/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/230927.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 27, 2023, Vol. 24, No. 194 Headlines A L B A N I A ALBANIA: S&P Affirms 'B+/B' SCRs & Alters Outlook to Positive C R O A T I A ZAGREB: S&P Raises LT ICR to 'BB+' on Improving Liquidity F R A N C E NOVAFIVES SAS: Moody's Alters Outlook on 'Caa1' CFR to Positive G E R M A N Y DEUTSCHE LUFTHANSA: Egan-Jones Retains B Senior Unsecured Ratings DEUTSCHE TELEKOM: Egan-Jones Retains 'BB' Senior Unsecured Ratings DICE MIDCO: Moody's Withdraws 'Ca' Rating on EUR130MM PIK Notes [*] Fitch Revises Outlook on 16 Turkish Banks to Stable I R E L A N D BARINGS EURO 2019-2: Moody's Affirms Ba2 Rating on Class E Notes JUBILEE CLO 2015-XVI: Moody's Ups EUR25.6MM E Notes Rating to Ba1 L A T V I A AIR BALTIC: Moody's Assigns First Time B2 Corporate Family Rating L U X E M B O U R G AEGEA FINANCE: Fitch Rates Proposed $500MM Unsecured Notes 'BB' IDEAL STANDARD: Fitch Lowers LongTerm IDR to 'C', Off Watch Neg. N O R W A Y PGS ASA: Moody's Raises CFR to B2, On Review for Further Upgrade PGS ASA: S&P Puts 'B-' Issuer Credit Rating on Watch Negative R O M A N I A ONIX ASIGURARI: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable S P A I N AUTONORIA SPAIN 2023: Moody's Gives B2 Rating to EUR7.2MM F Notes CODERE FINANCE 2: Moody's Rates New EUR50MM Sr. Secured Notes 'B3' TELEFONICA SA: Egan-Jones Retains BB- Senior Unsecured Ratings S W E D E N HEIMSTADEN AB: Fitch Cuts LongTerm IDR to 'BB', On Watch Negative INTRUM AB: Fitch Lowers LongTerm IDR to 'BB-', Outlook Stable INTRUM AB: Moody's Lowers CFR to B1 & Senior Unsecured Debt to B2 OREXO AB: Egan-Jones Cuts Senior Unsecured Ratings to 'B' POLYGON GROUP: Moody's Cuts CFR to B3 & Senior Secured Debt to B2 SAS AB: Receives Final Rounds of Bids From Potential Buyers STENA AB: Moody's Raises CFR to Ba3 & Senior Unsecured Notes to B1 T U R K E Y ALTERNATIFBANK: Fitch Alters Outlook on 'B-' LongTerm IDR to Stable BURGAN BANK: Fitch Alters Outlook on 'B' LongTerm IDR to Stable TURKLAND BANK: Fitch Alters Outlook on 'B-' LongTerm IDR to Stable U N I T E D K I N G D O M JACKSONS THE BAKERS: Allen Jackson Bakery Acquires Business MAR HALL: Put Up for Sale by Savills After Administration PINNACLE BIDCO: Moody's Rates New GBP805MM Sr. Secured Notes 'B3' REAL LSE: Files Notice to Appoint Administrators TRIPLE TWO COFFEE: Set to Go Into Administration WESTRIDGE CONSTRUCTION: Enters Administration Amid Trading Woes - - - - - ============= A L B A N I A ============= ALBANIA: S&P Affirms 'B+/B' SCRs & Alters Outlook to Positive ------------------------------------------------------------- S&P Global Ratings, on Sept. 22, 2023, revised its outlook on Albania to positive from stable. At the same time, S&P affirmed its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings on Albania. Outlook S&P said, "The positive outlook reflects our view that the sovereign's fiscal metrics will improve beyond our expectation over the next 12 months, through government efforts to consolidate public finances. Furthermore, despite a slowdown in the country's primary trading partner, the EU, we anticipate that Albania's external metrics could improve more than expected as the global economy recovers and the Albanian tourism sector continues expanding." Upside scenario S&P said, "We could consider raising the ratings if the government's fiscal position improves more than we anticipate, perhaps due to further tax base broadening. Also, a stronger-than-expected performance from the tourism sector could reduce external funding risks beyond our expectations. We could also raise the ratings if the institutional framework is strengthened, possibly through structural reforms as a part of the country's EU accession objective." Downside scenario S&P may consider lowering the ratings in the coming year if the public debt stock increases significantly more than we project, following elevated fiscal deficits. Rationale S&P said, "Our ratings on Albania are constrained by a somewhat weak institutional framework, limited monetary policy flexibility, moderately high public debt, and large external financing needs. Over 50% of government debt is denominated in foreign currency or is short maturity. Furthermore, the economy's extensive euroization, high informality, and shallow capital markets impair the Bank of Albania's (BoA's) monetary policy transmission channel. "The ratings are supported by Albania's moderate growth prospects and relatively high reserves. These factors continue to be important buffers against potential external shocks. Furthermore, we believe authorities will continue to be fiscally prudent, lowering public debt over 2023-2026." Institutional and economic profile: GDP growth will slow in 2023, but recover thereafter -- Growth will slow to a still-moderate 3% this year due to lower external demand from Europe, tightening monetary policy, and reduced fiscal stimulus. -- After 2023, growth will recover to 3%-4%, supported by easing financial and improved global economic activity. -- Albania is well-positioned to progress in its EU membership bid through to 2030 without major external hindrances, but domestic challenges persist. S&P said, "We expect Albania's real GDP growth to slow to a relatively moderate 3% in 2023 from 4.9% in 2022, which we attribute to tight financial conditions, a slowdown in the euro area (Albania's largest trading partner), and a reduction in fiscal stimulus. Nevertheless, growth will remain underpinned by strong consumption (supported by tourism). Beyond 2023, growth will pick up toward 4% through 2026 as global economic and financial conditions ease." Compared with regional peers, the indirect effects of the Russia-Ukraine war have not significantly affected Albania's economy due its diversified oil import sources. In addition, its energy mix is somewhat advantageous, given that a majority of domestic electricity production comes from hydropower. However, expensive drought-triggered electricity imports from international spot markets in recent years have led to greater efforts by authorities to diversify sources of electricity away from hydropower and into areas such as natural gas. Infrastructure gaps, a somewhat weak legal framework, corruption, and a tightening labor market continue to hinder Albania's economy. Nevertheless, the country, spurred by its efforts to join the EU after achieving candidate status in 2014, has made incremental steps in addressing these structural impediments. Initiatives like the Trans-Adriatic Pipeline are set to reduce Albania's dependence on hydropower. In addition, judiciary reforms initiated in 2016, supported by the EU, aim to enhance the legal infrastructure and have recently resulted in more cases going to court. These reforms have the potential to foster a more conducive business climate, curb emigration, and increase foreign investments, allowing the country to sustain higher income growth. The Socialist Party of Albania (SPA) retained its parliamentary majority at the general election in early 2021. Subsequently, policymaking decisions have been stable, with a focus on fostering economic development. However, the country experienced protests in 2022 triggered by sharp rises in energy and food costs. While these protests continued earlier in the year, their scale decreased. In recent local elections, the SPA won 53 of the 61 municipalities, maintaining its strong political position. But voter participation plummeted to a historical low of 35%, from 47% in 2021, marking the lowest turnout since records began. EU accession has remained a key policy priority for successive administrations since Albania was awarded candidate status in mid-2014. The country's path to EU membership differs notably from regional peers such as Serbia and North Macedonia, as it lacks the bilateral or geopolitical tensions that these countries face. Despite this, Albania's EU membership bid was initially grouped with North Macedonia's, reflecting a regional approach to EU integration. However, since July 2022, with the start of accession negotiations and the first intergovernmental conference being held, we believe that Albania's EU bid has been decoupled from North Macedonia's, in an effort to keep Albania within the EU's political sphere. Given Albania's lack of bilateral and geographical disputes, its robust domestic support for the EU, and the government's parliamentary majority, which facilitates the passage of reforms, we believe the country is well-positioned to progress in its EU membership bid without major external hindrances. Yet domestic challenges persist, particularly related to the rule of law, corruption, and organized crime. While there have been notable advancements, especially in the judiciary, sustained momentum in implementing structural reforms is crucial for Albania's EU bid. Without this, it's unlikely the country will join the bloc before 2030. Flexibility and performance profile: General government debt levels are set to decrease as authorities prioritize fiscal prudence -- S&P expects Albania's fiscal deficit will narrow to 2.8% of GDP in 2023; thereafter, it expects fiscal consolidation to continue. -- S&P anticipates a decrease in net general government debt, at a projected average of 57% of GDP from 2023-2026, down from 60% in 2022. -- Elevated euroization, coupled with the potential for a downturn in real estate prices, represent potential risks to the banking sector. S&P said, "We estimate a budget deficit of 2.8% of GDP (down from 3.7% in 2022 and compared with the official target of 2.6%) due to our lower growth assumptions. There could be a positive surprise, however: so far this year, authorities have registered a fiscal surplus of 2.8% of GDP, up from 0.7% for the same period in 2022. Revenue has grown more strongly than expenditure, albeit with support from one-off items such as EUR80 million in from the EU and $50 million in grants from Saudi Arabia. The government is financing the budget deficit with domestic and external borrowing (Eurobond and multilateral financing). Authorities previously tapped the Eurobond market in June for EUR600 million; depending on market conditions, the government may use about EUR250 million of the Eurobond funds raised to buy back part of Albania's Eurobonds due in 2025. Moreover, authorities have taken out loans with the World Bank and French Development Agency. "There has been a noticeable buildup of government arrears, which increased 40% quarter over quarter in second-quarter 2023. This relates to public investments, specifically in projects that finished ahead of schedule; under Albanian legislation, funds cannot be disbursed to projects that finish ahead of schedule. We expect the stock of arrears to decrease materially later this year as the government reorganizes its finances (most spending tends to take place at the end of the year). "In recent years, Albania has faced a series of shocks, including an earthquake in 2019. Despite this, the government has made strong efforts to consolidate public finances. As a result, we expect the budget deficit to converge to about 2% by 2026, aligning with the neutral primary balance and debt brake fiscal rules outlined in the Organic Budget Law (OBL). According to the OBL, the government must achieve at least a neutral primary balance by 2024 onward and continuously target a declining debt-to-GDP ratio until it falls and remains below 45%. Notably, authorities are on track to achieve a positive primary balance this year, surpassing their initial timeline by a year. However, fiscal consolidation hinges on the sustained recovery of economic growth and continued reforms. To further augment tax revenue collection, the government intends to carry on implementing its medium-term revenue strategy. At about 27%, Albania's government revenue-to-GDP ratio is the lowest in the Western Balkan region, which we attribute to a large informal economy, and tax loopholes and exemptions." Albania's net general government debt decreased to 60% of GDP in 2022 from 67% in 2021. The drop follows efforts to consolidate public finances and an 11% increase in nominal growth. Based on the projected fiscal outlook, net general government debt will narrow to approximately 59% of GDP from 2023-2026. Nevertheless, Albania's debt stock remains moderately high and suffers from refinancing and foreign currency risks. Average debt maturity has increased but remains short. Moreover, about 45% of central government debt is in foreign currency, subjecting it to exchange-rate volatility. Domestic debt is particularly short-term, at approximately over two years. Moreover, despite lending more to the private sector in recent years, Albania's banking sector continues to hold the largest share of domestic government debt, at about 26% of the sector's total assets. Off-balance-sheet public-private partnerships (PPPs) persist as a potential fiscal vulnerability. Albania has more than 200 PPPs in sectors such as road infrastructure, hydropower-based power generation, and health care. Spending related to PPPs is capped at 5% of the previous year's tax revenue, with current liabilities hovering near 2% of government revenue. While Albania has made efforts to bridge its infrastructure deficit, the regulatory framework overseeing PPPs requires strengthening, especially in terms of cost transparency. As a result, the fiscal risks associated with PPPs continue to be difficult to predict and quantify. With potential fiscal vulnerabilities associated with the extensive use of PPPs, the Albanian government has shifted away from PPPs altogether. Inflation declined to 4% in August, down significantly from 7.2% in January. S&P said, "We attribute this to falling commodity prices, tight financial conditions, and the lek's appreciation against the euro. Moreover, compared with regional peers, inflation in Albania is relatively low, in part due to the subsidization of electricity prices. We anticipate that inflation will average 4.7% for 2023, then fall gradually to the BoA's inflation target band of 3% due the lagged effects of monetary policy tightening and the lek's recent strengthening." The effectiveness of the BoA's monetary policy transmission mechanism is undermined due to underdeveloped capital markets, with commercial banks holding a substantial 63.2% of the domestic government debt stock. Another hindrance to the transmission mechanism is euroization in the economy--approximately 53% of deposits were held in foreign currencies as of June 2023. The euro remains a commonly accepted currency in transactions, even in sectors such as real estate. S&P said, "We anticipate that the current account deficit will narrow to 5% of GDP in 2023 from 6% in 2022, primarily from an uptick in the services balance. Albania's goods trade deficit will remain large, but will be somewhat offset by strong remittances inflows and services exports, particularly tourism receipts. Foreign tourist arrivals soared to a record 5.2 million through July 2023, marking a 31% increase compared with the same period in 2022. Over the next few years, the current account deficit will narrow slightly as merchandise and services exports increases on improving global economic conditions. Net foreign direct investment inflows and public sector external borrowing will continue to finance the external deficit until 2025. "Foreign currency reserves have increased throughout the year, reaching about EUR5.6 billion in July due to the recent Eurobond issuance, strong tourism revenue, and financial account inflows. We expect usable reserves (that is, gross reserves net of required reserves on commercial banks' foreign currency liabilities) will cover about five months of current account payments over the next few years." Albania's banking sector is liquid, well-capitalized, and profitable. The regulatory tier 1 capital ratio reached 17.7% of risk-weighted assets in June, up from 16.9% in December 2021. Nonperforming loans (NPLs) remain low at 5.2%, although we expect a slight uptick given tighter financial conditions. Data, albeit limited, indicates a deceleration in property price growth compared to the trends observed in 2022. Nevertheless, a sharp reversal in house prices could threaten financial stability given elevated rates and a weakening economy. In addition, the banking sector remains highly euroized. Nevertheless, the risk of contingent liabilities remains moderately low. In accordance with S&P's relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable. At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action. Ratings List RATINGS AFFIRMED; OUTLOOK ACTION TO FROM ALBANIA Sovereign Credit Rating B+/Positive/B B+/Stable/B RATINGS AFFIRMED ALBANIA Transfer & Convertibility Assessment BB Senior Unsecured B+ ============= C R O A T I A ============= ZAGREB: S&P Raises LT ICR to 'BB+' on Improving Liquidity --------------------------------------------------------- S&P Global Ratings, on Sept. 22, 2023, raised its long-term foreign and local currency issuer credit ratings on the Croatian capital city of Zagreb to 'BB+' from 'BB'. The outlook on the rating is positive. Outlook The positive outlook reflects S&P's expectation that continued economic growth, an improved institutional framework for Croatian local governments, and improving funding access in the wake of eurozone accession could further strengthen Zagreb's credit profile. Upside scenario S&P could raise the rating on Zagreb over the next 12 months if the improvement of the city's liquidity position is sustained, leading to further structural improvements beyond 100% debt service coverage with liquid funds; and if Croatia's and the city's income levels in terms of GDP continue to rise. An improvement in the predictability of the institutional framework governing Croatian municipalities, by itself or coupled with city-specific improvements, could also lead to a positive rating action. Downside scenario S&P could revise the outlook to stable if Croatia's and Zagreb's economic growth falter and budgetary performance deteriorates substantially, or if liquidity improvements are not sustained. A reversal of the improving institutional framework trend would also prompt a stable outlook, for example if the sector's aggregate finances are adversely affected by government reform efforts. Rationale The upgrade reflects Zagreb's improved liquidity situation compared with previous years, with average monthly cash reaching EUR92 million in July 2023. At the same time, Croatia's and Zagreb's economies continue to demonstrate resilient growth despite a subdued macroeconomic environment in Europe. This will likely translate into robust tax revenue growth and therefore help the city preserve a sound budgetary performance, even in the wake of inflation-driven cost increases and elevated capital expenditure needs. At the same time, the fiscal framework for Croatian municipalities is improving, as efforts to improve the sector's revenue and expenditure balance as well as transparency and planning standards are taking hold. S&P said, "Our ratings on Zagreb also take into account its moderately-high tax-supported debt burden including the debt of Zagrebacki Holding and public transport company ZET. The city also has comparably limited budgetary flexibility and a weak track record in some areas of financial management, for example regarding the city's government-related entities (GREs) and liquidity management, with recent improvements still to be firmly embedded. On the other hand, we view positively central government and EU funds supporting investment spending and the remaining reconstruction after the 2020 earthquakes." Robust economic growth and progress on institutional settings support Zagreb's credit profile Zagreb is Croatia's capital and dominant economic center. The city contributes over one-third of Croatia's GDP, and its economic structure is diversified compared with the national economy where tourism is dominant. Zagreb has a stronger socioeconomic profile than the national average, with an unemployment rate of 3.1% in 2022 compared with 7.6% for Croatia, and GDP per capita exceeding the national average by 75% (2020 data). Over the past decade, Zagreb's population decreased at a much lower rate than Croatia's, reflecting the attractiveness of the city's labor market. S&P expects a broadly stable population trend going forward. S&P said, "We project the city's economy will expand in tandem with the resilient growth that we project for Croatia. Our projections for Croatia factor in growth of 2%-3% over 2023-2026." This reflects continued dynamism of the tourism sector and benefits from the 2023 eurozone accession, as well as substantial EU-funded investments. Croatia is among the top EU countries in terms of implementation of the Recovery and Resilience Facility (RRF) and Zagreb is benefitting from these and other EU funds as well. The robust macroeconomic environment underpins S&P's projection of sound tax revenue growth for Zagreb. S&P said, "That said, we view some elements of the tax-sharing and institutional framework for Croatian municipalities as rather volatile. The policy environment could become increasingly contentious between government tiers as elections draw closer--national elections in 2024 and municipal in 2025. From 2024, the central government will raise the basic exemption and replace the city surtax with a system where municipalities decide on personal income tax rates within certain boundaries. For the city of Zagreb, this in isolation will likely have a negative revenue impact. We still assess the predictability of the intergovernmental setting as somewhat reduced, given relatively frequent tax code changes that complicate longer-term planning. That said, we note improvements, with efforts to improve local governments' fiscal balance yielding results and we anticipate that eurozone accession will serve as a further institutional anchor in various areas. We hence see the institutional framework as on an improving trend." The city's administration under Mayor Tomasevic, in office since 2021, has made significant strides to improve the city's financial management practices, for example regarding the transparency of the budgetary process. Liquidity levels and liquidity management have substantially improved and the control over key municipal enterprises has been reshuffled, with the aim of improving oversight and reducing risk. Fiscal prudence remains a goal, but this might be tested, given significant cost and salary increases. S&P said, "We note positively the ongoing efforts to settle liabilities between city companies and the intention to end past quasi-debt practices, but the past track record still weighs on our assessment until improvements are fully institutionalized. Given the dependence on decisions made at the national level for Zagreb's finances, good relations with the central government remain crucial for the city." S&P said, "We expect that elevated investment needs will continue to weigh on Zagreb's budgetary performance. At the same time, we anticipate that the city would access favorable funding from European promotional banks to finance EU-funded projects, thus supporting its investment agenda." The liquidity position continues to strengthen amid sound budgetary performance S&P expects Zagreb's budgetary performance will remain robust, with an average operating surplus of about 15% of operating revenue over 2023-2025, thanks to strong tax revenue growth. At the same time, we expect the balance after capital accounts to gradually turn to a small deficit by 2025. The city had access to the EU Solidarity Fund until midyear 2023 to alleviate the cost of rebuilding infrastructure after two earthquakes in March 2020 and withdrew about EUR200 million by that deadline. The unfinished remaining work will be financed by the central government and some eligible parts by RRF funds. Zagreb's budgetary flexibility is limited because large parts of the revenue structure ultimately depend on the central government's decisions. The legislative framework also limits the borrowing capacity of the city, curbing flexibility on financing investments. S&P has also observed constraints on the willingness to increase revenues in some areas, such as fees. However, under the reformed income tax system, the city can set the PIT rate within certain boundaries. Expenditure flexibility is constrained by subsidies granted to municipal companies Zagrebacki Holding (ZGH) and Zagrebacki Elektricni Tramvaj (ZET), both of which supply essential public services. Asset sales have been difficult to achieve in recent years and do not provide additional room to maneuver in the near term. S&P said, "We project a moderate debt increase over 2024-2025 as we understand that the city intends to limit its debt intake to loans for EU-funded projects and those that are key for the city's agenda, such as energy efficiency. We project that the city will take on relatively low amounts of short-term debt. In our projection, tax-supported debt will increase to almost 90% of operating revenues by 2026 from 83% in 2022, which we regard as high for a local government in Central and Eastern Europe. The lion's share of the increase reflects moderate net new borrowing for investment projects. Direct debt is less than half the city's tax-supported debt, reflecting the substantial use of nontraditional means like factoring and the debt of various municipal companies. We therefore include the debt of ZGH and ZET in our tax-supported debt ratio. We understand that the city intends to end past off-budget financing practices and support ZGH's deleveraging. We assume Zagreb will continue to reduce payables and aims to sustain its increased