/raid1/www/Hosts/bankrupt/TCREUR_Public/230920.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Wednesday, September 20, 2023, Vol. 24, No. 189
Headlines
A Z E R B A I J A N
AZERBAIJAN: Fitch Affirms BB+ Foreign Currency IDR, Outlook Pos.
C Z E C H R E P U B L I C
DRASLOVKA HOLDING: Moody's Alters Outlook on 'B2' CFR to Negative
F R A N C E
CLAUDIUS FINANCE: Moody's Alters Outlook on 'B2' CFR to Stable
COOKIE INTERMEDIATE: Moody's Alters Outlook on Caa1 CFR to Stable
LAGARDERE SA: Egan-Jones Retains 'B' Sr. Unsecured Debt Ratings
RENAULT SA: Egan-Jones Hikes Sr. Unsecured Debt Ratings to 'BB'
VALEO SE: Egan-Jones Retains 'BB-' Sr. Unsecured Debt Ratings
G E R M A N Y
FRESENIUS MEDICAL: Egan-Jones Retains 'BB+' Sr. Unsecured Ratings
K+S AKTIENGESELLSCHAFT: Egan-Jones Retains BB+ Unsec. Debt Ratings
PBD GERMANY AUTO: Fitch Hikes Rating on Class F Notes to 'BBsf'
SCHNIEDER REISEN: Files for Insolvency
I R E L A N D
CAIRN CLO X: Fitch Affirms 'Bsf' Rating on F Notes, Outlook Pos.
CAPITAL FOUR VI: Fitch Gives 'B-(EXP)sf' Rating on Class F Debt
CAPITAL FOUR VI: S&P Assigns Prelim. B-(sf) Rating on Cl. F Notes
GOLDENTREE LOAN 3: Moody's Cuts EUR10.6MM F Notes Rating to Caa1
L U X E M B O U R G
AURIS LUXEMBOURG II: Fitch Affirms B- LongTerm IDR, Outlook Stable
CULLINAN HOLDCO: Moody's Alters Outlook on 'B1' CFR to Negative
P O L A N D
BANK MILLENNIUM: Fitch Gives 'BB' Rating on Sr. Non-Preferred Notes
P O R T U G A L
TAP: Portugal Gov't to Kick Off Sale Process Next Week
R U S S I A
REGIONAL ELECTRICAL: Fitch Affirms BB- LongTerm IDR, Outlook Stable
S P A I N
GRIFOLS SA: Fitch Alters Outlook on 'BB-' LongTerm IDR to Negative
T U R K E Y
ANKARA METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
ANTALYA METROPOLITAN: Fitch Alters Outlook on 'B' IDRs to Stable
BURSA METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
ISTANBUL METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
U N I T E D K I N G D O M
ACELERON: Enters Administration, Buyer Sought for Business
ATLANTICA SUSTAINABLE: Egan-Jones Retains 'B-' Unsecured Ratings
BRITISH LEGION: Delayed Planning Agreement Prompts Liquidation
MORTIMER BTL 2022-1: S&P Affirms 'BB(sf)' Rating on Class E Notes
VEREX: Car Care Plan Buys Assets Out of Administration
WPP PLC: Egan-Jones Retains 'BB' Sr. Unsecured Debt Ratings
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A Z E R B A I J A N
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AZERBAIJAN: Fitch Affirms BB+ Foreign Currency IDR, Outlook Pos.
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Fitch Ratings has affirmed Azerbaijan's Long-Term Foreign-Currency
Issuer Default Rating (IDR) at 'BB+' with a Positive Outlook.
KEY RATING DRIVERS
Rating Fundamentals, Positive Outlook: The rating is supported by a
very strong external balance sheet, the lowest public debt in the
peer group, and financing flexibility from large sovereign wealth
fund assets. Set against these factors are weak governance
indicators, lack economic policy-making predictability, high
financial dollarisation, heavy dependence on hydrocarbons, and
geopolitical risks. The Positive Outlook reflects continued
strengthening of external and fiscal buffers due to
higher-than-budgeted energy prices, and greater expenditure
restraint than in previous energy sector windfalls.
Strengthening External Position: The current account surplus will
decline to 19% of GDP in 2023, but remains the highest in the 'BB'
category. Fitch expects surpluses in double digits in 2024-2025
despite lower oil prices (oil and gas revenues equal 90% of total
exports). Fitch therefore forecasts sovereign foreign-currency
assets will increase to USD68 billion in 2023, 82% held by SOFAZ,
reflecting still-high energy revenues and investment portfolio
recovery. Fitch projects Azerbaijan's net sovereign asset position
to increase by 14pp to 63% of GDP in 2023 and 72% by 2025, the
highest in the peer group.
Continued Fiscal Surpluses, Developing Fiscal Rule: Fitch expects
higher-than-budgeted oil prices and non-oil revenue growth to
underpin continued surpluses despite increased reconstruction
spending. Fitch forecasts the consolidated budget surplus at 5.6%
of GDP in 2023, before declining to 1.4% in 2025. Azerbaijan's 2022
fiscal rule seeks to reduce the non-energy primary deficit to 17.5%
of non-oil GDP in 2026 (22.7% in 2022) and set a public debt
ceiling of 30% (previously 20%) of GDP.
Fitch considers that the rule has a limited track record, and a
weak institutional framework in terms of oversight and
establishment of fiscal targets. In its view, the latter could be
modified, as the recent change in the debt ceiling shows. Lower
nominal GDP and slower non-oil tax revenue growth could increase
the challenges of sustainably maintaining the non-energy primary
deficit's reduction, especially given large Karabakh-related
expenditure commitments.
Government Debt Increase: The debt ceiling increase, from 20% to
30% of GDP, was to include AZM9.5 billion (7.5% of GDP) guaranteed
debt from Agrarkredit in government debt. Fitch therefore forecasts
debt to increase to 21.4% of GDP in 2023, the lowest in the 'BB'
category. Outstanding external government guarantees and on-lending
declined from USD6.4 billion at end-2022 to USD6.2 billion (8.3% of
GDP) in 1H23.
Limited-Predictability Policy Framework: A lack of policy
predictability, institutional independence, and clarity of mandates
for the Central Bank of Azerbaijan (CBA) and SOFAZ within the
broader exchange-rate framework persist, increasing the risk of a
disruptive adjustment to a very severe shock. The CBA uses the
exchange rate as the intermediate operational target and introduced
instruments to improve transmission into the money market and
banking rates.
Fitch considers there is still a strong political prioritisation to
maintain the 1.7 AZN/USD de facto peg, despite the authorities'
stated aim of allowing greater flexibility in the medium term.
Inflation Declining: Annual inflation is falling supported by the
nominal effective appreciation of the manat relative to main
trading partners such as Turkiye and Russia and easing of world
food prices. Nevertheless, pressures in food and non-tradables
(most notably services) remain strong. Fitch forecasts annual
inflation to approach the CBA target band ceiling (4±2%) by
end-2023, so average inflation will decline to 10.1% in 2023 and 6%
in 2024. Higher commodity prices and demand-side pressures
represent risks to disinflation.
Weak Trend Growth: Fitch forecasts growth of 1.8% in 2023, after a
slowdown in 1H23 in the oil and non-oil economies. Fitch expects
growth to average 2.3% in 2024-2025 due to the non-oil economy
growth, while the energy sector drag could ease due to new oil
production that could slow the decline (7.6% fall in 2022 to
676,000 barrels a day). Fitch also expects further natural gas
production growth with potential upside if purchasing contracts to
increase export volumes to Europe are finalized.
Progress towards economic diversification is constrained by the
large state presence, limited access to financing, governance
challenges and low non-energy foreign investment.
Banking Fundamentals Steadily Improving: The banking sector has
improved, but is still fairly weak, reflected by Fitch's Banking
System Indicator score of 'b'. The non-performing loan ratio fell
to 3.5% in July, from 3.8% at end-2022, helped by strong loan
growth.
Capitalization remains adequate at 17.8%, and the sector remains
profitable, supported by rising loan portfolio interest income,
while the interest-rate increase does not affect funding costs due
to the prevalence of demand deposits. Deposit dollarisation fell to
42% in July from 60% at end-1H20 but is well above the peer group
historical median of 35%; foreign-currency loans fell to 19% of the
sector loan book from 35% in that period.
High Geopolitical Risks: Geopolitical risks from the Karabakh
conflict remain high, with sporadic fighting since the 2020 war.
The US and EU have supported negotiations, but no political
settlement has been reached. Closure of the Lachin corridor to
Armenia has exacerbated frictions. Recently, Azerbaijan and Armenia
have both reported troop build-up at their borders. Fitch believes
that in the event of a military conflict with Armenia, fighting
would largely be limited to the disputed region, and broader
macroeconomic implications for Azerbaijan limited.
ESG - Governance: Azerbaijan has an ESG Relevance Score (RS) of '5'
for both Political Stability and Rights and for the Rule of Law,
Institutional and Regulatory Quality and Control of Corruption.
These scores reflect the high weight that the World Bank Governance
Indicators (WBGI) have in its proprietary Sovereign Rating Model.
Azerbaijan has a low WBGI ranking at the 32nd percentile,
reflecting very poor voice and accountability, relatively weak
rights for participation in the political process, uneven
application of the rule of law and a high level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Public Finances: Significant deterioration in the strength of the
public finances, for example due to significant fiscal loosening
and/or additional material contingent liabilities crystallizing in
the sovereign balance sheet
- External Finances: Lower energy prices sufficient to have a
material negative impact on external buffers
- Macro: Reduced confidence that Azerbaijan's policy framework
capacity to preserve macroeconomic and financial stability in the
event of external shocks, for example oil price volatility.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Public Finances: Greater confidence that the strong public
balance sheet will be preserved, for example due to continued
expenditure restraint in line with the fiscal rule, or prolonged
high energy prices
- External Finances: Further strengthening of the external balance
sheet, for example due to sustained high energy revenues.
- Macro: Improvements in the effectiveness and predictability of
Azerbaijan's policy framework, to manage external shocks and reduce
macro volatility.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Azerbaijan a score equivalent to a
rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR
scale.
Fitch's sovereign rating committee adjusted the output from the SRM
score to arrive at the final LT FC IDR by applying its QO, relative
to SRM data and output, as follows:
- Macro: -1 notch, to reflect relative weakness in Azerbaijan's
macro-framework, including from the lack of institutional
independence, policy predictability and clarity of mandates for the
CBA and SOFAZ within the broader exchange rate framework, and a
weak record of preserving the fiscal and external balance-sheet
gains from previous energy windfalls.
- External Finances: +1 notch, to reflect large SOFAZ assets, which
underpin Azerbaijan's exceptionally strong foreign-currency
liquidity position and the country's very large net external
creditor position.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within its
criteria that are not fully quantifiable and/or not fully reflected
in the SRM.
COUNTRY CEILING
The Country Ceiling for Azerbaijan is 'BB+' in line with the LT FC
IDR. This reflects no material constraints and incentives, relative
to the IDR, against capital or exchange controls being imposed that
would prevent or significantly impede the private sector from
converting local currency into foreign currency and transferring
the proceeds to non-resident creditors to service debt payments.
Fitch's Country Ceiling Model produced a starting point uplift of 1
notch above the IDR. Fitch's rating committee applied an offsetting
-1 notch qualitative adjustment to this, under the Near-Term
Macro-Financial Stability Risks and Exchange-Rate Risks to reflect
lack of policy predictability, institutional independence and
clarity of mandates for CBA and SOFAZ within the broader exchange
rate framework, which increase the risk of a disruptive adjustment
to a very severe shock.
In 2016, authorities closed FX bureaus and attempted to introduce a
FX transaction tax. There is still a strong political
prioritisation to maintaining the 1.7 AZN/USD de facto exchange
rate peg.
ESG CONSIDERATIONS
Azerbaijan has an ESG Relevance Score of '5' for Political
Stability and Rights as World Bank Governance Indicators have the
highest weight in Fitch's SRM and are therefore highly relevant to
the rating and a key rating driver with a high weight. As
Azerbaijan has a percentile rank below 50 for the respective
Governance Indicator, this has a negative impact on the credit
profile.
Azerbaijan has an ESG Relevance Score of '5' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight. As Azerbaijan has a percentile
rank below 50 for the respective Governance Indicators, this has a
negative impact on the credit profile.
Azerbaijan has an ESG Relevance Score of '4' for Human Rights and
Political Freedoms as the Voice and Accountability pillar of the
World Bank Governance Indicators is relevant to the rating and a
rating driver. As Azerbaijan has a percentile rank below 50 for the
respective Governance Indicator, this has a negative impact on the
credit profile.
Azerbaijan has an ESG Relevance Score of '4+' for Creditor Rights
as willingness to service and repay debt is relevant to the rating
and is a rating driver for Azerbaijan, as for all sovereigns. As
Azerbaijan has track record of 20+ years without a restructuring of
public debt and captured in its SRM variable, this has a positive
impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
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Azerbaijan LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
LC LT IDR BB+ Affirmed BB+
LC ST IDR B Affirmed B
Country Ceiling BB+ Affirmed BB+
senior
unsecured LT BB+ Affirmed BB+
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C Z E C H R E P U B L I C
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DRASLOVKA HOLDING: Moody's Alters Outlook on 'B2' CFR to Negative
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Moody's Investors Service affirmed the B2 long term corporate
family rating and B2-PD probability of default rating of Draslovka
Holding Alpha a.s. (Draslovka or the company) and the B2 instrument
ratings on the USD348 million backed senior secured term loan B and
USD30 million senior secured revolving credit facility (RCF), both
issued by Manchester Acquisition Sub LLC, a subsidiary of
Draslovka. Concurrently, Moody's changed the outlook on both
entities to negative from stable.
RATINGS RATIONALE
"The negative outlook reflects the negative free cash flow (FCF) in
2022 and projected in 2023 that continues to pressure the company's
liquidity, with Moody's expectation that the company will reach
break-even only by 2024 at the earliest," says Sebastien
Cieniewski, a Moody's Vice President - Senior Credit Officer and
lead analyst for Draslovka. Given the slower-than-expected
recovery projected in 2023 driven by the sustained challenging
operating environment, Moody's expects leverage to be at around
6.0x debt-to-EBITDA by the end of 2023 - at or above the higher end
of expectations for its B2 CFR. After a weak 2022, the company's
Moody's adjusted gross leverage peaked at 7.6x at the end of 2022
before falling to 6.2x as of last twelve months through June 30.
However, the combination of meaningful equity injections from
Draslovka's shareholders to support the company's liquidity
position in 2022 and 2023 and expectation for incremental equity in
2023 and 2024, the potential upside for revenues and EBITDA from
the commercialization of Draslovka's GlyCat gold leaching
technology for which the company signed its first licensing
agreement in Q2 2023, and the absence of near-term refinancing
needs as both the RCF and backed senior secured term loan B mature
in 2026 issued by Manchester Acquisition Sub LLC, afford the
company with prospects for and time to improve its stretched
capital structure.
Moody's projects USD40-45 million of EBITDA (excluding licensing
income) for Draslovka's segments and at least USD20 million of
licensing income for 2023, resulting in leverage around 6x. The
reliance on licensing income and high leverage provide minimal
flexibility for any further shortfalls or unexpected events.
Draslovka signed a first licence agreement for its GlyCat solution,
glycine to be used by the gold mining industry, with a Mongolian
gold mine and the company indicated is currently onboarding new
customers to record first sales of GlyCat during the second half of
the year. The successful commercialization of the technology could
provide revenue and EBITDA upside, but visibility as to timing for
this remains limited.
Despite operating through three divisions, Moody´s considers that
Draslovka has a small scale and narrow business profile relative to
larger international chemical companies, with concentration of
revenues around sodium cyanide (NaCN) and hydrogen cyanide (HCN).
The company´s credit profile is also constrained by concentration
of customers, end markets and manufacturing footprint (only two
production plants). However, the company benefits from its strong
market position, including in the North American NaCN market, a
consolidated market structure with high barriers to entry, with
limited diversification in two other industries and products,
including fumigants and vulcanization products for green tyres.
Draslovka's Mining Solutions segment, which accounted for 89% of
the company's USD35.5 million reported EBITDA (as reported by the
company) in the first six months of 2023, has benefitted from
continued volume recovery of sodium cyanide (NaCN) in H1 2023
compared to the second half of 2022 - NaCN volumes in H1 2023 were
16% higher than in the same period last year. Volume growth
reflected increasing demand from gold producers which benefitted
from higher gold prices and improved profitability due to lower
input costs. Q2 2023 EBITDA was also supported by USD13.4 million
of high-margin licensing income from the company's HCN-based
technology leading to a cumulated reported EBITDA of USD70.9
million in the last twelve months (LTM) period to June 30, 2023.
However the positive trend in NaCN volumes was partly mitigated by
the negative impact from elevated caustic soda prices in the US and
a margin squeeze on Draslovka's hydrogen cyanide (HCN) production
which resulted in the company initiating renegotiations of
contractual terms with its largest HCN customer in the US,
Mitsubishi Chemical Group. The Specialty Chemicals segment suffered
in the first half of 2023 from lower volumes of liquid nitrogen
fertilizers due to oversupply in the European market as well as the
re-pricing of the company's inventory in relation to the downward
trend in feedstock prices which had an unplanned negative impact on
the EBITDA in Q2 2023.
LIQUIDITY
Draslovka has adequate liquidity primarily because of large equity
injections from its shareholders, a Czech multifamily office
operating under the name of bpd. These equity injections amounted
to USD91 million in 2022 and USD34 million in H1 2023 and mitigated
the significant negative FCF of USD80 million in 2022 and USD32
million in the first half of 2023. Moody's expects FCF to be at
around break-even level in 2024 supported by modest EBITDA
recovery, more favourable working capital movements and the
company's flexibility in reducing capital expenditures. As of June
30, 2023, the company had a cash balance of USD35.7 million with
only USD2 million of availability under the USD30 million RCF. The
company is relying on historical equity contributions to maintain
adequate liquidity and will likely need incremental equity during
2024, which Moody's considers likely to occur.
STRUCTURAL CONSIDERATIONS
Manchester Acquisition Sub LLC's backed senior secured term loan B
and the senior secured RCF are rated B2, in line with the long term
corporate family rating. This reflects their dominance in the
capital structure and the fact that they share the same guarantor
coverage and security package.
OUTLOOK
The negative outlook on Draslovka's ratings reflects Moody's
expectation that the company's leverage and cash flow metrics will
remain weak in 2023 before moderately improving in 2024. The rating
agency also assumes continued support from shareholders during this
recovery period.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Draslovka's rating could be upgraded if the company would achieve a
more diversified revenue mix with an increasing share of non NaCN
sales. An upgrade of the rating would also require Moody's adjusted
gross leverage to remain well below 4x on a sustainable basis and
its FCF / Debt to consistently remain around 10%. The establishment
of a track record of a balanced financial policy would also be a
prerequisite for a rating upgrade.
