. COMPANY PROFILE The company develops, manages and currently owns interests in approximately 9 million square feet of mixed-use space including over 1,100 Build to Rent apartments. The investment properties, developments, and development land it owns were valued in aggregate at GBP8.3 billion as of December 31, 2022, with 38 income-producing properties generating GBP294 million of gross rental income. The company is the largest private sector led developer in Europe. The Estate consists of 128 acres of land and includes 30 office buildings, five shopping malls with over 300 shops, cafes, bars, restaurants, and amenities, and over 16.5 acres of open space. In addition to directly managing its properties, the company also maintains the roads, car parks, open spaces, gardens and waterfront promenade and other common areas on the Estate. The company is one of the largest sustainable developers in the UK and has purchased 100% electricity from renewable sources since 2012 and sent zero waste to landfill since 2009. CWGIH is ultimately owned on a 50/50 basis between Qatar Investment Authority (QIA) and Brookfield Property Partners L.P. EIDER VF: Enters Administration, Seeks Buyer for Business --------------------------------------------------------- Fred Searle at Fresh Produce Journal reports that Worcestershire-based Eider VF (EVF) has become the latest casualty in the global vertical farming sector, announcing that it has entered administration and is selling the business and its assets. Internationally, the vertical farming industry has encountered major challenges in the past two years, not least soaring electricity prices, lower demand from cash-strapped consumers, and even higher construction costs, Fresh Produce Journal notes. David Shambrook and Phil Armstrong of FRP Advisory Trading Ltd (FRP) were appointed administrators of Eider VF Limited on May 15, 2023, and have invited offers to acquire the business and its assets, with a deadline of June 9, 2023 for best and final offers, Fresh Produce Journal relates. For sale are the company's leasehold property, its plant and machinery, fixtures and fittings, office equipment and furniture, and intellectual property, Fresh Produce Journal discloses. Interested parties should contact FRP's Anthony Druce at Anthony.Druce@frpadvisory.com. According to Fresh Produce Journal, in a statement, the administrators said: "The business entered into administration after a period of challenging trading conditions left it unable to meet its financial obligations as they fell due. The business ceased trading on appointment and the 17 staff were made redundant." Founded in 2016, EVF develops farms growing leafy produce for the UK mass market. Its products are grown in standard warehouses that are augmented to house vertical farms. GREENE KING: S&P Affirms 'BB+(sf)' Rating on Class B Notes ---------------------------------------------------------- S&P Global Ratings affirmed its 'BBB (sf)', 'BBB- (sf)', and 'BB+ (sf)' ratings on Greene King Finance PLC's class A, AB, and B, notes, respectively. Greene King Finance is a corporate securitization of the U.K. operating business of the managed and tenanted pub estate operator Greene King Retailing Ltd., the borrower. It originally closed in March 2005 and has been tapped several times since, most recently in February 2019. The transaction features three classes of notes (A, AB, and B), the proceeds of which have been on-lent by Greene King Finance, the issuer, to Greene King Retailing, via issuer-borrower loans. The revenues generated by the assets owned by the borrower, Greene King Retailing, are available to repay its borrowings from the issuer that, in turn, uses those proceeds to service the notes. Each class of notes is fully amortizing and our ratings address the timely payment of interest and principal due on the notes, excluding any subordinated step-up interest. The issuer redeemed the class A5 notes in December 2022. Consequently, the corresponding interest rate swap was also terminated. Business risk profile S&P said, "We have applied our corporate securitization criteria as part of our rating analysis of the notes in this transaction. As part of our analysis, we assess whether the operating cash flows generated by the borrower are sufficient to make the payments required under the notes' loan agreements by using a debt service coverage ratio (DSCR) analysis under a base-case and a downside scenario. Our view of the borrowing group's potential to generate cash flows is informed by our base-case operating cash flow projection and our assessment of its business risk profile (BRP), which we derive using our corporate methodology." Recent performance and events In the financial year 2022 ended on Jan. 1, 2023 (FY2022), Greene King Retailing had disposed of four tenanted pubs and one managed pub from the securitized portfolio, while closing three managed pubs. In the same period, three tenanted pubs were converted to managed and one managed pub was converted to tenanted. Overall, in FY2022, the tenanted segment decreased by 0.9% (by number of pubs) and the managed segment decreased by about 0.24% (by number). Greene King Retailing's estate comprised 1,473 outlets at the end of FY2022, of which 832 were managed and 641 were tenanted. Total revenues were GBP953.8 million, a 13.4% increase from FY2019. At the same time, high and persistent core inflation has remained a challenge to growth, even as energy prices fall. This materially affected EBITDA. Reported EBITDA was 15.4% lower in FY2022 compared to FY2019, resulting in a decrease in the EBITDA margin (to 19.2% from 25.8% over the same period) based on the reported figures. Cost inflation headwinds continue to pose a major challenge to the hospitality sector as a whole, most notably in utilities, wages, and food, even as energy prices fall. S&P said, "We believe that the extraordinary levels of inflation will decline at the end of this year to a level averaging approximately 1.4% from 2024-2026. While companies within the sector have been able to increase prices and pass through some of the cost inflation, weaker consumer confidence and pressure on discretionary spending limit the pace of earnings recovery. As the cost of living crisis continues to constrain customer's disposable incomes, we think that volatility of profitability will remain elevated compared to the historical level, and we expect the recovery in earnings and cash generation to be delayed and more gradual for the industry." S&P continues to assess the borrower's BRP as fair, supported by the group's strong position as one of the top-three pub operators in the U.K., its well-invested estate, and the added flexibility of its cost structure due to high levels of real estate ownership. Issuer's liquidity position Based on the FY2022 fourth quarter investor report, the committed liquidity facility remains fully undrawn with GBP224 million available to the issuer. The subordinated loan facility was fully drawn in December 2022 to help fund the redemption of the class A5 note. Rating Rationale Greene King Retailing's primary sources of funds for principal and interest payments on the outstanding notes are the loan interest and principal payments from the borrower, which are ultimately backed by future cash flows generated by the operating assets. S&P's ratings address the timely payment of interest and principal due on the notes, excluding any subordinated step-up coupons. DSCR analysis S&P said, "Our cash flow analysis serves to both assess whether cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in our base-case and downside scenarios. "Our current view is that the unprecedented inflation severely affected the hospitality sector, delaying cash flow recovery to pre-pandemic levels. We estimate that the hardest-hit sectors will recover to near 2019 levels in 2025. Importantly, we already expect inflation to decline from last year's extraordinary levels to a level averaging approximately 1.4% between 2024-2026. Therefore, the prevailing macroeconomic environment will not have a lasting effect on the industries and companies themselves in our view, meaning that the long-term creditworthiness of the underlying companies will not fundamentally or materially deteriorate over the long term. "Our downside analysis provides unique insight into a transaction's ability to withstand the liquidity stress precipitated by the current inflationary pressures on pubs in the U.K. Given those circumstances, the outcome of our downside analysis alone determines the resilience-adjusted anchor. As a result, our analysis begins with the construction of a base-case projection from which we derive a downside case. However, in view of the delayed recovery driven by the exceptionally high inflation and the challenging macroeconomic conditions, we developed the downside scenario from the base case to assess whether the effect from the prevailing inflationary macroeconomic environment would have a negative effect on the resilience-adjusted anchor for each class of notes. "That said, we performed the base-case analysis to assess whether, after the current stressed economic period, the anchor would be adversely affected given the long-term prospects currently assumed under our base-case forecast." Base-case forecast S&P said, "We typically do not give credit to growth after the first two years, however in this review, we consider the growth period to continue through FY2025 to accommodate both the duration of the effect from inflationary pressures and the subsequent recovery. We expect the earnings and cash flows recovery to pre-COVID-19 levels to take longer than initially anticipated due to cost inflation and pressures on discretionary spending. "Greene King Retailing's earnings depend mostly on general economic activity and discretionary consumer demand. Considering the economic outlook, we continue to forecast a delay in the recovery." S&P's current assumptions for the U.K. are: -- The U.K. economic outlook has improved but continues to face headwinds. We now expect a GDP contraction of 0.5% in 2023, before growth turns positive and averages 1.4% in 2024-2026. -- High and persistent core inflation is still the main challenge to profitability and cash generation, even as energy prices fall. Inflation is expected to rise 5.8% in 2023, before dropping below 2% in 2024-2026. This could particularly impact fuel, utilities, and food inflation even as S&P expects the Bank of England to refrain from any potential rate cuts until 2024, to directly control core inflation. -- Downside risks to S&P's forecasts continue. Risks to global sentiment and energy and commodity prices from an escalation of Russia's war on Ukraine remain elevated, although less so than a few months ago partly thanks to continental Europe's better preparedness for next winter. Considering S&P's macroeconomic outlook and current expectations for the recovery prospects of the sector, it revised its forecasts through to financial year 2025. Considering the potential effects from our macroeconomic outlook and current expectations for the recovery prospects of the sector, S&P has revised its business performance forecasts through to financial year 2025. S&P said, "We expect FY2023 revenues to be about 21.3% higher than 2019 (pre-pandemic) levels. Revenue growth is expected to be supported by a trend toward premiumization and increased spend per head. A rise in costs may be offset to a certain extent by increased prices. Sales volumes are expected to stabilize by the end of 2023, which will offset declines the following two years. Revenue per pub is already higher than 2019 levels, and we expect this trend to continue. "However, considering the cost pressures, we expect the FY2023 EBITDA to be 14.03% lower and the EBITDA margin 29.2% lower than 2019 (pre-pandemic) levels. We expect the EBITDA to gradually recover to 3.8% higher than pre-pandemic levels by 2025. We also expect this to be primarily driven by a faster recovery on managed pubs, while the recovery on tenanted pubs may take slightly longer. At the same time, consolidated EBITDA margins could remain pressured for longer." Downside DSCR analysis S&P said, "Our downside DSCR analysis tests whether the issuer level structural enhancements improve the transaction's resilience under a moderate stress scenario. Greene King Retailing falls within the pubs, restaurants, and retail industry. Considering U.K. pubs' historical performance during the 2007-2008 financial crisis, in our view, a 15% and 25% decline in EBITDA from our base case is appropriate for the managed and tenanted pub subsectors, respectively. "The cost pressures from the prevailing macroeconomic environment has delayed recovery, causing EBITDA to remain close to the 15% and 25% declines we would normally assume under our downside stresses for managed and tenanted pubs, respectively. Therefore, our downside scenario comprises both our short- to medium-term EBITDA projections during the liquidity stress period and our long-term forecast, but with the level of ultimate recovery limited to 15% and 25% lower than what we would assume for a base-case forecast over the long-term for managed and tenanted pubs, respectively. "Our downside DSCR analysis resulted in strong resilience scores for the class A and AB notes and a satisfactory score for the class B notes, which are unchanged from our previous review. This reflects the headroom above a 1.80:1 and 1.30:1 DSCR threshold that is required under our criteria to achieve strong and satisfactory resilience scores, respectively, after considering the liquidity support available to each class of notes." Each class's resilience score corresponds to rating categories--excellent at 'AAA' through vulnerable at 'B'. Within each category, the recommended resilience-adjusted anchor reflects notching based on where the downside DSCR falls within a range (for the class A, AB, and B notes). As a result, the resilience-adjusted anchors for the class A, AB, and B notes would not be adversely affected under our downside scenario. Liquidity facility adjustment As S&P has given full credit to the liquidity facility amount available to each class of notes, a further one-notch increase to any of the resilience-adjusted anchors is not warranted. Modifiers analysis S&P applied a one-notch downward adjustment to the class AB notes to reflect their subordination and weaker access to the security package compared to the class A notes, which is unchanged from our previous reviews. Comparable rating analysis A comparison of the potential ratings (following the modifiers analysis) for notes issued by Greene King Finance and the ratings on the comparable class (by seniority) issued by Mitchells & Butlers Finance PLC shows that the relative ratings for the class A and AB notes are commensurate with the relative strengths and weaknesses between the borrowers in each transaction, while the relative ratings assigned to the class B notes show an inverse relationship with the relative strengths and weaknesses between the two borrowers. However, the class AB notes issue by Greene King Finance are significantly thinner than the class AB notes issued by Mitchells & Butlers Finance, resulting in a one-notch ratings differential between the class AB and B ratings, in the case of Greene King Finance, compared to a three-notch differential, in the case of Mitchells & Butlers Finance. Based on those comparisons, S&P does not apply any additional adjustment due to its comparable rating analysis. Counterparty risk S&P's ratings are not currently constrained by the ratings on any of the counterparties, including the liquidity facility, derivatives, and bank account providers. The notes are supported by hedging agreements with the London branch of Banco Santander S.A. (interest rate swaps for the floating-rate class B1 and B2 notes). S&P said, "We assess the collateral framework as weak under our counterparty criteria, notably due to the type of collateral that can be posted, which we do not view as eligible under our criteria, or lower haircuts for collateral denominated in currencies other than British pound sterling. But because the replacement commitment is sufficiently robust, based on our counterparty criteria, we give credit to it. As the swaps in this transaction are collateralized, we consider the resolution counterparty rating (RCR) on the swap counterparty as the applicable counterparty rating." Outlook S&P said, "We expect the pub sector's earnings volatility to remain elevated over the next 12-24 months as the sector grapples with several issues, with full-year EBITDA recovering to 2019 levels by 2025, pub operators prioritizing agility in meeting shifting consumer preferences, efficiency of their operations and cash generation, and that it will take time to recover the covenant headroom to 2019 levels. Our expectations of recovery in profitability and credit metrics in 2023 and 2024 will be the key factors in shaping our views of issuers' underlying credit quality and will be the main reason for any rating actions." For many rated pub operators, their significant freehold property portfolios offer substantial operational and financial flexibility, and proceeds generated from disposals provide additional source of funding the capital investment underpinning strategic initiatives. In the case of Greene King Finance, In FY2022 the company made modest disposals within the securitized estate of three pubs, which generated GBP2 million in proceeds. S&P does not expect the group to make significant disposals in the near future, and it expects that the quality of earnings will be the defining factor in the pub operators' credit profile compared with the amount of real estate ownership. Downside scenario S&P said, "We may consider lowering our ratings on the class A, AB, and B notes if their minimum projected DSCRs in our downside scenario have a material adverse effect on each class's resilience-adjusted anchor. "We could also lower our ratings on the class A, AB, and B notes if their minimum projected DSCRs in our base case analysis, once the inflationary pressures ease, falls below 1.40:1 for the class A and AB notes and below 1.30:1 for the class B notes, or in our downside scenario worsens each class's resilience-adjusted anchor. This could also happen if a deterioration in trading conditions related to a general reduction in consumers' disposable income reduce cash flows available to the borrowing group to service its rated debt. However, the quality of earnings will, in our view, be largely driven by the ability to manage inflationary cost pressures." Upside scenario Due to the current economic situation, S&P does not anticipate raising its assessment of Greene King Retailing's BRP over the near to medium term. ITEC PACKAGING: Bought Out of Administration, 70 Jobs Secured ------------------------------------------------------------- Business Sale reports that a Mansfield-based packaging business has been acquired out of administration, completing the rescue of a company that fell into insolvency earlier this year. Administrators from FRP Advisory secured the sale of iTEC Packaging (Mansfield) Ltd to packaging group Alpla UK, securing 70 jobs, Business Sale relates. iTEC Packaging fell into administration in April, with FRP's Martyn Rickels, Simon Farr and Allan Kelly appointed as joint administrators to iTEC Packaging (Mansfield) Ltd and sister business iTEC Packaging (Chester-Le-Street) Ltd., Business Sale discloses. Last month, the joint administrators completed the sale of the Chester-Le-Street business to Shalam Packaging Group, which acquired the business and assets as a going concern, rebranding the firm as Shalam Thermoforming (UK) Ltd., Business Sale recounts. According to Business Sale, joint administrator Martyn Rickels said: "iTEC Packaging was a long-established business and player in the dairy supply chain so we're delighted to have secured a new buyer. Alongside the transaction to sell the sister business in Chester-Le-Street, this has helped save nearly 200 jobs in a short space of time, as well as protecting the customer base with ongoing production." MARSTON'S ISSUER: S&P Affirms 'BB+(sf)' Rating on Class A Notes --------------------------------------------------------------- S&P Global Ratings affirmed its 'BB+ (sf)' and 'B+ (sf)' credit ratings on Marston's Issuer PLC's class A and B notes, respectively. Marston's Issuer is a corporate securitization of the U.K. operating business of the managed and tenanted pub estate operator Marston's Pubs Ltd. (Marston's Pubs; the borrower). The transaction originally closed in August 2005, and was subsequently tapped in November 2007. The transaction features two classes of notes (class A and B), the proceeds of which have been on-lent to Marston's Pubs, via issuer-borrower loans. The operating cash flows generated by Marston's Pubs are available to repay its borrowings from the issuer that, in turn, uses those proceeds to service the notes. Each class of notes is fully amortizing and our ratings address the timely payment of interest and principal due on the notes, excluding any subordinated step-up interest. Business risk profile S&P said, "We have applied our corporate securitization criteria as part of our rating analysis on the notes in this transaction. As part of our analysis, we assess whether the operating cash flows generated by the borrower are sufficient to make the payments required under the notes' loan agreements by using a debt service coverage ratio (DSCR) analysis under a base-case and a downside scenario. Our view of the borrowing group's potential to generate cash flows is informed by our base-case operating cash flow projection and our assessment of its business risk profile (BRP), which we derive using our corporate methodology. Recent performance and events In financial year 2022 ended Sept. 30, 2022 (FY2022), Marston's Issuer disposed of three pubs from the securitized portfolio (all managed). Consequently, the tenanted segment remained unchanged (by number of pubs) and the managed segment decreased by about 1.1% (by number). Marston's Issuer's estate consisted of 942 outlets at the end of FY2022, of which 268 were managed and 674 were tenanted. Total revenues were GBP384.2 million, 6.2% lower than FY2019. This is on account of significant disposals in FY2020 and consequently a lower number of pubs in the current financial year compared to FY2019. Revenue per pub improved 11.2% during the same period on the back of both price and volume expansion. Cost inflation headwinds continue to pose a major challenge to the hospitality sector as a whole, most notably in utilities, wages, and food, even as energy prices fall. S&P said, "We believe that the extraordinary levels of inflation will decline at the end of 2023 to a level averaging approximately 1.4% from 2024-2026. While companies within the sector have been able to increase prices and pass through some of the cost inflation, weaker consumer confidence and pressure on discretionary spending limit the pace of earnings recovery. As the cost of living crisis continues to constrain customer's disposable incomes, we think that volatility of profitability will remain elevated compared to the historical level, and we expect the recovery in earnings and cash generation to be delayed and more gradual for the industry." S&P continues to assess the borrower's BRP as fair, which is supported by the business benefiting from the suburban locations of its portfolio of pubs and operations benefiting from a mix of managed and tenanted pubs. Issuer's liquidity position During FY2022, the issuer repaid GBP5 million of the liquidity facility previously drawn. Consequently, as of April 2023, the drawn amount on the liquidity facility stands at GBP15 million. The total amount available for drawing stands at GBP105 million. Of the drawings, which occurred prior to FY2022, GBP2 million was used toward servicing the class B notes. Of the total liquidity facility, the class B notes can draw up to GBP17 million. Rating Rationale Marston's Issuer's primary sources of funds for principal and interest payments due on the outstanding notes are the loan interest and principal payments from the borrower, which are ultimately backed by future cash flows generated by the operating assets. Our ratings address the timely payment of interest, excluding any subordinated step-up coupons, and principal due on the notes. DSCR analysis S&P said, "Our cash flow analysis serves to both assess whether cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in our base-case and downside scenarios. "Our current view is that the unprecedented levels of inflation severely affected the hospitality sector, delaying cash flow recovery to pre-pandemic levels. We estimate that the hardest-hit sectors will recover to near 2019 levels in 2025. Importantly, we already expect inflation to decline from 2022's extraordinary levels to a level averaging approximately 1.4% between 2024-2026. Therefore, the prevailing macroeconomic environment will not have a lasting effect on the industries and companies themselves in our view, meaning that the long-term creditworthiness of the underlying companies will not fundamentally or materially deteriorate over the long term. "Our downside analysis provides unique insight into a transaction's ability to withstand the liquidity stress precipitated by the current inflationary pressures on pubs in the U.K. Given those circumstances, the outcome of our downside analysis alone determines the resilience-adjusted anchor. As a result, our analysis begins with the construction of a base-case projection from which we derive a downside case. However, in view of the delayed recovery driven by the exceptionally high levels of inflation and the challenging macroeconomic conditions, we developed the downside scenario from the base case to assess whether the effect from the prevailing inflationary macroeconomic environment would have a negative effect on the resilience-adjusted anchor for each class of notes. "That said, we performed the base-case analysis to assess whether, after the current stressed economic period, the anchor would be adversely affected given the long-term prospects currently assumed under our base-case forecast." Base-case forecast S&P said, "We typically do not give credit to growth after the first two years, however in this review, we consider the growth period to continue through FY2025 to accommodate both the duration of the effect from inflationary pressures and the subsequent recovery. We expect the earnings and cash flows recovery to pre-COVID-19 levels to take longer than initially anticipated due to cost inflation and pressures on discretionary spending." Marston's Pubs earnings depend largely on general economic activity and discretionary consumer demand. Considering the economic outlook, S&P continues to forecast a delay in the recovery. S&P's current assumptions for the U.K. are: -- The U.K. economic outlook has improved but continues to face headwinds. S&P now expects a GDP contraction of 0.5% in 2023, before growth turns positive and averages 1.4% in 2024-2026. -- High and persistent core inflation is still the main challenge to profitability and cash generation, even as energy prices fall. Inflation is expected to rise 5.8% in 2023, before dropping below 2% in 2024-2026. This could particularly affect fuel, utilities, and food inflation even as S&P expects the Bank of England to refrain from any potential rate cuts until 2024, to directly control core inflation. -- Downside risks to our forecasts continue. Risks to global sentiment and energy and commodity prices from an escalation of Russia's war on Ukraine remain elevated, although less so than a few months ago partly thanks to continental Europe's better preparedness for next winter. Considering its macroeconomic outlook and current expectations for the recovery prospects of the sector, S&P revised its forecasts through to financial year 2025. -- Considering the potential effects from its macroeconomic outlook and current expectations for the recovery prospects of the sector, S&P has revised its business performance forecasts through to financial year 2025. S&P said, "We expect total revenues for FY2023 to be about 2% below 2019 (pre-pandemic) levels, but revenue per pub will likely improve by 16.2% over the same period. We expect revenue growth to be supported by a trend toward premiumization and increased spend per head. A rise in costs may be offset to a certain extent by increased prices. We also expect sales volumes to stabilize by end of 2023 and moderately decline in the following two years. Revenue per managed and tenanted pubs is already higher than 2019 levels, and we expect this trend to continue. "However, considering the cost pressures, we expect the EBITDA for FY2023 to be 28.0% lower and EBITDA margin 26.6% lower than 2019 (pre-pandemic) levels. We expect the EBITDA to remain comparatively lower due to a lower number of operational pubs, compared to FY2019. At the same time, we expect EBITDA per pub to gradually recover to 7.2% higher than pre-pandemic levels by 2025. We also expect this to be primarily driven by a faster recovery on managed pubs, while the recovery on tenanted pubs may take slightly longer. At the same time, consolidated EBITDA margins could remain pressured for longer." Downside DSCR analysis S&P said, "Our downside DSCR analysis tests whether the issuer level structural enhancements improve the transaction's resilience under a moderate stress scenario. The issuer falls within the pubs, restaurants, and retail industry. Considering U.K. pubs' historical performance during the 2007-2008 financial crisis, in our view, a 15% and 25% decline in EBITDA from our base case is appropriate for the managed pub and leased and tenanted subsector. "The cost pressures from the prevailing macroeconomic environment has delayed recovery, causing EBITDA to remain close to the 15% and 25% declines we would normally assume under our downside stresses for managed and tenanted pubs, respectively. Therefore, our downside scenario comprises both our short- to medium-term EBITDA projections during the liquidity stress period and our long-term forecast but with the level of ultimate recovery limited to about 20% lower than what we would assume for a base-case forecast over the long term. "Our downside DSCR analysis resulted in a resilience score of strong for the class A and B notes. This reflects the headroom above a 1.80:1 DSCR threshold that is required under our criteria to achieve a strong resilience score after giving consideration for the liquidity support available to each class. The improvement for both the class A and class B notes since our previous review is due to the higher cash flows available for debt service, deleveraging, and partial repayment of the liquidity facility." The class B notes have limits on the amount of the liquidity facility they may utilize to cover liquidity shortfalls. Moreover, any senior classes may draw on those same amounts, which makes the exercise of determining the amount of the liquidity support available to the class B notes a dynamic process. For example, the full GBP17 million that the class B notes may access could be available and undrawn at the start of a rolling 12-month period, but could be fully used to cover any shortfall on the class A notes over that period. In effect, the class B notes were not able to draw on any of the GBP17 million. Each class's resilience score corresponds to rating categories from excellent at 'AAA' through vulnerable at 'B'. Within each category, the recommended resilience-adjusted anchor reflects notching based on where the downside DSCR falls within a range for the class A and B notes. As a result, the resilience-adjusted anchors for the class A and B notes would not be adversely affected under S&P's downside scenario. Liquidity facility adjustment Given that S&P has given full credit to the liquidity facility amount available to each class of notes, a further one-notch increase to any of the resilience-adjusted anchors is not warranted. Modifier analysis S&P said, "As mentioned, we performed our base-case analysis to assess whether the anchor would decrease given the long-term prospects currently assumed in our base-case forecast. "Our assessment of the overall creditworthiness of the borrower has not deteriorated since our previous review and, consequently, we do not apply any additional adjustment due to our modifier analysis." Comparable rating analysis A comparison of the potential ratings (following the modifiers analysis) for notes issued by Marston's Issuer and the ratings on the comparable class (by seniority) issued by The Unique Pub Finance Co. PLC (UPP) shows that the relative ratings for the class A notes are commensurate to the relative strengths and weaknesses between the borrowers in each transaction. The BRP for both transactions is rather on the weaker side compared with other pubcos with fair BRPs. On one hand, Marston's Issuer has a better regional diversification than UPP, which benefits from the superior size of its estate. On the other hand, UPP's leased and tenanted model and a wet-led orientation lead to weak earnings and cash flow generation per pub, which could expose the group to weaker trading performance in a market with declining on-trade beer consumption. In S&P's view, Marston's Issuer's growing presence in the managed segment outweighs UPP's larger estate size. Based on those comparisons, S&P does not apply any additional adjustment due to our comparable rating analysis. Counterparty risk S&P said, "We do not consider the liquidity facility or bank account agreements to be in line with our counterparty criteria. Therefore, in the case of Marston's Issuer's non-derivative counterparty exposures, the maximum supported rating is constrained by our long-term issuer credit rating (ICR) on the lowest rated bank account provider. "We have assessed the strength of the collateral framework as weak under the criteria based on our review of the following items in the collateral support annex: (i) a lack of volatility buffers; (ii) we do not consider some types of collateral eligible under our criteria; and (iii) currency haircuts are not specified. "In the case of a collateralized hedge provider that is a U.K. bank, the applicable counterparty rating under our counterparty risk criteria is the resolution counterparty rating (RCR). As a result, the maximum supported rating for the issuer's derivative exposures is limited to a counterparty's RCR. "However, our ratings are not currently constrained by our ICRs on any of the counterparties, including the liquidity facility, and bank account providers or the RCR on the derivative counterparty." Outlook S&P said, "We expect the pub sector's earnings volatility to remain elevated over the next 12-24 months as