/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/231107.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 Tuesday, November 7, 2023, Vol. 24, No. 223 Headlines C Z E C H R E P U B L I C ENERGO-PRO AS: Fitch Assigns 'BB-' Rating on $300MM Unsec. Notes I R E L A N D PENTA CLO 15: Fitch Assigns 'B-(EXP)sf' Rating on Cl. F Notes WILTON PARK: S&P Assigns Prelim. B-(sf) Rating on Class F Notes L U X E M B O U R G BIRKENSTOCK FINANCING: Fitch Hikes IDR to 'BB', Outlook Stable SUNSHINE LUXEMBOURG VII: S&P Upgrades LT ICR to 'B', Outlook Stable M A L T A MULTITUDE BANK: Fitch Assigns 'B-(EXP)' Rating on Sub. Tier 2 Bonds R U S S I A KAFOLAT INSURANCE: Fitch Affirms 'B+' Insurer Financial Strength U N I T E D K I N G D O M 888 HOLDINGS: S&P Affirms 'B' ICR, Outlook Negative AMPHORA FINANCE: GBP301MM Bank Debt Trades at 55% Discount BOPARAN HOLDINGS: Fitch Alters Outlook on B- LongTerm IDR to Stable CASTELL PLC 2023-2: S&P Assigns Prelim. B Rating on Class X Notes CUBE HEALTHCARE: S&P Lowers ICR to 'B-' on Muted Performance DENTS OF CHESTERFIELD: Pharmacies Put Up for Sale After Collapse DIGNITY FINANCE: S&P Lowers Class A Notes Rating to 'B+(sf)' ENERGEAN PLC: Fitch Hikes LongTerm IDR to 'BB-', Outlook Stable ENERGEAN PLC: S&P Affirms 'B+' ICR & Alters Outlook to Negative PARAGON MORTGAGE 29: Fitch Assigns B+sf Final Rating on Cl. D Notes PEPCO GROUP: S&P Affirms 'BB-' ICR & Alters Outlook to Negative SAFESTYLE UK: Set to Be Put Into Liquidation SHAWBROOK MORTGAGE 2022-1: Fitch Hikes Rating on F Notes to 'B+sf' SIGNA: Rene Benko May Sell Selfridges to Raise Funds TALKTALK: Seeks to Raise Cash Amid Debt Pressure THAMES WATER: Plans to Cut 300 Jobs Amid Debt Woes - - - - - =========================== C Z E C H R E P U B L I C =========================== ENERGO-PRO AS: Fitch Assigns 'BB-' Rating on $300MM Unsec. Notes ---------------------------------------------------------------- Fitch Ratings has assigned ENERGO-PRO a.s.'s (EPas; BB-/Stable) USD300 million 11% notes due 2028 a final senior unsecured 'BB-'/'RR4' rating, in line with EPas's Long-Term Issuer Default Rating (IDR). The final rating of the notes reflects the bond's final terms. The proceeds will be used for the repayment of EPas's EUR300 million bridge facility, which financed the acquisition of a 100% stake in Xallas Electricidad y Aleaciones, S.A.U. and Feroe Ventures & Investments, S.L.U., and pay transaction-related expenses. The Stable Outlook on EPas's Long-Term IDR reflects its expectation that the rating has sufficient headroom to absorb the acquisition, which includes 10 hydro-power plants (HPPs) and two ferroalloy plants in Spain. Fitch forecasts the company's post-acquisition funds from operations (FFO) net leverage (adjusted for connection fees and guarantees) to remain below the negative sensitivity of 5.5x over 2023-2026, although with limited headroom from 2025. The 'BB-' Long-Term IDR is constrained by significantly higher cash flow volatility relative to other rated European utilities, foreign-exchange (FX) mismatch between revenue and debt, operating environment risk, and key-person risk from ultimate ownership by one individual. Rating strengths are the high, although decreasing, share of regulated activities, supportive regulatory regimes for networks in Georgia and Bulgaria, and some geographic and business diversification. KEY RATING DRIVERS Final Notes Terms: The notes constitute direct, unconditional, unsubordinated and unsecured obligations of EPas and rank pari passu among themselves and equally with all its other unsecured obligations. The notes are fully, unconditionally and irrevocably guaranteed by seven operating companies within the EPas group, which covered around 80% of consolidated EBITDA in 2022. Spanish Acquisition Broadly Neutral: The acquisition will negatively affect EPas's share of regulated and quasi-regulated EBITDA, which had already gradually declined to 58% in 1H23 from 89% in 2017. Positively, EPas's profile will benefit from better geographical diversification to a developed electricity market in Spain and a region with good hydrology. The acquisition will increase the share of euro-denominated cash flows, reducing the group's exposure to foreign-currency risk. The company will also benefit from larger scale, with an around 20% increase in installed capacity to reach 1GW, consisting mostly of clean energy. Forecast Revised Upwards: Fitch has revised its forecast of EBITDA in 2023 up to around EUR290 million (EUR306 million in 2022) reflecting strong 1H23 results. Fitch has also raised its pre-acquisition EBITDA forecast for 2024-2026 by 7% compared with its previous expectations, mainly to reflect the stronger Georgian lari and a healthy price environment. Re-leveraging Expected: Fitch believes most factors contributing to strong performance in 2022-2023 are temporary and forecast FFO net leverage (adjusted for connection fees and guarantees) increasing to levels that are consistent with the rating from 2024. Together with the debt-funded acquisition, this would be on the back of stabilising electricity market prices, normalising supply margins in Bulgaria, lower distribution tariffs from 2024 in Georgia as compensation for previous periods of under-performance ends, and the continued weakening of the Turkish lira. Weaker Coverage Expected: Despite leverage likely remaining commensurate with the rating after the acquisition, Fitch forecasts EPas's interest coverage to weaken below the negative sensitivity of 3x from 2024 as the cost of debt rises. Fitch had already projected FFO interest coverage to be weak for the rating before the acquisition announcement, although to a lesser extent. Fitch sees the overall positioning of the key credit ratios as consistent with the current rating. Increased Shareholder Distributions: EPas is planning to distribute EUR100 million in 2023 compared with an average of around EUR40 million annually in 2019-2022. Distributions are constrained by a 4.5x net debt/EBITDA incurrence covenant and remain flexible and subject to business needs. EPas increased distributions versus its original plan in 2022 and expects to do so in 2023. Its flexible distributions policy supports its view that current low leverage is likely to be unsustainable. Higher Capex: Fitch has raised its capex expectations to an average of around EUR110 million annually over 2023-2026, which is slightly below management's expectations. The increase is related to higher network investments in Georgia, which should be reflected in tariffs in the next regulatory period; in storage batteries at EP Varna; and construction of a new hydro plant in Colombia. Volatile Cash Flows: EPas's Fitch-calculated EBITDA ranged between EUR96 million and EUR306 million in 2016-2022, due to volatile electricity market prices, variable hydro generation and a less than consistent application of the regulatory frameworks in Georgia and Bulgaria leading to tariff changes and working-capital swings. These factors limit cash flow predictability, contributing to volatile credit metrics. This is only partially balanced by a flexible capex and dividend policy. DERIVATION SUMMARY EPas benefits from a higher share of regulated activities in EBITDA than Bulgarian Energy Holding EAD (BEH, BB+/Stable, Standalone Credit Profile (SCP): bb), higher geographical diversification and a better carbon footprint, which is close to zero. This is partially balanced by BEH's larger scale of operations, higher integration across the electricity value chain, lower leverage and lower exposure to FX. Overall, EPas has a moderately higher debt capacity than BEH. Central European utilities like PGE Polska Grupa Energetyczna S.A. (BBB+/Stable), TAURON Polska Energia S.A. (BBB-/Stable), ENEA S.A. (BBB/Stable) and MVM Zrt (BBB/Negative) are larger in size and have stronger market positions than EPas. EPas has a stronger business profile than Turkish power producers Zorlu Yenilenebilir Enerji Anonim Sirketi (B-/Stable) and Aydem Yenilenebilir Enerji Anonim Sirketi (B/Stable), due to a better operating environment, integration into networks and geographical diversification. EPas has greater geographic diversification, more stable regulation, and deeper integration into networks than Uzbekhydroenergo JSC (BB-/Stable, SCP: b+), a hydro producer with a monopoly in Uzbekistan rated at the same level as the Republic of Uzbekistan (BB-/Stable), reflecting its strong links with the state. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: - Electricity generation at about 2.8 TWh annually in 2023-2026 - Electricity distribution at about 11.5 TWh annually in 2023-2026 - Average market prices for electricity over 2023-2026 at EUR96/MWh in Bulgaria and EUR74/MWh in Turkiye - Capex on average at around EUR110 million annually over 2023-2026, which is below management forecast - Spanish acquisition to contribute around 20% of group EBITDA on average over 2023-2026 - Distributions to shareholder on average at EUR46 million annually over in 2023-2026 - Euro to the US dollar at 1.05, euro to Turkish lira at 23-36 and euro to Georgian lari at 2.9-3.2 over 2023-2026 - Around EUR47 million guarantees included as off-balance-sheet obligations in 2023-2026 RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Improved FFO net leverage (excluding connection fees and including group guarantees) below 4.5x and FFO interest coverage (excluding connection fees) above 4x on a sustained basis Factors that could, individually or collectively, lead to negative rating action/downgrade: - Higher distributions to shareholders and lower profitability and cash generation leading to FFO net leverage (excluding connection fees and including group guarantees) above 5.5x and FFO interest coverage (excluding connection fees) below 3x on a sustained basis - Significant weakening of the business profile with lower predictability of cash flows may lead to a tighter leverage sensitivity or a downgrade LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: At end-2Q23, EPas had cash and equivalents of EUR82 million and unused committed bank overdrafts of EUR152 million. Following the early refinancing of the 2024 notes, EPas does not have significant debt repayments until 2027. The company is using the proceeds from the current USD300 million notes issuance mostly for the repayment of the bridge facility, which financed the Spanish acquisition. FX Mismatch in Revenue/Debt: EPas remains subject to FX fluctuations, as its debt at end-2022 was euro- and dollar-denominated. This is in contrast to its local-currency denominated revenue in Georgian lari, Bulgarian leva and Turkish lira, although the Bulgarian leva is pegged to the euro. The Spanish acquisition will increase the share of euro-denominated cash flows. EPas does not use hedging instruments, other than holding some cash in foreign currencies. ISSUER PROFILE EPas is a utility company headquartered in the Czech Republic with operating companies in Bulgaria, Georgia, Turkiye and Spain. Its core activities are power distribution to over two million customers and electricity generation at HPPs and a gas-fired plant with a total installed capacity of around 1GW. SUMMARY OF FINANCIAL ADJUSTMENTS - Change in inventory, provisions, other income are excluded from EBITDA - Guarantees of EUR48 million at end-2022 issued by EPas under loan agreements of its sister companies are treated as off-balance sheet obligations and included in debt ratios - Net loans granted to shareholders are reclassified as dividends - For the purpose of FFO net leverage (excluding connection fees) and FFO interest coverage (excluding connection fees) calculations Fitch reduced FFO by the amount of customer connection fees received as they are set off against capex ESG CONSIDERATIONS ENERGO-PRO a.s. has an ESG Relevance Score of '4' for Group Structure due to a negative impact of guarantees in favour of its sister companies within the DK Holding Group on EPas's credit metrics. Guarantees add around 0.3x to FFO net leverage (excluding connection fees) over 2023-2026, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. ENERGO-PRO a.s. has an ESG Relevance Score of '4' for Governance Structure due to the company being part of the larger DK Holding Group, which is ultimately owned by one individual. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- ENERGO-PRO a.s. senior unsecured LT BB- New Rating RR4 BB-(EXP) ============= I R E L A N D ============= PENTA CLO 15: Fitch Assigns 'B-(EXP)sf' Rating on Cl. F Notes ------------------------------------------------------------- Fitch Ratings has assigned expected ratings to Penta CLO 15 DAC. The assignment of the final ratings is contingent on the receipt of final documents conforming to information already reviewed. Entity/Debt Rating ----------- ------ Penta CLO 15 DAC Class A-L LT AAA(EXP)sf Expected Rating Class A-N LT AAA(EXP)sf Expected Rating Class B LT AA(EXP)sf Expected Rating Class C LT A(EXP)sf Expected Rating Class D LT BBB-(EXP)sf Expected Rating Class E LT BB-(EXP)sf Expected Rating Class F LT B-(EXP)sf Expected Rating Subordinated Notes LT NR(EXP)sf Expected Rating Penta CLO 15 DAC is a securitisation of mainly senior secured obligations (at least 90%) with a component of senior unsecured, mezzanine, second-lien loans and high-yield bonds. Note proceeds will be used to fund a portfolio with a target par of EUR350 million. The portfolio will be actively managed by Partners Group. The collateralised loan obligation (CLO) will have a reinvestment period of about 4.5-years and an 8.5 year weighted average life (WAL) test limit. KEY RATING DRIVERS Average Portfolio Credit Quality (Neutral): Fitch places the average credit quality of obligors in the identified portfolio at 'B'/'B-'. The Fitch-weighted average rating factor (WARF) of the identified portfolio is 25.6. High Recovery Expectations (Positive): At least 90% of the portfolio is expected to comprise senior secured obligations. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-weighted average recovery rate (WARR) of the identified portfolio is 62.7%. Diversified Asset Portfolio (Positive): Exposure to the 10 largest obligors and fixed-rate assets for assigning the expected ratings is limited to 25% and 10%, respectively. The transaction also includes various concentration limits, including the maximum exposure to the three-largest Fitch-defined industries in the portfolio at 40%. These covenants ensure that the asset portfolio will not be exposed to excessive concentration. Portfolio Management (Neutral): The transaction will have a 4.5-year reinvestment period and includes reinvestment criteria similar to those of other European transactions. Fitch's analysis is based on a stressed-case portfolio with the aim of testing the robustness of the transaction structure against its covenants and portfolio guidelines. Cash Flow Modelling (Neutral): The WAL used for the stressed-cased portfolio is 12 months less than the WAL covenant to account for structural and reinvestment conditions after the reinvestment period, including passing the over-collateralisation and Fitch 'CCC' limitation tests, and a WAL covenant that progressively steps down over time, both before and after the end of the reinvestment period. In Fitch's opinion, these conditions reduce the effective risk horizon of the portfolio during the stress period. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A 25% increase of the mean default rate (RDR) across all ratings and a 25% decrease of the recovery rate (RRR) across all ratings of the identified portfolio would have no impact on the class A-N notes and A-L loan, but would lead to downgrades of no more than one notch for the class B, C, D and E notes, and to below 'B-sf' for the class F notes. Downgrades, which are based on the identified portfolio, may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of defaults and portfolio deterioration. Due to the better metrics and shorter life of the identified portfolio than the stressed-case portfolio, the class B to F notes display a rating cushion of up to two notches. Should the cushion between the identified portfolio and the stressed-case portfolio be eroded either due to manager trading or negative portfolio credit migration, a 25% increase of the mean RDR across all ratings and a 25% decrease of the RRR across all ratings of the stressed-case portfolio would lead to downgrades of up to four notches for the rated notes. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade A 25% reduction of the RDR across all ratings and a 25% increase in the RRR across all ratings of the stressed-case portfolio would lead to upgrades of up to three notches for the rated notes, except for the 'AAAsf' rated notes. During the reinvestment period, upgrades, which are based on the stressed-case portfolio, may occur on better-than-expected portfolio credit quality and a shorter remaining WAL test, leading to the ability of the notes to withstand larger-than-expected losses for the remaining life of the transaction. After the end of the reinvestment period, upgrades, except for the 'AAAsf' notes, may occur on stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio. DATA ADEQUACY The majority of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other nationally recognised statistical rating organisations and/or European securities and markets authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information or information on the risk-presenting entities. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. WILTON PARK: S&P Assigns Prelim. B-(sf) Rating on Class F Notes --------------------------------------------------------------- S&P Global Ratings assigned its preliminary credit ratings to Wilton Park CLO DAC's class A, B-1, B-2, C, D, E, and F notes. At closing, the issuer will also issue unrated subordinated notes. The class F notes is a delayed draw tranche, which has a maximum notional amount of EUR11.40 million, and a spread of three/six-month Euro Interbank Offered Rate (EURIBOR) plus 9.51%. They can only be issued once and only during the reinvestment period with an issuance amount totaling EUR11.40 million. The issuer will use the full proceeds received from the sale of the class F notes to redeem the subordinated notes or to purchase additional assets. Upon issuance, the class F notes' spread could be subject to a variation and, if higher, is subject to rating agency confirmation. The reinvestment period will be 4.54 years, while the non-call period will be 1.50 years after closing. Under the transaction documents, the rated loans and notes will pay quarterly interest unless there is a frequency switch event. Following this, the notes will switch to semiannual payment. The preliminary ratings assigned to the notes reflect S&P's assessment of: -- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests. -- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. -- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. -- The transaction's legal structure, which S&P expects to be bankruptcy remote. -- The transaction's counterparty risks, which S&P expects to be in line with our counterparty rating framework. Portfolio benchmarks CURRENT S&P Global Ratings weighted-average rating factor 2747.51 Default rate dispersion 565.10 Weighted-average life (years) 4.54 Obligor diversity measure 143.10 Industry diversity measure 19.81 Regional diversity measure 1.23 Transaction key metrics CURRENT Total par amount (mil. EUR) 400.00 Defaulted assets (mil. EUR) 0.00 Number of performing obligors 183 Portfolio weighted-average rating derived from our CDO evaluator B 'CCC' category rated assets (%) 1.25 Actual 'AAA' weighted-average recovery (%) 36.12 Actual weighted-average spread (%) 3.98 Actual weighted-average coupon (%) 4.63 S&P said, "Our preliminary ratings reflect our assessment of the preliminary collateral portfolio's credit quality, which has a weighted-average rating of 'B'. We consider that the portfolio will be well-diversified on the closing date, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we conducted our credit and cash flow analysis by applying our criteria for corporate cash flow CDOs. "The transaction includes an amortizing reinvestment target par amount, which is a predetermined reduction in the value of the transaction's target par amount unrelated to the principal payments on the notes. This may allow for the principal proceeds to be characterized as interest proceeds when the collateral par exceeds this amount, subject to a limit, and affect the reinvestment criteria, among others. This feature allows some excess par to be released to equity during benign times, which may lead to a reduction in the amount of losses that the transaction can sustain during an economic downturn. Hence, in our cash flow analysis, we assumed a starting collateral size of EUR389.00 million (i.e., the EUR400 million target par minus the maximum reinvestment target par adjustment amount of EUR11.00 million). "In our cash flow analysis, we also modeled the covenanted weighted-average spread of 3.98%, and the covenanted weighted-average recovery rates as indicated by the collateral manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. "We expect the transaction's documented counterparty replacement and remedy mechanisms to adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned preliminary ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria. "We expect the transaction's legal structure and framework to be bankruptcy remote, in line with our legal criteria. "Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1, B-2, and C notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from the effective date, during which the transaction's credit risk profile could deteriorate, we have capped our preliminary ratings assigned to the notes. "The class A, D, and E notes can withstand stresses commensurate with the assigned preliminary ratings. In our view, the portfolio is granular in nature, and well-diversified across obligors, industries, and asset characteristics when compared with other CLO transactions we have rated recently. As such, we have not applied any additional scenario and sensitivity analysis when assigning our preliminary ratings to any classes of notes in this transaction. "For the class F notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses commensurate with a lower rating. However, we have applied our 'CCC' rating criteria, resulting in a preliminary 'B- (sf)' rating on this class of notes." The ratings uplift for the class F notes reflects several key factors, including: -- The class F notes' available credit enhancement, which is in the same range as that of other CLOs S&P has rated and that has recently been issued in Europe. -- The preliminary portfolio's average credit quality, which is similar to other recent CLOs. -- S&P's model generated break-even default rate at the 'B-' rating level of 22.51% (for a portfolio with a weighted-average life of 4.54 years), versus if we were to consider a long-term sustainable default rate of 3.1% for 4.54 years, which would result in a target default rate of 14.07%. -- S&P does not believe that there is a one-in-two chance of this tranche defaulting. -- S&P does not envision this tranche defaulting in the next 12-18 months. -- Following this analysis, S&P considers that the available credit enhancement for the class F notes is commensurate with the assigned preliminary 'B- (sf)' rating. -- Following S&P's analysis of the credit, cash flow, counterparty, operational, and legal risks, it believes that its preliminary ratings are commensurate with the available credit enhancement for the class A, B-1, B-2, C, D, E, and F notes. -- In addition to S&P's standard analysis, S&P has also included the sensitivity of the ratings on the class A to E notes, based on four hypothetical scenarios. -- As S&P's ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and it would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, S&P has not included the above scenario analysis results for the class F notes. Wilton Park CLO is a European cash flow CLO securitization of a revolving pool, comprising euro-denominated senior secured loans and bonds issued mainly by speculative-grade borrowers. Blackstone Ireland Ltd. will manage the transaction. Ratings list CLASS PRELIM PRELIM SUB (%) INTEREST RATE§ RATING* AMOUNT (MIL. EUR) A AAA (sf) 248.00 38.00 Three/six-month EURIBOR plus 1.70% B-1 AA (sf) 33.00 27.25 Three/six-month EURIBOR plus 2.40% B-2 AA (sf) 10.00 27.25 6.10% C A (sf) 23.10 21.48 Three/six-month EURIBOR plus 3.00% D BBB- (sf) 27.40 14.63 Three/six-month EURIBOR plus 5.20% E BB- (sf) 16.30 10.55 Three/six-month EURIBOR plus 7.56% F† B- (sf) 11.40 7.70 Three/six-month EURIBOR plus 9.51% Sub NR 37.60 N/A N/A *The preliminary ratings assigned to the class A, B-1, and B-2 notes address timely interest and ultimate principal payments. The preliminary ratings assigned to the class C, D, E, and F notes address ultimate interest and principal payments. =================== L U X E M B O U R G =================== BIRKENSTOCK FINANCING: Fitch Hikes IDR to 'BB', Outlook Stable -------------------------------------------------------------- Fitch Ratings has upgraded Birkenstock Financing S.a.r.l.'s (Birkenstock) Long-Term Issuer Default Rating (IDR) to 'BB' from 'BB-'. The Outlook is Stable. Fitch has also affirmed Birkenstock Group B.V. & Co. KG's EUR375 million term loan B (TLB) and Birkenstock US Bidco Inc.'s USD785 million TLB senior secured rating at 'BB+'. The Recovery Rating is 'RR2'. The upgrade reflects the achievement of conservative leverage metrics pro-forma for the application of IPO proceeds to debt reduction, a target to maintain leverage at these levels, as well as Birkenstock's continued revenue and profit growth. This growth has been supported by the company's premium position with a strong brand and unique health attributes and Fitch believes it will allow EBITDA to reach a level close to EUR500 million by FY24 (financial year ending September). Fitch believes that over the rating horizon, these features, complemented by an effective marketing strategy, will continue to support the company's growth, high profitability and materially stronger free cash flow (FCF) generation from FY24, once the current capex plan is completed. These strengths are balanced by the company's product portfolio remaining reliant on a limited number of models, which albeit increasingly reducing and mitigated by geographic diversification, constrains the rating. KEY RATING DRIVERS Reducing Leverage, Deleveraging Capacity: The company applied the majority of the EUR466 million cash proceeds from its stock exchange listing (IPO) in early October 2023 to part prepayment of the US dollar TLB. Fitch views positively Birkenstock's record of de-leveraging since the Catterton transaction in 2021 via increased EBITDA and a small EUR50 million debt prepayment earlier in 2023, as well as the target to further sustainably reduce net debt/EBITDA (IFRS 16 calculated by the company) to below 2.0x. Fitch projects leverage at 3.7x at end-FY23, and pro-forma for the application of the IPO proceeds to debt prepayment, to drop to around 2.7x, which is consistent with a mid 'BB' category IDR, despite the company's product concentration. Strong Brand; Effective Distribution: Birkenstock has demonstrated continued rapid revenue growth since 2012, with the brand gaining wide appeal and a loyal customer base in many regional markets, particularly in the US and Europe. This is driven by the product's unique and increasingly appreciated characteristics of comfort, innovation, and an effectively managed distribution model with careful allocation of products across markets and channels, including growing its direct-to-consumer (D2C) online sales channel. Strong Growth to Continue: Fitch expects Birkenstock to have closed FY23 with revenues that have doubled compared with pre-pandemic FY19 levels, due to consistent price increases and product mix benefits, despite periods of subdued consumer spending in Europe. The greater emphasis of its commercial strategy on the online channel, pricing power and product range extension supported revenue growth and contributed to a resetting of Fitch-calculated EBITDA margin to a higher level of around 30% (FY19: 26.1%), which is commensurate with the top end of the investment-grade category for the sector. Capex to Boost Output: New investments in capacity will increase manufacturing capability by up to 50% from FY24, sustaining its growth in the following three years, addressing growing demand and providing scope to strengthen the presence in markets, particularly in Asia, where it is currently limited. Based on the demonstrated effectiveness of its products' profile and positioning, as well as of its communication and channel mix strategy, Fitch expects the company to deliver strong sales and profit growth in the mid to high single digits or higher over the rating horizon. Single-Product Concentration, Moderate Scale: Key rating weaknesses and constraints remain the company's narrow product diversification and its moderate scale for the sector. Around 70% of sales (FY22) are generated from five core models, modestly complemented by other shoe models and an accessory offering. Products are also concentrated on sandals and the premium end. These operating risk factors are reflected in the 'BB' rating, and are balanced by Birkenstock's strong profitability and FCF margins. Gradual Diversification Within Product: Birkenstock is diversifying its product with a high variety of styles under each model, adapted to meet regional appetite and evolving consumer trends and preferences, plus expansion into both lower- and higher-priced items as well as into closed-toe products (17% of sales in FY22). Fitch believes the company's growth across a wide geographical footprint, the trend towards more casual clothing, including work dress codes post-pandemic, and increasing consumer health consciousness, could be beneficial for Birkenstock's orthopaedic offering, and help reduce risks related to a narrow product portfolio. Working Capital Absorbs Cash: The shift of sales to the online channel led to a material outflow in FY22 (EUR196 million), with working capital growing to 44% of revenues. Fitch conservatively assumes that as sales growth in the D2C channel continues, working capital will not reduce as a share of sales. FCF to Grow: Higher interest charges will erode funds from operations generation in FY23, but Fitch projects cash flow from operations (before capex and dividends) of around EUR340 million-EUR400 million from FY23 onwards, also thanks to lower debt. This will enable the company to cover outflows from working capital and capex. Once capex normalises in FY24 following the large investment over FY22-FY23 Fitch expects Birkenstock to generate annual FCF of up to EUR200million-EUR280 million from FY24, representing a healthy 11%-16% of revenues. DERIVATION SUMMARY Birkenstock's rating is two notches above that of its closest peer, Golden Goose S.p.A. (B+/Stable), which also has a concentrated portfolio of product offering and similar profitability. Unlike Golden Goose, Birkenstock is not developing its own retail store network, and therefore Fitch does not adjust its leverage for leases. The two-notch rating difference reflects Birkenstock's 3x larger scale and product positioning being less subject to fashion risk. Fitch views Birkenstock's credit profile as weaker than that of Levi Strauss & Co. (BB+/Stable), which also has a high concentration on one brand. Despite prospectively higher leverage at Levi Strauss of close to 3.5x (corresponding to the 'bb' median in the non-food retail Navigator) adjusted for leases, and more advanced inroads into the D2C channel by Birkenstock, Fitch views Levi Strauss's much greater scale and diversification by product to warrant for a one-notch rating differential. Birkenstock has lower revenues and a more concentrated product portfolio than well-diversified producer of home and garden, home and personal care, pet care products manufacturer Spectrum Brands, Inc. (BB/Negative). However, Birkenstock has significantly higher profitability than Spectrum (EBITDA margin of around 8%-9%), leading to EBITDA that is twice as large as Spectrum's. Birkenstock's pro-forma FY23 gross leverage, at 2.7x will also be materially lower than Spectrum's, which Fitch expects could reach approximately 6.0x in FY23, before reducing toward 4.0x in FY24. Compared with consumer products company ACCO Brands Corporation (BB/Stable), one of the world's largest designers, marketers and manufacturers of branded academic, consumer and business products, Birkenstock is notably smaller in size but has materially higher profitability. Despite ACCO Brands's larger revenue scale and diversification, Birkenstock's prospectively 0.5x lower leverage and its larger EBITDA scale, support a similar rating. Frozen foods company, Nomad Foods Limited (BB/Stable), operates in an essentials category and so is less exposed to changing consumer preferences, which Fitch believes warrants a similar rating, despite Nomad's higher leverage and significantly lower EBITDA margin (around 15%). Fitch views Birkenstock's credit profile as stronger than that of Italian furniture producer International Design Group S.p.A. (IDG; B/Stable), which has constrained its deleveraging trajectory with several acquisitions. Birkenstock also benefits from a moderately larger scale and more resilient consumer demand, which combined with high profitability, support greater visibility over its deleveraging prospects. KEY ASSUMPTIONS Fitch's Key Assumptions within Its Rating Case for the Issuer: — Organic growth of 19.4% in FY23, followed by CAGR of 5.7% in FY24-FY26, driven by Europe and the Americas — EBITDA margin of 30% over FY23-FY26 — Working capital at 44% of sales to FY26 — Capex of about EUR130 million in FY23, followed by EUR100 million in FY24 and normalising to around 3.5% of sales over FY25-FY26 — IPO proceeds of EUR466 million received in FY24 — Debt prepayment of EUR50 million in FY23, followed by USD450 million on the US dollar TLB tranche in FY24 — Repayment of part of vendor loan by EUR100 million in FY24 treated as equity distribution — No M&A to FY26 RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: — Clarity and record of a financial policy, including the application of cash flow to dividends, consistent with maintaining gross debt/EBITDA below 2.0x — Continued successful implementation of business plan, with the prospect of sustained organic revenue and EBITDA growth — Maintenance of EBITDA margin equal to or above 30%, translating into a FCF margin in the high single digits — EBITDA interest cover of above 5.0x Factors that could, individually or collectively, lead to negative rating action/downgrade: — Failure to implement successfully business plan and maintaining a trajectory for annual EBITDA to grow to, and be sustained above, EUR500 million — EBITDA margin dropping below 28% and failing to maintain the FCF margin above 5% — Trading under-performance, absorption of resources in connection to growth, or financial policy changes causing gross debt/EBITDA to grow above 3.0x LIQUIDITY AND DEBT STRUCTURE Comfortable Liquidity: The IPO has improved Birkenstock's liquidity, but Fitch notes that the proceeds, together with around EUR80 million of cash from balance, have been fully used to prepay debt across the TLB and the vendor loan. Over the four-year rating horizon, Fitch expects Birkenstock to maintain a comfortable liquidity position. This comprises Fitch-modelled EUR247 million cash on balance sheet as of end-FY23, strong FCF generation through to FY26 and availability of a USD200 million equivalent asset-based lending (ABL) facility as backstop to fund inventory build-up during low seasons. No Immediate Maturities: No debt maturities before FY28 and FY29 other than the ABL facility (currently undrawn), which is due in April 2026. The mandatory 1% amortisation of the remainder of the US dollar senior secured TLB is the only scheduled debt repayment over the rating horizon. ISSUER PROFILE Birkenstock is a Germany-based manufacturer of branded casual footwear. ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Birkenstock US BidCo Inc. senior secured LT BB+ Affirmed RR2 BB+ Birkenstock Financing S.a.r.l. LT IDR BB Upgrade BB- senior unsecured LT BB Upgrade RR4 BB- Birkenstock Group B.V. & Co. KG senior secured LT BB+ Affirmed RR2 BB+ SUNSHINE LUXEMBOURG VII: S&P Upgrades LT ICR to 'B', Outlook Stable ------------------------------------------------------------------- S&P Global Ratings raised its long-term issuer credit rating on Sunshine Luxembourg VII S.a r.l. (Galderma) to 'B' from 'B-'. At the same time, S&P raised its issue credit rating on the $3,837 million senior secured term loan B due in 2026 and the $500 million revolving credit facility (RCF) to 'B'. S&P's recovery rating remains unchanged at '3' (recovery prospects: 65%). S&P said, "The stable outlook reflects our expectation of an ongoing deleveraging trend, with adjusted leverage approaching 7.0x by year-end 2023 and below 7.0x in 2024. We expect funds from operations (FFO) cash interest coverage will improve to about 2.0x by year-end 2024. We expect a significant improvement in profitability, with an adjusted EBITDA margin of about 18.0%-18.5% in 2023, up 200 basis points (bps) to 250 bps. The profitability improvement is mainly driven by operating leverage, cost controlling measures, and a normalization in R&D expenses, which support our expectation of an improving FOCF generation. "The upgrade reflects a better performance -- included in our revised base case -- that will improve credit metrics. We now expect adjusted leverage of 7.0x-7.2x in 2023, declining to 6.4x-6.6x in 2024. This will be driven by strong earnings generation and a decline in adjusted debt of about $1 billion to about $5,300 million over 2023-2024. The decline in adjusted debt is the result of the repayment of $380 million of the $1,379 million second-lien debt due in 2027, the full repayment of the $358 million PIK loan, and the repayment of about $265 million of the $380 million drawn amount under the $500 million RCF, following a $1 billion capital injection in the form of new common equity by current shareholders, new investors, and management in June and August 2023. In our view, this shows the owners' strong commitment to prioritize deleveraging and organic growth over the next years, while reducing the interest burden and enhancing the company's liquidity position and credit metrics. Our adjusted debt figure comprises the $3,837 million term loan B due in 2026, $989 million second-lien notes due in 2027, $115 million drawn under the RCF, $30 million facility secured on collateral, lease liabilities of $120 million-$130 million, $50 million-$60 million factoring line, $90 million-$100 million pension liabilities, and about $50 million contingent considerations. We forecast FOCF will rebound to $20 million-$30 million in 2023 and $150 million-$160 million in 2024, from negative $48 million in 2022. Good earnings generation and good working capital management will drive the increase. A lower interest burden, versus previous years, will also contribute positively to cash flow generation from 2024. We note FFO cash interest coverage will remain weaker at about 1.5x in 2023 because of the higher interest burden. The latter resulted from the more leveraged capital structure the first three quarters of the year when Galderma had not repaid the debt yet. We forecast FFO cash interest coverage will be close to 2x from 2024, given the lower debt and interest burden. "Galderma's half-year 2023 earnings exceeded our expectations and demonstrated the company's operational resilience and its ability to transform the business over the past years. Sales across all divisions were up by 4.6% on a reported currency basis, versus half-year 2022, mainly driven by therapeutic dermatology (11.9%) and dermatological skincare (6%). Therapeutic dermatology increased solidly across all geographies, despite the loss of exclusivity of some products in 2022. The performance of dermatological skincare benefited from the international brand expansions of Cetaphil and Alastin skincare, a brand acquired by Galderma last year. A softer filler market, especially in the U.S., led to a decline in fillers and biostimulators (-10.8%) and meant that injectable aesthetics reported only modest growth (1.4%), compared with a high comparative base for the first quarter of 2022, with a particularly strong rebound post-COVID-19 and a return to typical seasonality. Neuromodulators increased by 6% due to high demand and are at a lower price point than fillers. Galderma's reported EBITDA stood at $410 million, up by 15.9%, compared with first-half 2022. It benefited from solid demand, some price increases, cost cutting initiatives, and good commercial execution. In half-year 2023, free cash flow generation suffered from meaningful working capital requirements, notably due to investments in stock. Yet, we expect inventory will decline by the end of 2023, meaning annual free cash flow will turn positive. "We assume Galderma's profitability will improve over 2023-2024, driven by operating leverage, cost efficiency measures, and a normalization of R&D expenses. We expect Galderma's sales will grow by 7%-8% on a reported currency basis in 2023. The sales increase will result from some price increases, aligned with Galderma's premiumization strategy, and volume growth. We expect consumer demand for skincare treatments will remain supportive, which--combined with Galderma's cost savings measures, good commercial execution, and a normalization of R&D expenses--will improve profitability. We forecast the adjusted EBITDA margin will improve by 200 bps to 250 bps to 18.0%-18.5% in 2023 and to 18.5%-19.0% in 2024. We note the cost efficiency measures commenced in 2019 as part of Galderma's transformation initiative delivered valuable savings of about $150 million as of the first quarter of 2023, ultimately resulting in gradual year-on-year margin improvements. Cost efficiency measures include leveraging on the scale of the company to attain procurement efficiencies, process, and systems optimization, and promoting sales growth through innovation and new product launches across the portfolio. The international brand expansion of Cetaphil and Alastin post-acquisition in 2022 also fueled growth in dermatological skincare. Next steps within Galderma's transformation initiative include i) entering the biologics space, with investigational drug nemolizumab for the treatment of prurigo nodularis and atopic dermatitis expected to be launched in the U.S. in the second half of 2024; and QM-1114 (RelabotulinumtoxinA), one of the key neuromodulator innovations as part of the broadest injectable aesthetics portfolio, which Galderma will also bring to the market; (ii) expanding its business in fast-growing emerging markets; (iii) normalizing R&D expenses as a percentage of sales; and (iv) integrating and scaling a commercial infrastructure." Galderma's integrated global dermatology platform and the complementary nature of its portfolio will continue boosting growth and market share. Galderma's portfolio is highly complementary. The company leverages cross-selling opportunities across all business segments, including therapeutic dermatology, injectable aesthetics, and dermatological skincare. This, coupled with Galderma's ability to reach healthcare professionals and consumers alike, enabled the company to build an integrated dermatology platform and strengthen its competitive position since most skincare players specialize only in one segment. Investments in innovation and R&D capabilities are key to fuel sustainable growth. Galderma doubled R&D spending to about $300 million in 2022, from about $150 million in 2018, which led to successful product launches. In half-year 2023, Galderma reported market share gains in a softening fillers market, where Galderma holds the number two position, mainly due to its products innovation and good commercial execution. S&P said, "We note innovation is ongoing, although we expect a normalization of annual R&D spending (at about 8% of total sales) from 2023 onward. At the same time, the skincare market continues to present good growth opportunities, which also support our growth expectations for the company. The therapeutic dermatology segment was worth about $50 billion in 2022, with an expected compound annual growth rate (CAGR) of close to 8% over 2022 -2025, according to IQVIA Analytics Link Disease Module, Evaluate Pharma, Nicholas Hall DB6 & DRG. Injectable aesthetics amounts to about $8 billion, and the expected CAGR is also 8% over 2022-2025, according to Medical Insights, the Global Aesthetic Market Study, the DRG Aesthetic Injectables Report, and EY Aesthetic Market Analysis – Dermal Fillers & Evaluate Pharma. Dermatological skincare-–the high end of the skincare market--amounts to $19 billion, and the broader total skincare market has an expected CAGR of 6% over 2022-2025, according to the Galderma database (TABS) and Euromonitor Passport (Nov. 2022). We expect dermatological skincare will expand faster. It grew by 10% in 2022, while total skincare grew by 4%." S&P said, "The stable outlook reflects our expectation of ongoing deleveraging, with adjusted leverage approaching 7.0x by year-end 2023 and dropping below 7.0x in 2024. We expect FFO cash interest coverage will improve to about 2.0x by year-end 2024. We assume a significant improvement in profitability and FOCF generation, with an adjusted EBITDA margin of about 18.0%-18.5% in 2023 (up 200 bps to 250 bps), mainly driven by operating leverage, cost controlling measures, and a normalization of R&D expenses. "We could lower the rating if Galderma's adjusted leverage is persistently above 7.0x and FFO cash interest coverage remains below 2x with no improvements in sight; or if its liquidity profile comes under pressure, including an increasing risk of a covenant breach. This could happen, for example, if profitability margins decrease significantly versus our base case because of significantly lower sales and material cost increases, which would deteriorate cash flow generation significantly. "We could raise the rating if Galderma demonstrates a clear track record of deleveraging successfully, with an adjusted leverage ratio approaching 5.0x and below on a sustained basis and a clear commitment from the owners to maintain this level in the future. Under such circumstances, we would expect Galderma to generate higher recurring FOCF while continuing to effectively grow the Cethaphil brand, complete a successful rollout of Nemolizumab within the therapeutic segment, and increase its market share in the injectable aesthetics market." ========= M A L T A ========= MULTITUDE BANK: Fitch Assigns 'B-(EXP)' Rating on Sub. Tier 2 Bonds ------------------------------------------------------------------- Fitch Ratings has assigned Multitude Bank's Plc upcoming issue of subordinated Tier 2 bonds an expected long-term rating of 'B-(EXP)'. The final rating is contingent upon the receipt of final transaction documents conforming to information already received. KEY RATING DRIVERS Multitude Bank is a Malta-based 100%-owned subsidiary bank of online lender Multitude SE (B+/Stable). The Tier 2 bonds' expected rating is notched down twice from Multitude Bank's 'B+' Long-Term Issuer Default Rating (IDR), which is in line with the group's Standalone Credit Profile, reflecting Fitch's 'group ratings' approach applied to Multitude, as a group of companies, on a consolidated basis (see 'Fitch Rates Multitude Bank 'B+'/Stable' dated 24 August 2023). The two notches from the IDR reflect loss severity, the subordinated status of the bonds and Fitch's view of a heightened likelihood of poor recoveries in the event of non-viability. According to the transaction documents, the holders' rights to payment of any amounts under or in respect of the subordinated Tier 2 bonds may be subject to bail in action, including conversion or write-down in accordance with the EU recovery and resolution legislation. Fitch does not additionally notch the Tier 2 bonds for non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability. The floating-rate subordinated Tier 2 bonds will mature in 2033, with a first call date in 2028, and will constitute direct, unsecured, and subordinated obligations of Multitude Bank. The amount of the issuance is expected to be around EUR25 million. The Tier 2 bonds will (i) rank junior to all Multitude Bank's deposits and other senior obligations; (ii) rank equally with all other obligations, which constitute Tier 2 capital of Multitude Bank; and (iii) rank in priority in respect of Multitude Bank's more junior obligations, including any common equity Tier 1 (CET1) or additional Tier 1 (AT1) capital instruments. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The subordinated Tier 2 bonds' long-term rating will be downgraded if Multitude Bank's Long-Term IDR, from which it is notched, is downgraded. The Tier 2 bonds' rating is also sensitive to an adverse change in notching should Fitch change its assessment of loss severity and/or relative non-performance risk. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade The subordinated Tier 2 bonds' long-term rating will be upgraded if Multitude Bank's Long-Term IDR is upgraded. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Multitude Bank's ratings are linked to Multitude SE's ratings. ESG CONSIDERATIONS Multitude Bank has an ESG Relevance Score of '4' for Exposure to Social Impacts as a result of its exposure to the high-cost consumer lending sector. As the regulatory environment evolves (including a tightening of rate caps), this has a moderately negative influence on the credit profile via its assessment of its business model and is relevant to the rating in conjunction with other factors. Multitude Bank has an ESG Relevance Score of '4' for customer welfare, in particular in the context of fair lending practices, pricing transparency and the potential involvement of foreclosure procedures, given its focus on the high-cost consumer credit segment. This has a moderately negative influence on the credit profile via its assessment of risk appetite and asset quality 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 ----------- ------ Multitude Bank plc Subordinated LT B-(EXP) Expected Rating =========== R U S S I A =========== KAFOLAT INSURANCE: Fitch Affirms 'B+' Insurer Financial Strength ---------------------------------------------------------------- Fitch Ratings has affirmed Kafolat Insurance Company JSC's (Kafolat) Insurer Financial Strength (IFS) Rating at 'B+'. The Outlook is Stable. The rating reflects the Uzbek insurer's good company profile, improved investment risk, as well as weak capital position and financial performance. KEY RATING DRIVERS Favourable Business Profile: Kafolat has a 'Favourable' business profile compared with other Uzbek insurers', reflecting its strong competitive positioning and business line diversification. Kafolat is the fourth-largest non-life insurer in Uzbekistan, with a stable 8% market share by gross written premiums (GWP) at end-2022. Its life GWPs grew substantially between 2018 and 2023. However, Fitch expects life business volumes to decline in 2023, as a result of an adverse tax legislation change in 2022. Kafolat's inwards reinsurance premiums grew significantly to UZS224 billion in 2022, mainly in relation to its property business line, and accounted for 70% of non-life GWPs (2021: 45%). In absolute terms, volumes of inward reinsurance more than doubled in 2022 and further grew in 1H23. Fitch views this rapid growth of inwards reinsurance from abroad as a risk to Kafolat's business risk profile, as it exposes the company to more significant single large losses and volatility than its domestic business. Weak Capital Position: Due to increased business volumes, in particular for inwards reinsurance, the insurer's regulatory capital buffer, based on a Solvency I-like formula, remained under pressure at 104% at end-September 2023 (end-2022: 102%). This was despite an increase of authorised capital to UZS45 billion in 3Q22 and strong financial results in 1H23. Fitch expects growing business volumes to continue to weigh on Kafolat's capital position. Kafolat's capital position, as measured by Fitch's Prism Factor-Based Model (FBM) score, remained 'Adequate' at end-2022. Kafolat's capital also remains exposed to changes in the valuation of non-tradeable equity investments and tangible assets on its balance sheet. At end-2022, Kafolat recorded a UZS55 billion positive revaluation, which corresponded to 38% of its IFRS-based capital. This revaluation is related to the insurer's headquarters. Reduced Investment Risk: Kafolat sold its equity stake of UZS38 billion (30% of its total invested assets at end-2022) in Ipak Yuli Bank in 1H23, reducing its exposure to risky assets and removing significant concentration risk from its balance sheet. Kafolat's investment portfolio is largely represented by bank deposits. Its ability to improve asset diversification is constrained by a narrow local investment market. Loss in 2022: Kafolat reported a net loss of UZS4 billion, versus a UZS2.2 billion profit in 2021, resulting in a return on equity (ROE) of -3% (five-year average ROE: 2%). The loss was largely driven by significant outflows in its life business line, which were due to a tax legislation change. Kafolat's net combined ratio marginally improved to 96% in 2022 from 97.3% in 2021 (five-year average: 102%), following a reduction in its commission and expenses ratio. It net loss ratio deteriorated in 2022, largely reflecting higher claims volume in the property line. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Significant capital depletion, for example, demonstrated by a Prism FBM score at the low end of 'Somewhat Weak' on a sustained basis Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Significant strengthening of Kafolat's company profile, while maintaining a Prism FBM score at least above 'Adequate' and positive financial performance ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Prior ----------- ------ ----- Kafolat Insurance Company JSC LT IFS B+ Affirmed B+ =========================== U N I T E D K I N G D O M =========================== 888 HOLDINGS: S&P Affirms 'B' ICR, Outlook Negative --------------------------------------------------- S&P Global Ratings affirmed its ratings on 888 Holdings PLC and its senior secured notes at 'B'. The rated debt has a recovery rating of '3', indicating meaningful recovery (50%-70%, rounded estimate: 60%) in the event of default. S&P said, "The negative outlook reflects that we could downgrade 888 in the next 12 months if the group underperforms our base-case forecast. This could include inability to generate FOCF after leases, or adjusted leverage remaining above 7.0x -- both of which could indicate to us a financial profile at the weaker end of the rating range in the medium term." S&P forecasts 888 Holdings will return to growth in 2024. Revenues from the U.K. online division, about 38% of the group's revenue as of first-half 2023, have been declining, in most part due to pre-emptive implementation of safer gaming initiatives ahead of government reforms. Higher spenders', as defined by the company, contribution to U.K. online revenue declined to about 20% as of second-quarter 2023 from more than 40% at the beginning of 2021. Monthly average revenue per user (ARPU) fell to GBP44 by second-quarter 2023 from GBP80 in the beginning of 2021, partly also fueled by the cost-of-living pressure on U.K. players. However, this has been accompanied by an increase in monthly average player volumes, which reached a new high after the acquisition of William Hill. The group now has 1.28 million average monthly players as of second-quarter 2023, up from 0.9 million at the beginning of 2021. 