Negative rating pressure would arise if Draslovka's liquidity
profile weakens, likely to occur if shareholders fail to inject
more capital into the group. Moody's could also downgrade
Draslovka's rating if its leverage remains close to 6x and its
FCF/debt is consistently in the low single digits.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemicals
published in June 2022.
COMPANY PROFILE
Draslovka Holding Alpha a.s. (Draslovka) is a leading producer of
cyanide (CN)-based chemicals. These chemicals are used in sectors
such as agriculture, mining, automotive and pharmaceuticals.
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F R A N C E
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CLAUDIUS FINANCE: Moody's Alters Outlook on 'B2' CFR to Stable
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Moody's Investors Service affirmed Claudius Finance Parent S.a
r.l.'s (Cegid or the company) B2 long term corporate family rating
and the B2-PD probability of default rating. Moody's also affirmed
the B2 ratings of the EUR880 million senior secured term loan B and
the proposed upsized EUR125 million senior secured revolving credit
facility (RCF), and assigned a B2 rating to the proposed EUR700
million senior secured term loan B borrowed by Claudius Finance S.a
r.l. The outlook of both entities has changed to stable from
positive. The company expects to use proceeds from the proposed
term loan primarily to fund a dividend to shareholders.
RATINGS RATIONALE
The ratings affirmation balances Cegid's strong performance over
the last few years and improved business profile with the
significant dividend recapitalization transaction that will
materially increase Cegid's leverage by approximately 2.0x
debt-to-EBITDA, and its absolute Moody's-adjusted debt to about
EUR1.8 billion from EUR1.1 billion. Pro forma for the transaction,
Moody's-adjusted leverage and free cash flow (FCF) to debt metrics
are forecast to weaken to around 4.7x and 6% in fiscal year 2023
but remain within the B2 rating triggers.
Prior to this transaction, Cegid's rating was strongly positioned
relative to Moody's expectations, given the improvement in
fundamental operations (including size, profitability and
geographical diversification) as well as credit metrics.
Uncertainty regarding financial policy decisions was among the key
ratings constraints. Since 2021, Cegid's maintained approximately
flat gross debt while achieving strong EBITDA growth.
The proposed dividend recapitalization, the first since Silver Lake
acquired Cegid in 2016, re-sizes the capital structure while
returning funds to shareholders. Management and sponsors have
indicated that there is no willingness to meaningfully increase
leverage beyond the pro forma levels for further shareholder
distributions, and that the company will focus on growing the
business organically and via M&A. Considering the proposed
re-leveraging transaction, Moody's believes M&A will likely
comprise small, cash-financed bolt-on acquisitions or all-share
transactions. The growth profile of the company will likely
facilitate a decline in leverage through EBITDA growth.
The transaction also includes EUR400 million of PIK notes outside
of the restricted group, which creates the potential for a further
leverage increase at Cegid to refinance the PIK.
Cegid's leading position as a provider of enterprise software for
the midmarket sector in France and Iberia; high switching costs for
customers, which results in low churn; good revenue visibility
because of the recurring nature of maintenance and
software-as-a-service (SaaS) fees; and good liquidity support its
B2 CFR.
However, Cegid's high degree of product concentration; its exposure
to the midmarket sector, which may face a higher degree of
competitive pressure from global software providers or, at the
smaller end in terms of scale, have a higher degree of operating
and financial risk; its geographic concentration; and the risk of
re-leveraging via debt-funded acquisitions or shareholder
distributions, weigh negatively on its credit quality.
A combination of robust organic growth and relatively prudent M&A
strategy acquisitions led to strong growth, with revenue climbing
to around EUR798 million during 2022 from EUR396 million in 2018,
pro forma for the combination with Grupo Primavera and other M&A
that closed later in the year. During the same period, reported
company-adjusted EBITDA (margin) improved to EUR336 million (42.2%)
from EUR154 million (38.9%). The company's growth also brought a
certain degree of geographical diversification, in particular to
Iberia that represented around 15% of pro forma revenues in 2022.
RATING OUTLOOK
The stable outlook reflects Moody's expectations that the company's
credit metrics will remain commensurate with the B2 CFR triggers
over the next 12 to 18 months. The outlook incorporates Moody's
assumption that acquisitions in the near term will be funded mostly
through FCF or equity and that the company will maintain adequate
liquidity.
LIQUIDITY
Cegid has good liquidity. As of June 30, 2023, Cegid held EUR55
million of cash on balance sheet. Liquidity is further supported by
a fully undrawn senior secured revolving credit facility (RCF) that
Moody's expect will be increased up to EUR125 million from EUR75
million at present. Additionally, Moody's expect robust cash flow
generation over the course of 2023, 2024 and 2025. The company is
subject to one springing financial maintenance covenant on the RCF,
which is set at 8x and tested when the senior secured RCF is drawn
by more than 40%, with a breach constituting an event of default.
STRUCTURAL CONSIDERATIONS
The company's capital structure consists of a EUR125 million senior
secured RCF maturing in January 2028 and an EUR880 million and
EUR700 million senior secured term loans maturing in July 2028,
which rank pari passu. Security consists of pledges over shares,
intercompany receivables and bank accounts. The senior secured term
loans and RCF are rated B2, in line with the CFR, as they are the
only financial debt instruments in the capital structure. The
probability of default rating is in line with the CFR and reflects
Moody's assumption of a 50% family recovery rate.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure could develop if the company continues to
grow its revenue and EBITDA, such that Moody's-adjusted leverage
improves towards 4.0x; Moody's-adjusted (EBITDA – capital
expenditures) / interest expense improves towards 2.5x; or
Moody's-adjusted FCF/debt improves towards 10%, all on a sustained
basis. Clarity regarding financial policy that could accommodate a
higher rating is also an important consideration.
Conversely, negative rating pressure could develop if Cegid's
revenue and EBITDA growth is weaker than expected, such that
Moody's-adjusted leverage weakens to above 6.0x; Moody's-adjusted
FCF/debt is below 5%; or Moody's-adjusted (EBITDA – capital
expenditures)/ interest expenses is well below 2.0x, all on a
sustained basis; or if liquidity deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Software
published in June 2022.
COMPANY PROFILE
Claudius Finance Parent S.a r.l. (Cegid) is a leading French
provider of on-premise and cloud-enabled enterprise software and
related services. The company was founded in 1983 and is
headquartered in Lyon, France. It operates primarily in France, but
has through M&A build a significant presence in Iberia and made
inroads to other European countries. Cegid offers functional
solutions focused on finance and tax, human resources and payroll,
as well as vertical solutions serving customers in the accounting
and retail sectors.
In 2022, Cegid reported revenue of EUR718 million and EBITDA of
EUR310 million (after the capitalisation of EUR62 million of
software development costs), according to its audited accounts. The
company had more than 530,000 client sites, and customer retention
rates were high at around 95%. Moody's calculate that recurring
revenue represented around 85% of total revenue in 2022, composed
of SaaS fees and maintenance fees.
COOKIE INTERMEDIATE: Moody's Alters Outlook on Caa1 CFR to Stable
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Moody's Investors Service has affirmed the Caa1 corporate family
rating and the Caa1-PD probability of default rating of Cookie
Intermediate Holding II SAS (Biscuit or the company), the parent
company of Biscuit Holding S.A.S., one of the largest European
manufacturers of private-label sweet biscuits based in France.
Concurrently, Moody's has affirmed the B3 ratings on the EUR493.8
million senior secured first lien term loan B due 2027 and the
EUR85 million senior secured multi-currency revolving credit
facility (RCF) due 2026 borrowed by Biscuit Holding S.A.S. At the
same time the rating agency has affirmed the B3 rating on the
EUR201.2 million senior secured first lien term loan B due 2027
borrowed by De Banketgroep Holding International BV. The outlook of
all entities has been changed to stable from negative.
"The outlook change to stable from negative reflects Biscuit's
improvement in operating performance due to the full implementation
of price increase, which led to a recovery in contribution margin
and profitability during the first half of 2023. Moody's expects
earnings growth to be sustained through year end 2023, driving
deleveraging progress, though with debt/EBITDA remaining very high
at around 9.5x with potential for reduction to a more sustainable
level only in 2024," says Valentino Balletta, a Moody's Analyst and
lead analyst for Biscuit.
"The rating action also reflects the company's improved liquidity
following the completion of its sale lease back and the issuance of
additional debt, that, while structurally increasing leverage,
provided additional liquidity to cope with the peak in its working
capital needs," added Mr. Balletta.
RATINGS RATIONALE
Biscuit's Caa1 CFR reflects the company's very high financial
leverage and still weak credit metrics which have been
substantially hurt in 2022 by the very high cost inflation and the
company's delay in renegotiating its yearly contracts with
retailers in some markets, which lead to a significant
deterioration in profitability and liquidity. During 2022 the
company reported negative EBITDA and a significant negative free
cash flow of around EUR100 million.
However, the outlook change to stable from negative reflects the
company's improving operating performance over the past few months
as earnings continue to rebound from very weak level in 2022 and
Moody's expectations that the earnings recovery will be sustained
over the next 12 month.
Since the beginning of 2023, the company implemented, under the new
management, a turnaround plan and took various steps to address its
liquidity shortfall, including the issuance of around EUR80 million
additional debt and the achievement of around EUR20 million
proceeds from the sale and lease back of some assets. In addition,
all customer contracts were terminated and renegotiated in the
first quarter of 2023 to reflect commodities and energy inflation.
As a result of the successful implementation of price increases
(+38% versus the same period in previous year) pressure on margins
started easing, supporting a recovery in profitability.
The company's operating performance is further bolstered by a
moderation in the prices of certain commodities and the
normalization of supply chains. However, Moody's notes that the
prices of key ingredients like sugar and chocolate remain extremely
high and volatile. Consequently, there may be a necessity to
continue increasing prices to maintain profit margins. This will
become progressively challenging as the demand weakens and as
retailers intensify their price competition.
Moody's believes, the company's adjusted financial leverage,
measured as gross debt/EBITDA (Moody's-adjusted), could fall
further, but will remain high, at around 9.5x as of year-end 2023,
with potential for reduction to a more sustainable level only in
2024.
Although Moody's expects Biscuit's profitability to improve
sequentially this year and that its private label offering should
benefit from customer downtrading in a weakening macroeconomic
environment, the persisting high inflation might continue to put
pressure on volumes. In addition, there is a potential risk that
retailers, in a perceived deflationary environment will start to
push for price reduction to try to reduce the decline in volume
from cost-conscious consumers, while in some markets, particularly
in France, the company might be forced to roll back pricing as
commodity prices decline, as a result of governments efforts to
lower prices for end consumers, constraining the ability to
preserve the current margins over the next 12-18 months.
In addition Moody's still expects the company's free cash flow to
remain substantially negative this year, mainly because of the
reversal in working capital and higher interest expenses, only
partially compensated by a reduction in capital spending. As of
June 2023, the peak in liquidity needs was over and Moody's
projects FCF to move in positive territory in the second half of
2023.
LIQUIDITY
Biscuit's liquidity has improved since the beginning of 2023,
thanks to the issuance of around EUR80 million additional debt and
around EUR20 million proceeds from the sale and lease back of some
assets. Moody's consider the company's liquidity to be adequate
with a cash balance of EUR53.9 million as of June 2023 and Moody's
forecasts that free cash flow (Moody's-adjusted) will move into
positive territory in the second half of 2023. The company also
benefits from access to an EUR85 million RCF due in 2026, which was
partially drawn by around EUR42 million, thought expect to be
further repaid over the next few quarters, given the expected
improvement in profitability and cash flow generation. Moody's
notes, however, that availability under the RCF is limited as the
company would not comply with its financial covenants.
The company's RCF has one financial covenant, a consolidated
first-lien net coverage ratio with a maximum threshold of 8.5x, to
be tested only when drawings, net of cash on balance sheet, exceed
more than 50% of the size of the facility. This was not tested as
of June 2023 and not expected to be tested in the next few
quarters; however, while it will not be met, Moody's expects the
company to maintain sufficient headroom from the end of Q4 2023
onwards, as it continues to reduce its leverage as defined by the
covenant.
Moody's notes that the company has no material debt maturities
until 2026, when its RCF is due.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Biscuit's deleveraging progress and
improved liquidity. The outlook assumes that Biscuit will maintain
at least adequate liquidity over the next 12 months, will further
reduce leverage and start generating positive free cash flow beyond
2023.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded, overtime, if the company continues
to demonstrate a track record in successfully improve its operating
profitability and cash generation leading to consistent EBITDA
growth with margin expansion above historical levels, while
debt/EBITDA is sustained below 7x and EBITA/interest is sustained
well above 1.0x. Upward pressure will also require the company to
maintain at least adequate liquidity highlighted by sustained
positive free cash flows and lower reliance on revolver borrowings
and the successful integration and delivery of the expected
synergies from the Continental Bakeries acquisition.
The ratings could be downgraded if the company's earnings recovery
stalls or reverses, or if liquidity deteriorates. The ratings could
also be downgraded if the risk of default increases, including free
cash flow remaining negative beyond 2023 such that Moody's views
the company's capital structure as unsustainable.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Consumer
Packaged Goods published in June 2022.
COMPANY PROFILE
Cookie Intermediate Holding II SAS (Biscuit or the company) is the
parent company of Biscuit Holding S.A.S., one of the largest
European manufacturers of private-label sweet biscuits in terms of
volume. The company produces and distributes traditional biscuits,
nutrition biscuits, waffles and other sweet products across Europe.
In 2022, pro forma for the acquisition of Continental Bakeries, the
company generated EUR1,030 million of revenue (EUR957 million in
2021) and negative company-adjusted EBITDA of EUR6 million
(EUR112.7 million in 2021).
LAGARDERE SA: Egan-Jones Retains 'B' Sr. Unsecured Debt Ratings
---------------------------------------------------------------
Egan-Jones Ratings Company on September 1, 2023, maintained its 'B'
foreign currency and local currency senior unsecured ratings on
debt issued by Lagardere SA. EJR also withdrew rating on
commercial paper issued by the Company.
Headquartered in Paris, France, Lagardere SA operates as a
publishing company.
RENAULT SA: Egan-Jones Hikes Sr. Unsecured Debt Ratings to 'BB'
---------------------------------------------------------------
Egan-Jones Ratings Company on September 5, 2023, upgraded the
foreign currency and local currency senior unsecured ratings on
debt issued by Renault SA to BB from BB-. EJR also withdrew rating
on commercial paper issued by the Company.
Headquartered in Boulogne-Billancourt, France, Renault designs,
manufactures, markets, and repairs passenger cars and light
commercial vehicles.
VALEO SE: Egan-Jones Retains 'BB-' Sr. Unsecured Debt Ratings
-------------------------------------------------------------
Egan-Jones Ratings Company on September 6, 2023, maintained its
'BB-' foreign currency and local currency senior unsecured ratings
on debt issued by Valeo SE. EJR also withdrew rating on commercial
paper issued by the Company.
Headquartered in Paris, France, Valeo SE. Valeo designs and
manufactures automobile components.
=============
G E R M A N Y
=============
FRESENIUS MEDICAL: Egan-Jones Retains 'BB+' Sr. Unsecured Ratings
-----------------------------------------------------------------
Egan-Jones Ratings Company on September 7, 2023, maintained its
'BB+' foreign currency and local currency senior unsecured ratings
on debt issued by Fresenius Medical Care AG & Co. KGaA.
Headquartered in Bad Homburg, Germany, Fresenius Medical Care AG &
Co. KGaA offers kidney dialysis services and manufactures and
distributes equipment and products used in the treatment of
dialysis patients.
K+S AKTIENGESELLSCHAFT: Egan-Jones Retains BB+ Unsec. Debt Ratings
------------------------------------------------------------------
Egan-Jones Ratings Company on September 7, 2023, maintained its
'BB+' foreign currency and local currency senior unsecured ratings
on debt issued by K+S Aktiengesellschaft.
Headquartered in Kassel, Germany, K+S Aktiengesellschaft
manufactures and markets within the fertilizer division standard
and specialty fertilizers to the agricultural and industrial
industries worldwide.
PBD GERMANY AUTO: Fitch Hikes Rating on Class F Notes to 'BBsf'
---------------------------------------------------------------
Fitch Ratings has upgraded PBD Germany Auto Lease Master S.A.,
Compartment 2021-1 class C to F notes, and affirmed the rest. The
ratings are on Stable Outlook.
Entity/Debt Rating Prior
----------- ------ -----
PBD Germany Auto
Lease Master S.A.,
Compartment 2021-1
A XS2399669006 LT AAAsf Affirmed AAAsf
B XS2399669931 LT AA+sf Affirmed AA+sf
C XS2399672216 LT A+sf Upgrade Asf
D XS2399683098 LT BBB+sf Upgrade BBB-sf
E XS2399684658 LT BB+sf Upgrade BBsf
F XS2399684815 LT BBsf Upgrade Bsf
TRANSACTION SUMMARY
PBD Germany Auto Lease Master S.A., Compartment 2021-1 is a
securitisation of auto lease receivables granted to German private
and commercial customers. The leases are originated and serviced by
PSA Bank Deutschland GmbH (PSAD), the German captive financing arm
of Stellantis for its Peugeot, Citroen and DS brands.
The securitised leases include the residual value (RV) component,
for which either the lessee bears the risk, or the car can be sold
to the dealer for the contractual RV via a put option. The
transaction ended its one-year revolving period in November 2022
and is now amortising pro-rata. The interest-rate mismatch between
assets and liabilities is addressed by an interest-rate cap with a
strike rate of one-month Euribor at 0%.
KEY RATING DRIVERS
Strong Performance; Economic Challenges Probable: During the
revolving period and since it ended, the transaction's defaults and
recoveries have been better than its expectation. Despite the risk
of economic deterioration, Fitch has maintained its assumptions for
private and commercial clients. The weighted average default base
case was amended slightly to 1.75% from 1.83% and the recovery base
to 65.0% from 62.5% based on the current weights of the sub-pools.
The end of the 12-month revolving period was also reflected by
lowering the default multiple by 0.25 to 5.0x, whereas the 45%
recovery haircut was unchanged.
RV Drives Risk: Under PSAD's kilometer leasing contracts (48% of
the current portfolio), car dealers pay the contractual RV.
However, dealer defaults will expose the issuer to the risk of RV
losses from declining used car prices when vehicles are sold at
market prices. The current RV portion is 40% of the overall pool.
Fitch assumes RV losses of 14.8% at 'AAA', compared with 5.6%
losses from the instalment portion.
The remaining 52% of the portfolio are Restwert leasing contracts
where the lessee carries the market value risk of the cars. Here,
the risk profile is comparable to balloon loans.
Credit Enhancement Increase Despite Pro-rata: The class A to F
notes currently pay down pro-rata since no sequential payment
triggers are breached. The collateralised class G notes are paid
sequentially after the class A to F notes in the principal priority
of payments but can also be repaid by excess spread (up to a target
schedule) in the interest priority of payments. Therefore the
collateral balance is now higher than the balance of the class A to
G notes. The resulting over-collateralisation of assets has allowed
credit enhancement to build up by approximately 70bp for each rated
tranche.
The combination of smaller loss expectations and slightly increased
credit enhancement led to the upgrade of mezzanine and junior notes
(class C to F notes).
Effective Pro-Rata Triggers: Performance triggers for sequential
amortisation consider defaults and RV losses. In Fitch's view, the
design of the triggers as well as their levels are adequate to
avoid excessive pro-rata allocations in an environment of adverse
asset performance.
Consideration of Put Option: For Kilometer Leasing contracts, PSAD
can exercise a put option at lease maturity to sell cars to the
dealers for the contractual RV. Fitch continues to consider the
loss-reducing effect of the option in the 'B' and 'BB' rating
categories via reduced RV haircuts and selling costs, constituting
a variation to its Consumer ABS Rating Criteria (see below).
Servicing Continuity Risk Reduced: PSAD services the portfolio. A
servicing facilitator is appointed to find a replacement servicer
should PSAD fail to perform its duties or become insolvent. In
addition, an amortising liquidity reserve provides adequate
protection against payment interruption risk. Fitch deems
commingling risk immaterial in the transaction, due to collections
being transferred to the issuer within two days.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Unanticipated increases in the frequency of defaults, widening RV
losses or decreases in recovery rates could produce larger losses
than the base case and could result in negative rating action on
the notes.
- Different timing of defaults or RV losses leading to a longer
period of pro-rata amortisation and longer RV time to sale could
lead to negative rating action on the senior notes.
Fitch conducted a sensitivity analysis by stressing the
transaction's base-case default rate and recovery rate assumptions,
with the results as below for the class A/B/C/D/E/F notes:
Default rates up 10%: 'AAAsf'; 'AA+sf'; 'A+sf'; 'BBB+sf'; 'BB+sf';
'BBsf'
Default rates up 25%: 'AAAsf'; 'AA+sf'; 'A+sf'; 'BBB+sf'; 'BB+sf';
'BBsf'
Default rates up 50%: 'AAAsf'; 'AAsf'; 'Asf'; 'BBBsf'; 'BB+sf';
'BBsf'
Recovery rates down 10%: 'AAAsf'; 'AA+sf'; 'A+sf'; 'BBB+sf';
'BB+sf'; 'BBsf'
Recovery rates down 25%: 'AAAsf'; 'AA+sf'; 'A+sf'; 'BBB+sf';
'BB+sf'; 'BBsf'
Recovery rates down 50%: 'AAAsf'; 'AA+sf'; 'Asf'; 'BBB-sf';
'BB+sf'; 'BB-sf'
Default rates up and recovery rates down 10% each: 'AAAsf';
'AA+sf'; 'A+sf'; 'BBB+sf'; 'BB+sf'; 'BBsf'
Default rates up and recovery rates down 25% each: 'AAAsf'; 'AAsf';
'Asf'; 'BBB-sf'; 'BB+sf'; 'BB-sf'
Default rates up and recovery rates down 50% each: 'AA+sf'; 'A+sf';
'A-sf'; 'BB+sf'; 'BBsf'; 'B+sf'
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Lower-than-expected defaults and/or more robust recoveries
leading to smaller losses.
- The contracts with RV exposure maturing without/ with
smaller-than-expected associated RV losses.
Fitch found a 25% decrease in default rates and a 25% increase of
recovery rates would result in upgrades of no more than one notch
each for the class B, D and E notes.
CRITERIA VARIATION
The issuer benefits from a dealer put option via a contractual
agreement it entered into with PSAD, under which it can demand
payment of the contractual RV from dealers through PSAD.
The available mechanisms and incentives for the insolvency
administrator suggest that the put option exercise will also be
effective after an insolvency of PSAD. Fitch believes that it is
unlikely that no dealer put options will be exercised during the
transaction's life. Therefore Fitch found it appropriate to
incorporate the beneficial effect of exercised put options into
scenarios close to its baseline, gradually decreasing with every
rating notch up to 'BB+sf'. No benefit is assumed in
investment-grade scenarios.
The criteria variation comprises reducing the market value haircuts
to below the low end of the criteria range and assuming no selling
costs for the calculation of RV loss in non-investment-grade
scenarios.
The criteria variation has an impact on the ratings of the class E
and F notes of up to two categories higher.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Prior to the transaction closing, Fitch conducted a review of a
small targeted sample of the originator's origination files and
found the information contained in the reviewed files to be
adequately consistent with the originator's policies and practices
and the other information provided to the agency about the asset
portfolio.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
SCHNIEDER REISEN: Files for Insolvency
--------------------------------------
Von Oliver Graue at fvw reports that the Hamburg-based tour
operator Schnieder Reisen has filed for insolvency.
According to fvw, the bankruptcy is the first case for the German
Travel Guarantee Fund, which was launched two years ago.
Schnieder Reisen was founded in 1992.
=============
I R E L A N D
=============
CAIRN CLO X: Fitch Affirms 'Bsf' Rating on F Notes, Outlook Pos.
----------------------------------------------------------------
Fitch Ratings has upgraded Cairn CLO X Designated Activity
Company's class D-R notes to 'BBB+' from 'BBB' and revised the
Outlook to Positive from Stable for six other tranches.
Entity/Debt Rating Prior
----------- ------ -----
Cairn CLO X DAC
A-R XS2350603374 LT AAAsf Affirmed AAAsf
B-1-R XS2350603960 LT AAsf Affirmed AAsf
B-2-R XS2350604422 LT AAsf Affirmed AAsf
C-1-R XS2350605239 LT Asf Affirmed Asf
C-2-R XS2350605742 LT Asf Affirmed Asf
D-R XS2350606633 LT BBB+sf Upgrade BBBsf
E XS1880994246 LT BBsf Affirmed BBsf
F XS1880994329 LT Bsf Affirmed Bsf
TRANSACTION SUMMARY
Cairn CLO X DAC is a cash flow collateralised loan obligation (CLO)
actively managed by the manager, Cairn Loan Investments LLP. The
reinvestment period ended in April 2023. At closing of the
refinance, the class A-R to D-R notes were issued and the proceeds
used to refinance the existing notes. The class E and F and the
subordinated notes were not refinanced.
KEY RATING DRIVERS
Stable Performance, Shorter Life: The stable performance of the
transaction combined with a shortened weighted average life (WAL)
covenant result in better break-even default rate cushions versus
the last review in September 2022. This results in the upgrade of
class D-R notes and affirmation of other notes. The large default
rate cushion of the class D-R notes supports the Stable Outlook
while the Positive Outlook of the class B-1-R, B-2-R, C-1-R, C-2-R,
E and F notes reflects the possibility of upgrade should portfolio
performance remain stable and the decreasing WAL of the portfolio
contribute to a higher default-rate cushion.
Deviation from MIR: Except for class A-R and class D-R notes, the
ratings of the remaining notes are one notch below their model
implied ratings (MIR). Such deviations reflect Fitch's view that
the default-rate cushions of these notes are not commensurate with
the MIRs given current uncertain macroeconomic conditions.
Asset Performance Within Expectations: The transaction has
performed in line with Fitch's expectation. The transaction is
currently 0.35% above par and is passing all coverage and
portfolio-profile tests. The last trustee report shows one
defaulted name in the current portfolio, contributing 0.5% of the
reinvestment target par.
'B'/'B-' Portfolio: Fitch assesses the average credit quality of
the underlying obligors at 'B'/'B-'. The Fitch-calculated weighted
average rating factor (WARF) of the current portfolio was 25.0. The
WARF of the current portfolio for which we have notched down by one
rating level entities on Negative Outlook was 27.0.
High Recovery Expectations: Senior secured obligations comprise
99.7% of the portfolio as calculated by the trustee. Fitch views
the recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch-calculated
weighted average recovery rate (WARR) of the current portfolio is
61.8%.
Diversified Portfolio: The portfolio is well-diversified across
obligors, countries and industries. The top 10 obligor
concentration is 14.0%, and no obligor represents more than 1.9% of
the portfolio balance, as reported by the trustee.
Transaction Outside Reinvestment Period: Although the transaction
exited its reinvestment period in April 2023, the manager can
reinvest unscheduled principal proceeds and sale proceeds from
credit-risk obligations after the reinvestment period, subject to
compliance with the reinvestment criteria.
Given the manager's ability to reinvest, Fitch's analysis is based
on a stressed portfolio using the agency's collateral quality
matrix specified in the transaction documentation. Fitch used the
matrix with a top-10 obligor limit at 17.5%, which is currently
used by the manager.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
An increase of the default rate (RDR) at all rating levels by 25%
of the mean RDR and a decrease of the recovery rate (RRR) by 25% at
all rating levels of the current portfolio would not result in
downgrades. While not Fitch's base case, downgrades may occur if
build-up of the notes' credit enhancement following amortisation
does not compensate for a larger loss expectation than assumed due
to unexpectedly high levels of defaults and portfolio
deterioration.
Due to the better metrics and shorter life of the current portfolio
than the Fitch-stressed portfolio as well as the MIR deviation, the
class F notes display a rating cushion of four notches, the class
D-R notes of three notches, the class B-1-R, B-2-R and E notes of
two notches, the class C-1-R and C-2-R notes of one notch and no
rating cushion for the class A-R notes.
Should the cushion between the current portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
and a 25% decrease of the RRR across all ratings of the stressed
portfolio would lead to downgrades of up to two notches each for
the rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A reduction of the RDR at all rating levels by 25% of the mean RDR
and an increase in the RRR by 25% at all rating levels in the
Fitch-stressed portfolio would result in upgrades of up to four
notches, except for the 'AAAsf' notes. Upgrades may also occur,
except for the 'AAAsf' notes, if the portfolio's quality remains
stable and the notes continue to amortise, leading to higher credit
enhancement across the structure.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
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.
CAPITAL FOUR VI: Fitch Gives 'B-(EXP)sf' Rating on Class F Debt
---------------------------------------------------------------
Fitch Ratings has assigned Capital Four CLO VI DAC expected
ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
Entity/Debt Rating
----------- ------
Capital Four
CLO VI DAC
A-1 XS2682068502 LT AAA(EXP)sf Expected Rating
A-2 XS2682068767 LT AAA(EXP)sf Expected Rating
B XS2682068924 LT AA(EXP)sf Expected Rating
C XS2682069146 LT A(EXP)sf Expected Rating
D XS2682069575 LT BBB-(EXP)sf Expected Rating
E XS2682069732 LT BB-(EXP)sf Expected Rating
F XS2682070078 LT B-(EXP)sf Expected Rating
Sub XS2682069815 LT NR(EXP)sf Expected Rating
TRANSACTION SUMMARY
Capital Four CLO VI DAC is a securitisation of mainly senior
secured loans (at least 90%) with a component of senior unsecured,
mezzanine, and second-lien loans. The note proceeds will be used to
fund an identified portfolio with a target par of EUR350 million.
The portfolio is managed by Capital Four CLO Management II K/S and
Capital Four Management Fondsmæglerselskab A/S. The CLO envisages
a 4.5-year reinvestment period and a 7.5-year weighted average life
(WAL).
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors at 'B/B-'. The Fitch weighted
average rating factor (WARF) of the identified portfolio is 24.8.
Strong Recovery Expectation (Positive): At least 90% of the
portfolio will comprise senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch weighted
average recovery rate (WARR) of the identified portfolio is 63.2%.
Diversified Portfolio (Positive): The maximum exposure to the 10
largest obligors and fixed-rate assets is 20% and 10%,
respectively. The transaction also includes various concentration
limits, including the maximum exposure to the three-largest
Fitch-defined industries in the portfolio at 40%. These covenants
ensure that the asset portfolio will not be exposed to excessive
concentration.
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Neutral): The WAL used for the Fitch-stressed
portfolio and matrices analysis is 12 months less than the WAL
covenant to account for structural and reinvestment conditions
after the reinvestment period, including the satisfaction of the
over-collateralisation test and Fitch 'CCC' limit, together with a
consistently decreasing WAL covenant. In Fitch's opinion, these
conditions reduce the effective risk horizon of the portfolio
during the stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean default rate (RDR) across all ratings
and a 25% decrease of the recovery rate (RRR) across all ratings of
the identified portfolio would result in downgrades of up to two
notches for the class B to E notes and to below 'B-sf' for the
class F notes.
Based on the identified portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of defaults and portfolio deterioration. Due to the
better metrics and shorter life of the identified portfolio than
the Fitch-stressed portfolio, the class D, E and F notes display a
rating cushion of two notches and the class B and C notes of one
notch.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded 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 Fitch-stressed portfolio would lead to downgrades of up to
four notches for the class A to D notes and to below 'B-sf' for the
class E and F 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
notes, except for the 'AAAsf' rated notes.
During the reinvestment period, based on the Fitch-stressed
portfolio, upgrades, except for the 'AAAsf; notes, may occur on
better-than-expected portfolio credit quality and a shorter
remaining WAL test, meaning the notes are able to withstand larger
than expected losses for the transaction's remaining life. After
the end of the reinvestment period, upgrades may occur on stable
portfolio credit quality and deleveraging, leading to higher credit
enhancement and excess spread available to cover losses in the
remaining portfolio.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
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.
CAPITAL FOUR VI: S&P Assigns Prelim. B-(sf) Rating on Cl. F Notes
-----------------------------------------------------------------
S&P Global Ratings assigned its preliminary credit ratings to
Capital Four CLO VI DAC's class A-1, A-2, B, C, D, E, and F notes.
At closing, the issuer will also issue unrated subordinated notes.
The reinvestment period will be 4.6 years, while the non-call
period will be 2.1 years after closing.
Under the transaction documents, the rated loans and notes will pay
quarterly interest unless there is a frequency switch event.
Following this, the notes will switch to semiannual payment.
The preliminary ratings assigned to the notes 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 Global Ratings weighted-average rating factor 2832.08
Default rate dispersion 354.36
Weighted-average life (years) 4.75
Obligor diversity measure 112.00
Industry diversity measure 20.82
Regional diversity measure 1.30
Transaction key metrics
CURRENT
Total par amount (mil. EUR) 350.00
Defaulted assets (mil. EUR) 0.00
Number of performing obligors 119
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 0.00
Actual 'AAA' weighted-average recovery (%) 37.40
Actual weighted-average spread (%) 4.11
Actual weighted-average coupon (%) 7.39
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary collateral portfolio's credit quality, which has a
weighted-average rating of 'B'. We consider that the portfolio will
be well-diversified on the closing date, primarily comprising
broadly syndicated speculative-grade senior secured term loans and
senior secured bonds. Therefore, we conducted our credit and cash
flow analysis by applying our criteria for corporate cash flow
CDOs.
"In our cash flow analysis, we also modeled the covenanted
weighted-average spread of 4.05%, and the covenanted
weighted-average recovery rates as indicated by the collateral
manager. 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.
"We expect the transaction's documented counterparty replacement
and remedy mechanisms to adequately mitigate its exposure to
counterparty risk under our current counterparty criteria.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk to
be limited at the assigned preliminary ratings, as the exposure to
individual sovereigns does not exceed the diversification
thresholds outlined in our criteria.
"We expect the transaction's legal structure and framework to be
bankruptcy remote, in line with our legal criteria.
"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 the effective date, during which the
transaction's credit risk profile could deteriorate, we have capped
our preliminary ratings assigned to the notes.
"The class A-1, A-2, and F notes can withstand stresses
commensurate with the assigned preliminary ratings. In our view,
the portfolio is granular in nature, and well-diversified across
obligors, industries, and asset characteristics when compared with
other CLO transactions we have rated recently. As such, we have not
applied any additional scenario and sensitivity analysis when
assigning our preliminary ratings to any classes of notes in this
transaction.
"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
the class A-1, A-2, B, C, D, E, and F notes.
"In addition to our standard analysis, we have also included the
sensitivity of the ratings on the class A to E notes, based on four
hypothetical scenarios. The results are shown in the chart below.
"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."
Environmental, social, and governance (ESG)
S&P regards the exposure to ESG credit factors in the transaction
as being broadly in line with our 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 the following industries:
controversial weapons, casinos, pornography or prostitution, payday
lending, tobacco, fossil fuels, weapons, hazardous chemicals,
endangered wildlife, or private prisons.
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, no specific adjustments have been
made in our rating analysis to account for any ESG-related risks or
opportunities.
Capital Four CLO VI is a European cash flow CLO securitization of a
revolving pool, comprising euro-denominated senior secured loans
and bonds issued mainly by speculative-grade borrowers. Capital
Four CLO Management II K/S and Capital Four Management
Fondsmæglerselskab A/S will manage the transaction.
Ratings list
CLASS PRELIM PRELIM SUB (%) INTEREST RATE*
RATING AMOUNT
(MIL. EUR)
A-1 AAA (sf) 210.00 40.00 Three/six-month EURIBOR
plus 1.73%
A-2 AAA (sf) 7.00 38.00 Three/six-month EURIBOR
plus 2.05%
B AA (sf) 36.75 27.50 Three/six-month EURIBOR
plus 2.45%
C A (sf) 19.25 22.00 Three/six-month EURIBOR
plus 3.15%
D BBB- (sf) 22.75 15.50 Three/six-month EURIBOR
plus 4.90%
E BB- (sf) 17.50 10.50 Three/six-month EURIBOR
plus 7.30%
F B- (sf) 10.50 7.50 Three/six-month EURIBOR
plus 9.49%
Sub NR 26.58 N/A N/A
*The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A--Not applicable.