the sector grapples with several issues, with full-year EBITDA recovering to 2019 levels by 2025, pub operators prioritizing agility in meeting shifting consumer preferences, efficiency of their operations and cash generation, and that it will take time to recover the covenant headroom to 2019 levels. Our expectations of recovery in profitability and credit metrics in 2023 and 2024 will be the key factors in shaping our views of issuers' underlying credit quality and will be the main reason for any rating actions." For many rated pub operators, their significant freehold property portfolios offer substantial operational and financial flexibility, and proceeds generated from disposals provide additional source of funding the capital investment underpinning strategic initiatives. For example, in the first half of 2023 Marston's Issuer generated GBP10.3 million proceeds from disposals as part of the broader group's stated full-year 2023 objective of GBP50 million-GBP60 million asset sales. That being said, S&P expects that the quality of earnings will remain the defining factor in the pub operators' credit profile compared with the amount of real estate ownership. Downside scenario S&P said, "We may consider lowering our rating on the class A notes if their minimum projected DSCRs in our base case scenario falls below 1.20x coverage or if our downside scenario deteriorates each class's resilience-adjusted anchor. "We could also lower our rating on the class B notes if the minimum projected DSCR in our base-case scenario falls below a 1.10x coverage or if our downside scenario worsens each class's resilience-adjusted anchor. This could be brought about if we thought Marston's Pubs' liquidity position had weakened, for example, due to a material decline in cash flows, a tightening of covenant headroom, or reduced access to the overall group's committed liquidity facilities. This could also happen if a deterioration in trading conditions related to a general reduction in consumers' disposable income reduces cash flows available to the borrowing group to service its rated debt. However, the quality of earnings will, in our view, be largely driven by the ability to manage inflationary cost pressures." Upside scenario Due to the current economic situation, S&P does not anticipate raising its assessment of Marston's Pubs' BRP over the near to medium term. MITCHELLS & BUTLERS: S&P Affirms 'B+(sf)' Rating on Class D Notes ----------------------------------------------------------------- S&P Global Ratings affirmed its 'BBB+ (sf)', 'BBB (sf)', 'BB (sf)', 'B+ (sf)', and 'B+ (sf)' credit ratings on Mitchells & Butlers Finance PLC's class A, class AB, class B, class C, and class D notes, respectively. Mitchells & Butlers Finance is a corporate securitization of the U.K. operating business of managed pub estate operator Mitchells & Butlers Retail Ltd. (Mitchells & Butlers Retail or the borrower). It originally closed in November 2003 and was subsequently tapped in September 2006. The transaction features five classes of notes (A, AB, B, C, and D), the proceeds of which have been on-lent by Mitchells & Butlers Finance, the issuer, to Mitchells & Butlers Retail, via issuer-borrower loans. The operating cash flows generated by Mitchells & Butlers Retail are available to repay the issuer's borrowings that, in turn, uses those proceeds to service the notes. Each class of notes is fully amortizing, and S&P's ratings address the timely payment of interest and principal due on the notes, excluding any subordinated step-up interest. Its ratings does not consider the deferability of the class AB, B, C, and D notes. Business risk profile S&P said, "We applied our corporate securitization criteria as part of our rating analysis on the notes in this transaction. In our analysis, we assess whether the borrower's generated operating cash flows are sufficient to make the payments required under the notes' loan agreements by using a debt service coverage ratio (DSCR) analysis, under a base-case and a downside scenario. Our view of the borrower's potential to generate cash flows is informed by our base-case operating cash flow projection and our assessment of its business risk profile (BRP), which we derive using our corporate methodology." Recent performance and events In financial year 2022 (ending Sept. 24) Mitchells & Butlers Retail disposed of eight pubs from its securitized portfolio. Total revenues were GBP1,645 million, a 1.7% decrease from financial year 2019. Reported EBITDA was 30.9% lower due to a decrease in the reported EBITDA margin (to 15.5% from 21.9%). Over the same period, revenue per pub decreased by 0.9% and EBITDA per pub decreased by 30.2%. Trading through the first half of financial year 2023 remains strong, despite train strike disruption. This is in comparison with the same period in financial year 2022 when most of the festive season was hindered by city lockdowns. Mitchells & Butlers Retail saw 10.0% growth in the first half of financial year 2023--well within our expected recovery trajectory when compared with the same period last year. Parent Mitchells & Butlers PLC reported like-for-like sales increase of 8.5% in the first half of financial year 2023, including growth of 5.8% for food and 12.8% for drink. This was largely driven by pubs passing through cost inflation to customers, thus raising spend per head. Cost inflation continues to threaten the overall hospitality sector, most notably in utilities, wages, and food, even as energy prices fall. S&P said, "We believe extraordinary inflation in the current macroeconomic environment will decline at the end of this year to an average of approximately 1.4% over 2024-2026. While companies within the sector have increased prices and passed through some cost increases, weaker consumer confidence and pressure on discretionary spending limit the pace of earnings recovery. As the cost of living crisis continues to constrain customers' disposable incomes, we think profitability volatility will remain high compared with the historical level. Therefore, we expect earnings and cash generation recovery to be delayed and more gradual for the industry." S&P continues to assess the borrower's BRP as fair, supported by the group's strong position as one of the top three pub operators in the U.K., its well invested estate, and its significant freehold property portfolio that provides substantial operational and financial flexibility. Issuer's liquidity position The borrower is current on principal payments due under the issuer/borrower loans, as well as other payments due to the issuer under the pre-enforcement priority of payments. The committed liquidity facility remains fully undrawn with GBP295 million available to the issuer. Rating Rationale Mitchells & Butlers Finance's primary sources of funds for principal and interest payments on the outstanding notes are the loan interest and principal payments from the borrower, which are ultimately backed by future cash flows generated by the operating assets. S&P's ratings address the timely payment of interest and principal due on the notes. DSCR analysis S&P said, "Our cash flow analysis serves to both assess if cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in our base-case and downside scenarios. "We currently think unprecedented inflation has severely strained the hospitality sector, thereby delaying cash flow recovery to pre-pandemic levels. We estimate the hardest-hit sectors will recover to near 2019 levels in 2025. Importantly, we already expect inflation to decline from 2022's extraordinary levels to an average of roughly 1.4% in 2024-2026. Therefore, we anticipate this macroeconomic environment will stabilize, meaning the long-term creditworthiness of companies in the sector will not fundamentally or materially deteriorate. "Our downside analysis provides a unique insight into a transaction's ability to withstand liquidity stress precipitated by current inflationary pressures on pubs in the U.K. Given the circumstances, our downside analysis alone determines the resilience-adjusted anchor. As a result, our analysis begins with constructing a base-case projection from which we derive a downside case. However, in this case, we have not determined our anchor. This is because the anchor does not reflect the issuer's liquidity support, which we see as a mitigating factor to liquidity stress from exceptionally high levels of inflation and challenging macroeconomic conditions. Rather, we developed the downside scenario from the base case to assess whether the prevailing inflationary macroeconomic environment would have a negative effect on the level of each class of notes' resilience-adjusted anchor. 