cash holdings compared with previous years. "We regard contingent liabilities as low overall. These consist of spending for earthquake-related damages on private buildings with low yearly drawings, liabilities of other GREs apart from ZGH and ZET, and some litigation risks. By law, Zagreb needs to cover 20% of the costs of rebuilding the more heavily damaged private buildings. The costs are hard to estimate, but effective drawings on Zagreb's finances were well below budgeted funds so far, which we believe is likely to continue, effectively limiting the city's contingent liabilities relating to earthquake-related damage. In our view, the city might support ZGH and ZET by taking on additional payables from the companies or by injecting capital. Foreign exchange risk is very limited following the adoption of the euro, because all debt is in euros. "In our view, Zagreb's liquidity situation has improved significantly. Cash on hand increased to EUR92 million on average in July 2023, substantially raising the coverage of the next 12 months' debt service and financing needs. The city reduced payables outstanding in 2022, which helped further ease stress on liquidity. We view Zagreb's access to external liquidity as satisfactory because the city has access to a pool of international banks willing to provide short-term loans and because eurozone accession should facilitate Zagreb's capital market access." In accordance with S&P's relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable. At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action. Ratings List UPGRADED TO FROM ZAGREB (CITY OF) Issuer Credit Rating BB+/Positive/-- BB/Positive/-- =========== F R A N C E =========== NOVAFIVES SAS: Moody's Alters Outlook on 'Caa1' CFR to Positive --------------------------------------------------------------- Moody's Investors Service has affirmed the Caa1 corporate family rating and the Caa1-PD probability of default rating of Novafives S.A.S. Concurrently, Moody's has affirmed the Caa2 ratings of the EUR325 million senior secured fixed rate notes and EUR275 million senior secured floating rate notes due June 2025 issued by the company. The outlook has been changed to positive from stable. RATINGS RATIONALE The change in outlook to positive was prompted by the EUR150 million equity increase agreement the company has announced in its second quarter 2023 results call and that is expected to close late in 2023 or early in 2024. Moody's expects this equity injection will be instrumental for Novafives to refinance its current senior secured notes that mature in June 2025. This potential transaction would not only make the refinancing of the notes that mature in around 18 months easier but, importantly, Moody's also anticipates that it could allow the company to resize its capital structure to more sustainable levels. Additionally, Novafives' operational performance continues to evolve positively with the company having reported revenue growth above 30% during the first half of 2023 and company reported EBITDA around EUR143 million during the last twelve months up to June 2023. A record high order backlog above EUR2.5 billion as of June 2023 improves visibility in relation to upcoming performance, however, challenging economic conditions forecast for the rest of 2023 and 2024 may negatively impact performance. Moody's expecting that the company will continue to be able to maintain the recent positive momentum from an operational perspective is also an important consideration for the current rating action. Moody's forecasts that a debt reduction of up to EUR150 million compared to June 2023 (adjusted by the EUR40 million amortization of the state guaranteed loan in July) levels combined with at least a stable performance from an EBITDA and free cash flow generation point of view could improve credit metrics to levels commensurate with a higher rating on a sustained basis among which Moody's-adjusted Debt/EBITDA sustained below 7.0 (estimated 7.5x for last twelve months to June 2023). The company's Caa1 CFR is constrained by its still-high leverage; its low profitability compared with manufacturing peers; its historically volatile working capital, which may strains free cash flow (FCF); and the EUR40 million annual amortisation of the French state-guaranteed loan, which, although positive in terms of debt reduction, weighs on its liquidity. At the same time, Novafives' CFR is supported by its good geographical diversification, leading niche market positions and products with high technological content; long-standing customer relationships, which create a barrier to entry for potential competitors; record-high order backlog above EUR2.5 billion as of June 2023; and adequate liquidity. RATING OUTLOOK Novafives' positive rating outlook reflects Moody's expectation that upward rating pressure may build over the next quarters if the company manages to refinance its current senior secured notes with a more conservative capital structure and operational performance continues to be robust. The outlook also incorporates Moody's assumption that there will be no significant increase in leverage from any future debt-funded acquisitions or shareholder distributions, and that the company will maintain adequate liquidity. LIQUIDITY Novafives' liquidity is adequate. As of June 30, 2023, the company had around EUR166 million of cash and EUR59 million available under its EUR115 million long-term RCF due 2024. These liquidity sources, together with the FCF Moody's expect the company to generate in the second half of 2023 after working capital outflows during the first half of the year, should be sufficient to accommodate Novafives' cash needs for the next quarters. Apart from the repayment of the next EUR40 million instalment under the EUR200 million French state-guaranteed loan in July 2024, no significant debt repayments are due until June 2025, when the notes issued in April 2018 become due. Novafives has a EUR115 million committed long-term RCF due in December 2024. The first EUR50 million out of the total EUR115 million is available without any leverage condition. The excess (EUR65 million) is available subject to an adjusted leverage ratio test below 6.0x (5.5x as of June 2023) at the end of the previous quarter. STRUCTURAL CONSIDERATIONS The EUR325 million senior secured fixed rate notes and the EUR275 million senior secured floating-rate notes issued by Novafives are secured by share pledges over shares of Fives S.A.S., the main operating company, the issuer's bank accounts and intercompany receivables. The EUR115 million super senior RCF is borrowed by Novafives S.A.S. and Fives S.A.S. The RCF ranks pari passu with all existing and future senior secured debt, and shares the same collateral package, but benefits from a priority claim in an enforcement scenario. The Caa2 instrument rating on the senior secured notes, one notch below the CFR, reflects the fact that in an enforcement scenario they would rank behind the RCF. The 2020 EUR200 million state guaranteed loan (EUR120 million outstanding) and 2023 EUR60 million state guaranteed loan are issued at the level of Fives S.A.S., hence structurally in an advanced position over the notes, but ranks below the EUR115 million RCF. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Factors that could lead to an upgrade -- Moody's-adjusted EBITA margin around 5% on a sustained basis -- Moody's-adjusted debt/EBITDA below 7.0x on a sustained basis -- At least modestly positive FCF generation, after investments in JVs and associates (equity injections and loans) on a sustained basis -- Moody's-adjusted EBITA to interest expenses above 1.5x -- Adequate liquidity with comfortable covenant headroom For the purposes of evaluating an upgrade or downgrade, the trigger metrics deviate from Moody's standard approach by excluding equity accounted income or losses and unrealised foreign-exchange gains or losses on intercompany loans. Factors that could lead to a downgrade -- Negative FCF after investments in JVs and associates (equity injections and loans) for a prolonged period -- Liquidity deterioration -- Inability to reduce Moody's-adjusted debt/EBITDA from current very high levels For the purposes of evaluating an upgrade or downgrade, the trigger metrics deviate from Moody's standard approach by excluding equity accounted income or losses and unrealised foreign-exchange gains or losses on intercompany loans. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Manufacturing published in September 2021. COMPANY PROFILE Novafives S.A.S. is a global industrial engineering group. The company designs machines, process equipment and production lines for use in a number of different industries, including the automotive, logistics (for e-commerce, courier and retail), steel, aluminium, energy, cement and aerospace sectors. As of December 2022, Novafives employed more than 8,500 people and had a network of more than 100 operational units in 25 countries. During 2022 the company generated sales of around EUR2.0 billion and company-reported EBITDA of around EUR125 million. ============= G E R M A N Y ============= DEUTSCHE LUFTHANSA: Egan-Jones Retains B Senior Unsecured Ratings ----------------------------------------------------------------- Egan-Jones Ratings Company on September 13, 2023, maintained its 'B' foreign currency and local currency senior unsecured ratings on debt issued by Deutsche Lufthansa Aktiengesellschaft. EJR also withdrew rating on commercial paper issued by the Company. Headquartered in Cologne, Germany, Deutsche Lufthansa Aktiengesellschaft provides passenger and cargo air transportation services worldwide. DEUTSCHE TELEKOM: Egan-Jones Retains 'BB' Senior Unsecured Ratings ------------------------------------------------------------------ Egan-Jones Ratings Company on September 15, 2023, maintained its 'BB' foreign currency and local currency senior unsecured ratings on debt issued by Deutsche Telekom AG. EJR also withdrew rating on commercial paper issued by the Company. Headquartered in Bonn, Germany, Deutsche Telekom AG offers telecommunications services. DICE MIDCO: Moody's Withdraws 'Ca' Rating on EUR130MM PIK Notes --------------------------------------------------------------- Moody's Investors Service has withdrawn the Ca instrument rating on the EUR130 million subordinated PIK notes due 2026 issued by Dice MidCo S.a r.l. (Lowen Play or the company), a holding entity and ultimate parent of Safari Beteiligungs GmbH (Caa3 positive). The outlook for the entity prior to the withdrawal was positive. Safari Beteiligungs GmbH's Caa3 corporate family rating, Caa3-PD probability of default rating and Caa2 instrument rating on the EUR258 million backed senior secured notes due 2025 are unaffected. RATINGS RATIONALE Moody's has decided to withdraw the rating for its own business reasons. COMPANY PROFILE Lowen Play is the second largest gaming arcade operator in Germany. The company has also nine gaming arcades in the Netherlands, and an online gaming platform in Germany and in Spain. In 2022, Moody's estimate Lowen Play's pro forma revenue to be EUR229 million and EBITDA to be c. EUR61 million (after IFRS 16). [*] Fitch Revises Outlook on 16 Turkish Banks to Stable ------------------------------------------------------- Fitch Ratings has revised the Outlook on 16 Turkish banks' Long-Term Foreign-Currency (LT FC) and Long-Term Local-Currency (LT LC) Issuer Default Ratings (IDRs) to Stable from Negative and affirmed their IDRs. Fitch has also revised the Outlooks on the LT LC IDRs of Turkiye Emlak Katilim Bankasi A.S.'s (Emlak Katilim) and Vakif Katilim Bankasi A.S. (Vakif Katilim) to Stable from Negative and affirmed their IDRs. Fitch has also affirmed the Viability Ratings (VRs) of seven Turkish banks. Fitch has maintained Turkiye Halk Bankasi A.S.'s (Halk) LT FC IDR of 'B-', LT LC IDR of 'B' and VR of 'b-' on Rating Watch Negative (RWN). Fitch has also revised the Outlooks on Akbank AG and AB Kazakhstan - Ziraat International Bank JSC's (KZI) LT IDRs to Stable from Negative. The Outlooks on the National Ratings of AKBANK T.A.S. (Akbank), Turkiye Is Bankasi A.S. (Isbank), Yapi ve Kredi Bankasi A.S. (YKB) and KZI have been revised to Stable from Negative. All other Turkish banks' National Ratings have been affirmed. The 16 banks are Akbank; Denizbank A.S.; ING Bank A.S. (INGBT); Kuveyt Turk Katilim Bankasi A.S (Kuveyt Turk); QNB Finansbank Anonim Sirketi (QNBF); Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi (Ziraat); Ziraat Katilim Bankasi A.S. (Ziraat Katilim); Turk Ekonomi Bankasi A.S. (TEB); Turkiye Finans Katilim Bankasi A.S. (Turkiye Finans); Turkiye Garanti Bankasi A.S. (Garanti BBVA); Isbank; Turkiye Sinai Kalkinma Bankasi A.S. (TSKB); Turkiye Vakiflar Bankasi T.A.O. (Vakifbank); YKB; Turkiye Ihracat Kredi Bankasi A.S. (Turk Eximbank) and Turkiye Kalkinma ve Yatirim Bankasi A.S. (TKYB). The rating actions follow the revision of the Outlook on Turkiye's Long-Term IDR to Stable from Negative (see 'Fitch Revises Turkiye's Outlook to Stable; Affirms at 'B' dated 8 September 2023 at www.fitchratings.com). The sovereign Outlook revision is driven by Turkiye's return to a more conventional and consistent policy mix that has reduced near-term macro-financial stability risks and eased balance of payments pressures, although there is still uncertainty regarding the magnitude, longevity and success of the policy adjustment to bring down inflation, partly due to political considerations. The easing of external financing risks and near-term financial stability risks mean that Fitch considers the near-term likelihood of government intervention in the banking system to have partially abated. This drives the revision of the Outlooks on foreign-owned Turkish banks' IDRs to Stable, mirroring the sovereign Outlook change. However, in case of a marked deterioration in the country's external finances, some form of intervention in the banking system that might impede the banks' ability to service their FC obligations remains likely. The VRs of the seven banks which IDRs are driven by VRs (or underpinned by the VR in the case of Garanti BBVA) have been affirmed at their respective levels following the sovereign Outlook revision. This reflects our view that short-term risks and operating environment pressures have abated to a certain extent, although risks remain due to still challenging market conditions and expected pressures on asset quality amid rising interest rates and slowing growth environment. Over the coming months, Fitch plans to review the VRs of small banks (Albaraka Turk Katilim Bankasi A.S., Fibabanka Anonim Sirketi, Sekerbank T.A.S., Odea Bank A.S. and Anadolubank A.S.) and Turkish state-owned participation banks (Ziraat Katilim, Emlak Katilim and Vakif Katilim), whose LT FC IDRs are driven by these VRs, as well as and foreign-owned banks (INGBT; QNBF; TEB; Denizbank; Kuveyt Turk and Turkiye Finans) whose ratings are driven by support. Fitch has maintained the RWN on Halk's ratings to reflect its view of the material risk of the bank becoming subject to a fine or other punitive measures as a result of ongoing US legal proceedings, and uncertainty over the sufficiency and timeliness of support from the authorities, if needed. Fitch expects to resolve the RWN once there is clarity on the outcome of the US investigations and the implications this may have for the bank. Fitch may maintain the RWN for longer than six months if US investigations are extended. KEY RATING DRIVERS VRs, IDRS, GSRs, SSR(TSKB) AND SENIOR UNSECURED DEBT RATINGS OF STATE-OWNED BANKS AND TSKB (Ziraat; Vakifbank; Halk; Vakif Katilim; TSKB; Turk Eximbank; TKYB; and Emlak Katilim) The LT FC IDRs of Ziraat, Vakif, Halk and TSKB are driven by the banks' VRs. They (excluding Halk) have been affirmed at 'B-' and the Outlooks revised to Stable from Negative, mainly reflecting the revision of the operating environment score for Turkish banks to 'b-'/stable, given Fitch's view that operating environment and external financing pressures have partially abated following the authorities' policy adjustments. However, risks remain high amid uncertainty over the durability of the recent policy shift, high banking sector external FC debt, weak international reserves, large macroeconomic imbalances seen in high and rising inflation, deeply negative real interest rates (even after the recent interest rate hikes) and a wide current account deficit. Fitch views the banks' credit profiles and the strength of their capital and FC liquidity buffers as only commensurate with the risks of the Turkish operating environment, despite Ziraat and Vakifbank's significant franchises (ranked first and second by total assets, respectively). Their VRs are below their 'b' implied VRs due to the operating-environment constraint. The LT FC IDRs of state-owned development banks; Turk Eximbank and TKYB are driven by potential government support as indicated by their Government Support Rating (GSR). Their Outlooks have been revised to Stable from Negative, mirroring the Outlook on the sovereign, reflecting the sovereign's improved ability to provide support in case of need. TKYB's LT FC IDR is equalised with Turkiye's sovereign rating, as reflected in its 'b' GSR, reflecting its small size relative to sovereign resources, still largely treasury-guaranteed funding base and the medium-term tenor of its non-guaranteed funding (as a result of which its potential need for support over the short term is likely to be limited). Turk Eximbank's 'b-' GSR, one notch below Turkiye's LT FC IDR and TKYB's GSR, reflects the bank's strategic policy role as the country's export credit agency, but also its considerably larger balance sheet and volumes of external market funding when compared with TKYB and the sovereign's financial flexibility. This is an important rating driver in light of Turkiye's weak net foreign-exchange (FX) reserves position. The senior unsecured debt ratings of Ziraat, Vakifbank, Turk Eximbank and TSKB have been affirmed in line with their FC IDRs. The GSRs of Ziraat, Vakifbank, Halk, Emlak Katilim, TSKB and Vakif Katilim have been affirmed at 'ns' reflecting the sovereign's still weak financial flexibility to provide support in FC, given its weak external finances and sovereign FX reserves, as denoted by Turkiye's 'B' LT FC IDR. This is despite a high propensity to provide support, given these banks' state ownership (except for TSKB, which is privately owned), policy roles (TSKB), systemic importance (Ziraat, Vakifbank, Halk), state-related or state-guaranteed funding, the strategic importance of participation banking to the authorities (Emlak Katilim, Vakif Katilim) and record of capital support. The LT LC IDRs of all state-owned commercial and development banks, and of TSKB, the privately owned development bank, are driven by potential government support. They have been affirmed at 'B', in line with the sovereign rating, on the basis of support, reflecting the sovereign's high propensity and stronger ability to provide support in LC, as well as lower government intervention risk in LC. The revision of the Outlooks to Stable from Negative mirrors the sovereign rating action. Halk's LT LC IDR remains on RWN, reflecting potential uncertainty about the authorities' ability and propensity to provide sufficient and timely support in LC in case a material fine or other punitive measures result from the US legal proceedings against the bank. TSKB's Shareholder Support Rating (SSR) of 'ccc+' has also been affirmed, reflecting our view that support from Isbank, its majority owner (via Turkiye Is Bankasi Group), is possible, although it cannot be relied upon. The banks' 'B' Short-Term (ST) IDRs are the only possible option for LT IDRs in the 'B' rating category. The affirmation of National Ratings reflects our view that the banks' creditworthiness in LC, relative to other Turkish issuers, is unchanged. VRs, IDRs, GSRs AND SENIOR UNSECURED DEBT RATINGS OF PRIVATELY OWNED TURKISH BANKS (Akbank; Isbank and YKB) The LT FC IDRs of these banks are driven by their 'b' VRs, but are capped at 'B-', one notch below Turkiye's rating. This reflects our view that the likelihood of government intervention that would impede the banks from servicing their FC obligations is higher than that of a sovereign default. The affirmation of these banks' VRs at 'b', one notch above the 'b-' operating environment score for Turkish banks, reflects the banks' solid FC liquidity, strong capital buffers, resilient financial metrics and solid domestic franchises. The Stable Outlooks mirror those on the sovereign and also reflect reduced operating environment risks. All banks' LT LC IDRs are driven by their VRs and are one notch above their respective LT FC IDRs, reflecting our view of lower government intervention risk in LC. The revision of Outlooks to Stable on the banks' LT LC IDRs reflects reduced risks to the banks' standalone credit profiles amid reduced operating environment pressures. It also considers the sovereign Outlook, given that the banks have VRs of 'b', in line with the sovereign's LT LC IDR, and we do not rate any bank above Turkiye's sovereign rating. The senior unsecured debt ratings of Akbank, Isbank and YKB have been affirmed in line with their FC IDRs. The banks' 'B' ST IDRs are the only possible option for LT IDRs in the 'B' rating category. The affirmation of National Ratings reflects our view that the banks' creditworthiness in LC, relative to other Turkish issuers', is unchanged. The revision of Outlooks on the National Ratings reflects that on the banks' LT LC IDRs. The banks' GSRs of 'ns', notwithstanding their systemic importance, reflects our view that support from the Turkish authorities in FC cannot be relied upon given the sovereign's weak financial flexibility. VR (Garanti BBVA only), IDRs, SSRs AND SENIOR UNSECURED DEBT RATINGS OF FOREIGN-OWNED BANKS (Garanti BBVA; INGBT; QNBF; TEB; Denizbank; Kuveyt Turk and Turkiye Finans) The LT IDRs of QNBF; TEB; Denizbank; Kuveyt Turk and Turkiye Finans are driven by potential shareholder support based on their strategic importance, to varying degrees, integration, roles within their respective groups and, for some, common branding and legal commitments. In the case of INGBT and Garanti BBVA, the LT IDRs are also underpinned by the banks' VRs. The banks' LT FC IDRs are one notch below the sovereign's LT FC IDR, reflecting Fitch's view that in case of marked deterioration in Turkiye's external finances, the risk of government intervention in the banking sector would be higher than that of a sovereign default. The LT LC IDRs of these banks are one notch above their LT FC IDRs, reflecting our view of a lower likelihood of government intervention that would impede the banks' ability to service obligations in LC. The banks' FC senior debt ratings, where assigned (Garanti, QNB Finans, Denizbank, TEB), are aligned with their LT FC IDRs. Garanti BBVA's VR has been affirmed at 'b', one notch above the 'b-' operating-environment score for Turkish banks, reflecting its solid FC liquidity and capital buffers, generally resilient financial metrics and solid domestic franchise. The revision of the Outlooks on all foreign-owned banks' Long-Term IDRs to Stable from Negative mirrors the sovereign Outlook change. This reflects the reduced risk of stress in Turkiye's external finances and, as a result, reduced government intervention risk in the banking sector. However, in case of marked deterioration in the country's external finances, some form of intervention in the banking system that might impede the banks' ability to service their FC obligations remains likely. The banks' 'B' ST IDRs are the only possible option mapping to LT IDRs in the 'B' rating category. The affirmation of the banks' National Ratings with Stable Outlooks reflects our view that the banks' creditworthiness in LC relative to other Turkish issuers' is unchanged. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade VRs (Akbank, Garanti BBVA, Isbank, YKB, Ziraat, Vakifbank, Halk and TSKB) The VRs of Akbank, Garanti BBVA, Isbank and YKB are primarily sensitive to a sovereign downgrade. Fitch would also downgrade the banks' VRs by one notch to the level of their LT FC IDRs if there was material erosion in their capital and FC liquidity buffers. The 'b-' VRs of Ziraat, Vakifbank, Halk and TSKB are also potentially sensitive to a sovereign downgrade. Their VRs could also be downgraded due to a marked deterioration in the operating environment, in case of a material erosion in their FC liquidity buffers, for example due to a prolonged funding-market closure or deposit instability, or in their capital buffers, if not offset by government or shareholder support. The VR of Halk could also be downgraded if, as a result of the US investigations, Halk becomes subject to a fine or other punitive measure that materially weakens its solvency or negatively affects its standalone credit profile. The removal from RWN is dependent upon increased certainty that the outcome of the investigations will not materially weaken Halk's capital, or other aspects of its credit profile. LONG-TERM IDRs, GSRs, SSR (TSKB) AND SENIOR UNSECURED DEBT RATINGS OF STATE-OWNED COMMERCIAL AND PARTICIPATION BANKS, AND DEVELOPMENT BANKS (Ziraat, Vakifbank, Halk, Turk Eximbank, TKYB, Vakif Katilim, Emlak Katilim and TSKB) The LT FC IDRs of Ziraat, Vakifbank, Halk and TSKB are sensitive to a change in their VRs, Fitch's view of government intervention risk in the banking sector and, potentially, also a sovereign downgrade. TKYB's GSR and LT FC IDR are sensitive to a downgrade of Turkiye's LT FC IDR. Its LT FC IDR could also be downgraded if the bank's proportion of non-guaranteed funding increases materially, particularly if Fitch believes this to be indicative of a weakening in TKYB's policy role, or if its balance sheet size sharply increases relative to sovereign resources. A sovereign downgrade would likely trigger a similar rating action on Turk Eximbank, particularly if it reflects a further weakening in the sovereign's ability to provide support in FC. A material weakening in Turk Eximbank's policy role could also result in a downgrade of its LT FC IDR. The LT LC IDRs of Ziraat, Vakifbank, Vakif Katilim, TSKB, Turk Eximbank, TKYB, Emlak Katilim and Halk are primarily sensitive to a sovereign downgrade, but also a change in the ability or propensity of the authorities to provide support in LC, and to our view of government intervention risk in LC. The RWN on Halk's IDRs could be resolved once there is more clarity on the outcome of the US investigations and is sensitive to the authorities' ability and propensity to provide sufficient and timely support in LC in case a material fine or other punitive measures result from the US case against the bank. TSKB's SSR is sensitive to a change in Isbank's LT FC IDR and Fitch's view of its ability and propensity to provide support to TSKB. Banks' senior unsecured debt ratings, where relevant, are primarily sensitive to changes in their IDRs. LONG-TERM IDRS AND SENIOR UNSECURED DEBT RATINGS OF PRIVATELY OWNED TURKISH BANKS (Akbank, Isbank and YKB) The LT FC and LT LC IDRs of the privately owned Turkish banks (Akbank, Isbank and YKB) are sensitive to a sovereign downgrade and any increase in Fitch's view of government intervention risk in the banking sector. As the banks' ratings are driven by their VR, they are also sensitive to any weakening in their VRs. The banks' senior unsecured debt ratings, where relevant, are primarily sensitive to changes in their respective IDRs. LONG-TERM IDRs, SSRs AND SENIOR UNSECURED DEBT RATINGS OF FOREIGN-OWNED BANKS A downgrade of Turkiye's sovereign rating or an increase in our view of government intervention risk would lead to a downgrade of the foreign-owned banks' SSRs, leading to a negative rating action on their Long-Term IDRs (Garanti BBVA, INGBT, QNBF, TEB, Deniz, Kuveyt Turk, Turkiye Finans). All banks' SSRs are also sensitive to Fitch's view of their shareholders' ability and propensity to provide support. The banks' senior unsecured debt ratings, where assigned, are primarily sensitive to changes in their respective IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade A positive change in Turkiye's LT IDRs could likely lead to similar actions on these banks' LT IDRs and GSRs. A material improvement in Turkiye's external finances or its net FX reserves position, resulting in a marked strengthening in the sovereign's ability to support banks in FC, could also lead to a positive rating action on Turk Eximbank's GSR and equalising its LT FC IDR with Turkiye's sovereign rating. Turk Eximbank's senior unsecured debt rating is primarily sensitive to a change in its LT FC IDR. VRs, GSRS, LT IDRs of ZIRAAT, VAKIFBANK, HALK, TSKB and SENIOR UNSECURED DEBT RATINGS of Ziraat, Vakifbank and TSKB, and SSR of TSKB Upside for the VRs is constrained by operating environment risks. An upgrade of the operating-environment score, which could result from lower market- or exchange-rate volatility, a sustainable decline in inflation, a material improvement in investor sentiment and a reduction in government intervention in the banking sector could support the VRs and an upgrade, combined with a reduction in risk appetites in the case of state-owned banks and improvement in capital and earnings in the case of Halk. An upgrade of LT FC IDRs is unlikely given our view of government intervention risk in the banking sector. A positive change in the sovereign's LT LC IDR would likely lead to similar actions on these banks' LT LC IDRs. The GSRs could be upgraded if we view the government's ability to support the banks in FC as stronger. The banks' senior unsecured debt ratings are primarily sensitive to changes in their IDRs. VRs, GSRs, LT IDRs and SENIOR UNSECURED DEBT of Akbank, Isbank and YKB A positive change in Turkiye's LT IDRs could lead to similar actions on the banks' VR driven LT IDRs, given their VRs are at the same level as the sovereign. The GSRs could be upgraded if we view the government's ability to support the banks in FC as stronger. The banks' senior unsecured debt ratings are primarily sensitive to changes in their IDRs. IDRS AND SSRs OF FOREIGN-OWNED BANKS (Garanti BBVA; INGBT; QNBF; TEB; Denizbank; Kuveyt Turk and Turkiye Finans), VR OF GARANTI, SENIOR UNSERCURED DEBT OF Garanti BBVA; QNBF; TEB; Denizbank A positive change in Turkiye's LT IDRs would likely lead to similar actions on the banks' SSRs and LT IDRs and it could also lead to a similar action on Garanti BBVA's VR. A material improvement in Turkiye's external finances or a marked improvement in its net FX reserves position, resulting in a significant reduction in our view of government intervention risk in the banking sector, could lead to an upgrade of the banks' SSRs and LT FC IDRs to the level of Turkiye's LT FC IDR. The banks' senior unsecured debt ratings are primarily sensitive to changes in their IDRs. LT LC IDRS AND GSRs of VAKIF KATILIM AND EMLAK KATILIM A positive change in the sovereign's LT LC IDR would likely lead to similar actions on these banks' LTLC IDRs. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT RATINGS The subordinated notes' ratings of Garanti BBVA and Kuveyt Turk (issued through its SPV KT21 T2 Sukuk), have been affirmed at 'CCC+' following the affirmation of their LT FC IDR anchor ratings. The choice of the LT FC IDRs as anchor ratings reflects our view that, in case of failure, the respective parents seek to restore Garanti BBVA's and Kuveyt Turks's solvencies without imposing losses on subordinated creditors. The notching for the subordinated notes includes one notch for loss severity and zero notches for non-performance risk (relative to their anchor ratings). The one notch, rather than two, for loss severity reflects our view that shareholder support (as reflected in the banks' LT FC IDRs) could help mitigate losses, and it incorporates the cap on the banks' LT FC IDRs at 'B-' by our view of government intervention risks. The subordinated notes' ratings of Akbank, Isbank and YKB have been affirmed at 'CCC+' following the affirmation of their 'B-' LT FC IDR anchor ratings. The anchor ratings are the banks' 'B-' LT FC IDRs, rather than their VRs, which we deem as the most appropriate measure of non-performance risk given government intervention risk. The debt ratings have been notched down once, rather than twice, from the anchor ratings to reflect reduced loss severity given that the main risk on these instruments in our view is to timely payment rather than recoveries. NATIONAL RATINGS (ALL BANKS EXCLUDING AKBANK AG) The National Ratings are driven by the banks' LT LC IDRs. The affirmation of all National Ratings reflects our view that the banks' creditworthiness in LC, relative to other Turkish issuers', is unchanged. The revision of Outlooks on the National Ratings of Akbank, Isbank and YKB reflects that on the banks' LTLC IDRs. KZI's National Rating is based on support from Ziraat. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES NATIONAL RATINGS (ALL BANKS EXCLUDING AKBANK AG) The National Ratings are sensitive to changes in the banks' LT LC IDRs and their creditworthiness relative to other issuers' in their domestic market. SUBORDINATED DEBT RATINGS Banks' subordinated debt ratings (Garanti BBVA, Kuveyt Turk, Akbank, Isbank, YKB) are primarily sensitive to changes in their respective anchor ratings. They are also sensitive to a revision in Fitch's assessment of potential loss severity in case of non-performance in their respective anchor ratings. SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS SUBSIDIARIES & AFFILIATES (Ziraat Katilim, KZI and Akbank AG) The IDRs of Ziraat Katilim and Akbank AG are equalised with those of Ziraat and Akbank (reflecting their strategic importance and roles as core subsidiaries) and their Outlooks mirror those on their parents. The two banks' SSRs have been affirmed at 'b-' and their IDRs affirmed in line with their parents. KZI's 'B-' Long-Term IDRs reflect Fitch's view of a limited probability of support from the bank's parent, Ziraat, as denoted by its 'B-' LT FC IDR. The equalisation of the entity's ratings reflects significant integration between the two banks, and the rating scale compression at low rating levels. The revision of the Outlook on KZI to Stable from Negative mirrors the rating action on the parent bank's ratings. Akbank AG's long-term deposit rating has also been affirmed at 'B-' as its debt buffers do not afford any significant incremental probability of default benefit over and above the support benefit factored into the bank's IDRs. SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES BANK SUBSIDIARIES The ratings of Ziraat Katilim, KZI and Akbank AG are sensitive to changes in their respective parent ratings or parents' propensity to provide support. VR ADJUSTMENTS The operating environment score of 'b-' for Turkish banks is below the 'bb' category implied score due to the following adjustment reasons: macroeconomic volatility (negative), which reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkiye, and sovereign rating (negative). The business profile scores of 'b' for Akbank, Ziraat, Garanti BBVA, Isbank, Vakifbank and YKB is below the 'bb' category implied scores, due to the following adjustment reason: business model (negative). This reflects the banks' business model concentration on the high-risk Turkish market. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS All banks included in this review have ratings linked to the Turkish sovereign rating. Turkish foreign-owned banks have ratings linked to their respective parent banks' ratings. Akbank AG's ratings are driven by support from Akbank. Ziraat Katilim's ratings are driven by support from Ziraat. ESG CONSIDERATIONS All Turkish Banks (Excluding Turk Eximbank and TKYB) The ESG Relevance Score for Management and Strategy of '4' (in contrast to a typical Relevance Score of '3' for comparable banks) reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the credit profile and is relevant to the rating in combination with other factors. State-owned Turkish banks In addition to a '4' score for Management Strategy, the state-owned commercial banks - Ziraat, Vakifbank, Emlak Katilim, Vakif Katilim and Ziraat Katilim have also ESG Relevance Scores of '4' for Governance Structure (in contrast to a typical Relevance Score of '3' for comparable banks) due to potential government influence over their boards' effectiveness and management strategy in the challenging Turkish operating environment, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Halk has an ESG Relevance Score of '5' for Governance Structure, reflecting the elevated legal risk of a large fine, which drives the RWN on the bank. It also considers potential government influence over the board's effectiveness in the challenging Turkish operating environment. Halk has an ESG Relevance Score of '4' for Management Strategy (in contrast to a typical Relevance Score of '3' for comparable banks), due to potential government influence over its management strategy in the challenging Turkish operating environment, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Islamic Banks (Emlak Katilim, Vakif Katilim, Kuveyt Turk, TFKB, Ziraat Katilim) Islamic banks' ESG Relevance Score of '4' for Governance Structure reflects their Islamic banking nature (in contrast to a typical ESG Relevance Score of '3' for comparable conventional banks). These banks' operations and activities need to comply with sharia principles and rules, which entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This has a negative impact on their credit profiles and is relevant to the ratings in conjunction with other factors. Islamic banks also have an ESG Relevance Score of '3' for Exposure to Social Impacts (in contrast to a typical ESG Relevance Score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on Islamic banks. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Akbank AG LT IDR B- Affirmed B- ST IDR B Affirmed B Shareholder Support b- Affirmed b- long-term deposits LT B- Affirmed B- short-term deposits ST B Affirmed B Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi 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)Affirmed AA(tur) Viability b- Affirmed b- Government Support ns Affirmed ns senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Turkiye Emlak Katilim Bankasi A.S. LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Government Support ns Affirmed ns AKBANK T.A.S. LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT A+(tur)Affirmed A+(tur) Viability b Affirmed b Government Support ns Affirmed ns senior unsecured LT B- Affirmed RR4 B- subordinated LT CCC+ Affirmed RR5 CCC+ senior unsecured ST B Affirmed B Turk Ekonomi Bankasi A.S. 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Turkiye Kalkinma ve Yatirim Bankasi A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT AAA(tur)Affirmed AAA(tur) Government Support b Affirmed b Turkiye Is Bankasi A.S. LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT A+(tur)Affirmed A+(tur) Viability b Affirmed b Government Support ns Affirmed ns senior unsecured LT B- Affirmed RR4 B- Subordinated LT CCC+ Affirmed RR5 CCC+ senior unsecured ST B Affirmed B Denizbank A.S. 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Turkiye Ihracat Kredi Bankasi A.S. LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT AAA(tur)Affirmed AAA(tur) Government Support b- Affirmed b- senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Turkiye Halk Bankasi A.S. LT IDR B- Rating Watch Maintained B- ST IDR B Rating Watch Maintained B LC LT IDR B Rating Watch Maintained B LC ST IDR B Rating Watch Maintained B Natl LT AA(tur)Rating Watch Maintained AA(tur) Viability b- Rating Watch Maintained b- Government Support ns Affirmed ns Turkiye Sinai Kalkinma Bankasi A.S. 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)Affirmed AA(tur) Viability b- Affirmed b- Government Support ns Affirmed ns Shareholder Support ccc+ Affirmed ccc+ senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Kuveyt Turk Katilim Bankasi A.S 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- Turkiye Garanti Bankasi A.S. 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)Affirmed AA(tur) Viability b Affirmed b Shareholder Support b- Affirmed b- senior unsecured LT B- Affirmed RR4 B- subordinated LT CCC+ Affirmed RR5 CCC+ senior unsecured ST B Affirmed B Ziraat Katilim Bankasi A.S. 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- Vakif Katilim Bankasi A.S. LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Government Support ns Affirmed ns QNB Finansbank Anonim Sirketi 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B ING Bank A.S. 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- Turkiye Vakiflar Bankasi T.A.O. 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)Affirmed AA(tur) Viability b- Affirmed b- Government Support ns Affirmed ns senior unsecured LT B- Affirmed RR4 B- senior unsecured ST B Affirmed B Yapi ve Kredi Bankasi A.S. LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT A+(tur)Affirmed A+(tur) Viability b Affirmed b Government Support ns Affirmed ns senior unsecured LT B- Affirmed RR4 B- subordinated LT CCC+ Affirmed RR5 CCC+ senior unsecured ST B Affirmed B KT21 T2 Company Limited subordinated LT CCC+ Affirmed RR5 CCC+ Turkiye Finans Katilim Bankasi A.S. 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)Affirmed AA(tur) Shareholder Support b- Affirmed b- AB Kazakhstan - Ziraat International Bank JSC LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B- Affirmed B- Natl LT B+(kaz)Affirmed B+(kaz) Shareholder Support b- Affirmed b- ============= I R E L A N D ============= BARINGS EURO 2019-2: Moody's Affirms Ba2 Rating on Class E Notes ---------------------------------------------------------------- Moody's Investors Service has downgraded the rating on the following notes issued by Barings Euro CLO 2019-2 Designated Activity Company: EUR10,500,000 Class F Senior Secured Deferrable Floating Rate Notes due 2032, Downgraded to B3 (sf); previously on Feb 14, 2022 Affirmed B2 (sf) Moody's has also affirmed the ratings on the following notes: EUR240,000,000 Class A-1-R Senior Secured Floating Rate Notes due 2032, Affirmed Aaa (sf); previously on Feb 14, 2022 Definitive Rating Assigned Aaa (sf) EUR10,000,000 Class A-2-R Senior Secured Floating Rate Notes due 2032, Affirmed Aaa (sf); previously on Feb 14, 2022 Definitive Rating Assigned Aaa (sf) EUR18,000,000 Class B-1-R Senior Secured Floating Rate Notes due 2032, Affirmed Aa2 (sf); previously on Feb 14, 2022 Definitive Rating Assigned Aa2 (sf) EUR20,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2032, Affirmed Aa2 (sf); previously on Feb 14, 2022 Affirmed Aa2 (sf) EUR25,200,000 Class C-R Senior Secured Deferrable Floating Rate Notes due 2032, Affirmed A2 (sf); previously on Feb 14, 2022 Definitive Rating Assigned A2 (sf) EUR25,500,000 Class D-R Senior Secured Deferrable Floating Rate Notes due 2032, Affirmed Baa3 (sf); previously on Feb 14, 2022 Definitive Rating Assigned Baa3 (sf) EUR20,500,000 Class E Senior Secured Deferrable Floating Rate Notes due 2032, Affirmed Ba2 (sf); previously on Feb 14, 2022 Affirmed Ba2 (sf) Barings Euro CLO 2019-2 Designated Activity Company, issued in January 2020, is a collateralised loan obligation (CLO) backed by a portfolio of mostly high-yield senior secured European loans. The portfolio is managed by Barings (U.K.) Limited. The transaction's reinvestment period will end in July 2024. RATINGS RATIONALE The rating downgrade on the Class F notes is primarily a result of 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 September 2023 [1], the Class A/B, Class C, Class D, Class E and Class F OC ratios are reported at 136.35%, 125.38%, 115.94%, 109.32% and 106.22% compared to September 2022 [2] levels of 137.85%, 126.76%, 117.22%, 110.53% and 107.39%, respectively. Key model inputs: 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: EUR392.4m Defaulted Securities: EUR2.2m Diversity Score: 59 Weighted Average Rating Factor (WARF): 2907 Weighted Average Life (WAL): 4.46 years Weighted Average Spread (WAS) (before accounting for Euribor floors): 4.12% Weighted Average Coupon (WAC): 4.17% Weighted Average Recovery Rate (WARR): 42.86% Par haircut in OC tests and interest diversion test: none The default probability derives from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The estimated average recovery rate on future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance and a collateral manager's latitude to trade collateral are also relevant factors. Moody's incorporates these default and recovery characteristics of the collateral pool into its cash flow model analysis, subjecting them to stresses as a function of the target rating of each CLO liability it is analysing. Moody's notes that the September 2023 trustee report was published at the time it was completing its analysis of the August 2023 data. Key portfolio metrics such as WARF, diversity score, weighted average spread and life, and OC ratios exhibit little or no change between these dates. 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 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: -- 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. The effect on the ratings of extending the portfolio's weighted average life can be positive or negative depending on the notes' seniority. -- Recovery of defaulted assets: Market value fluctuations in trustee-reported defaulted assets and those Moody's assumes have defaulted can result in volatility in the deal's over-collateralisation levels. Further, the timing of recoveries and the manager's decision whether to work out or sell defaulted assets can also result in additional uncertainty. Recoveries higher than Moody's expectations would have a positive impact on the notes' ratings. -- Other collateral quality metrics: Because the deal can reinvest, the manager can erode the collateral quality metrics' buffers against the covenant levels. However, as part of the base case, Moody's considered spread and coupon levels higher than the covenant levels because of the large difference between the reported and covenant levels. 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. JUBILEE CLO 2015-XVI: Moody's Ups EUR25.6MM E Notes Rating to Ba1 ----------------------------------------------------------------- Moody's Investors Service has upgraded the ratings on the following notes issued by Jubilee CLO 2015-XVI DAC: EUR25,000,000 Class C Deferrable Mezzanine Floating Rate Notes due 2029, Upgraded to Aaa (sf); previously on Feb 24, 2023 Upgraded to Aa1 (sf) EUR20,000,000 Class D Deferrable Mezzanine Floating Rate Notes due 2029, Upgraded to Aa3 (sf); previously on Feb 24, 2023 Upgraded to A2 (sf) EUR25,600,000 Class E Deferrable Junior Floating Rate Notes due 2029, Upgraded to Ba1 (sf); previously on Feb 24, 2023 Affirmed Ba2 (sf) Moody's has also affirmed the ratings on the following notes: EUR225,000,000 (Current outstanding amount EUR79,088,772) Class A-1 Senior Secured Floating Rate Notes due 2029, Affirmed Aaa (sf); previously on Feb 24, 2023 Affirmed Aaa (sf) EUR5,000,000 (Current outstanding amount EUR 1,757,528) Class A-2 Senior Secured Fixed Rate Notes due 2029, Affirmed Aaa (sf); previously on Feb 24, 2023 Affirmed Aaa (sf) EUR19,000,000 Class B-1 Senior Secured Floating Rate Notes due 2029, Affirmed Aaa (sf); previously on Feb 24, 2023 Affirmed Aaa (sf) EUR37,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2029, Affirmed Aaa (sf); previously on Feb 24, 2023 Affirmed Aaa (sf) EUR13,000,000 Class F Deferrable Junior Floating Rate Notes due 2029, Affirmed B2 (sf); previously on Feb 24, 2023 Affirmed B2 (sf) Jubilee CLO 2015-XVI DAC, issued in December 2015 and refinanced in December 2017, is a collateralised loan obligation (CLO) backed by a portfolio of mostly high-yield senior secured European loans. The portfolio is managed by Alcentra Limited. The transaction's reinvestment period ended in December 2019. RATINGS RATIONALE The rating upgrades on the Class C, Class D and Class E notes are primarily a result of the deleveraging of the Class A-1 and Class A-2 notes following amortisation of the underlying portfolio since the last rating action in February 2023. The affirmations on the ratings on the Class A-1, Class A-2, Class B-1, Class B-2 and Class F notes are primarily a result of the expected losses on the notes remaining consistent with their current ratings after taking into account the CLO's latest portfolio, its relevant structural features and its actual over-collateralization (OC) levels. The Class A-1 and A-2 notes have paid down by approximately EUR62.4 million (27.1%) since the last rating action in February 2023 and EUR149.1 million (64.9%) since closing. As a result of the deleveraging, over-collateralisation (OC) has increased across the capital structure. According to the trustee report dated January 2023 [1] the Class A/B, Class C, Class D, Class E, and Class F OC ratios are reported at 152.31%, 135.33%, 124.25%, 112.46% and 107.3% compared to August 2023 [2] levels of 174.35%, 147.42%, 131.21%, 115.01% and 108.23%, respectively. Moody's notes that the September 2023 principal payments are not reflected in the reported OC ratios. 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: EUR237.7m Defaulted Securities: EUR2.9m Diversity Score: 34 Weighted Average Rating Factor (WARF): 3067 Weighted Average Life (WAL): 2.66 years Weighted Average Spread (WAS) (before accounting for Euribor floors): 3.60% Weighted Average Coupon (WAC): 3.24% Weighted Average Recovery Rate (WARR): 44.34% The default probability derives from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The estimated average recovery rate on future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance and a collateral manager's latitude to trade collateral are also relevant factors. Moody's incorporates these default and recovery characteristics of the collateral pool into its cash flow model analysis, subjecting them to stresses as a function of the target rating of each CLO liability it is analysing. Methodology Underlying the Rating Action: The principal methodology used in these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in December 2021. Counterparty Exposure: The rating action took into consideration the notes' exposure to relevant counterparties, such as account bank and swap provider, using the methodology "Moody's Approach to Assessing Counterparty Risks in Structured Finance" published in June 2022. Moody's concluded the ratings of the notes are not constrained by these risks. Factors that would lead to an upgrade or downgrade of the ratings: The rated notes performance is subject to uncertainty. The notes performance is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The collateral manager's investment decisions and management of the transaction will also affect the notes' performance. Additional uncertainty about performance is due to the following: -- Portfolio amortisation: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio, which can vary significantly depending on market conditions and have a significant impact on the notes' ratings. Amortisation could accelerate as a consequence of high loan prepayment levels or collateral sales by the collateral manager or be delayed by an increase in loan amend-and-extend restructurings. Fast amortisation would usually benefit the ratings of the notes beginning with the notes having the highest prepayment priority. -- Recovery of defaulted assets: Market value fluctuations in trustee-reported defaulted assets and those Moody's assumes have defaulted can result in volatility in the deal's over-collateralisation levels. Further, the timing of recoveries and the manager's decision whether to work out or sell defaulted assets can also result in additional uncertainty. 