888's ability to return to structural growth in particular in U.K. online is a key assumption underpinning our 2024 forecast, as is the ability for the group to drive top line momentum, after its cost rationalization and synergy efforts. Success will be subject to both developments in the economic environment affecting players' discretionary spending and whether the scope and timing of the new regulations will have additional impact beyond the pre-emptive measures U.K. gaming companies have been gradually implementing. Meanwhile, in the international market (as defined by the group), which makes up about 30% of revenue, regulatory changes in Germany and the slow trading recovery from the suspension of VIPs in the Middle East has offset the growth in the core markets of Italy and Spain in 2023. These impacts contribute to an expected decline in our forecast of 2023 revenue by 7%-8% to GBP1.71 billion (compared with GBP1.85 billion in 2022 pro forma) before returning to our base-case forecast of about 3% growth in 2024, driven by assumptions of modest return to growth in U.K. online, stable performance in U.K. Retail and a turnaround in international performance. S&P said, "We have revised down our assessment of the group's business risk profile to weak from fair. We now forecast adjusted EBITDA below GBP200 million for 2023 and then about GBP250 million in 2024, which remains subject to execution risks. Additionally, margins are below 20%, a level we regard as average for the sector, while the U.K., a single jurisdiction, represents around 70% of group revenue in 2023. Meanwhile, the group has made material organizational changes via a new CEO and CFO and continues its significant integration and synergy efforts. The executive management changes raise the question of possible minor tweaks to the group's strategy or operations, but at this time the board has not communicated any changes and key targets such as synergy capture and the 2025 financial policy remain unchanged. Separately, we understand that the current conflict in the Middle East region has limited impact on operations, although the group does have a meaningful number of staff in Israel. We will continue to monitor the situation. We will also monitor the outcome of the U.K. license review, which was launched following discussions with shareholder FS Gaming and related parties. As announced in July 2023, 888 terminated discussions with the parties. Accordingly, we do not currently factor any material downside outcomes from the review into our base case. "Our financial forecast relies heavily on successful integration and synergies. As of third-quarter 2023, 888 confirmed it was still on track to realize the GBP150 million run rate of total synergies, including GBP116 million cumulative operating expenditure synergies and GBP34 million capital expenditure (capex) synergies, even pushing this target a year earlier to 2024. Our base case incorporates costs to capture these synergies, such as restructuring and other exceptional costs, with our estimate of about GBP70 million in 2023. We expect these will fall materially to about GBP30 million in 2024, creating a GBP40 million direct EBITDA uplift additional to an approximate GBP20-million synergy benefit uplift (S&P Global Ratings' assumptions). We expect the S&P Global Ratings-adjusted EBITDA margin to remain flat in 2023 at about 11% before improving to 14%-15% in 2024, thus driving down adjusted debt to EBITDA to below 7x in 2024-2025 from our forecast of about 9x in 2023. Our 2024 forecast of material improvement in profitability, cash flows, and leverage is captured in our rating via the positive assessment of the comparable rating analysis modifier, and thus the 2024 forecast expectations directly underpin the current rating. The group is seeking to execute the integration plan against a backdrop of high inflation in the U.K. and some uncertainty regarding implementation of final U.K. white paper measures. "Cash flows are weak, but liquidity is adequate. We expect FOCF after leases to return to positive in 2024 after a dip to negative GBP60 million-negative GBP80 million in 2023, predicated on organic revenue growth and margin recovery from execution of the integration plan. Should there be any shortfall in performance or synergy plans, however, interest expenses could become a pressure point on cash flows. With adjusted debt of about GBP1.7 billion largely incurred from the acquisition of William Hill, about 30% of it at floating rate, the group is exposed to high interest expenses. We forecast an annual interest expense of about GBP170 million, which is a very significant portion of the GBP180 million-GBP200 million adjusted EBITDA forecast in 2023. That said, we believe this is mitigated by the group's adequate liquidity position, thanks to the undrawn GBP150 million revolver, about GBP162 million of cash as of Sept. 22, 2023 (net of customer balance, based on the company's guidance revision, which we deem as restricted cash). The group's S&P Global Ratings-adjusted forecast FFO to debt, which is a core ratio in our analysis, is neutral in 2023 and at about 4% in 2024 (the highly leveraged range is 0%-12%). "The negative outlook reflects that we could downgrade 888 in the next 12 months if the group underperforms our base-case forecast. This could include an inability to generate FOCF after leases, or to deleverage the group. "Our base-case forecast is for adjusted leverage to decline to about 6.5x, FFO to debt of about 4%, and FOCF after leases to debt of about 1%-1.5%." S&P could lower the ratings in the next 12 months if 888 underperforms its base-case forecast, which could include: -- Reported FOCF of less than GBP50 million, which would likely result in S&P Global Ratings-adjusted FOCF after leases to debt of below 1%; or -- Adjusted FFO to debt of less than 4% in 2024; or -- Adjusted debt to EBITDA does not advance to below 7.0x; or -- 888 deviating from its financial policy commitment of 3.0x company reported debt to EBITDA by way of dividends or mergers and acquisitions that prevent deleveraging toward its policy target. Taken holistically, the above metrics represent the core and key supplementary ratios for the sector and thus could indicate if maintained at the weaker end of the range, a weaker financial profile for longer than our current base case. S&P's focus at this stage remains the group's progress toward 2024 recovery in key credit metrics and it will monitor this as quarterly results are reported. S&P expects 2023 therefore to be a transitional year in terms of credit metric performance, but nonetheless S&P will also take note of final audited actuals in the context of: -- The group's ability to track and meet budgeted performance; -- Maintenance of liquidity; -- Any other management or strategic guidance updates for 2024; and -- Key ratio development momentum, in particular into fourth-quarter 2023 and building into 2024. S&P could consider revising the outlook to stable if the group made material progress on its integration, while sustainably reducing leverage and achieving positive and increasing FOCF after lease payments. Specifically, an outlook revision would depend on the group's ability to maintain the following credit metrics, which S&P considers commensurate for the current rating: -- S&P Global Ratings-adjusted debt to EBITDA below 7.0x and on a declining trend, with a continued commitment to leverage remaining below this level; -- Adjusted FOCF after leases to debt of about 2% or more, which would likely require FFO to debt of 4% or greater; and -- Maintenance of adequate liquidity, in part evidenced by a rising ratio of sources to uses (reversal of the current trend). S&P said, "Governance factors are a negative consideration in our credit rating analysis, because we see risks from the executive management changes, as well as from the apparent compliance failings that the group's internal investigation has revealed, which has caused a material revenue impact to date in 2023. The group's U.K. operating license is currently under review by the U.K. Gambling Commission, following discussions with shareholder and relating party FS Gaming, which we understand have now ceased. While the outcomes of the review remain uncertain, we do not factor in major downside outcomes, such as a suspension (which we view as unlikely), into our base case. "Social factors remain a negative consideration in our credit rating analysis, because we see the group as particularly exposed to the health and safety and social capital implications of its gaming operations. Specifically, we note 888 Holdings' and William Hill's prior fines and the GBP19.2 million of regulatory settlement with the U.K. Gambling Commission for player-protection shortcomings. Ongoing safer gaming initiatives in the U.K. ahead of U.K. white paper measures being implemented, most likely in 2024, have continued to contribute to revenue declines. The consultation for the white paper was recently finalized in October 2023. In 2023, the group will also settle a fine with the Gibraltar Gaming Authority following Middle East compliance shortcomings." AMPHORA FINANCE: GBP301MM Bank Debt Trades at 55% Discount ---------------------------------------------------------- Participations in a syndicated loan under which Amphora Finance Ltd is a borrower were trading in the secondary market around 44.6 cents-on-the-dollar during the week ended Friday, November 3, 2023, according to Bloomberg's Evaluated Pricing service data. The GBP301 million facility is a Term loan that is scheduled to mature on June 1, 2025. The amount is fully drawn and outstanding. Amphora Finance Limited operates as a special purpose entity. The Company was formed for the purpose of issuing debt securities to repay existing credit facilities, refinance indebtedness, and for acquisition purposes. The Company's country of domicile is the United Kingdom. BOPARAN HOLDINGS: Fitch Alters Outlook on B- LongTerm IDR to Stable ------------------------------------------------------------------- Fitch Ratings has revised the Outlook on Boparan Holdings Limited's Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'. Fitch has also affirmed Boparan Finance plc's GBP525 million senior secured notes due in 2025 at 'B-' with a Recovery Rating of 'RR4'. The revision of the Outlook reflects its expectations that Boparan's EBITDA leverage will improve to below 5.5x in FY24 (financial year ending July). Fitch also expects the EBITDA margin to strengthen to 4% in FY24, following profitability improvement in the poultry segment and anticipate neutral to positive free cash flow (FCF) despite the increased capex plans through FY27. This follows a margin improvement in 3Q and 4QFY23, and its expectation that this will continue in 1H24. Execution risk remains as the operating environment remains challenging, with some labour cost increases expected in the UK, and uncertainty about trading improvement in the EU poultry market. However, following recent cost-cutting measures and closure of the site at Llangefni, Fitch views the company as better positioned to deal with these challenges. Additionally, Fitch views refinancing risk as high given the 2025 maturities. Fitch expects this to be addressed in a timely manner. KEY RATING DRIVERS Ongoing Profitability Recovery: Fitch projects Boparan's EBITDA margin will recover to 4% in FY24 (FY23: 3.2%), mainly due to the full-year impact of cost-cutting measures, with the introduction of a fillet automation line and closure of the Llangefni production site. Fitch still sees risks that profits remain under pressure from labour costs inflation, particularly in the UK, which might not be fully covered by further price increases. However, Fitch views Boparan's operating position as slightly stronger than last year, given the lower feed price, which will be passed through to customers, potentially making compensation for other cost increases easier to negotiate. This may also increase volumes. Continued Expected Deleveraging: Its estimates of the projected recovery in Boparan's profitability translate into a further reduction in leverage metrics in FY24, with EBITDA gross leverage expected to reduce to 5.3x from 6.6x in FY23 and its peak of 8.4x in FY21. This is in line with the top range of its sensitivity for a 'B-'rating, supporting the revision of the Outlook. A further reduction in leverage to under 5x in FY25-26 would restore rating headroom. Execution Risks Remain High: Boparan's operating margins remain vulnerable to external pressures. The group achieved some additional cost savings in FY23 with the full impact expected in FY24-25, which will translate into a more resilient operating margin in its core poultry segment. The closure of the Llangefni site in particular, should help improve the cost base and focus on new products. Cost inflation will remain a risk for FY24, so further margin growth will be subject to the company's ability to manage this, particularly wage growth. Unlike feed costs, wages and energy costs are not part of the ratchet mechanism. Volatile FCF: Fitch projects FCF will return towards neutral territory by FY24, following several years of negative FCF, which eroded Boparan's liquidity headroom and increased leverage. The projection takes into account anticipated accelerated capex of GBP50 million-GBP55 million after tighter average capex of EUR35 million a year in FY21-23. The medium-term FCF profile also considers the newly-signed pension agreement, with planned cash contributions GBP11 million-GBP 17 million lower than previously agreed. However, as Fitch estimates higher debt cost at refinancing, Fitch projects FCF will turn negative from FY26. Leading UK Poultry Producer: Boparan has a leading position in the UK, covering nearly one-third of the country's poultry market. The market position is supported by Boparan's large-scale operations and established relationships with key customers, including grocery chains, the food-service channel and packaged-food producers. It also benefits from an integrated supply chain via its joint venture with PD Hook, the UK's largest supplier of broiler chicks. This adds to the stability of livestock supply and ensures sufficient processing capacity utilisation. Limited Diversification: The protein business accounts for nearly 80% of Boparan's revenue, with poultry the core animal protein processed, with the remainder from ready chilled meals and bakery categories. Boparan is exposed to key customer concentration risk, in poultry and ready meals in the UK, particularly with sales to Marks and Spencer Group plc. Geographical diversification benefits from operations in the EU, as the company is the second-largest poultry producer in the Netherlands and among the top five in Poland, the largest poultry-producing country in the EU. Favourable Market Fundamentals: Boparan operates in food categories with sound fundamental growth prospects. Fitch assumes resilient low-to-mid single-digit growth in poultry consumption, which is the fastest-growing protein globally, due to its low cost versus other proteins, as well as consumer perception that it represents a healthier option than beef and pork. The company's large exposure to discount retailers should support resilience of its sales volumes during weakened economic environment, as expected during FY24. DERIVATION SUMMARY Boparan's credit profile is constrained by high leverage and a modest size, with EBITDA below USD200 million, the median for the 'B' rating category in Fitch's Rating Navigator for protein companies, as well as by its regional focus in the UK with only moderate diversification in the EU. The company has lower profitability than the majority of its peers, such as Minerva S.A. (BB/Stable) and Pilgrim's Pride Corporation (BBB-/Stable), which Fitch believes is due to limited vertical integration and some operating inefficiencies that Boparan is addressing. Fitch still sees the risk of profits remaining under pressure from energy, distribution, packaging and labour cost inflation, which may not be fully covered if there are additional price increases. No Country Ceiling, parent-subsidiary linkage or operating environment aspects apply to Boparan's ratings. KEY ASSUMPTIONS Fitch's Key Assumptions Within its Rating Case for the Issuer: - Revenue decline of 0.5% in 2024 followed by about 1%-2% growth thereafter - EBITDA margin at 4% in FY23, recovering gradually to 4.4% in FY27 - Capex at GBP55 million in FY24 before moderating to around GBP50 million in FY25-FY27 - No M&A or dividend payments over FY24-FY27 - Cash pension contribution of GBP8 million in FY24, before normalising at around GBP16 million-GBP18 million from FY24, reflected in funds from operations. - Timely refinancing of the revolving credit facility (RCF), term loan B (TLB) and senior secured notes at 10%-12% all-in annual cost of capital RECOVERY ANALYSIS Key Recovery Rating Assumptions: The recovery analysis assumes that Boparan would be reorganised as a going concern (GC) in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim. Boparan's GC EBITDA is estimated at GBP95 million, reflecting its view of a sustainable, post-reorganisation EBITDA, upon which Fitch bases the enterprise valuation (EV). An EV/EBITDA multiple of 4.5x is used to calculate a post-reorganisation valuation and reflects a mid-cycle multiple consistent with other protein business peers, particularly in market share and brand. Fitch views Boparan's receivables factoring as super senior in the waterfall, which would not be available to the company during and post-bankruptcy and would need to be replaced with an alternative funding. Fitch assumes the GBP80 million RCF is fully drawn on default. The waterfall analysis generated a ranked recovery for the GBP525 million senior secured notes in the 'RR4' band, ranking after the GBP80 million of committed RCF incremented by the add-on GBP10 million TLB ranking pari-passu. This indicates a 'B-'/'RR4' instrument rating for the senior secured debt with an output percentage based on current metrics and assumptions of 47%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Sustained EBITDA margin improvement above 5% and positive FCF - EBITDA leverage below 4.5x on a sustained basis - EBITDA interest coverage above 2.5x - Sufficient liquidity to cover all operational needs (working capital and capex) with limited intra-year drawings under the RCF Factors that could, individually or collectively, lead to negative rating action/downgrade: - Absence of credible refinancing options 12 months ahead of debt maturities - EBITDA margin below 3.5% with negative FCF eroding liquidity headroom - EBITDA leverage above 5.5x on a sustained basis - EBITDA interest coverage below 2.0x LIQUIDITY AND DEBT STRUCTURE Limited Liquidity: Fitch forecasts that by end-FY24 Boparan will have GBP19 million cash on its balance sheet, after adjusting for GBP15 million required for operating purposes and GBP45 million availability under its RCF available until May 2025. Fitch expects FCF to remain negative at about GBP5million in 2024 constrained by weak working capital contribution and increasing capex despite the lower pension contribution outflow. Approaching Debt Maturities: The Stable Outlook incorporates its assumption of Boparan's timely near-term resolution of the upcoming RCF, TLB and senior secured notes becoming due in May 2025, and November 2025 respectively. ISSUER PROFILE Boparan is the UK's leading poultry meat producer, providing around one-third of all poultry products eaten in the UK. In addition, the group is the second-largest poultry processor in the fragmented Continental European market, with facilities in Holland and Poland. Boparan also supplies ready meals and bakery products (buns and rolls) to major UK food retailers. ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Boparan Holdings Limited LT IDR B- Affirmed B- Boparan Finance plc senior secured LT B- Affirmed RR4 B- CASTELL PLC 2023-2: S&P Assigns Prelim. B Rating on Class X Notes ----------------------------------------------------------------- S&P Global Ratings assigned its preliminary ratings to Castell 2023-2 PLC's class A1, A2, B-Dfrd, C-Dfrd, D-Dfrd, E-Dfrd, F-Dfrd, and X-Dfrd notes. At closing, Castell 2023-2 will also issue unrated class G-Dfrd and H notes, as well as RC1 and RC2 residual certificates. The assets backing the notes are U.K. second-lien mortgage loans. Most of the pool is considered prime, with 91.92% originated under UK Mortgage Lending's prime product range. Additionally, 1.35% of the pool refers to loans advanced to borrowers under UK Mortgage Lending's "near prime" product, with the remaining 6.73% loans advanced to borrowers under its "Optimum+" product. Loans advanced under the "near prime" or "Optimum+" product range have lower credit scores and potentially higher amounts of adverse credit markers, such as county court judgments, than those under the "prime" product range, and borrowers pay a higher rate of interest under these products. The transaction benefits from liquidity provided by a liquidity reserve fund, and principal can be used to pay senior fees and interest on the notes subject to various conditions. Credit enhancement for the rated notes will consist of subordination. The transaction incorporates a swap with a fixed schedule to hedge the mismatch between the notes, which pay a coupon based on the compounded daily Sterling Overnight Index Average, and the loans, which pay fixed-rate interest before reversion. At closing, the issuer will use the issuance proceeds to purchase the full beneficial interest in the mortgage loans from the seller. The issuer grants security over all of its assets in the security trustee's favor. At closing, a prefunding amount of about GBP15 million will be available until the first interest payment date in December 2023 to include the loans originated in October 2023. S&P's analysis of the provisional portfolio does not factor any prefunding amount. There are no rating constraints in the transaction under S&P's counterparty, operational risk, or structured finance sovereign risk criteria. S&P considers the issuer to be bankruptcy remote. Pepper (UK) Ltd. is the servicer in this transaction. In S&P's view, it is an experienced servicer in the U.K. market with well-established and fully integrated servicing systems and policies. It has its ABOVE AVERAGE ranking as a primary and special servicer of residential mortgages in the U.K. In its analysis, S&P considered its current macroeconomic forecasts and forward-looking view of the U.K. residential mortgage market through additional cash flow sensitivities. Preliminary ratings CLASS PRELIM. RATING* CLASS SIZE (%) A1 AAA (sf) 71.25 A2 AAA (sf) 3.75 B-Dfrd AA (sf) 6.25 C-Dfrd A (sf) 5.50 D-Dfrd BBB- (sf) 4.50 E-Dfrd BB (sf) 2.00 F-Dfrd B- (sf) 1.50 G-Dfrd NR 2.75 X-Dfrd B (sf) 2.00 H NR 2.50 RC1 Certs NR N/A RC2 Certs NR N/A *S&P Global Ratings' ratings address timely receipt of interest and ultimate repayment of principal on the class A notes, and the ultimate payment of interest and principal on all other rated notes. S&P's ratings also address timely interest on the rated notes when they become most senior outstanding. Any deferred interest is due immediately when the class becomes the most senior class outstanding. NR--Not rated. N/A--Not applicable. CUBE HEALTHCARE: S&P Lowers ICR to 'B-' on Muted Performance ------------------------------------------------------------ S&P Global Ratings lowered to 'B-' from 'B' its ratings on Cube Healthcare Europe Bidco SAS (holding company of Domidep) and its senior secured term loan B (TLB); the recovery rating on the debt remains '3', reflecting its expectation of 50%-70% recovery (rounded estimate: 50%) in the event of a default. The stable outlook reflects S&P's view that Domidep will be able to gradually reduce leverage in line with its base case, fund its day-to-day operations, and service its cash interest payments in the next 12-18 months. Difficult market conditions limited Domidep's operating performance recovery in 2022, resulting in a material deviation from our base case, and reducing the prospect of adjusted leverage decreasing below 7.0x before 2025. For the past three years, the health care services sector in general--and nursing homes in particular--have faced business disruption due to the pandemic. This has led to reduced occupancy rates, staff absenteeism due to sickness, and additional costs to ensure residents' safety. There was also the scandal involving the top two French players (Orpea and Korian), which had a spillover effect on all operators in the sector, although only indirectly. Nursing homes have not been immune to inflation either; staffing, rent, energy, and food costs have all gone up, and this has weighed on Domidep's profitability. As a result, the S&P Global Ratings-adjusted EBITDA margin decreased by 310 basis points (bps) from the 2021 level to 26.2% in 2022, with EBITDA at about EUR128.5 million in 2022. This led to S&P Global Ratings-adjusted debt to EBITDA of 8.1x, versus the 7.7x initially forecast and up from 7.9x at year-end 2021. In turn, fixed-charge coverage deteriorated to below 2.0x and FOCF (after leases) was less than EUR10 million, hampered by additional leases related to the expansion into Germany and significant investments related to the real estate reconstruction and extension projects. Although government subsidies helped address some of the immediate inflationary pressures, notably on staff costs, Domidep's overall operating performance remained heavily dependent on the alignment of tariffs paid by nursing home residents in France. The accommodation tariffs in France were aligned only after the annual pension revaluation to 5.14% as of Jan. 1, 2023, and in Germany only after region-per-region negotiations, which were fully finalized on April 1, 2023. Persistent inflation and increased debt due to recent external growth activities will prevent Domidep from deleveraging to below 7.0x before 2025. S&P said, "We see insufficient headroom for unexpected setbacks, owing to difficult operating conditions in Germany, persistent inflation, and acquisitions. In our base case, we assume adjusted EBITDA of EUR135 million-EUR140 million in 2023 and EUR150 million-EUR155 million in 2024, translating into a margin of 24.5%-25.5%, against adjusted debt of about EUR1.1 billion. Our adjusted debt figure corresponds to the group's gross debt and includes the EUR415 million term loan, EUR90 million of drawings on the revolving credit facility (RCF), about EUR70 million of other debt (mainly real estate debt), EUR470 million-EUR490 million of lease commitments, and a EUR23 million adjustment to account for minority shareholders' put options. We note that, compared with peers, Domidep's leasing debt weighs heavily on its total debt quantum due to the length of the leasing contracts in Germany. Because Domidep is owned by a financial sponsor, we do not net cash from gross debt; our EBITDA calculation excludes leases, but includes one-off items like restructuring and acquisition costs. We anticipate adjusted debt to EBITDA to remain elevated this year at close to 8.0x, compared to our previous forecast of less than 7.5x, before decreasing toward 7.0x in 2024 and below 7.0x in 2025. German nursing homes the group acquired in 2021 contribute to the subdued performance since their profitability is lower than the group's nursing homes in France. For the German operations, accommodation revenue is also lower due to suboptimal occupancy rates. A key differentiator of the German market, which accounted for 17% of Domidep's revenue in 2022, is the required minimum ratio of 0.5 full-time equivalent nurses per resident. This requirement has a direct impact on Domidep's occupancy rate in Germany lagging that in France, at 85% versus 94%, due to the structural shortage of medical staff. This is preventing a more rapid rebound of occupancy rates at the German nursing homes, despite strong demand. Moreover, we believe increased energy costs, rents, and salaries will limit margin expansion in the next 12-18 months. S&P understands that 85% of the cost increase will be offset by year-end 2023, partially thanks to the revaluation index, which was fixed at 5.14% as of Jan. 1, 2023, for existing residents in France, and thanks to tariff increases for new residents in all geographies. The remaining 15% is expected to be recovered during 2024 supported by both new tariff increases and a rebound in occupancy rates. S&P said, "Although deleveraging has been delayed, we believe Domidep's operational recovery will support gradual deleveraging from 2024. Occupancy rates in France (accounting for 80% of sales) are rebounding as health risks normalize, at 95% for Domidep compared to 90% on average for the sector, which includes public-sector, associative, and private nursing homes. We also believe average daily rates will remain an organic growth driver, with an anticipated 8% increase in tariffs to be passed through this year. The group shows good capacity to increase prices for new residents, thanks to most of its rooms being for single occupancy, especially in France. Thus, we anticipate top-line growth of 14.5%-15.5% in 2023 (including the pro-rata contribution from acquisitions) and 6%-7% in 2024." Domidep's acquisition strategy may support future growth but limits its ability to deleverage, which will remain subject to a prudent funding mix. Since the beginning of 2023, the group has closed eight small bolt-on acquisitions in France and signed a greenfield agreement in Germany for the development of five nursing homes and five assisted-living facilities. The EUR54 million spent on those transactions were funded by a EUR20 million equity injection from the financial sponsor and drawings from the RCF, adding up to total debt. S&P said, "We understand the group will now focus on cash management and the execution of its integration strategy, especially in Germany where it is still in a ramp-up phase. Yet we believe it will continue to pursue opportunistic bolt-on acquisitions in the next 12-18 months, remaining among the leading consolidating groups in the French and German private nursing home market. This reflects additional opportunities following the pandemic and the Orpea scandal, since less financially sound operators could seek to sell. As a result, we believe Domidep's ability to gradually deleverage will also depend on its capacity to generate FOCF in line with our base case to self-fund its external growth. We forecast that Domidep will generate less than EUR10 million of FOCF (after leases) in 2023 and EUR10 million-EUR20 million (after leases) in 2024, compared with about EUR1.1 billion of adjusted gross debt. FOCF will remain under pressure due to ongoing real estate extension and reconstruction projects, which should down from 2024. This will drive lower rental expenses in the future and increase the quality of the nursing homes, which will ultimately result in higher pricing power for the group." S&P said, "In our view, the group has adequate liquidity to fund its day-to-day operations and cover mandatory annual debt amortization. Domidep had about EUR15 million in cash as of June 30, 2023, and EUR26 million available under its RCF. We believe it can manage its intrayear working capital needs, capital expenditure (capex), and interest payments for the next 12 months. We also note as positive the absence of significant debt maturities until the TLB matures in 2026. We expect the group to maintain enough headroom under its covenant test, despite the RCF being drawn by more than 40%. We also view the group as reasonably well protected from interest-rate fluctuations, since 100% of its TLB is hedged until January 2026. "The stable outlook reflects our view that Domidep's adjusted debt leverage will remain close to 8.0x in 2023 before reducing to 7.0x-7.5x in 2024. We still foresee the company's FOCF remaining depressed this year because of relocation capex, higher interest expenses, and reduced profitability due to inflation albeit offset by a rebound in operations across geographies." Downside scenario S&P could lower the ratings if the risk of an unsustainable capital structure increases amid high debt, or if pressure on liquidity builds. Either scenario would most likely stem from unexpected operational setbacks preventing an improvement in profitability and cash flow generation. Upside scenario S&P said, "We could take a positive rating action if Domidep's operating performance showed clear signs of strengthening, leading us to believe it could significantly outperform our projections. This would result in deleveraging to below 7.0x while FOCF allows the company to partially self-fund its external growth strategy or increase its cushion to absorb external shocks. This could happen if the company delivers consistent and sustainable EBITDA growth on a sustainable basis, and external growth activities don't increase the group's leverage. "Environmental and social factors have no material influence on our rating analysis of Domidep. Providers of elderly care services have an important role in health care because of an increasing share of dependent individuals due to demographic trends, the demand for beds, and supply imbalances. Domidep has demonstrated a track record of good quality in care standards, patient satisfaction, and staff retention that will continue to support high occupancy rates and shield the group from negative media attention derived from the Orpea scandal, in our view. "We note that 60% of the Domidep's establishments are certified "SGS Label," which attests to the quality of operations and welfare of residents. Domidep aims to increase the percentage of certified homes to 100% by 2025. We also understand the group is in the process of embedding environmental, social, and governance standards by becoming a mission-led company "Entreprise a Mission". "Governance is a moderately negative consideration, as is the case for most rated entities owned by private-equity sponsors. We believe the group's highly leveraged financial risk profile points to corporate decision-making that prioritizes the interests of the controlling shareholders. This also reflects the owners' generally finite holding periods and focus on maximizing shareholder returns." DENTS OF CHESTERFIELD: Pharmacies Put Up for Sale After Collapse ---------------------------------------------------------------- Business Sale reports that a pair of pharmacies in Chesterfield are set to be put up for sale after falling into administration. Dents of Chesterfield on Windermere Road and Dents Pharmacy in Saltergate are both established community pharmacies in Chesterfield, with more than 100 years of trading history. They are both health centre-integrated pharmacies and collectively dispense 16,000 items on average per month. As of September 2023, the two pharmacies, which are run by full-time pharmacists with locum pharmacists on site one day per week, had total income of more than GBP1.5 million. According to Business Sale, joint administrators Richard D'Arcy and Christopher Latos engaged property broker Christie & Co to market the pharmacies for sale on Nov. 3. They are available to buyers either as a pair or on an individual basis, with an asking price of GBP850,000, Business Sale discloses. The sale process will be handled by Christie & Co Director for Pharmacy Carl Steer, Business Sale states. "We expect that the sale of these two long-established pharmacies within health centres that are thoroughly modernised throughout will bring about strong interest from a mix of pharmacy operators. Interested parties are encouraged to act swiftly to meet the deadline for offers of November 30, 2023," Business Sale quotes Mr. Steer as saying. DIGNITY FINANCE: S&P Lowers Class A Notes Rating to 'B+(sf)' ------------------------------------------------------------ S&P Global Ratings lowered to 'B+ (sf)' from 'BBB- (sf)' and removed from CreditWatch negative its credit rating on Dignity Finance PLC's class A notes. At the same time, S&P affirmed its 'CCC+ (sf)' rating on the class B notes. On Aug. 11, 2023, S&P placed on CreditWatch negative its rating on the class A notes to reflect the uncertainty about Dignity's timely execution of the deleveraging plan and company underperformance compared with its previous forecast. Since then, a new consent solicitation was agreed with the class A noteholders. Based on the new plan, the management does not rule out the sale of crematoria to partially redeem the class A notes by the end of 2024, but it also considers other possible options to secure the class A partial redemption such as a drawdown of a portion of the surplus within the funeral plan trusts or further equity injections from the group. S&P said, "In our view, there remains material execution risk for the deleveraging plan to partially redeem GBP70 million of the class A notes (including make-whole fees). This is owing to a higher-for longer outlook for interest rates and capital markets volatility suppressing demand and valuations for real assets. Furthermore, approval from the trustees of the funeral plan trusts will be required for any release of surplus to occur, which is also subject to 25% income tax. As a result, our current base-case assumption is that the company will not complete the deleveraging of the class A notes by the end of 2024, which is reflected in our revised cash flow analysis." As part of the updated restructuring plan, the 1.5x EBITDA debt service coverage ratio (DSCR) financial covenant waiver, which lapsed in March 2023, was reinstated for a period of 15 months, until December 2024, starting from the end of September 2023 and subject to certain conditions. Since the initial waiver in March 2022, this financial covenant has been supported through equity injections from the parent company. However, there is no assurance of the ability and willingness of the parent to continue to provide the same level of support. S&P said, "Our analysis assumes minimal parent support available to the securitization group in order to fulfill covenant requirements and that the issuer may draw on the liquidity facility for any shortfalls in debt service. Based on our cash flow analysis, we believe this will be required for the next two to three years, with heavy reliance on liquidity in the near term." S&P said, "We believe the combined effect of the failure to deleverage and the reduction in operating cash flows in the near-to-medium term has resulted in a material deterioration in the creditworthiness of the class A notes. Accordingly, we lowered our rating to 'B+ (sf)' from 'BBB- (sf)'. "We affirmed our 'CCC+ (sf)' rating on the class B notes as the uplift above the borrowing group's creditworthiness reflected in our rating is limited." Transaction structure Dignity Finance is a corporate securitization of the U.K. operating business of the funeral service provider Dignity (2002) Ltd. (Dignity 2002 or the borrower). It originally closed in April 2003 and was last tapped in October 2014. The transaction features two classes of fixed-rate notes (A and B), the proceeds of which have been on-lent by the issuer to Dignity 2002 via issuer-borrower loans. The operating cash flows generated by Dignity 2002 are available to repay its borrowings from the issuer that, in turn, uses those proceeds to service the notes. Dignity Finance's primary sources of funds for principal and interest payments on the notes are the loans' interest and principal payments from the borrower and any amounts available under the GBP55 million tranched liquidity facility. In S&P's opinion, the transaction would qualify for the appointment of an administrative receiver under the U.K. insolvency regime. An obligor default would allow the noteholders to gain substantial control over the charged assets prior to an administrator's appointment without necessarily accelerating the secured debt, both at the issuer and at the borrower level. Rating Rationale S&P's ratings address the timely payment of interest and principal due on the notes. They are based primarily on its ongoing assessment of the borrowing group's underlying business risk profile (BRP), the integrity of the transaction's legal and tax structure, and the robustness of operating cash flows supported by structural enhancements. Business risk profile S&P said, "We continue to assess the borrower's BRP as weak. Our weak BRP assessment reflects the unfavorable trend of consumers' shift to cheaper, lower margin direct cremations or unattended funerals under the cost of living pressure, which has continued since the pandemic. The Competition and Markets Authority's (CMA) decision to implement the obligation to offer direct cremations in every branch, while this service was previously only offered online, has also fueled this trend. Despite the unbundling of funeral services and offering tailored options since 2021, consumers' choice, in our view, will continue to be dictated by budget under macroeconomic recessionary pressure. "In addition, there remains competitive pressure within the sector in terms of pricing. Our view is that the business has limited differentiation potential in the industry that continues to be crowded, although the regulatory reforms from the CMA and the Financial Conduct Authority (FCA) may facilitate some consolidation. In our base case, we assume Dignity 2002's market share will pick up by 10-20 basis points (bps) in 2023 and a further 20 bps in 2024. As of the end of 2022, it had about 12% market share for funeral services and 11% for cremations. Dignity 2002's commitment to helping customers of other funeral plan providers that did not meet FCA requirements leads to costs including professional fees and onerous contract provisions (loss-making plans, costs of which are not fully recovered by other trusts). Under our criteria, we include these exceptional costs as part of adjusted EBITDA calculation (which reduce EBITDA), although we understand the business rationale behind this initiative. As a major funeral services provider in the U.K., Dignity 2002 benefits from maintaining market integrity and consumer confidence in the funeral plans market, mildly growing market share over the years. Moreover, the industry continues to experience staff shortage, the cost of which is accentuated by the increase in the minimum wage. Energy and input cost inflation through 2023 will continue to pressure profitability before starting to recede in 2024. "In our view, changes in consumer demand and product mix from budget-conscious customers that trade down to cheaper options, such as cremations, coupled with regulatory changes and cost inflation, will continue to set the industry in a transitory mode for at least another year before a new equilibrium of the economics of the business kicks in. "Under our corporate securitization methodology, we use the BRP as a proxy for earnings and cash flow volatility. We assume that a weak BRP signifies a more volatile business." Financial performance While S&P's assessment of the BRP remains unchanged, it revised downward its base-case operating cash flow projection, incorporating the company's recent financial performance and its forward-looking expectations. Dignity 2002 reported an unsupported EBITDA (without the benefit of equity injections) for the 52-week period ended June 30, 2023, of GBP31.2 million, compared with GBP48.1 million for the 53-week period ended July 1, 2022. The reduced profitability is due to lower pricing and changing business mix, as well as higher operating costs. While the group increased prices in 2023 in line with expectations, this is partly absorbed by higher operating expenses (notably personnel expenses, but also energy and raw materials). Recent performance and events -- Dignity 2002 has slightly improved its market share by offering affordable services. This includes simplicity funerals for GBP995. As of year-end 2022, the funerals market share was 11.9%, only marginally higher compared with 11.8% in year-end 2021 and below 12.0% in 2020. The cremation market share was 11.8%, compared with 11.3% in 2021 and 11.2% in 2020. S&P notes that this represents market share at the group level--which includes two more crematoria compared with the securitization--but, in S&P's view, is a good proxy for the borrower's performance. -- For the 52-week period ending June 30, 2023, net revenue was GBP276.5 million, down 1.0% compared with the same period last year. The reported EBITDA, without equity cure, was GBP31.2 million, down 35% versus GBP48.1 million the same period last year. -- The Office for National Statistics (ONS) forecasts deaths will continue to increase in the long term. It foresees a roughly 1.1%% increase each year. Accordingly, the group should benefit from gradually growing volumes. -- Meanwhile, customers increasingly opt for basic services. This combined with inflation makes profitability growth more challenging. -- On Sept. 4, 2023, the class A noteholders reinstated and extended the waiver for the securitization group. This waiver allows for an equity cure should the securitization group have a shortfall in EBITDA at any covenant test date up to and including Dec. 29, 2024 (subject to certain conditions). Any cash transferred into the securitization group during this period will be included within the EBITDA for the purpose of the DSCR calculation for the following 12 months. The new proposal does not include an equity cure cap limitation, which featured in the last waiver in March 2022. -- The financial covenant is still supported by equity injections from the parent company. Based on the June 2023 investor report, GBP32.7 million was transferred to the securitization group in the last 12-month period ending 30 June 2023, of which GBP19.7 million was required to ensure the 1.5:1 EBITDA DSCR ratio was satisfied, and GBP13.0 million was an additional cash transfer. S&P said, "The transaction in its current form could, in our view, continue so long as the parent is willing and capable of providing elevated levels of support (beyond the required minimum level). Our forecast level of the unsupported EBITDA DSCR ratio suggests the need for continued material support in financial year (FY) 2023 and FY2024. "We estimate that without increased equity injections (beyond the minimum covenanted level), the cash flow available for debt service would be insufficient to meet the debt service requirements on the class A and B notes. We understand that repayment of cash transfers made into the securitization group will be subordinated to class A and B notes' payments. "The documented definition of covenanted EBITDA DSCR differs from that we use to determine our base-case DSCR under our corporate securitization criteria. Our base-case DSCR calculation is based on cash flow available for debt service (CFADS), which for a given period is calculated as S&P Global Ratings-adjusted EBITDA less maintenance capital expenditure (capex) to support ongoing operations, less growth capex, corporate tax, working capital, and pension liabilities. The parent company (Dignity Group Holdings Ltd. (formerly Dignity PLC) is expected to continue injecting cash when needed so that the EBITDA DSCR is not breached until the end of the waiver period. However, as the injections may not be enough to support the debt service, under our assumptions, we assume drawdowns on the liquidity facility. "Under our methodology, we expect borrowers to make a broad range of covenants to ensure that cash is trapped and control is given to the noteholders before debt service under the notes is jeopardized. "In our view, further parental support from outside the securitization continues to reduce the effectiveness of financial covenants, including the delayed appointment of a financial adviser or an administrative receiver. "We will continue to monitor both the effect of these waivers and any long-term weakening of the creditor protections they provide to the noteholders. We may re-evaluate whether these waivers result in any such weakening." DSCR Analysis S&P's cash flow analysis serves to both assess whether cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in base-case and downside scenarios. Base-case scenario S&P said, "Our base-case EBITDA and operating cash flow projections in the short term rely on our corporate methodology. We gave credit to three years of growth through to the end of FY2025 as, in our opinion, it will be a closer reflection of normalized business environment. Beyond FY2025, our base-case projections are based on our methodology and assumptions for corporate securitizations, from which we then apply assumptions for capex and taxes to arrive at our projections for the cash flow available for debt service." Key drivers of S&P's base-case forecast are as follows: -- S&P forecasts that the funeral volume for Dignity 2002 in 2023 will be about 0%-1% higher than in 2022, supported by an increase in the death rate (in line with ONS forecasts). Coupled with the small growth in market share of Dignity 2002, it expects funeral volumes will increase by 2%-3% in both 2024 and 2025. -- S&P said, "Following the decline in average revenue for funerals since the beginning of 2022, we assume the proactive shift in pricing strategy that the company has launched will drive about 7%-8% overall price increases in 2023. We expect this to be less than 1% growth in 2024 and 2025, as the sector continues to be under regulatory pricing pressure. We also believe the new, lower pricing equilibrium is enabled by budget-conscious customers that trade down to cheaper options, such as cremations." -- S&P forecasts that the growth in cremation volumes will pick up at about 3% in 2023 and 2024, annually. This growth will stem from the increasing popularity of the cheaper cremation options under looming recessionary risk and Dignity 2002's increase in market share in the segment. -- S&P expects average revenue for cremations to also benefit from the shift in pricing strategy and a pass-through of energy costs. It will increase by about 5%-6% in 2023, before slowing to less than 1% growth annually. -- S&P said, "As such, we forecast total revenue to grow by about 5% in 2023 compared with the previous financial year. However, we expect S&P Global Ratings-adjusted EBITDA margin to drop to about 8% in 2023, from 12.3% in 2022. This drop will primarily be due to labor and energy cost inflation, and exceptional costs including rescue measures for third-party funeral plans. This is in line with the company's guidance of continuous execution of the rescue plans to grow reputation and market share. Our base case assumes administrative costs and costs for funerals that were not fully recovered by other trusts. We expect the EBITDA to be affected by these additional costs for at least the next two years." -- Maintenance capex: S&P considered the minimum level of maintenance capex reflecting the transaction documents' minimum requirements, (GBP10 million per year adjusted for the consumer price index (CPI) since 2014, currently at about GBP13 million based on the June 23 investor report). -- Development capex: S&P's assumed development capex also reflects the spend above the maintenance capex to reach total capex spend of about GBP20 million in 2023, and subsequent years. -- Pension liabilities: S&P incorporates the deficit reduction plan agreed to by the company with the pension trustee, leading to yearly payments of about GBP4.0 million. -- Tax: S&P's base-case pre-tax income expectation is negative for 2023 and 2024, hence it expects nil annual tax payment. -- Asset disposals: S&P said, "We no longer factor in any disposal of the seven crematoria or other assets in our base case as there is significant execution risk of doing so within the anticipated timeframe approved by noteholders. Under our current assumption, we do not anticipate that the class A partial redemption will take place by the December 2024 interest payment date." -- S&P assumes annual finance leases payments of about GBP13.3 million and working capital outflows of about GBP2.0 million. -- CFADS: Lower level of S&P Global Ratings-adjusted EBITDA compared with our previous analysis negatively affected CFADS, which S&P expects to be insufficient to cover debt service in the next two to three years and project heavy reliance on the liquidity facility in this period. S&P said, "Based on our assessment of Dignity 2002's weak BRP, which we associate with a business volatility score of 5, and the minimum DSCR achieved in our base-case analysis, we established an anchor of 'b-' for the class A notes. This equates to a three-notch reduction to the anchor for the class A notes compared with our previous review in February 2023. In the context of the low DSCR for the class A notes, we determine the anchor based on the credit quality of the operating company in conjunction with consideration of available liquidity support and the position of the class A notes in the payment waterfall. "For the class B notes, low DSCRs in our base-case analysis result in our rating on the class B notes reflecting the creditworthiness of the borrowing group. We consider the class B notes to be currently vulnerable and dependent upon favorable business, financial, and economic conditions to pay timely interest and ultimate principal." Downside scenario S&P said, "Our downside DSCR analysis tests whether the issuer-level structural enhancements improve the transaction's resilience under a moderate stress scenario. Considering the structural, regulatory, operating, and competitive position changes in the funeral services market, we have assumed a 25% decline in EBITDA from our base case. This level of stress reflects our view of the new market conditions and increased competition in the funeral services sector and Dignity 2002's lower pricing power. "Our downside DSCR analysis resulted in a fair resilience score for the class A notes. This reflects the headroom above a 1.00:1 DSCR threshold in the majority of periods that is required under our criteria to achieve a fair resilience score, in the case of the class A notes, after giving consideration for the level of liquidity support available to each class, minimal support from the parent during the waiver period, and the prospect of business recovery over the long term." The combination of a fair resilience score and the 'b-' anchor derived in the base case results in a resilience-adjusted anchor of 'b+' for the class A notes. The class B notes have limits on the quantum of the liquidity facility they may use to cover liquidity shortfalls. Moreover, any senior classes may draw on those same amounts, which makes the exercise of determining the amount of the liquidity support available to the class B notes a dynamic process. For example, it is possible that the full GBP24.75 million (45% of total liquidity commitment) that the class B notes may access is available and undrawn at the start of a rolling 12-month period but is fully used to cover shortfalls on the class A notes over that period. In effect, the class B notes would not be able to draw on any of the GBP24.75 million. S&P said, "Under our downside stress, we project that the amount available for the class B notes will diminish. Based on our DSCR analysis, our current rating on the class B notes reflects the creditworthiness of the borrowing group." Liquidity facility adjustment Given the weakening cash flow position of the borrower, its current reliance on equity injections to support the EBITDA-based financial covenant, and an increased likelihood of required liquidity drawings to support debt service payments, we no longer apply a one-notch uplift for strong liquidity support for the class A notes. S&P forecasts the required usage of the liquidity facility in the near term, considering minimal group support, will result in the available amount falling below 10% of the debt. Modifier analysis The amortization profile of the class A notes results in full repayment within 20 years. Therefore, S&P has not made any specific adjustment to the class A notes' resilience-adjusted anchor. Comparable rating analysis S&P has not applied any adjustments under its comparable rating analysis. Counterparty Risk S&P said, "The terms of the issuer's liquidity facility agreement and the issuer's and obligor's cash administration and account bank agreement contain replacement mechanisms and timeframes that are in line with our current counterparty criteria. We view both the liquidity facility providers and the account banks as non-derivative limited supports, which, given their stated minimum eligible rating requirements of 'BBB', can support a maximum rating of 'A'. As a result, the application of our counterparty criteria caps the maximum potential ratings at the higher of 'A' and the long-term issuer credit rating (ICR) on the lowest-rated counterparty. This is not currently a constraining factor given the current ratings on the notes." Outlook A further reduction of cash flow projections or distressed debt restructuring would likely lead to rating actions on the notes. S&P would require higher or lower DSCRs for a weaker or stronger business risk profile to achieve the same anchors. Downside scenario S&P said, "We could lower our rating on the class A notes if our minimum projected DSCRs fall below 1.00:1 in the majority of periods for the class A notes in our downside scenario. This would most likely happen if management fails to keep the business as a going concern, in a scenario where liquidity facility is fully used, or the parent does not provide equity cures." Upside scenario S&P said, "We could raise the rating on the class A notes if Dignity 2002 was to execute its deleveraging plan in a timely fashion. We could also raise the rating on the class A notes if performance improves such that the minimum DCSR for these notes goes above 1.5:1 in our base-case scenario. "We could also raise the rating on the class B notes if our assessment of the borrower's overall creditworthiness improved, as the rating uplift is currently limited." Credit Rating Steps CURRENT REVIEW PREVIOUS REVIEW* Business risk profile Weak Weak Business volatility score 5 5 Base case minimum DSCR range below 1.50x 1.50x-3.5x lower end Anchor b- bb- Downside case EBITDA decline (%) 25 25 Downside minimum DSCR range Above 1.0x in 1.8x-4.0x the majority of periods Resilience score Fair Strong Resilience adjusted-anchor b+ bb+ Liquidity adjustment None +1 notch Modifier analysis adjustment None None Comparable rating analysis adjustment None None Rating B+ (sf) BBB- (sf) DSCR--Debt service coverage ratio. ENERGEAN PLC: Fitch Hikes LongTerm IDR to 'BB-', Outlook Stable --------------------------------------------------------------- Fitch Ratings has upgraded Energean plc's Long-Term Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is Stable. Fitch has also upgraded Energean's senior secured notes to 'BB' from 'B+'. The Recovery Rating is 'RR3'. The upgrade reflects Energean's enlarged output from a ramp-up of production in the Karish field. It also reflects its expectation that EBITDA net leverage will decline to below 2x by 2025 from 6.3x in 2022. Energean's 'B+' Long-Term IDR reflects its strong gas-weighted growth prospects in Israel, some additional growth potential in existing producing assets, reserve life of over 20 years on a 2P basis and a large share of contracted sales under long-term take-or-pay agreements that will provide more visibility to its cash flows. Fitch views potential short-term material disruptions or a shut-down in production in Israel due to the ongoing conflict between Israel and Hamas to be manageable, given the company's solid credit metrics, liquidity sources and staggered debt maturity profile. If further escalation affects Energean's ability to produce from its highly cash-generative assets in Israel on a more protracted basis Fitch would treat it as an event risk. KEY RATING DRIVERS Project Completion Drives Upgrade: Energean nearly tripled its production during 1H23, driven by the successful ramp-up of the Karish field. The company is the sole indirect owner and operator of the offshore Karish, Karish North, and Tanin gas developments in Israel. Fitch expects 2023 production contribution from Karish will be around 85kboe/d, increasing above 150kboe/d next year as Karish North comes onstream and a full year of run-rate production is realised. Severe Shock to Operating Environment: The conflict between Israel and Hamas remains a shock and a heightened risk for Energean's operation in Israel. Since the start of the military conflict, the Karish field has been operating at full capacity with no disruption to its operations. It is uncertain how the conflict will develop and while not its base case, a large-scale escalation of military confrontations will be an event risk to Energean's rating. Fitch expects the company to have sufficient strength of the balance sheet and liquidity to withstand six months of lost production in Israel. Clear Path to Deleveraging: Fitch expects Energean's Fitch-calculated EBITDA net leverage, on a consolidated basis and including operating company-level project-finance debt, to decline in 2023 to 3.3x under Fitch's base-case commodity-price assumptions and assessment of cash flows from the Israeli assets based on the floor price. Fitch expects the metric to decline further to 2.8x in 2024, before it normalises at 1.5x-2.0x as its Israeli assets fully ramp up production. Defined Dividend Policy: Energean is expected to pay dividends of at least USD50 million per quarter. This will rise in line with its medium-term production and revenue targets to at least USD100 million per quarter, as fully sanctioned and funded developments come onstream in the medium term. Consolidated Profile: Energean's holding company notes are structurally subordinated to debt located at operating companies, which mainly consist of USD2.6 billion project-finance notes at its 100% opco Energean Israel Limited (EISL) secured by its assets. However, Fitch analyses Energean on a consolidated basis, due to cross-default provisions in its notes' documentation. Senior Secured Rating: Fitch rates the senior secured notes using a generic approach for 'BB' category issuers, which reflects the relative instrument ranking in the capital structure. Given a large share of debt ranking more senior to notes, the Recovery Rating for the notes is 'RR3' to reflect a lower relative call on EV. This results in the senior secured rating being notched up once from the IDR. Israel-Focused Gas Producer: Over 70% of Energean's production comes from Israel. Energean assets outside of Israel have a run-rate working interest production base of around 40-60kboe/d. Non-Israeli producing assets are primarily located in Egypt and Italy. Energean operates the majority of its portfolio, and maintains a gas-to-oil production ratio of over 70% from its producing assets. While the company's gas-focused production mix is supportive of strong long-term demand given relative undersupply in the region, Fitch notes that the company's credit profile is highly dependent on cash flows from Israel. Low Re-contracting Risk: Fitch expects Energean would be able to replace customers in the event of a contract termination or other unforeseen event, given high demand in Israel, access to international markets, and the favourable cost position of the Karish, Karish North and Tanin projects. Fitch views the company's record of customer replacement during 2022 as well as production ramp-up at the Karish field as substantially mitigating contract termination and re-contracting risks. Improving Cost of Production: Energean's cost structure has significantly fallen to USD12.1/boe as of 1H23 from USD19/boe as of 1H22 and is expected to decline further to the USD9-12/boe range. This is driven by the Israeli assets, which are low-cost, with favourable unit economics and a primarily gas-weighted production mix. These assets are Energean's key value driver, contributing around 77% of current 2P reserves and run-rate production of around 140kboe/d, bringing consolidated production to around 200kboe/d by 2024 under its assumptions. DERIVATION SUMMARY Fitch rates Energean one notch lower than Harbour Energy PLC (BB/Negative). Energean has longer reserve life, and is expected to have similar production of around 200kboe/d by 2024. This is partially offset by Harbour's lower leverage. Fitch rates Energean one notch above Kosmos Energy Ltd. (B+/Stable). Energean's longer reserve life, larger production base including initial contributions from the Karish field, more stable cash flows owing to long-term contracted sales volumes, and better geographic mix support the one-notch difference. KEY ASSUMPTIONS Key Assumptions Within Its Rating Case for the Issuer: - Oil and gas prices to 2027 in line with its base case price deck - Production from Karish field for 2024 at 76kboe/d, taking into account a hypothetical operational disruption resulting in six months of lost production - Consolidated production volumes of 120kboe/d in 2023, 116kboe/d in 2024 and peaking at around 185-190kboe/d in 2025 - Capex averaging around USD464 million a year between 2023 and 2027 - No insurance proceeds - Karish North coming online in late 2023 - Israeli gas sold at contractual floor price of USD4.5/mmbtu through 2027 - Dividend payments of USD200 million in 2023, no dividend payments in 2024, followed by USD200 million in 2025-2027 RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - De-escalation of geopolitical risk will be a pre-requisite for positive rating action - Maintaining EBITDA net leverage below 1.0x on a sustained basis - Continued prudent financial management at EISL, ensuring sound distributable cash flow generation - Increasing 1P reserve levels Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Significant escalation of the conflict that will lead to material reduction in production due to closure of Israeli fields and/or damage to EISL's operations on a protracted basis - EBITDA net leverage rising above 2.0x on a sustained basis - Significant gas sales contract terminations at EISL - Negative post-dividend free cash flow on a sustained basis, due to capex overruns, production delays or high dividend payments LIQUIDITY AND DEBT STRUCTURE Comfortable Liquidity: Energean does not have any immediate external funding needs and liquidity is strong, with no maturities until 2026. At end-1H23 Energean's liquidity was USD658 million, including cash and cash equivalents (USD358 million) and an unused revolving credit facility of USD300 million. ISSUER PROFILE Energean is an international independent gas-focused oil and gas company focused on the exploration, development and production of gas and oil assets in the Mediterranean. ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Energean plc LT IDR BB- Upgrade B+ senior secured LT BB Upgrade RR3 B+ ENERGEAN PLC: S&P Affirms 'B+' ICR & Alters Outlook to Negative --------------------------------------------------------------- S&P Global Ratings revised its rating outlook on London-headquartered Energean PLC to negative from stable, and affirmed its 'B+' ratings on Energean and its senior secured notes. The negative outlook indicates that S&P could lower its ratings if the geopolitical situation in region worsens and erodes Energean's credit metrics. The outlook revision primarily stems from the material escalation of geopolitical and security risks in Israel, and exposure of Energean's assets to such risks, given their role as important infrastructure in the country. S&P said, "Over previous decades Israel has experienced several military escalations around Gaza, but we consider the current development to be of a greater magnitude, and the risk of the conflict widening in the region remains. As of now, Energean's assets have not been directly affected by the conflict because they are located in the northern part of Israel, away from the affected areas in the south. That said, in recent days, there has also been an exchange of fire in the north of the country between the Israeli Defense Forces and Hezbollah as well as Syria, which exposes Energean's projects to higher security risks. We continue to assess the risk of a shutdown, damage, or any other limitations on operations and expansion works, as well as repercussions for sales and cash generation. In case of a further escalation of the geopolitical situation in the region, the physical integrity of Energean's assets, continuity of its operations, and the stability and timeliness of revenue would be our primary focus." S&P said, "We affirmed our ratings because Energean's assets remain fully operational, and cash flows have not been affected at this stage. Following the shutdown of the Chevron-operated Tamar field in the southern part of Israel amid security risks, Energean's Karish field and Chevron-operated Leviathan field are the two main fields supplying gas to Israel. Given Karish's important role in the country's power supply, we believe that Energean will continue to operate the field at the maximum available capacity, absent any direct security threats. We also believe the company's liquidity and credit metrics should be able to withstand a temporary shutdown of a field. This is in part thanks to Energean's only modest cash needs in the coming 12 months, with $50 million of convertible loan notes due in December 2023 being the only debt maturity. At the same time, Energean had about $360 million of cash as of June 30, 2023, and $275 million available on its revolving credit facilities. "The negative outlook reflects the risk that the war between Israel and Hamas could spread more widely and affect Energean's credit metrics. We continue to assess the risk of a shutdown, damage, or any other limitations on operations and expansion works, as well as repercussions for domestic sales and cash generation. Assuming no impact on Energean's profits, we expect Energean to post S&P Global Ratings-adjusted EBITDA of about $1.0 billion in 2023, rising to $1.8 billion in 2024 as the full effect of increased gas production in Israel is realized. This should translate into funds from operations (FFO) to debt improving to about 12% in 2023 and about 30% by 2024 from 5% in 2022. We see FFO to debt higher than 20% as commensurate with the 'B+' rating." Downside scenario S&P may downgrade Energean in one or both of the following scenarios: -- Operational issues at the assets in Israel result in higher leverage, with FFO to debt staying below 20% for a sustained period. -- Liquidity pressure intensifies, especially if it becomes more difficult for Energean to access capital markets, hindering its ability to refinance debt. Upside scenario S&P could revise the outlook to stable if risks from the conflict subside substantially or it is resolved, resulting in a reduction of regional and domestic geopolitical and security risks. PARAGON MORTGAGE 29: Fitch Assigns B+sf Final Rating on Cl. D Notes ------------------------------------------------------------------- Fitch Ratings has assigned Paragon Mortgages (No.29) PLC final ratings, as detailed below. Entity/Debt Rating ----------- ------ Paragon Mortgages (No.29) PLC A XS2666574129 LT AAAsf New Rating B XS2666572008 LT AAsf New Rating C XS2666572180 LT A-sf New Rating D XS2666572263 LT B+sf New Rating S VFN LT NRsf New Rating S XS2666572420 LT NRsf New Rating Z XS2666572347 LT NRsf New Rating TRANSACTION SUMMARY Paragon Mortgages (No.29) PLC is the 29th transaction from the Paragon series and consists solely of buy-to-let (BTL) mortgages originated by Paragon Mortgages (2010) Limited and Paragon Bank PLC (Paragon). The transaction is revolving for a five-year period with the ability to purchase additional assets into the portfolio subject to certain conditions. KEY RATING DRIVERS Recent BTL Originations: Paragon is an experienced lender that specialises in the BTL sector and lends predominantly to professional investors. Fitch Ratings views Paragon's underwriting standards to be in line with its expectations for a BTL lender, which can be observed in the robust performance of previous transactions. Fitch applied a 1.0x originator adjustment to the loans. The assets in the closing pool were originated between 2011 and 2023 although new assets can be added during the revolving period. The original loan-to-value of the pool is 70.1% which is slightly less than comparison transactions. The pool contains no loans to any borrower with either a county court judgement or bankruptcy registered against them in line with Paragon's lending conditions. Revolving Transaction: The transaction features a five-year revolving period with no scheduled amortisation of the notes. This allows new assets to be added to the portfolio. The replenishment criteria mitigate the risks related to any significant migration of the portfolio's credit profile, but the risk of deterioration during the revolving period remains. Fitch assumed changes to the portfolio characteristics, giving credit to the replenishment criteria listed in the transaction documentation where relevant. Fixed Notional Swap: All fixed-rate loans included in the pool must be hedged to mitigate the risk of adverse interest rate movements as the notes pay a floating rate. This is achieved through a fixed swap notional which assumes no defaults or prepayments. The maximum weighted average (WA) swap rate is 4%. A combination of high prepayments and decreasing interest rates would cause a significant reduction in the amount of revenue funds available to the notes due to the high outward payment on the swap relative to the size of the pool. This risk has constrained Fitch's rating of the class D notes. Reserves Provide Liquidity Support: The transaction features a liquidity reserve which provides coverage to payments of senior expenses, class A interest and class B interest. A general reserve is also in place which covers the same items plus class C and D interest and is used after the liquidity reserve. Neither reserve can cover credit losses so are available exclusively for liquidity purposes. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The transaction's performance may be affected by changes in market conditions and the economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce the credit enhancement available to the notes. In addition, unexpected declines in recoveries could result in lower net proceeds, which may make certain notes' ratings susceptible to potential negative rating action depending on the extent of the decline in recoveries. Fitch conducts sensitivity analyses by stressing a transaction's base-case foreclosure frequency (FF) and recovery rate (RR) assumptions. For example, a 15% weighted-average (WA) FF increase and 15% WARR decrease would result in a model implied downgrade of up to two notches on the class A and C notes, three notches on the class B notes and one notch on the class D notes. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Stable-to-improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and consideration for potential upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the WAFF of 15% and an increase in the WARR of 15%, implying upgrades up to two notches on the class B and C notes, and four notches on the class D. Class A is already rated the maximum AAAsf. DATA ADEQUACY Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, and concluded that there were no findings that affected the rating analysis. Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. PEPCO GROUP: S&P Affirms 'BB-' ICR & Alters Outlook to Negative --------------------------------------------------------------- S&P Global Ratings revised the outlook on Pepco Group N.V. to negative from stable and affirmed its 'BB-' long-term issuer credit and issue ratings on the group and its debt. The negative outlook reflects the risk that headwinds in the group's main growth markets may last longer and have a stronger negative effect on its credit metrics than incorporated in our base case, with a one in three chance of a downgrade over the next 12 months if the group cannot generate positive free operating cash flow after lease payments (FOCF), improve its EBITDAR coverage to 2.0x, or prevent S&P Global Ratings-adjusted leverage from exceeding 3.0x. S&P said, "Our negative outlook reflects heightened performance uncertainty amid tougher operating conditions, including a rising tide of competition. Pepco Group reported no growth in like-for-like (lfl) revenue in fourth-quarter fiscal 2023, including a lfl revenue contraction for the Pepco segment, which makes up about 60% of the group's revenue, in August and September. In its second largest market, Poland (representing about 25% of revenue), there were strong macroeconomic challenges with falling real wages, weak consumer confidence, and inflation well above 11.0% in 2023. Moreover, unusually warm weather in September and October suppressed demand for higher-margin autumn and winter clothing and negatively affected gross margins. This led to weaker-than-expected earnings in fiscal 2023, exacerbated by inventory buildup. Consequently, the group has guided its underlying 2023 International Financial Reporting Standard (IFRS) 16 EBITDA at about EUR750 million, which is significantly lower than the equity market consensus of about EUR850 million during the company's bond placements in June 2023. Given ongoing weak consumer sentiment in Poland, there is uncertainty surrounding the group's performance over the next 12 months. Competition is also intensifying in the country, as evidenced by the aggressive expansion of Pepco's four closest rivals, who collectively added 700 stores between 2019 and 2023, significantly outpacing Pepco's additions of just over 300. "We consider execution risk related to profitability and growth initiatives elevated over the next 12 months. In the past year, lfl revenue growth has hovered at 6%, lagging consumer price inflation rates seen in the U.K. and Poland, the group's largest markets together accounting for 55% of annual revenue. While total revenue growth was 17% in fiscal 2023, it was largely supported by adding new stores, particularly in the group's core CEE markets. For example, new store openings stood at 668 for fiscal 2023. The group has paused any new commitments toward its store refit program and announced plans to decrease annual spending on new stores, scaling back openings to at least 400 from 550. While supportive of FOCF, the related decrease in discretionary capital expenditure (capex) may not be sufficient to offset a potential decline in earnings if the group cannot mitigate demand-driven pressure on revenue and dilution in margins resulting from a possible increase in discounting. In addition, continuous labor cost inflation is likely to curtail its ability to scale down operating costs for the existing store footprint to match lower revenue. FOCF generation will also depend on the group's ability to unwind the working capital built up over the past two years, particularly in its apparel segment. Risk arising from the implementation of an Oracle enterprise resource planning solution in the Pepco segment during fiscal 2024 could also delay the anticipated working capital benefits. "Our base case does not factor any material changes in the group's strategy and reflects its track record in the value retailing sector. Anticipated growth in the value retail segment stems from consumers searching for better value as they adjust to the ripple effects of high inflation and the cost-of-living crises, which are translating into increased rental costs and higher interest payments as current low-fixed-rate mortgages approach renewal. The group will also benefit from its geographic diversity. For example, while the Pepco segment declined 2.4% in fourth-quarter fiscal 2023, it was offset by 4.1% growth within mostly U.K.- and Ireland-based Poundland Group supported consolidated topline. We assume lfl revenue growth will be modest in fiscals 2024 and 2025 and overall revenue growth will largely result from the ramp-up sales in the new stores opened in the prior year, along with the at least 400 additions anticipated in fiscal 2024. We forecast overall revenue growth of 10%-13% in fiscal 2024 and about 10% in fiscal 2025. Moreover, in the coming 12 months reduced headwinds from foreign exchange and container shipping costs will support margins, while the financial flexibility that Pepco's increasing scale provides should create room for investment in pricing. The latter could help enhance its low-price proposition, which seems to have weakened in recent quarters. "We anticipate the group will pursue a conservative financial policy supportive of the rating, despite recent management changes, while maintaining independence from the principal shareholder. The sudden resignation of former CEO Trevor Masters and the transfer of Barry Williams, who previously managed Poundland business, to run Pepco, coincided with the profit warning announcement. Following these changes, the company's board, led by Andy Bond, has refined its strategy, scaling back its growth ambitions and thereby improving cash generation prospects due to lower outlays on discretionary investment. "We understand that, when available, management expects to allocate excess cash flow between strengthening the balance sheet and shareholder returns. We expect shareholder returns to be consistent with the dividend policy of similar publicly listed companies and the group to not pursue any debt-financed shareholder payouts. Principal shareholder Ibex Topco B.V., with a 72% stake, publicly expressed support for management's plan during its recent capital market day presentation, including the financial and capital allocation policy. Management hasn't disclosed the timing, quantum, or form of shareholder returns. However, we conservatively assume a dividend payment of about EUR40 million in fiscal 2024. "The negative outlook reflects the risk that headwinds in the group's main growth markets may continue longer and have stronger negative effects on its credit metrics than incorporated in our base case, with a one in three chance of a downgrade over the next 12 months." S&P could downgrade Pepco Group if the group's operating performance and earnings weaken, so that any of the following credit metrics persisted in fiscal 2024: -- S&P Global Ratings-adjusted debt to EBITDA above 3.0x; -- Negligible FOCF after leases; or -- EBITDAR coverage less than 2.0x. S&P said, "We could also lower the ratings if there were adverse changes in its financial policy leading to more aggressive shareholder returns or any evidence of principal shareholder influence on strategic or capital allocation decisions to the contrary of our expectations of full independence, which weaken the group's cash cushion and credit metrics. "We could revise the outlook back to stable if the group outperforms our base case, implementing its strategy of increasing its scale of operations in existing markets while investing in lower prices to maintain annual positive sales growth and competitive edge. This would include maintaining adjusted EBITDA margins above 14%, meaningfully positive FOCF after leases, and at least 2.0x EBITDAR coverage , while not pursuing debt-funded shareholder returns. It is also underpinned by the group's and its principal shareholder's financial policy commitment to maintain S&P Global Ratings-adjusted leverage of below 3.0x." SAFESTYLE UK: Set to Be Put Into Liquidation -------------------------------------------- Michael Susin at Dow Jones Newswires reports that Safestyle UK said that it is likely be put into liquidation after its subsidiaries were placed under administration and it ceased to control its business activities. The U.K. double-glazing supplier said on Nov. 3 that ordinary shares will be cancelled once liquidators have been appointed, Dow Jones relates. The company appointed administrators to its subsidiaries HPAS, Style Group Holdings and Style Group U.K. on Oct. 30, Dow Jones discloses. SHAWBROOK MORTGAGE 2022-1: Fitch Hikes Rating on F Notes to 'B+sf' ------------------------------------------------------------------ Fitch Ratings has upgraded Shawbrook Mortgage Funding 2022-1 PLC's class B, C, D and E notes and affirmed the others. Entity/Debt Rating Prior ----------- ------ ----- Shawbrook Mortgage Funding 2022-1 PLC Class A XS2562973615 LT AAAsf Affirmed AAAsf Class B XS2562973706 LT AA+sf Upgrade AAsf Class C XS2562973888 LT A+sf Upgrade Asf Class D XS2562973961 LT BBB+sf Upgrade BBB-sf Class E XS2562974001 LT B+sf Upgrade B-sf Class F XS2562974183 LT CCsf Affirmed CCsf TRANSACTION SUMMARY The transaction is a static securitisation of buy-to-let (BTL) mortgages originated between 2016 and 2022 by Shawbrook Bank Limited (Shawbrook), in England, Scotland and Wales. Shawbrook is the named servicer, although day-to-day servicing is delegated to Target Servicing Limited. KEY RATING DRIVERS Strong Asset Performance: The transaction's one-month plus and three-month plus arrears were 0.32% and 0.11%, respectively, at the September 2023 interest payment date (IPD). This compares with 3.24% and 1.54% for the Fitch-rated BTL performance index. Fitch expects a deterioration in these measures in this pool (notably as loans revert to floating) and the BTL sector as a whole as higher mortgage costs for floating-rate borrowers are expected to persist into 2024. Increasing CE: Credit enhancement (CE) has increased since the last review due to sequential amortisation and the general reserve fund, which increases as the liquidity reserve fund amortises. CE for the class A notes had increased to 15.41% from 14.75% as at the September 2023 IPD. This supported the rating actions. Below MIR: The class B notes have been upgraded to one notch below their model-implied rating (MIR) and the class D and E notes two notches below their MIRs. Fitch performed a forward-looking analysis by running scenarios assuming an increase in the loss levels at all rating levels, to account for a potential increase in arrears that could result in lower MIR in future model updates. This included increasing the weighted average (WA) foreclosure frequency (FF) by 30%, where the notes' ratings withstood this scenario and supports the rating actions. Change in Modelling Approach: The majority of loans in the pool are fixed-rate loans reverting to Shawbrook's base rate (SBR) plus a contractual margin. Fitch has changed its modelling approach in terms of SBR-linked loans in the pool. The agency has observed that in the current rising interest rate environment, the SBR has continued to track the Bank of England Base Rate (BBR) and so now has sufficient evidence to model all SBR-linked loans as BBR loans (plus the contractual margin). The modelling of the BBR loans is in line with Fitch's UK RMBS Rating Criteria whereby a 15bp haircut was applied to the assets margins of BBR loans in rising and stable interest rate scenarios to account for the basis risk with the SONIA-linked notes. This change in approach supported the upgrades of the notes as the updated approach gives credit to the contractual margin over SBR and does not imply a compression of margin unlike the previous SVR approach used. HMO Rental Yield Haircut: The high interest coverage ratio (ICR) for the asset pool is linked to the higher rental yield of house in multiple occupation (HMO) properties, which make up 68% of the pool. However, these properties are complex to manage and may require higher maintenance costs. Fitch has therefore applied an approximately 25% haircut to the rental income of HMO properties. This broadly aligns with the stricter debt service coverage ratio (DSCR) requirement from Shawbrook than for standard properties, resulting in an adjusted ICR of 116.7%. This is a variation to Fitch's criteria. HMO Valuation Haircut: Fitch has adjusted the valuation of large HMO properties (seven occupants or more) by applying a 10% haircut. This is a variation to Fitch's criteria. These properties are typically valued with a yield-based approach, which may result in higher volatility depending on factors such as the occupation rate. Fitch believes the attractiveness of these properties may be driven by other factors than the typical drivers of housing demand such as the evolution of a specific population (students, care workers, seasonal workers). This market also has a limited size and conversion costs may be needed to adapt these properties to more standard properties that could be sold to an owner-occupier or non-HMO-investor. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The transaction's performance may be affected by adverse changes in market conditions and economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce CE available to the notes. Additionally, unanticipated declines in recoveries could result in lower net proceeds, which may make certain notes susceptible to negative rating action, depending on the extent of the decline in recoveries. Fitch conducts sensitivity analyses by stressing both a transaction's FF and recovery rate (RR) assumptions, and examining the rating implications on all issued notes. Fitch found that increasing the WAFF by 15% and decreasing the WARR by 15% would result in downgrades for the class F notes of two notches, one notch for the class E notes, and no impact on the class A, B, C and D notes. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE and potentially upgrades. A decrease in the WAFF of 15% and an increase in the WARR of 15% would result in upgrades for the class D notes of three notches, one notch for the class B and E notes, and no impact on the class A, C and F notes. CRITERIA VARIATION Fitch has adjusted the valuation of large HMO properties (seven occupants or more) by applying a 10% haircut. These properties are typically valued with a yield-based approach, which may result in higher volatility depending on factors such as the occupation rate. Fitch believes the attractiveness of these properties may be driven by other factors than the typical drivers of housing demand such as the evolution of a specific population (students, care workers, seasonal workers). This market also has a limited size and conversion costs may be needed to adapt these properties to standard properties that could be sold to an owner occupier or non-HMO-investor. Rental income on HMO properties is multiplied by 125/165. This is necessary as rental income on HMO properties may also need to cover various additional costs compared with standard BTL properties and therefore may not be available to meet rental payments. Consequently, the rental value input is reduced for Fitch's ICR calculation for this pool. This broadly aligns with Shawbrook's stricter DSCR requirement for HMO properties than for standard properties. DATA ADEQUACY Prior to the transaction closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis. Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. SIGNA: Rene Benko May Sell Selfridges to Raise Funds ---------------------------------------------------- Luke Barr and Ben Marlow at The Telegraph report that a battle for control of historic British department store Selfridges is brewing as the business empire of one of its major shareholders begins to rapidly unravel. According to The Telegraph, speculation is mounting over whether Rene Benko's Signa investment group will have to sell its 50% stake in Selfridges in a bid to raise funds after it was hit by a cash crunch. The financial crisis engulfing Signa, a retail and property investor, spiralled when shareholders sought to remove Mr. Benko and sent in restructuring specialists, The Telegraph relates. After years of breakneck expansion Signa's growth has been brought to a grinding halt by rising borrowing costs and falling property valuations, The Telegraph notes. As well as owning a 50% stake in Selfridges, Signa's EUR23 billion (GBP20 billion) empire also includes the Chrysler Building in New York and Berlin's KaDeWe luxury department store, The Telegraph discloses. A bid to shore up the empire by selling the landmark Elbtower development in Hamburg to one of Signa's own shareholders collapsed, escalating the crisis, The Telegraph states. According to The Telegraph, industry sources said Selfridges could be a priority in any potential firesale at Signa given its trophy asset status. The impact of Signa's struggles has already been felt in the UK after concerns were raised over Frasers' bid to acquire one of its subsidiaries, SportScheck, The Telegraph relays. Mike Ashley's business announced the intended acquisition of the 34-store retailer last month in a deal with Signa, which had agreed to continue financing the business until the deal was complete, The Telegraph discloses. The SportScheck has now been thrown into question and administrators could be called in as soon as Nov. 6, according to The Telegraph. TALKTALK: Seeks to Raise Cash Amid Debt Pressure ------------------------------------------------ James Warrington at The Telegraph reports that regulators are drawing up plans for a broadband "supplier of last resort" regime in the event higher interest rates spark a wave of collapses and disruption. According to The Telegraph, Ofcom has been planning to ensure there is no disruption to broadband services as scores of providers reel from higher borrowing costs. The financial pressures at TalkTalk, Britain's fourth-biggest provider, are fuelling concern across the industry, although the regulator said its plans are not specific to any individual company, The Telegraph relates. The regulator has been in talks with BT's Openreach division for more than a year amid fears that expected bankruptcies among small broadband network owners, known as alt-nets, could leave households facing uncertainty over their internet connection, The Telegraph notes. BT chief executive Philip Jansen last week warned it was a "hugely challenging" environment for many broadband providers amid surging inflation, The Telegraph notes. Talks between BT and Ofcom are also understood to cover a possible failure of major retailers including TalkTalk, which is in the process of breaking up and selling off part of its business to raise cash under pressure from a GBP1.1 billion debt pile, The Telegraph states. TalkTalk has around four million customers, including 2.4 million in its consumer direct division. The provider does not operate its own network, but rather sells access to networks run by Openreach and CityFibre. Any decision to select BT as the supplier of last resort would likely raise competition concerns due to the former monopoly's dominant position in the market, according to The Telegraph. The Ofcom discussions are understood to focus on issues such as customer service to ensure users could still access information about their broadband, The Telegraph says. Other players, such as Virgin Media O2, are also thought to be monitoring the situation, The Telegraph notes. THAMES WATER: Plans to Cut 300 Jobs Amid Debt Woes -------------------------------------------------- Luke Barr and Adam Mawardi at The Telegraph report that Thames Water is preparing to cut 300 jobs as the debt-laden supplier struggles to improve its finances. The UK's largest water company, which employs 8,200 people, launched a redundancy consultation on Nov. 1 mainly targeting roles in its retail and digital divisions, The Telegraph relates. It comes as Thames Water seeks to shore up its finances in an attempt to turnaround the business, The Telegraph notes. According to The Telegraph, a Thames Water spokesman said: "The last year has been an extremely challenging year for the business and we continue to take a rigorous approach to financial discipline throughout the company in order to operate within budget. "We need to make more difficult but necessary decisions to ensure we continue to deliver to our budgets. That's why we've announced a range of measures to reduce our costs further and become more efficient." More than half of the 300 jobs affected by the proposed layoffs are currently vacant, The Telegraph states. "We will seek to minimise compulsory redundancies wherever possible, through redeployment and voluntary redundancy," The Telegraph quotes a Thames Water spokesman saying. Trade unions GMB, Unite and Unison were all consulted before the announcement, The Telegraph relays. Job cuts come as the water provider seeks to reduce debts largely acquired when it was owned by Australian investment bank Macquarie, between 2006 and 2016, The Telegraph notes. The utility giant, which serves 15 million customers across London and the south-east of England, has debts of GBP14 billion and is under pressure to raise cash to stabilise its balance sheet, The Telegraph discloses. However, attempts to shore up its finances have been undermined by the threat of renationalisation and heavy fines for sewage spills, The Telegraph notes. Thames Water was thrown into crisis in June after the surprise departure of chief executive Sarah Bentley, who was tasked with overseeing an eight-year turnaround plan for the business, The Telegraph recounts. Last month, the struggling supplier warned regulators it faces a GBP2.5 billion budget blackhole unless it can hand bigger payouts to investors, The Telegraph relates. ********* 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 * * *