'That said, we performed our base-case analysis to assess whether, after the current stressed economic period, the anchor would be adversely affected given the long-term prospects currently assumed under our base-case forecast." Base-case forecast S&P said, "We typically do not give credit to growth after the first two years. However, in this review, we consider the growth period to continue through financial year 2025 to accommodate both the duration of inflationary pressures and the subsequent recovery. We expect earnings and cash flow recovery to pre-COVID-19 levels will take longer than we initially anticipated, due to cost inflation and pressures on discretionary spending." Mitchells & Butlers Finance's earnings depend mostly on general economic activity and discretionary consumer demand. Considering the economic outlook, S&P continues to forecast a delay in recovery. S&P currently assume: -- Even though the U.K. economic outlook has improved, it continues to face challenges. S&P now expects GDP to contract by 0.5% in 2023, before returning to growth averaging 1.4% in 2024-2026. -- High and persistent inflation is still the main challenge to profitability and cash generation, even as energy prices fall. S&P projects inflation will rise to 5.8% in 2023, before dropping to below 2% in 2024-2026. This could raise the prices of fuel, utilities, and food, even though it expects the Bank of England will refrain from any rate cuts until 2024 to directly control core inflation. -- Downside risks to S&P's forecasts continue. Risks to global sentiment and energy and commodity prices from an escalation of Russia's war on Ukraine remain elevated, although less so than a few months ago partly thanks to continental Europe's better preparedness for next winter. Considering S&P's macroeconomic outlook and current expectations for the recovery prospects of the sector, S&P revised its forecasts through to financial year 2025. S&P said, "Within the securitization portfolio, we expect revenue for financial year 2023 to be about 6.0% higher than the 2019 pre-pandemic level. We anticipate revenue growth will be supported by increasing premiumization and increased spend per head. This is because some costs will be passed through by increased prices as volumes stabilize by the end of 2023 and moderately decline in the following two years. "However, considering cost pressures, we expect the borrower's S&P Global Ratings-adjusted EBITDA for financial year 2023 to be 24% lower and EBITDA margin 650 basis points lower than pre-pandemic levels. We expect the EBITDA will remain comparatively lower due to a lower number of operational pubs than in financial year 2019. At the same time, ongoing cost pressure would restrain consolidated EBITDA margins for longer." Downside DSCR analysis S&P said, "Our downside DSCR analysis tests whether the issuer-level structural enhancements improve the transaction's resilience under a moderate stress scenario. Mitchells & Butlers Retail falls within the pubs, restaurants, and retail industry. Considering U.K. pubs' historical performance during the financial crisis of 2007-2008, in our view, a 15% decline in EBITDA from our base case is appropriate for the managed pub subsector. "Cost pressures from the prevailing macroeconomic environment have delayed recovery, causing EBITDA to remain at a level close to the 15% decline we would normally assume under our downside stress. Hence, our downside scenario comprises both our short- to medium-term EBITDA projections during the liquidity stress period and our long-term forecast, but with the level of ultimate recovery limited to 15% lower than what we would assume for a base-case forecast over the long term. "Our downside DSCR analysis resulted in an excellent resilience score for the class A notes, an improvement since our last review, and strong resilience scores for the class AB and B notes, unchanged since our previous review. The excellent resilience score reflects the headroom above the 4.0 to 1 DSCR threshold required under our criteria after considering the level of liquidity support available to the class A notes. The strong resilience score reflects headroom above a 1.80 to 1 DSCR threshold after considering the level of liquidity support available to each class of notes. For both the class C and D notes, our downside DSCR analysis resulted in a fair resilience score." The class A notes' improved resiliency score is due to higher cash flows available for debt service, deleveraging, and available liquidity facility. Both the class C and class D notes have limits on the amount of the liquidity facility they may use to cover liquidity shortfalls, and the limits vary over the transaction's life. Moreover, more-senior classes may draw on those same amounts, making determining the amount of liquidity support available to the class C and D notes dynamic. Each class's resilience score corresponds to rating categories--excellent at 'AAA' through vulnerable at 'B'. Within each category, the recommended resilience-adjusted anchor reflects notching based on where the downside DSCR falls within a range (for the class A, AB, and B notes) or the length of time the notes will survive before S&P projects shortfalls (for the class C and D notes). As a result, the resilience-adjusted anchors for each class of notes would not be adversely affected under S&P's downside scenario. Liquidity facility adjustment As S&P gave full credit to the liquidity facility amount available to each class of notes, a further one-notch increase to any of the resilience-adjusted anchors is not warranted. Modifiers analysis S&P applied a one-notch downward adjustment to the class D notes to reflect their subordination and weaker access to the security package compared to the class C notes. Comparable rating analysis Comparing the potential ratings (following the modifiers analysis) for notes issued by Mitchells & Butlers Finance and the ratings on the comparable class (by seniority) issued by Greene King Finance PLC shows that the relative ratings for the class A and AB notes are commensurate with the relative strengths and weaknesses between the borrowers in each transaction. The relative ratings assigned to the class B notes show an inverse relationship to the relative strengths and weaknesses between the two borrowers. However, the class AB notes issued by Greene King Finance are significantly thinner than the class AB notes issued by Mitchells & Butlers Finance, resulting in a one-notch differential between the class AB and B ratings, in the case of Greene King Finance, compared to a three-notch differential in the case of Mitchells & Butlers Finance. Based on those comparisons, S&P does not apply any additional adjustment due to its comparable rating analysis. Counterparty risk S&P said, "We do not consider the liquidity facility and bank account agreements to be in line with our counterparty criteria, due to the weakness of the contractual remedies provided in the documentation. Therefore, our ratings on the notes in this transaction are capped at the weakest issuer credit rating (ICR) among the bank account providers (Barclays Bank PLC and Santander U.K. PLC) and the liquidity facility providers (Lloyds Bank Corporate Markets PLC and HSBC Bank PLC)." The notes are supported by hedging agreements with NatWest Markets PLC (interest rate swaps for all the floating rate notes and cross-currency swap on the class A3N notes) and the Citibank N.A. London branch (interest rate swaps on the class A4, AB, C2, and D1 notes). S&P said, "We assess the collateral framework as weak under our counterparty criteria, notably due to the length of the remedy period to begin collateral posting, while the replacement commitment is robust enough that we give credit to it. As the swaps in this transaction are collateralized, we consider the resolution counterparty rating (RCR) on the swap counterparty as the applicable counterparty rating." This combination of factors results in a maximum supported rating on the notes at the level of the lowest applicable rating among the ICR on the account banks, the ICR on the liquidity facility providers, and the RCR on the swap counterparties. The current minimum applicable rating is at least equal to the ratings on the senior notes, so they do not currently constrain our ratings. Outlook S&P said, "We expect the pub sector's earnings volatility to remain high over the next 12-24 months as it grapples with several issues. We think the sector's full-year EBITDA will recover to 2019 levels by 2025, with pub operators prioritizing agility to meet shifting consumer preferences and operational and cash flow efficiency. We anticipate that it will take time to recover covenant headroom to 2019 levels. Our profitability and credit metric recovery expectations for 2023 and 2024 will be key factors in shaping our view of issuers' underlying credit quality and will be the main reason for any rating actions." For many rated pub operators, their significant freehold property portfolios offer substantial operational and financial flexibility, and the proceeds from disposals provide an additional source of funding to the capital investment that underpins strategic initiatives. For example, Mitchells & Butlers has generated about GBP18 million of proceeds from disposals since 2019, adding to its track record of selling noncore businesses since 2010. That said, S&P expects earnings quality will remain the defining factor in pub operators' credit profile compared with the quantum of real estate ownership. Downside scenario S&P said, "We may consider lowering our ratings on the notes if their minimum projected DSCRs in our downside scenario have a material-adverse effect on each class's resilience-adjusted anchor. "We could also lower our ratings on the class B, C, or D notes if the borrower's overall creditworthiness deteriorates, reflecting its financial and operational strength over the short to medium term. This could arise if we think Mitchells & Butlers Retail's liquidity position has weakened significantly. Finally, the quality of earnings will, in our view, be largely driven by the company's ability to invest and tailor its offering to changes in consumer behavior.' Upside scenario S&P said, "Due to the current economic situation, we do not anticipate raising our assessment of Mitchells & Butlers Retail's BRP over the near to medium term. We could raise our ratings on the class B, C, or D notes if our assessment of the borrower's overall creditworthiness improves, which reflects its financial and operational strength over the short to medium term. In particular, we would consider lower leverage and the ability to generate higher cash flows, as well as higher covenant headroom, when evaluating the scale of any improvement." NETWORK DISTRIBUTING: Goes Into Liquidation ------------------------------------------- According to Film Stories' Jake Godfrey, DVD and Blu-ray company Network Distributing has reportedly gone into liquidation. One of the most vital purveyors of niche British television and films, the company released thousands of films, sitcoms and television dramas that would otherwise never have seen the light of day, Film Stories notes. The news comes as a major blow not only to those who collect vintage television and films, but it also raises the question of who will take over the mantle, Film Stories states. Though Network has yet to put out an official statement, the news spread over social media and their website is down, Film Stories relates. NORTH HIGHLAND: Goes Into Voluntary Liquidation ----------------------------------------------- Val Sweeney at The Inverness Courier reports that an Inverness-based events company has gone into voluntary liquidation. According to The Inverness Courier, North Highland Events and Promotions, whose role includes supporting activities to performing arts, is now in the hands of advisory firm Quantuma. North Highland Events director Liam Christie, who has personally lost GBP35,000, said he was devastated, The Inverness Courier notes. A meeting in Glasgow last week agreed North Highland Events and Promotions should be wound up, The Inverness Courier relates. It passed a special resolution "that it has been proved to the satisfaction of the meeting that the company cannot by reason of its liabilities continue its business and it is advisable to wind up the same and, accordingly, that the company be wound voluntarily", The Inverness Courier discloses. PIZZAEXPRESS: S&P Lowers LongTerm ICR to 'B-' --------------------------------------------- S&P Global Ratings lowered its long-term issuer credit rating on PizzaExpress and its senior secured notes to 'B-' from 'B'. At the same time, S&P lowered its issue rating on its super senior revolving credit facility (RCF) to 'B+' from 'BB-'. S&P said, "The stable outlook reflects our view that PizzaExpress' leverage will be close to 6.5x in 2023 and 5.0x-5.5x in 2024, and its EBITDA margin will remain subdued at about 17%-19% in 2023 and 20%-22% in 2024. We anticipate FOCF after leases will drop negative for 2023-2025 as the EBITDA margin weakens and rent normalizes following the company voluntary agreement (CVA) completion. Nonetheless, we expect the group will retain adequate liquidity." Lower consumer discretionary spending and the competitive trading environment will continue to constrain revenue growth in the next two years. Total revenue for fiscal 2022 grew by about 31% to GBP422 million, driven by the recovery of footfall as pandemic restrictions were lifted for most of the year. S&P said, "However, this revenue is hitting the lower end of our last forecast, as the dine-in segment recovered at a slightly slower pace than we expected. With the cost-of-living crisis persisting in the U.K., although PizzaExpress may benefit from customers trading down from more premium restaurants, we expect revenue growth to be reined in by lower discretionary spend per head. We view the restaurant sector as highly fragmented and therefore think the group will limit the pass-through of costs to customers to defend volume from other pizza competitors. We expect revenue to grow at about 6%-7% in 2023 and 5%-6% in 2024-2025, which will be primarily driven by some price increases and new delivery partnerships with UberEats and Just Eat." Cost inflation and pent-up capital expenditure (capex) needs will squeeze cash flow generation. S&P said, "We project a mild recession for calendar year 2023 in the U.K. with still high food and labor costs. Combined with the group's capex requirements, this should drive FOCF after leases down to negative from 2023 to 2025. In our view, the fiscal 2022 results--adjusted EBITDA that declined to GBP80.9 million by about 11% from fiscal 2021, because of the inflated cost base, and topline that increased by 31%--shows a high degree of operating leverage, which could put the company at risk. In order to defend volumes, PizzaExpress may only be able to pass on part of the inflation to customers. This should translate in a further weakening of adjusted EBITDA margins to 17%-19% in 2023 from 2022, but translate into stable or slightly growing EBITDA. We also expect this strategy to normalize earnings as some inflation eases in 2024, with the adjusted EBITDA margin recovering to 20%-22%." As the group seeks to secure its positioning in the competitive market by investing in restaurants' refurbishments and the development of digital technology (including the loyalty scheme app), capex will rise to about GBP20 million-GBP25 million in 2023 and GBP25 million-GBP30 million in 2024, translating into negative FOCF after leases in the next two to three years. S&P said, "We expect PizzaExpress' capital structure to remain highly leveraged, with adjusted debt to EBITDA at 6.5x in 2023. Slower EBITDA recovery under inflationary pressure drove up leverage more than we anticipated. As of the end of fiscal 2022, the group holds about GBP330 million of financial debt and GBP182 million of lease liabilities, leading to adjusted debt to EBITDA of 6.3x in 2022. We expect leverage to remain escalated at close to 6.5x in 2023 before falling to 5.0x-5.5x in 2024 as cost pressure begins to normalize and profitability improves." PizzaExpress maintains an adequate liquidity position with limited refinancing risk compared to other 'B-' rated peers. On the trail of rate hikes, the group benefits from a fixed rate debt structure that leads to higher visibility in interest expense of the notes, which is a steady amount of GBP22 million-GBP22.5 million per year. In addition to lower interest outflow compared to floating-rate peers, as of the first quarter of fiscal 2023, the group's liquidity profile is supported by about GBP59.6 million cash, GBP26 million available under the GBP30 million RCF, and a lack of near-term maturities. The GBP335 million senior secured notes are due July 2026. S&P Said, "The stable outlook reflects our view that PizzaExpress' leverage will be close to 6.5x in 2023 and 5.0x-5.5x in 2024, while the EBITDA margin will remain subdued at about 17%-19% in 2023 and 20%-22% in 2024. We anticipate FOCF after leases will drop to negative for 2023-2025 as the EBITDA margin weakens and rent normalizes following the CVA exit. Nonetheless, we expect the group will maintain adequate liquidity. "We could downgrade PizzaExpress if its profitability and cash flow generation is weaker than we expected, leading to deterioration in liquidity or putting into question the sustainability of its capital structure. "We could upgrade PizzaExpress if, thanks to stronger-than-expected EBITDA margin recovery and FOCF generation, the group deleverages such that adjusted debt to EBITDA falls sustainably below 6.0x, FOCF after leases turns substantially positive, and EBITDAR cover recovers to over 1.5x sustainably." ESG credit indicators: E-2, S-2, G-3 POLARIS PLC 2023-1: Moody's Assigns Caa3 Rating to Class G Notes ---------------------------------------------------------------- Moody's Investors Service has assigned definitive long-term credit ratings to Notes issued by Polaris 2023-1 plc: GBP334.3M Class A Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Aaa (sf) GBP22.0M Class B Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Aa2 (sf) GBP 1.0M Class C Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned A1 (sf) GBP9.0M Class D Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Baa2 (sf) GBP9.0M Class E Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Ba2 (sf) GBP5.0M Class F Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Caa1 (sf) GBP6.0M Class G Mortgage Backed Floating Rate Notes due February 2061, Definitive Rating Assigned Caa3 (sf) Moody's did not rate GBP3.0 M Class Z Notes due February 2061. 