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 A T V I A =========== AIR BALTIC: Moody's Assigns First Time B2 Corporate Family Rating ----------------------------------------------------------------- Moody's Investors Service has assigned a B2 long term Corporate Family Rating, a B2-PD Probability of Default rating and a caa1 Baseline Credit Assessment (BCA) to Air Baltic Corporation AS (airBaltic, company). Concurrently Moody's has assigned a B2 instrument rating to the proposed $300 million senior unsecured notes to be issued by the company. The outlook is stable. RATINGS RATIONALE airBaltic's B2 long term Corporate Family Rating is derived from a caa1 Baseline Credit Assessment (BCA) and two notches uplift for support from the Government of Latvia (A3 stable) in accordance with Moody's Government-Related Issuers (GRI) Methodology. The two notches has been determined based on expectations of moderate dependence between the Government of Latvia and airBaltic and strong state support should the company require financial support. Moody's assessment of strong support is founded on the Government of Latvia's track record of financial support in the past and the expectation that it would provide extraordinary support, if needed, given the economic and strategic importance of airBaltic to Latvia's GDP and ensuring connectivity to the country. airBaltic's B2 CFR is supported by (1) its strong market position in the Baltics (especially at Riga Airport) with strong growth prospects, (2) its competitive cost structure compared to other European network airlines primarily based on lower personal costs, (3) its focus on Airbus's narrow-body A220-300 fleet with suitable capacity and beneficial cost structure, (4) its ACMI strategy catering for high utilization in recently capacity constrained market and (5) long track record of support from the Government of Latvia and its importance to the tourism and economy in the entire Baltic region. On the other hand, the rating is constrained by airBaltic's (1) very small size in the highly competitive European airline market, (2) historical volatility in profitability and lower EBIT margins compared to industry peers at just over 8% expected in the next 12-18 months resulting in (3) high leverage of 7-8.0x which is high for the highly cyclical industry that is exposed to exogenous shocks, (4) high reliance on proceeds from debt or equity injection to fund expansion of fleet, (5) execution and adoption risk of the ACMI expansion strategy with short-term contracts that strains free cash flow and could result in excess capacity, (6) the company's low hedging levels exposing it to high earnings volatility, (7) rather aggressive financial policy with maintenance of low cash on balance and high tolerance for financial leverage. RATIONALE FOR THE STABLE OUTLOOK The stable outlook assigned reflects Moody's view that airBaltic will be able to translate the reduction in CASK (including fuel) into stronger profitability and a deleveraging path to below 7.0x by year-end 2024. The stable outlook also anticipates the maintenance of an adequate liquidity profile, also catering for future negative FCF driven by high capex, and the focus on deleveraging the company from recently elevated levels. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Moody's would consider a positive rating action if its EBIT margins are moving sustainably towards 10%; (FFO + Interest Expense) / Interest Expense stays above 2.0x; airBaltic successfully delevers towards 5.0x; and airBaltic continues to preserve adequate liquidity with cash/turnover remaining around 20%; or stronger evidence that the Latvian government would financially support airBaltic should the airline face financial difficulties, for example an explicit guarantee. Moody's would consider a negative rating action if its EBIT margins remain in the low single-digits in percentage terms; (FFO + Interest Expense) / Interest Expense is forecast to remain below 1.0x; airBaltic's leverage looks likely to remain above 6.5x, such that this could jeopardise a successful refinancing of the bond as well as the company's inability to fund its expansion strategy funding of which will continue to be needed in the next 2 years; evidence that the Latvian government would not financially support airBaltic (for example if there is evidence of weaker support for other state-owned entities) or there is a material weakening in Latvia's own credit quality. LIQUIDITY Liquidity is weak and is contingent on the company's issuance of a $300 million bond as well as further funds to support the expansion plan of the company. Its liquidity is also to some degree dependent on financing conditions for the A220 aircraft that airBaltic has on order, although the favourable in-service operation of the A220 mitigates the risk of a softening in the aircraft lease market. airBaltic maintains adequate levels of cash on balance sheet but lacks the availability of credit lines that would provide necessary funds in times of lower capacity utilization. STRUCTURAL CONSIDERATIONS airBaltic's capital structure, pro-forma for the planned issuance of $300 million unsecured bonds, is unsecured. Moody's has treated trade payables as unsecured claims in line with the proposed senior unsecured bonds due to the absence of an all asset pledge security package for the secured debt instruments. In light of the relatively low percentage of secured debt in the capital structure, the rating of the proposed senior unsecured bond is in line with the long term corporate family rating at B2. The recovery of the corporate family is assumed to be 50%. The shareholder loans by the Latvian government, albeit partially secured, are ranked in line with the secured instruments due to the potential difficulty to enforce such a claim as a bondholder. ENVIRONMENTAL, SOCIAL and GOVERNANCE CONSIDERATIONS airBaltic's ESG Credit Impact Score 2 (CIS-2) reflects the government ownership and very high level of government support which offsets the ESG risks identified for airBaltic in the IPS scores. As a standalone entity without government support airBaltic's credit rating would be impacted by Environmental, Social and Governance risks. =================== L U X E M B O U R G =================== AEGEA FINANCE: Fitch Rates Proposed $500MM Unsecured Notes 'BB' --------------------------------------------------------------- Fitch Ratings has assigned 'BB' rating to Aegea Finance S.a.r.l's (Aegea Finance) proposed senior unsecured sustainable and sustainability-linked notes due in 2030 of USD500 million. The issuance will be unconditionally and irrevocably guaranteed by Aegea Saneamento e Participacoes S.A.'s (Aegea; Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) 'BB'/Outlook Stable). Proceeds will be used to support capex, debt refinancing and general corporate purposes. Aegea's ratings reflect its strong business position and diversified asset base within the Brazilian water/wastewater industry, with expected growing operational cash generation and leverage trending to more moderate levels as it develops its subsidiaries. Fitch views the high debt at the holding level as manageable, considering the group's proved access to diversified sources of funding and the estimated increase of dividends inflow. Aegea should continue to generate negative FCF due to its capex needs and higher interest payments. KEY RATING DRIVERS Solid Business Position: Aegea is the leading private player in the water/wastewater industry in Brazil. The company has a diversified portfolio of assets, which mitigates the operational, hydrological, political and regulatory risks associated to its business. The groups credit profile benefits from predictable demand and increase in operational scale from new projects and acquisition. The company's recent acquisition, Companhia Riograndense de Saneamento (Corsan; AA(bra)/Stable) is credit positive, despite elevating its leverage profile in the short-term. Fitch expects, given Aegea track record, it will improve its efficiency and further strengthen its cash flow profile. Moderate Leverage: Fitch's ratings case assumes that Aegea will deleverage from its current peak of 4.5x in 2023 to 4.0x in 2025. The deleveraging will be supported by Corsan's EBITDA margin growth to 60% by 2028, from 23% in 2022. The ongoing operating development of non-consolidated important subsidiary Águas do Rio (AdR) should also support deleveraging given the expected upstream of dividends starting in 2026. Aegea concentrates most of its debt at the holding level, which makes the company reliant on cash upstreamed from dividends. Debt Concentration at the Holding Level: Fitch considers the debt at Aegea as high, but manageable as dividends from subsidiaries should increase. At the end of June 2023, the holding company had outstanding debt of BRL9.8 billion, which compares Fitch's base case assumption that Aegea will receive BRL716 million in annual dividends on average from 2023 to 2025, increasing substantially in 2026 to around BRL1.7 billion as AdR starts to contribute. Negative FCF: The consolidated EBITDA estimate for Aegea is BRL2.7 billion with 44% EBITDA margin in 2023, increasing to BRL4.6 billion and margin of 48% in 2024. This profitability is amongst the highest of its local peers. The assumptions consider strong average total billed volume growth of 35% during the next two years mainly due to the incorporation of Corsan and a tariff increase mostly linked to inflation. The consolidated cash flow from operations (CFFO) should be around BRL470 million in 2023 and BRL1.3 billion in 2024. Aegea's annual FCF should remain negative and register BRL2.6 billion, on annual average in the next two years, mainly pressured by annual average investments of BRL2.7 billion and dividends of almost BRL790 million. Consolidated Approach: Fitch views Aegea's consolidated profile as stronger than the subsidiaries' profiles. Its ratings are supported by its diversified portfolio of concessions leading to a predictable and stable cash flow profile. The company guarantees around 100% of most subsidiaries' debt and has cross default languages on its financial instruments leading to high legal incentive of support. Non-mature subsidiaries are strategic for the company's growth, which are estimated to represent the majority of growth. The fully integrated corporate structure leads to the equalization of the ratings, given combination of high legal and medium-high strategic and operational incentive to support. In the case of Prolagos and Guariroba, which are matured subsidiaries, Fitch views the standalone credit profile of both companies equal to Aegea's. DERIVATION SUMMARY Aegea's LC IDR is positioned one notch below Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp; BB+/Stable), which has lower leverage and a more predictable cash generation coming from its recently established tariff framework. Positively, Aegea has a more diversified portfolio of concessions in terms of geography, which brings lower operational and regulatory risks. Aegea and Sabesp have strong EBITDA margins. Sabesp carries higher political risk, given its state-ownership, yet benefits as the country's largest water/wastewater utility with economies of scale. Transmissora Alianca de Energia Eletrica S.A. (LC IDR BBB-/Negative and FC IDR BB+/Stable), a power transmission company, has a better credit profile than Aegea given a more predictable cash flow, in addition to strong financial profile and lower regulatory risk. Aegea's activity in Brazil is influenced by the country's operating environment, which is subject to volatile macroeconomic environments and mostly explains the difference in ratings from Wessex Water Limited (WWL; BBB-/Stable), a holding company with water operations in England. WWL subsidiaries' operating position is strong compared with rated peers in the UK water sector due to a long-standing record of strong operational and regulatory performance. KEY ASSUMPTIONS - Annual average of total volume billed growth of 5% in 2023-2025; - Tariff increase in line with Fitch's inflation estimates added by already approved real tariff increase for certain subsidiaries; - Average annual capex of BRL3.2 billion in 2023-2025; - Average annual dividend distributions of BRL732 million in the next three years; - Equity injection of BRL1.4 billion in 2023-2024 on non-consolidated subsidiaries; - Corsan's EBITDA margin growth to 60% until 2027; - Dividends upstreamed from AdR of BRL970 million in 2026 to Aegea; - CDI curve of 11.75% by the end of 2023, 9.0% in 2024 and 8.5% thereafter. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Consolidated net debt/EBITDA sustainably below 3.0x and maintenance of adequate liquidity profile. Factors that could, individually or collectively, lead to negative rating action/downgrade: - Perception of unexpected additional relevant cash contributions on subsidiaries; - Deterioration of liquidity profile on a consolidated and standalone basis and/or weaker financial flexibility; - Consolidated net leverage sustainably trending to above 4.0x; - Sustainable EBITDA interest coverage below 2.5x. LIQUIDITY AND DEBT STRUCTURE Proven Financial Flexibility: Aegea benefits from demonstrated debt market access, which is important to support the significant planned investments and necessary injections at subsidiaries. The company has to continuously fund its negative FCF generation and manage its debt refinancing needs. By the end of June 2023, Aegea's total debt was BRL12.7 billion, on a consolidated basis. The debt was mainly comprised of the outstanding bond (BRL2.6 billion, adjusted by hedged derivatives) and debentures (BRL7.6 billion). Fitch considered 100% of Aegea group's BRL1.2 billion outstanding issued preferred shares as debt, according to the agency's criteria. The group's liquidity profile was strong with cash and equivalents at BRL1.8 billion, which compares with BRL1.4 billion of short-term debt. ISSUER PROFILE Aegea manages and operates water/wastewater concessions in 489 municipalities in 13 Brazilian states, supported by long-term contracts. The company is controlled by Equipav Group with 52.8% ownership with remining shares owned by GIC (Singaporean sovereign fund: 34.3%) and Itausa S.A. (12.9%). Entity/Debt Rating ----------- ------ Aegea Finance S.a r.l. senior unsecured LT BB New Rating IDEAL STANDARD: Fitch Lowers LongTerm IDR to 'C', Off Watch Neg. ---------------------------------------------------------------- Fitch Ratings has downgraded Ideal Standard International SA's (IS) Long-Term Issuer Default Rating (IDR) to 'C' from 'CCC-' following the completed exchange of its EUR325 million senior secured bonds due 2026 for new notes. Fitch has also affirmed its existing EUR325 million senior secured notes due 2026 at 'CCC-' and its Recovery Rating has been revised to 'RR2' from 'RR4', driven by expected recovery for the notes if the acquisition by Villeroy & Boch AG (V&B) goes ahead. The ratings have been removed from Rating Watch Negative (RWN). IS has obtained majority bondholder consent to amend the indenture and exchange its existing EUR325 million senior secured bonds. V&B has signed a binding agreement to acquire IS pending certain regulatory approvals. Fitch views both these events as correlated. Fitch expects to downgrade IS to 'Restricted Default' (RD) post completion of the merger based on the distressed debt exchange (DDE) and simultaneously withdraw the ratings as IS will be integrated into V&B. KEY RATING DRIVERS Consent Solicitation a Step Closer to DDE: IS announced that they have received consent from 99.25% of the bondholders by value for its proposed indenture amendments. Fitch views this as a step closer to DDE, as EUR325 million noteholders will receive a maximum of 82% of the notes' face value on mandatory redemption following a change of control. Fitch would withdraw the notes ratings post-merger as the new and remaining existing notes would be redeemed using the proceeds of the merger and will no longer feature in IS's. capital structure. Material Reduction in Terms: Holders of the existing notes will be receiving at least 72% of the face value while the new noteholders will receive at least 82% of their principal value at change of control. This is a reduction to the terms under the earlier bond documentation of 101% of the face value on change of control. Trading Conditions Remain Challenging: Fitch expects IS's EBITDA margins to remain low and subsequent free cash flow (FCF) generation to be negative in the next 12 months, continuing its recent weak performance as a result of poor market conditions and high inflation. FCF in 2022 was a negative EUR97 million, slightly worse than Fitch's expectations of an EUR82 million outflow. Fitch forecasts negative FCF of EUR28 million in 2023-2024 as higher interest costs erode EBITDA. Diminished Financial Flexibility: Restructurings and recent inflationary pressure have dented IS's liquidity and financial flexibility. IS has limited ability to fund further outflows as its revolving credit facility (RCF), factoring and other facilities are almost fully utilised. IS has raised new funding from banks, primarily in Bulgaria, and from a sales lease-back agreement to cover imminent cash needs, but Fitch believes its access to wider sources of refinancing for its 2026 maturities are extremely limited. Eroded Margins: Fitch expects IS's EBITDA margins to deteriorate to 7.8% in 2023, from 8.4% in 2022, due to lower volumes and higher raw materials and energy prices. In 1H23, IS's EBITDA margins were 7.1%, the lowest for any quarter in the past three years as it had hedged raw materials and energy prices at higher levels. While IS's price increases in 4Q22 did not sufficiently support 1Q23 margins, margins improved in 2Q23, which Fitch expects to be sustained for the rest of 2023. Fitch forecasts a gradual increase in margins in 2024 and 2025, due to expectations of muted additional inflation. Slowing Volumes: Fitch expects volumes to decline as new construction activity, in particular residential projects, slows. IS will see lower volumes but its large share of non-residential projects, for example, schools, hotels and hospitals, will provide some support. Fitch forecasts a low, single-digit rise in revenues for 2023-2026 due to higher prices but declining volumes. DERIVATION SUMMARY Fitch compares IS with Fitch-rated building-product peers, PCF GmbH (Pfleiderer: B+/Negative) HESTIAFLOOR 2 (Gerflor; B/ Stable), Tarkett Participation (B+/Stable) and Victoria plc (BB-/Stable). With revenues below EUR1 billion, IS is slightly smaller than Pfleiderer, Gerflor and Victoria but better diversified geographically than Pfleiderer, which has around 50% of its exposure to Germany. However, these companies serve a diverse range of markets, but their smaller scale (with sales typically below EUR1 billion) means they characteristically have a niche product range and more limited geographic diversification with Europe as the core region. IS's EBITDA margin of around 7%-9% is the weakest among rated building-product peers, which generate margins of 12%-15%. FCF generation is also weaker due to excessive restructuring-related costs, working-capital lock-up and capex. We expect FCF margins to remain negative across the rating horizon. Fitch's forecast EBITDA gross leverage of around 7x by 2025 for IS is higher than PCF's and Hestiafloor 2's. KEY ASSUMPTIONS Key Assumptions Within Its Rating Case for the Issuer: - Revenue in to grow at low single digits across 2023-2026 - EBITDA margin of 7.5%-8% for 2023, increasing gradually to 9% by 2026 - Capex at 3.6% of sales in 2023 and then remaining at 3%-3.5% in 2024-2026 - Negative FCF margin for 2023-2026 - No dividends or M&As to 2026 Key Recovery Assumptions - The recovery analysis assumes that the EUR325 million noteholders will receive at least 72% of the outstanding principal based on the consent solicitation document on the completion of the acquisition by Villeroy & Boch. - These assumptions result in a recovery rate for the senior secured instrument ratings for EUR325 million within the 'RR2' range, resulting in the debt rating being two notches higher than the IDR. RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - Positive rating action is not expected given that the acquisition is the most likely outcome. If the merger does not go ahead, Fitch would rerate the capital structure accordingly Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Fitch would downgrade the IDR to 'RD' on the completion of the change of control and repayment of the notes LIQUIDITY AND DEBT STRUCTURE Limited Liquidity: IS had Fitch-adjusted cash (adjusted by 2% of revenue for working-capital swings) of EUR20 million at end-2022 with a fully utilised EUR15 million RCF and EUR25 million Bulgarian credit facilities. It has serviced half-year coupon payment for the senior secured bonds amounting to around EUR10 million-EUR11 million at end-July 2023 and will be able to service the next coupon payment in January 2024 with its existing cash balances. Highly Leveraged Debt Structure: IS's debt structure comprises EUR322.2 million of new senior secured Series A notes and EUR2.8 million existing senior secured notes. The company uses factoring and non-recourse factoring lines along with lease-back arrangements, which can be rolled over on their due dates. Temporary Reprieve from Shareholder Loan: IS in January 2023 raised a new EUR25million shareholder loan that requires no interest payments in 2023 and matures in December 2024 to manage its operations. Given the short-term nature, we view this as debt that will be refinanced when it becomes due. Consequently, liquidity and financial flexibility is strained and Fitch believes that adverse changes to its ability to roll over its working-capital bank borrowings may lead to further liquidity stress and, subsequently, a default. ISSUER PROFILE IS is a leading manufacturer of sanitaryware in Europe and MENA. Product offering includes ceramic, fittings, bathing & wellness as well as bathroom furniture and accessories for residential and non-residential end-markets. 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 ----------- ------ -------- ----- Ideal Standard International SA LT IDR C Downgrade CCC- senior secured LT CCC- Affirmed RR2 CCC- =========== N O R W A Y =========== PGS ASA: Moody's Raises CFR to B2, On Review for Further Upgrade ---------------------------------------------------------------- Moody's Investors Service has upgraded the PGS ASA's ("PGS" or the "Company") corporate family rating to B2 from B3 and the probability of default rating to B2-PD from B3-PD and the Petroleum Geo-Services AS's $450 million backed senior secured Nordic Bond ("bond") rating to B2 from B3. Concurrently, Moody's has placed PGS' CFR and PDR as well as Petroleum Geo-Services AS's bond rating on review for further upgrade. Previously, the outlook for both entities was stable. RATINGS RATIONALE The rating upgrade to B2 reflects the company improved liquidity and debt maturities profile after the closing of approximately USD41 million of new equity raised from existing shareholders on September 18, 2023 and the drawing of the USD75 million term loan due in December 2026 that was raised in July 2023. The USD138 million of stub term loan maturing in March 2024 has now been reduced to USD69.8 million; Moody's now views PGS's liquidity to provide sufficient room to meet the March 2024 debt maturity. Additionally, PGS has delivered a solid set of first half 2023 financial results that combined with tangible signs of a recovery in oil & gas exploration activities, reduces uncertainty of the company's ability to meet Moody's projections for 2023 and 2024. PGS' rating review for upgrade reflects the company's announcement on September 18, 2023 of the proposed merger between PGS and TGS, expected to close in the second half of 2024. Should the transaction close successfully, it is likely that the combined group CFR would have a better rating than PGS's B2 CFR because of the stated intention to refinance PGS's bond and to maintain a low leverage and strong liquidity going forward in line with TGS's conservative balance sheet profile. LIQUIDITY Moody's view PGS's stand-alone liquidity to remain adequate; the augmented cash on balance sheet resulting from the equity injections provide coverage for the March 2024 debt maturities. However, the company free cash flow generation remain constrained by investments in 3D streamers equipment, multi-client library and elevated debt servicing charges (interests and contractual amortization). Without any other committed financing or revolving credit, PGS's liquidity remains highly dependent on the company's ability to maintain a stable cash flow generation from operations. The company remains subjected to a minimum liquidity covenant of $75 million ($137.1 million as of June 2023) and a net debt to EBITDA, which have sufficient room in Moody's opinion. ESG CONSIDERATIONS Moody's assessed PGS's governance to be a key driver for the rating action. Moody's acknowledges management put significant effort and commitment to reduce leverage through cost savings and equity private placements and that management is on track to achieve a sustainable capital structure. Additionally, the proposed merger also represent a key development that will have a material impact on PGS's future governance. The overall Governance score of PGS remain unchanged at IPS-4 and would be re-assessed when Moody's concludes the review for upgrade. RATING OUTLOOK Moody's rating review will focus on the combined group business profile, whether the capital structure would withstand a seismic market downturn and its liquidity profile, as well as the impact of synergies. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The guidance is referring to PGS stand-alone and does not represent any guidance for the entity resulting from the likely merger of PGS and TGS. A rating upgrade would require improved visibility and predictability of the seismic market beyond a 12 month horizon and PGS's capital structure being able to withstand another downcycle as early as 2025/2026. An improved PGS's financial profile would require to have Moody's-adjusted total debt to EBITDA (excluding multiclient capital spending) at or below 1.5x and Moody's-adjusted EBITDA (excluding multiclient capital spending) to interest of at least 5.5x on a sustained basis. An upgrade would also require the company to demonstrate tangible progress in diversifying its revenue stream away from oil & gas activities and to have a good liquidity profile rather than adequate. The B2 rating could be downgraded if Moody's-adjusted total debt to EBITDA (excluding multiclient capital spending) exceeds 3.0x or Moody's-adjusted EBITDA (excluding multiclient capital spending) to interest falls below 3.0x on a sustained basis, or the company's free cash flow turn negative. Tightening liquidity or pressure building up under the financial covenants could also lead to a negative rating action. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Oilfield Services published in January 2023. COMPANY PROFILE PGS ASA (PGS) is one of the leading offshore seismic acquisition companies with worldwide operations. PGS headquarters are located at Oslo, Norway. The company is a technologically leading oilfield services company specializing in reservoir and geophysical services, including seismic data acquisition, processing and interpretation, and field evaluation. PGS maintains an extensive multi-client seismic data library. PGS reported revenues of $825 million and EBITDA of $455 million with a margin of 55.2% in 2022. PGS is a public limited company and it is listed on the Oslo Stock Exchange. PGS ASA: S&P Puts 'B-' Issuer Credit Rating on Watch Negative ------------------------------------------------------------- S&P Global Ratings placed on CreditWatch with positive implications its 'B-' issuer credit rating on Norway-based oilfield services company PGS ASA and its 'B' issue rating on PGS' senior secured debt. The CreditWatch positive reflects the possibility of an upgrade following PGS' merger with TGS, which we expect will close in the first half of 2024. On Sept. 18, 2023, PGS ASA announced a merger with its peer TGS ASA, that, in S&P's opinion, will yield a material improvement in pro forma EBITDA and credit metrics. This transaction is an all-stock deal, with PGS' shareholders set to receive one-third of the combined company. S&P said, "The CreditWatch placement with positive implications reflects that we will likely raise the ratings on PGS and its senior secured debt following the close of the merger with fellow Norwegian oilfield services company TGS ASA. According to the announced conditions, PGS' shareholders will own approximately one-third of the combined company. Per our estimates, pro forma EBITDA will more than double PGS' current level. "Additionally, we anticipate a material improvement in PGS' debt metrics by end-2024.TGS has maintained a conservative capital structure with negative reported net debt and minimal borrowings, and the combined company intends to repay or refinance PGS' debt. We also note PGS' recent securing of a new $75 million loan (due in December 2026) to refinance aimed at upcoming maturities in first-quarter 2024 and the $40 million equity raise completed this week aimed at improving liquidity. "The boards of both companies have approved the transaction. It is still subject to shareholder and regulatory approvals, alongside other customary closing conditions, which we assume the company will receive over the coming few months, with the transaction likely closing in the first half of 2024. "The CreditWatch positive indicates that we could raise our issuer credit rating on PGS by one notch if we think the company will demonstrate stronger financials after the transaction closes. The CreditWatch placement on the issue rating points to our assumption that the recovery prospects will remain materially unchanged, without large swings in the capital structure or the priority of liabilities, and that the notes will continue to benefit from an extensive security package, including a second-lien pledge on vessels (after ECFs). "We expect to resolve the CreditWatch following the close of the merger, expected to occur in the first half of 2024. We will also monitor developments around the future financial policies and business strategies PGS will adopt." ============= R O M A N I A ============= ONIX ASIGURARI: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable ---------------------------------------------------------------- Fitch Ratings has affirmed ONIX Asigurari S.A.'s (ONIX) Insurer Financial Strength (IFS) Rating at 'BB' and Issuer Default Rating (IDR) at 'BB-'. The Outlooks are Stable. The ratings of ONIX reflect its small scale and franchise compared with larger, more diversified insurers' and its weak risk-mitigation policies. These weaknesses are offset by ONIX's sound capitalisation and strong financial performance. KEY RATING DRIVERS Weak Company Profile: Fitch assesses ONIX's business profile as 'Least Favourable' compared with larger, more diversified peers' due to the company's small size and limited product diversification. In 2022, ONIX had EUR41 million in equity (2021: EUR37 million) and wrote EUR27 million in gross premiums (GWP; 2021: EUR31 million). Fitch assesses ONIX's business profile as its key rating weakness. ONIX is a small Romanian-based non-life insurer that operates predominantly in Spain and, to a lesser extent, in Italy, Poland, Portugal, Greece and, since 2022, Romania. It focuses largely on surety business for medium-sized to large corporations operating predominantly in the construction and energy industries. Lack of Reinsurance Protection: ONIX does not make use of reinsurance protection. We believe that this exposes the company's capital to large shocks, albeit supporting its strong profitability. We see the company's risk mitigants like, for example, its prudent underwriting policy and the use of counter-guarantees, as supportive of ONIX's rating. Adequate Capitalisation, No Leverage: ONIX's sound capitalisation is reflected in an adequate credit exposure-to-equity ratio of 16% in 2022 (2021: 22%). Fitch categorised ONIX's guarantee portfolio as 'medium risk' due to the company's predominant focus on the civil engineering and renewable energy sectors in Spain and Italy. ONIX's Solvency II coverage ratio, calculated under the standard formula, was very strong at 272% at end-2022, up from 197% at end-2021, as a result of no dividend distribution and strong earnings in 2022. The absence of financial debt is a favourable rating factor. Strong Profitability: Our assessment of ONIX's profitability is driven by the company's record of very profitable underwriting results, due to good underwriting discipline. This is reflected in a Fitch-calculated combined ratio of 62% at end-2022 (2021: 52%). Its net income return-on-equity (ROE) was very strong at 27% in 2022 (2021: 40%). We expect ONIX to continue to report very strong technical results. However, due to its small scale, net income is subject to potential volatility. Low Asset Risk: Fitch views ONIX's investment and liquidity risk as low for the ratings. Exposure to Romanian sovereign debt (BBB-/Stable) was low at 0.1x shareholders' equity at end-2022 (2021: 0.8x), as the company invested the profits from matured Romanian bonds into term deposits. The company holds a highly liquid portfolio, approximately 80% of which is invested in cash or term deposits with Spanish and Romanian banks, some of which are small and with a modest franchise. We consider term deposits held with small banks in our calculation of ONIX's risky assets-to-equity ratio. As a result, ONIX's risky assets ratio, which measures risky assets as a share of capital, was low at 19% at end-2022. RATING SENSITIVITIES Factors That Could, Individually or collectively, Lead to Positive Rating Action/Upgrade: - A strengthening in ONIX's risk-mitigation practices as manifested in, for example, greater reinsurance utilisation - A significant improvement of ONIX's business profile through profitable growth and greater product diversification Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - A weakening of ONIX's business profile driven, for example, by lower premium volumes - Deterioration in ONIX's capital position, as manifested in a Solvency II coverage ratio of less than 120% 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 ----------- ------ ----- ONIX Asigurari S.A. LT IDR BB- Affirmed BB- LT IFS BB Affirmed BB ========= S P A I N ========= AUTONORIA SPAIN 2023: Moody's Gives B2 Rating to EUR7.2MM F Notes ----------------------------------------------------------------- Moody's Investors Service has assigned the following definitive ratings to Notes issued by AUTONORIA SPAIN 2023, FONDO DE TITULIZACION: EUR484.4M Class A Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned Aa1 (sf) EUR5.7M Class B Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned Aa3 (sf) EUR25.9M Class C Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned A2 (sf) EUR11.5M Class D Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned Baa1 (sf) EUR27.3M Class E Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned Ba1 (sf) EUR7.2M Class F Asset Backed Floating Rate Notes due September 2041, Definitive Rating Assigned B2 (sf) Moody's has not assigned a rating to the EUR13M Class G Asset Backed Floating Rate Notes due September 2041. RATINGS RATIONALE The transaction is a six-month revolving cash securitisation of auto loans extended to obligors in Spain by Banco Cetelem S.A.U. (Banco Cetelem (Spain), NR). Banco Cetelem (Spain), acting also as servicer in the transaction, is a specialized lending company 100% owned by BNP Paribas Personal Finance (Aa3/P-1, Aa3(cr)/P-1(cr)). The portfolio of underlying assets consists of auto loans originated in Spain. The loans are originated via intermediaries or directly through a physical or online point of sale. The portfolio includes fixed rate, annuity style amortising loans with no balloon or residual value risk, the market standard for Spanish auto loans. A securitised portfolio of EUR575.0 million is selected at closing randomly from the provisional pool of EUR616.3 million described here. As of August 7, 2023, the provisional pool had 42,299 loans with a weighted average seasoning of 8.4 months and a total outstanding balance of approximately EUR616.3 million. The weighted average remaining maturity of the loans is 79.6 months. The securitised portfolio is highly granular, with top 10 borrower concentration at 0.13% and the portfolio weighted average interest rate is 7.5%. The portfolio is collateralised by 62.4% new cars, 26.9% used or semi-new cars, 3.4% recreational vehicles and 7.3% motorcycles. The ratings are primarily based on the credit quality of the portfolio, the structural features of the transaction and its legal integrity. According to Moody's, the transaction benefits from credit strengths such as the granularity of the portfolio, the excess spread-trapping mechanism through a 5 months artificial write-off mechanism, the high average interest rate of 7.5% and the financial strength of BNP Paribas Group. Banco Cetelem (Spain), the originator and servicer, is not rated. However, it is 100% owned by BNP Paribas Personal Finance (Aa3/P-1, Aa3(cr)/P-1(cr)). However, Moody's notes that the transaction features some credit weaknesses such as (i) six-month revolving structure which could increase performance volatility of the underlying portfolio, partially mitigated by early amortisation triggers, strict revolving criteria both on individual loan and portfolio level and the eligibility criteria for the portfolio, (ii) a complex structure including interest deferral triggers for juniors Notes, pro-rata principal payments on all classes of Notes after the end of the revolving period, (iii) a fixed-floating interest rate mismatch as 100% of the loans have fixed interest rates and the Classes A-G Notes are linked to one-month Euribor. The interest mismatch is mitigated by two interest rate swaps provided by Banco Cetelem (Spain) and guaranteed by BNP Paribas (Aa3/P-1, Aa3(cr)/P-1(cr)). Moody's analysis focused, amongst other factors, on (1) an evaluation of the underlying portfolio of receivables and the eligibility criteria; (2) the revolving structure of the transaction; (3) historical performance data on defaults and recoveries for the vintages from Q1 2014 to Q2 2023 provided on the originator's total book; (4) the credit enhancement provided by excess spread and the subordination; (5) the liquidity support available in the transaction by way of principal to pay interest for Classes A-F Notes (and Class G Notes when they become the most senior class) and a dedicated liquidity reserve only for Classes A-F Notes, and (6) the overall legal and structural integrity of the transaction. Moody's determined the portfolio lifetime expected defaults of 3.3%, expected recoveries of 15.0% and portfolio credit enhancement ("PCE") of 14.0%. The expected defaults and recoveries capture Moody's expectations of performance considering the current economic outlook, while the PCE captures the loss Moody's expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and PCE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in Moody's cash flow model to rate Auto and Consumer ABS. Portfolio expected defaults of 3.3% are lower than other Spanish Auto loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account: (i) historical performance of the book of the originator, (ii) strict revolving criteria both on individual loan and portfolio level and the eligibility criteria for the portfolio, (iii) other similar transactions used as a benchmark, and (iv) other qualitative considerations. Portfolio expected recoveries of 15.0% are lower than the Spanish Auto loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account: (i) historical performance of the book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations. PCE of 14.0% is in line with Spanish Auto loan ABS average and is based on Moody's assessment of the pool taking into account: (i) the unsecured nature of the loans, and (ii) the relative ranking to the originators peers in the Spanish and EMEA consumer ABS market. The PCE level of 14.0% results in an implied coefficient of variation ("CoV") of approximately 60.0%. The principal methodology used in these ratings was "Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS" published in November 2022. Factors that would lead to an upgrade or downgrade of the ratings: Factors or circumstances that could lead to an upgrade of the ratings of the Notes would be: (1) better than expected performance of the underlying collateral, or (2) a lowering of Spain's sovereign risk leading to the removal of the local currency ceiling cap. Factors or circumstances that could lead to a downgrade of the ratings would be: (1) worse than expected performance of the underlying collateral, (2) deterioration in the credit quality of Banco Cetelem (Spain), or (3) an increase in Spain's sovereign risk. CODERE FINANCE 2: Moody's Rates New EUR50MM Sr. Secured Notes 'B3' ------------------------------------------------------------------ Moody's Investors Service has assigned a B3 rating to the new backed EUR50 million Interim super senior secured notes due 2024 issued by Codere Finance 2 (Luxembourg) S.A. ("Codere Finance 2"), a wholly owned subsidiary of Codere Luxembourg 2 S.a.r.l. ("Codere", or "the company"), an international gaming operator. All other ratings, including the Ca long term corporate family rating, the Ca-PD/LD probability of default rating of Codere Luxembourg 2 S.a.r.l. and the existing backed senior secured instrument ratings of Codere Finance 2 and the backed subordinate rating of Codere New Holdco S.A. remain unchanged. The outlook on all entities is stable. RATINGS RATIONALE On September 20, 2023, Codere announced[1] the issuance of EUR50 million worth of new backed Interim super senior secured notes due 2024, that will bridge its liquidity needs until the restructuring transaction announced[2] on March 29, 2023 is completed. In March, Codere reached a lock-up agreement on the terms of a proposed restructuring transaction which involves the issuance of EUR100 million new first priority notes (ranking senior to the Super senior notes and all other debt instruments) and amendments to the Super senior notes and Senior notes interest charges to include a lower cash component and a larger payment-in-kind (PIK) component. The company has received sufficient consent to implement the transaction and amend the existing debt documentation. The company also secured a grace period on its interest payments due March 31, 2023 and April 30, 2023 until completion of the transaction, initially anticipated before the end of Q2 2023. The lock-up agreement and grace period were later extended until October 27, 2023 due to a delay in completion of the transaction. According to the company, the delays have been caused by the temporary closures and trading restrictions on several halls in Mexico and Argentina imposed by public authorities due to alleged non-compliance with certain regulations. Moody's also notes that the gaming hall closures and restrictions coincide with recent changes in the management team, including a new CEO and CFO, that will require time to address the regulatory restrictions and their potential impact on the company's profitability and cash flow. Moody's understands that the new management team is proactively working to accelerate the resolution of the restrictions and has made good progress so far. Codere's YTD June 2023 revenue and EBITDA grew by 11.7% and 14.3%, respectively. However, the company experienced a slowdown in the second quarter mainly because of the underperformance in Mexico and Argentina, due to the aforementioned restrictions. Since July, two halls have already reopened while 5 halls in Mexico and 2 halls in Argentina remain subject to temporary closures and 45 halls in Mexico remain subject to trading restrictions. Moody's expects the reduction in operating revenue and EBITDA caused by these disruptions to result in weaker than expected credit metrics and cash flow generation in 2023. The rating agency assumes that most of the closures and restrictions will be lifted by 2024, but notes that there are downside risks related to the duration of operational disruptions and the magnitude of their impact on the company's profitability and cash flow. Moody's also assumes that the restructuring transaction will be completed before the end of the year on the agreed terms, including the issuance of the EUR100 million first priority notes, which are critical for Codere in order to avoid a liquidity shortfall. However, the exact timing for completion remains uncertain. STRUCTURAL CONSIDERATIONS Codere's probability of default rating is in line with the long term corporate family rating (CFR). The backed Interim senior secured notes are rated B3 reflecting their first priority ranking ahead the super senior notes and senior notes. The backed super senior notes are rated in line with the CFR, which reflects their significant size relative to other debt in the capital structure and their first priority ranking according to the terms of the proposed restructuring transaction. The backed senior secured notes are rated one notch below the CFR because they rank after the Super senior notes in priority of payment over the proceeds in an enforcement scenario under the terms of the intercreditor agreement. The backed subordinated PIK notes are also rated one notch below the CFR. LIQUIDITY Codere's cash balance as of June 2023 amounted to EUR110 million, of which close to EUR64.4 million correspond to the retail activities and are needed to run the business. While the recently announced issuance of EUR50 million worth of backed Interim senior secured notes will provide some liquidity relief, the company's liquidity for the next 12-18 months continues to be weak resulting in heightened risks of a liquidity shortfall and a liquidity covenant breach. As part of the restructuring transaction, expected to close before the end of 2023, the group will receive a total of EUR100 million of additional liquidity via the first priority notes issuance, although part of the proceeds will be used to refinance the backed Interim senior secured notes. Codere will also have a significantly lower amount of cash component on the interest rates of the Super senior notes and Senior notes. Codere will be subject to a liquidity covenant tested quarterly. It requires that Codere maintains a minimum of EUR40 million of cash in its retail operations (excluding the cash in the online division, given that it is restricted). In accordance with the lock-up agreement currently in place, this covenant would be waived. Other than the new backed interim senior secured notes which will mature in 2024, the group currently does not have significant debt maturities before September 2026. RATIONALE FOR STABLE OUTLOOK The stable rating outlook reflects Moody's recovery assumption for the company, which is commensurate with a Ca rating, i.e. between 35% and 65%. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING Upward pressure on the ratings could arise if the company achieves a strong and sustainable recovery in profitability such that the overall recovery of the company's debt is higher than anticipated by Moody's and implied by the Ca CFR. The ratings could be downgraded if the estimated degree of recovery at the group level falls below the levels commensurate with a Ca rating. PRINCIPAL METHODOLOGY The principal methodology used in this rating was Gaming published in June 2021. COMPANY PROFILE Founded in 1980 and headquartered in Madrid (Spain), Codere Luxembourg 2 S.a.r.l. (Codere) is an international gaming operator. The company is present in seven countries where it has market-leading positions: Spain and Italy in Europe; and Mexico, Argentina, Uruguay, Panama and Colombia in Latin America. In 2022, the company reported operating revenue of EUR1.3 billion and company-adjusted EBITDA of EUR156 million. TELEFONICA SA: Egan-Jones Retains BB- Senior Unsecured Ratings -------------------------------------------------------------- Egan-Jones Ratings Company on September 14, 2023, maintained its 'BB-' foreign currency and local currency senior unsecured ratings on debt issued by Telefonica SA. EJR also withdrew rating on commercial paper issued by the Company. Headquartered in Madrid, Spain, Telefonica SA operates as a telecommunications company. =========== S W E D E N =========== HEIMSTADEN AB: Fitch Cuts LongTerm IDR to 'BB', On Watch Negative ----------------------------------------------------------------- Fitch Ratings has downgraded Heimstaden AB's Long-Term Issuer Default Rating (IDR) to 'BB' from 'BB+' and placed the rating on Rating Watch Negative (RWN). Fitch has also downgraded Heimstaden AB's senior unsecured rating to 'BB'/'RR4' from 'BB+'/'RR4', and its subordinated rating to 'B+'/'RR6' from 'BB-'/'RR6' and placed them all on RWN. The downgrades and RWN reflect the forecast deterioration of Heimstaden AB's core interest cover ratio (ICR) to 0.7x in 2023 (1H23: 0.7x), driven by rising interest costs on its partially floating-rate debt. The interest cover (including hybrids at 100%) is at risk of no longer being supported by regular subordinated dividend income (preference B and common share class dividends) from its subsidiary Heimstaden Bostad AB, as the latter focuses on supporting its own credit metrics. Previously, Heimstaden AB received these sizeable dividends on a gross basis from Heimstaden Bostad, and would first retain enough liquidity to comfortably cover its interest expense (1H23: 2.75x) and mandatory debt repayments before reinvesting excess proceeds in Heimstaden Bostad's equity. Heimstaden Bostad's likely cessation of and, implied reduced, dividends, thereafter, leave Heimstaden AB reliant on asset disposals to meet debt service and refinancing needs unless other sources of funding are found. Disposals could include the sale of its SEK6 billion Icelandic residential portfolio and some of its 37.5% shares in Heimstaden Bostad (SEK49 billion at 1H23). Fitch expects to resolve the RWN when Heimstaden Bostad quantifies its plans to deleverage, including potentially raising equity and carrying out disposals. KEY RATING DRIVERS Weakening Income Streams: Heimstaden AB's core income comprises management fees (0.2% of Heimstaden Bostad's gross asset value (GAV)), priority class A preference shares dividends from Heimstaden Bostad (0.2% of GAV) and rental income from its own SEK6 billion Icelandic residential-for-rent portfolio. These three recurring cash flow sources cover Heimstaden AB's own operational expenses, though not all of its debt, hybrid bonds and preference share dividends. Additional subordinated cash flow comprises preference B share dividends and ordinary share dividends. Fitch expects rising interest rates and refinancing priorities at Heimstaden Bostad to limit these subordinated dividend-based cash flow sources in the near term, until there is further deleveraging in the subsidiary. Planned Equity Raise at Subsidiary: Heimstaden Bostad is planning a mix of raising new equity and disposals, repaying its debt to strengthen its ICR and leverage. The subsidiary has also changed its financial policy (ICR: above 1.8x from 2.4x, loan-to-value (LTV) below 60% from 55%), which could decrease the headroom from which dividends are paid to Heimstaden AB. Potentially higher leverage in the subsidiary (not necessarily to the financial policy threshold) would weaken the quality of its subordinated cash flows. Fitch believes preference B and common share class dividend receipts to Heimstaden AB (although not formally announced or quantified) could be limited until Heimstaden Bostad's credit metrics are restored. These dividends are governed by its shareholder agreement, and the financial policy, which includes a condition to cease dividends if Heimstaden Bostad's LTV is above 60%. Managing Refinancing Risk: The spreads on Heimstaden AB's end-2022 senior unsecured (SEK16.9 billion) and hybrid bonds (SEK7.8 billion) are high, limiting its ability to refinance using debt capital markets. Near-term debt maturities are limited to a SEK1.2 billion bond in January 2024, fully covered in 1H23 by SEK2.4 billion in available liquidity (SEK1.4 billion (cash) and SEK1 billion (undrawn committed credit lines)). In August 2023, Heimstaden AB launched a SEK1 billion bond-buy back offer targeting senior unsecured bonds maturing in January 2024, April 2025 and October 2025. Assets Disposal Options: Heimstaden AB's core assets are its Heimstaden Bostad shares and SEK6 billion Icelandic property portfolio. It has the option to use asset disposal proceeds to meet debt maturities and interest payments, and can sell shares in Heimstaden Bostad down to a low level without losing its voting control. In March 2023, Heimstaden AB raised SEK1.15 billion by selling shares in Heimstaden Bostad to institutional shareholders (via its subsidiary Heimstaden Investment AB). After the disposal, Heimstaden AB retained 37.5% of capital and 50.1% of voting control in Heimstaden Bostad. Fredensborg Has No Rating Impact: Fitch has not included any financial support from Heimstaden AB's main shareholder Fredensborg AS in the rating assessment, although Heimstaden AB recently paid a SEK1.5 billion dividend to its shareholder. Floating-Rate Exposure: Of Heimstaden AB's bonds and hybrids SEK9 billion have floating interest rates, which have increased materially in line with Swedish central bank rates, putting pressure on ICR. A key cost is the SEK4.5 billion hybrid bond (call-date: November 2024), which, at the current 9.8% rate, costs about SEK440 million per year. Its first call-date will, due to the lack of step-up until 2029 not lead to further step-ups beyond changes in the floating rate even if left uncalled. Heimstaden AB's hybrid bonds and preference shares lack formal maturity dates, offering the flexibility to defer payments, if needed. Lower ICR: Fitch forecasts Heimstaden AB's core ICR to decline to 0.7x in 2023 (up to 2026), driven by higher interest rates. Recurring income could decrease further on the sale of the Icelandic portfolio, and a decrease in Heimstaden Bostad's GAV due to property valuations or planned disposals. Fitch includes 100% of hybrid coupons in the ICR calculation. Fitch expects preference B and common share class dividends from Heimstaden Bostad, which Heimstaden AB has historically used to service debt or reinvest, to be limited until the former's credit metrics are restored. Incremental Leverage: Fitch forecasts incremental gross debt/EBITDA leverage between Heimstaden Bostad and Heimstaden AB on a proportionally consolidated basis to be below 3x. Fitch includes the subsidiary's hybrid bonds, which lose their equity credit as they rank ahead of Heimstaden AB's own bank and bond debt, and hybrids. This incremental leverage at end-2022 was SEK24.8 billion gross debt relative to Heimstaden Bostad's equity-credit-adjusted gross debt of about SEK210 billion outstanding. Fitch has applied 50% equity credit to Heimstaden AB's own hybrid bonds and preferred shares. Heimstaden AB has an ESG Relevance Score of '4' for Governance Structure due to its 93.2% ownership (96% of votes) by Fredensborg SA, itself owned by family interests, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. DERIVATION SUMMARY There are no relevant publicly rated real estate holding company peers to compare Heimstaden AB with. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer - Icelandic portfolio rents, plus core asset management fees and preference A dividends (a percentage of Heimstaden Bostad's GAV), paid by Heimstaden Bostad, cover Heimstaden AB's administration expenses resulting in a standalone EBITDA of SEK1.0 billion-1.1 billion per year. - Preference B and common share class dividends of SEK2.8 billion will cease in 2023. These gross receipts primarily fund core interest cover shortfalls and help address refinancing risk for Heimstaden Bostad's debt. Thus, the refinance risk is now more dependent on asset sales. - Rising interest rates on variable rate debt to 3.5% plus existing margins, resulting in an average cost of debt of 5.6% (including two bonds at 3% fixed rates). Refinanced debt at an assumed all-in 6.5% cost of debt. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - An upgrade of Heimstaden Bostad's IDR - Heimstaden AB's standalone EBITDA/interest expense coverage above 1.2x - Liquidity score above 1.0x Factors that could, individually or collectively, lead to negative rating action/downgrade: - A downgrade of Heimstaden Bostad's IDR - Heimstaden AB's standalone EBITDA/interest expense coverage below 0.9x and prospective disruption in ordinary dividends from Heimstaden Bostad constraining Heimstaden AB's debt service - Heimstaden AB's proportionally consolidated gross debt/EBITDA more than 3x higher of Heimstaden Bostad's proportionally consolidated gross debt/EBITDA - Liquidity score below 1.0x LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: At end-1H23, Heimstaden AB had SEK2.4 billion of available liquidity, comprising SEK1.4 billion of readily available cash in addition to SEK1 billion undrawn credit facilities. Near-term debt maturities comprise a SEK1.2 billion senior unsecured bond in 2024. In 2025, a total of SEK3.1 billion of debt matures, including its SEK0.5 billion April 2025 and SEK2.1 billion October 2025 bonds. Assuming no near-term cash preference B and common share class dividends, Heimstaden AB's 2025 debt maturities would need to be covered by asset disposals. Additionally, its SEK4.5 billion of hybrid bond has its first call-date in November 2024, although without payment obligation. Heimstaden AB's debt structure at 1H23 comprised SEK2.5 billion secured debt, SEK14.4 billion of unsecured bonds, SEK7.8 billion of hybrids bonds and preference shares. The hybrids bonds and preference shares issued by Heimstaden AB are deeply subordinated and have received 50% equity credit. ESG CONSIDERATIONS Heimstaden AB has an ESG Relevance Score of '4' for Governance Structure due to its 93.2% ownership (96% of votes) by Fredensborg SA, itself owned by family interests, which has a negative impact on the credit profile, and is relevant to the ratings 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 Recovery Prior ----------- ------ -------- ----- Heimstaden AB LT IDR BB Downgrade BB+ senior unsecured LT BB Downgrade RR4 BB+ subordinated LT B+ Downgrade RR6 BB- INTRUM AB: Fitch Lowers LongTerm IDR to 'BB-', Outlook Stable ------------------------------------------------------------- Fitch Ratings has downgraded Sweden-based credit management group Intrum AB (publ)'s Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB'. The Outlook is Stable. The downgrade reflects Fitch's view that Intrum's progress in 2023 towards its stated leverage target (net debt/cash EBITDA ratio of 2.5x-3.5x) has been slower than anticipated. Fitch previously identified failure to demonstrate progress towards management's stated deleveraging targets as negative rating sensitivities (see 'Fitch Affirms Intrum at 'BB'; Outlook Negative' published on 29 June 2023). Management now expects to reduce net leverage to 3.5x or below by end-2025, which is beyond Fitch's Outlook horizon. KEY RATING DRIVERS High Leverage; Sound Franchise: Intrum's 'BB-' Long-Term IDR reflects its high leverage and the dependence of its business model on regular portfolio acquisitions amid increasing funding and collection costs. This is balanced by Intrum's market-leading franchise in the European debt-purchasing and credit-management sector, where the group benefits from diversification across more than 20 countries and its high proportion of fee-based servicing revenue, which complements its more balance sheet-intensive investment activities. Revised Strategy Supports Deleveraging: Under its recently revised strategy, Intrum intends to reduce its reliance on debt-funded cash-flow generation by increasing the share of servicing revenue, decreasing average annual investments in distressed debt portfolios by about 3x, exiting several smaller markets and selling a portion of the portfolio, while maintaining its servicing. Fitch expects Intrum's revised strategy to support its deleveraging efforts as it requires less debt funding and should be less capital-intensive. Pausing Dividends Positive for Leverage: Intrum has a history of high dividend pay-outs even during volatile periods. This has delayed previously communicated deleveraging targets and further eroded tangible capital, in addition to the goodwill resulting from large acquisitions. The new dividend policy envisages pay-outs only subject to Intrum's net leverage ratio being at or below 3.5x. New Targets Outside Outlook Horizon: Fitch views the new strategy as credit positive, albeit subject to execution risks, but the new timeframe for achieving the leverage target is outside Fitch's Outlook horizon. Intrum's Fitch-calculated gross debt/adjusted EBITDA ratio of around 5x at end-1H23 was at the lower end of the 'b' rating category, while Intrum's interest coverage ratio weakened from 5.6x at end-2021 to 3.1x (the lower end of 'bb' rating category). Leading Credit Management Company: Intrum managed the equivalent of about EUR170 billion (at notional value) of third-party debt at end-1H23, while the net book value of its own portfolio was EUR3.3 billion. Collections were EUR9 billion in 1H23 (trailing 12 months) comprising own-portfolio collections of EUR1.2 billion and servicing collections of EUR7.8 billion. Strong Competitiveness: Intrum benefits from product and geographical diversification and a high proportion of capital-light servicing revenue (2022: 53% of total revenue) based on long-term contracts. Intrum's large scale of operations, long relationships with clients and expertise in collecting millions of payments annually across different jurisdictions provide it with strong competitive advantages. Higher Funding Costs: Intrum is exposed to the sharp rise in funding costs as almost 30% of its debt is at floating rates, while leverage is high. Management plans to significantly cut investments in the medium term and use cash flows to repay debt. This should reduce refinancing risks, but immediate liquidity is sound, with adequate on-balance sheet cash reserves equivalent to EUR207 million and a sizeable undrawn revolving credit facility (RCF) at end-1H23. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Inability to improve leverage to below 5x gross debt/adjusted EBITDA or material deterioration of interest coverage ratio (adjusted EBITDA/interest expense). - Material downward portfolio revaluations and/or significant collection underperformance. - A sustained reduction in profitability, material divergence between earnings and cash generation or material increase in refinancing risk. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Material improvement of the gross leverage ratio closer to 3.5x-4x and net leverage close to management target of 3.5x, coupled with maintenance of sound interest coverage and profitability ratios. DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS Debt Rating Equalised: Intrum's senior unsecured debt rating is equalised with the Long-Term IDR, reflecting Fitch's expectation for average recovery prospects, given that Intrum's funding is mostly unsecured. DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES Intrum's senior unsecured debt rating is primarily sensitive to changes to the Long-Term IDR. Changes to its assessment of recovery prospects for senior unsecured debt in a default (e.g. a material increase in debt ranking ahead of the senior unsecured debt) could result in the senior unsecured debt rating being notched down from the Long-Term IDR. Close to full utilisation of the super-senior RCF could trigger a downgrade of the bonds' rating by one notch. ESG CONSIDERATIONS Intrum has an ESG Relevance Score of '4' for financial transparency, in view of the significance of internal modelling to portfolio valuations and associated metrics such as estimated remaining collections, but being a feature of the debt purchasing sector as a whole, this has a moderately negative influence on Intrum's rating. 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 ----------- ------ ----- Intrum AB (publ) LT IDR BB- Downgrade BB ST IDR B Affirmed B senior unsecured LT BB- Downgrade BB INTRUM AB: Moody's Lowers CFR to B1 & Senior Unsecured Debt to B2 ----------------------------------------------------------------- Moody's Investors Service has downgraded the corporate family rating of Intrum AB (publ) to B1 from Ba3 and Intrum's senior unsecured debt rating to B2 from previously Ba3. The issuer outlook remains stable. RATINGS RATIONALE RATIONALE FOR THE DOWNGRADE OF THE CFR to B1 The downgrade of the CFR to B1 from Ba3 is driven by the company's lack of progress in deleveraging, accompanied by deteriorating interest coverage and profitability since the last rating action in Q4 2022. Intrum's Moody's adjusted gross debt/EBITDA leverage has remained consistently over 5.0x for several quarters, its interest coverage has significantly weakened to 3.3x in the high interest rate environment. In the meantime, the company's profitability was burdened by high interest rates, negative foreign currency impact and a loss related to the disposal of the Brazilian and Baltic operations in the first half of 2023. Furthermore, the agency came to the conclusion that despite the company's size and broad geographical footprint with leading market positions in several countries, Intrum did not succeed in improving operational efficiency and leveraging the economies of scale as anticipated, especially through the implementation of the One Intrum strategy. As a result, Moody's removed a one notch positive adjustment previously assigned to Intrum's financial profile for business diversification, concentration and franchise positioning. On September 13, 2023 Intrum announced meaningful strategic measures aimed at deleveraging, improving operational efficiency and repositioning its business model after focusing on aggressive, debt-funded growth strategy for several years. Among other measures Intrum plans to reduce leverage to net 3.5x Net Debt/EBITDA by the end of 2025, by limiting portfolio investments, pausing dividend payments, focusing on servicing and strengthening operational efficiency, while also exploring capital-light assets under management (AuM) cooperations. While the agency acknowledges the strategic effort and management's commitment to these goals, Moody's believes that the mitigating impact of the strategic initiatives will only become visible and help to restore Intrum's key credit metrics from 2025 earliest, however not during the transitory period until the end of 2024, thus resulting in a downgrade of the CFR to B1 from Ba3. Nonetheless, the agency believes that the announced cost efficiency and streamlining of operations measures will result in a leaner, more profitable and delevered Intrum, provided the company follows a disciplined approach. Achieving these goals would allow Intrum to return to the Ba rating category in the medium term, thus the agency will closely monitor Intrum's progress. Finally, even though Moody's believes that the risks stemming from the previous aggressive growth strategy have largely materialized and resulted in a negative impact on Intrum's financial profile, the new strategic measures announced on September 13 also bear execution risks in the currently challenging operating environment, characterized by increased refinancing costs, stiff competition in the debt purchasing and servicing sector and deteriorating macro-economic environment in Europe and thus might face additional execution risks which are beyond the company's control. As a result, Moody's continues to assign a one notch negative adjustment to Intrum's financial profile for corporate behavior and risk management which is also reflected in a governance issuer profile score (IPS) of G-4, indicating high governance risks under Moody's framework for assessing environmental, social and governance (ESG) risks. Similarly, the credit impact score of CIS-4 continues to reflect the discernable impact of the aforementioned governance risks on the ratings. RATIONALE FOR DOWNGRADE OF THE SENIOR UNSECURED DEBT RATING TO B2 The downgrade of Intrum's senior unsecured notes to B2 from Ba3 reflects the application of Moody's Loss Given Default (LGD) analysis to the company's liability structure, which reflects the priorities of claims and asset coverage in the company's liability structure and also takes into account the significant draw-down of the senior secured revolving credit facility (RCF) which is senior to the company's unsecured obligations. The model outcome for the senior unsecured notes is B2. The agency anticipates that the above-average utilization of the RCF in 2023 will be reduced in the next quarters given limited investment plans and deleveraging focus of the company. OUTLOOK The stable outlook underpins Moody's acknowledging that Intrum has initiated a restructuring process to address the shortcomings of the previous growth focused, debt funded strategy and to prioritize deleveraging, focus on selective investments and improve operational effectiveness and profitability of the debt servicing business. During the 12-18 month outlook period the agency expects the company to make gradual progress that will support its credit profile, commensurate with its B1 CFR. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The firm's CFR could be upgraded if it were able to evidence visible and accelerated progress of the strategic measures announced in September 2023. In particular, a sustainable reduction in Moody's adjusted gross leverage ratio to at least below 4.5x, strengthened interest coverage and improved profitability, while ensuring sufficient liquidity for upcoming maturities and investments, would trigger upward pressure on the firm's CFR. An upgrade of Intrum's CFR would likely result in an upgrade of its senior unsecured debt rating. Intrum's CFR could be further downgraded if the announced strategic measures will not result in visible improvements. Particularly, if Moody's adjusted gross leverage ratio continues to remain above 5.0x, while other credit metrics deteriorate further; liquidity deteriorates significantly; and it fails to appropriately execute its planned reorganization towards a more capital light business model. As Intrum is facing material upcoming maturities in 2024 and 2025, which it will have to refinance in a high interest rate environment, the inability to address the refinancing in a timely manner might result in additional downward pressure. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Finance Companies Methodology published in November 2019. OREXO AB: Egan-Jones Cuts Senior Unsecured Ratings to 'B' --------------------------------------------------------- Egan-Jones Ratings Company on September 11, 2023, downgraded the foreign currency and local currency senior unsecured ratings on debt issued by Orexo AB to B from B+. EJR also withdrew rating on commercial paper issued by the Company. Headquartered in Uppsala, Sweden, Orexo AB operates as a pharmaceutical company. POLYGON GROUP: Moody's Cuts CFR to B3 & Senior Secured Debt to B2 ----------------------------------------------------------------- Moody's Investors Service has downgraded Polygon Group AB's corporate family rating to B3 from B2, the probability of default rating to B3-PD from B2-PD, and the ratings on the backed senior secured bank credit facilities to B2 from B1. The outlook remains negative. RATINGS RATIONALE The rating action reflects Moody's expectation that Polygon's free cash flow (FCF), on a Moody's adjusted basis, will remain negative over the next 12-18 months thus preventing any significant improvement in its liquidity profile, which has been deteriorating since 2021. Polygon has been facing larger working capital needs, in part due to the implementation of a new ERP system in 2022, which combined with the lower margins and rising interest rates reduced its cash generation ability. While Moody's expects the company's earnings to increase on the back of the continued positive sales growth, it will likely not be sufficient to cover the high cost of debt in addition to its working capital and capex needs. As a result, the company will likely need to rely on external funds to cover any shortfalls. Polygon's EBIT/interest expense ratio has also materially weakened and will likely remain below 1.0x over the next 12-18 months. More positively Moody's expects Moody's adjusted leverage to gradual decline to below 6.5x over the next 12-18 months from 7.7x in 2022. The rating also continues to be supported by the company's leading position in the fragmented European PDR market with strong capabilities, long-standing relationships with its key customers, and defensive business profile, supported by steady recurring claims and favourable industry dynamics. LIQUIDITY Polygon's liquidity is weak. As of June 2023 the company's main source of liquidity is its revolving credit facility (RCF) of EUR90 million of which EUR59 million is available. Moody's expects the company to continue to draw on its RCF to cover further cash outflows over the next 12-18 months. The company is considering securing additional external funds, which could ease the liquidity pressure. The debt structure is covenant-lite, with one springing maintenance covenant set at 7.8x senior secured net leverage, tested only when more than 40% of the RCF is drawn. Moody's expects the company to maintain sufficient headroom under this covenant over the next 12-18 months. The company does not have any major debt maturity until 2028. STRUCTURAL CONSIDERATIONS Polygon's capital structure consists of a EUR430 million senior secured first-lien term loan B1, a EUR55 million senior secured first-lien term loan B2 and a EUR90 million senior secured RCF, all ranking pari passu with each other. These facilities are rated one notch above the CFR, reflecting their seniority in the capital structure, given the presence of a EUR120 million second-lien loan (not rated). The instruments share the same security package and are guaranteed by a group of companies accounting for at least 80% of the consolidated group's EBITDA. The security package is relatively weak, consisting of shares, bank accounts and intercompany loans. The B3-PD probability of default rating is on a par with the company's CFR, reflecting the use of a standard 50% recovery rate, as is customary for capital structures with first- and second-lien bank loans and covenant-lite documentation. RATING OUTLOOK The negative outlook reflects the risk that the company's liquidity profile will further deteriorate, which raises the concern around the sustainability of its capital structure. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Considering the negative outlook, an upgrade is unlikely in the next 12-18 months. The outlook could be stabilised if Polygon's liquidity strengthens and FCF, on a Moody's adjusted basis, turns positive. A stabilisation of the outlook would also require continued EBITDA growth. The rating could be upgraded if Moody's adjusted EBIT margin increases to above 5% on a sustainable basis, Moody's adjusted EBIT/ interests increases well above 1.0x, Moody's adjusted debt/ EBITDA declines sustainably below 5.5x, and Moody's-adjusted FCF turns positive on a sustained basis with adequate liquidity. The rating could be downgraded if the company's fails to strengthen its liquidity or if concerns around the sustainability of its capital structure increases. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Environmental Services and Waste Management published in May 2023. COMPANY PROFILE Headquartered in Stockholm, Sweden, Polygon provides property restoration services for water and fire damage, major and complex claims, temporary climate solutions and leak detection services. The group is present in 16 countries in Western and Northern Europe, North America and Singapore, and employs more than 7,000 people across more than 400 depots. In 2022, Polygon reported sales of around EUR1.1 billion and company-adjusted EBITDA of EUR111 million. The company is majority owned by funds managed by AEA Investors since October 2021. SAS AB: Receives Final Rounds of Bids From Potential Buyers ----------------------------------------------------------- Christopher Jungstedt at Bloomberg News reports that Scandinavia's biggest airline SAS AB has received a final round of bids from potential suitors looking to invest in the carrier as part of a rescue plan to shore up its ailing finances. According to Bloomberg, the Stockholm-based company, which is going through a Chapter 11 reorganization in the US, needs to raise at least SEK9.5 billion (US$856 million) in new equity and convert or cut its debt pile of about SEK20 billion. Chief Executive Officer Anko van der Werff has previously said the amount of equity is not set and could go higher, Bloomberg notes. The airline warned in April that there would be no value in its existing shares at the end of the restructuring, Bloomberg recounts. The governments of Denmark and Sweden each own a 21.8% stake in SAS, but only Denmark has said it's open to adding to its holding, according to Bloomberg. Sweden indicated it will accept a conversion of debt it is owed into equity, but that it will not participate in a new capital raise, Bloomberg relays. Norway's government said it won't contribute any new equity, Bloomberg notes. Other possible bidders include US-based Apollo Global Management Inc., which provided the company with a US$700 million debtor-in-possession term loan as part of the Chapter 11 process, Bloomberg discloses. "SAS will announce the winning bidder or bidders as soon as the evaluation process has been completed," the carrier, as cited by Bloomberg, said in a statement on Sept. 26, referring to an equity solicitation process that closed on Sept. 25. STENA AB: Moody's Raises CFR to Ba3 & Senior Unsecured Notes to B1 ------------------------------------------------------------------ Moody's Investors Service has upgraded Stena AB's ("Stena") corporate family rating to Ba3 from B1, its probability of default rating to Ba3-PD from B1-PD and its senior unsecured notes rating to B1 from B2. Furthermore, Moody's upgraded the backed senior secured notes rating of subsidiary Stena International S.A. to Ba2 from Ba3. The outlook on all ratings remains stable. "The upgrade of the CFR to Ba3 from B1 was prompted by continued improved business fundamentals for Stena Drilling, leading to an estimated gross debt / EBITDA ratio of 4.5x as of June 30 this year for Stena's shipping and drilling businesses compared to 4.9x end of 2022 and 9.7x end of 2021" says Daniel Harlid, a Moody's Vice President - Senior Analyst and the lead analyst for Stena AB. "The rating continues to benefit from Stena's long track record of managing a diverse set of businesses as well as its conservatively leveraged and relatively low risk portfolio of Swedish rental residential properties" Mr Harlid added. RATINGS RATIONALE During the last six years, Stena has gone through one of the toughest periods in the company's almost 100 year long history, first with a steep decline in demand for crude oil and refined products, followed by a collapse in demand for offshore drilling. This followed by the outbreak of the COVID-19 during the first quarter of 2020 which resulted in a 55% decline in EBITDA year-over-year for Stena Line due to pandemic induced travel restrictions, leading to the group's reported EBITDA declining over 30% during the year. Moody's believes the strength of Stena's conglomerate operating model, which includes a conservatively leveraged real estate and investment holdings portfolio as well as a supportive shareholder refraining from paying out more or less no dividends during 2018-2022, was a major driver of the company still being able to fund itself on both the capital market and in the banking system unlike many of its peers in oil and offshore related industries. Since the trough in EBITDA during 2020, all struggling businesses have since recovered and by the end of this year Moody's expect the group to report a consolidated EBITDA of around SEK13.0 – SEK13.5 billion on a consolidated basis; its strongest figure on record. Adding Moody's expectations of continued stellar performance over at least the next two years, supported by strong demand for transport of oil related commodities and continued increase in capex spend for offshore drilling supporting day rates, Moody's believe there is a high likelihood for Stena's shipping and drilling arm (restricted group) to achieve a gross debt / EBITDA ratio of around 4.0x – 4.5x. Stena's restricted group is assessed with Moody's Shipping Methodology, acknowledging Stena Drilling and Stena RoRo is not traditional shipping businesses. Moody's also acknowledges Stena Property's ownership of mainly Swedish multi-family rental properties and commercial buildings with market value of SEK47.1 billion as of June 30, an estimated Total Debt + Preferred Stock / Gross Assets ratio of 40.1% and a net debt / EBITDA ratio of 10.3x. These key credit indicators are amongst the lowest within the European real estate peer group rated by Moody's. With its long dated debt maturity profile, low sensitivity to variable interest rates and risk averse hedging strategy, it positions itself very differently than many other real estate companies in the Nordics that Moody's rates. Furthermore, it has refrained from recording high levels of unrealised value gains which is evidenced by the absence of negative revaluation effects during the last twelve months. Notwithstanding Stena's credit strengths, the company has a history of pursuing a relatively opportunistic strategy often resulting in sizeable debt funded newbuild contracts for vessels. Furthermore, the absence of prioritising cash flow generation toward debt reductions when business fundamentals are strong is a credit constraint. Also, the fact that Stena is a conglomerate with only one consolidating entity, Stena AB, creates an organisational complexity which is a corporate governance risk. This is, however, partly mitigated with a high degree of board independence, both at Stena AB as well as in the main operating companies of the group and a very long and successful track record operating with this business profile and structure. RATINGS RATIONALE FOR THE UPGRADE OF STENA INTERNATIONAL S.A. The ratings upgrade of the backed senior secured notes rating of subsidiary Stena International S.A. to Ba2 from Ba3 was anchored in the presence of the sizeable SEK9.6 billion senior unsecured revolving credit facility guaranteed to 75% by the Swedish Export Credit Corporation (Aa1 Stable). The facility gives just sufficient cushion for loss absorption to justify the sustained one-notch difference between the rating of the secured bonds (Ba2) and the CFR (Ba3). Moody's emphasises that the expected repayment of the senior unsecured notes, amounting to $393 million and maturing February 1 next year, could weaken the position of the senior secured notes if they are refinanced with secured debt or repaid by cash. This is because the repayment would reduce the buffer for absorbing losses. Therefore, if the proportion of unsecured debt to secured debt decreases further, it is likely that the rating of the secured notes will be downgraded to match the level of the CFR. STRUCTURAL CONSIDERATIONS Stena's senior unsecured bond rating is one notch below its CFR, reflecting the contractual subordination to the secured debt existing within the group. Conversely, the senior secured notes issued by Stena International S.A. are rated Ba2, one notch above the CFR, reflecting their security largely in the form of drilling assets and their structurally senior position ahead of the senior unsecured bonds issued by Stena AB and the unsecured revolving credit facility. Hence, any further reduction in unsecured debt in favour of secured debt will most likely lead to an alignment of the secured bond rating and the corporate family rating. As Stena AB is part of the restricted group and guarantees all of its debt, all of its underlying assets have been considered in Moody's LGD assessment, while Stena Property and its investment holdings are considered as a factor for the CFR, but the related debt is not included in the LGD. RATING OUTLOOK The stable outlook balances the historically as well as expected very stable financial performance of Stena Property with the more uncertain outlook for some of the company's more volatile shipping and drilling operations. Having said that, Moody's sees increasingly positive prospects for the drilling market as a whole, which tend to move in long cycles and where demand remains strong but supply of new drilling rigs will remain tight over at least the next two to three years. LIQUIDITY Stena's liquidity profile is strong, supported by SEK9.8 billion in cash, short term investments and marketable securities as well as over SEK16.0 billion in availability under various RCFs by end of June 2023. Although capex is expected to be around SEK8 billion during the remainder of 2023 and around SEK7.5 billion during 2024, Moody's understands a significant part of this is uncommitted and could be postponed or cancelled. Moody's also acknowledges that in terms of debt maturities, the potential refinancing of the 2025 Senior Secured Bonds of Stena International S.A. would translate to very low mandatory debt repayments during the next four years. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive ratings pressure could be the result of the company showing (1); continued deleveraging of the group's balance sheet, with a total consolidated debt/EBITDA sustainably below 5.0x; (2) Retained cash flow/net debt increasing above 20% on a sustainable basis; (3) Interest coverage improving measured as (FFO + Interest Expense) / Interest Expense above 4.0x; (4) sustaining a total debt / gross assets ratio at or below 40% for Stena Property and (5) maintaining good liquidity at all times Conversely, negative ratings pressure could be the result of weakening key credit ratios such as (1); debt / EBITDA trending towards 7.0x; (2) interest coverage approaching 2.5x and (3) deterioration of Stena's cash flow generation, reflected in retained cash flow / net debt toward 10%; (4) signs of an increasing total debt / gross assets ratio for Stena Property and (5) a worsening liquidity profile. The rating of the senior secured bonds could be aligned with the CFR in case the level of senior unsecured debt would be reduced further. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in April 2023. COMPANY PROFILE Headquartered in Gothenburg, Sweden, Stena AB is one of the largest privately owned groups in Sweden (100% owned by the Olsson family). For the twelve months that ended June 30 this year, the group generated revenue of SEK54.9 billion and EBITDA of SEK14.0 billion. Stena is a conglomerate with operations in five business divisions (1) Stena Line, the group's ferry operator; (2) Stena Drilling, the group's offshore drilling company; (3) Shipping Operations (comprising Stena's RoRo, Bulk and LNG operations, as well as Northern Marine, the fleet manager); (4) Stena Property, the group's real estate company; and (5) Stena Adactum, the group's investment company. =========== T U R K E Y =========== ALTERNATIFBANK: Fitch Alters Outlook on 'B-' LongTerm IDR to Stable ------------------------------------------------------------------- Fitch Ratings has revised the Outlooks on Alternatifbank A.S.'s (Alternatifbank) Long-Term Foreign-Currency (LTFC) and Long-Term Local Currency (LTLC) Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at 'B-' and 'B', respectively. Fitch has also affirmed the bank's Viability Rating (VR) at 'b-'. Fitch has also revised the Outlooks on Alternatif Finansal Kiralama A.S.'s (Alternatif Lease) LTFC and LTLC IDRs to Stable from Negative and affirmed the IDRs at 'B-' and 'B', respectively. The rating actions follow the 8 September 2023 revision of the Outlook on Turkiye's Long-Term IDR to Stable from Negative. The easing of external financing risks and near-term financial stability risks means that Fitch considers the near-term likelihood of government intervention in the banking system to have partially abated. This drives the revision of the Outlooks on the bank's IDRs to Stable, mirroring the sovereign Outlook change. However, in case of marked deterioration in the country's external finances, some form of intervention in the banking system that might impede the bank's ability to service its FC obligations remains likely. Fitch has also affirmed the National Ratings of Alternatifbank and Alternatif Lease. KEY RATING DRIVERS Intervention Risk Caps LTFC IDR: Alternatifbank's LTFC IDR is driven by its Shareholder Support Rating (SSR) and underpinned by its VR. The LTFC IDR is capped at 'B-', one notch below Turkiye's, due to government intervention risk, notwithstanding a high support propensity from The Commercial Bank (P.S.Q.C) (CBQ; A-/Positive). The LTLC IDR is driven by its SSR and is one notch above its LTFC IDR, reflecting lower intervention risk in LC. The Stable Outlooks mirror those on the sovereign, while that on the LTFC IDR also reflects reduced operating environment pressures. The bank's 'B' Short-Term (ST) IDRs are the only option mapping to LT IDRs in the 'B' category. The bank's 'b-' VR reflects its concentrated operations in the challenging Turkish market, limited franchise, high wholesale funding, only adequate FX liquidity and below-sector-average profitability, but also strengthened core capitalisation and adequate asset-quality. The National Rating reflects potential support from CBQ. It is in line with foreign-owned peers. Operating Environment Pressures Recede: Alternatifbank's operations are concentrated in the challenging Turkish operating environment. The recent shift towards normalisation of monetary policies have reduced near-term macro-financial stability risks and decreased external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite recent simplification efforts. Shareholder Support Capped: Alternatifbank's SSR considers potential support from CBQ, primarily reflecting potential reputational risks for its parent and legal commitments, but also its strategic importance, integration and role within the group. However, government intervention risk caps the SSR at one notch below the sovereign rating. The cap reflects Fitch's view that the likelihood of government intervention that would impede Alternatifbank's ability to service its FC obligations is higher than that of a sovereign default. High Wholesale Funding, Only Adequate FX Liquidity: Customer deposits comprised only 45% of total funding at end-1H23 (38% in FC and 34% in FX protected lira deposits), reflecting high reliance on wholesale funding (55% of total funding or 40% net of CBQ funding). The loans/deposits ratio increased to a high 138% at end-1H23 (end-2022: 116%). FC liquid assets covered the majority of FC debt due within one year at end-July, and a higher proportion net of CBQ funding. FC liquid assets include high FX swaps with the Central Bank of Turkey, access to which could become uncertain in a market stress. FC liquidity could also come under pressure from prolonged market closure or sector-wide deposit instability, if not offset by shareholder support. Adequate Core Capitalisation: The common equity tier 1 (CET1) ratio increased to 11.4% at end-1H23 (7.5% excluding forbearance; end-2022: 9.6%), reflecting stronger earnings and loan book contraction. The total capital ratio (27.2% at end-1H23) is supported by additional Tier 1 capital (AT1), which provides a partial hedge against lira depreciation. Our view of capitalisation considers ordinary support from CBQ given regular capital support to the bank since 2018 (including CET1 and AT1). Non-performing loans (NPLs) were fully covered by total reserves and pre-impairment operating profit (1H23: 9% of average loans; annualised) provides a solid buffer to absorb unexpected credit losses through the income statement. Asset Quality Risks: The non-performing loans (NPLs) ratio improved to 1.8% at end-1H23 reflecting still strong collections performance. Stage 2 loans rose to 16% (43% were restructured) at end-1H23, reflecting lira depreciation as well as vulnerable exposures. Credit risks are heightened by high single-name concentrations (top 25 cash loans comprised 52% of gross loans or 3.0x CET1 capital), exposure to the construction sector (20%), including shopping malls (8%) and still-high above-sector-average FC lending (50% of gross loans), despite deleveraging. Total NPL reserves coverage increased to 249% (sector: 246%). Below-Sector-Average Profitability: Operating profit/risk-weighted assets improved to 5.1% in 1H23 (sector: 5.9%; 2022: 3.3%), driven mainly by strong trading income despite margin contraction. We expect performance to remain relatively stable in 2H23 as loan repricing amid the higher interest rate environment is offset by higher LC funding costs, and growth remains constrained by competition within the corporate segment. Profitability remains sensitive to asset-quality weakening and the regulatory environment, but will be supported by CPI-linker gains in 2H23. Deleveraging Balance Sheet: Loans shrank by 14% (FX-adjusted basis) in 1H23 (sector: +17%), reflecting the impact of the macroprudential regulations and management's strategy to minimise purchases of long-term lira government bonds. Growth is likely to remain conditioned by regulatory and operating environment conditions in the near term. Limited Franchise: Alternatifbank has a limited domestic franchise (below 1% market shares) resulting in limited pricing power. Lending is concentrated in the corporate (end-1H23: 64%) and commercial (35%) segments. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of Turkiye's sovereign rating or an increase in our view of government intervention risk would lead to a downgrade of Alternatifbank's SSR, leading to negative rating action on its Long-Term IDRs. Alternatifbank's SSR is also sensitive to Fitch's view of the bank's shareholder's ability and propensity to provide support. The bank's VR could be downgraded due to erosion of its core capitalisation, for example due to asset-quality weakening, if not offset by ordinary support from CBQ. The VR is also sensitive to a marked deterioration in the operating environment. A weakening in the bank's FC liquidity due to sector-wide deposit instability or an inability to refinance maturing external obligations could also result in a downgrade if not offset by shareholder support. The VR is also potentially sensitive to a sovereign downgrade. The National Rating is sensitive to an adverse change in the bank's LTLC IDR and its creditworthiness relative to other Turkish issuers with a 'B' LTLC IDR. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of the bank's Long-Term IDRs and SSR would require a sovereign rating upgrade and a reduction in Fitch's view of government intervention risk in the banking sector. A VR upgrade would require a marked improvement in the operating environment, coupled with a record of sufficient capital buffers and stable earnings performance. The National Rating is sensitive to a positive change in Alternatifbank's LTLC IDR and also to its relative creditworthiness in LC relative to other Turkish issuers with a 'B' LTLC IDR. SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS The ratings of Alternatif Lease are equalised with those of its parent, reflecting Fitch's view that it is a core and highly integrated subsidiary and the sole provider of leasing products within the group. Our view of support also considers Alternatif Lease's full ownership, shared branding and track record of ordinary support from its bank parent. The Stable Outlook mirrors that on its parent bank. SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES The Stable Outlook on the LTFC IDR of Alternatif Lease mirrors that on its parent and would therefore be sensitive to a marked deterioration in the operating environment or a sovereign downgrade. The ratings of Alternatif Lease could be notched down from the parent if: 1) there are signs that support of the subsidiary becomes less probable because the parent's own solvency is compromised, 2) the subsidiary becomes materially larger relative to the parent bank's ability to provide support, or 3) the subsidiary's strategic importance reduces materially, for example, through a substantial reduction in operational and management integration, a reduced level of ownership, a prolonged period of underperformance or a sharp fall in business origination through the parent. An upgrade of the parent's IDRs would likely be mirrored in Alternatif Lease's IDRs. A revision of the Outlook on the parent's IDRs would likely be mirrored on the subsidiary. VR ADJUSTMENTS The operating environment score for Turkish banks is lower than the category implied score of 'bb' due to the following adjustment reasons: Sovereign Rating (negative) and Macroeconomic Stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkey. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Alternatifbank's ratings are linked to that of its parent. Alternatif Lease's ratings are driven by potential support from Alternatifbank. ESG CONSIDERATIONS Alternatifbank's and Alternatif Lease's ESG Relevance scores for Management Strategy of '4' reflect increased regulatory intervention in the Turkish banking sector, which hinders the operational execution of management strategy, constrains management ability to determine strategy and price risk and creates an additional operational burden for the entities. This has a moderately negative credit impact on the entities' ratings 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 ----------- ------ ----- Alternatif Finansal Kiralama A.S. 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) Affirmed AA(tur) Shareholder Support b- Affirmed b- Alternatifbank A.S. 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) Affirmed AA(tur) Viability b- Affirmed b- Shareholder Support b- Affirmed b- BURGAN BANK: Fitch Alters Outlook on 'B' LongTerm IDR to Stable --------------------------------------------------------------- Fitch Ratings has revised Burgan Bank A.S.'s (BBT) Outlooks to Stable from Negative, while affirming its Long-Term Foreign- and Long-Term Local Currency (LTFC and LTLC) Issuer Default Ratings (IDRs) at 'B-' and 'B', respectively. Fitch has also affirmed the bank's Viability Rating (VR) at 'b-'. The rating actions follow the revision of the Outlook on Turkiye's Long-Term IDR to Stable from Negative (see 'Fitch Revises Turkiye's Outlook to Stable; Affirms at 'B' dated September 8, 2023). The easing of external financing risks and near-term financial stability risks mean that Fitch deems the near-term likelihood of government intervention in the banking system to have partially abated. This drives the revision of the Outlooks on the bank's IDRs to Stable, mirroring the sovereign Outlook change. However, in case of marked deterioration in the country's external finances, some form of intervention in the banking system that might impede the banks' ability to service their FC obligations remains likely. KEY RATING DRIVERS Intervention Risk Caps LTFC IDR: BBT's LTFC IDR is driven by its Shareholder Support Rating (SSR) and underpinned by its VR. The LTFC IDR is capped at 'B-', one notch below Turkiye's, despite a high support propensity of Burgan Bank K.P.S.C. (BBK; A/Stable), due to government intervention risk. The LTLC IDR is one notch above its LTFC IDR, reflecting lower intervention risk in LC. The Stable Outlooks mirror those on the sovereign, while that on the LTFC IDR also reflects reduced operating environment pressures. The VR reflects BBT's concentrated operations in the challenging Turkish market, limited franchise, below sector-average asset quality, only adequate capitalisation, adequate FC liquidity buffers and ordinary support from BBK. The National Rating reflects potential support from BBK and is in line with foreign-owned peers'. The bank's 'B' Short-Term (ST) IDRs are the only option mapping to the Long-Term IDRs in the 'B' category. Operating Environment Pressures Recede: BBT's operations are concentrated in the challenging Turkish operating environment. The recent shift towards the normalisation of the monetary policy has reduced near-term macro-financial stability risks and decreased external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite recent simplification efforts. Shareholder Support Capped: BBT's SSR considers potential support from BBK, reflecting its ownership, integration with the BBK group, and the reputational risk given the banks' shared branding, but government intervention risk caps the SSR at one notch below the sovereign rating. The cap reflects Fitch's view that the likelihood of government intervention that would impede BBT's ability to service its FC obligations is higher than that of a sovereign default. Improving Asset-Quality Metrics: BBT's non-performing loan (NPL) ratio is high (5.1% at end-1H23; sector: 1.7%), but falling (peak of 11.5% in March 2021), reflecting collections, despite stagnating growth. Stage 2 loans are high (21% of loans; 12% of average reserves), are mainly legacy FC loans, and 97% restructured. Credit risks are heightened by concentration and high FC lending (61%) as not all borrowers are fully hedged against lira depreciation. Total NPL reserves coverage is low (85% vs. sector's 246%), reflecting reliance on collateral. Together with free provisions, BBT's coverage is 170%. Trading Income Boosts Profitability: BBT's operating profit/risk-weighted assets rose to 8.1% in 1H23 (sector: 5.9%), from 4.0% in 2022, boosted by customer-driven trading income and net fees and commissions, despite tightening margins. Net interest margin (NIM) tightened to 1.9% (2022: 4.4%) due to an increase in the cost of lira deposit funding and interest-rate caps on loans. Gains on CPI-linkers were moderate, given their low share in total assets (end-1H23: 5.1%). Improved Capital Ratios: BBT's common equity Tier 1 (CET1) ratio rose to 11.9% at end-1H23 including a 192bp forbearance uplift (end-2022: 9.6%), supported by profitability, but is only adequate for its risk profile. Pre-impairment profit was equal to 6.9% of average gross loans, while free provisions (equal to 4% of loans) provide an additional buffer. The total capital ratio (24.4% at end-1H23) is supported by subordinated debt in FC, providing a partial hedge against lira depreciation. BBK has provided regular capital support to the bank since 2018. Risks to capitalisation remain high given macro uncertainty, sensitivity to lira depreciation (due to the inflation of FC RWAs) and asset-quality risks. Deposit Funded; Adequate FC Liquidity: Deposits comprised 58% of total funding at end-1H23, including 38% in FC. Wholesale funding is high at 42% of total funding (7% of net of parent funding) at end-1H23 but parent funding mitigates risks. FC liquidity (largely foreign exchange swaps with the Central Bank of Turkiye, cash and foreign bank placements) covered all short-term FC liabilities, excluding parent funding, plus 21% of FC deposits at end-1H23. FC liquidity could come under pressure from prolonged market closure or deposit instability. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of Turkiye's sovereign rating or an increase, in our view, of government intervention risk would lead to a downgrade of the bank's SSR, leading to a downgrade of its Long-Term IDRs. The SSR is also sensitive to an unfavourable change in Fitch's view of the shareholder's ability and propensity to provide support. BBT's VR is sensitive to a sovereign downgrade. The VR could also be downgraded due to a further marked deterioration in the operating environment, in case of a material erosion in its FC liquidity buffers, for example due to prolonged funding-market closure or sector-wide deposit instability. A sharp decline in its capital buffers, for example through significant deterioration in asset quality that is not offset by shareholder support, could also lead to a VR downgrade. The Short-Term IDRs are sensitive to changes in their respective Long-Term IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of the bank's Long-Term IDRs and SSR would require a sovereign rating upgrade and a reduction, in Fitch's view, of government intervention risk in the banking sector. A VR upgrade would require a marked improvement in the operating environment, coupled with a considerable strengthening of its core capitalisation, easing of asset quality risks and a sustained, significant improvement in underlying profitability. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS The bank's 'AA(tur)' National Rating is driven by shareholder support and is in line with foreign-owned peers' in Turkiye. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES The National Rating is sensitive to a change in the bank's LTLC IDR and a change in its creditworthiness relative to that of other Turkish issuers with a 'B' LTLC IDR. VR ADJUSTMENTS The 'b-' operating environment' score for Turkish banks is lower than the category implied score of 'bb' due to the following adjustment reasons: sovereign rating (negative) and macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of foreign exchange movements in Turkiye. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS BBT's ratings are driven by shareholder support from BBK. ESG CONSIDERATIONS BBT's ESG Relevance score for Management Strategy of '4' reflects increased regulatory intervention in the Turkish banking sector, which hinders the implementation of management's strategy, constrains management's ability to determine strategy and price risk and creates an additional operational burden for banks, including BBT. This has a moderately negative impact on BBT's credit profile and is relevant to its ratings in combination with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entities, either due to their nature or to the way in which they are being managed by the entities. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. Entity/Debt Rating Prior ----------- ------ ----- Burgan Bank A.S. 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) Affirmed AA(tur) Viability b- Affirmed b- Shareholder Support b- Affirmed b- TURKLAND BANK: Fitch Alters Outlook on 'B-' LongTerm IDR to Stable ------------------------------------------------------------------ Fitch Ratings has revised the Outlook on Turkland Bank A.S.'s (T-Bank) Long-Term Foreign-Currency (LTFC) and Local-Currency (LTLC) Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at 'B- ' and 'B', respectively. Fitch has also affirmed the bank's Viability Rating (VR) at 'ccc+'. The rating actions follow the revision of the Outlook on Turkiye's Long-Term IDR to Stable from Negative (see "Fitch Revises Turkiye's Outlook to Stable; Affirms at 'B'" dated September 8, 2023). The easing of external financing risks and near-term financial stability risks mean that Fitch considers the near-term likelihood of government intervention in the banking system to have partially abated. This drives the revision of the Outlooks on the bank's IDRs (driven by shareholder support) to Stable, mirroring the sovereign Outlook change. However, in case of marked deterioration in the country's external finances, some form of intervention in the banking system that might impede the banks' ability to service their FC obligations remains likely. Fitch has also affirmed T-Bank's National Ratings. KEY RATING DRIVERS IDRs Driven by Shareholder Support: T-Bank's Long-Term IDRs are driven by potential support from its Jordan-based 50% owner, Arab Bank Plc (AB; BB/Stable), as reflected by its Shareholder Support Rating (SSR). The LTFC IDR and SSR are capped at 'B-' and 'b-', respectively, one notch below Turkiye's, due to government intervention risk. The 'B' LTLC IDR reflects a lower risk of government intervention in LC. The Stable Outlook on the LT IDRs mirrors that on the sovereign. The 'B' Short-Term IDRs are the only option mapping to LT IDRs in the 'B' category. Weaker Intrinsic Credit Profile: T-Bank's VR reflects its small size and limited franchise, weak asset quality, still high unreserved impaired loans that weigh on capitalisation, and volatile profitability. Shareholder Support: Our view of support considers T-Bank's ownership, but also its limited role in the AB group, weak performance, and our view that Turkiye is a non-core market compared with AB's other markets. AB classifies T-Bank as an investment held for sale in its financial statements, which, in our view, indicates a high potential for disposal, and limits reputational risk for AB, reducing its propensity to support T-Bank. Operating Environment Pressures Recede: T- Bank's operations are concentrated in the challenging Turkish operating environment. The recent shift towards the normalization of monetary policies has reduced near-term macro-financial stability risks and decreased external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite recent simplification efforts. Weak Asset-Quality: T-Bank's impaired loans (Stage 3) ratio decreased significantly (end-1H23: 7.8%; end-2022:19.3%; end-2021: 30.8%), reflecting NPL collections and a strong nominal increase in loans (1H23: 109%;2022: 43%) in the high inflationary environment, but remained significantly above the sector average (end-1H23:1.7%). Stage 2 loans are fairly low at less than 1% of gross loans. Exposure to macroeconomic and market volatility, loan concentration and seasoning risk, and FC lending (end-1H23: 24% of gross loans) amid lira weakness present risks to asset quality. Profitability Generated Through Trading Income: T-Bank's operating profit/risk-weighted assets (RWA) ratio increased significantly to 16.5% in 1H23 from 2.7% in 2022, supported largely by higher gains from trading and derivatives (1H23: 96% of total operating income), despite negative net interest income due to a significant increase in lira deposit funding cost and interest rate caps on loans stemming from macroprudential measures. Profitability is sensitive to macroeconomic and regulatory developments, inflationary pressure on costs, asset quality risks and growth. Capital Pressures: T-Bank's common equity Tier 1 ratio increased to 18.9% at end-1H23 (excluding forbearance: 12.8%) from 13.4% at end-2022, supported by high profitability. We view capitalisation as weak given high unreserved impaired loans despite a material reduction (end-1H23: 31% of common equity Tier 1 capital; end-2022: 57%). Capitalisation is sensitive to lira depreciation (due to the inflation of FC risk-weighted assets), internal capital generation and asset-quality risks. FC Liquidity Risks: T-Bank is almost entirely funded by customer deposits (end-1H23: 100% of non-equity funding), mitigating refinancing risk. Deposit dollarisation has reduced (end-1H23: 28% of total customer deposits; end-2022: 35%) but remains substantial, including FX protected lira deposits (end-1H23: 45%). FC deposits create FC liquidity risks in case of deposit instability. The deposit base remains concentrated. FC liquidity comprising largely foreign-exchange (FX) swaps with the Central Bank of Turkiye fully covered FC deposits at end-1H23. Nominal franchise: T- Bank had a 0.1% share of banking sector assets at end-1H23. Loans are concentrated in the corporate and commercial segment largely via short-term lira lending. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade T-Bank's IDRs are sensitive to changes in its SSR. Negative rating action on Turkiye's sovereign rating or an increase in our view of government intervention risk would lead to a downgrade of T- Bank's SSR and consequently its Long-Term IDRs. T- Bank's SSR is also sensitive to an adverse change in Fitch's view of the shareholder's ability and propensity to provide support. T-Bank's VR could be downgraded due to an erosion in the capital buffer, for example through significant deterioration of asset quality and profitability, or a weakening of its FC liquidity position due to sector-wide deposit instability, if not offset by shareholder support. The Short-Term IDRs are sensitive to changes in their respective LT IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of the bank's LTFC IDR would require a sovereign rating upgrade and a reduction in Fitch's view of government intervention risk in the banking sector. An upgrade of the bank's LTLC IDR is unlikely given that the bank is classified as an investment held for sale by AB. A VR upgrade could stem from an improvement in the bank's sustainable profitability and asset quality that reduces risks to capitalisation. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS The National Long-Term Rating is underpinned by its SSR, but is lower than that of foreign-owned banks in Turkiye, reflecting weaker support propensity. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES The National Rating is sensitive to changes in T-Bank's LTLC IDR and also to its creditworthiness relative to that of other Turkish issuers with a 'B' LTLC IDR. VR ADJUSTMENTS The operating-environment score of 'b-' is below the 'bb' category implied score due to the following adjustment reasons: macroeconomic volatility (negative), which reflects heightened market volatility, high dollarisation and high risk of foreign exchange movements in Turkiye, and the sovereign rating (negative). PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS T-Bank's IDRs are linked to the ratings of AB. ESG CONSIDERATIONS T-Bank's ESG Relevance Score for Management and Strategy of '4' reflects an increased regulatory burden on all Turkish banks. Managements' ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the credit profile and is relevant to the rating in combination with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Entity/Debt Rating Prior ----------- ------ ----- Turkland Bank A.S. LT IDR B- Affirmed B- ST IDR B Affirmed B LC LT IDR B Affirmed B LC ST IDR B Affirmed B Natl LT A(tur) Affirmed A(tur) Viability ccc+ Affirmed ccc+ Shareholder Support b- Affirmed b- =========================== U N I T E D K I N G D O M =========================== JACKSONS THE BAKERS: Allen Jackson Bakery Acquires Business ----------------------------------------------------------- Tom Hardwick at Derbyshire Times reports that Allen Jackson Bakery Limited, part of Lifft Group Limited, has acquired Chesterfield's Jacksons the Bakers, in a deal which has secured the historic bakery's presence in the town and safeguarded dozens of local jobs. The acquisition, which completed earlier this month for an undisclosed sum with a turnaround time of just two weeks, follows news that the company had gone into administration amidst challenging trading conditions, Derbyshire Times notes. Andrew Fielder from Chesterfield law firm Banner Jones, and Andrew McDaid from Mitchells Chartered Accountants & Business Advisers, advised Allen Jackson Bakery Limited on the purchase of the company's trade and assets, Derbyshire Times discloses. According to Derbyshire Times, looking to the future, the company's new owners say they hope to build on its heritage and success over the years in order to establish new contracts with local independent pubs, restaurants, and cafes. Allen Jackson Bakery Limited's founder and Lifft Group Limited Director, Giles Allen, said the move formed part of group's strategic growth ambitions to expand its portfolio of businesses -- which operate commercial fleets and companies specialising in transport training, Derbyshire Times relates. MAR HALL: Put Up for Sale by Savills After Administration --------------------------------------------------------- Ian McConnell at The Herald reports that Mar Hall Golf & Spa Resort, which fell into administration last month and continues to trade on a "business-as-usual basis", has been brought to market by property agent Savills, which anticipates global interest. Savills noted it was acting on the instructions of the joint administrators from accountancy firm EY in bringing the five-star hotel, golf and spa resort, at Bishopton near Glasgow, to market, The Herald relates. The hotel comprises 65 hotel guest rooms and suites, two lodges, an 18-hole golf course, a formal and informal restaurant, and additional leisure, conference and banqueting accommodation, The Herald says, citing Savills. According to The Herald, the administrators said in a statement last month: "On August 22, 2023, Andrew Dolliver, Kris Aspin and Luke Charleton of EY-Parthenon's turnaround and restructuring strategy team were appointed as joint administrators of Mar Estates Limited, trading as Mar Hall Golf & Spa Resort. "Located on a 240-acre woodland estate, Mar Hall Golf & Spa Resort is a five-star luxury hotel near Glasgow, employing 118 staff. The resort continues to trade on a business-as-usual basis. Existing bookings and gift vouchers remain valid." PINNACLE BIDCO: Moody's Rates New GBP805MM Sr. Secured Notes 'B3' ----------------------------------------------------------------- Moody's Investors Service has assigned B3 ratings to the planned five-year GBP805 million equivalent backed senior secured notes issuance (split into EUR and GBP tranches) by leading budget gym operator Pinnacle Bidco plc's (PureGym or the company). The rating agency said that the company's B3 corporate family rating and B3-PD probability of default rating are unaffected by the new issuance. Furthermore, PureGym's existing Ba3 senior secured bank credit facility rating and the existing B3 backed senior secured rating are also unaffected. The outlook is stable. RATINGS RATIONALE The planned transaction will marginally lower Moody's-adjusted gross leverage, to around 6.3x pro forma for the transaction from 6.5x for the last twelve-month (LTM) period ended June 30, 2023, with proceeds from the issuance and cash on balance sheet used to repay the currently outstanding GBP855 million equivalent backed senior secured notes maturing in February 2025, along with transaction costs. The new backed senior secured notes will largely have the same ranking, security, guarantees, and substantially similar covenants as the existing notes. The company also plans to put in place a new 4.75-year GBP175.5 million super senior revolving credit facility (SSRCF) to replace its currently undrawn GBP145 million SSRCF. The new notes will materially increase the cost of debt service to around GBP80 million per annum from their current GBP51 million level. As a result, Moody's-adjusted pro forma EBITA/interest ratio for the LTM period ended June 30, 2023 is weak at 0.7x, down from 0.9x currently. Higher interest payments will also worsen PureGym's substantial cash consumption. The rating agency nonetheless expects an improvement in key credit metrics over the next 12-18 months, driven by continued profit growth. Profit growth accelerated in Q2 2023, with company-adjusted after-rent EBITDA reaching GBP36 million, up 30% quarter-on-quarter and a 60% increase compared to Q4 2022. Profit growth has been driven by the UK market where recovery from the pandemic has been quicker and where the company has been expanding at a rapid pace. Maturation of recently opened sites, tight cost control, and timely hedging of energy costs have contributed to earnings growth. Despite being positive by GBP4 million in Q2 2023 on account of working capital timing effects, free cash flow (FCF) for the LTM ended June 30, 2023 was negative by GBP76 million following GBP107 million of reported capital spending. This reflects PureGym's investment in growth, with 70% of capital spending allocated to expansion and IT in the period. Continued expansion, maturation of clubs, and rise in member yields will grow company-adjusted after-rent EBITDA towards GBP130 million in 2023, which is the pre-COVID level, and GBP145 million in 2024, from GBP110 million in the LTM ended June 30, 2023. As a result, Moody's forecasts gross leverage and interest cover to improve to around 5.3x and 1.0x respectively by year-end 2024. FCF will however keep being largely negative as projected by Moody's, by about GBP50 million and GBP60 million in the second half of 2023 and in 2024 respectively, as PureGym continues to invest in growth. The company's liquidity is however still adequate, with about GBP100 million of cash on balance as at end June 2023 pro forma for the transaction and the fully available new GBP175.5 million SSRCF. ESG CONSIDERATIONS Moody's considers ESG factors when assessing the company's credit quality including governance considerations. The company has a high tolerance for leverage. RATIONALE FOR THE STABLE OUTLOOK The stable outlook reflects Moody's expectation that the company will sustain good operating performance driving earnings growth that will improve interest cover and reduce leverage over the next 12-18 months. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Moody's could upgrade the ratings if: -- the company continues positive organic revenue and EBITDA growth; -- Moody's adjusted Debt/EBITDA reduces sustainably below 6.5x; -- Moody's adjusted EBITA / Interest improves towards 1.5x; and -- the company maintains adequate liquidity and positive FCF while it continues to scale up its operations. Moody's could downgrade PureGym's ratings if: -- liquidity deteriorates; -- Moody's adjusted gross leverage is sustained above 7.5x; -- Moody's adjusted EBITA /interest is sustainably below 1x; or -- if there is any material and sustained decline in the number of members or in membership yield. STRUCTURAL CONSIDERATIONS The new backed senior secured notes and the new SSRCF will be secured by a first-priority security interests which includes (1) a fixed charge over bank accounts, shares and receivables and a floating charge over substantially all assets of the Guarantors incorporated in England and Wales (2) pledges over shares of other Guarantors incorporated in Denmark and Switzerland. Under the terms an intercreditor agreement the SSRCF ranks ahead of the backed senior secured notes in an enforcement scenario. LIQUIDITY Pro forma for the transaction, PureGym's liquidity is adequate, with GBP180 million of cash on balance sheet as at June 30, 2023 and a fully available GBP175.5 million SSRCF. Moody's expects FCF cumulatively to be negative by around GBP110 million over the next six quarters. The refinancing transaction will consume GBP80-85 million of cash, including transaction costs. PureGym also has GBP30 million from Kohlberg Kravis Roberts & Co. L.P.'s (KKR) GBP300 million equity investment still remaining at the Pinnacle Topco Limited level, which can be pushed down to the Pinnacle Bidco plc level. The new SSRCF will have a leverage covenant that will be tested if the facility is more than 40% (GBP70.2 million) drawn. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Business and Consumer Services published in November 2021. PROFILE Founded in 2008 and headquartered in Leeds, Pinnacle Bidco plc (PureGym or the company) is the third-largest health and fitness club operator in Europe by number of members, positioned in the low-cost segment. As of June 2023, the group had 1,855 million members across 566 owned gyms in the UK, Denmark, Switzerland, and the US, along with 16 franchised clubs in the Kingdom of Saudi Arabia. The group generated GBP515 million of revenue for the LTM June 2023 for a company-adjusted after-rent EBITDA of GBP110 million (post-IFRS 16: GBP213 million). The company is owned by private equity firm Leonard Green & Partners (LGP) and its management. Since early 2022, KKR owns convertible preferred equity shares in PureGym. Assuming conversion to 22% of equity on exit, LGP would have a 64%-67% stake and management 11%-14%. REAL LSE: Files Notice to Appoint Administrators ------------------------------------------------ Charlotte Banks at Construction News reports that housing contractor Real LSE has filed a notice to appoint administrators. The GBP19 million-turnover firm sent the application to the Companies Court on Sept. 22, Construction News relays, citing CreditSafe. Real LSE is a subsidiary of Real Group. TRIPLE TWO COFFEE: Set to Go Into Administration ------------------------------------------------ Business Sale reports that a coffee franchise business with 11 sites across England and Wales is poised to be placed into administration amid a difficult trading environment. Triple Two Coffee, part of the Cooks Coffee Company, was first established in 2016 with a flagship site in Swindon. The company now has ten sites across the South East and South West and one outlet in Newport, Wales. In 2020, the business joined Cooks Coffee Company and, prior to the onset of the COVID-19 pandemic, had been experiencing strong growth. According to Business Sale, in a statement, Cooks Coffee Company said: "Triple Two was growing rapidly before the COVID-19 pandemic and had shown continuing momentum in FY22. However, in recent times, this momentum has not been able to be maintained and the business has been adversely impacted by the current market environment." As a result, Cooks Coffee Company said that expects to "shortly appoint administrators to place its Triple Two coffee franchise business, comprising Triple Two Holdings Limited and its subsidiaries, into an insolvency process". In accounts for the year ending December 31, 2021, Triple Two Coffee Holdings Limited had fixed assets of GBP15,873 and current assets of GBP105,960, with total liabilities of GBP183,752, Business Sale discloses. Triple Two Coffee Franchise Limited, meanwhile, reported fixed assets of GBP25,332 and current assets of GBP799,375 during the period from May 1 to December 31, 2021, with total liabilities of GBP338,969, Business Sale notes. WESTRIDGE CONSTRUCTION: Enters Administration Amid Trading Woes --------------------------------------------------------------- Ben Vogel at Construction News reports that a contractor that carried out projects worth up to GBP15 million has fallen into administration. Westridge Construction Ltd filed a notice of intention to appoint administrators on Sept. 12 -- now a new notice confirms that Vincent Green and Steven Edwards of Crowe UK were appointed as administrators three days later, Construction News relates. Crowe told Construction News in a statement: "The administrators indicated that the company had endured numerous trading difficulties which included but [were] not limited to: supply-chain insolvencies leading to delays and supply-chain re-engagement costs; soaring inflation leading to higher supplier and subcontract costs; lack of labour and instability in material availability; and the implications of long-term fixed-price contracts during a high inflationary period. The company had also experienced escalating professional indemnity insurance premiums." The East Sussex-based firm, which posted turnover of GBP64 million in its most recent annual accounts to February 28, 2022, operated across the commercial, residential, industrial, education and healthcare sectors, mainly in South East England. Westridge's latest accounts described a GBP6.9 million year-on-year increase in revenue but its pre-tax profit fell by GBP980,900 to reach GBP853,400, Construction News discloses. The company's board said this was driven by "challenging trading conditions" featuring "significant cost increases" and a rise in supply-chain failures, Construction News notes. The company employed a monthly average of 214 staff that year. Westridge entered administration with several live projects in its portfolio, Construction News states. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2023. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *