/raid1/www/Hosts/bankrupt/TCREUR_Public/231027.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Friday, October 27, 2023, Vol. 24, No. 216
Headlines
A Z E R B A I J A N
STATE OIL: Fitch Affirms 'BB+' LongTerm IDR, Outlook Positive
C Z E C H R E P U B L I C
ENERGO PRO: S&P Rates New US-Dollar-Denominated Notes 'B+'
I T A L Y
BCC NPLS 2018: Moody's Cuts Rating on EUR282MM Cl. A Notes to B3
ICCREA BANCA: S&P Affirms 'BB+/B' ICRs & Alters Outlook to Positive
INTER MEDIA: S&P Affirms 'B' Issue Rating, Off Watch Negative
L U X E M B O U R G
SK NEPTUNE: S&P Lowers LongTerm Issuer Credit Rating to 'CCC+'
S P A I N
PROPULSION (BC) FINCO: Moody's Affirms 'B2' CFR, Outlook Stable
U N I T E D K I N G D O M
ARTHUR MIDCO: Moody's Assigns First Time 'B2' Corp. Family Rating
ARTHUR MIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable
NOVALOANS LTD: Goes Into Administration, Halts Operations
THESSCO LTD: Enters Administration, Halts Operations
WASPS: May Establish Permanent Home in Kent Amid Funding Woes
[*] UK: Scottish Corporate Insolvencies Up 19.9% in 2nd Qtr 2023
X X X X X X X X
[*] BOOK REVIEW: TAKING CHARGE: Management Guide to Troubled
- - - - -
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A Z E R B A I J A N
===================
STATE OIL: Fitch Affirms 'BB+' LongTerm IDR, Outlook Positive
-------------------------------------------------------------
Fitch Ratings has affirmed State Oil Company of the Azerbaijan
Republic's (SOCAR) Long-Term Issuer Default Rating (IDR) and senior
unsecured rating at 'BB+'. The Outlook remains Positive. The
Recovery Rating is 'RR4'.
Fitch has revised its assessment of SOCAR's Standalone Credit
Profile (SCP) to 'bb-' from 'b+' in light of its stronger financial
profile.
SOCAR is fully owned by the state and its rating is equalised with
that of Azerbaijan (BB+/Positive) under Fitch's Government-Related
Entities (GRE) Rating Criteria. This is underpinned by state
support provided to the company in the form of financial
guarantees, cash contributions and equity injections, as well as
SOCAR's social functions and its importance as a state vehicle for
the development of oil and gas projects.
KEY RATING DRIVERS
Stable Oil and Gas Production: SOCAR's oil and gas output remained
broadly stable in 2022 at 284 thousand barrels of oil equivalent
per day. This comes on top of Azerbaijan's 6% decrease in oil
output and 7% higher gas production. Azerbaijan's oil production
has historically decreased and Fitch does not expect this to
materially change. Fitch assumes SOCAR's production will grow by
0.5% annually in 2023-2025 on the back of higher natural gas
output.
Close Links with the State: SOCAR's rating is equalised with that
of the state given their strong ties under Fitch's GRE Rating
Criteria. Fitch assesses status, ownership and control and support
track record factors as well as socio-political and financial
implications of GRE's default as 'Strong', resulting in a score of
30. As the IDR reflects the combination of the strength of state
linkage and SOCAR's SCP, a sovereign upgrade would lead to
continued equalisation of SOCAR's rating with the sovereign's and
the company's upgrade.
Most oil and gas projects in Azerbaijan operate under
production-sharing agreements, in which SOCAR has a minority stake
and where it also represents the state and is involved in marketing
the latter's share of crude oil and gas (profit oil). In addition,
SOCAR has stakes in some other major energy projects promoted by
the state, such as the Southern Gas Corridor (SGC).
Supportive Business Profile: SOCAR's leverage has historically been
relatively high compared with its peer group, but declined from
2022. This reflects higher cash-flow generation due to higher oil
and gas prices. Fitch expects that SOCAR will maintain a strong
financial profile over forecast period until 2026 under Fitch's oil
and gas price deck. This underpins its upward revision of SOCAR's
SCP. The 'bb-' SCP also takes into account the scale of operations
and is constrained by corporate governance considerations with
significant limitations on the disclosure of information.
Absheron Adds to Gas Output: SOCAR and TotalEnergies SE
(AA-/Stable) started production in Absheron gas and condensate
field in July 2023. SOCAR expects production from Absheron will
amount to 1.8 million barrels of oil and 707 million cubic metres
of natural gas in 2023. Fitch understands that the start of
Absheron field is the largest Azeri oil and gas development since
Shah Deniz II. Fitch believes the start of Absehron improves
SOCAR's business profile.
Asset Transfers Completed: SOCAR completed sales of its 14.35%
participation interest in Shah Deniz PSA to SGC Upstream LLC and
its 14.35% equity interest in South Caucasus Pipeline and SCP Hold
Co to SGC Midstream LLC at end-March 2023. The purchasers are
wholly owned by Southern Gas Corridor (SGC), which in turn is 49%
owned by SOCAR. Fitch believes that completion of the transaction
is neutral for SOCAR's business profile given SOCAR co-owns SGC.
At the same time, it is positive for SOCAR's financial profile
because it removes the risk that SOCAR would be obliged to return
advances of AZN4.3 billion (end-2022 balance) received for the sale
of these entities. Fitch has historically treated the advances as
debt.
DERIVATION SUMMARY
Fitch equalises SOCAR's rating with that of Azerbaijan to reflect
the strong ties between the two. SOCAR's three most relevant peers
rated on a top-down or constrained basis are JSC National Company
KazMunayGas (BBB/Stable, equalised with Kazakhstan) in Kazakhstan,
Petroleo Brasileiro S.A. (BB/Stable, constrained) in Brazil and OQ
S.A.O.C. (BB+/Stable, constrained) in Oman.
KEY ASSUMPTIONS
- Brent crude price: USD80/bbl in 2023; USD75/bbl in 2024;
USD70/bbl in 2025 and USD65/bbl in 2026.
- Upstream production growing by 0.5% annually in 2024-2025 due to
the higher natural gas output
- USD/AZN exchange rate: 1.7
- Aggregate capex of AZN12.6 billion over 2023-2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Upgrade of Azerbaijan's rating
- Improved financial transparency coupled with EBITDA net leverage
maintained below 2x on a sustained basis would lead to the upward
revision of the SCP but not necessarily the IDR.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
The Outlook is Positive so Fitch does not expect negative rating
action at least in the short term. However, a revision of
Azerbaijan's Outlook back to Stable would be replicated on SOCAR.
- A downgrade of Azerbaijan would be replicated on SOCAR.
- EBITDA net leverage exceeding 3x on a sustained basis would lead
to the downward revision of SOCAR's SCP, but not necessarily the
IDR.
- Weakening state support.
Azerbaijan
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Public Finances: Significant deterioration in the strength of the
public finances, for example due to significant fiscal loosening
and/or additional material contingent liabilities crystallising in
the sovereign balance sheet
- External Finances: Lower energy prices sufficient to have a
material negative impact on external buffers
- Macro: Reduced confidence that Azerbaijan's policy framework
capacity to preserve macroeconomic and financial stability in the
event of external shocks, for example oil price volatility.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Public Finances: Greater confidence that the strong public
balance sheet will be preserved, for example due to continued
expenditure restraint in line with the fiscal rule, or prolonged
high energy prices
- External Finances: Further strengthening of the external balance
sheet, for example due to sustained high energy revenues.
- Macro: Improvements in the effectiveness and predictability of
Azerbaijan's policy framework, to manage external shocks and reduce
macro volatility.
LIQUIDITY AND DEBT STRUCTURE
Good Liquidity: SOCAR reported cash balance of AZN8.4 billion
against short-term debt of AZN5.8 billion at end-June 2023. Fitch
expects strong cash-flow generation in 2023 and 2024 on the back of
favourable oil and gas prices supporting SOCAR's liquidity.
ISSUER PROFILE
SOCAR is the wholly state-owned national oil company of the
Azerbaijan Republic. It is a mid-size integrated oil company with
oil production of 154kbbl/d and natural gas production of 7.8bcm in
2022, including JVs. SOCAR's refinery throughput is around
120kbbl/d.
SOCAR's main function is to secure uninterrupted supply of oil and
gas products in the local market at regulated prices; the balance
can be exported at international prices.
SOCAR has expanded overseas over the past 10 years, particularly in
Turkiye, where it operates petrochemical business (Petkim) and the
STAR refinery (non-consolidated). It has also substantially
expanded trading operations.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SOCAR's rating is equalised with the sovereign's.
ESG CONSIDERATIONS
SOCAR has an ESG Relevance Score of '4' for Governance Structure
due to concentrated ownership and limited board independence, which
has a negative impact on the credit profile, and is relevant to the
rating in conjunction with other factors.
SOCAR has an ESG Relevance Score of '4' for Financial Transparency
due to weak information disclosure, which has a negative impact on
the credit profile, and is relevant to the rating in conjunction
with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
State Oil Company of the
Azerbaijan Republic (SOCAR)
LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
senior unsecured LT BB+ Affirmed RR4 BB+
===========================
C Z E C H R E P U B L I C
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ENERGO PRO: S&P Rates New US-Dollar-Denominated Notes 'B+'
----------------------------------------------------------
S&P Global Ratings assigned a 'B+' issue rating to the proposed
U.S.-dollar-denominated notes to be issued by Energo-Pro a.s.
(EPas), a Czech Republic-headquartered electricity producer and
distribution network operator with activities mainly in Bulgaria,
Georgia, Turkiye, and more recently Spain. The rating was placed on
CreditWatch with developing implications.
S&P said, "We placed our 'B+' long-term issuer credit rating on
EPas on CreditWatch with developing implications on Sept. 28, 2023.
This followed EPas's announcement of the acquisition of Western
European-based hydro generators. We expect the acquisition to add
about EUR60 million-EUR70 million to EPas' EBITDA, offsetting the
expected reduction in Georgian and Bulgarian EBITDA." To finance
the acquisition, EPas contracted a EUR300 million bridge loan
expiring in June 2024, which we understand the current transaction
intends to refinance.
The developing CreditWatch reflects:
-- On the downside, liquidity pressure stemming from the EUR300
million bridge loan that needs to be refinanced in what we see as
difficult market conditions. S&P could lower the rating on EPas if
it is unable to refinance the bridge loan when due; and
-- On the upside, S&P's view that the acquisition of Western
European hydro assets is marginally positive for EPas's credit
standing, since it would enlarge the scope of operations.
An upgrade to EPas would hinge on:
-- Successful integration of the hydro power plants;
-- The consolidated funds-from-operations-to-debt ratio staying
above 20% even in times of low hydro or back-to-normal power
prices; and
-- Supportive liquidity for a company rated 'BB-'.
S&P's rating on EPas continues to reflect the larger group's credit
quality at the level of the parent, DK Holding Investments, since
S&P views EPas as its core subsidiary.
=========
I T A L Y
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BCC NPLS 2018: Moody's Cuts Rating on EUR282MM Cl. A Notes to B3
----------------------------------------------------------------
Moody's Investors Service has downgraded the ratings of two notes
in BCC NPLs 2018 S.r.l. ("BCC 2018"). The rating action reflects
lower than anticipated cash-flows generated from the recovery
process on the nonperforming loans (NPLs) and in the case of class
A notes, underhedging.
EUR282M Class A Notes, Downgraded to B3 (sf); previously on Feb
16, 2022 Downgraded to B1 (sf)
EUR31.4M Class B Notes, Downgraded to Ca (sf); previously on Feb
16, 2022 Affirmed Caa3 (sf)
RATINGS RATIONALE
The rating action is prompted by lower than anticipated cash-flows
generated from the recovery process on the NPLs and in the case of
class A underhedging.
Lower than anticipated cash-flows generated from the recovery
process on the NPLs:
As of May 2023 the Cumulative Collection Ratio based on collections
net of legal and procedural costs, was at 49.67% meaning that
collections are coming in at significantly lower amounts than
anticipated in the original Business Plan projection. Through the
May 31, 2023 collection period, ten collection periods since
closing, aggregate collections net of legal and procedural costs
and servicing fees were EUR144.04 million versus original business
plan expectations of EUR292.89 million. Last approved updated
business plan had a cut-off date as of November 2019 and it expects
a total amount of future collections lower than the outstanding
amount of the Class A Notes.
Special Gardant S.p.A. (SG) has replaced the original servicer. The
six-month handover process has now concluded and SG is working on
the portfolio and it will produce the first SG's Updated Portfolio
Base Case Scenario by the end of February 2024.
PV Cumulative Profitability Ratio, stood at 89.8% as of May 2023,
on the low side compared to other Italian NPL transactions.
In terms of the underlying portfolio, the Gross Book Value ("GBV")
stood at EUR660.69 million as of May 2023 down from EUR1.05 billion
at closing. Borrowers are mainly corporates (around 85.16%) and the
underlying properties for secured positions, under Moody's
classification, are mostly concentrated in Lombardia, Toscana and
Emilia Romagna (about 77.21%).
Moody's notes that the advance rate, the ratio between the size of
the most senior tranche in the transaction and its GBV, stood at
24.63% as of June 2023.
NPL transactions' cash flows depend on the timing and amount of
collections. Due to the current economic environment, Moody's has
considered additional stresses in its analysis, including a 6 to
12-months delay in the recovery timing.
Underhedging:
The transaction benefits from two interest rate caps liked to
six-month EURIBOR with J.P. Morgan SE (Aa1(cr), P-1 (cr)) acting as
cap counterparty. The cap strike for the receiver leg of caps
started from 0.50% and moves up stepwise to a maximum of 2.5% for
Class A and 4% for Class B. The cap covering class A has also a
payer leg with increasing strikes which are set at the same levels
as the six-month Euribor contractual cap for Class A (which is
capped from December 2022 till final maturity date at 2.5%
increasing to 3.5%).
The notional of the two interest rate caps was determined at
closing, it was initially equal to the outstanding balance of the
class A and Class B notes and reduced in consideration of the
anticipation of notes' amortization based on a pre-defined
schedule. Given the Class A notes have so far amortised at a slower
pace than the scheduled notional amount set out in the cap
agreement, a portion of the outstanding notes is unhedged.
Scheduled notional for the next period is EUR123.97 million while
Class A notes outstanding balance stands at EUR162.71 million.
Class B notes are fully hedged. Six-months EURIBOR for last payment
date was 2.75% as it was fixed 6 months before. The rate for next
periods will be higher, however the negative effect of this
underhedging is partially mitigated due to the six-month Euribor
contractual cap for Class A notes mentioned above.
Moody's has taken into account the potential cost of the GACS
Guarantee within its cash flow modelling, while any potential
benefit from the guarantee for the senior Noteholders has not been
considered in its analysis.
The principal methodology used in these ratings was 'Non-Performing
and Re-Performing Loan Securitizations Methodology' published in
July 2022.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (1) the recovery process of the non-performing
loans producing significantly higher cash-flows in a shorter time
frame than expected; (2) improvements in the credit quality of the
transaction counterparties; and (3) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include: (1) significantly lower or slower cash-flows
generated from the recovery process on the non-performing loans due
to either a longer time for the courts to process the foreclosures
and bankruptcies, a change in economic conditions from Moody's
central scenario forecast or idiosyncratic performance factors. For
instance, should economic conditions be worse than forecasted and
the sale of the properties generate less cash-flows for the issuer
or take a longer time to sell the properties, all these factors
could result in a downgrade of the ratings; (2) deterioration in
the credit quality of the transaction counterparties; and (3)
increase in sovereign risk.
ICCREA BANCA: S&P Affirms 'BB+/B' ICRs & Alters Outlook to Positive
-------------------------------------------------------------------
S&P Global Ratings has taken various rating actions on the
following Italian banks:
-- S&P raised its long- and short-term issuer credit ratings on
Banca Popolare dell'Alto Adige Volksbank S.p.A. (Volksbank) to
'BBB-/A-3' from 'BB+/B' and assigned a stable outlook to the
long-term rating;
-- Revised its rating outlook on Iccrea Banca SpA to positive from
stable and affirmed the 'BB+/B' long- and short-term issuer credit
ratings;
-- Revised S&P's rating outlook on MedioCredito Centrale SpA to
stable from negative and affirmed its 'BBB-/A-3' long- and
short-term ratings; and
-- Affirmed S&P's 'BBB/A-2' long- and short-term issuer credit
ratings on Mediobanca SpA, FinecoBank S.p.A., Banca Mediolanum. The
outlooks on the long-term ratings remain stable.
-- S&P also affirmed its 'BBB/A-2' long- and short-term issuer
credit ratings on Intesa Sanpaolo SpA (as well as its core
subsidiary Fideuram - Intesa Sanpaolo Private Banking SpA) and
UniCredit SpA. Although S&P assesses that both Intesa Sanpaolo and
UniCredit's stand-alone credit profiles (SACP) have improved to
'bbb+' from 'bbb', its issuer credit ratings on these two banks are
capped at the ratings on Italy (unsolicited BBB/Stable/A-2). S&P's
ratings on the banks' hybrids, senior non-preferred, subordinated,
junior subordinated, and additional tier 1 securities are not
affected, since S&P now derives those ratings by notching down from
the issuer credit rating.
S&P said, "The rating actions reflect our view that Italy's banking
system is better positioned than in the past to manage future
economic downturns. Italian banks have made structural progress in
how they manage and control credit risk. At the same time, most of
the institutions that experienced the sharpest deterioration in
previous downturns are no longer operating or have been rescued by
public authorities. Furthermore, banks have substantially reduced
the amount of legacy nonperforming exposures (NPEs), which as of
June 30, 2023, represented 3.5% of customer loans (1.5% net of loan
loss provisions). As such, the potential tail risk attached to
existing legacy NPEs has largely abated.
"Consequently, we anticipate that potential asset quality
deterioration in 2024 should remain manageable overall. Although
default rates remain low and below our expectations so far this
year, they are likely to rise in the coming quarters. The effect of
high inflation, higher interest rates, and tightening financing
conditions will inevitably lead to some asset quality deterioration
in Italy and elsewhere, in our opinion. We anticipate new NPE will
increase in 2024, although this will be contained for most
institutions and stay well below the peak reached in the previous
downturn. We factor into our assessment our estimate of credit
losses of 60 basis points (bps) to 65 bps in 2023 and 70 bps-80 bps
in 2024, instead of our previous forecast of 90 bps-100 bps over
these periods. We also factor in the potential benefits from
government guarantees on over EUR200 billion of loans granted to
small and midsize enterprises (SMEs) and corporations, primarily as
part of support measures to tackle the consequences of the pandemic
and the Russia-Ukraine conflict. These guarantees provide a
meaningful cushion for credit losses over the next two to three
years, in our view." They cover 80%-100% of the value of the loans
covered and give the bank the option of triggering the guarantee as
soon as a customer defaults. These guaranteed loans are amortizing,
mainly over the next four years.
Increased preprovision incomes provide a significant cushion in
more adverse scenarios. The strong rise in net interest income,
versus a still relatively contained increase in operating expenses,
has bolstered profitability so far in 2023. S&P said, "We now
expect the average return on equity in the banking sector will
likely peak close to 10% this year. We anticipate preprovision
income will decline moderately in 2024 and to a greater extent in
2025, although remaining higher than before the interest rate
hikes. This is because we assume Italian banks' cost of funding
will gradually increase in the coming quarters as the effect of the
partial replacement of the European Central Bank's third targeted
longer-term refinancing operations with more costly sources becomes
apparent and moderate retail deposit repricing takes place."
The renewal of the banking labor contract could also affect
operating expenses, although banks continue to reap the benefits
from reducing branches and cost rationalization. S&P said, "We now
expect preprovision income will still materially exceed banks'
credit provisions over the next two years, contrary to our previous
expectations. In our forecast, we assume most banks will not pay
the windfall tax recently introduced by the Italian government. We
understand banks have the option of paying a one-off tax
corresponding to 0.26% of their regulatory risk-weighted assets or
strengthening their capitalization by retaining 2.5x the value of
the tax in a nondistributable reserve. As it stands, we consider
more likely that banks will opt to strengthen their capital."
Banks stronger capitalization positions them well to face the risk
of an increasingly uncertain operating environment. Italian banks
have gradually strengthened their capitalization in the past few
years, thanks to a combination of deleveraging, earnings retention,
and capital-enhancing measures. Most banks will also benefit from
increased capital generation in 2023-2025. Although many
institutions have announced generous dividend distributions, we
anticipate that capital consumption from new business growth will
be limited and earnings generation sufficient to continue
accumulating capital. Additionally, according to our Banking
Industry and Country Risk Assessment (BICRA), economic risk for the
banking sector in Italy has reduced, which further supports our
view of banks' solvency (as per our measures). S&P estimates the
change in its economic risk score will affect our risk-adjusted
capital (RAC) ratio of all banks by between 40 bps and 100 bps
depending on the composition of their respective assets.
S&P said, "Nevertheless, we expect to see some divergence in
performance and resilience among banks next year and in 2025. The
difference may become increasingly evident in terms of the cost of
funding (after years of access to cheaper funding for all banks),
asset-quality metrics, and operating efficiency. We believe some
smaller regional banks, concentrated in riskier customer segments,
may be more vulnerable in the event of a sharp deterioration of
their operating environment."
Banca Popolare dell'Alto Adige SpA (Volksbank)
Primary credit analyst: Francesca Sacchi
S&P said, "The upgrade of Volksbank reflects our view that the bank
has significantly strengthened its capital and we expect its asset
quality will remain resilient over the next two years. We believe
Volksbank will continue to benefit from its strong footprint in
Trentino-Alto Adige, one of Italy's wealthiest regions." In
addition, Volksbank's loan loss reserves--accumulated in recent
years--are larger than peers' and provide buffers against future
losses.
Outlook
S&P said, "The stable outlook reflects our view that in the next
12-24 months Volksbank's operating performance and balance sheet
will remain resilient. We expect the bank's RAC ratio will remain
comfortably above 7% over the next two years. We also anticipate
the bank can maintain a better risk profile than the domestic
system average over the next two years, despite some contained
asset-quality deterioration. We assume credit losses will peak at
60 bps-65 bps in 2024, before gradually decreasing to about 50bps
in 2025."
Downside scenario: S&P said, "We could lower the ratings on
Volksbank if, contrary to our base-case expectations, the bank's
asset quality materially deteriorated, likely leading to
higher-than-expected credit losses potentially eroding its capital
base. We could also lower the rating if we anticipated the bank's
RAC ratio will decrease below 7% over the next 12-24 months."
Upside scenario: S&P currently sees an upgrade of Volksbank as
unlikely. To consider raising the ratings, it would need to see the
bank's projected RAC ratio exceeding 10% on a sustainable basis,
while its risk profile remains stronger than the system average.
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB-/STABLE/A-3 BB+/POSITIVE/B
Stand-alone credit profile bbb- bb+
Anchor bbb- bbb-
Business position Moderate (-1) Moderate (-1)
Capital and earnings Adequate (0) Moderate (-1)
Risk position Strong (+1) Strong (+1)
Funding and liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
MedioCredito Centrale SpA
Primary credit analyst: Regina Argenio
S&P said, "We revised our outlook on MedioCredito Centrale (MCC) to
stable from negative primarily because we factor in the likelihood
of the bank receiving capital support from its main shareholder
Invitalia, which is 100% owned by the government, in the coming
months. The government would sustain MCC's mandate to support
investment in economically depressed areas in southern Italy and
provide a cushion to clean up asset quality at recently acquired
Banca Popolare di Bari and cover legal risk. For this reason, we
now see diminished risk that any potential rise in credit may
hamper the bank's solvency position."
Outlook
S&P said, "The stable outlook on MCC reflects our view that MCC
will be able to preserve its credit profile over the next 12-24
months, also benefitting from ongoing government support. We
anticipate the group's capitalization will remain resilient despite
still-high losses on nonperforming loans and legal expenses. The
likely completion of a capital injection from Invitalia will also
help the RAC ratio remaining comfortably above 7% in 2025. We also
expect potential asset quality deterioration to be generally
manageable."
Downside scenario: S&P said, "We could lower the long-term rating
on MCC if the RAC ratio declined below 7%, for example because of
higher-than-anticipated credit and legal costs or unexpected
failure to complete the announced capital increase. We can also
consider a downgrade if the group is not able to restructure Banca
Popolare di Bari as planned and the profitability of that
subsidiary continues to hurt the group's results.”
Upside scenario: Although unlikely at this stage, an upgrade can be
considered if S&P sees increased extraordinary support for MCC from
the Italian government.
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB-/STABLE/A-3 BBB-/NEGATIVE/A-3
Stand-alone credit profile bb bb
Anchor bbb- bbb-
Business position Moderate (-1) Moderate (-1)
Capital and earnings Adequate (0) Adequate (0)
Risk position Moderate (-1) Moderate (-1)
Funding and liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support +2 +2
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
Iccrea Banca SpA (Gruppo Bancario Cooperativo ICCREA; GBCI)
Primary credit analyst: Regina Argenio
S&P said, "We revised our rating outlook to positive based on our
view that, notwithstanding still-weaker asset quality and higher
NPEs than peers', the group has improved its asset quality metrics
and will continue making significant progress in strengthening its
risk management and governance. This, paired with higher
capitalization, will help it better navigate a likely economic
slowdown in Italy in the coming months. We also consider that over
30% of ICCREA's SME loans are backed by public guarantees, which
provides it with an additional cushion if credit losses rise in
that segment. We also believe ICCREA can preserve its solid
franchise and strong funding and liquidity position over the coming
quarters."
Outlook
S&P said, "The positive outlook reflects our view that GBCI will
continue improving integration and oversight of the cooperative
banks in the group, strengthening risk management, and lowering
risk tolerance, while increasing its capitalization. In our
base-case scenario, we anticipate that the RAC ratio will gradually
improve to 9.5%-10.0% by year-end 2025 from 8.1% as of Dec. 31,
2022, considering reduced economic risk in Italy supported by
resilient profitability and credit losses reducing to 75 bps-80 bps
per year over 2023-2025 from 90 bps on average over the past three
years."
Upside scenario: S&P could raise the ratings in the next 12-18
months if it concludes that GBCI's capitalization has materially
strengthened, with the projected RAC ratio improving sustainably
beyond 10%, or if it anticipates a significantly lower inflow of
NPEs and credit losses than during the previous downturn.
Downside scenario: S&P could revise the outlook to stable if GBCI's
capital does not strengthen in line with our projections or it sees
setbacks in oversight and risk management of the cooperative
banks.
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BB+/POSITIVE/B BB+/STABLE/B
Stand-alone credit profile bb+ bb+
Anchor bbb- bbb-
Business position Adequate (0) Adequate (0)
Capital and earnings Adequate (0) Adequate (0)
Risk position Weak (-2) Weak (-2)
Funding and liquidity Strong (+1) Strong (+1)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
Intesa Sanpaolo SpA
Primary credit analyst: Mirko Sanna
S&P said, "We revised our assessment of Intesa Sanpaolo's SACP to
'bbb+' from 'bbb' owing to the strengthening of the bank's earnings
capacity, which we expect will continue supporting its
capitalization and providing substantial buffers against
potentially deteriorating economic conditions. We currently
forecast net profit to exceed EUR7 billion in 2023-2025. Even if
Intesa were to eventually distribute most of its net profit to
shareholders through dividends or other forms of remuneration, its
projected RAC ratio is now likely to exceed 7% over the next two
years, in our view. While our assumptions on credit losses are
somewhat higher than management's guidance, we expect Intesa
Sanpaolo's asset quality to be resilient in the coming years.
"We consider that the bank's SACP now compares well with that of
its domestic peers, reflecting effective diversification, scale,
and operating efficiency, as well as the improved capitalization
and asset quality. We also consider that the bank will continue to
benefit from sound liquidity buffers, strong access to a stable
cost-effective retail funding base, and more established access to
different market sources than most domestic peers.
"That said, given its strong interconnectedness with the sovereign,
we consider that Intesa Sanpaolo would not be able to withstand a
sovereign stress. Therefore, we cap our ratings on the bank at
those on Italy. We will continue to derive the ratings on Intesa
Sanpaolo's hybrids by deducting notches from the lower of the SACP
and the long-term issuer credit rating. Therefore, a change in the
ratings on the group's rated additional Tier 1 and Tier 2 and
senior nonpreferred instruments would now be dependent on a change
of the issuer credit rating."
Outlook
The stable outlooks on Intesa Sanpaolo and its core subsidiary
Fideuram Intesa Sanpaolo Private Banking SpA mirror that of Italy.
Downside scenario: S&P said, "We could lower the rating on Intesa
Sanpaolo over the next two years if we were to downgrade Italy.
This is because we continue to believe the bank would be unable to
withstand a hypothetical sovereign stress. However, if we were to
revise down our assessment of the bank's SACP by one notch, this
would currently not translate into a downgrade of Intesa Sanpaolo,
due to the bank's 'bbb+' SACP."
Upside scenario: S&P would raise its rating on Intesa Sanpaolo if
it was to upgrade Italy, providing that it maintains its existing
view of the bank's stand-alone creditworthiness.
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB/STABLE/A-2 BBB/STABLE/A2
Stand-alone credit profile bbb+ bbb
Anchor bbb- bbb-
Business position Strong (+1) Strong (+1)
Capital and earnings Adequate (0) Moderate (-1)
Risk position Strong (+1) Strong (+1)
Funding and liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors -1 (sovereign cap) 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
UniCredit SpA
Primary credit analyst: Regina Argenio
S&P said, "We revised our assessment of UniCredit's SACP to 'bbb+'
from 'bbb' owing to the strengthening of the bank's earnings
capacity, which we expect will continue supporting its
capitalization and providing substantial buffers against
potentially deteriorating economic conditions. We consider that the
bank's SACP now compares well with that of its domestic peers,
reflecting effective diversification, scale, and operating
efficiency, as well as the improved capitalization and asset
quality. We also consider that the bank will continue to benefit
from sound liquidity buffers, strong access to a stable
cost-effective retail funding base, and more established access to
different market sources than most domestic peers.
"We expect UniCredit to benefit from lower economic risks in Italy,
its reduced exposure to Russia, and the progress made in recent
years to clean up its balance sheet and strengthen its risk
management and underwriting, domestically and abroad. We now
consider that UniCredit's asset quality metrics will likely remain
close to that of banks facing similar economic risks, primarily
large geographically diverse banks operating in Europe.
"We forecast UniCredit's RAC ratio to remain above 7%, despite the
announced generous capital distribution to shareholders, in line
with previous years. We think the recently announced transaction
with Alpha Bank, including the acquisition of 90.1% of Alpha Bank
Romania S.A., will have a limited impact on UniCredit's
capitalization and is consistent with its strategy of being a
market leader in most of the countries where it operates. Although
we note that management could use acquisitions as to speed up
growth, we will assess the risks of any potential transaction if it
were to materialize.
"That said, given its strong interconnectedness with the sovereign,
we consider that UniCredit would not be able to withstand a
sovereign stress. Therefore, we cap our ratings on the bank at
those on Italy. We will continue to derive the ratings on
UniCredit's hybrids by deducting notches from the lower of the SACP
and the long-term issuer credit rating. Therefore, a change in the
ratings on the group's rated additional Tier 1 and Tier 2 and
senior nonpreferred instruments would now be dependent on a change
of the issuer credit rating."
Outlook
S&P said, "The stable rating outlook on UniCredit mirrors that on
Italy and reflects our view that the group's credit profile will
remain resilient over the next two years. In particular, we expect
the bank's asset-quality metrics will only moderately deteriorate
and its RAC ratio will be sustainably above 7%."
Downside scenario: S&P said, "We could lower the rating on
UniCredit if we were to downgrade Italy. This because we continue
to believe that the bank would be unable to withstand a
hypothetical sovereign stress. If we revise down our assessment of
UniCredit's SACP by one notch, this would not translate into a
downgrade, since the SACP is currently higher than the long-term
sovereign rating."
Upside scenario: S&P would raise the rating if it was to upgrade
Italy providing that it at least maintains its existing view of the
bank's stand-alone creditworthiness.
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB/STABLE/A-2 BBB/STABLE/A2
Stand-alone credit profile bbb+ bbb
Anchor bbb bbb
Business position Strong (+1) Strong (+1)
Capital and earnings Adequate (0) Adequate (0)
Risk position Adequate (0) Moderate (-1)
Funding and liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors -1 (sovereign cap) 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
Mediobanca SpA
Primary credit analyst: Francesca Sacchi
S&P said, "We affirmed our ratings, since the reduction of economic
risk for banks in Italy does not have meaningful rating
implications, given the constraint of the Italian sovereign's
creditworthiness.
"We will continue to derive the ratings on Mediobanca's hybrids by
deducting notches from the lower of the SACP and the long-term
issuer credit rating. Therefore, if we were to lower the issuer
credit rating or revise downward our assessment of the SACP, we
would also lower the ratings on the bank's subordinated debt and
senior nonpreferred instruments."
Outlook
S&P said, "The stable outlooks on Mediobanca and its core
subsidiary, MB Funding Lux, mirror that on Italy and reflect our
view that Mediobanca's credit profile will remain resilient over
the next two years. In our base-case scenario, we anticipate the
bank's operating performance will remain stronger than most
domestic peers' because of a more diversified revenue base and
lower credit losses than the sector average. We also expect
Mediobanca's RAC ratio will remain at 9.5%-10.0% through 2024-2025,
including the bank's planned distribution to shareholders."
Downside scenario: S&P said, "We could lower the ratings on
Mediobanca and MB Funding Lux if we lower the long-term rating on
Italy. This is because we believe the bank is unlikely to withstand
a hypothetical sovereign default, given its high exposure to the
Italian economy. In addition, we could take a negative rating
action if we conclude that the bank's governance structure would
lead to a more aggressive or risky strategy."
Upside scenario: S&P said, "We could consider an upgrade if we
raised our long-term rating on Italy and concluded that
Mediobanca's intrinsic creditworthiness had strengthened. In
particular, we would consider an upgrade if our two-year
projections for the bank's RAC ratio were to move closer to 10%,
owing to better-than-expected internal capital generation, and, at
the same time, the bank maintains a stronger operating performance
than peers' and its risk profile remains resilient to macroeconomic
uncertainty."
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB/STABLE/A-2 BBB/STABLE/A-2
Stand-alone credit profile bbb bbb
Anchor bbb- bbb-
Business position Adequate (0) Adequate (0)
Capital and earnings Adequate (0) Adequate (0)
Risk position Strong (+1) Strong (+1)
Funding Adequate (0) Adequate (0)
Liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
Banca Mediolanum SpA
Primary credit analyst: Mirko Sanna
S&P affirmed its ratings, since the reduction of economic risk for
banks in Italy does not have meaningful rating implications, given
the constraint of the Italian sovereign's creditworthiness.
Outlook
S&P said, "The stable outlook on Banca Mediolanum mirrors that on
the sovereign and reflects our opinion that the bank's overall
credit profile will remain resilient over the next two years. This
primarily stems from the group's limited exposures to credit risk,
its sound earnings capacity compared with peers', and strong
insurance operations. Even excluding the contribution of any
market-related commissions, we anticipate Mediolanum's return on
equity will likely exceed 20% in 2024, well above the average 8% we
expect for Italian banks and better than that of most European
financial institutions. We project the bank's RAC ratio will exceed
7% in 2024 and 2025 compared to 6.3% as of Dec. 3, 2022."
Downside scenario: S&P said, "We could lower the ratings over the
next 12-24 months if we were to take a similar action on Italy.
Similarly, we could lower the ratings if we saw a meaningful
deterioration of the economic and operating conditions in Italy or
in the bank's credit portfolio, or heightened reputational risks."
Upside scenario: S&P said, "We could upgrade Mediolanum if we were
to upgrade Italy and conclude that Mediolanum's stand-alone
creditworthiness had strengthened. This would likely stem from the
bank's profitability prospects improving, combined with it
maintaining strong asset-quality metrics and control of its
operational risk while preserving capitalization."
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB/STABLE/A-2 BBB/STABLE/A2
Stand-alone credit profile bbb bbb
Anchor bbb- bbb-
Business position Adequate (0) Adequate (0)
Capital and earnings Adequate (0) Adequate (0)
Risk position Strong (+1) Strong (+1)
Funding and liquidity Adequate (0) Adequate (0)
Comparable ratings analysis 0 0
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
FinecoBank SpA
Primary analyst: Francesca Sacchi
S&P said, "We affirmed our ratings, since the reduction of economic
risk for banks in Italy does not have meaningful rating
implications, given the constraint of the Italian sovereign's
creditworthiness.
"We will continue to derive the ratings on Fineco's hybrids by
deducting notches from the lower of the SACP and the long-term
issuer credit rating. Therefore, if we were to lower the issuer
credit rating or revise downward our assessment of the SACP, we
would also lower the ratings on the bank's additional tier 1
instruments."
Outlook
S&P said, "The stable outlook on Fineco mirrors that on Italy and
reflects our view that the bank's overall credit profile will
remain resilient over the next two years. We anticipate robust
revenue prospects, very low cost of credit risk, and strong cost
efficiency will continue to support its creditworthiness."
Downside scenario: S&P could lower the ratings on Fineco if it
lowers the long-term rating on Italy. S&P could also lower the
ratings if the bank's funding and liquidity position weakened from
its current sound level.
Upside scenario: S&P said, "We could consider an upgrade if we
raised our long-term rating on Italy and, and the same time, we
concluded that Fineco's intrinsic creditworthiness had
strengthened. The latter scenario would most likely materialize if
we remained confident about the bank's small capital base in
absolute terms being strong enough to absorb the risks the bank is
facing. This is providing that our projected RAC ratio for Fineco
sustainably exceeds 10% over the next two years, its earnings
remain strong and higher than European banks' average, and its
funding and liquidity profile stays solid."
Ratings score snapshot
TO FROM
ISSUER CREDIT RATING BBB/STABLE/A-2 BBB/STABLE/A-2
Stand-alone credit profile bbb bbb
Anchor bbb- bbb-
Business position Adequate (0) Adequate (0)
Capital and earnings Adequate (0) Adequate (0)
Risk position Adequate (0) Adequate (0)
Funding Adequate (0) Adequate (0)
Liquidity Adequate (0) Adequate (0)
Comparable ratings analysis +1 +1
Support 0 0
ALAC support 0 0
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
ALAC--Additional loss-absorbing capacity.
GRE--Government-related entity.
BICRA Score Snapshot
Italy
TO FROM
BICRA GROUP 5 5
Economic risk 5 6
Economic resilience Intermediate risk Intermediate risk
Economic imbalances Intermediate risk High risk
Credit risk in the economy High risk High risk
Trend Stable Positive
Industry risk 5 5
Institutional framework Intermediate risk Intermediate risk
Competitive dynamics High risk High risk
Systemwide funding Intermediate risk Intermediate risk
Trend Stable Stable
Banking Industry Country Risk Assessment (BICRA) economic risk and
industry risk scores are on a scale from 1 (lowest risk) to 10
(highest risk).
Ratings List
BANCA MEDIOLANUM
RATINGS AFFIRMED
BANCA MEDIOLANUM
Issuer Credit Rating BBB/Stable/A-2
BANCA POPOLARE DELL'ALTO ADIGE VOLKSBANK S.P.A.
UPGRADED; OUTLOOK ACTION
TO FROM
BANCA POPOLARE DELL'ALTO ADIGE VOLKSBANK S.P.A.
Issuer Credit Rating BBB-/Stable/A-3 BB+/Positive/B
FINECOBANK S.P.A.
RATINGS AFFIRMED
FINECOBANK S.P.A.
Issuer Credit Rating BBB/Stable/A-2
Resolution Counterparty Rating BBB/--/A-2
ICCREA BANCA SPA
RATINGS AFFIRMED
ICCREA BANCA SPA
Resolution Counterparty Rating BBB/--/A-2
RATINGS AFFIRMED; OUTLOOK ACTION
TO FROM
ICCREA BANCA SPA
Issuer Credit Rating BB+/Positive/B BB+/Stable/B
INTESA SANPAOLO SPA
INTESA SANPAOLO SPA
Local Currency BBB/A-2
RATINGS AFFIRMED
INTESA SANPAOLO SPA
FIDEURAM - INTESA SANPAOLO PRIVATE BANKING SPA
Issuer Credit Rating BBB/Stable/A-2
Resolution Counterparty Rating BBB+/--/A-2
MEDIOCREDITO CENTRALE SPA
RATINGS AFFIRMED; OUTLOOK ACTION
TO FROM
MEDIOCREDITO CENTRALE SPA
Issuer Credit Rating BBB-/Stable/A-3 BBB-/Negative/A-3
MEDIOBANCA SPA
RATINGS AFFIRMED
MEDIOBANCA SPA
MB FUNDING LUX S.A.
Issuer Credit Rating BBB/Stable/A-2
Resolution Counterparty Rating BBB+/--/A-2
UNICREDIT SPA
RATINGS AFFIRMED
UNICREDIT SPA
Issuer Credit Rating BBB/Stable/A-2
Resolution Counterparty Rating BBB+/--/A-2
INTER MEDIA: S&P Affirms 'B' Issue Rating, Off Watch Negative
-------------------------------------------------------------
S&P Global Ratings affirmed the 'B' issue rating on Inter Media and
Communication SpA's (MediaCo) bonds and removed it from CreditWatch
negative.
The stable outlook reflects S&P's expectation that TeamCo will
continue playing in the Italian football league's top division,
allowing MediaCo to benefit from sufficient cash flows to service
its bonds and support its refinancing needs when the bonds mature
in 2027.
MediaCo is the main financing vehicle for Italian football club
Internazionale Milano (TeamCo). MediaCo services its bonds through
receivables from TeamCo's media and sponsorship contracts, while
TeamCo depends on the distributions it receives from MediaCo to
fund part of its operations.
TeamCo's long track record of participation in Serie A, Italian
football league's top division that generates the fourth-highest
broadcasting revenue among European domestic football leagues
(after the English, Spanish, and German leagues).
The inclusion in the security package of TeamCo's trademark and
intellectual property, a key business asset, and the rights and
receivables from media and sponsorship deals.
The structural seniority of MediaCo-issued debt to TeamCo's
financial and operational expenses, including players' salaries.
The short-term nature of the broadcasting and sponsorship
contracts. This is typical of the live sports industry, but exposes
MediaCo's cash flow to high volatility.
Substantial refinancing risk for MediaCo's debt.
MediaCo's partial dependency on TeamCo's operations and financial
condition to maintain attractive media and sponsorship revenue
pledged to MediaCo.
TeamCo's unstable capital structure, which gives rise to a
dependency on shareholder support to avoid liquidity shortfalls.
The risk of a material drop in MediaCo's cash flow has eased
following the restoration of a contractual sponsorship revenue
stream on the back of TeamCo's strong on-pitch performance and
brand. TeamCo had a strong on-pitch performance over the previous
season that ended in June 2023, peaking with its achievement of
second place in the Union of European Football Associations (UEFA)
Champions League in June 2023. Performance prize money from UEFA,
as well as from the Italian Super Cup and Coppa Italia, boosted
MediaCo's income. This offset the short-term impact of missed
payments from the previous main shirt sponsor, DigitalBits. More
importantly, between July and September 2023, TeamCo was able to
secure new contracts for its training kit, as well as replace the
DigitalBits sponsorship and the expired Lenovo and Suning contracts
with new contracts on reasonably similar terms that are in line
with our expectations.
Although the contracts with Paramount+ and eBay have shorter terms,
comparable visibility comes from sponsorships with U-Power, Konami,
and LeoVegas. This adds to TeamCo's positive track record of
generating commercial revenue by renewing sponsorship deals, as was
the case when its longstanding contract with Pirelli expired in
2021 and its Asian sponsorship contract with iMedia ended the same
year. It is also true of the July renewal of the long-standing
partnership with Nike as kit supplier that TeamCo extended on
favorable terms to 2031.
S&P said, "Over the estimated period for the debt repayment, we
expect close to 60% of MediaCo's revenue entitlement is be
associated with TeamCo's media rights revenue. This depends to
different degrees on TeamCo's on-pitch performance, although
balanced by the moderate stability of Serie A revenue and the
current allocation method. The remaining 40% is forecast to come
from commercial exploitation of the F.C. Internazionale brand
through short-term sponsorship contracts, with an explicit link to
sport performance and particularly to its international
visibility.
"The stable outlook reflects our expectation that TeamCo will
continue playing in the Italian football league's top division,
allowing it to continue attracting strong sponsorship and media
revenue. In turn, this will allow MediaCo to benefit from
sufficient cash flows to service its debt and support its
refinancing needs in February 2027.
"We could lower the rating if we see a risk of permanent
operational weakness and financial deterioration at Italian
football or if we see liquidity or near-term default risks at
TeamCo. This could occur, for example, if we expect significant
repricing pressure for key contracts, or if any key stakeholders
take steps that elevate the risk to TeamCo's business model."
S&P could also lower the rating if MediaCo's stand-alone credit
profile (SACP) weakens. This could stem from a change to the rules
regarding the distribution of Serie A media rights, which would
increase the sensitivity of MediaCo's revenue to on-pitch
performance, or if the existing sponsorship contracts are not
renewed on roughly similar terms. Although not expected, relegation
to the second division, due to poor pitch performance or adverse
decisions on financial fair play, would significantly impair both
media and sponsorship revenues and exacerbate credit pressure. This
would notably be the case if the team remained in the second
division for multiple years.
S&P said, "An upgrade is unlikely, notwithstanding the recent
improvement in short- to medium-term sponsorship contracts, because
we continue to perceive rising risks post refinancing in 2027,
after which we have very limited contractual cashflow visibility."
An upgrade would require greater visibility on long-term cash flow,
supported by contracted revenue, since it would likely strengthen
TeamCo's liquidity and credit quality as well as MediaCo's
resiliency and refinancing risk.
===================
L U X E M B O U R G
===================
SK NEPTUNE: S&P Lowers LongTerm Issuer Credit Rating to 'CCC+'
--------------------------------------------------------------
S&P Global Ratings lowered its long-term issuer credit rating on
Luxembourg-based pigments manufacturer Heubach to 'CCC+' from 'B-'.
At the same time, S&P lowered its issue rating on its $610 million
term loan B (TLB) due in 2029 and the revolving credit facility
(RCF) to 'CCC+' from 'B-'. The '3' recovery rating remains
unchanged, indicating S&P's expectation of meaningful (50%-70%;
rounded estimate: 60%) recovery in the event of a default.
The negative outlook reflects that the company could face liquidity
constraints over the next 12 months if recovery in its key end
markets is delayed or integration and restructuring costs remain
elevated, which would constrain cash flows and lead to a liquidity
shortfall.
Heubach's earnings have been weaker-than-expected over the last
year due to challenging economic conditions and high exceptional
costs from its acquired majority stake in Clariant AG's pigments
business.
S&P said, "We expect the company will generate negative S&P Global
Ratings-adjusted EBITDA in 2023. Along with the high interest
burden, this will lead to tighter liquidity and covenant cushion
over the next quarters, jeopardizing Heubach's ability to further
draw on its revolving credit facility (RCF). This led us to revise
our liquidity assessment to less than adequate.
"The downgrade reflects our expectation that adjusted EBITDA will
remain negative in 2023, resulting in an unsustainable capital
structure. The weakening in Heubach's credit metrics is largely due
to a combination of two factors: the downturn in the pigments
industry, which started in the second half of 2022 as a result of
stagnant demand and customer destocking; and cost disadvantages
given its mostly Europe-based production footprint. These effects
led to a deterioration in the company's operating rates and
margins.
"In this environment, we forecast the adjusted EBITDA to remain
negative in 2023, resulting in an unsustainable capital structure.
This is due to the pronounced downturn in the company's important
end markets--such as coatings and plastics--that are cyclical and
dependent on general macroeconomic conditions. We assume demand
will moderately strengthen in 2024, since most customers now have
low inventories, but we see uncertainty around the pace and timing
of the recovery. As such, we forecast our adjusted debt to EBITDA
to improve but remain very high at about 12.0x in 2024."
High exceptional costs will continue to weigh on Heubach's credit
metrics in 2023. High costs related to integrating Clariant's
pigments business have weighed on performance and the related
synergy realization has been delayed in the current challenging
market environment. S&P said, "Our adjusted EBITDA excludes
adjustments for items that the company classifies as exceptional,
such as stand up and restructuring costs, which we estimate at
EUR75 million-EUR80 million in 2023, down from EUR158 million in
2022. The high exceptional items reflect the complex carve-out of
Clariant's pigments business and its integration with Heubach, and
include stand up costs and costs related to synergy realization. We
expect these costs to reduce to about EUR10 million in 2024,
underpinning the improvement in profitability. While our estimation
of EBITDA is uncertain due to the volatile inventory revaluation
gains or losses included in the company's gross profit, we forecast
that it will improve to EUR50 million-EUR60 million in 2024, from
negative EUR45 million in 2023. In our management and governance
assessment we negatively reflect the large number of adjustments in
financial metrics, as well as the timeliness and transparency of
information provided to investors."
Heubach's mostly Europe-based production footprint leads to a cost
disadvantage for its commoditized products. Products that display a
low degree of differentiation, such as the traditional azo and
phthalocyanine pigments, face intensifying competition from
low-cost producers in China and India that have a lower cost base
and are less exposed to still-high energy prices. While the company
is relocating some of its production lines to lower-cost
jurisdictions such as India and Mexico, higher costs and a higher
degree of competition will continue to soften the pricing
capability of western producers, including Heubach. While Heubach
has a diversified and global asset base, its operational footprint
is skewed toward Europe, with its sites in Hochst and Langelscheim
accounting for over 50% of the total production capacity.
S&P said, "Even so, we think that products produced in
Langelscheim--such as anti-corrosives and preparations--for which
Heubach mostly competes with Western producers, the company's
European operations are efficient. In our view, this is evidenced
by the more resilient performance of preparations in 2023. We
consider these products as more defensive due to Heubach's product
quality and technological capabilities, allowing the company to
provide custom-made solutions to customers, along with a global
production network, which offers supply chain resilience and
underpins customer loyalty."
S&P's base case points to further tightening covenant headroom on
the RCF from third-quarter 2023, thereby pressuring liquidity. At
the end of second-quarter 2023, the company reported its net
leverage ratio for covenant calculations increased to 5.8x from
4.0x in the first quarter. Under its senior facility agreement,
Heubach is subject to a springing financial covenant of 6.3x,
tested when drawings on the RCF exceed 35%. When triggered, the net
leverage test occurs each quarter. Consolidated EBITDA, as per the
covenants definition, includes add-backs for integration costs,
transition costs, and run-rate cost savings, among others.
Heubach's financial performance in first-half 2022 was
comparatively strong, with EBITDA before exceptional items at
EUR65.3 million in the six months to June 2022. The sequential
weakening from third-quarter 2022 led to increasingly higher
leverage, with trailing 12-month EBITDA before exceptional items
declining to EUR20.5 million in the period ending June 2023. Still,
the third-quarter 2022 EBITDA before exceptional items represents
more than 50% of the trailing 12-month EBITDA (before pro forma
adjustments). S&P forecasts that the third quarter of 2023 will be
considerably weaker year on year, leading to further tightening
under the springing covenant.
S&P said, "Given the tight covenant headroom, we do not include the
availability of the RCF beyond the 35% level in liquidity sources.
For the next 12 months, we estimate that the company's liquidity
sources will exceed uses by about 1.2x thanks to significant
working capital inflows. In addition to the covenant pressure, we
anticipate the company would be unable to bear a low-probability
adversity, even after factoring in the minimum capital expenditure
(capex). As a result, we revised our liquidity assessment to less
than adequate from adequate.
"The long-dated maturity profile and minimal capex currently
support the rating. Management is controlling its capex, which we
forecast will decline to a minimum of about EUR20 million, or 2% of
sales, in 2023. This is alongside implementing additional cost
controls to safeguard earnings, from which it expects to achieve
total savings of EUR60 million-EUR80 million (including
approximately EUR25 million already realized) by 2024. Moreover,
the debt amortization schedule is modest, with the $610 million TLB
amortizing at 1% per year. However, cash uses--including cash
interest expense, normalized capex, and working capital needs to
fund future growth--are structurally high and the business is
dependent on improving demand and its operating performance to
continue meeting its obligations."
The negative outlook reflects that the company could face liquidity
constraints over the next 12 months if recovery in its key end
markets is delayed or integration and restructuring costs remain
elevated, which would constrain cash flows and lead to a liquidity
shortfall.
S&P could lower its ratings if it believes a default is likely
within the next 12 months. This could occur if:
-- Operating performance remains subdued, leading to low operating
rates and margins and a cash flow shortfall.
-- The company's liquidity position deteriorates further and the
availability under its RCF remains restricted due to a potential
covenant violation, such that we no longer believe the company has
sufficient liquidity to fund its operations over a 12-month
period.
-- The company fails to secure additional sources of liquidity on
a timely basis, if needed.
S&P believes there is an increased likelihood that the company will
engage in a distressed restructuring.
S&P could revise the outlook to stable if the company's liquidity
position improves through sustainable free cash flow generation due
to lower exceptional costs and normalized demand, or improved
covenant headroom.
=========
S P A I N
=========
PROPULSION (BC) FINCO: Moody's Affirms 'B2' CFR, Outlook Stable
---------------------------------------------------------------
Moody's Investors Service has affirmed the B2 long-term corporate
family rating and the B2-PD probability of default rating of
Propulsion (BC) Finco S.a r.l. ("ITP Aero" or "the company"), the
parent company of the Spanish supplier of aero engine modules ITP
Aero. Moody's has also affirmed the B2 instrument rating on the
senior secured bank credit facilities. The company intends to
upsize the senior secured term loan by proposed $200 million to
$866.7 million and the senior secured revolving credit facility
(RCF) by proposed $37.5 million to $153.5 million. The rating
outlook remains stable.
Proceeds from the add-on will be used to acquire BP Aerospace, a
US-based provider of engine maintenance, repair and overhaul (MRO)
services, as well as to cover related fees and expenses and fund
additional near-term growth opportunities.
RATINGS RATIONALE
Since the rating assignment in February 2022, the company managed
to improve its credit metrics benefitting from the strong
post-pandemic growth in earnings. In the last 12 months ended June
2023, ITP Aero's revenue and Moody's adjusted EBITDA increased by
56% and 46%, respectively, compared to 2021. Prior to the announced
acquisition of BP Aerospace, Moody's estimate ITP Aero's gross
leverage (Moody's adjusted) to be approximately 4.5x, which
positioned it strongly in the B2 rating category. However, the
additional debt incurred through the acquisition will increase
leverage towards 5.5x and will weaken the relative rating position,
though will also enhance its business profile. The newly acquired
company will expand ITP Aero's MRO's capabilities and extend its
regional footprint into the large US market. While its current MRO
activities are primarily defense-based, the acquisition would
broaden its scope into commercial aviation with a special focus on
the CFM56 engine platform. This engine, powering popular
single-aisle commercial jets like the Boeing 737 and Airbus A320,
is the most widely used in the world.
Moody's expect that ITP Aero will continue to experience strong
topline and earnings growth in the coming years as market
fundamentals across commercial and defense aviation remain
positive. Organic growth in line with the industry would facilitate
further deleveraging, along with positive Free Cash Flow (FCF)
generation and liquidity improvement. However, Moody's expect the
company to continue pursuing debt-funded acquisitions to fuel its
international expansion and increase in scope and scale. This
strategy is likely to consume any rating headroom that may be
created over time. Evidence of a more conservative growth strategy,
coupled with improvements in business profile and credit metrics,
could exert upward pressure on the rating.
The rating is mainly supported by (1) the company's tier one aero
engine supplier position for complete engine modules; (2) its good
engine programme diversification with most engine programmes at the
sweet spot of their programme life; (3) the diversification into
defense engine programmes and MRO activities (around 25% of group
revenue); (4) fundamentally supportive market outlook for
commercial and defense aviation; and (5) the profitable and cash
flow generative nature of ITP Aero's business model.
However, the rating is constrained by (1) its concentration on
Rolls Royce plc and wide body engine platforms (over half of group
revenue), which recover from the pandemic slower than narrow body
engine platforms; (2) its limited reporting track record as a
stand-alone entity; (3) complex organizational structure with third
party investors holding preferred equity outside of the restricted
group as well as the equity being held by Spanish private or public
investors through a Basque holding company located within the
restricted group; and (4) event risk related to further debt-funded
acquisitions and mostly private equity ownership with Bain Capital
holding c. 80% of the equity capital.
Governance considerations are important considerations in the
rating action. The recent debt-funded acquisition is an evidence of
the company's financial strategy that is tolerant of operating with
relatively high leverage, though leverage remains lower than at
time of the LBO. Furthermore, its ownership structure with the vast
majority of shares being held by the private equity company Bain
Capital has a greater propensity to favor shareholders over
creditors.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that ITP Aero will
continue benefiting from the favorable market conditions over the
next 12 to 18 months supported by a strong post-pandemic recovery
in the aerospace and defense industry. After the initial
re-leveraging post BP Aerospace acquisition Moody's expect the
company's credit metrics to become strong fairly quickly given the
anticipated rapid earnings growth. However, Moody's expect the
created headroom to be largely used for further debt-funded
acquisitions. The stable outlook is conditional upon the company
maintaining an adequate liquidity profile in light of its growth
aspiration.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure could arise if:
-- Further improvement of the business profile;
-- Moody's adjusted gross debt/ EBITDA sustained below 4.5x;
-- Sustainably positive FCF generation with FCF/ debt around
mid-single digit;
-- Good liquidity.
Conversely, negative rating pressure could arise if:
-- Moody's adjusted gross debt/ EBITDA sustained above 5.5x;
-- Moody's adjusted EBIT/ Interest sustained below 1.5x;
-- Liquidity position materially deteriorates as a result of
negative FCF, shareholder remuneration or M&A.
LIQUIDITY
The liquidity position of Propulsion (BC) Finco S.a r.l. will be
solid at closing of the transaction. Considering the overfunding,
its pro forma cash position as of June 2023 would be EUR280
million. The company will also have access to the upsized fully
undrawn $153.5 million senior secured revolving credit facility
maturing in September 2027. Furthermore, additional EUR100 million
unsecured bilateral facilities have been arranged recently in order
to create sufficient resources to fund future organic and inorganic
growth opportunities. Moody's expect ITP Aero to generate positive
free cash flow over the next 12-18 months that will further improve
its liquidity position.
The RCF contains a springing covenant set at 7.5x senior secured
net leverage ratio (1.49x in H1 2023) tested when more than 40% of
the facility is drawn.
STRUCTURAL CONSIDERATION
The instrument ratings on the senior secured term loan and senior
secured revolving credit facility is in line with the B2 corporate
family rating reflecting the absence of other structurally senior
or junior debt instruments within the restricted group. Despite the
capital structure of Propulsion (BC) Finco S.a r.l. being solely
composed of bank debt Moody's have assumed a 50% recovery rate at
the corporate family level due to the loose financial covenant
package.
The capital structure also includes EUR375 million of preferred
equity outside of the restricted group, which since issuance
increased to EUR422 million including PIK interest. Moody's do not
include it in debt and leverage calculations. However, its
existence implies an additional risk of potential cash leakage over
time.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Aerospace and
Defense published in October 2021.
COMPANY PROFILE
Propulsion (BC) Finco S.a r.l. is the parent company of ITP Aero.
Headquartered in Zamudio, Spain, ITP Aero is a tier 1 supplier of
aero engine modules and he ninth largest aeronautical engine and
components company in the world. Established in 1989, ITP Aero
operated as a wholly-owned subsidiary of Rolls-Royce plc (Ba2
positive) since 2017 before being acquired by Bain Capital in
September 2021. In the last twelve month ended June 2023, ITP Aero
generated approximately EUR1.2 billion of revenue and employed
around 4,900 people.
===========================
U N I T E D K I N G D O M
===========================
ARTHUR MIDCO: Moody's Assigns First Time 'B2' Corp. Family Rating
-----------------------------------------------------------------
Moody's Investors Service has assigned a first-time B2 corporate
family rating and a B2-PD probability of default rating to Arthur
Midco Limited (A-Gas or the company). Concurrently, Moody's has
assigned B2 ratings to the proposed $520 million senior secured
term loan B borrowed by Arthur US Finco, Inc. and the proposed $60
million senior secured revolving credit facility (RCF) co-borrowed
by Arthur Bidco Limited and Arthur US Finco, Inc. The outlook is
stable for Arthur Midco Limited, Arthur Bidco Limited and Arthur US
Finco, Inc.
The proceeds, alongside equity financing, will be used to finance
the acquisition of a controlling stake in A-Gas by TPG from KKR &
Co. Inc. (KKR). After the transaction concludes, KKR will maintain
a minority stake.
RATINGS RATIONALE
A-Gas B2 CFR is supported by (i) the company's leading position in
the lifecycle management of refrigerant gases, especially in the
areas of recovery and reclaim; (ii) the currently supportive
regulatory environment, with significant Hydrofluorocarbons (HFC)
quota step-downs in the US, EU and UK taking place in 2024 which
will benefit reclaimers of refrigerated gases; (iii) the
significant and continuously increasing separation capacity and the
established recovery and reclaim infrastructure network in the
major markets where it operates; and (iv) its good profitability
relative to other rated distributors of chemical goods.
Conversely, the CFR is constrained by (i) the company's moderately
high Moody's-adjusted opening leverage of 5.8x as of the last
twelve months (LTM) ending in June 2023, with Moody's expecting it
to reach 5.1x by year-end 2023; (ii) limited scale and significant
geographical concentration in the US; (iii) its product focus in
refrigerant gases, a commoditised end product within a competitive
and fragmented market; (iv) significant supplier concentration,
with an individual supplier accounting for more than 40% of A-Gas'
procurement of virgin gases; and (v) low cash balance post-closing
as a result of the company's investment in separation capacity,
which will limit flexibility during the first two quarters of
2024.
Governance considerations, which include the company's financial
policy, concentrated ownership and lack of independent board
members, were key drivers of the rating action.
A-Gas is a distributor of refrigerant gases to more than 2,500
customers across the US, EU, UK, South Africa and Australia, among
others. The company's competitive position benefits from its
established infrastructure with significant capacity, extensive
network and value proposition to customers for the recovery of used
refrigerant gases that A-Gas then processes, separates, purifies
and sells again to the market alongside re-packed virgin gas.
Reclaimed gas is expected to be a fast growing segment, and since
it has a differentiated and harder to replicate operating model,
A-Gas and other reclaimers tend to generate better operating
margins than distributors of virgin gas. The current regulatory
environment is also supportive of recovery and reclaim, as the
supply of refrigerant gases is heavily regulated in several
jurisdictions due to their environmental impact. In 2024, there
will be significant quota step-downs for virgin HFC supply in the
EU, UK and the US which will create a supply imbalance relative to
existing demand. Moody's considers that this will create an
attractive opportunity for A-Gas and other reclaimers since quotas
do not restrict the supply of reclaimed gas.
A-Gas has significantly invested in increasing in separation and
processing capacity over the last ten years and will continue to do
so over the next 12 to 18 months. Moody's view this as an
additional growth opportunity for the company given its presence in
the US voluntary market for carbon credits. These are driven by
offset volumes from high-GWP (Global Warming Potential) HFC
reclamation, although it is unclear how the offset eligibility will
evolve as the HFC quotas continue to significantly step down.
Moody's estimates that Moody's-adjusted Debt/EBITDA and
EBITA/Interest expense as of LTM June 2023 proforma for this
transaction are respectively approximately 5.8x and 1.5x, and
expects them to reach 5.1x and 1.7x at the end of 2023,
respectively. Additionally, Moody's forecasts that these ratios
will improve respectively to below 4.5x and approximately 2.0x by
the end of 2024 as a result of the more favourable regulatory
environment and the demand gap for HFCs. The rating agency also
expects that free cash flow will be positive in 2024 despite the
continuous investment in separation capacity.
ESG CONSIDERATIONS
A-Gas CIS-4 indicates that ESG considerations have a discernible
impact on the current rating, which is lower than it would have
been if ESG risks did not exist. The negative impact of ESG
considerations on the rating is higher than for an issuer scored
CIS-3. This mostly reflects exposure to governance risks stemming
from the company's tolerance for financial risk, concentrated
ownership and lack of independent board members which resulted in a
G-4 Issuer Profile Score (IPS).
LIQUIDITY
A-Gas' liquidity is adequate. Although the cash balance is expected
to be substantially below historical levels by the end of 2023,
Moody's views the undrawn $60 million RCF as sufficient to meet
working capital seasonality during the first quarters of 2024.
Additionally, the rating agency forecasts free cash flow generation
to be positive over the next 12 to 18 months, which will improve
the company's liquidity profile by the end of 2024. Provided the
term loan is successfully placed as planned, the company will have
long-dated maturities, with the $520 million senior secured term
loan B maturing in 2030 and the $60 million RCF maturing in 2028.
The debt structure includes a springing senior secured net leverage
covenant set at 8.75x, tested if the RCF is drawn by more than
35%.
STRUCTURAL CONSIDERATIONS
The $520 million senior secured term loan B and the $60 million RCF
are rated B2, in line with the B2 CFR and reflecting both their
pari passu ranking and the absence of any significant liabilities
ranking ahead or behind them. The debt instruments share the same
security package and are guaranteed by a group of companies
representing more than 100% of the consolidated group's EBITDA on
day one.
COVENANTS
Moody's has reviewed the marketing draft terms for the new credit
facilities. Notable terms include the following:
Guarantees will be provided by all US restricted subsidiaries and
by wholly-owned subsidiaries in the Cayman, England and Wales,
Australia and Germany so that there is guarantor coverage of at
least 80% of the EBITDA generated in those jurisdictions,
calculated excluding companies representing less than 10% of group
EBITDA. US subsidiary guarantors will grant all assets security,
guarantors incorporated in England and Wales will grant fixed and
floating charge security, and guarantors incorporated in Cayman
will grant security over material shares, bank and accounts and
intercompany receivables; no security will be granted in any other
jurisdiction.
Incremental facilities are permitted up to the greater of $110
million (increasing by the same percentage as consolidated EBITDA),
and additional indebtedness can be incurred (either as an
incremental facility or separately) as follows: $27.5 million
(increasing by the same percentage as consolidated EBITDA) plus an
unlimited amount of pari passu secured debt up to a consolidated
first lien leverage ratio of 5.0x, an unlimited amount of junior
secured debt up to a consolidated secured leverage ratio of 5.50x
or a fixed charge cover ratio (FCCR) of 2.0x, and an unlimited
amount of unsecured debt up to a consolidated total net leverage
ratio of 6.0x or a fixed charge cover ratio of 2.0x.
Any restricted payments are permitted if total leverage is 4.0x or
lower. Asset sale proceeds are only required to be applied in full
(subject to exceptions) where total leverage is 4.50x or greater.
Adjustments to consolidated EBITDA include the full run rate of
cost savings and synergies, on an uncapped basis and with no
requirement that the savings be expected to be realised within a
specified time.
The proposed terms, and the final terms may be materially
different.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that A-Gas will
continue to significantly increase its revenue in 2023 and 2024
while improving its profitability. This will enable the company to
improve its EBITA/Interest Expense ratio to approximately 2.0x and
generate materially positive free cash flow in 2024.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if the company (i) increases
significantly its scale and geographical diversification; and (ii)
Moody's-adjusted Debt/EBITDA is sustainably below 4x; and (iii)
Moody's-adjusted EBITA/Interest Expense is above 3x; and (iv)
significantly increases the volumes of reclaimed HFC and these
continue to granted voluntary carbon offset status; and (v)
generates positive free cash flow generation; and (vi) improves
liquidity from current levels.
Conversely, the ratings could be downgraded if (i) operating
performance fails to improve from current levels, resulting in
Moody's-adjusted Debt/EBITDA substantially higher than 5.0x; or
(ii) Moody's-adjusted EBITA/Interest Expenses falls sustainably
below 1.75x; or (iii) free cash flow stays negative beyond 2023; or
(iv) volumes of reclaimed HFC no longer meet the eligibility
criteria for voluntary carbon offsets; or (v) liquidity
deteriorates; or (vi) the company undertakes debt-financed
acquisitions or distributions to shareholders.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Distribution
and Supply Chain Services published in February 2023.
COMPANY PROFILE
Headquartered in the UK, A-Gas is a leading distributor of
refrigerant gases with a focus on the US market. Alongside
providing re-packed virgin gas to the market, the company has a
large presence in the recovery and reclaim of previously used
high-GWP refrigerant gases which are exempt of regulatory quotas.
Additionally A-Gas is also able to generate carbon credits driven
by offset volumes from high-GWP HFC reclamation, which it places on
the US voluntary carbon credits market. In August 2023, TPG agreed
to acquire a controlling stake in A-Gas from KKR, with KKR
remaining a minority shareholder. In 2022 the company generated
revenue of GBP319 million and Company-reported EBITDA of GBP69
million.
ARTHUR MIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable
-------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B' ratings to
U.K.-headquartered A-Gas intermediate parent company Arthur Midco
Ltd. and to the proposed $520 million term loan B (TLB); the
proposed TLB has a preliminary recovery rating of '3'.
S&P said, "The stable outlook indicates our assumption that A-Gas'
earnings are likely to improve in 2023, on strong growth in the
reclaim product and services, which in turn underpins margin
expansion. We anticipate that, although higher gross debt will
weigh on S&P Global Ratings-adjusted debt to EBITDA, the ratio will
remain strong for the rating, at 5.0x-5.3x in 2023."
Private equity firm TPG is acquiring a controlling stake in
U.K.-headquartered A-Gas, a company involved in the supply and
lifecycle management of refrigerants and associated products. As
part of this transaction, A-Gas plans to raise a new term loan B
(TLB) and revolving credit facility (RCF).
A-Gas plans to issue debt as part of private equity firm TPG's
agreement to acquire a controlling stake in the company. The
planned issuances comprise a seven-year senior secured TLB of $520
million and a $60 million RCF that will rank pari passu to the
proposed TLB. The proceeds will be used to fund the buyout, pay the
transaction fees, and repay the existing secured loans of about
£260 million. There is no rolled-over debt in the capital
structure, save for about £23 million of lease liabilities.
S&P assumes A-Gas will generate high profitability thanks to its
leading market position in a specialized industry. The company
holds top market positions in the specialized and niche gas
reclamation market, where technical know-how, service, and
proximity to customers are key. The good technical capabilities in
the gas separation process allow the company to run its operations
efficiently--which we note in the high yields of 95% from recovered
gases--and helps it to generate high profitability. The company's
EBITDA margin tends to stay at 18%-22%, and we anticipate
improvements over the rest of 2023 and in 2024, benefiting from
higher proportion of revenue from the company's circular economy
segment, which includes reclaim products, services and the sale of
carbon credits that are produced during the normal course of the
gas reclamation process.
In addition, the company's investments in infrastructure, which
includes warehouses, fleet, cylinders, and separation towers, over
the years enables A-Gas to provide broad service offerings to its
customers. For example, its deployed cylinder fleet acts as a
benefit to customers, in S&P's view, thanks to the effort required
to manage and maintain a cylinder fleet, which is often not core to
their operations, leading to more resilient earnings. Moreover, its
dense network and proprietary recovery equipment allows the company
to recover gases faster than competitors and at a lower cost.
A-Gas' business model enables the company to benefit from the
supportive regulatory environment. Refrigerant gases are heavily
regulated due to their contribution to ozone depletion (in the case
of older generation gases) and climate change. International and
local regulations, such as the Fluorinated gas (F gas) regulation
in Europe and the American Innovation in Manufacturing Act in the
U.S., aim to reduce their use over time. These laws impose a
restriction on supply, while demand for older generation gases is
more resilient due to the long lifespan of installed equipment,
which requires servicing. The supply-demand imbalance is bridged
through reclaimed gases that are not subject to quotas. A-Gas'
strategy includes investments in increasing its separation capacity
(mainly in the EU and the U.S.). Benefits materialized as early as
in 2022, when the company's revenue from the sale of reclaimed
gases and services nearly doubled from the 2020 level.
S&P said, "We regard A-Gas' scale and narrow product focus as the
main rating constraint. The company is a comparatively small
distributor of refrigerants and industrial gases, fire
suppressants, and blowing agents. It is also involved in the
lifecycle management through recovery, separation and destruction
technologies. In 2022 it generated revenues of about £319 million.
While we expect a pronounced increase in sales in 2023 and 2024,
the company is markedly smaller than other rated peers. We expect
no major change to A-Gas' product range, which we deem as
narrow--making the company's credit metrics more sensitive to
underperformance compared with larger and more diversified industry
peers.
"We forecast S&P Global Ratings-adjusted leverage of 5.0x-5.3x on
the closing of the transaction, then moderating to 4.0x-4.5x in
2024. We base these ratios on our estimates of an adjusted EBITDA
margin improving to about 23% in 2023 and 24%-25% in 2024. We also
forecast that the company will generate moderately positive free
operating cash flow (FOCF) in 2023, primarily due to significant
growth capital expenditure (capex) amounting to 8%-9% of sales.
This capex will be linked to the company's investments in its
separation capacity, mainly in the U.S. We expect that capex will
gradually normalize, reducing to 5% of sales in 2025, as the
group's investment cycle is completed. We also consider A-Gas'
lower working capital requirements, in line with the shift of the
product mix toward reclaimed gas. This then leads to less cash tied
in working capital and supports the company's credit quality.
"A-Gas' elevated cash uses and limited track record of maintaining
adjusted leverage below 5.0x constrain rating upside. While we
forecast that the company's leverage metrics will improve to
4.0x-4.5x in 2024, we expect the company will continue to allocate
capital to growth initiatives, in line with its strategy. For
example, the company has been investing in the construction of five
new separators in the U.S. and the Netherlands, as well as
associated upgrades. These works have caused elevated capital
outflows since 2022. We forecast capex will climb further, peaking
at approximately 8% of sales by 2024, from £12 million in 2021.
Therefore, we project FOCF to debt will improve only modestly to up
to 1% in 2023 and 4%-5% in 2024, from negative 3% in 2022.
"We also believe that financial-sponsor ownership limits the
potential for leverage reduction over the coming year. Although we
do not deduct cash from debt in our calculation, owing to A-Gas'
private-equity ownership, we expect that cash on balance sheet,
along with free cash generation could be used to fund bolt-on
mergers and acquisitions (M&A) or shareholder remuneration. In
addition, we think the company might use the rating headroom to
pursue growth, including debt-funded acquisitions. As a result, we
assess the financial profile as highly leveraged. In the near- to
medium-term, the financial sponsor's commitment to maintaining
financial leverage sustainably well below 5.0x, teamed with
consistently strong positive FOCF, would be necessary for use to
consider a higher rating.
"The final ratings will depend on our receipt and satisfactory
review of all final documentation and final terms of the
transaction. The preliminary ratings should therefore not be
construed as evidence of the final ratings. If we do not receive
the final documentation within a reasonable time, or if the final
documentation and terms of the transaction depart from the
materials and terms reviewed, we reserve the right to withdraw or
revise the ratings. Potential changes include, but are not limited
to, changes in the acquisition's perimeter, utilization of the
proceeds, maturity, size and conditions of the facilities,
financial and other covenants, security, and ranking.
"The stable outlook indicates that A-Gas' earnings are likely to
improve in 2023, due to strong growth in the reclaim product and
services, which in turn underpins margin expansion. In our
base-case scenario, we anticipate that S&P Global Ratings-adjusted
debt to EBITDA will increase thanks to higher gross debt but will
remain strong for the rating at 5.0x-5.3x in 2023. We view this as
healthy, since we consider adjusted leverage of to be commensurate
with our 'B' rating."
Downside scenario
S&P could downgrade A-Gas if a less-than-supportive market
environment hampers demand and prices for the company's products.
This could occur, for example, if refrigerant gas prices faced
pressure from the release of accumulated stockpile of virgin gases
in the U.S., leading to lower profitability and negative FOCF. S&P
could also lower the rating if:
-- Adjusted debt to EBITDA surpassed 6.0x without near-term
prospects of recovery;
-- A-Gas and its sponsors were to adopt a more aggressive
financial policy with regards to leverage or shareholder returns.
Upside scenario
S&P could consider an upgrade if the adjusted debt-to-EBITDA ratio
reduces to, and stays, well below 5x while the company maintains
strong FOCF. An upgrade would also hinge on a supportive financial
policy and strong public commitment from management and financial
sponsors to maintaining credit metrics at these levels.
S&P said, "Governance factors are a moderately negative
consideration in our credit rating analysis of A-Gas, as is the
case for most rated entities owned by private-equity sponsors. We
believe the company's highly leveraged financial risk profile
points to corporate decision-making that prioritizes the interests
of the controlling owners. This also reflects generally finite
holding periods and a focus on maximizing shareholder returns.
"Environmental factors have a moderately negative influence on our
rating analysis for A-Gas. In our ratings, we factor in the
benefits provided from its gas reclamation business, including the
sale of reclaim products and services through revenue growth and
margin expansion. At the same time, we consider the nature of the
company's products that are sensitive to handle and heavily
regulated, along with long-term risks stemming from potential
changes in the regulatory framework--for example any changes in the
methodology of U.S. carbon offset generation from HFC gas
reclamation beyond 2025--or the emissions generated in the
application of high global warming potential gases, which is
particularly relevant for A-Gas' distribution business."
About 50% of the company's revenue stems from lifecycle management
and recycling of gases that prevent their loss to the atmosphere.
Regulations in key markets, such as Europe or the U.S., require the
reduction of high global warming potential virgin gas supply. S&P
expects regulations to continue supporting A-Gas' long-term growth
prospects. Operationally, the company uses energy in its separation
process and water in its cleaning process. The group aims to use
renewable energy where possible and target carbon neutrality by
2035 and committed to reduce its scope 1 and scope 2 emissions 50%
within five years, relative to a 2020 baseline.
NOVALOANS LTD: Goes Into Administration, Halts Operations
---------------------------------------------------------
Miran Rahman at TheBusinessDesk.com reports that administrators
have been appointed for lending business Novaloans Ltd (trading as
Cash4UNow).
Mike Kienlen and Daryl Warwick, of Armstrong Watson LLP, have been
confirmed as joint administrators of the Leeds-based firm and they
have instructed Credit Resource Solutions Ltd -- trading as COEO --
to collect all outstanding loans, TheBusinessDesk.com relates.
According to TheBusinessDesk.com, an update published on the
Financial Conduct Authority website states: "The firm is no longer
lending. However, all existing loan agreements remain in place and
the joint administrators will update customers as soon as
possible.
"The firm's administration doesn't change the payment terms and
conditions of customers' loans, these are the same as when the loan
was taken out. The firm remains subject to the same regulatory
rules and requirements as it did before its administration.
"Customers should continue to make repayments as normal. Failure
to do so could affect your credit records. Any payment
arrangements currently in place won't be affected.
"Novaloans Ltd's customers won't be covered by the Financial
Services Compensation Scheme (FSCS) as consumer credit lenders
aren't covered by the scheme."
Novaloans, a family-run business founded in 2011, employed 38
people according to its total exemption full accounts made up to
May 31, 2022. Its offices are at Limewood Business Park, in
Seacroft.
THESSCO LTD: Enters Administration, Halts Operations
----------------------------------------------------
Business Sale reports that Thessco Ltd, a Sheffield-based
manufacturer of precious metal alloys, has fallen into
administration and ceased trading.
According to Business Sale, following their appointment,
administrators will seek buyers for the company's plant and
machinery.
Thessco, which can trace its history as far back as 1760, was one
of the largest manufacturers of metal joining products, silver
brazing alloys and industrial silver alloys in the world. The
company employed 47 staff, with all jobs expected to be lost
following the appointment of administrators, and had its head
office and production site at Sheffield Royds Mills, Business Sale
relates.
During the year ending December 31, 2021, the company reported
turnover of GBP31.6 million, up from GBP22.3 million a year earlier
and a pre-tax profit of GBP141,601, compared to a GBP204,376 loss
the previous year, Business Sale states. At the time, its fixed
assets were valued at around GBP5.6 million and current assets at
GBP7.5 million, while total equity amounted to GBP4.5 million
Business Sale notes.
Following the appointment of administrators, Thessco's directors
attributed its collapse to a range of factors that arose "following
a year of turbulent market forces", including soaring energy
prices, a significant increase in finance costs and rising raw
materials costs, Business Sale discloses.
Joanne Hammond and Kris Wigfield of Begbies Traynor were appointed
as joint administrators to Thessco Ltd on October 26, 2023,
Business Sale relays.
WASPS: May Establish Permanent Home in Kent Amid Funding Woes
-------------------------------------------------------------
RTE News reports that former Premiership giants Wasps have
announced their intention to explore the possibility of
establishing a permanent home in the southeastern county of Kent.
The club, who were removed from the Premiership last year after
falling into administration, say they are "actively engaged" with
Sevenoaks District Council to identify a suitable location,
RTE News recounts.
In the short term Wasps plan to begin their revival by playing and
training at Sixways, the home of Worcester Warriors, another of the
three clubs, along with London Irish, who failed to start the
2022/3 season, RTE News discloses.
According to RTE News, Wasps said in a statement: "Having faced
significant challenges with regulation and funding, the club has
persisted with its determination to revive Wasps at the highest
possible level.
"As the development progresses through its planning stages, Wasps
will be actively exploring temporary facilities to underpin its
operations in Kent.
"Whilst determined to establish a base in the southeast of England,
the club has also agreed an option of utilising Worcester Warriors'
Sixways ground for both training and playing purposes, without in
any way replacing Worcester Warriors RFC and indeed committed to
assisting their return to competitive rugby."
[*] UK: Scottish Corporate Insolvencies Up 19.9% in 2nd Qtr 2023
----------------------------------------------------------------
Peter A Walker at insider.co.uk reports that corporate insolvencies
in Scotland rose 19.9% during the second quarter, when compared to
pre-pandemic levels in 2019 and rose by 4.8% compared to the same
period last year.
The latest data from Accountant in Bankruptcy, the Scottish
Government's insolvency service, also revealed that the number of
liquidations and receiverships in the second quarter decreased by
3.1% compared with the previous quarter's total of 292,
insider.co.uk discloses.
According to insider.co.uk, Iain Fraser, chair of the Scottish
Technical Committee at R3, the UK's insolvency and restructuring
trade body, said: "The year-on-year rise in corporate insolvencies
has been driven by an almost 35% rise in compulsory liquidations.
"This increase suggests that, faced with financial challenges of
their own, more and more creditors are now increasing their efforts
to pursue debts they are owed to meet their own financial
obligations.
"Times remain tough for Scottish businesses," he continued.
"Inflation is still a big worry for many, prices are going up, and
businesses are struggling to reasonably pass on these extra costs
to customers.
"Businesses have faced the dilemma of whether to increase prices to
compensate for their falling margins, or whether to absorb these
expenses themselves in an attempt to retain customers.
"For some, further increases could be enough to see them entering
an insolvency process to resolve their financial issues, while
others may hold on in the hope things will improve."
"Corporate insolvencies in Scotland rising by 4.8% on the same
period last year reflects what we are seeing in the market,"
insider.co.uk quotes David Alexander, head of debt recovery at
Gilson Gray, as saying.
"This will likely have a knock-on effect for the next six to twelve
months on the personal insolvency sector, when creditors who hold
personal guarantees against directors of struggling companies begin
to enforce them.
"With inflation stubbornly high and question marks over whether
interest rates will rise again before the end of the year,
conditions remain challenging for a lot of businesses."
===============
X X X X X X X X
===============
[*] BOOK REVIEW: TAKING CHARGE: Management Guide to Troubled
------------------------------------------------------------
TAKING CHARGE: Management Guide to Troubled Companies and
Turnarounds
Author: John O. Whitney
Publisher: Beard Books
Softcover: 283 Pages
List Price: $34.95
Order a copy today at:
http://beardbooks.com/beardbooks/taking_charge.html
Review by Susan Pannell
Remember when Lee Iacocca was practically a national hero? He won
celebrity status by taking charge at a company so universally known
as troubled that humor columnists joked their kids grew up thinking
the corporate name was "Ayling Chrysler." Whatever else Iacocca may
have been, he was a leader, and leadership is crucial to a
successful turnaround, maintains the author.
Mediagenic names merit only passing references in Whitney's book,
however. The author's own considerable experience as a turnaround
pro has given him more than sufficient perspective and acumen to
guide managers through successful turnarounds without resorting to
name-dropping. While Whitney states that he "share[s] no personal
war stories" in this book, it was, nonetheless, written from inside
the "shoes, skin, and skull of a turnaround leader." That sense of
immediacy, of urgency and intensity, makes Taking Charge compelling
reading even for the executive who feels he or she has already
mastered the literature of turnarounds.
Whitney divides the work into two parts. Part I is succinctly
entitled "Survival," and sets out the rules for taking charge
within the crucial first 120 days. "The leader rarely succeeds who
is not clearly in charge by the end of his fourth month," Whitney
notes. Cash budgeting, the mainstay of a successful turnaround, is
given attention in almost every chapter. Woe to the inexperienced
manager who views accounts receivable management as "an arcane
activity 'handled over in accounting.'" Whitney sets out 50
questions concerning AR that the leader must deal with -- not
academic exercises, but requirements for survival.
Other internal sources for cash, including judiciously managed
accounts payable and inventory, asset restructuring, and expense
cuts, are discussed. External sources of cash, among them banks,
asset lenders, and venture capital funds; factoring receivables;
and the use of trust receipts and field warehousing, are handled in
detail. Although cash, cash, and more cash is the drumbeat of Part
I, Whitney does not slight other subjects requiring attention. Two
chapters, for example, help the turnaround manager assess how the
company got into the mess in the first place, and develop
strategies for getting out of it.
The critical subject of cash continues to resonate throughout Part
II, "Profit and Growth," although here the turnaround leader
consolidates his gains and looks ahead as the turnaround matures.
New financial, new organizational, and new marketing arrangements
are laid out in detail. Whitney also provides a checklist for the
leader to use in brainstorming strategic options for the future.
Whitney's underlying theme -- that a successful business requires
personal leadership as well as bricks and mortar, money and
machinery -- is summed up in a concluding chapter that analyzes the
qualities that make a leader. His advice is as relevant in this
1999 reprint edition as it was in 1987 when first published.
*********
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 * * *