GOLDENTREE LOAN 3: Moody's Cuts EUR10.6MM F Notes Rating to Caa1
----------------------------------------------------------------
Moody's Investors Service has taken a variety of rating actions on
the following notes issued by GoldenTree Loan Management EUR CLO 3
Designated Activity Company:
EUR25,000,000 Class B-1-R Senior Secured Floating Rate Notes due
2032, Upgraded to Aa1 (sf); previously on Sep 10, 2021 Assigned
Aa2 (sf)
EUR8,000,000 Class B-2-R Senior Secured Fixed Rate Notes due
2032,
Upgraded to Aa1 (sf); previously on Sep 10, 2021 Assigned Aa2
(sf)
EUR25,000,000 Class C-R Senior Secured Deferrable Floating Rate
Notes due 2032, Upgraded to A1 (sf); previously on Sep 10, 2021
Assigned A2 (sf)
EUR10,600,000 Class F Senior Secured Deferrable Floating Rate
Notes
due 2032, Downgraded to Caa1 (sf); previously on Sep 10, 2021
Affirmed B3 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR248,000,000 Class A-R Senior Secured Floating Rate Notes due
2032,
Affirmed Aaa (sf); previously on Sep 10, 2021 Assigned Aaa (sf)
EUR28,000,000 Class D-R Senior Secured Deferrable Floating Rate
Notes due 2032, Affirmed Baa3 (sf); previously on Sep 10, 2021
Assigned Baa3 (sf)
EUR26,000,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2032, Affirmed Ba3 (sf); previously on Sep 10, 2021
Affirmed Ba3 (sf)
GoldenTree Loan Management EUR CLO 3 Designated Activity Company,
issued in September 2019 and refinanced in September 2021, is a
collateralised loan obligation (CLO) backed by a portfolio of
mostly high-yield senior secured European loans. The portfolio is
managed by GoldenTree Loan Management, LP. The transaction's
reinvestment period will end in January 2024.
RATINGS RATIONALE
The rating upgrades on the Class B-1-R, B-2-R and C-R notes are
primarily a result of the benefit of the shorter period of time
remaining before the end of the reinvestment period in January
2024. The rating downgrade on the Class F notes is primarily a
result of the deterioration in over-collateralisation ratios over
the last year,a shorter weighted average life of the portfolio
which leads to reduced time for excess spread to cover shortfalls
caused by future defaults and the impact of the fixed floating
asset liability mismatch.
The over-collateralisation ratios of the rated notes have
deteriorated over the last year. According to the trustee report
dated August 2023 [1] the Class A/B, Class C, Class D and Class E
and OC ratios are reported at 138.81%, 127.47%, 116.78% and
108.35% compared to August 2022 [2] levels of 139.93%, 128.50%,
117.72% and 109.22% respectively.
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: EUR389.8m
Defaulted Securities: EUR0.9m
Diversity Score: 53
Weighted Average Rating Factor (WARF): 2866
Weighted Average Life (WAL): 4.06 years
Weighted Average Spread (WAS) (before accounting for Euribor
floors): 3.81%
Weighted Average Recovery Rate (WARR): 44.46%
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, 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.
-- Weighted average life: The notes' ratings are sensitive to the
weighted average life assumption of the portfolio, which could
lengthen as a result of the manager's decision to reinvest in new
issue loans or other loans with longer maturities, or participate
in amend-to-extend offerings.
-- 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. Moody's analysed
defaulted recoveries assuming the lower of the market price or the
recovery rate to account for potential volatility in market prices.
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.
===================
L U X E M B O U R G
===================
AURIS LUXEMBOURG II: Fitch Affirms B- LongTerm IDR, Outlook Stable
------------------------------------------------------------------
Fitch Ratings has affirmed Auris Luxembourg II S.A.'s (WSA)
Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable
Outlook. Fitch has also affirmed the senior secured ratings on
Auris Luxembourg III S.a.r.l.'s term loan B (TLB) and revolving
credit facility (RCF) at 'B' with Recovery Ratings of 'RR3'.
The Stable Outlook reflects steady organic earnings development
with financial leverage forecast to fall back within its 8x
negative leverage sensitivity by fiscal year ending September 2025
(FY25). Nonetheless, Fitch assesses growing refinancing risk
resulting from the RCF and first-lien TLB maturities upcoming in
1H26, combined with negative free cash flow (FCF) projected over
FY23-FY24, which are being pressured by rising interest costs and
high capital expenditures. WSA's inability to address its
overly-leveraged capital structure by mid-2024 would pressure the
rating and Outlook.
The 'B-' IDR balances WSA's aggressive financial policy, with total
debt-to-EBITDA projected to remain above 8.0x until at least the
end of FY24, coupled with weak FCF generation, against a strong
business profile supported by a meaningful market position as the
third-largest manufacturer in the global, non-cyclical, hearing-aid
market.
KEY RATING DRIVERS
Growing Refinancing Risk: Fitch views refinancing risk as growing
as debt maturities approach in 2026. The group has almost EUR3.7
billion of debt against Fitch-adjusted EBITDA of around EUR420
million, implying EBITDA leverage of almost 9x. Furthermore, Fitch
expects the highly leveraged capital structure to lead to negative
FCF generation over the next two years, as we project the group's
interest costs to rise to around 60% of EBITDA in FY24. The final
size and terms of a future refinancing exercise, including
shareholder support or otherwise, will be critical for the
direction of the rating.
Steady Earnings Development: Fitch expects WSA to generate EBITDA
of around EUR420 million in FY23, in line with its prior
expectations. This reflects steady growth across wholesale and
retail markets in the group's core geographies, despite some
softness in the US consumer market as well as Germany and France.
Fitch expects that resolution of the issues facing the new
distribution centre in Mexico will also support profitability into
FY24. Fitch expects mid-single digit cost inflation to continue
being passed onto consumers, and Fitch expects new product launches
within the Signia and Widex brands, to add earnings and lead to a
gradually increasing EBITDA margin towards 17.5% in FY24.
Negative Cash Flow; Sufficient Liquidity: Fitch projects cash flow
to remain under pressure as the group manages high capex, moderate
working capital cash outflows to support new product launches in
FY23-24, and rising interest costs against a gradually improving
earnings base. In this context, and with interest costs projected
to increase by almost EUR80 million in FY24 as interest rate hedges
roll off, we project negative FCF over FY23-FY24.
However, Fitch believes that current liquidity sources following
the shareholders' EUR100 million equity injection in March 2023, in
addition to available drawings under the RCF of around EUR140
million plus Fitch-adjusted cash on balance sheet of around EUR60
million, are sufficient to cover the group's investment and
financing requirements over the rating horizon.
Long-Term Growth Continues: Hearing-aid sales have been resilient
through the cycle, despite being predominantly discretionary
spending. Fitch expects the sector's customer base to expand,
driven by stronger penetration in large markets such as the US,
China and South America, demographic shifts in advanced economies
with a higher percentage of hearing-impaired individuals adopting
the device, and advancements in hearing-aid technology and
diagnostics. WSA's extensive footprint, diverse product portfolio
and solid competitive position should allow the company to
capitalise on these growth trends.
Regulation Mildly Credit Positive: The introduction of full
reimbursement for hearing aids in France in 2021, alongside US Food
and Drug Administration approval for hearing aids to be sold over
the counter (OTC) without a prescription from October 2022, are
supportive of the sector, increasing the take-up of hearing aids
and awareness. WSA's recent OTC launch earlier this year has added
limited earnings so far, but is still in early stages, and the
Mexican distribution centre ramp up should improve supply for the
market. Regional regulation can occasionally reduce demand for
hearing aids, as in Australia, where the recommended replacement
cycle was recently extended.
DERIVATION SUMMARY
WSA is one of the top manufacturers and distributors in the hearing
aid industry, benefiting from significant scale, a large portfolio
of brands and widespread geographical coverage. The business
profile is a crossover between a strong medical device
manufacturer, supported by resilient health-driven demand, and a
consumer goods company. Worldwide state- and private insurance-led
reimbursement regimes are rapidly developing. However, the majority
of the expense for such devices remains discretionary and requires
co-payment by customers.
Fitch assesses WSA's business profile at a solid 'BB' rating, but
its tight liquidity headroom, negative FCF, high leverage and
aggressive financial policy constrain the credit profile to 'B-'.
Since the merger between Sivantos and Widex in 2019, its EBITDA
leverage has remained over 9.0x, and we expect it to remain at that
level in FY23, which heightens its refinancing risk towards its
2026 maturities.
Its credit metrics are weaker than those of manufacturers and
retail entities in sectors that share WSA's traits of healthcare
and consumer products, such as Sunshine Luxembourg VII S.a.r.l.
(Galderma, B/Stable) and Afflelou S.A.S. (B/Stable). These
entities' business models are also dependent on marketing and
distribution of an R&D-led product with a healthcare profile.
KEY ASSUMPTIONS
- Sales growth of 6.5% in FY23, increasing to close to 7% in FY24
fostered by new product launches. Fitch forecasts similar levels of
growth in FY25-26
- Fitch-adjusted EBITDA margin of 16.8% in FY22, gradually
increasing towards 18.5% in FY26 as inflationary pressures recede
and the new North American plant works at full capacity.
- Capex rising towards EUR200 million in FY23, remaining at
EUR180-EUR190 million in FY24-26, for a capex intensity average of
6.8%-6.2% of sales.
- Working capital outflow of EUR45 million in FY22, followed by
more normalised levels of about EUR20 million-EUR30 million
thereafter.
- No M&A
- No dividends paid
KEY RATING ASSUMPTIONS
- The recovery analysis assumes that WSA would be considered a
going concern (GC) in bankruptcy, and that it would be reorganised
rather than liquidated, given the inherent value behind its product
portfolio, brands, retail network and clients.
- Fitch assesses WSA's GC EBITDA at about EUR300 million, which
after undertaking corrective measures, should allow the company to
generate moderately positive FCF.
- Financial distress, leading to restructuring, may be the result
of new technologies in the hearing aid market or a widespread
diffusion of value-for-money devices, both potentially leading to a
loss of pricing power across WSA's portfolio, reducing gross
margins and overall profitability.
- Fitch believes that, given WSA's high leverage, restructuring
will primarily be triggered by an increase in leverage associated
with financial distress, leading to above-average debt multiples.
This is likely to materialise at EBITDA levels still potentially
able to generate mildly positive or neutral FCF.
- Fitch applies an enterprise value (EV) multiple of 6.5x EBITDA to
the GC EBITDA to calculate a post-reorganisation EV. The multiple
is at the high end of the range of multiples used for other
healthcare-focused credit opinions and ratings in the 'B' category,
reflecting WSA's strong global market position in the hearing aid
market and scale.
- Its waterfall analysis generated a ranked recovery in the 'RR3'
band, indicating a 'B' instrument rating for the senior secured
TLB1 and TLB2 and RCF. The latter ranks pari passu with the TLBs,
and which Fitch assumes to be fully drawn upon default. The
waterfall analysis based on current metrics and assumptions yields
recoveries of 51% for the senior secured debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Lack of credible path to a sustainable capital structure
communicated to the market by mid-2024 that supports positive FCF
generation
- EBITDA interest coverage below 1.5x
- Liquidity deterioration along with neutral to negative FCF
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- EBITDA leverage below 7.0x on a sustained basis
- EBITDA interest cover over 2.2x on a sustained basis
- FCF margin in mid-single digits on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Limited Liquidity: Fitch continues to view WSA's liquidity as
limited, given its assumption of only very limited FCF generation
over the next two years. We estimate WSA's end-FY23 freely
available cash of around EUR60 million (excluding EUR60 million of
restricted cash Fitch deems to be unavailable for debt service),
which is supported by an unutilised RCF of around EUR145 million
out of a total committed amount of EUR260 million.
WSA has concentrated funding with RCF and TLBs maturing in August
2025 and February 2026 respectively, followed by a second-lien
facility due in February 2027.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Auris Luxembourg
III S.a.r.l
senior secured LT B Affirmed RR3 B
Auris Luxembourg
II S.A. LT IDR B- Affirmed B-
CULLINAN HOLDCO: Moody's Alters Outlook on 'B1' CFR to Negative
---------------------------------------------------------------
Moody's Investors Service affirmed Cullinan Holdco SCSp's (Graanul
or the company) B1 long term corporate family rating, B1-PD
probability of default rating and B1 rating of the EUR630 million
floating and fixed rate backed senior secured notes maturing
October 2026, issued by Cullinan Holdco SCSp. The outlook changed
to negative from stable.
RATINGS RATIONALE
The rating action reflects the weakened operating performance as a
result of excess supply in the European wood pellets market caused
by an unusually mild European winter period 2022/23, a drop in
European power prices as well as the UK's contract for differences
(CfD) system that made it economically unviable to use pellets for
power production. In addition, Graanul has had a customer dispute
since early 2023 which lead to unprofitable sales to this customer
in the first half of 2023. These factors resulted in an EBITDA
decline to around EUR34 million in the first six months of 2023
compared to around EUR59 million in the same period of 2022. With
the onset of the heating season in the Northern hemisphere in
October, Moody's expects that the high inventory levels in the
market will get cleared supporting higher revenues and
profitability.
Graanul's B1 CFR continues to take into account its strong market
position as one of Europe's largest wood pellets producer; its
strong production footprint in the Baltics that yields economies of
scale; the current regulatory environment, supporting
carbon-neutral biomass including wood pellets; and the track record
of positive Moody's-adjusted free cash flow (FCF) generation
supported by moderate maintenance capex.
At the same time, the rating is constrained by the relatively small
size of the business with revenues of around EUR595 million in the
twelve months ended June 2023; its high operational concentration
as a single product-company with a high customer and geographical
concentration; the group's highly leveraged capital structure with
Moody's-adjusted gross debt/EBITDA of 5.7x as of June 30, 2023 and
the rating agency's expectation for the leverage ratio to
deteriorate to above 6.0x by the end of 2023 before returning to a
lower at around 5.0x by the end of 2024; the risk of adverse
changes in the regulatory environment; and the threat of
technological advances in wind and solar energy generation that
could potentially make these technologies more competitive when
compared to biomass.
LIQUIDITY
Moody's considers the liquidity of Graanul as good. As of June 30,
2023 the company had EUR23.5 million cash at banks after making the
last payment of contingent considerations of EUR31.25 million
linked to earn-outs when the company was sold in 2021. Graanul
currently has around EUR25 million drawings under its EUR100
million revolving credit facility (RCF). The RCF is subject to a
springing covenant test if drawn more than 40% and Graanul has
ample headroom against the financial covenant if it were tested.
Moody's expects working capital reductions from seasonal demand
uptake and a concurrent reduction of its inventories. The rating
agency expects Moody's-adjusted FCF of at least EUR30 million in
2023 and 2024. Graanul's next sizeable debt maturity are the EUR630
million backed senior secured bonds due in October 2026.
OUTLOOK
The negative outlook on Graanul's ratings reflects the weak metrics
relative to expectations for its B1 rating category as well as the
uncertainties with regards to the resolution of its pricing dispute
with one of its customers and the seasonal demand pick up for the
forthcoming heating season.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Graanul's (1) leverage is reduced
to below 4.5x Moody's-adjusted gross debt/EBITDA on a sustainable
basis, (2) EBITA margin remains at around 17%-18%, (3) the company
consistently generates positive FCF with FCF/debt in the high
single digits and maintains its good liquidity.
The ratings could be downgraded, if (1) Graanul does not stem the
operating performance deterioration resulting in continued weak
profitability; (2) Moody's-adjusted leverage remains above 5.5x
debt/EBITDA into 2024; or (3) if the company was not able to
generate positive FCF and its liquidity deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing
published in September 2021.
COMPANY PROFILE
Cullinan Holdco SCSp is a Luxembourg-domiciled intermediate holding
company that owns the entire share capital of AS Graanul Invest
following the acquisition of 80% of the company's capital by Apollo
Global Management, Inc. Graanul is headquartered in Tallinn/Estonia
and is the largest utility-grade wood pellet producer in Europe
with 12 production plants in the Baltics region (Estonia, Latvia
and Lithuania) and the US. The company also owns six combined heat
and power plants in Estonia and Latvia, which are biomass-fired and
provide the majority of the company's internal heat and power
needs. For the twelve months ended June 30, 2023, the company
generated EUR595 million in revenues and around EUR120 million in
company-adjusted EBITDA.
===========
P O L A N D
===========
BANK MILLENNIUM: Fitch Gives 'BB' Rating on Sr. Non-Preferred Notes
-------------------------------------------------------------------
Fitch Ratings has assigned Bank Millennium S.A.'s (Millennium;
BB/Positive) EUR400 million senior non-preferred (SNP) bond (ISIN
XS2684974046) a final 'BB' long-term rating. The rating is in line
with the expected rating assigned on 7 September 2023 (Fitch Rates
Bank Millennium's Upcoming Senior Non-Preferred Notes 'BB(EXP)').
The bonds mature on September 18, 2027 with the first optional
redemption date on 18 September 2026. They carry a coupon of 9.875%
paid annually until the first optional redemption date and are
expected to be traded on the Luxemburg Stock Exchange.
KEY RATING DRIVERS
Millennium's SNP debt is rated in line with the bank's IDR,
reflecting its expectations that the bank will use only SNP and
more junior debt to meet its minimum requirement for own funds and
eligible liabilities (MREL) resolution buffer.
On the consolidated level, starting from end-2023 the bank must
comply with MREL requirement set at 21.64% (including the combined
buffer requirement of 2.75%) of risk-weighted assets (RWA) of the
resolution group, which excludes its mortgage bank subsidiary. The
bank can meet part of its MREL requirements with senior preferred
debt, but it is limited to a low 0.27% of RWA.
Millennium's IDRs and debt ratings balance the benefits of a
well-established retail franchise and a record of adequate asset
quality with an above-average exposure to non-financial risks from
foreign-currency mortgage loans. A materialisation of the latter,
combined with the high cost of mortgage credit holiday imposed by
the authorities, has led to sizeable losses and capital erosion
triggering the launch of a capital recovery plan in 2022. The bank
has been progressing well with its implementation.
The Positive Outlook on the bank's Long-Term IDR reflects its
base-case expectation for medium-term improvements of the bank's
risk profile through a further gradual reduction of risks related
to its foreign-currency mortgage loan portfolio. It also reflects
its expectations that its improved core profitability will absorb
ongoing legal costs and potential government intervention, leading
to a further recovery of the bank's capitalisation.
The bank is in the midst of its capital recovery plan following the
breach of regulatory capital buffers in mid-2022. Capitalisation
metrics had partly recovered by end-1H23, with a Tier 1 ratio of
11.7% resulting in a buffer of around 150bp above the regulatory
minimum (excluding Pillar 2 guidance). In its base case Fitch
expects capitalisation to recover further on a combination of
improved internal capital generation and RWA optimisation.
The bank's capital structure is supplemented by subordinated debt,
equivalent to about 3.3% of RWA, maturing in 2027 (PLN700 million)
and 2029 (PLN830 million), which supports its regulatory
capitalisation and MREL-eligible liabilities. The bank's funding
structure is dominated by customer deposits (about 97% of total
funding at end-1H23), with household deposits accounting for
around70% of total customer deposits.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The SNP debt rating would be downgraded if the bank's Long-Term IDR
is downgraded.
The SNP debt would also be downgraded to one notch below the bank's
Long-Term IDR if Fitch expects Millennium to use senior preferred
debt to meet its MREL requirement while SNP and more junior debt
would not exceed 10% of the Millennium resolution group's RWA on a
sustained basis.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The SNP debt rating could be upgraded if the bank's Long-Term IDR
is upgraded.
ESG CONSIDERATIONS
Millennium's ESG Relevance Score for Management Strategy is '4',
reflecting its view of high government intervention risk in the
Polish banking sector, which affects the banks' operating
environment and their ability to define and execute on strategy.
This has negative implications for the credit profile and is
relevant to the rating in combination with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Bank Millennium S.A.
Senior
non-preferred LT BB New Rating BB(EXP)
===============
P O R T U G A L
===============
TAP: Portugal Gov't to Kick Off Sale Process Next Week
------------------------------------------------------
Sergio Goncalves at Reuters reports that Portugal's government will
approve the legal framework for the privatisation of state-owned
airline TAP next week, kicking off the sale after a few months'
delay, Prime Minister Antonio Costa said on Sept. 19.
The government has said it intends to keep a strategic stake in the
carrier, which is undergoing a restructuring under an EU-approved
EUR3.2 billion (US$3.53 billion) rescue plan, Reuters relates.
At least three major global players -- British Airways and Iberia
owner IAG, Lufthansa and Air France-KLM -- have so far shown an
interest in TAP, Reuters notes.
"I can confirm that next week the cabinet will approve the document
that will establish the (legal) framework for the privatisation of
TAP, defending the company, and the interests of Portugal and the
Portuguese," Mr. Costa told lawmakers during a debate.
The cabinet meets every Thursday and next week's meeting will take
place on Sept. 28, Reuters discloses.
According to Reuters, the privatisation process, which was
initially scheduled to be launched in July, will take months and
should only be concluded next year.
===========
R U S S I A
===========
REGIONAL ELECTRICAL: Fitch Affirms BB- LongTerm IDR, Outlook Stable
-------------------------------------------------------------------
Fitch Ratings has affirmed Uzbekistan-based electricity
distribution and sales company Regional Electrical Power Networks
JSC's (Regional Networks) Long-Term Issuer Default Rating (IDR) at
'BB-' with a Stable Outlook.
The rating is equalised with that of its sole parent Uzbekistan
(BB-/Stable) due to strong ties between the company and the state
under Fitch's Government-Related Entities (GRE) Rating Criteria.
Fitch assesses the company's Standalone Credit Profile (SCP) at
'b-', reflecting an opaque regulatory framework for electricity
distribution in Uzbekistan, significant political risk in
tariff-setting, high counterparty risk, low and erratic
profitability, and large foreign-exchange (FX) mismatch between
revenue and debt.
Rating strengths are the company's dominant position in the
domestic electricity distribution market, access to end-user
payment collections and moderate improvement expected in
profitability.
KEY RATING DRIVERS
Rating Equalised with Uzbekistan's: Regional Networks scores 30
support points out of a maximum 60 under Fitch's GRE Criteria,
which together with its 'b-' SCP, leads to the rating being
equalised with the state's as per its notching guidelines.
Strong Links with State: Fitch assesses status ownership and
control as 'Strong', due to the government's full ownership and
control of operations, the company's inclusion on the list of
strategically important enterprises and lack of short-term plans
for privatisation. Support track record is 'Very Strong', as almost
all of the company's debt is provided by the Ministry of Finance,
either directly or by on-lending funds from international
development banks, or by Uzbekistan's Fund for Reconstruction and
Development. Other forms of support include equity injections and
minimal dividends to the parent.
Socio-Political and Financial Implications: Fitch views the
socio-political impact of a default as 'Strong', as in its view the
company's default may endanger the continued provision of essential
public services. The socio-political impact is compounded by
Regional Networks' large workforce and significant infrastructure
renovation programme. The financial implications of a default are
'Moderate' due to the company's low amount of debt relative to
other GREs' and its lack of public debt, although we see some
reputational risk for the state.
Regulatory Decisions Key: Almost all of Regional Networks' revenue
and around 90% of costs are regulated, underlining the considerable
influence on its financials of the regulator's decision on tariffs.
Regulated costs include the purchase of electricity from JSC
National Electric Grid of Uzbekistan for further sale to
end-customers and costs for grid losses. Therefore, regulated cost
growth is as important as the tariff increase itself.
Opaque Regulation: The regulatory framework weighs on Regional
Networks' business profile. It is characterised by low
transparency, short-term tariffs and political risk in
tariff-setting as electricity tariffs are one of the government's
instruments for social stability. In Uzbekistan, large industrial
consumers, who are less sensitive to tariff levels, cross-subsidise
households and other customers.
Working-Capital Swings: In 2022 Regional Networks saw a
working-capital outflow related to decreased collection rates and
an increase in prepayments for electricity. This contrasts with the
2019-2021 period of working-capital inflows when the company did
not fully pay National Grid for its purchased electricity. The
visibility of cash settlements between Regional Networks and its
counterparties is low, which adds to cash flow volatility.
Improvement in Leverage: In 2022 Fitch-calculated EBITDA increased
almost three times to UZS1.7 trillion (USD150 million) after a
tariff increase for customers in 2H22 and slight narrowing in
electricity losses. As a result, funds from operations (FFO)
leverage improved to 3.8x at end-2022 from 8.5x at end-2021.
Ambitious Capex Programme: Regional Networks' business plan
incorporates an ambitious investment programme of around USD144
million annually over 2023-2026 for the installation of advanced
electricity meters and network renovation. It expects to fund
investments with international loans channelled through the
Ministry of Finance, or state-guaranteed loans. We expect the
company to remain negative in free cash flow (FCF) to 2026 (on
average USD58 million a year), as was the case in 2019-2022.
High FX Risk: Regional Networks is exposed to foreign-currency
fluctuations risk as 83% of its debt at end-2022 (versus 92% at
end-2021) was denominated in US dollars, against all revenue in
Uzbek soum. The company does not hedge its FX risks, and it plans
to continue funding capex from debt raised in foreign currencies
from international banks. We see increased risks of Uzbek soum
depreciation due to its correlation with the Russian rouble. The
latter lost around 30% against the US dollar from January 2023
versus 8% for the Uzbek currency against the US dollar.
DERIVATION SUMMARY
Regional Networks' rating is equalised with that of Uzbekistan. The
strength of ties with the government under Fitch's GRE Rating
Criteria is comparable to those of JSC Almalyk Mining and
Metallurgical Complex (BB-/Stable, SCP: b+) and JSC Uzbek
Metallurgical Plant (BB-/Stable; SCP b+) and slightly stronger than
for UzbekHydroEnergo JSC (BB-/Stable; SCP b+).
Regional Networks' ties with the state are stronger than those of
Kazakhstan-based GREs such as Kazakhstan Electricity Grid Operating
Company (KEGOC, BBB-/Stable; SCP: bb+) and JSC Samruk-Energy
(BB+/Stable; SCP: bb-) as those peers require less state support.
On a standalone basis, Regional Networks has a larger asset base
and greater geographical and customer diversification than
Kazakhstan-based Mangistau Regional Electricity Network Company
(B+/Stable), which is balanced by Mangistau's more established
regulatory framework, with a longer record and multi-year tariffs,
and a stronger operating environment in Kazakhstan.
Regional Networks has a weaker business profile than Enerjisa
Enerji A.S. (AA+(tur)/Negative), a distribution and supply company
in Turkiye, and KEGOC, a transmission operator in Kazakhstan, as
those peers benefit from stronger regulation and a less depreciated
asset base.
Mangistau, Enerjisa and KEGOC all have stronger financial profiles
than Regional Networks due to higher profitability, lower leverage,
a limited share of FX-denominated debt and more established
financial policies.
KEY ASSUMPTIONS
Key Assumptions Within Its Rating Case for the Issuer:
- Domestic GDP growth of around 6% on average per year over
2023-2026
- Average Uzbek soum at 12,800 to the US dollar over 2023-2026
- Electricity sales volumes of around 63 TWh on average per year
over 2023-2026
- Double-digit tariff growth for legal entities in 2023, and in
line with inflation to 2026
- Single-digit tariff growth for households annually during
2023-2026
- Capex on average USD137 million annually over 2023-2026, slightly
below management's expectations
- Negligible dividends to 2026
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- A sovereign upgrade
- A more transparent and predictable operating and regulatory
framework (including implementation of multi-year tariffs) together
with a stronger financial profile (FFO leverage below 5.0x on a
sustained basis) could be positive for the SCP
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A sovereign downgrade
- Evidence of weaker government links, including lack of support
for new debt or large portions of non-guaranteed debt without
adequate compensation in tariffs
- Continued adverse tariff decisions, operational underperformance,
or dividends resulting in deterioration in the financial profile
(eg. FFO leverage exceeding 7x on a sustained basis)
The following rating sensitivities are for Uzbekistan (25 August
2023):
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- External Finances: A substantial worsening of external finances,
for example, via a large drop in remittances, or a widening in the
trade deficit, leading to a significant decline in FX reserves
- Public Finances: A marked rise in the government debt-to-GDP
ratio or an erosion of sovereign fiscal buffers, for example, due
to an extended period of low growth or crystallisation of
contingent liabilities
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Macro: Consistent implementation of structural reforms that boost
GDP growth prospects and macroeconomic stability
- Public Finances: Fiscal consolidation that enhances medium-term
public debt sustainability
- Structural: A marked and sustained improvement in governance
standards and an easing in geopolitical risk
LIQUIDITY AND DEBT STRUCTURE
Key Role of External Financing: At end-2022, Regional Networks had
cash and equivalents of UZS0.5 trillion (USD48 million) against
short-term debt of UZS1.0 trillion (USD88 million). The majority of
cash was held in Uzbek Industrial and Construction Bank Joint-Stock
Commercial Bank (BB-/Stable) in US dollars and Uzbek soums.
Fitch expects the company to continue generating negative FCF over
2023-2026, which it plans to finance with new loans from
international development banks with state guarantees or loans
directly from the state. Capex can be postponed until funding is
secured.
State Funding Dominates: Ninety-four per cent of Regional Networks'
debt at end-2022 were loans from the state (via the Ministry of
Finance and Uzbekistan Fund for Reconstruction and Development),
which either provides direct funding or on-lends proceeds from
international development banks, like Asian Development Bank.
Maturities over 2023-2025 are around UZS0.5 trillion per year.
ISSUER PROFILE
Regional Networks is a distribution service operator (DSO) and
electricity sales company in Uzbekistan, which purchases
electricity from the transmission network, JSC National Electric
Grid of Uzbekistan, and then distributes and sells electricity to
end-customers. Distribution and supply activities are not split in
Uzbekistan.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Regional Networks' ratings are linked to Uzbekistan's IDRs.
ESG CONSIDERATIONS
Regional Networks has an ESG Relevance Score of '4' for Financial
Transparency due to delays in the publication of IFRS accounts
compared with international best practice and the absence of
interim IFRS reporting. The lack of transparency limits its ability
to assess the company's financial condition, which has a negative
impact on the credit profile and is relevant to the rating, in
conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Regional Electrical
Power Networks JSC LT IDR BB- Affirmed BB-
=========
S P A I N
=========
GRIFOLS SA: Fitch Alters Outlook on 'BB-' LongTerm IDR to Negative
------------------------------------------------------------------
Fitch Ratings has revised the Outlook on Grifols, S.A.'s Long-Term
Issuer Default Rating (IDR) to Negative from Stable and affirmed
the IDR at 'BB-'.
The Negative Outlook reflects that leverage will remain
significantly above the 5x negative sensitivity in 2023, and that
the recovery in margins and leverage has been slower than
previously expected.
Grifols IDR is constrained by its high leverage, which increased
significantly in 2021 and 2022 largely as a result of a temporary
pandemic-driven operating underperformance and the debt-funded
acquisition of Biotest. The rating is supported by Grifols' healthy
cash-flow margins and its solid business profile underpinned a
large manufacturing footprint and strong global positions in the
niche, oligopolistic and defensive plasma derivatives market.
Fitch expects that margins will progressively improve, leading to
an organic reduction in leverage towards its 5x sensitivity for the
rating by 2025. We note management's commitment to reduce leverage
by 2024 and its intention to consider divestments to reduce debt,
which could accelerate deleveraging towards levels commensurate
with the current rating in 2024.
Fitch is also affirming the IDR of Grifols Worldwide Operations
Limited and Grifols Worldwide Operations USA, Inc at 'BB-', while
revising its Outlook to Negative, and immediately withdrawing its
ratings for commercial reasons. Its instrument ratings will remain
active and monitored by Fitch. A full list of ratings is below.
KEY RATING DRIVERS
High Leverage Pressures Rating: Grifols' Fitch-defined gross
debt/EBITDA leverage was already high over 2016-2020 at around 5.5x
(5x net) due to an aggressive financial policy that prioritised
growth, but leverage increased materially towards 10x (9x net) in
2021 and peaked at 10.7x (10.3x net) in 2022. This was due to
pandemic-driven temporary operating underperformance and the EUR1.5
billion debt-funded acquisition of Biotest AG in April 2022.
Margins Compressed by Plasma Cost: Fitch views Grifols' operational
weakness in 2021 and 2022 was largely caused by pandemic
restrictions, which led to shortages of plasma, its main raw
material. Plasma collection volumes gradually recovered to
pre-pandemic levels in 2H21 and 2022, but the cost of collection
continued rising until 3Q22.
This affected 2022 and to a lesser degree 1H23 margins, given the
9-12 month lag between plasma collection and sale of related
derivatives. Fitch-defined EBITDA margins (excluding IFRS 16
leases) declined from historical high 20s-low 30s to 16% in
2021-2022.
Margin Improvement Drives Deleveraging: Its rating case reflects
that Grifols' margins steadily improved through 1H23, although they
are not yet at pre-pandemic levels. Fitch expects margin
improvement to continue in 2H23 and 2024, driven by gradual decline
in plasma collection costs since July 2022. Margins will be also
supported by cost savings from the restructuring launched in early
2023 (EUR450 million expected), which should more than offset
inflationary costs.
Fitch expects EBITDA margin (Fitch-adjusted, excluding IFRS 16) to
improve to 20% in 2023 and 23.5% in 2024 from 16% in 2022. This
would lead to organic deleveraging towards 7.5x in 2023 and 5.5x in
2024, which could be accelerated with divestments.
Financial Policy Key, Divestments Considered: The rating is
predicated on management remaining committed to disciplined
financial policy, prioritising deleveraging over shareholder
distributions and large M&A. Management has publicly committed to
reducing reported net leverage to 4x by end-2024 (consistent with
5x Fitch-defined net leverage, as it includes Singapore public
investment fund GIC's preferred equity and factoring). It has also
openly discussed possible divestments to achieve this, including
monetising its 26% stake in Chinese firm Shanghai RAAS.
Fitch does not factor in divestments in its rating case given the
associated uncertainty, but they could help Grifols improve
leverage towards levels commensurate with the current rating in
2024.
Upside from Potential Biotest Product Launches: The Biotest
acquisition has strengthened Grifols' product pipeline and
innovation capabilities, and broadened its scale and geographic
footprint in the near term. The approval and successful
commercialization of two plasma derivatives from Biotest's pipeline
is critical as it would lead to a structural EBITDA margin
improvement from improved plasma economics, as the two new
derivatives would be obtained from the same litters of plasma used
in production of existing products.
The expected approval of two products, fibrinogen and trimodulin,
was delayed, and we anticipate their launch from 2025. We see
moderate execution risks associated with the approval and
successful commercialisation of these plasma proteins.
Healthy FCF: The rating reflects Grifols' intrinsic cash-generative
profile excluding the pandemic impact, with free cash flow (FCF)
margins structurally expected in mid-to-high single-digits. This
counterbalances its leveraged balance sheet and sets the company
apart from lower-rated sector peers. Inability to maintain this FCF
profile would signal a weakening business profile, which combined
with its already stretched financial leverage would no longer
support a 'BB-' IDR.
Leading Company in Attractive Niche: The rating recognizes Grifols'
meaningful position in plasma derivatives, which we estimate will
grow at high single digits due to use of plasma proteins for
manufacturing biologic drugs for existing and new treatments. The
market benefits from barriers to entry due to complex and highly
regulated collection, handling and processing of plasma, the
importance of scale given the sector's high capital intensity, and
reliable access to the key raw material of blood plasma.
Niche-Specific Pressures: Its rating assessment reflects that the
plasma-derivatives niche is more exposed to cost and price pressure
than innovative pharmaceuticals, given a chronically under-supplied
plasma market where the manufacturing process is more relevant than
intellectual property protections. Fitch believes that as one of
the larger sector constituents, Grifols is well placed to defend
its market position through vertical integration securing plasma
supply and running cost-efficient operations.
Superior Recoveries for Secured Creditors: Fitch rates Grifols'
senior secured debt at 'BB+', two notches above the IDR, reflecting
its category 2 first-lien debt class under Fitch's Corporates
Recovery Ratings and Instrument Ratings Criteria. This translates
into a Recovery Rating of 'RR2'. Fitch believes the high amount of
senior secured debt and prior-ranking debt relative to EBITDA in
2021 and 2022 is temporary and will improve significantly from
2023.
Fitch rates the senior unsecured debt issued by Grifols and its
subsidiaries at 'B+', one notch below the IDR, with a Recovery
Rating of 'RR5'. Fitch considers the high amount of senior secured
debt reduces recovery prospects for the senior unsecured debt in
line with a subordinated debt class.
DERIVATION SUMMARY
Fitch rates Grifols using the framework of the Ratings Navigator
for Generic companies.
Grifols stands out as an issuer within the non-investment-grade
space with a compelling business model in terms of its global
market position in core products and strong FCF generation. This is
counterbalanced by a heavy reliance on the performance on four main
plasma-derived medicinal products that are responsible for well
over 50% of its sales. Its financial risk is the main constraint,
with EBITDA leverage projected to remain above 5.0x (net 4.5x)
until 2024.
Fitch compares Grifols with pharmaceutical peers such as Grunenthal
Pharma GmbH & Co. Kommanditgesellschaft (BB/Stable), Teva
Pharmaceutical Industries Limited (BB-/Stable), and CHEPLAPHARM
Arzneimittel GmbH (B+/Stable). Grifols is larger in scale than both
Grunenthal and Cheplapharm, which constrains Cheplapharm's ratings.
However, both peers have significantly higher margins than Grifols
and significantly less EBITDA leverage, which underpins
Grunenthal's one-notch higher rating despite its smaller scale.
Other life science peers such as Avantor Funding, Inc.
(BB/Positive) are similar in terms of scale and margins to Grifols,
but its higher rating reflects its lower leverage and cash flow
levels.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Double-digit revenue growth in 2023, reflecting increased plasma
supply and the integration of Biotest. Mid-single-digit organic
revenue growth in 2024-2026
- Gradual recovery of EBITDA margin (excluding the contribution of
associate Shanghai RAAS) to above 20% in 2023. EBITDA margin to
rise further to 23.5% in 2024, and above 24% in 2025-2026, as
raw-material costs normalise and Biotest's new products are
launched
- Working-capital outflows of EUR100 million in 2023, gradually
increasing to EUR260 million in 2026, after the launch of new
products from 2024-2025
- Annual capex of about EUR270 million-EUR370 million during
2023-2025
- No acquisitions from 2022-2025, as the company disposes of
non-core assets to support deleveraging. We expect acquisitions to
resume in 2026.
- No cash dividend paid in 2022-2024, followed by a 30% dividend
pay-out in 2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a
revision of the Outlook to Stable:
- Total debt/EBITDA leverage above 5.0x (net 4.5x)
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Total debt/EBITDA above 5.0x (4.5x net) on a sustained basis
- (Cash flow from operations (CFO) less capex)/total debt with
equity credit below 5% on a sustained basis
- Biotest integration challenges, delays in new product launches or
weakened cost management leading to weaker inability to improve
EBITDA margins (Fitch-defined, excl. IFRS 16) to above 24% beyond
2023
- Low single-digit FCF margin on a sustained basis
- EBITDA/interest paid persistently below 3.5x on a sustained
basis
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Total debt/EBITDA below 4.0x (3.5x net) on a sustained basis
- CFO less capex/total debt with equity credit above 7.5% on a
sustained basis
- Increased product diversification, reducing reliance on plasma
derivatives
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: We assess Grifols' liquidity headroom as
limited, as it faces significant maturities in February and May
2025 of EUR1.8 billion. The company had EUR523 million of balance
sheet cash as of June 2023, and a USD1 billion unutilised revolving
credit facility. Grifols could use these resources, along with its
positive FCF generation (mid-single digit FCF margin in 2023 and
high-single digit in 2024-2025) to cover its maturities. The
company could also cover these maturities by disposing of non-core
assets.
The company's following significant maturities are in 2027 for
about EUR740 million, and about EUR2.0 billion in 2028.
ISSUER PROFILE
Grifols is a global company specialising in the hemotherapy/plasma
derivatives sector, which treats diseases using blood
components/proteins derived from human plasma.
ESG CONSIDERATIONS
Grifols has an ESG Relevance Score of '4' for governance structure
and group structure due to the company's concentrated ownership and
a complex group structure with some material related-party
transactions, both of which have a negative impact on the credit
profile and are relevant to the rating in conjunction with other
factors. In its view, the concentrated family ownership has
favoured long-term growth at the expense of high indebtedness for a
listed company. In addition, complex related-party business
transactions with entities related to the family exist, albeit
conducted at arm's length.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Grifols Escrow
Issuer, S.A.U.
senior
unsecured LT B+ Affirmed RR5 B+
Grifols, S.A. LT IDR BB- Affirmed BB-
senior
unsecured LT B+ Affirmed RR5 B+
senior secured LT BB+ Affirmed RR2 BB+
Grifols Worldwide
Operations USA,
Inc LT IDR BB- Affirmed BB-
LT IDR WD Withdrawn BB-
senior secured LT BB+ Affirmed RR2 BB+
Grifols Worldwide
Operations Limited LT IDR BB- Affirmed BB-
LT IDR WD Withdrawn BB-
senior secured LT BB+ Affirmed RR2 BB+
===========
T U R K E Y
===========
ANKARA METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
--------------------------------------------------------------
Fitch Ratings has revised Ankara Metropolitan Municipality's
(Ankara) Outlook to Stable from Negative, while affirming its
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
at 'B'.
The revision of Outlook follows a recent similar action on
Turkiye's sovereign ratings (see 'Fitch Revises Turkiye's Outlook
to Stable, Affirms at 'B' dated September 8, 2023).
The ratings reflect Fitch's unchanged view that Ankara will
maintain a robust operating balance despite high inflation,
although capex-induced debt will increase substantially under
Fitch's conservative rating case. Its debt metrics will remain
commensurate with that of its peers and its 'bbb' Standalone Credit
Profile (SCP) over the rating case. Ankara's IDRs are capped by the
Turkish sovereign's 'B' IDRs.
KEY RATING DRIVERS
Risk Profile: 'Weaker'
The 'Weaker' risk profile reflects Fitch's view of a high risk that
Ankara's ability to cover debt service with its operating balance
may weaken unexpectedly over the forecast horizon (2023-2027). This
may be due to lower-than-expected revenue, higher-than-expected
expenditure, or an unanticipated rise in liabilities or
debt-service requirements.
Revenue Robustness: 'Midrange'
The 'Midrange' assessment is supported by Ankara's well-diversified
and broad-based local economy, which leads to a less volatile
tax-revenue structure and robust tax revenue growth prospects that
are at least in line with national GDP growth. The assessment is
further underpinned by a GDP per capita that is 38% higher than the
national median.
Tax revenue totalled TRY14 billion in 2022 and represented about
80% of its operating revenue. Under its conservative rating case,
Fitch expects operating revenue to grow broadly in line with
expected national nominal GDP CAGR of around 34% to TRY78.1 billion
in 2027.
Revenue Adjustability: 'Weaker'
The 'Weaker' assessment reflects a limited ability to generate
additional tax revenue as tax rates are mostly set by the central
government. At end-2022, nationally collected taxes set by the
central government comprised 71% of Ankara's total revenue, whereas
locally set taxes were only 0.4%.
Tax-setting inflexibility is partly compensated by financial
equalisation transfers received by metropolitan municipalities, and
scope for asset sales. These accounted for 12% and 9.0%,
respectively, of Ankara's total revenue in 2022. It has some
flexibility over fees and charges, which constitute 6.5% of total
revenues.
Expenditure Sustainability: 'Weaker'
The 'Weaker' assessment reflects a high inflationary operating
environment fuelled by significant lira volatility, which would
erode expenditure control, despite Ankara's moderately
cyclical-to-counter-cyclical responsibilities. Fitch expects Ankara
to continue to provide large subsidies to its transportation
company, given high fuel prices and lower cost coverage by its
operating revenues, similar to other metropolitan municipalities'.
Together with increasing social aids, it should result in faster
expenditure growth than revenue growth in 2023-2027. We therefore
forecast operating margin to fall to 22.0% on average in 2023-2027
from 46.4% in 2018-2022.
Expenditure Adjustability: 'Midrange'
The 'Midrange' assessment reflects Ankara's low share of rigid cost
items (60%) in total costs versus international peers at 70%-90%
and is in line with other Fitch-rated Turkish metropolitan
municipalities'.
Capex can be cut to mandatory items and postponed, given Ankara's
history of investments in public infrastructure. Following cost
reductions in 2019-2021 and continuous demographic growth, capex
almost tripled in 2022. Fitch expects the rapid spending growth to
continue in 2023 and 2024 ahead of local elections in March.
Ankara's capex should remain about 32% of total spending during the
rating case, and will be focused on the extension of its metro
network on top of basic infrastructure investments such as road
construction and urban landscaping.
Liabilities & Liquidity Robustness: 'Midrange'
The 'Midrange' assessment reflects Ankara's moderate framework for
debt and liquidity with no foreign-exchange (FX) risk compared with
its large national peers'. Its Dikimevi-Natoyolu metro line
investment and transportation company EGO's debt are expected to
raise Ankara's FX exposure, which will, however, remain moderately
low at 30% of total debt stock by 2027. Its robust payback ratio of
2.6x in 2027 and strong debt service coverage over 2.0x under its
rating case support the assessment.
At end-2022 its debt was all in local currency, with 71% of direct
debt at floating rates and with a fairly short weighted average
maturity of 2.1 years, similar to its domestic peers'
local-currency borrowing. Fitch expects interest-rate risk (47% of
its debt matures within one year) to be mitigated by a strong debt
service coverage at 13.4x at end-2022. At end-2022, Ankara was in a
net cash position, excluding a TRY1 billion loan at EGO.
Liabilities & Liquidity Flexibility: 'Weaker'
Ankara's counterparty risk stems from domestic liquidity providers
rated below 'BBB-', which coupled with the short tenor of loans,
limits its assessment to 'Weaker', similar to other Turkish peers'.
Due to its important status as the country's political centre,
Ankara has firm relationships with local banks and evolving
relationships with international banks. At end-2022, Ankara's cash
balance was TRY1.2 billion (unrestricted) in 2022, up from TRY1.1
billion in 2021, and covering 2.8x its annual debt servicing.
Turkish local and regional governments (LRGs) do not benefit from
treasury lines or national cash pooling, making it challenging to
fund unexpected increases in liabilities or spending peaks.
Debt Sustainability: 'aaa category'
Under Fitch's rating case for 2023-2027, Ankara's operating balance
will be about TRY15.7 billion with direct debt totalling TRY40.6
billion in 2027, leading to a debt payback (net adjusted
debt/operating balance) of below 5x, in line with an 'aaa' debt
sustainability (DS) assessment.
Fitch's rating case projects that Ankara's actual debt service
coverage ratio (ADSCR) will deteriorate to 2.0x in 2027 from 13.4x
in 2022 (or 8.0x on average over the rating case), but still
corresponding to DS 'aa' assessment. The assessment is further
supported by a low fiscal debt burden (net adjusted debt/operating
revenue) just above 50% in 2027 and at the lower end of the DS 'aa'
band.
DERIVATION SUMMARY
Ankara's 'bbb' SCP results from a 'Weaker' risk profile and a 'aaa'
DS score. The SCP also factors in Ankara's comparison with its
international peers in the same rating category. Ankara's IDRs are
not affected by any other rating factors but are capped by the
Turkish sovereign IDRs.
Short-Term Ratings
The 'B' Short-Term IDR is the only option for Ankara's 'B'
Long-Term IDR.
National Ratings
Ankara's National Ratings are driven by its Long-Term
Local-Currency IDR of 'B', which is mapped to 'AAA(tur)' in the
Turkish National Rating Correspondence Table based on national peer
comparison. The National Rating reflects Ankara's lower likelihood
to default on its long-term local-currency obligations than
foreign-currency obligations.
Debt Ratings
N/A
KEY ASSUMPTIONS
Qualitative Assumptions:
Risk Profile: 'Weaker, Unchanged with Low weight'
Revenue Robustness: 'Midrange, Unchanged with Low weight'
Revenue Adjustability: 'Weaker, Unchanged with Low weight'
Expenditure Sustainability: 'Weaker, Unchanged with Low weight'
Expenditure Adjustability: 'Midrange, Unchanged with Low weight'
Liabilities and Liquidity Robustness: 'Midrange, Unchanged with Low
weight'
Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low
weight'
Debt sustainability: 'aaa, Unchanged with Low weight'
Support (Budget Loans): 'N/A, Unchanged with Low weight'
Support (Ad Hoc): 'N/A, Unchanged with Low weight'
Asymmetric Risk: 'N/A, Unchanged with Low weight'
Rating Cap (LT IDR): 'B, Raised with High weight'
Rating Cap (LT LC IDR) 'B, Raised with High weight'
Rating Floor: 'N/A, Unchanged with Low weight'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2018-2022 reported figures and 2023-2027
projected ratios. The key assumptions for the scenario include:
- Operating revenue CAGR of 34.4% in 2023-2027 (versus an annual
average of 29.1% for 2018-2022) due to expected inflation of about
35% on average; low weight
- Tax revenue CAGR of 34.5% in 2023-2027, versus 30.0% CAGR in
2018-2022; low weight
- Current transfer CAGR of 37.5% in 2023-2027, versus 32.8% CAGR in
2018-2022; low weight
- Operating expenses CAGR of 38.9% in 2023-2027 (versus an annual
average of 31.4% for 2018-2022) due to expected inflation of about
35% on average; low weight
- Negative net capital balance of TRY17.5 billion in 2023-2027; low
weight
- Cost of debt on average at 13.2%, around 5% below the level in
2022 due to new euros financing for its metro investment at better
terms than local-currency funding options; low weight
- Turkish lira at 28.8 to the euro at end-2023, with 10% annual
depreciation for 2024-2027; low weight
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2022 and forecast for
2025, respectively (no weights and changes since the last review
are included as none of these assumptions were material to the
rating action)
GDP per capita (US dollar, market exchange rate): 10,521; 15,244
Real GDP growth (%): 5.5; 3.4
Consumer prices (annual average % change): 72.0; 34.6
General government balance (% of GDP): -1.1; -4.8
General government debt (% of GDP): 31.7; 30.4
Current account balance plus net FDI (% of GDP): -4.5; -1.2
Net external debt (% of GDP): 15.8; 15.1
IMF Development Classification: EM
CDS Market-Implied Rating: 'B'
Liquidity and Debt Structure
Ankara's adjusted-debt was TRY1.7 billion at-end 2022, up from
TRY1.0 billion in 2021. Net adjusted debt (TRY488 million at
end-2022) corresponds to the difference between adjusted debt and
the year-end available cash viewed as unrestricted by Fitch. EGO's
total debt amounting to TRY1.0 billion is reclassified as 'other
Fitch-classified debt' as the loan is guaranteed by the
metropolitan municipality and serviced from Ankara's operating cash
flow.
Fitch expects its metro line investment to change Ankara's 100%
local currency debt profile and raise its unhedged FX exposure in
Fitch's rating case. Fitch forecasts Ankara's unrestricted cash
(2022: TRY1.2 billion) to be depleted over 2023-2027 due to high
inflation.
Ankara's contingent liabilities are moderate and comprise mostly
borrowings of its water affiliate, ASKI, which has the capacity to
service its own debt due to its strong debt service coverage of
14.9x. Ankara's contingent liabilities totalled TRY627 million at
end-2022.
Issuer Profile
Ankara is Turkiye's capital and second-largest city by population
(6.7% of the national population). Its GDP per capita accounts for
136% of the national average. Fitch classifies Ankara as 'Type B'
LRG, meaning they are required to cover debt service from their own
cash flows on an annual basis.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A downgrade of the Turkish sovereign IDRs or a downward revision of
Ankara's SCP resulting from a deterioration of the payback ratio
above 13x across its rating case would lead to a downgrade of
Ankara's IDRs.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of the Turkish sovereign IDRs would lead to a similar
rating action on Ankara's IDRs, provided that Ankara maintains its
debt payback ratio below 5x under Fitch's rating case.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
DISCUSSION NOTE
Committee date: September 12, 2023
There was an appropriate quorum at the committee and the members
confirmed that they were free from recusal. It was agreed that the
data was sufficiently robust relative to its materiality. During
the committee no material issues were raised that were not in the
original committee package. The main rating factors under the
relevant criteria were discussed by the committee members. The
rating decision as discussed in this rating action commentary
reflects the committee discussion.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Ankara's IDRs are capped by the Turkish sovereign IDRs (B/
Stable).
Entity/Debt Rating Prior
----------- ------ -----
Ankara
Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
Natl LT AAA(tur)Affirmed AAA(tur)
ANTALYA METROPOLITAN: Fitch Alters Outlook on 'B' IDRs to Stable
----------------------------------------------------------------
Fitch Ratings has revised Antalya Metropolitan Municipality's
(Antalya) Outlook to Stable from Negative while affirming its
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs)
at 'B'.
Fitch has also revised Antalya's Standalone Credit Profile (SCP) to
'bb-' from 'b+', and upgraded its National Long-Term Rating to
'AA(tur)' from 'AA-(tur)'. The Outlook is Stable.
The ratings reflect Fitch's view that Antalya will maintain a
robust operating balance despite high inflation and a substantial
increase in debt-funded capex over Fitch's conservative rating
case. This is due to Antalya's vibrant local economy that is
largely dominated by the services sector, which is benefitting from
a strong recovery in tourism. This will support coverage of its
moderately high debt by its healthy operating balance, leading to
debt metrics that are commensurate with a 'bb-' SCP. Antalya's IDRs
are capped by the Turkish sovereign's 'B' IDRs.
The revision of Outlook follows the recent similar action on
Turkiye's sovereign ratings (see 'Fitch Revises Turkiye's Outlook
to Stable, Affirms at 'B' dated 8 September 2023.
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
Antalya's 'Vulnerable' risk profile reflects four 'Weaker' key risk
factors (KRFs) and two 'Midrange' KRFs. This reflects a very high
risk that Antalya's ability to cover debt service with its
operating balance may weaken unexpectedly over the rating case
(2023-2027) due to lower-than-expected revenue,
higher-than-expected expenditure or an unforeseen rise in
liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
The 'Midrange' assessment reflects Antalya's economy benefitting
from a post-pandemic recovery in tourist arrivals and anticipated
growth in population. Tourist inflows reached pre-pandemic levels
in 2022, supporting lower volatility in tax revenue. This will also
support employment and trade revenue, boosting personal and
corporate income tax and VAT. Fitch expects this to lead to overall
tax revenue growth above expected national nominal GDP CAGR at
around 34% for 2023-2027.
Its estimate of local nominal GDP CAGR of about 37% for 2023-2027
should drive operating revenue towards TRY22.8 billion by 2027, up
from TRY5.1 billion in 2022 under its conservative rating case.
Taxes are about two-thirds of Antalya's total revenue.
Revenue Adjustability: 'Weaker'
Antalya's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2022, nationally set and
collected taxes comprised 66% of Antalya's operating revenue or 63%
of total revenue. Local taxes over which Antalya has tax autonomy
were less than 1% of total revenue, implying negligible tax
flexibility.
However, tax inflexibility is partly compensated by financial
equalisation transfers received by metropolitan municipalities,
which accounted for about 21% of Antalya's total revenue. The fees
and charges over which Antalya has some control constitute around
11% of total revenues.
Expenditure Sustainability: 'Weaker'
The 'Weaker' assessment reflects Fitch's expectations that spending
growth will outpace revenue growth by around 7.4% for 2023-2027,
due to high inflation and further lira depreciation. This will
reverse Antalya's trend of spending growth lagging revenue growth
in 2018-2022 driven by its moderately cyclical and counter-cyclical
spending responsibilities.
The rapid spending growth forecast also factors in the partial
transfer of Antalya's transportation operations from its transport
company to the municipality, together with the relevant personnel.
Expenditure Adjustability: 'Midrange'
Antalya's spending flexibility reflects a low share of inflexible
costs, on average at less than 65% of its total expenditure.
Infrastructure investments can be postponed, given the moderate
level of existing socio-economic infrastructure.
However, Antalya has a weak record of balanced budgets due to large
swings in capex during pre-election periods, although this improved
to a surplus of 17.2% in 2022, from 10.4% in 2021 and a
deficit-before-financing of 10% in 2020. Fitch expects spending
flexibility to be reduced ahead of local elections in 2024 and
restored gradually thereafter. We expect Antalya's capex to
increase about 44% of total spending over the rating case, up from
36% in 2022 based on its planned extension of its urban rail
transit system.
Liabilities & Liquidity Robustness: 'Weaker'
Antalya faces foreign-exchange (FX ) risk as nearly 86% of its
total debt is in euros and unhedged. It is also exposed to
interest-rate risk as 57% of its bank loans are at floating rates.
Additionally, the weighted average life of its total debt is
moderate at four years. Partly offsetting these risks are a robust
actual debt service coverage ratio (ADSCR) at 2.7x in 2022, which
we expect to remain above 1.5x over the rating case, and the
amortising nature of its bank loans.
Antalya has no material off-balance-sheet risk and its debt
comprises mostly borrowings of its water affiliate ASAT, which has
the capacity to service its own debt.
Liabilities & Liquidity Flexibility: 'Weaker'
The 'Weaker' assessment reflects Antalya's weak unrestricted cash
reserves, net of receivable minus payables and funds earmarked for
future investment, which cover only 36% of its annual debt service.
It also reflects the counterparty risk of its domestic liquidity
lines from lenders rated below 'BBB-' and short loan tenors.
Antalya has a moderate record of accessing national and
international lenders. Turkish local and regional governments
(LRGs) do not benefit from treasury lines or national cash pooling,
making it challenging to fund unexpected increases of debt
liabilities or spending.
Debt Sustainability: 'aaa category'
Fitch has revised its debt sustainability (DS) assessment to 'aaa'
from 'aa', based on an improved payback ratio (net adjusted
debt/operating balance) corresponding to 'aaa' (2.0x in 2023-2027
compared with 2.7x in 2018-2022). This is despite an expected fall
in the operating margin to 40% on average over 2023-2027, from 51%
on average in 2022.
Fitch has removed the previous downward adjustment to DS due to
Antalya's capacity to report robust operating balances after an
improved payback ratio at 1.5x in 2022, versus 3.4x in 2019. Its
rating case expects total net adjusted debt to grow to TRY26.6
billion at end-2027 on its large capex and the impact of expected
lira depreciation. However, a forecast ADSCR of 2.4x on average for
2023-2027 supports the 'aaa' DS assessment. Fitch expects the
fiscal debt burden to be at 117% in 2027, corresponding to the 'a'
category or on average at 81% for 2023-2027 (compared with 108% in
2018-2022).
DERIVATION SUMMARY
Antalya's 'bb-' SCP results from a 'Vulnerable' risk profile and a
'aaa' DS score. It also factors in Antalya's comparison with
national and international peers in the same rating category, which
results in an SCP at the low end of the 'bb' category, as well as
its relatively weaker debt coverage. Antalya's IDRs are not
affected by any other rating factors but are constrained by the
Turkish sovereign IDRs.
Short-Term Ratings
The 'B' Short-Term IDR is the only option for a 'B' category
Long-Term IDR.
National Ratings
Antalya's National Ratings are driven by its Long-Term
Local-Currency IDR at 'B', which is mapped to 'AA(tur)' on the
Turkish National Rating Correspondence Table based on a peer
comparison.
The upgrade of its National Long-Term Rating reflects its resilient
operating performance and improved budgetary flexibility to service
its long-term local currency obligations, compared with that of
some local issuers in Turkiye.
Debt Ratings
N/A
KEY ASSUMPTIONS
Qualitative Assumptions:
Risk Profile: 'Vulnerable, Unchanged with Low weight'
Revenue Robustness: 'Midrange, Unchanged with Low weight'
Revenue Adjustability: 'Weaker, Unchanged with Low weight'
Expenditure Sustainability: 'Weaker, Unchanged with Low weight'
Expenditure Adjustability: 'Midrange, Unchanged with Low weight'
Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low
weight'
Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low
weight'
Debt sustainability: 'aaa, Raised with Medium weight'
Support (Budget Loans): 'N/A, Unchanged with Low weight'
Support (Ad Hoc): 'N/A, Unchanged with Low weight'
Asymmetric Risk: 'N/A, Unchanged with Low weight'
Rating Cap (LT IDR): 'B, Raised with High weight'
Rating Cap (LT LC IDR) 'B, Raised with High weight'
Rating Floor: 'N/A, Unchanged with Low weight'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2018-2022 reported figures and 2023-2027
projected ratios. The key assumptions for the scenario include:
- Operating revenue CAGR of 34.9% in 2023-2027 (versus an annual
average of 33.1% for 2018-2022) due to expected inflation of about
35% on average, low weight
- Tax revenue CAGR of 35.3% in 2023-2027, versus 36.6% CAGR in
2018-2022; low weight
- Current transfers CAGR of 37.7% in 2023-2027, versus 33.0% CAGR
in 2018-2022; low weight
- Operating expenses CAGR of 42.3% in 2023-2027 (versus an annual
average of 24.7% for 2018-2022) due to expected inflation of about
35% on average; low weight
- Negative net capital balance of TRY8.5 billion in 2023-2027; low
weight
- Cost of debt on average at 10.3%, around 3% above the level in
2022 due to higher borrowing rates; low weight
- Turkish lira at 28.8 to the euro at end-2023, with a 10% annual
depreciation over the previous year's rate for 2024-2027; low
weight
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2022 and forecast for
2025, respectively (no weights and changes since the last review
are included as none of these assumptions were material to the
rating action)
GDP per capita (US dollar, market exchange rate): 10,521; 15,244
Real GDP growth (%): 5.5; 3.4
Consumer prices (annual average % change): 72.0; 34.6
General government balance (% of GDP): -1.1; -4.8
General government debt (% of GDP): 31.7; 30.4
Current account balance plus net FDI (% of GDP): -4.5; -1.2
Net external debt (% of GDP): 15.8; 15.1
IMF Development Classification: EM
CDS Market-Implied Rating: 'B'
Liquidity and Debt Structure
Net Fitch-adjusted debt (TRY 3.8 billion at-end 2022) includes
Antalya's short-term debt (TRY567 million) and long-term debt
(TRY3.6 billion), as well as other Fitch-classified debt items
(TRY10 million) represented by leases. Net Fitch-adjusted debt
corresponds to the difference between Fitch-adjusted debt and
Antalya's year-end available cash viewed as unrestricted by Fitch
(TRY346 million at end-2022). Antalya's unrestricted cash is
adjusted by the amount that is earmarked to offset payables.
Antalya has a moderately low contingent risk stemming from its
public-sector entities. Most of its majority-owned public sector
companies are self-financing. Their accounts are not consolidated
into the municipality's budget.
Antalya's contingent liabilities are largely limited to the debt at
ASAT at above 99% of its total public sector debt. The company has
a solid payback ratio at a low 0.9x and ADSCR of 3.2x.
Issuer Profile
Antalya is Turkiye's fifth-largest city with 3.1% of the national
population. It is the sixth-largest GDP contributor (2.9% of
national GDP output in 2021). It is the tourism hub of the country,
capturing on average 30% of tourist arrivals nationwide. Fitch
classifies Antalya as 'Type B' LRG, meaning they are required to
cover debt service from their own cash flows on an annual basis.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A downgrade of the Turkish sovereign IDRs or a downward revision of
Antalya's SCP resulting from a debt payback of more than nine years
on a sustained basis would lead to a downgrade of Antalya's IDRs.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of the Turkish sovereign IDRs would lead to a similar
rating action on Antalya's IDRs, provided that Antalya maintains
its debt payback ratio below 5x under Fitch's rating case.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Antalya
Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT AA(tur) Upgrade AA-(tur)
BURSA METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
-------------------------------------------------------------
Fitch Ratings has revised Bursa Metropolitan Municipality's (Bursa)
Outlook to Stable from Negative, while affirming its Long-Term
Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B'.
Fitch has also assigned Bursa Short-Term Foreign- and
Local-Currency IDRs of 'B'.
The ratings reflect Fitch's unchanged view that Bursa will maintain
a robust operating balance despite high inflation, although
capex-induced debt will increase substantially under Fitch's
conservative rating case. Its debt metrics will remain commensurate
with that of its peers and with a 'bb-' Standalone Credit Profile
(SCP) over the rating case. Bursa's IDRs are capped by the Turkish
sovereign's 'B' IDRs.
The revision of Outlook follows the recent similar action on
Turkiye's sovereign ratings (see 'Fitch Revises Turkiye's Outlook
to Stable, Affirms at 'B' dated September 8, 2023).
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
The assessment reflects Fitch's view of a very high risk that
Bursa's ability to cover debt service with its operating balance
may weaken unexpectedly over the rating horizon (2023-2027) due to
lower-than-expected revenue, higher-than-expected expenditure or an
unanticipated rise in liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
The 'Midrange' assessment reflects Bursa's dynamic, industrialised
and well-diversified local economy as well as a GDP per capita that
is 11% above the national median. Following resilient operating
performance over the last five years, we expect tax revenue growth
to be above national nominal GDP growth. We forecast operating
revenue to increase further to about TRY27.9 billion by 2027 from
TRY6.5 billion in 2022, leading to a robust operating margin of
about 32%.
Similar to its national peers', tax revenue represents 65% of
Bursa's operating revenue, resulting in low volatility and high
predictability. Fitch expects its significant share of VAT on
imported intermediate goods, combined with a broad and diversified
personal and corporate income tax base, to persist over the medium
term, underpinned by average national real economic growth of about
3% and a weak Turkish lira.
Revenue Adjustability: 'Weaker'
Bursa's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2022, nationally collected
and set taxes comprised 62% of Bursa's total revenue. Local taxes
set by Bursa were a low 0.8% of total revenue, implying negligible
tax flexibility. However, this is compensated by financial
equalisation transfers received by metropolitan municipalities, and
scope for asset sales. For Bursa, these accounted for 19% and 4%,
respectively, of its total revenue, in 2022.
Expenditure Sustainability: 'Weaker'
Bursa's moderately cyclical to counter-cyclical spending
responsibilities help it adapt spending to local economic cycles.
Its operating expenditure growth lagged operating revenue growth in
2018-2022, resulting in a sound average 46% operating margin.
However, Fitch expects Bursa's spending growth to outpace revenue
growth in its rating case by around 7% due to high inflation fueled
by large lira volatility and upcoming local elections in March.
Recent hikes to fuel prices are also likely to add pressure to
operating expenditure, especially for its loss-making public
transportation company, Burulas, as the cost increase will not be
fully reflected in tariffs. We expect, however, operating spending
growth to slow to operating revenue growth, post local-elections.
Expenditure Adjustability: 'Midrange'
The 'Midrange' assessment reflects Bursa's lower share of
inflexible costs than its international peers' on average at less
than 62% of total expenditure, which is in line with other
Fitch-rated Turkish metropolitan municipalities'. This is supported
by its moderate level of socio-economic infrastructure and
flexibility to cut or postpone infrastructure investments.
Its capital-intensive metro investments are undertaken by the
General Directorate of Infrastructure Investments, which further
supports expenditure flexibility. However, spending flexibility
will be reduced in the run-up to local elections with large swings
in capex leading to budget deficits, which Fitch expects to
gradually narrow thereafter.
Liabilities & Liquidity Robustness: 'Weaker'
Bursa is exposed to considerable foreign-exchange (FX) risk with
nearly 56% of its total debt in euros and unhedged. By end-2023, we
expect FX volatility to result in a roughly 19% increase in its
debt stock. Bursa's bank loans have a moderately long maturity at
3.2 years and are fully amortising. Its robust operating balance
covered about 2.9x of its annual debt service in 2022, mitigating
refinancing risk.
Bursa's interest-rate exposure is limited as 90% of its total debt
is at fixed rates. Off-balance-sheet risk is also limited as most
of the debt stems from its water affiliate, BUSKI, which has the
capacity to service its debt from its own cash flow.
Liabilities & Liquidity Flexibility: 'Weaker'
Bursa has a moderate record of accessing international and national
lenders. The latter is limited by the counterparty risk associated
with domestic liquidity lines from banks rated below 'BBB-' and by
the short tenor of their loans. Bursa's unrestricted cash reserves,
net of receivables minus payables, remained weak at TRY64 million,
covering less than 0.1x of its annual debt service.
Turkish local and regional governments (LRGs) do not benefit from
treasury lines or national cash pooling, making it challenging to
fund unexpected increases in liabilities or spending.
Debt Sustainability: 'aaa category'
Under Fitch's rating case for 2023-2027, Bursa's operating balance
will be about TRY9.0 billion and its direct debt at TRY18.6
billion, leading to a payback ratio (net adjusted debt/operating
balance) of below 5x, in line with an 'aaa' debt sustainability
(DS) assessment.
Fitch's rating case projects that Bursa's actual debt service
coverage ratio (ADSCR) will deteriorate to 1.8x in 2027 from 2.9x
in 2022, corresponding to an 'a' DS assessment. This is despite an
expected fall in operating margin to 35% over 2023-2027 from 48% in
2022. Fitch also expects fiscal debt burden to remain below 100%,
corresponding to a 'aa' category for DS.
DERIVATION SUMMARY
Bursa's 'bb-' SCP reflects a 'Vulnerable' risk profile and a 'aaa'
DS score. The SCP also factors in Bursa's comparison with its
national and international peers in the same rating category.
Bursa's IDRs are not affected by any other rating factors but are
capped by Turkish sovereign IDRs.
Short-Term Ratings
Bursa Short-Term IDRs of 'B' are the only option for a 'B' category
Long-Term IDR.
National Ratings
Bursa's National Long-Term Ratings are driven by its Long-Term
Local-Currency IDR at 'B', which is mapped to 'AA(tur)' on the
Turkish National Rating Correspondence Table, based on a peer
comparison. The rating reflects Bursa's moderately low
vulnerability to default on its long-term local-currency
obligations compared with that of other local issuers in Turkiye.
Debt Ratings
Not applicable.
KEY ASSUMPTIONS
Qualitative Assumptions:
Risk Profile: 'Vulnerable, Unchanged with Low weight'
Revenue Robustness: 'Midrange, Unchanged with Low weight'
Revenue Adjustability: 'Weaker, Unchanged with Low weight'
Expenditure Sustainability: 'Weaker, Unchanged with Low weight'
Expenditure Adjustability: 'Midrange, Unchanged with Low weight'
Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low
weight'
Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low
weight'
Debt sustainability: 'aaa, Unchanged with Low weight'
Support (Budget Loans): 'N/A, Unchanged with Low weight'
Support (Ad Hoc): 'N/A, Unchanged with Low weight'
Asymmetric Risk: 'N/A, Unchanged with Low weight'
Rating Cap (LT IDR): 'B, Raised with High weight'
Rating Cap (LT LC IDR) 'B, Raised with High weight'
Rating Floor: 'N/A, Unchanged with Low weight'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2018-2022 reported figures and 2023-2027
projected ratios. The key assumptions for the scenario include:
- Operating revenue CAGR of 33.9% unchanged on 2018-2022 due to
expected inflation of about 35% on average; with low weight
- Tax revenue CAGR of 35.1%, unchanged on 2018-2022; low weight
- Current transfers CAGR of 34.9%, versus 30.9% CAGR in 2018-2022;
low weight
- Operating expenses CAGR of 41.0% (versus an annual average of
28.5% for 2018-2022) due to expected inflation of about 35% on
average; low weight
- Negative net capital balance of TRY7.9 billion; low weight
- Cost of debt on average at 11.0%, around 3.5% above the level in
2022 due to higher borrowing rates: low weight
- Turkish lira at 28.8 to the euro at end-2023, with 10% annual
depreciation over the previous year's rate for 2024-2027; low
weight
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2022 and forecast for
2025, respectively (no weights and changes since the last review
are included as none of these assumptions were material to the
rating action)
GDP per capita (US dollar, market exchange rate): 10,521; 15,244
Real GDP growth (%): 5.5; 3.4
Consumer prices (annual average % change): 72.0; 34.6
General government balance (% of GDP): -1.1; -4.8
General government debt (% of GDP): 31.7; 30.4
Current account balance plus net FDI (% of GDP): -4.5; -1.2
Net external debt (% of GDP): 15.8; 15.1
IMF Development Classification: EM
CDS Market-Implied Rating: 'B'
Liquidity and Debt Structure
Fitch expects Bursa to spend an average TRY8.8 billion a year on
investments over the next five years. Fitch forecasts capex to
average 40% of total expenditures over Fitch's rating case, funded
by a mix of borrowings and Bursa's operating cash flow.
Bursa's contingent liabilities are moderate and mainly comprise the
liabilities of BUSKI. Its total debt was TRY2.3 billion at
end-2022. BUSKI is self-funding and has a well-structured balance
sheet. In 2022, operating performance is robust with a payback
ratio at 2.6x and ADSCR of 3.1x.
Fitch expects Bursa's net overall debt to increase to about TRY24.9
billion by 2027, from TRY6.1 billion in 2022. This factors in
BUSKI's planned water supply and waste water investments over the
medium-term.
Issuer Profile
Bursa is Turkiye's fourth-largest city with 3.7% of the national
population. Bursa is an important export-oriented industrial hub in
the Marmara region and accounts for 4.2% of Turkiye's GDP. Fitch
classifies Bursa as a 'Type B' LRG, meaning they are required to
cover debt service from their own cash flows on an annual basis.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A downgrade of the Turkish sovereign IDRs or a downward revision of
Bursa's SCP resulting from a debt payback of more than nine years
on a sustained basis would lead to a downgrade of Bursa's IDRs.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of the Turkish sovereign IDRs would lead to a similar
rating action on Bursa's IDRs, provided that Bursa maintains its
debt payback ratio below 5x under Fitch's rating case.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
DISCUSSION NOTE
Committee date: 12 September 2023
There was an appropriate quorum at the committee and the members
confirmed that they were free from recusal. It was agreed that the
data was sufficiently robust relative to its materiality. During
the committee no material issues were raised that were not in the
original committee package. The main rating factors under the
relevant criteria were discussed by the committee members. The
rating decision as discussed in this rating action commentary
reflects the committee discussion.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Bursa's IDRs are capped by the Turkish sovereign IDRs (B/Stable).
Entity/Debt Rating Prior
----------- ------ -----
Bursa
Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B New Rating
LC LT IDR B Affirmed B
LC ST IDR B New Rating
Natl LT AA(tur) Affirmed AA(tur)
ISTANBUL METROPOLITAN: Fitch Alters Outlook on 'B' IDR to Stable
----------------------------------------------------------------
Fitch Ratings has revised Istanbul Metropolitan Municipality's
(Istanbul) Outlook to Stable from Negative while affirming their
Long-Term Foreign- and Local-Currency Issuer Default Ratings at
'B'.
The ratings reflect Fitch's unchanged view that Istanbul will
maintain a robust operating balance despite high inflation. Fitch
forecasts debt to rise on large capex and further lira
depreciation, but its debt metrics over its rating case will remain
commensurate with Istanbul's 'b+' Standalone Credit Profile (SCP)
and that of peers in the 'b' category. Its Issuer Default Ratings
(IDRs) are capped by Turkiye's 'B' IDRs.
The revision of Outlook follows a recent similar action on
Turkiye's sovereign ratings (see 'Fitch Revises Turkiye's Outlook
to Stable, Affirms at 'B' dated September 8, 2023).
KEY RATING DRIVERS
Risk Profile: 'Vulnerable'
The assessment reflects a very high risk that Istanbul's ability to
cover debt service with its operating balance may weaken
unexpectedly over the forecast horizon (2023-2027) due to
lower-than-expected revenue, higher-than-expected expenditure or an
unexpected rise in liabilities or debt-service requirements.
Revenue Robustness: 'Midrange'
Istanbul has a well-diversified and vibrant local economy with a
GDP per capita that is about 63% above the national median, leading
to a tax revenue base with low volatility and robust tax revenue
growth prospects. This makes Istanbul resilient to economic
slowdown, which Fitch expects to continue over the forecast
horizon.
Fitch expects tax revenue to outpace national GDP CAGR at 34% and
operating revenue to increase further to about TRY259.4 billion by
2027 from TRY56.6 billion in 2022, leading to a robust operating
margin of about 32%. Taxes represent about 80% of operating revenue
while non-tax revenue, such as charges and fees, make up around
10%. Transfers from the central government comprise about 10% of
its operating revenue, a fairly low share compared with national
peers' due to the city's high socio-economic wealth indicators.
Revenue Adjustability: 'Weaker'
Istanbul's ability to generate additional revenue is constrained by
nationally pre-defined tax rates. At end-2022, nationally set and
collected taxes were 76% of Istanbul's total revenue and locally
set taxes a low 0.3%. Istanbul does not have full discretion on
non-tax revenue, such as charges, rental income and fees levied on
public services, as these are set by the central government.
Expenditure Sustainability: 'Weaker'
Istanbul has mostly moderately cyclical and counter-cyclical
responsibilities, which have allowed the municipality to control
total expenditure growth. However, Fitch expects spending control
to weaken over 2023-2027 as high inflation drives faster cost
growth than revenue growth.
A large and essential investment programme focused on the
construction of around a 100 km metro line within the next five
years will account for roughly 45% of total expenditure, which is
higher than its national peers', and will sharply increase
borrowings. This will result in large deficits before financing on
average at close to 27% of total revenue for 2023-2027, versus 8.6%
in 2018-2022.
Expenditure Adjustability: 'Midrange'
Istanbul has a low share of inflexible costs versus its
international peers, on average at around 52% of total expenditure.
Capex constitutes the remaining 48%, which can be postponed or
reduced given the city's reasonable infrastructure.
Spending flexibility is partly offset by Istanbul's weak record of
balanced budgets due to large swings in capex in pre-election
periods. Fitch expects Istanbul's spending flexibility to be
reduced ahead of local election in March 2024 and to be restored
gradually thereafter.
Liabilities & Liquidity Robustness: 'Weaker'
Istanbul's debt is nearly 95% in foreign currency and unhedged,
resulting in significant foreign-exchange (FX) risk. By end-2023,
we expect FX volatility to increase Istanbul's debt by TRY25
billion, or roughly 27%.
Fitch forecasts debt service coverage ratio to fall to a record low
below 1.2x in 2025 and 2027, primarily due to its bond redemptions.
At end-2022, the weighted average life of debt was 4.1 years and a
majority of its debt was amortising, while around 28% of its debt
stock was bonds with a bullet repayment profile. Almost half of its
debt is at variable rates, exposing Istanbul to interest-rate risk.
Istanbul is not exposed to material off-balance-sheet risk.
Liabilities & Liquidity Flexibility: 'Weaker'
Istanbul's liquidity is mainly restricted to its own cash reserves,
which at year-end are either earmarked for the settlement of
payables or particular spending such as payments to contractors for
its metro line investments.
However, Istanbul benefits from good access to financial markets
and can generate additional liquidity through asset sales. At
end-2022, it attracted TRY4.7 billion in committed credit
facilities from national lenders. The counterparty risk associated
with its domestic liquidity providers rated below 'BBB-' and short
tenor of loans limit its assessment to 'Weaker', similar to other
Turkish local and regional governments (LRGs). Turkish LRGs do not
benefit from treasury lines or cash pooling, making it challenging
to fund unexpected increases in debt liabilities or spending.
Debt Sustainability: 'aa category'
Under Fitch's conservative rating case for 2023-2027, Istanbul's
payback ratio will deteriorate to 4.6x in 2027 from 2.4x in 2022.
However, it is still robust, corresponding to the lower end of the
'aaa' debt sustainability (DS). Fitch projects the payback to
average 3.5x over 2023-2027, supported by a robust operating
balance.
Istanbul's actual debt service coverage ratio (ADSCR) will weaken
to 1.1x by 2027, due to bond redemptions, lira depreciation and new
additional debt driven by capex, and corresponding to a 'bb' DS.
The fiscal debt burden (net adjusted debt/operating revenue) will
remain slightly below 150% in 2027, in line with a 'a' DS. This
leads us to apply a downward adjustment to Istanbul's payback
ratio, resulting in a DS assessment at the stronger end of the 'aa'
category.
DERIVATION SUMMARY
Istanbul's 'b+' SCP reflects a 'Vulnerable' risk profile and a 'aa'
DS score. The SCP also factors in Istanbul's comparison with its
national and international peers in the same rating category.
Istanbul's IDRs are not affected by any other rating factors but
are capped by the Turkish sovereign IDRs.
Short-Term Ratings
The 'B' Short-Term IDR is the only option for a 'B' Long-Term IDR.
National Ratings
Istanbul's National Rating is driven by its Long-Term
Local-Currency IDR at 'B', which is mapped to 'AAA(tur)' on the
Turkish National Rating Correspondence Table based on a peer
comparison. Istanbul's National Long-Term Rating reflects its
budgetary flexibility benefiting from a valuable asset base that
may be used to generate additional liquidity and good access to
both domestic and international financial markets.
Debt Ratings
The long-term ratings on Istanbul's senior unsecured USD580 million
6.375% bond due in December 2025 and USD305 million 10.75% bond due
in April 2027 are in line with its Long-Term IDR.
KEY ASSUMPTIONS
Qualitative Assumptions:
Risk Profile: 'Vulnerable, Unchanged with Low weight'
Revenue Robustness: 'Midrange, Unchanged with Low weight'
Revenue Adjustability: 'Weaker, Unchanged with Low weight'
Expenditure Sustainability: 'Weaker, Unchanged with Low weight'
Expenditure Adjustability: 'Midrange, Unchanged with Low weight'
Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low
weight'
Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low
weight'
Debt sustainability: 'aa, Unchanged with Low weight'
Support (Budget Loans): 'N/A, Unchanged with Low weight'
Support (Ad Hoc): 'N/A, Unchanged with Low weight'
Asymmetric Risk: 'N/A, Unchanged with Low weight'
Rating Cap (LT IDR): 'B, Raised with High weight'
Rating Cap (LT LC IDR) 'B, Raised with High weight'
Rating Floor: 'N/A, Unchanged with Low weight'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2018-2022 reported figures and 2023-2027
projected ratios. The key assumptions for the scenario include:
- Operating revenue CAGR of 35.6%, unchanged on 2018-2022 due to
expected inflation of about 35% on average; low weight
- Tax revenue CAGR of 36.7%, unchanged on 2018-2022; low weight
- Current transfers CAGR of 34.5%, versus 31.8% CAGR in 2018-2022;
low weight
- Operating expenses CAGR of 42.1% (versus an annual average of
32.9% for 2018-2022) due to expected inflation of about 35% on
average; low weight
- Negative net capital balance of TRY94.8 billion; low weight
- Cost of debt on average at 7.3%, around 3% above the level in
2022 due to higher borrowing rates; low weight
- Turkish lira at 28.8 to the euro at end-2023, with 10% annual
depreciation over the previous year's rate for 2024-2027; low
weight
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for 2022 and forecast for
2025, respectively (no weights and changes since the last review
are included as none of these assumptions were material to the
rating action)
GDP per capita (US dollar, market exchange rate): 10,521; 15,244
Real GDP growth (%): 5.5; 3.4
Consumer prices (annual average % change): 72.0; 34.6
General government balance (% of GDP): -1.1; -4.8
General government debt (% of GDP): 31.7; 30.4
Current account balance plus net FDI (% of GDP): -4.5; -1.2
Net external debt (% of GDP): 15.8; 15.1
IMF Development Classification: EM
CDS Market-Implied Rating: 'B'
Liquidity and Debt Structure
Istanbul's adjusted debt increased to TRY62.5 billion in 2022 from
TRY45.4 billion in 2021 excluding year-end cash and liquid deposits
that Fitch deems restricted and fully earmarked for the settlement
of payables.
Fitch expects the municipality to spend on average TRY98 billion
annually on investments for the next five years, focused on the
construction of metro lines. Fitch expects capex to average 45% of
total expenditure in the forecast period, with high capex funded by
new FX borrowing due to more favourable terms and conditions. Fitch
expects total direct debt to reach TRY373 billion in 2027, up from
TRY60 billion in 2022 based on lira depreciation and large budgeted
capex to be funded by debt. Nevertheless, its payback ratio is
robust at 4.6x for 2027, underpinned by a resilient operating
balance.
Istanbul's contingent liabilities are moderate and mostly comprises
the liabilities of its water affiliate, ISKI. At end-2022 ISKI
continued to report strong operating performance and we expect the
company to service its debt via its cash flow, underpinned by its
strong debt service coverage at around 6x.
Issuer Profile
Istanbul is the largest city in Turkiye with about 15.9 million
inhabitants. It has a crucial role in Turkiye's economy, due its
strategic location as an international junction of land and sea
trade routes, contributing an average 30.5% of national GDP.
Fitch classifies Istanbul as 'Type B' LRG, meaning they are
required to cover debt service from their own cash flows on an
annual basis.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A downgrade of the Turkish sovereign IDRs or a downward revision of
Istanbul's SCP resulting from a debt payback of more than nine
years on a sustained basis would lead to a downgrade of Istanbul's
IDRs.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
An upgrade of the Turkish sovereign IDRs would lead to a similar
rating action on Istanbul's IDRs, provided that Istanbul maintains
its debt payback ratio below 5x under Fitch's rating case.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
DISCUSSION NOTE
Committee date: 12 September 2023
There was an appropriate quorum at the committee and the members
confirmed that they were free from recusal. It was agreed that the
data was sufficiently robust relative to its materiality. During
the committee no material issues were raised that were not in the
original committee package. The main rating factors under the
relevant criteria were discussed by the committee members. The
rating decision as discussed in this rating action commentary
reflects the committee discussion.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Istanbul's IDRs are capped by the Turkish sovereign IDRs
(B/Stable).
Entity/Debt Rating Prior
----------- ------ -----
Istanbul
Metropolitan
Municipality LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
Natl LT AAA(tur)Affirmed AAA(tur)
senior
unsecured LT B Affirmed B
===========================
U N I T E D K I N G D O M
===========================
ACELERON: Enters Administration, Buyer Sought for Business
----------------------------------------------------------
Anna Cooper at TheBusinessDesk.com reports that innovative lithium
battery developer Aceleron has appointed administrators, after
struggling to secure further investment.
Martyn Rickels and Simon Farr of FRP Advisory were appointed as
joint administrators on Sept. 12 as the company was no longer able
to meet its financial obligations, TheBusinessDesk.com relates.
According to TheBusinessDesk.com, administrators are now in the
process of marketing Aceleron and its assets for sale. All 11
employees have been made redundant, TheBusinessDesk.com discloses.
Based in Bromsgrove, Aceleron created patented sustainable battery
technology as part of its mission to accelerate the shift to
renewable energy.
ATLANTICA SUSTAINABLE: Egan-Jones Retains 'B-' Unsecured Ratings
----------------------------------------------------------------
Egan-Jones Ratings Company on September 7, 2023, maintained its
'B-' foreign currency and local currency senior unsecured ratings
on debt issued by Atlantica Sustainable Infrastructure PLC. EJR
also withdrew rating on commercial paper issued by the Company.
Headquartered in United Kingdom, Atlantica Sustainable
Infrastructure PLC provides renewable energy solutions.
BRITISH LEGION: Delayed Planning Agreement Prompts Liquidation
--------------------------------------------------------------
Richard Evans at NorthWalesLive reports that a 100-year-old British
Legion club has gone into liquidation and claims it is because a
council has been "too slow" to sign the paperwork on a planning
agreement.
The Local Democracy Reporting Service reported in June how the
British Legion was granted planning permission to replace a bowling
green and allotments with 12 homes at its building at 31 Coed Pella
Road, NorthWalesLive relates.
According to NorthWalesLive, the British Legion said the sale of
the land to developers and the relocation of the allotments would
allow the club to continue. Without the tens of thousands of
pounds raised by the sale, the club was threatened with
liquidation, meaning the 100-year-old club would close, six staff
would lose their jobs, and the club's manager and her family would
lose their home, NorthWalesLive states.
The application was passed subject to a 106 agreement being agreed,
appearing to save the club from folding, NorthWalesLive recounts.
A section 106 agreement is a condition agreed by developers and the
council and often relates to a minimum number of affordable housing
being agreed upon or a community asset being built, such as a
playground.
But the club says a 106 agreement offer has not emerged from the
council, and consequently the land has not been sold to raise the
GBP20,000 the club needs to survive, NorthWalesLive notes. The
land would have sold for in the region of quarter of a million
pounds, NorthWalesLive states. The council, as cited by
NorthWalesLive, said discussions are ongoing with the developer
around the requirements for the provision of affordable housing and
other matters.
Club President Merfyn Thomas says the club with 400 members will
now go into liquidation and blames Conwy for being too slow to
process the agreement, NorthWalesLive discloses.
MORTIMER BTL 2022-1: S&P Affirms 'BB(sf)' Rating on Class E Notes
-----------------------------------------------------------------
S&P Global Ratings raised to 'A+ (sf)' from 'A (sf)', to 'BBB+
(sf)' from 'BBB (sf)', and to 'BB (sf)' from 'B- (sf)' its credit
ratings on Mortimer BTL 2022-1 PLC's class C-Dfrd, D-Dfrd, and
X-Dfrd notes, respectively. At the same time, S&P affirmed its 'AAA
(sf)', 'AA (sf)', and 'BB (sf)' ratings on the class A, B-Dfrd, and
E-Dfrd notes, respectively.
S&P said, "Our ratings address timely receipt of interest and
ultimate repayment of principal for the class A notes, and ultimate
receipt of interest and repayment of principal for the other rated
notes. Interest on each class except the class A notes is
deferrable until they become the most senior outstanding.
Previously deferred interest is due only at maturity.
"The rating actions follow our full analysis of the most recent
information received and reflect the transaction's current
structural features. Our review reflects the application of our
relevant criteria.
"The performance of the loans in the collateral pool since closing
is stable. As of the May 2023 investor report, no arrears and
losses were recorded since closing. The three month prepayment rate
as per the May 2023 investor report was 2.43%, below our U.K.
prepayment index of 14.47% (as of first quarter 2023)."
The loans' amortization decreased the weighted-average current
loan-to-value ratio, slightly decreasing the weighted-average
foreclosure frequency (WAFF) and weighted-average loss severity
(WALS) levels for all ratings.
WAFF and WALS levels
RATING LEVEL WAFF (%) WALS (%)
AAA 25.35 52.03
AA 17.11 44.72
A 12.89 32.94
BBB 8.87 25.52
BB 4.65 20.00
B 3.70 14.87
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
S&P's operational, legal, and counterparty risk analysis for the
transaction remains unchanged since closing.
The notes' sequential amortization has slightly increased available
credit enhancement for the class A, B-Dfrd, C-Dfrd, and D-Dfrd
notes. The class A to D notes also benefit from excess spread as a
form of soft credit enhancement. Meanwhile, the class E-Dfrd and
X-Dfrd notes do not benefit from any hard credit enhancement and
rely only on excess spread as a form of credit enhancement.
The liquidity reserve fund was fully funded at closing and is
currently at the target level.
S&P said, "Our model cash flow results improved compared to our
closing analysis, mainly because of higher collections from the
swap counterparty due to the rising interest rate environment
(Sterling Overnight Index Average [SONIA] currently exceeds 5%
versus 0.0% at closing).
"In addition to our standard cash flow analysis, we also considered
sensitivity to reduced excess spread caused by prepayments,
potential increased exposure to tail-end risk, a potential drop in
the SONIA index in the longer run, and the relative positions of
tranches in fully sequential capital structures like this.
Following our review, we raised our ratings on the class C-Dfrd,
D-Dfrd, and X-Dfrd notes to reflect the results of our credit
analysis and considering the factors below.
"Our upgrade considered various factors, such as notes'
deleveraging, each classes' relative position in the waterfall for
receiving interest and principal payments, the availability of
notes' hard and soft credit enhancement, and the sensitivity
analysis outlined above.
"We also considered these factors when affirming our rating on the
most junior term class notes.
"Following our review, we concluded that our ratings on the class
A, B-Dfrd, and E-Dfrd notes remain robust at the current levels
despite additional sensitivities performed. We therefore affirmed
our 'AAA (sf)', 'AA (sf)', and 'BB (sf)' ratings on these classes
of notes, respectively.
"We expect U.K. inflation to remain high for the rest of 2023 and
house prices to decline by 6.6% in 2023. Although high inflation is
overall credit negative for all borrowers, inevitably some
borrowers will be more negatively affected than others, and to the
extent inflationary pressures materialize more quickly or more
severely than currently expected, risks may emerge."
The transaction is backed by a pool of buy-to-let mortgage loans
secured on properties in the U.K.
VEREX: Car Care Plan Buys Assets Out of Administration
------------------------------------------------------
Business Sale reports that warranty provider Car Care Plan (CCP)
has acquired the assets of insurance broker Verex out of
administration for an undisclosed sum.
Verex, which provides vehicle manufacturer-branded insurance
products, fell into administration after being hit by falling sales
of new vehicles, Business Sale relates.
Gary Pettit of PBC Business Recovery & Insolvency was appointed as
administrator to the business on August 18, 2023, Business Sale
discloses.
According to Business Sale, the firm's assets have now been sold to
CCP, one of the UK's leading providers of vehicle insurance
products, using genuine manufacturer parts and approved
technicians.
CCP has acquired the company's team, customers, systems and
processes, Business Sale states.
WPP PLC: Egan-Jones Retains 'BB' Sr. Unsecured Debt Ratings
-----------------------------------------------------------
Egan-Jones Ratings Company on September 7, 2023, maintained its
'BB' foreign currency and local currency senior unsecured ratings
on debt issued by WPP PLC. EJR also withdrew rating on commercial
paper issued by the Company.
Headquartered in London, United Kingdom, WPP PLC operates a
communications services group.
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S U B S C R I P T I O N I N F O R M A T I O N
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