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 GBP399.2 million as of April 30, 2023 pool cut-off date. At closing, the liquidity reserve fund will be equal to 1.5% of the Class A notes and total credit enhancement for the Class A Notes will be 17.51%. 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 1.5% 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 1.5% 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 11% 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. 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 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. POLARIS PLC 2023-1: S&P Assigns CCC Rating on Class G Notes ----------------------------------------------------------- S&P Global Ratings assigned ratings to Polaris 2023-1 PLC's class A to G-Dfrd notes. At closing, the issuer also issued unrated class Z and RC1 and RC2 certificates. Polaris 2023-1 is an RMBS transaction that securitizes a portfolio of owner-occupied and buy-to-let (BTL) mortgage loans that are secured over properties in the U.K. This is the sixth first-lien RMBS transaction originated by Pepper group in the U.K. that S&P has rated. The first was Polaris 2019-1 PLC. The loans in the pool were originated between 2022 and 2023 by UK Mortgage Lending Ltd. which trades as Pepper Money, a nonbank specialist lender. Of the pool, 10.96% refers to shared ownership mortgages. The collateral comprises complex income borrowers, borrowers with immature credit profiles, and borrowers with credit impairments, and there is a high exposure to self-employed borrowers and first-time buyers. Approximately 9.9% of the pool comprises BTL loans and the remaining 90.1% are owner-occupier loans. The transaction benefits from a fully funded liquidity reserve fund, which will be used to provide liquidity support to the class A notes and to pay senior fees and expenses and senior swap payments. Principal can be used to pay senior fees and interest on some classes of the rated notes, subject to conditions. The transaction incorporates a swap to hedge the mismatch between the notes, which pay a coupon based on the compounded daily Sterling Overnight Index Average (SONIA), and loans, which pay fixed-rate interest before reversion. At closing, the issuer used the issuance proceeds to purchase the full beneficial interest in the mortgage loans from the seller. The issuer granted security over all of its assets in favor of the security trustee. There are no rating constraints in the transaction under our counterparty, operational risk, or structured finance sovereign risk criteria. S&P's consider the issuer to be bankruptcy remote. Pepper (UK) Ltd. is the servicer in this transaction. In its analysis, S&P considers its current macroeconomic forecasts and forward-looking view of the U.K. residential mortgage market through additional cash flow sensitivities. Ratings CLASS RATING* AMOUNT (MIL. GBP) A AAA (sf) 334.315 B-Dfrd AA (sf) 21.955 C-Dfrd A+ (sf) 10.978 D-Dfrd A- (sf) 8.982 E-Dfrd BBB- (sf) 8.982 F-Dfrd BB- (sf) 4.990 G-Dfrd CCC (sf) 5.988 Z NR 2.994 RC1 residual certs NR N/A RC2 residual certs NR N/A *S&P's ratings address timely receipt of interest and ultimate repayment of principal on the class A notes, and the ultimate payment of interest and principal on all the other rated notes. NR--Not rated. N/A--Not applicable. =============== X X X X X X X X =============== [*] BOOK REVIEW: Bankruptcy and Secured Lending in Cyberspace ------------------------------------------------------------- Author: Warren E. Agin Publisher: Bowne Publishing Co. List price: $225.00 Review by Gail Owens Hoelscher Red Hat Inc. finds itself with a high of 151 5/8 and low of 20 over the last 12 months! Microstrategy Inc. has roller-coasted from a high of 333 to a low of 7 over the same period! Just when the IPO boom is imploding and high-technology companies are running out of cash, Warren Agin comes out with a guide to the legal issues of the cyberage. The word "cyberspace" did not appear in the Merriam-Webster Dictionary until 1986, defined as "the on-line world of computer networks." The word "Internet" showed up that year as well, as "an electronic communications network that connects computer networks and organizational computer facilities around the world." Cyberspace has been leading a kaleidoscopic parade ever since, with the legal profession striding smartly in rhythm. There is no definition for the word "cyberassets" in the current Merriam-Webster. Fortunately, Bankruptcy and Secured Lending in Cyberspace tells us what cyberassets are and lays out in meticulous detail how to address them, not only for troubled technology companies, but for all companies with websites and domain names. Cyberassets are primarily websites and domain names, but also include technology contracts and licenses. There are four types of assets embodied in a website: content, hardware, the Internet connection, and software. The website's content is its fundamental asset and may include databases, text, pictures, and video and sound clips. The value of a website depends largely on the traffic it generates. A domain name provides the mechanism to reach the information provided by a company on its website, or find the products or services the company is selling over the Internet. Examples are Amazon.com, bankrupt.com, and "swiggartagin.com." Determining the value of a domain name is comparable to valuing trademark rights. Domain names can come at a high price! Compaq Computer Corp. paid Alta Vista Technology Inc. more than $3 million for "Altavista.com" when it developed its AltaVista search engine. The subject matter covered in this book falls into three groups: the Internet's effect on the practice of bankruptcy law; the ways substantive bankruptcy law handles the impact of cyberspace on basic concepts and procedures; and issues related to cyberassets as secured lending collateral. The book includes point-by-point treatment of the effect of cyberassets on venue and jurisdiction in bankruptcy proceedings; electronic filing and access to official records and pleadings in bankruptcy cases; using the Internet for communications and noticing in bankruptcy cases; administration of bankruptcy estates with cyberassets; selling bankruptcy estate assets over the Internet; trading in bankruptcy claims over the Internet; and technology contracts and licenses under the bankruptcy codes. The chapters on secured lending detail technology escrow agreements for cyberassets; obtaining and perfecting security interests for cyberassets; enforcing rights against collateral for cyberassets; and bankruptcy concerns for the secured lender with regard to cyberassets. The book concludes with chapters on Y2K and bankruptcy; revisions in the Uniform Commercial Code in the electronic age; and a compendium of bankruptcy and secured lending resources on the Internet. The appendix consists of a comprehensive set of forms for cyberspace-related bankruptcy issues and cyberasset lending transactions. The forms include bankruptcy orders authorizing a domain name sale; forms for electronic filing of documents; bankruptcy motions related to domain names; and security agreements for Web sites. Bankruptcy and Secured Lending in Cyberspace is a well-written, succinct, and comprehensive reference for lending against cyberassets and treating cyberassets in bankruptcy cases. ********* 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. Copyright 2023. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *