/raid1/www/Hosts/bankrupt/TCREUR_Public/231109.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
Thursday, November 9, 2023, Vol. 24, No. 225
Headlines
A U S T R I A
AMS-OSRAM AG: Fitch Alters Outlook on 'BB-' LongTerm IDR to Stable
SIGNA DEVELOPMENT: Fitch Lowers LongTerm IDR to 'CCC'
F R A N C E
PAPREC HOLDING: Fitch Gives BB+(EXP) Rating on EUR600MM Sec. Bond
G E R M A N Y
SD REIFEN: Enters Liquidation, Operations to Cease in 2024
I T A L Y
INTERNATIONAL DESIGN: Fitch Rates EUR400MM Secured Notes 'B(EXP)'
INTERNATIONAL DESIGN: Moody's Rates New EUR400MM Secured Notes 'B2'
INTERNATIONAL DESIGN: S&P Rates Sr. Secured Fixed-Rate Notes 'B'
TELECOM ITALIA: Moody's Puts 'B1' CFR on Review for Upgrade
L U X E M B O U R G
IREL BIDCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
UNIGEL LUXEMBOURG: Fitch Affirms C Rating on USD350MM Unsec. Notes
T U R K E Y
MERSIN ULUSLARARASI: Fitch Assigns B(EXP) Rating on Sr. Unsec Debt
ZIRAAT KATILIM: Fitch Assigns 'B-' Rating on $500MM Unsec. Sukuk
U N I T E D K I N G D O M
ACTUAL EXPERIENCE: Depleted Cash Position Prompts Administration
EG GROUP: Fitch Hikes LongTerm IDR to 'B', Outlook Stable
HYPERION REFINANCE: Moody's Rates New $555MM Sec. Term Loan 'B2'
LIMELIGHT SPORTS: Goes Into Administration
LINDSTRAND: Mulls Liquidation Following Skyflyer Problems
ONTO: Owed More Than GBP121 Million at Time of Administration
PATISSERIE VALERIE: March 2026 Trial Scheduled in Fraud Case
SAGA PLC: Moody's Lowers CFR to B2 & Alters Outlook to Negative
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A U S T R I A
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AMS-OSRAM AG: Fitch Alters Outlook on 'BB-' LongTerm IDR to Stable
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Fitch Ratings has revised the Outlook on ams-OSRAM AG's Long-Term
Issuer Default Rating (IDR) to Stable from Positive and affirmed
the IDR and senior unsecured rating at 'BB-'. The senior unsecured
Recovery Rating is 'RR4'.
The revision of the Outlook reflects Fitch's view that the company
is no longer likely to meet its upgrade leverage and free cash flow
(FCF) sensitivities in the short term. Pressure on earnings margins
from supply chain disruptions and volatile demand in key
end-markets mean that the company's de-leveraging capacity has
stalled and gross leverage will likely stay above the present
upgrade sensitivity of 3x until at least 2025. Temporarily high
capex will also lead to negative FCF in 2023 and possibly 2024,
which is materially below the upgrade expectations.
Fitch believes the company has the potential to improve its
earnings and cash flows to levels that would be considered strong
for the 'BB-' rating but this is only likely in the medium term.
Furthermore, recent measures to strengthen the capital structure
should lead to a material improvement in leverage metrics in the
short term.
KEY RATING DRIVERS
FCF Pressure Eases in 2024: The construction of a new
semi-conductor facility in Malaysia means a material spike in capex
that began in 2022 will lead to significant cash burn in 2023 and
places pressure on the capital structure. Fitch estimates that
ams-Osram's FCF margin will likely only return to above 1%, the
present downgrade sensitivity, in 2025, as capex returns to close
to management's target of around 10% of revenue.
The company's liquidity position and the recent measures taken to
boost it, mean that it has adequate capacity to withstand these
pressures in the short term, but if they persist for longer than
expected, it could result in rating pressure.
Refinancing Will Boost Capital Structure: Recent actions taken to
strengthen the balance sheet will provide headroom to the current
rating and give the company time to implement its restructuring
plans. Fitch expects that the already-approved EUR800 million
equity injection and sale and lease back of assets totalling EUR450
million will be primarily applied towards debt repayment.
Fitch also assumes that the company will successfully refinance its
2025 maturities through the issuance of new EUR800 million notes
later this year and possibly further small debt issues in 2024.
Additional liquidity and debt repayment capacity may also be gained
from non-core asset disposals in 2024. Fitch expects that by
end-2024, the company's net debt is likely to structurally decline
to around EUR1.1 billion, from EUR2.4 billion presently.
Gradual Earnings Recovery: Fitch estimates the company's
Fitch-calculated EBITDA margin will be around 13% in 2023, from
13.4% in 2022 and much decreased from the high teens in the
previous two years. A combination of weakness in some key
end-markets such as consumer and automotive as well as inflation
and supply chain constraints have resulted in material
underperformance in profitability.
Fitch expects the company's earnings margins to recover in 2024 to
around 16% as markets recover and cost-cutting efforts show
results. The company has the capacity to raise its EBITDA margins
to over 20% in the medium to long term, but this will require a
combination of stronger markets and internal efficiencies.
Deleveraging Essential to Rating: ams-OSRAM needs to show a clear
deleveraging path and momentum for the Outlook to remain Stable. As
a result of weaker earnings, Fitch expects the company's gross
EBITDA leverage to be around 5.5x, well above the present downgrade
sensitivity of 4x. However, as earnings recover from 2024, and as
debt is reduced, Fitch expects gross leverage to improve to around
3.5x at end-2024 and continue to improve in subsequent years.
Exposure to Growth End-Markets: ams-OSRAM maintains good positions
in focused growth end-markets such as automotive, industrial and
medical devices and consumer applications. Some of these have
exhibited weak demand recently and others offer unpredictable
short-term demand visibility, but most have good structural
long-term growth trajectories.
Ownership Structure Rating Neutral: The rating factors in Fitch's
assumption that ams's ownership stake in OSRAM will not materially
change from the current approximately 86% in the short to medium
term. This leads to cash leakage from paying fixed dividends to
OSRAM minority shareholders of around EUR35 million per year and
therefore lower margins (the EBITDA and funds from operations (FFO)
margin impact is expected to be around 1%). This results in a
somewhat structurally weaker financial profile but does not have a
negative impact on the rating.
DERIVATION SUMMARY
ams-OSRAM's credit profile is broadly in line with that of
diversified industrial peers rated in the 'BB' category, given the
company's leading share in global automotive and sensor solutions,
reasonable geographic concentration and strong, albeit more
volatile, profitability and cash flow generation. It compares
favourably with US technological 'BB' category peers in
profitability and cash flow margins, but has higher leverage and
customer concentration.
The closest peers in the diversified industrials sector are KION
GROUP AG and GEA Group Aktiengesellschaft(both BBB/Stable), which
are larger and more diversified, but have significantly lower
profitability, with EBITDA margins typically closer to around 10%.
Leverage at KION and GEA is usually in the range of 0.5x-2x,
somewhat better than at ams-OSRAM, and a key rating
differentiator.
Microchip Technology Inc. (BBB/Positive), STMicroelectronics N.V.
(BBB+/Stable) NXP Semiconductors N.V. (BBB/Stable), all have
significantly higher EBITDA margins and FFO margins then ams-OSRAM.
They also all have currently better leverage profiles ranging from
around 2x for NXP Semiconductors N.V. to STMicroelectronics N.V.
which is under 1x. However, Fitch expects ams-OSRAM to move close
to this range over the medium term.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- Revenue growth will be equally driven by the three segments:
low-double digits forecast for automotive growth, high single-digit
growth in consumer products and mid-single digit forecast for the
industrial and medical segment
- Margins to improve over forecast period from completed asset
disposals in high opex segments, increased plant utilisation and
cost reduction through re-establishing the base programme
- Capex at around 24% of revenue in 2023 before reducing to and 10%
per year between 2024 and 2027
- Successful completion of the refinance programme including EUR800
million rights offer in 2023
- Around EUR200 million of debt issued in 2024
- Sale and lease back of assets for EUR450 million, to close in the
next six months;
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FCF margin above 3%
- Improved diversification of the customer base
- Gross debt / EBITDA under 3x
Factors that could, individually or collectively, lead to negative
rating action/upgrade:
- FCF margin below 1%
- Gross debt/EBITDA above 4x
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: At end-3Q23, ams-Osram had EUR591 million of
freely available cash, after adjusting for EUR100 million for
working capital swings and intra-year needs. The company also
benefits from a EUR800 million undrawn committed revolving credit
facility with a 2026 maturity.
The company keeps a high level of cash on its balance sheet as well
as the RCF as a contingency in case the remaining OSRAM minority
shareholders put their shares to ams-OSRAM. The value of this
potential pay-out would be around EUR616 million, although Fitch
does not treat this portion of cash as restricted, as it does not
believe that a meaningful portion of the minority shares will be
put to ams. The company had also utilised around EUR53 million of
its EUR95 million factoring facility as at December 2022.
In the short to medium term, Fitch expects the company's liquidity
to be boosted by the planned refinancing, equity issue and proceeds
from divestments, as well as improving FCF generation, which Fitch
expects to reach mid-single digits of revenue on a sustainable
basis by end of forecast period.
Debt Structure: The proposed refinancing plan is expected to cover
financing needs until 2025/2026 addressing the existing debt
maturities of EUR 2.2 billion consisting of senior unsecured notes
and convertible bond due to mature in 2025 and bank facilities and
a promissory note that are due in 2023/2024. It plans will comprise
of two phases. The first in 2023/2024 will total around EUR1.9
billion and consist of a rights issue placement, new senior
unsecured notes and asset disposals. The second will be an
additional debt issue of EUR350 million in 2024. The result will be
a reduction in debt of around EUR500 million and no maturities due
until 2027.
ISSUER PROFILE
Austria-based ams-OSRAM designs and manufactures semiconductor
sensor and emitter components and high-performance sensor solutions
for applications requiring the highest level of miniaturisation,
integration, accuracy, sensitivity and less power. The company's
products include sensor solutions, sensor integrated circuits ,
interfaces and related software for mobile, consumer, industrial,
medical, and automotive markets.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
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ams-OSRAM AG LT IDR BB- Affirmed BB-
senior
unsecured LT BB- Affirmed RR4 BB-
SIGNA DEVELOPMENT: Fitch Lowers LongTerm IDR to 'CCC'
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Fitch Ratings has downgraded Signa Development Selection AG's
(Signa Development) Long-Term Issuer Default Rating (IDR) to 'CCC'
from 'B-' and the senior unsecured rating to 'B-' from 'B+' with a
Recovery Rating of 'RR2'.
In Signa Development's interim results to 30 June 2023, the
property developer disclosed that "it is facing challenges
including with respect to its liquidity position. The company is in
the process of mandating leading financial and legal advisors to
support the company in this context". Other Signa group entities
have ceased projects and have financing difficulties due to the
changes in the interest rate environment, bank funding and
valuations. Signa Development does not have the same scale of
projects, but unpaid suppliers and bank funding providers to other
Signa entities may cross-contaminate and disrupt Signa
Development's projects and funding.
Fitch believes there is a risk Signa Development has increased
indirect on-lending to other parts of the Signa group through
increasing "other financial receivables" (which increased by EUR215
million in 1H23). These were described as interest-bearing "loans
to indirect shareholders". Fitch flagged the increase in 2022's
other financial receivables in its rating action commentary of 20
June 2023.
KEY RATING DRIVERS
1H23 Cash Position: Signa Development should have improved its
end-June 2023 cash position of EUR32 million with proceeds from the
BEAM Berlin office disposal (net proceeds undisclosed). During 1H23
it received net proceeds from selling kika/Leiner. The Berlin
office Schonerhauser Allee, forward-sold and fully-let, was due to
be completed. Together with fast-tracking the sale of various D18
assets, Signa should have received significant disposal proceeds
during 2023.
Wider Signa Group Difficulties: There has been various news flow on
property developments ceasing elsewhere in the group (Signa Prime
Selection), indicating constrained liquidity, rising material and
financing costs to complete projects, and real estate valuation
uncertainties, particularly as projects complete in future years.
Fitch understands that the European Central Bank requested banks to
scrutinise the real estate values used for lending to Signa
entities. Signa Development's end-December 2022 properties were
valued by external independent valuers.
Forward Sales Business Model: Signa Development's forward sale
model provides some certainty around timing and values of its
completed residential and office projects. During 2023, Signa
Development has fast-tracked other disposals, creating liquidity
and crystalising development profits. Nevertheless, liquidity is
required to fund developments to completion, alongside existing
debt funding (usually procured at a low 40% loan-to-value).
However, unpaid suppliers and bank funding providers to other Signa
entities may cross-contaminate and disrupt Signa Development's
near-term and longer-term projects and funding.
Wider Signa Group: As the Signa group is privately held, its public
transparency is not comparable with listed groups. Signa
Development uses and remunerates Signa Real Estate Management GmbH
for its project development services. Signa Development's disclosed
related-party transactions are also subject to the oversight of its
six-person supervisory board, which has a fiduciary duty to its
shareholders, both of which are equipped to investigate the
investment rationale, arm's-length nature, and reporting of
transactions with other Signa group entities.
However, all six of Signa Development's supervisory board members
also serve on the 10-member supervisory board of Signa Prime
Selection AG. Consequently, in Fitch's view, and from Signa
Development's creditors' perspective, transactions with Signa Prime
need to demonstrate a high degree of transparency. Although Signa
Development was conserving its cash with disposal receipts, in 2022
there was a EUR155 million (1H23: EUR215 million) increase in Signa
Development's other financial receivables, described as
interest-bearing "loans to indirect shareholders".
DERIVATION SUMMARY
Across Fitch's EMEA Housebuilder Navigator peers, there are
different risk profiles for different residential markets. In
France, there is little upfront capital outlay for land, and
purchaser deposits fund capex. In UK and Spain, there is an upfront
cash outlay for the land and the bulk of the purchase price is paid
by purchasers upon completion.
Signa Development's residential and office development operations
require upfront land outlay and final payment is made upon
completion (or scheduled payments, if this type of financing is
arranged). This results in higher leverage than other geographies'
housebuilders, which may receive staged payments.
Fitch believes that Signa Development's office and residential
development portfolios across different geographies provides some
diversity, but Fitch acknowledges that office development is
potentially more volatile (multi-participants in CBDs, variable
demand, rental levels and values) than necessity-based housing (to
either sell or rent), and requires perceptive and disciplined
management to read relevant markets.
If Signa Development did not have a schedule of agreed sales and
instead relied upon future (potentially volatile) commercial
property yields for valuations and residential apartment prices for
its profits, a lower rating would reflect this speculative approach
to real estate development.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its June 2023 Rating Case for the
Issuer
- Use of management's schedule of agreed and near-term likely to be
agreed forward sales, and announced asset disposals (including
kika/Leiner).
- Decrease in 2024 and thereafter percentage of completion (POC)
EBITDA by 10% to represent a stress of increased construction costs
relative to values.
- Relative to the POC-adjusted EBITDA, the cash flow forecasts the
timing of scheduled receipts (forward sales, completion of project
dates), but Fitch acknowledges that timings of these cash flows may
vary.
- Fitch assumes refinancing of the subordinated participation
capital notes.
- Signa Development external dividends at 4.5%-6% of net asset
value.
RECOVERY ANALYSIS
The recovery analysis assumes that Signa Development would be
liquidated in the event of bankruptcy rather than re-organised as a
going-concern. Fitch has assumed a 10% administrative claim.
Using the end-2022 gross asset value (GAV) of EUR3.1 billion, Fitch
deducted the D18 portfolio, and the bespoke-financed kika/Leiner
and Optimisation portfolio. Of the remaining end-2022 GAV of around
EUR1.8 billion, Fitch applies a standard 25% discount to values.
The resultant liquidation estimate of EUR1.4 billion reflects its
view of the value of Signa Development's GAV that could be realised
in a re-organisation and distributed to creditors.
Updated for 1H23's debt outstanding, the total amount of relevant
debt claims is EUR0.7 billion of relevant ProjectCo secured debt,
and EUR0.1 billion of profit participation notes at the ProjectCo
(SPV) level, which are senior to rated Signa Development's debt.
Next in the waterfall of debt is Signa Development's EUR300 million
(EUR289.4 million outstanding after partial buybacks in 1Q22)
unsecured bond. The Signa Development-level EUR310 million profit
participation notes are subordinate to Signa Development's
unsecured debt.
The allocation of value in the liability waterfall results in
recovery corresponding to 'RR2' (after application of Fitch's
recovery ratings criteria 'RR2' cap for unsecured debt) for the
rated EUR300 million unsecured bond guaranteed by Signa
Development.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Clarification over the remit of the announced adviser
appointments
- Focus of management on Signa Development's operational and
liquidity profile
- Improvement in liquidity (from disposal proceeds) and greater
certainty that existing secured lenders allow drawdown of funding
for developments
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Constrained liquidity to fund on-going Signa Development's
developments
- Asset value declines, or distressed sales, reducing the group's
development profit margin
- Evidence of a Signa Development restructuring, pointing to a
material change in terms and conditions for debtholders and
bondholders
- Adverse value transfers to Signa Development from related-party
transactions
LIQUIDITY AND DEBT STRUCTURE
Appointment of Advisors: Signa Development has disclosed that it is
appointing advisors to support the company with its current
challenges, including its liquidity position.
End-June 2023 Cash: End-June 2023 cash was EUR32 million (end-2022:
EUR125.1 million). Post-1H23 there were expected receipts from a
two-stage sale of BEAM for an undisclosed amount. Various projects
are expected to be completed and sale proceeds received.
Debt Maturities: Most near-term 2023 debt is connected to secured
project debt for the pre-sold Schonhauser Allee Berlin office. The
remaining secured debt is project-specific, averaging around 40%
LTV where these development loans are refinanced upon completion or
assets sold to repay their bespoke loans.
The next bulk debt maturity (EUR250 million in 2024) is the
refinancing of a mixed-scheme project in Berlin, and then the
unsecured bond of EUR300 million mid-2026. Fitch understands that
Signa Development's deferred dividend (EUR110 million) from 2021
remains unpaid and the decision whether to pay the 2022 dividend
will be made depending on progress with disposals and general
liquidity.
End-2022 subordinated debt was at various development companies,
but senior to the group's unsecured bond, totalling EUR107.5
million with various maturity dates and is likely to be repaid from
disposal of relevant projects. End-2022 EUR310 million of corporate
participation capital is subordinate to the group's unsecured
bond.
PSL Criteria: Signa Development is part of the wider Signa group.
Fitch has not made a detailed analysis of the significant
shareholder's (Signa Holding's) financial strength. However, under
its Parent and Subsidiary Linkage (PSL) criteria it has assessed
Signa Development as having sufficient ring-fencing in place so
that as a stronger subsidiary, its rating would not be adversely
affected by the Signa parent.
Reinforcing its ring-fencing protection, Signa Development's EUR300
million unsecured bond requires scrutiny of affiliate transactions.
Furthermore, around 50% of minority shareholders make any special
dividend an inefficient way to upstream preferential support to the
significant shareholder. Signa Development's debt is segregated
with no cross-default to other group entities
ISSUER PROFILE
At end-2022, management-estimated gross development value
(projected value of completed projects) was EUR7.9 billion and GAV
(reflecting current market values) totalled EUR3.1 billion. Signa
Development's debt totalled EUR1.76 billion, including EUR0.3
billion of debt subordinated to the EUR0.3 billion unsecured bond
dated 2026.
ESG CONSIDERATIONS
Signa Development has an ESG score of '4' for Governance Structure.
This reflects the active participation of the founder within Signa
Development without being a supervisory or management board member
of Signa Development. This has a negative impact on the credit
profile, and is relevant to the ratings in conjunction with other
factors.
Signa Development has an ESG score of '4' for Group Structure
reflecting its complexity, transparency as an unlisted entity and
levels of related-party transactions. This has a negative impact on
the credit profile, and is relevant to the ratings in conjunction
with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery Prior
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Signa Development
Selection AG LT IDR CCC Downgrade B-
senior unsecured LT B- Downgrade RR2 B+
Signa Development
Finance S.C.S.
senior unsecured LT B- Downgrade RR2 B+
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F R A N C E
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PAPREC HOLDING: Fitch Gives BB+(EXP) Rating on EUR600MM Sec. Bond
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Fitch Ratings has assigned Paprec Holding SA's proposed green
EUR600 million senior secured bond - split between four- and
six-year tranches - an expected rating of 'BB+(EXP)'/'RR3'. The
pricing, final tenor and tranche structure is subject to market
conditions.
The proposed issuance will be rated one notch above Paprec's 'BB'
Issuer Default Rating (IDR) and aligned with that of the
outstanding senior secured notes (2025 4.000% EUR575 million and
the 2028 3.500% EUR450 million). The proposed draft terms largely
reflects the terms and conditions of the existing notes.
The proposed notes will be used to finance the redemption (at par)
of the existing EUR575 million senior secured notes maturing in
2025. The remaining cash proceeds, depending on final issuance
terms, will be used to improve the group's liquidity and to support
company's growth financial needs.
The final instrument rating is subject to the receipt of final debt
terms and documentation confirming the information already
received.
KEY RATING DRIVERS
Senior Secured Instrument Rating: The proposed green senior secured
notes are rated one notch above Paprec's IDR and are aligned with
the 2028 EUR450 million (currently EUR422 million outstanding
following the execution of a partial buy-back) senior secured at
'BB+'. Bondholders will benefit from first-priority collateral on
securities, pledged bank accounts and intercompany receivables of
Paprec's subsidiaries on a first-priority basis. The notes will
rank equally with obligations under the 2028 notes and the super
senior revolving credit facility (SSRCF) agreement.
Issuer and guarantors generate about 65% of group EBITDA, which is
lower than similar transactions (usually about 80% of consolidated
EBITDA) but higher than the previous July 2021 issuance.
Limited impact on Credit Metrics: Fitch expects the proposed
issuance to be neutral in terms of funds flow from operations (FFO)
net leverage remaining at 3.8x in average for 2023-2026 from 3.7x
in its previous forecast. The FFO interest coverage would be more
affected averaging 4.0x for 2023-2026 compared with 5.0x in its
previous forecast, based on its higher interest cost estimate
compared with the refinanced 4.000% senior secured bond issued in
2018. These are still commensurate with its negative sensitivities
for the 'BB' IDR at 4.0x (leverage) and 3.5x (coverage).
Core Recycling Business: Paprec's revenue is split between waste
services (about 66% of 2022 revenue) and the sale of secondary raw
materials (34%). The largely contracted nature of its activities
and the granular and diversified customer base contribute to the
resilience of the business model, generating regular waste flows to
recycle and extract raw materials to sale. Recycling revenue is
mainly derived in France where the company has a good geographical
footprint, with sites close to customers, high quality
infrastructure and close relationships with key customers, which
create barriers to entry.
Cost-Inflation Affects Performance: Paprec's 1H23 revenue was
stable at EUR1.2 billion, despite the strong performance of the
waste services business on the back of healthy prices and growing
volumes. This performance was offset by the decline in raw material
sales, which were affected by the normalisation of prices after
exceptionally high prices in 2022. The company's reported 1H23
EBITDA decreased by about 8%, largely due to the impact of energy
prices (secured in 2022 at peak levels) and cost-inflation. Fitch
understands from management that Paprec has secured its 2024 energy
prices at more normalised levels.
Protection mechanisms embedded in contracts allow the company to
mitigate the impact in margins of sudden prices changes and
inflationary pressures, albeit with some time lag. Fitch's case
already factored in a challenging 2023 with a decline in Fitch's
EBITDA and a surge in FFO net leverage to 4.0x from 3.5x in 2022, a
trend that Fitch sees largely reverted in 2024-2026.
Opportunistic M&A Strategy: In 2023, Paprec has continued its
acquisitive strategy with the acquisition of CLD (EUR103 million of
sales; waste collection, treatment and street cleaning operator)
expected to close by end-November 2023 and 60% of GBI Serveis
(EUR41 million; waste collection and treatment) to enhance
geographic coverage in Spain, exploit synergies, and reinforce
certain segments. Fitch case included M&A of about EUR40 million
for 2023 (EUR440 million for 2023-2026).
Spain is a key geography in which Paprec expects a EUR200 million
(pro-forma of recent acquisitions) contribution in 2023 (2022:
EUR4.4 million) from a mix of organic and inorganic growth.
Commitment to Financial Policy: Fitch expects the company to keep
its strong commitment to maintain net debt/EBITDA (as reported by
Paprec) of 2.5x-3.5x, which is consistent with its guidance for the
'BB' rating. The founding family and remaining shareholders have
expressed their commitment to continue their growth/acquisition
strategy as far it is consistent with the above target. Fitch would
expect equity support for any large M&A that may permanently breach
its financial policy and rating sensitivities.
DERIVATION SUMMARY
Fitch views Seche Environnement S.A. (BB/Stable) and Derichebourg
S.A. (BB+/Stable) as Paprec's closest peers. The companies are
medium sized waste management players operating primarily in
France.
Seche specialises in hazardous waste (HW) management, which is
subject to strict technical requirements that provide higher
barriers to entry and pricing power compared with Paprec's
lower-margin non-HW business. Paprec benefits from a more
diversified waste mix, service offering and lower counterparty risk
based on its higher share of revenue from public entities. However,
Paprec's recycling activities have higher business risk, due to
exposure to the primary commodity prices and the demand of the
manufactured goods for which it is a price taker. Overall, Fitch
views Seche's credit profile as marginally stronger than Paprec's,
given its value and margin-added service offering, as well as its
higher weight of fee-based revenues.
Derichebourg is a pure-play recycling specialist leading the metal
(ferrous and non-ferrous) recycling business in France and Spain.
Both Paprec and Derichebourg operate a dense network of collection
and processing sites; with Paprec benefiting from a more
diversified waste mix and service-offering, and Derichebourg having
a stronger presence outside France. Derichebourg's higher rating is
largely explained by its more conservative financial policy and
lower leverage.
Paprec also face competition in France from the integrated global
industry leaders Veolia Environnement S.A. (BBB/Stable) and Suez
S.A. Paprec is significantly smaller and lacks geographical and
sector diversification, as the company is not present in low-risk
water activities, which is credit positive for Veolia and Suez. The
difference in ratings between Paprec and Veolia reflects Paprec's
much weaker business profile, which is not entirely offset by its
slightly better financial profile.
The Spanish waste management operators Luna III S.a.r.l.
(BB/Stable) and FCC Servicios Medio Ambiente Holding, S.A.U. (FCC
MA; BBB/Stable) operate under long-term concession contracts with
municipalities, and are largely shielded from price risk, as
opposed to Paprec's significant exposure to merchant risk. Luna and
FCC MA benefit from low exposure to private industrial and
commercial customers and sound geographical diversification. The
stronger business profiles of Luna and FCC MA support a materially
higher debt capacity than Paprec.
KEY ASSUMPTIONS
Its Key Assumptions within its Rating Case for the Issuer:
- Total volumes of waste processed growth at 2.7% CAGR 2022-2026
- Total volumes of raw materials recycled to grow at a 2.5% CAGR
2022-2026
- Raw material prices to gradually decline from EUR190/tonne at
2022 to about EUR165/tonne by 2026
- Prices for waste services to increase from EUR143/tonne at 2022
to EUR160/tonne by 2026
- Average EBITDA (excluding IFRS16) margin of 10% for 2023-2026
- Total capex of EUR670 million for 2023-2026
- Bolt-on acquisitions of about EUR440 million on average up to
2026 at a 6.0x enterprise value/EBITDA multiple
- EUR150 million convertible bond converted into equity in 2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- FFO net leverage below 3.3x (or EBITDA net leverage below 2.8x)
- FFO interest coverage above 4.5x
- Improved profitability reflected in a sustained EBITDA margin
above 12%
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO net leverage above 4.0x (or EBITDA net leverage above 3.5x)
and FFO interest coverage below 3.5x and consistently negative FCF
- Increasing margin volatility due to changes of in the structure
of contracts, especially regarding indexation to raw material price
evolution
- Deviations from the more conservative financial policy to fund
additional acquisitions and dividends
LIQUIDITY AND DEBT STRUCTURE
Improved Liquidity Post-Bond Refinancing: Paprec's liquidity
position at June 2023 was EUR534 million, including EUR254 million
of readily cash available and EUR280 million of available SSRCF. In
1H23, the company repaid its EUR114 million state-guaranteed loan
with cash available.
Fitch expects the proposed notes to add additional liquidity
depending on the excess of the refinancing of its EUR575 million
bond and the final quantum issued and to be gradually reinvested in
the business. Finally, the EUR300 million RCF maturity will be
automatically extended to the earlier of 12 April 2028 and three
months before the maturity of any of the two proposed bonds.
ISSUER PROFILE
Paprec is a majority family-owned waste recycling player in France
with a leading position in key segments in terms of tonnes of waste
processed across multiple industrial sectors and municipalities.
The company manages 204 waste processing and recycling sites, 27
energy waste sites and 21 landfills in France and recycled about
14.9 million tonnes of waste during 2022.
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
----------- ------ --------
Paprec Holding SA
senior secured LT BB+(EXP) Expected Rating RR3
=============
G E R M A N Y
=============
SD REIFEN: Enters Liquidation, Operations to Cease in 2024
----------------------------------------------------------
Stephen Goodchild at Tyrepress reports that tyre distributor
SD Reifen GmbH recently went into liquidation, which means its
business activities will officially end in autumn 2024.
According to Tyrepress, Bernd Schwarz, company shareholder and
managing director of the German firm since its founding almost
eight years ago, has been appointed to the role of liquidator.
=========
I T A L Y
=========
INTERNATIONAL DESIGN: Fitch Rates EUR400MM Secured Notes 'B(EXP)'
-----------------------------------------------------------------
Fitch Ratings has assigned International Design Group S.p.A. 's
(IDG) EUR400 million senior secured notes an expected rating of
'B(EXP)' with a Recovery Rating of 'RR4' following the company's
announced upcoming partial refinancing of its capital structure.
The senior secured rating is predicated on full repayment of its
existing EUR400 million senior secured notes with the proceeds of
the new notes and cash. The new notes will rank behind its
revolving credit facility (RCF), which Fitch understands from
management will increase to EUR140 million as part of the
refinancing. The assignment of final ratings is contingent on
completing the transaction in line with the terms already
presented.
IDG's 'B' Long-Term Issuer Default Rating (IDR), which has been
affirmed today, reflects successful execution of its growth
strategy centred on the integration of six brands and its joint
venture (JV) relating to the Fendi Casa brand with limited risk.
The Stable Outlook on its IDR reflects good leverage headroom and
its expectation of mildly improving free cash flow (FCF)
generation, which will support adequate liquidity in the medium
term.
KEY RATING DRIVERS
Refinancing Neutral to Credit Metrics: Fitch estimates that IDG's
EBITDA leverage will decrease slightly to 5.2x in 2023 from the
previously forecast 5.3x, which is comfortable for the rating.
Fitch projects leverage to trend lower to below 5.0x in the coming
four years, supported by absolute EBITDA growth and the first full
year of trading of IDG since its combination with Designers Company
(DC). If the leverage trajectory sustained, it could drive a
positive rating action in the medium term.
Mildly Weaker Interest Coverage: Fitch estimates a slightly weaker
EBITDA interest coverage of 2.2x-2.3x in 2023-2024 given an assumed
floating-rate debt capital structure. The metric should improve
towards 2.8x by 2026 on projected gradual EBITDA growth and
moderating interest rates.
Revenue Growth Deceleration: Fitch expects sales to contract 2% in
2023 after two years of strong 28%-25% growth on price increases,
volumes and inorganic growth. The integration of DC and YDesign
Group LLC (Lumens) acquisitions has enhanced IDG's online channel
and presence in the North American and Nordic markets. For 2023,
Fitch projects declining volumes on weaker consumer purchasing
power in Europe, the US and China due to persisting inflation and
the discretionary nature of IDG's product offerings. In 2024, Fitch
estimates sales will gradually rebound about 1.8% before
normalising to 3% in the following two years.
Moderated but Resilient Profitability: Fitch assumes IDG will be
able to maintain profitability above 20% as it rebalances its
distribution channels. Fitch consequently forecasts an EBITDA
margin of 20.4% in 2023, in line with 2022's, due to inflationary
pressures on key raw materials such as textiles, leather, glass and
chips, as well as higher distribution and marketing expenses.
The dilution effect of emerging brands is hitting profitability
with a higher impact from Fendi Casa, which is still in a start-up
phase. At the same time, Fitch also factors in initiated cost
savings, which will help support margins from 2024 at around 21%.
Positive FCF Generation: IDG's FCF margin remains positive,
although lower than during the pandemic due to the combined effect
of declining profitability, moderate increases in capex, higher
interest expenses and greater working capital needs as the business
grows. In particular, Fitch expects inventories to remain high due
to weakening spending power, which will partially be offset by
slower input cost inflation. Fitch forecasts an FCF margin of 1.9%
in 2023, before it improves towards 5% by 2026, which combined with
lower leverage to below 5.0x, could support a positive rating
action in the medium term.
Flexible Cost Structure: About 68% of IDG's costs are variable
which, along with cost-optimisation actions and cost pass-through,
mitigate margin declines. Over the last two years its double-digit
pricing strategy has helped preserve a gross margin of 60%-61%
despite some weakening in volumes.
Financial Policy Set to Evolve: Fitch still views IDG's financial
policy as aggressive, particularly after its debt-funded
acquisition of Lumens was followed by the acquisition of DC. Fitch
believes that an expansion of the brand's portfolio is supported by
shareholders' appetite to enhance the value of the business at
exit. However, Fitch believes an IPO of IDG over the next 12 to 18
months is a possibility, subject to market conditions. Should this
happen, Fitch expects IDG to use part of the IPO proceeds to prepay
debt.
DERIVATION SUMMARY
IDG's ratings are based on its premium brand portfolio in high-end
lighting and furniture, its average diversification between
products and channels, and its high leverage. The company's
catalogue is biased towards residential customers, while its
distribution is mainly wholesale, although with a relevant
e-commerce presence and a more volatile contracting business.
IDG's luxury peers are Capri Holdings Limited (BBB-/Rating Watch
Negative (RWN)), the owner of Versace, Jimmy Choo, and Michael Kors
(USA), Inc. (BBB-/RWN), and Tapestry Inc., the owner of Coach, Kate
Spade and Stuart Weitzman. Compared with IDG, Fitch sees higher
fashion risk for Capri and Tapestry as well as higher exposure to
retail distribution. However, comparability is limited due to IDG
being smaller, with material differences in the capital structure.
Within Fitch's LBO portfolio of branded consumer goods, IDG shares
similarities with shoe producers Birkenstock Financing S.a.r.l.
(BB/Stable) and Golden Goose S.p.A. (B+/Stable). The latter has a
smaller business scale and faces higher fashion and retail risks
than IDG, but these are balanced by its materially higher margins.
Birkenstock's rating reflects the combination of larger scale,
stronger brand recognition than IDG's, better margins and lower
leverage, especially after the recent IPO and partial debt
prepayment.
Afflelou S.A.S. (B/Stable) and beauty retailer Douglas GmbH
(B-/Stable) also have strong brand recognition and customer
loyalty, but with wider exposure to retail distribution. Affelou's
retail model is mitigated by the company's healthcare component and
partial public and insurance reimbursement for distributed goods.
Douglas's 'B-' rating is influenced by a more aggressive capital
structure.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Total revenue decline of around 2% in 2023, followed by a 2%-3%
growth in the following three years
- EBITDA margins of 20%-21% until end-2024, and strengthening
towards 21.5% by end-2026 as volumes normalise amid an improving
economic environment
- Working capital-related cash outflows of around EUR13 million in
2023, reflecting an increase of inventories. Minor working capital
inflow from 2024
- Capex on average at around 4.5%-5% of sales for the next four
years
- Deferred M&A consideration of around EUR40 million in 2023 and
EUR18 million in 2024, with scope for bolt-on acquisitions of
around EUR50 million a year in 2025-2026
RECOVERY ANALYSIS
The recovery analysis assumes that IDG would be considered a
going-concern (GC) in bankruptcy, and that it would be reorganised
rather than liquidated, given its immaterial asset base and the
inherent value within its distinctive portfolio of brands.
Additional value lies in its retail network and wholesale and
contract client portfolio. Fitch has assumed a 10% administrative
claim.
Fitch assesses GC EBITDA at about EUR95 million. Fitch would expect
distress to result from slower revenue growth due to weak expansion
under certain distribution channels, and as weaker pricing leads to
lower margins.
At the GC EBITDA, Fitch estimates IDG would still be able to
generate low single-digit FCF margins but its implied total
leverage would put the capital structure under pressure, making
refinancing extremely difficult without debt cuts or increasing the
cost of debt beyond the available FCF headroom.
Fitch used a 6.0x multiple, towards the high end of its distressed
multiples for high-yield and leveraged finance credits. Its choice
of multiple is justified by the premium valuations in the sector
involving strong design and luxury brands. The security package is
centered on shares in the key operating subsidiaries owned by IDG
and hence pledged against the holding company's debt obligations.
No security has been taken over the intellectual property assets,
whose access by creditors is, however, protected by negative
pledges and limitation of lien clauses. The guarantor's coverage
test is set at 80%.
Under the current capital structure, the RCF is assumed to be fully
drawn on default. The RCF ranks super senior, ahead of the senior
secured notes. Its waterfall analysis generates a ranked recovery
for the senior secured noteholders in the 'RR4' category, leading
to a 'B' instrument rating. This results in a waterfall-generated
recovery computation output percentage of 47%.
Based on the planned partial refinancing with the unchanged
super-senior ranking of the upsized RCF of EUR140 million, Fitch
estimates that recoveries for the new EUR400 million senior secured
notes would remain in 'RR4', albeit with a slightly lower
waterfall-generated output percentage of 42%. Therefore, on
completion Fitch expects to assign a final 'B' rating with 'RR4' to
the new senior secured notes.
RATING SENSITIVITIES
Factors that Individually or Collectively Could Lead to Positive
Rating Action/Upgrade:
- EBITDA leverage below 5.0x on a sustained basis, including as a
result of lower target leverage
- EBITDA interest coverage higher than 3.0x on a sustained basis
- FCF margin at 5% or higher as a result of successful pass-through
of input cost increases and strong retention of pricing power
Factors that Individually or Collectively Could Lead to Negative
Rating Action/Downgrade:
- EBITDA leverage higher than 6.0x through the cycle, as a
consequence of debt-funded acquisitions or higher drawdowns under
the RCF
- EBITDA interest coverage lower than 2.3x
- FCF margin lower than 2%
LIQUIDITY AND DEBT STRUCTURE
Reasonable Liquidity: Fitch assesses IDG's liquidity as
satisfactory. Following the refinancing, Fitch expects available
cash at end-2023 to be around EUR40 million, on top of the fully
available upsized RCF.
The partial refinancing will improve IDG's debt maturity profile by
extending the notes maturity to 2028, with the next material senior
secured debt due in May 2026.
ISSUER PROFILE
IDF is a leading global supplier of high-end furniture and
lighting.
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
----------- ------ -------- -----
International
Design Group
S.p.A. LT IDR B Affirmed B
senior
secured LT B(EXP)Expected Rating RR4
INTERNATIONAL DESIGN: Moody's Rates New EUR400MM Secured Notes 'B2'
-------------------------------------------------------------------
Moody's Investors Service has assigned B2 ratings to the proposed
EUR400 million backed senior secured notes due 2028, to be issued
by International Design Group S.p.A. (IDG), an Italian high-end
lighting and furniture company. All existing ratings remain
unchanged.
The transaction is broadly leverage neutral because proceeds from
this debt issuance will be used to fully repay the existing EUR400
million backed senior secured fixed rate notes due 2025, borrowed
by IDG.
RATINGS RATIONALE
IDG's ratings reflect the group's solid brand portfolio, its
leading market position in a niche and fragmented industry, good
liquidity with consistently positive free cash flow (FCF), and
track record of solid earnings growth, both organically and via
acquisitions.
The ratings also factor in the group's moderate size in a highly
fragmented market, its exposure to discretionary consumer spending,
its reliance on external designers for new products to remain
competitive, and a degree of M&A risk, which could slow down
leverage reduction and affect its good liquidity.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that IDG's key
credit metrics will remain commensurate with the current rating
level, with Moody's-adjusted leverage in the range of 5.5x-6.0x
over the next 12-18 months and FCF recovering to traditionally good
levels. The stable outlook also incorporates the assumption that
the company will maintain good liquidity, and a prudent approach
towards acquisitions and shareholder remuneration.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The ratings could be upgraded if IDG achieves strong top-line and
earnings growth, both organically and via acquisitions, leading to
Moody's-adjusted gross debt/EBITDA reaching towards 4.5x and
Moody's-adjusted EBIT interest cover ratio remaining sustainably
above 2.5x. A rating upgrade would also require the company to
maintain a Moody's-adjusted EBIT margin in the high-teen
percentages, as well as good liquidity, supported by consistently
positive FCF and a prudent approach towards M&A.
The ratings could be downgraded if IDG's operating performance
deteriorates significantly as a result of weak consumer demand or
poor execution of new business acquisitions, or both.
Quantitatively, the rating could be downgraded if its
Moody's-adjusted EBIT margin declines towards the low-teen
percentages and Moody's-adjusted gross debt/EBITDA remains above
6.0x on a sustained basis. A downgrade could also occur if
liquidity weakens and the company adopts a more aggressive
financial policy, with a more dynamic acquisition strategy or
shareholder remuneration in excess of FCF.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Consumer Durables
published in September 2021.
COMPANY PROFILE
IDG was created from the combination of three high-end design
companies: Flos, a leading Italian high-end lighting manufacturer;
B&B Italia, a leading Italian high-end furniture company; and Louis
Poulsen, a leading Danish high-end lighting company. In 2022, IDG
generated EUR848 million in revenue (2021: EUR676 million) and
around EUR180 million in EBITDA as reported by the company, that
is, before non-recurring costs (2021: EUR161 million). During 2021
and 2022, IDG acquired YDesign and Designers Company, and signed a
license agreement with Fendi Casa. The pro forma combined sales
contribution of these brands was EUR167 million in 2022 (2021:
EUR121 million).
Following the acquisition completed in late 2018, the group is
owned equally by Investindustrial and the Carlyle Group, together
with the company's management.
INTERNATIONAL DESIGN: S&P Rates Sr. Secured Fixed-Rate Notes 'B'
----------------------------------------------------------------
S&P Global Ratings assigned its 'B' issue rating and '3' (55%)
recovery rating to International Design Group SpA (IDG)'s proposed
EUR400 million, senior secured, fixed-rate notes due 2028. The
proposed notes will rank pari passu with the existing EUR470
million senior secured floating rate notes due 2026.
The issuance proceeds will be used for the early refinancing of the
existing EUR400 million senior secured fixed notes due 2025. To
support its liquidity profile, the company also intends to upsize
its super senior secured revolving credit facility (RCF) to EUR140
million from EUR100 million, which is expected to mature in 2028
and is drawn by EUR43 million post-transaction.
S&P said, "IDG's proposed refinancing is leverage neutral, with S&P
Global Ratings-adjusted debt to EBITDA at about 6.0x-6.5x by
year-end 2023, up from 5.9x in 2022. This compares with the
deleveraging toward 5.0x-5.5x we previously forecast. The change is
mainly because of weakened consumer spending in core European
markets, mostly in the Nordics, affecting Louis Poulsen (17% of
IDG's 2022 sales) with year-on-year revenue declining 28.8% in
first-half 2023. Also, we expect softening demand in the U.S. for
the rest of the year, leading to a revenue decline of 8%-10% in
2023."
That said, S&P Global Ratings-adjusted EBITDA margins are expected
to increase to close to 22.5% this year, from 21.3% in 2022,
supported by a material decline in nonrecurring costs following
acquisition expenses and the ramp up of the Fendi Casa business in
2022. S&P said, "In addition, sales price increases; cost-saving
initiatives linked to streamlined organization and procurement
efficiencies; and the variability of the cost base, with close to
70% make-to-order businesses (according to management estimates),
support our expectation of positive free operating cash flow of
close to EUR20 million this year after lease payments. Despite an
increase in interest burden following the refinancing, we expect
EBITDA interest coverage to remain close to 2x. Overall, credit
metrics remain commensurate with the current 'B' issuer credit
rating."
S&P said, "IDG has a leading position in the core luxury design
market with 4% global market share, according to management
estimates. We deem this a niche segment given it accounted for just
2% of the overall EUR1.4-trillion-value global luxury sector in
2022, according to industry research. The market is also highly
fragmented, with IDG the largest player at about EUR850 million
annualized revenue. IDG has a well-diversified brand portfolio
including Flos, Louis Poulsen, B&B Italia, and the licensed
business Fendi Casa, among others. The company also has a broad
geographical footprint, with Europe and the Americas accounting for
59% and 26.5% of total sales respectively in the 12 months ended
June 30, 2023. In the same period, Asia Pacific accounted for 14.5%
of total sales and we note that in this region, as well as the
Americas, the group has lower-than-average market penetration. This
means it has potential to expand in those areas, primarily through
collaboration with relevant architects and interior designers and
the rollout of the Fendi Casa business, which has good prospects in
China.
"In our base case, we expect IDG to return to positive revenue
growth of 1%-3% from 2024, mainly thanks to a higher focus on the
contract business, which enables cross-selling opportunities once a
project is assigned to IDG in the residential and commercial
segments. Other growth drivers stem from expansion of the Fendi
Casa business, further e-commerce penetration, and growth in
point-of-sales contributing to the expansion of the
direct-to-consumer channel, accounting for roughly 50% of total
sales.
"We embed in the rating assessment our assumption that the company
could pursue external growth opportunities to diversify toward
other products categories such as bathroom and accessories.
Currently, we see a moderate concentration in lighting products, at
60% of total sales, while living room, kitchen, and bedroom
contribute the remainder."
Issue Ratings--Recovery Analysis
Key analytical factors
-- The proposed senior secured, EUR400 million, fixed-rate notes
and the existing EUR470 million floating-rate notes have an issue
rating of 'B' and recovery rating of '3'. This reflects S&P's
meaningful recovery prospects (50%-70%; rounded estimate: 55%) in a
default scenario.
-- Prior-ranking liabilities, for example the super senior RCF,
and the weak security package, including share pledges, material
bank accounts, and issuer receivables, constrain the recovery
rating.
-- In S&P's hypothetical default scenario, it envisages increased
competition and a cut in discretionary spending, in line with
deteriorating economic conditions.
-- Due to its premium price positioning, iconic product portfolio,
and sound relationships with designers and architects, S&P values
IDG as a going concern.
Simulated default assumptions
-- Year of default: 2026
-- Jurisdiction: Italy
Simplified waterfall
-- Emergence EBITDA: Approximately EUR133 million
-- Capital expenditure: About 3% of the next three years' annual
pro forma average sales to reflect higher investments to develop
licenses, the e-commerce platform, and the Fendi Casa partnership
roll-out.
-- Cyclical adjustment: 5%, in line with S&P's standard
assumptions for the industry.
-- Operational adjustment: 15%
-- Multiple: 5.5x
-- Gross recovery value: About EUR733 million
-- Net recovery value for waterfall after administrative expense
(5%): approximately EUR695 million
-- Estimated priority claims: about EUR124 million
-- Estimated first-lien debt claims: approximately EUR970 million
--Recovery range: 50%-70% (rounded estimate 55%)
--Recovery rating: 3
Note: This is a simulated default scenario. All debt amounts
include six months of prepetition interest that S&P assumes to be
outstanding at default. The RCF is assumed to be 85% drawn at
default.
TELECOM ITALIA: Moody's Puts 'B1' CFR on Review for Upgrade
-----------------------------------------------------------
Moody's Investors Service has placed on review for upgrade the B1
long term corporate family rating and the B1-PD probability of
default rating of Telecom Italia S.p.A. ("Telecom Italia" or "the
company"), the leading telecommunications provider in Italy.
Concurrently, Moody's has placed on review for upgrade the B1
ratings on the senior unsecured debt instruments issued by Telecom
Italia, the B1 ratings on the backed senior unsecured debt
instruments issued by its subsidiaries, Telecom Italia Capital S.A.
and Telecom Italia Finance, S.A. and the (P)B1 senior unsecured
Euro MTN program ratings of Telecom Italia and the backed (P)B1 MTN
program ratings of Telecom Italia Finance, S.A. At the same time,
Moody's placed on review for upgrade Telecom Italia's B1 senior
unsecured revolving credit facility. Previously, the outlook was
negative for all entities.
The rating action follows the announcement [1] on 5 November 2023
that Telecom Italia's Board of Directors has approved by majority
vote KKR's binding offer for the company's fixed network assets
("NetCo"). The binding offer values NetCo at an Enterprise Value of
EUR18.8 billion, although this could be raised to up to EUR22
billion considering possible upsides associated with earn-outs
linked to the occurrence of certain conditions. The company said
that the sale would allow a reduction of Telecom Italia's net debt
by approximately EUR14 billion and that its reported net
debt/EBITDA ratio (after leases) will be less than 2x.
The transaction should close by the summer of 2024, subject to
government and regulatory approvals. The Board of Directors also
opined on the non-binding offer on the submarine cable unit
Sparkle, but decide to mandate the CEO to receive an improved
offer.
"Moody's have placed Telecom Italia's ratings on review for upgrade
because if the disposal of NetCo is completed as planned, the
expected EUR14 billion reduction in net debt will lead to a
significant improvement in the company's financial profile, which
will more than offset the deterioration in its business profile,"
says Ernesto Bisagno, a Moody's Vice President - Senior Credit
Officer and lead analyst for Telecom Italia.
"If the transaction is completed as planned, Moody's could upgrade
the company by one to two notches," adds Mr Bisagno.
The decision to place the ratings on review for upgrade reflects
corporate governance considerations associated with Telecom
Italia's decision to pursue a more conservative financial policy
and a lower tolerance for leverage than prior to the NetCo
disposal. Financial strategy and risk management is a governance
consideration under Moody's General Principles for Assessing
Environmental, Social and Governance Risks methodology.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR
DOWNGRADE OF THE RATINGS
Assuming the NetCo disposal is successfully completed as planned,
Moody's expects that Telecom Italia's financial profile will
improve materially owing to the EUR14 billion net debt reduction,
cutting the group's reported net debt by around 50%. Pro-forma for
the transaction, Telecom Italia's Moody's adjusted gross debt to
EBITDA ratio will decline towards 3.0x by 2024, from 5.7x in 2022.
While the debt reduction significantly improves the company's
financial profile, the disposal of the fixed network is a
transformational deal that will also weaken its business model.
Following the disposal, Telecom Italia will become asset lighter,
as it will no longer own the fixed-line infrastructure (i.e.
primary, secondary, edge, central office and real estate). Given
the regulated nature of those assets, which provide a relatively
stable and predictable source of cash flows, the transaction is
likely to make Telecom Italia's business model more exposed to the
volatile market conditions in the domestic market.
However, Telecom Italia will maintain full control of the active
infrastructure of its mobile business (spectrum, core and RAN
network), of the data centers, and will own selected Indefeasible
Rights of Use (IRUs) for backhauling. Telecom Italia will continue
to own the Enterprise business, as well as the well performing
assets in Brazil, although the weight of the Brazilian assets in
the overall group will be relatively higher than prior to the
disposal, and TIM Brazil is fully consolidated but not fully
owned.
The review process will focus on (1) the successful completion of
the disposal under the terms publicly announced; (2) the assessment
of Telecom Italia's business profile, its strategic priorities and
its operating performance after the disposal; (3) the
relationship between Telecom Italia and NetCo and the specific
terms of the master service agreement that governs this
relationship; and (4) the final debt structure of Telecom Italia,
its financial policies, as well as the strength of its liquidity
profile post transaction.
Prior to placing the ratings on review for upgrade, Moody's said
that upward pressure could develop if Telecom Italia's operating
performance improves significantly, such that its Moody's-adjusted
debt/EBITDA declines below 4.25x and (Moody's-adjusted EBITDA minus
capital spending)/interest expense rises above 2.0x, while the
company demonstrates an improvement in FCF.
Prior to placing the ratings on review for upgrade, Moody's said
that downward rating pressure could develop if Telecom Italia fails
to address the upcoming refinancing needs or if its operating
performance does not stabilize, such that its Moody's-adjusted net
leverage ratio fails to reduce below 5.0x and its (Moody's-adjusted
EBITDA minus capital spending)/interest expense remains below 1.5x,
with sustained negative FCF.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was
Telecommunications Service Providers published in September 2022.
COMPANY PROFILE
Telecom Italia is the leading integrated telecommunications
provider in Italy. The company provides a full range of services
and products, including telephony, data exchange, interactive
content, and information and communications technology solutions.
In addition, the group is one of the leading telecom companies in
the Brazilian mobile market, operating through its subsidiary TIM
Brasil.
===================
L U X E M B O U R G
===================
IREL BIDCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
-----------------------------------------------------------
Fitch Ratings has affirmed Irel BidCo S.a.r.l.'s (IFCO) Long-Term
Issuer Default Rating (IDR) at 'B+' with Stable Outlook. Fitch has
also affirmed IFCO's senior secured rating at 'BB-' with a Recovery
Rating of 'RR3'.
The rating reflects volatile capex, forecast negative FCF and
concentration risk, which are balanced by IFCO's leading market
position in reusable packaging container (RPC) pooling solutions,
and the stable, non-cyclical demand of its end-markets. Fitch
forecasts gradual rebound of EBITDA margins accompanied by a
continued rise in revenue that resulted in improved EBITDA leverage
in FY23 (financial year ending June) to 5.5x.
The Stable Outlook reflects its expectations that cash-flow
generation and debt service capacity will be supported by stable
demand for RPCs, ongoing ramp-up of RPCs to address an enlarged
network and successful application of price indexation.
KEY RATING DRIVERS
Strong Revenue Gain: Revenue rose 16% in FY23, supported by sales
volume from new contracts with retailers in the US and Europe,
organic growth in South America and also a ramp-up of volume after
the acquisition of Sanko Lease's RPC pooling service business in
Japan. In addition, the group successfully increased rental prices
in Europe by mid single digits in Europe in June 2022 and by low
double digits in January 2023.
EBITDA Margin to Rise: Fitch forecast revenue growth to slow to
mid-single digits in FY24 as reduced demand from
consumers/retailers, in particular in Europe, is partially
mitigated by higher prices implemented in FY23. Fitch forecasts a
gradual improvement of profitability due to price indexation
outstripping cost inflation, including logistics and wash costs.
Fitch forecasts Fitch-defined EBITDA margin at 21.2% in FY24 and
further improvement towards 22.9% by FY27, from 20% at FYE23.
Capex Volatility: IFCO's capex is subject to both the volatility of
resin (polypropylene) prices and the volume of RPCs to be replaced
or added to the existing pool in operation. In FY23 capex decreased
21% mainly due to lower growth-pooling capex. In FY24 Fitch expects
capex to remain high, at about 18% of revenue, or marginally higher
in absolute amount. Fitch forecasts capex at about EUR244 million
in FY25 with a small rise of non-pooling capex, before it declines
to about EUR230 million-EUR235 million or about 14.5% of revenue in
FY27.
To partly mitigate rising costs for capex due to resin prices
fluctuation, IFCO is increasing the usage of recycled material from
broken RPCs and legacy pools. Other cost inflation such as labour
and transportation, are covered via indexation which varies with
the country of operations.
FCF Temporarily Under Pressure: While Fitch expects EBITDA to be
broadly resilient to FY27, Fitch forecasts free cash flow (FCF) to
be negative in FY24 and marginally negative in FY25. This is due to
expected higher interest expenses and high capex for FY22-FY25
following acquisitions and increased penetration in Europe and
North America leading to a ramp-up of RPCs pool in operations as
well as a rise of non-pooling capex attributed to washing capacity
and automated equipment. However, its satisfactory liquidity and
limited refinancing risk are mitigating factors.
Deleveraging Expected: IFCO's EBITDA leverage improved in FY23 to
5.5x from 6.0x in FY22 versus its negative sensitivity of 5.5x.
Fitch forecasts lower inflationary pressure accompanied with
pricing revision and stable capex in FY24 to support deleveraging.
Fitch forecasts EBITDA leverage at around 5.1x in FY24 and under
5.0x from FY25.
Narrow Service Offering: IFCO's service offering is limited to
providing RPCs, primarily to fruit and vegetable producers for
further transport to retailer warehouses or shops. This is
mitigated by its strong market position and good, albeit
concentrated, geographic diversification (central and southern
Europe (70% in FY23), the US and Canada (20%), Latin America (4%)
and China/Japan (5%). It has concentration risk as its top 10
customers represent nearly 50% of trip volumes, albeit at a lower
share of revenue.
Supportive End-Market: IFCO's business profile is robust and
characterised by sustainable demand from customers, long-term
relationships with customers, exposure to the industry with low
cyclicality as well as by a solid market position. The market is on
a growing trend due to population growth, partial replacement of
cardboard packaging and healthier lifestyle choices. With pooled
RPC only accounting for some 20% of global fresh produce shipping
volumes and the majority still shipped in one-way carton-board
containers, the RPC market has headroom for further growth. Ongoing
retailer trends such as automation, supply-chain efficiencies and
environmental awareness should support the increased prevalence of
multi-use packaging.
Global Niche Market Leader: IFCO is the market leader with strong
shares of the European and north American pooled RPC markets. Its
strong international coverage across more than 50 countries offers
retailers a network that is stronger than its competitors. IFCO's
size and coverage offer further scale benefits and price
leadership, and it is renowned for building strong relationships
with larger retail chains. Competition comes from single-use
packaging, from which IFCO is taking market share, retailers' own
pools as well as small regional RPC providers.
DERIVATION SUMMARY
As IFCO does not have a direct peer Fitch compares it with
manufacturers of plastic containers (suppliers of IFCO), packaging
manufacturing companies and business services companies. IFCO is
much smaller than large packaging company Ardagh Group S.A.
(B/Stable), which has a stronger business profile supported by
greater geographical and product mix diversification. IFCO compares
well with Fiber Bidco S.p.A. (B+/Stable) by scale and has similar
geographical diversification being mostly exposed to Europe. IFCO
is larger versus its main supplier - Schoeller Packaging B.V.
(CCC+).
IFCO compares well against Fitch-rated medium-sized companies in
niche markets, including property damage restoration service
provider Polygon Group AB (B/Negative) and rental service provider
of cranes Sarens Bestuur NV (B/Stable).
IFCO's EBITDA margins are in line with that of Sarens, but stronger
than that of Polygon and aforementioned packaging companies.
Similar to Ardagh's, IFCO's FCF margin is under pressure from
growth capex to ramp up for new accounts while Fiber Bidco S.p.A.
reports broadly positive FCF margins.
IFCO's EBITDA leverage on average is comparable with Fiber Bidco's
and Sarens' and is stronger than that of Ardagh, Schoeller and
Polygon.
KEY ASSUMPTIONS
Key Assumptions Within Its Rating Case for the Issuer
- Revenue to rise on average 3.6% in FY24-FY27
- EBITDA margin to rise to 21.2% in FY24 and towards 23% by FY27
- Capex at about EUR264 million in FY24, EUR244 million in FY25 and
EUR230 million-235 million in FY26-FY27
- Drawdown of revolving credit facility (RCF) of additional EUR27
million in FY24
- No M&A to FY27
- Higher interest rates, no debt amortisations and two bullet
maturities in FY26
RECOVERY ANALYSIS
- The recovery analysis assumes that IFCO would be considered a
going-concern (GC) in bankruptcy and that it would be reorganised
rather than liquidated. This is driven by its leading market
position in niche market, long-term operating performance record
and long-term relationships with customers
- Its GC value available for creditor claims is estimated at about
EUR945 million, assuming GC EBITDA of EUR210 million. The latter
reflects the loss of a number of its largest retailers, increased
substitution to one-way cardboard packaging among some clients, and
increased competition. The assumption also reflects corrective
measures taken in reorganisation to offset the adverse conditions
that trigger default
- Fitch assumes a 10% administrative claim
- An enterprise value multiple of 5.0x EBITDA is used to calculate
a post-reorganisation valuation, and is comparable with multiples
applied to some peers in packaging industry. The choice of this
multiple considers the concentration around one product/service
only, albeit as market leader and supported by fairly good
geographic diversification and a flexible cost base
- Fitch estimates the total amount of senior debt for creditor
claims at EUR1.7 billion, which includes a secured TLB of EUR1.4
billion and a secured RCF of EUR270 million.
- These assumptions result in a recovery rate for the senior
secured TLB and RCF within the 'RR3' range to generate a one-notch
uplift to the debt ratings from the IDR
- The principal waterfall analysis output percentage on current
metrics and assumptions is 55%
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- EBITDA leverage sustained below 4.5x
- EBITDA interest coverage above 4.0x
- FCF margin in the high single digits on a sustained basis
- Larger scale while maintaining an EBITDA margin greater than 20%
and reduced customer concentration
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Operating under-performance resulting from a loss of large
customers, significant pricing pressure, technology risk or
margin-dilutive debt-funded acquisitions
- EBITDA leverage sustained above 5.5x
- EBITDA interest coverage below 3.0x
- FCF margin in low single digits on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: At FYE23 readily available cash (net of
Fitch-restricted cash of EUR21 million) was EUR167 million. IFCO
has an adequate debt maturity repayment profile with bullet
payments due in May 2026. Readily available cash was enough to
cover expected negative FCF of EUR78 million in coming 12 months.
In FY23 IFCO further drew down its RCF, with the EUR108 million
outstanding to at end-FY23. Nevertheless, liquidity is supported by
the EUR162 million undrawn part of the RCF and is sufficient to
cover expected negative FCF.
Debt Structure: At FYE23 IFCO had two first-lien TLBs on its
balance sheet of EUR1.3 billion and USD160 million, respectively,
both maturing in May 2026.
ISSUER PROFILE
IFCO runs a global network of RPC operations, servicing some 320
retailers and more than 15,000 growers worldwide.
ESG CONSIDERATIONS
IFCO has an ESG Relevance Score of '4' [+] for Waste & Hazardous
Materials Management; Ecological Impacts due to product design that
benefits life cycle management, which has a positive 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
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Irel Bidco S.a.r.l. LT IDR B+ Affirmed B+
IFCO Management GmbH
senior secured LT BB- Affirmed RR3 BB-
UNIGEL LUXEMBOURG: Fitch Affirms C Rating on USD350MM Unsec. Notes
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Fitch Ratings has downgraded Unigel Participacoes S.A.'s (Unigel)
Long-Term Foreign Currency Issuer Default Rating (IDR) to 'RD' from
'C' and its long-term National Scale Rating to 'RD(bra)' from
'C(bra)'. Fitch has also affirmed Unigel Luxembourg's S.A. USD530
million senior unsecured notes due 2026 at 'C'/'RR4'.The rating
actions follow the company's failure to cure the missed interest
payment due on Oct. 2, 2023 on its senior unsecured notes as part
of the company's ongoing negotiations with creditors.
KEY RATING DRIVERS
Uncured Missed Interest Payment: Unigel skipped an interest payment
due on Oct. 2, 2023 on its USD530 million senior unsecured notes.
Fitch views the failure to cure the missed interest payment within
the 30-day original grace period as a restricted default as per its
ratings definitions.
Bond Repayment Uncertain: Unigel is still considering a potential
debt restructuring in the midst of challenging market conditions.
Without additional funds, the company will need some combination of
asset sales, an equity injection from its shareholder or a
renegotiation of its natural gas supply contracts.
Fitch believes that the engagement of Moelis, which has been an
advisor for several companies that have restructured debt in
Brazil, materially reduces the creditors' willingness to provide
new financings to the group to cover its 2023 and 2024 funding
needs.
Elevated Leverage; Covenant Breach: Fitch understands that Unigel
violated its maintenance covenant on its debentures of 3.5x net
leverage in the 2Q23 and has reached an agreement with debenture
holders such that its debt is not accelerated. Unigel's financial
performance is the result of deteriorating market conditions in
both the chemical and agro segments. EBITDA in these segments
decreased to BRL104 million (~USD21 million USD) in 1Q23 from
BRL568 million in 1Q22 and BRL226 million in 4Q22 due to weak
prices and higher feedstock prices.
DERIVATION SUMMARY
Unigel's ratings reflect the non-payment of bond interests after
the original 30-day grace period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A liquidity injection sufficient to cover financing liabilities
without material reduction in terms compared with the original
contractual ones, that would otherwise be classified as Distressed
Debt Exchange;
- Fitch will reassess the IDRs upon the completion of a debt
restructuring process; the updated IDRs would reflect the new
capital structure and credit profile of the issuer.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Filing for bankruptcy protection would result in a downgrade to
'D'.
ISSUER PROFILE
Unigel is a medium-size chemical producer operating in the
midstream of the petrochemical industry value chain (acrylics and
styrenics), with facilities in Brazil and Mexico.
ESG CONSIDERATIONS
Unigel Participacoes S.A. has an ESG Relevance Score of '4' for
Governance Structure due to ownership concentration and key person
risk, which has a negative impact on the credit profile, and is
relevant to the rating[s] 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
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Unigel
Luxembourg S.A.
senior
unsecured LT C Affirmed RR4 C
Unigel
Participacoes S.A. LT IDR RD Downgrade C
LC LT IDR RD Downgrade C
Natl LT RD(bra)Downgrade C(bra)
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T U R K E Y
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MERSIN ULUSLARARASI: Fitch Assigns B(EXP) Rating on Sr. Unsec Debt
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Fitch Ratings has assigned Mersin Uluslararasi Liman Isletmeciligi
A.S.'s proposed issuance of USD600 million US dollar-denominated
senior unsecured debt an expected rating of 'B(EXP)'. The Outlook
is Stable.
The assignment of a final rating is contingent on the receipt of
final documents conforming to information already reviewed.
RATING RATIONALE
Mersin's dominant market position in its catchment area, its
location and strong connectivity to its industrial hinterland and
its diversified goods mix mitigate the volatility of its domestic
and export market. Its weak, single-bullet debt structure weighs on
the rating, although the refinancing risk associated with the
bullet bond is largely mitigated by its moderate leverage.
Mersin's rating remains capped by Turkiye's Country Ceiling at 'B'
and aligned with the sovereign rating due to the port's linkages to
the country's economic and regulatory environment.
KEY RATING DRIVERS
Industrial Hinterland, Exposed to Macroeconomic Volatility -
Revenue Risk (Volume): Midrange
Mersin is Turkiye's largest export-import port and the largest port
in terms of containerised throughput. The volume mix is diversified
and balanced between imports and exports, but volatile. The port,
which benefits from an industrial hinterland, has an annual
container and conventional cargo capacity of 2.6 million 20-foot
equivalent unit (TEUs) and 10.0 million tons, respectively.
Mersin lost some of its market share between 2015 and 2020 to its
main competitor, Limak Iskenderun Uluslararasi Liman Isletmeciligi
A.S. (B/Rating Watch Negative), due to the latter's competitive
rates. The market share fluctuated slightly over the past three
years and Fitch expects it to stabilise at 2020 levels from 2024.
Unregulated US Dollar Tariffs - Revenue Risk (Price): Midrange
Mersin's concession provides almost full pricing flexibility, with
restriction only against excessive and discriminatory pricing, for
which there is no history of enforcement and historically MIP has
been able to increase tariff. The typical contract length with
Mersin's customers is on average short at one to two years and
includes volume-related incentives.
Its fees are almost 100% set and largely paid in US dollars. The
remaining local-currency payments are settled weekly in dollars so
depreciation of the Turkish lira does not have much direct impact
on Mersin's tariffs. Most operational expenses are denominated in
lira and Mersin has been successful in passing its increased costs
of operations in inflationary periods to customers through tariff
adjustments. However, the operating margin has declined in 2023 as
a result of significant inflationary pressures. Fitch took the
recent margins and inflationary pressure into consideration in the
rating case.
Extensive Investment Plan - Infrastructure Development and Renewal:
Midrange
Mersin's current container handling capacity is 2.6 million TEUs.
After the completion of its East Mediterranean Hub (EMH) Phase I in
2016, it will begin constructing phase two of the East
Mediterranean Hub Project (EMH II) By end-2023, it aims to have
built additional berth capacity with a depth of up to 18 metres.
The project is scheduled to be completed in 2026. EMH II Project
will further enhance the company's competitiveness in the region
and increase container handling capacity from to 3.6 million TEUs.
Fitch has not included material additional volume growth from this
investment in the rating case.
Last year, Mersin also launched the Gate & Highway Connection
Project to improve traffic access by allowing trucks to enter and
exit Mersin Port directly to the highway. The project is expected
to be fully completed by 2Q24.
Mersin Port's infrastructures were not affected by the earthquakes
in February 2023 in the region.
Refinance Risk, Unsecured Debt - Debt Structure: Weaker
Mersin plans to issue a US dollar-denominated bullet bond to
refinance the existing USD600 million outstanding debt maturing in
November 2024. No material covenants protect debt holders apart
from a 3.0x net debt/EBITDA incurrence-based covenant. The senior
debt does not benefit from a security package.
Financial Profile
Under Fitch's rating case, projected net debt/EBITDA will average
around 2.0x between 2023 and 2027. Leverage is low but Mersin's
rating is capped by Turkiye's Country Ceiling and aligned with the
sovereign rating.
PEER GROUP
Mersin's main peer is Limak, which also operates in the eastern
Mediterranean. Limak is an export-import oriented port with lower
tariffs than Mersin due to its need to compete on price versus
bigger ports in the region, including Mersin. Limak's debt
structure is fully amortising compared to Mersin's bullet debt
structure, so it is not exposed to refinancing risk. Limak's
operations were temporarily halted after the earthquake hit Turkiye
in February 2023 and partially resumed operations in April with a
target for a return to full operations by end-2023.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Negative action on Turkiye's sovereign rating and Country
Ceiling;
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Positive action on Turkiye's sovereign rating and Country
Ceiling
TRANSACTION SUMMARY
Mersin is considering issuing a US dollar-denominated bond to
refinance the existing USD600 million bond, maturing in November
2024.
CREDIT UPDATE
Performance Update
In 2022, container and conventional cargo volumes declined by 3.6%
and 3.3%, respectively. Despite the volume declines, revenue
increased by 9.8% for container segment and 15% for conventional
cargo due to tariff adjustments and increase in container storage
revenue. As a result, EBITDA rose by 8.3% while EBITDA margin
declined slightly by 1% from both 2021 and 2020.
The earthquakes in 1H23 did not have a material adverse effect on
Mersin Port's throughput and tonnage or the company's results.
Similar to 2022, despite the decile in container and cargo volumes,
revenue increased by 14% year-on-year in 1H23 due to tariff and
container storage revenue increases. EBITDA margin declined to 67%
due to inflationary costs and increased external land trucking
activities in 2023.
EMH II is planned to be completed by 1Q26, but the company will
start to benefit from additional capacity of the project from 2H25,
with a projected investment of US455 million. In addition, Mersin
launched the Gate Highway Project, a US27 million project that will
deploy 10 smart gates using modern technology, and facilitate
direct highway access, thereby alleviating city and port traffic
and reducing truck waiting times.
FINANCIAL ANALYSIS
Fitch's rating case assumes annual volume growth at 2.0% CAGR
between 2023 and 2027, and prices to grow at around the rate of
inflation. Other revenues should grow in line with volumes. Costs
increase as a function of lira and US dollar inflation, growing at
7.7% between 2022 and 2027. Fitch forecasts EBITDA margin from 2024
to be at the same level of 2023, despite modest increases in US
dollar-denominated tariffs assumed under its rating case.
Fitch forecasts total capex of USD662 million between 2023 and 2027
including both maintenance and expansionary capex. Its forecast
includes the upcoming US dollar-denominated bond issuance, the
proceeds of which, together with cash available on the balance
sheet, should refinance the existing bond and be used for general
corporate purposes, including capital spending. The rating case
forecasts average net debt/EBITDA at around 2.0x between 2023 and
2027.
Dividends will be distributed according to management's policy of
distributing the maximum amount available each year with
maintaining a cash balance of USD25 million.
Asset Description
Mersin Port is a transportation hub located in the city of Mersin,
in southern Turkiye at the northeast corner of the Mediterranean
Sea. Mersin is Turkey's largest port by import/export container
throughput. It occupies an area of approximately 124 hectares, It
has eight container and 13 multi-purpose berths, and can handle a
range of dry bulk, liquid bulk, containers and roll-on, roll-off
cargo.
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
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Mersin Uluslararasi
Liman Isletmeciligi A.S.
Mersin Uluslararasi
Liman Isletmeciligi
A.S./Debt/1 LT B(EXP) Expected Rating
ZIRAAT KATILIM: Fitch Assigns 'B-' Rating on $500MM Unsec. Sukuk
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Fitch Ratings has assigned Ziraat Katilim Bankasi A.S.'s (Ziraat
Katilim; B-/Stable/b-) USD500 million senior unsecured sukuk (lease
certificates) issuance, issued through Ziraat Katilim Varlik
Kiralama A.S. (ZKVK), a rating of 'B-' with a Recovery Rating of
'RR4'.
The final rating is the same as the expected rating assigned on 30
October 2023 and in line with Ziraat Katilim's Long-Term (LT)
Foreign-Currency (FC) Issuer Default Rating (IDR) of 'B-'.
ZKVK, the issuer, is an asset lease company, incorporated in
Turkiye on 22 January 2016, solely to issue lease certificates
(sukuk) and enter into the transactions contemplated by the
transaction documents. Ziraat Katilim is the obligor. HSBC Bank plc
is acting as the representative of the issuer.
KEY RATING DRIVERS
The senior unsecured issuance's rating is driven solely by Ziraat
Katilim's LT IDR of 'B-'. These reflect Fitch's view that a default
of these senior unsecured obligations would equal a default of
Ziraat Katilim, in accordance with Fitch's rating definitions.
Ziraat Katilim's IDRs reflect its standalone creditworthiness and
potential support from its 100% shareholder, Turkiye Cumhuriyeti
Ziraat Bankasi Anonim Sirketi (Ziraat; B-/Stable).
Fitch has given no consideration to any underlying assets or any
collateral provided, as it believes that the issuer's ability to
satisfy payments due on the certificates will ultimately depend on
Ziraat Katilim satisfying its unsecured payment obligations to the
issuer under the transaction documents described in the base
prospectus and other transaction documents.
In addition to Ziraat Katilim's propensity to ensure repayment of
the sukuk, in Fitch's view, Ziraat Katilim would also be required
to ensure full and timely repayment of ZKVK's obligations due to
Ziraat Katilim's various roles and obligations under the sukuk
structure and transaction documents, which include especially - but
are not limited to - the features below:
- Ziraat Katilim will ensure sufficient funds are available to meet
the periodic distribution amounts payable by the issuer under the
certificates on each periodic distribution date. Ziraat Katilim can
take other measures to ensure that there is no shortfall and that
the payment of principal and profit are paid in full, and in a
timely manner.
- On any dissolution or default event, the aggregate amounts of the
outstanding face amount of the certificates and any due and unpaid
periodic distribution amount relating to the certificates will
become immediately due and payable; and the issuer will have the
right under the purchase undertaking to require Ziraat Katilim to
purchase all of the issuer's rights, title, interests, benefits and
entitlements under the exercise price specified in the transaction
documents.
- The outstanding deferred sale price payable by Ziraat Katilim
under the murabaha agreement and the exercise price payable by
Ziraat Katilim under the purchase undertaking together are intended
to fund the dissolution distribution amount payable by the issuer
under the relevant certificates, which should equal the sum of the
aggregate outstanding face amount of such certificates, plus all
accrued but unpaid periodic distribution amounts in respect of such
certificates.
- The payment obligations of Ziraat Katilim under the purchase
undertaking and the murabaha agreement will be direct,
unsubordinated and unsecured obligations (subject to certain
negative pledge provisions and certain obligations required to be
preferred by law) and shall at all times rank at least equally with
all other unsecured and unsubordinated obligations of Ziraat
Katilim, present and future.
- The transaction documents also include an obligation on Ziraat
Katilim to ensure that at all times the tangibility ratio is more
than 50%. Failure of Ziraat Katilim to comply with this obligation
shall not constitute an obligor event. However, if the tangibility
ratio falls below 33% (tangibility event), this would result in the
certificate holders having a put right. The certificates would then
be delisted and each certificate holder can exercise a put option
to have their holdings redeemed, in whole or in part, at the
relevant dissolution distribution amount within 15 days after a
tangibility event notice is given in accordance with the terms of
the transaction documents. In such an event, there would be
implications for the certificates' tradability and listing of the
certificates.
- Fitch expects Ziraat Katilim to maintain the tangibility ratio at
above 50% with support from its extensive asset base. The bank also
has a good liquidity profile that would allow it to repay the
outstanding sukuk in case of a breach of the tangibility ratio,
which is not its base case.
- Ziraat Katilim's sukuk issuance includes negative pledge and
cross-default provisions, financial reporting obligations, obligor
event and restrictive covenants.
Certain aspects of the transaction will be governed by English law,
while others are governed by the laws of Turkiye. Fitch does not
express an opinion on whether the relevant transaction documents
are enforceable under any applicable law. However, Fitch's rating
on the certificates reflects the agency's belief that Ziraat
Katilim would stand behind its obligations.
When assigning ratings to the certificates to be issued, Fitch does
not express an opinion on the certificates' compliance with sharia
principles.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The issuance's rating would be downgraded if Ziraat Katilim's LT FC
IDR was downgraded. Ziraat Katilim's LT FC IDR is sensitive to a
change in its Viability Rating (VR). A downgrade of the VR would
only result in negative action on the LT FC IDR if Ziraat Katilim's
Shareholder Support Rating (SSR) was simultaneously downgraded.
Ziraat Katilim's LT FC IDR is also sensitive to a change in its SSR
and a weakening in its view of the ability and propensity of Ziraat
to provide support.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The issuance's rating will be upgraded if Ziraat Katilim's LT FC
IDR is upgraded. An upgrade of Ziraat Katilim's LT FC IDR could
come from an upgrade of its VR or its SSR.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
ZKVK's senior unsecured issuance rating is linked to Ziraat
Katilim's rating. Ziraat Katilim's ratings are linked to those of
its parent, Ziraat.
Entity/Debt Rating Recovery Prior
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Ziraat Katilim
Varlik Kiralama A.S.
senior unsecured LT B- New Rating RR4 B-(EXP)
===========================
U N I T E D K I N G D O M
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ACTUAL EXPERIENCE: Depleted Cash Position Prompts Administration
----------------------------------------------------------------
Business Sale reports that Actual Experience, a listed analytics
services firm based in Bath, has appointed administrators after
saying that it is poised to run out of cash.
The company provides clients with digital workplace software
services and, according to its 2022 annual report, previously
employed 65 people.
According to Business Sale, the company has been struggling for
several months, seeking to reduce costs (including through job
cuts) and attract new funding. Following efforts to cut costs, the
company stated that it had reduced its headcount to its "lowest
viable level", Business Sale notes.
It had explored options including an equity fundraise and had been
in active discussions with existing and potential shareholders, as
well as potential new investors including venture capital trust and
EIS funds, in an effort to secure funding, Business Sale
discloses.
The company also engaged FRP Advisory to run an accelerated M&A
process in an effort to find a buyer for the business and its
assets, Business Sale states. A number of potential buyers were
contacted, but FRP received no firm indications of interest,
according to Business Sale.
In light of its depleted cash position and the lack of progress in
securing new funding or attracting potential buyers for the
business and assets, the company's board, as cited by Business
Sale, said that it was unlikely to be able to secure the required
funding to continue trading.
On Nov. 7, the company filed a notice of intention to appoint
administrators, with FRP Advisory's Jonathan Dunn and Andrew
Sheridan appointed as joint administrators later the same day,
Business Sale recounts. The company has also requested a
suspension of trading in its ordinary shares on AIM with immediate
effect, Business Sale relays.
In the company's most recent full year accounts, for the year to
September 30 2022, it reported a pre-tax loss of close to GBP5.5
million, although this was an improvement upon a GBP5.9 million
loss a year earlier, Business Sale discloses.
At the time, the company's non-current assets were valued at GBP1.5
million and current assets at GBP3.3 million, with total equity
amounting to GBP3.4 million, down from GBP8.8 million a year
earlier, Business Sale states.
EG GROUP: Fitch Hikes LongTerm IDR to 'B', Outlook Stable
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Fitch Ratings has upgraded EG Group Limited's Long-Term Issuer
Default Rating (IDR) to 'B' from 'B-'. The Outlook is Stable.
Fitch has also assigned the new USD500 million equivalent term loan
to be issued by EG Finco Limited and EG America LLC, an expected
senior secured instrument rating of 'B+(EXP)' with a Recovery
Rating of 'RR3'. The new USD1,589 million equivalent senior secured
notes, to be issued by EG Global Finance Plc, have been assigned an
expected senior secured instrument rating of 'B+(EXP)' with a
Recovery Rating of 'RR3'. The Rating Watch Positive on EG Global
Finance plc's and EG Group's senior secured instrument ratings has
been removed.
The upgrade follows a material reduction in debt after the
completion of asset disposals in 2023 and reduced refinancing risk
after an amend and extend (A&E) transaction on the equivalent of
USD3.2 billion in term loans becomes effective imminently. These
credit positives are balanced by high leverage and a USD2 billion
debt due in 2025 up for refinancing, leaving EG Group vulnerable to
market conditions during the process.
Fitch expects EBITDAR leverage to fall to 6.5x in 2024 and for
EBITDAR coverage to remain weak, with some execution risk from
management of fuel volumes and driving non-fuel business in
Continental Europe.
The new debt to be issued ranks pari passu with existing senior
secured debt. The assignment of final ratings is contingent on
completing the transactions in line with the terms already
presented.
KEY RATING DRIVERS
Debt Reduction: Fitch views positively the USD3.8 billion reduction
in debt the company is about to achieve by November 2023, from
using the full proceeds of completed business disposals and a sales
and leaseback transaction (S&LB) earlier in the year to repay debt.
Fitch forecasts leverage will sustainably reduce to around 6.5x in
2024, which meets the leverage rating sensitivity for an upgrade,
from the slightly higher estimated pro forma leverage of 7.5x at
end-2023.
Refinancing Risk Moderated: Fitch considers refinancing risk as
having moderated. However, the residual refinancing of GBP2 billion
senior notes, due between February and October 2025, remains
vulnerable to market conditions. This may challenge the refinancing
process, although it is mitigated by EG Group's 'BB' category
business profile. Fitch believes the company has more capacity to
complete the remaining refinancing compared with six months ago, as
it has markedly reduced debt to USD6.2 billion, from USD10 billion,
and extended a USD3.2 billion term loan to 2028, from 2025/2026.
Disposal Completed: EG Group has completed the disposal of most of
its UK and Ireland (UK&I) business (for USD2.5 billion), which was
a precondition to complete the A&E of its USD3.2 billion equivalent
term loans. The deal perimeter has changed from the original plan,
with EG Group retaining more foodservice brands. This has lowered
proceeds, and therefore debt reduction, by USD300 million, and
retained slightly higher EBITDA (about USD50 million).
EG Group will retain 31 petrol fuel stations (PFSs) and 613
foodservice outlets, including proprietary brand bakery chain
Cooplands and its franchise businesses under KFC and Starbucks.
Fitch believes the resultant diversification will partly offset the
lower debt reduction.
Execution Risk on Earnings Growth: Fitch sees some execution risk
to achieving earnings growth in 2024, related to managing fuel
gross profit by balancing fuel volumes with margin, due to US fuel
dynamics in 3Q23, and to driving its non-fuel business in
Continental Europe. EG Group expects to report 19% lower underlying
EBITDA in 3Q23 yoy, with most of the weakness coming from the US.
The group's fuel gross profit was 12% lower yoy due to a 9% drop in
volumes and an exceptionally strong margin in 3Q22.
US fuel dynamics reduced regional underlying profits by around
GBP65 million, which was only partly offset by gross profit
increases in non-fuel and cost savings. Nevertheless, its groupwide
fuel margin is improving qoq, driven by improvements in Continental
Europe. Fitch has adjusted its forecast to reflect the decline in
fuel volumes, but maintained the fuel margin.
Profits to Recover: Fitch expects EBITDAR of around USD1.5 billion
in 2024 despite the dynamics of fuel profits, which represent about
50% of the gross profits of the rest of the business. Its forecast
means EBITDAR would be lower yoy due to disposals, but this will be
compensated by profit growth from the remaining business. EG Group
has invested in growing its non-fuel segments and made progress in
converting points of sale into the more profitable company
owned-company operated (COCO) PFS business model in Continental
Europe.
Its forecast incorporates a sustained fuel gross margin that was
reset at a higher level when fuel retailers partly passed on higher
operational costs from inflation after the pandemic, and exceeds
its 2022 expectations.
Continental Europe Improving: EG Group expects to report 2% growth
of underlying EBITDA in Continental Europe year to date, after an
around 30% reduction in the region's EBITDA in 4Q22. Continental
Europe is less profitable for EG Group as only one-third of sites
are operated under the COCO model, but it should enjoy
opportunities to convert sites as contracts come up for renewals,
invest in foodservice and roll out Grocery and Merchandise (G&M)
offering. EG Group has G&M stores at two-thirds and foodservice
site at less than one-third of its COCO sites in Continental
Europe, with room to add more.
Moving Towards Leverage Target: Fitch expects EG Group to focus on
approaching its medium-term net debt/EBITDA (post IFRS16) target of
4.5x, supported by management's commitment to lower growth capex
spend and flexibility permitted by materially lower maintenance
capex. Fitch expects it to reinstate its growth capex once the
company's leverage target is achieved and debt is fully refinanced.
EG is also discussing a further UK&I forecourt disposal and KFC
franchise disposal to a third party, with proceeds to be used for
debt reduction.
Weak Coverage Metrics: Fitch forecasts weak EBITDAR fixed-charge
coverage metrics of 1.5x on average over the rating horizon. This
is due to EG Group's exposure to high interest rates while most of
its debt is at floating rates and is due for refinancing. An
additional USD1.5 billion S&LB increases the rental bill. The US
S&LB has only reduced adjusted debt by around USD175 million, as
Fitch capitalises the additional rental cost at 8x, but it has
reduced the overall debt that needs to be refinanced.
Diversified, Large-Scale Operator: EG Group's rating remains
supported by its scale and diversification, following a large
number of acquisitions since 2018. Fitch assesses its scale at a
high 'bb', trending towards the 'bbb' rating category, even after
the UK&I business disposal. It is a leading PFS, convenience retail
and foodservice operator that remains well diversified across its
markets - the US (48% of pro-forma gross profit), Europe (40%,
including remaining UK&I business) and Australia (12%). Its product
and service diversification is solid, with non-fuel activities
contributing around half of gross profit.
DERIVATION SUMMARY
Most of EG Group's business is broadly comparable with that of
peers in Fitch's food/non-food retail portfolio, although its COCO
model should provide more flexibility and profitability.
EG Group can be compared with UK motorway services group Moto
Ventures Limited and, to a lesser extent, to emerging-market oil
product storage/distributor/PFS vertically integrated operators
such as Puma Energy Holdings Pte. Ltd (BB-/Positive) and Vivo
Energy Ltd. (BBB-/Stable).
EG Group is larger and more geographically diversified with
exposure to 10 markets, including the US, Australia and western
European countries, against Moto's concentration in the UK,
although the latter is strategically positioned in more protected
motorway locations. Moto benefits from a robust business model with
a long-dated infrastructure asset base and the less discretionary
nature of motorway customers, enabling it to generate higher
EBITDAR margin than EG Group. Both companies invest in increasing
their exposure to higher-margin convenience and foodservice
operations.
Puma and Vivo's ratings are restricted by their concentration in
emerging markets, which limits the quality of cash flow available
to service debt at the holding company level. EG Group has higher
profitability than Vivo or Puma due to its materially higher share
of revenue from non-fuel activities.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer:
- Annual fuel volumes for remaining business of around 16 billion
litres in 2023, marginally declining thereafter
- Slightly increasing fuel gross margin yoy in 2024, which remains
below 2022 levels (ex UK&I), and a stable margin in 2025
- G&M and foodservice sales to grow by 5% on average in 2024-2026
with gross profit margins of 30% and 50%, respectively
- EBITDAR of around USD1.5 billion in 2024
- Working capital outflows in 2023-2025, mainly reflecting the
unwinding of deferred taxes
- Capex ranging from around USD300 million to USD400 million in
2023-2027
- No further M&A in the next four years; if further acquisitions
materialise, Fitch will assesses their impact based on their scale,
funding, multiples paid and earnings accretion, including
synergies
- No dividends
RECOVERY ANALYSIS
Recovery Rating Assumptions:
According to its bespoke recovery analysis, higher recoveries would
be realised by preserving the business model using a going-concern
approach, reflecting EG Group's structurally cash-generative
business. The value from EG Group's site ownership has reasonable
asset backing, but the real value to creditors comes from such
assets being operational rather than liquidated.
EG Group's going-concern EBITDA assumption at USD850 million
reflects Fitch's view of a sustainable post-reorganisation EBITDA
level upon which Fitch bases the enterprise valuation. This
incorporates the group's growth, captures the UK&I disposal and
additional rents, and compares with the going-concern EBITDA of
USD1.03 billion before the debt-reducing transactions. The
assumption also reflects corrective measures taken during the
reorganisation to offset adverse conditions that would have
triggered a theoretical default, such as cost-cutting efforts or a
material business repositioning.
In a distressed scenario, Fitch believes that a 5.5x multiple
reflects a conservative view of the weighted-average value of EG's
portfolio. As per its criteria, Fitch assumes EG's revolving credit
facility (RCF) and letter of credit facilities to be fully drawn or
claimed and takes 10% off the enterprise value to account for
administrative claims.
Its waterfall analysis generates a ranked recovery for the senior
secured facilities in the 'RR3' band, indicating a 'B+' instrument
rating, a one notch uplift from the IDR. The waterfall analysis
output percentage on current metrics and assumptions is 66% (up
from 54% previously). It incorporates the assumption that about
USD3 billion in proceeds from the disposals and S&LB have been
applied towards debt reduction (to occur on or before 10 November
2023). The second-lien debt instrument attracts 0% recovery and
remains in the RR6 band. It has an instrument rating at 'CCC+', two
notches below the IDR.
On a pro-forma basis, Fitch will use the same going-concern EBITDA
and multiple assumptions following the completion of the A&E and
refinancing of the senior secured notes from new term loan B add-on
and the new senior secured notes in the process of being issued,
but will take into account the higher debt quantum from the term
loan B add-on.
Thus, Fitch's pro-forma waterfall analysis generates a ranked
recovery for the senior secured facilities in the RR3 band
indicating a 'B+(EXP)' instrument rating, one notch higher than the
IDR. The waterfall analysis output percentage on current metrics
and assumptions is 64% (previously RR2/73%). The second-lien debt
instrument remains in the RR6 band and has an instrument rating of
'CCC+', two notches below the IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade (to B+):
- Sustained revenue and EBITDA expansion along with improving
operating margins
- Increased commitment to a financial policy, with EBITDAR leverage
comfortably below 6.0x on a sustained basis
- EBITDAR/interest plus rents approaching 2.0x on a sustained
basis
Factors that could, individually or collectively, lead to negative
rating action/downgrade (to B-):
- Lack of meaningful progress in addressing refinancing needs 12
months ahead of each major debt maturity
- Deteriorating performance of the business, either due to
recessionary environment, competition or lack of cost control,
leading to materially weaker EBITDA
- EBITDAR leverage remaining above 7.0x on a sustained basis
- EBITDAR/interest plus rents sustainably below 1.5x
- Increasingly negative free cash flow (FCF) as a result of trading
underperformance leading to compromised liquidity headroom
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch expects Fitch-calculated available
liquidity of around USD600 million at end-2023 after restricting
USD120 million of cash for intra-year working capital purposes and
including around USD400 million of an available, undrawn RCF.
Negative FCF: Fitch forecasts that FCF generation will be negative
and weaker than in previous years, driven by lower earnings
following disposals and additional rental costs after the US S&L
transaction. Its rating case incorporates capex of USD300
million-USD400 million, which is USD100 million-USD200 million
lower than historically as the group aims to deleverage.
New Instruments Address 2025 Notes: Refinancing will be largely
addressed once the USD500 million US term loan B add-on and the
raising of USD1.6 billion in senior notes are completed. The
launched USD500 million add-on term loan B will partly cover the
shortfall in disposal proceeds and refinance some of the senior
secured notes, with the balance to be covered by the USD1.6 billion
bond being launched.
Limited Refinancing Risk: A&E on term loan B (USD3.2 billion) will
become effective imminently, on or before 10 November 2023, after
the remaining proceeds are applied to debt reduction, extending
maturities to 2028. Overall, EG Group will have reduced its debt by
USD3.8 billion, to USD6.2 billion, since 2022 after these
transactions. The nearest maturities remaining will include around
USD300 million of term loan B in the current capital structure due
in 2025 and which were not extended, and second-lien debt (USD670
million) maturing in 2027 ahead of the newly raised debt due in
2028.
ISSUER PROFILE
EG Group Limited is a leading global PFS, convenience store and
foodservice operator with operations across 10 developed markets.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
EG Global
Finance plc
senior secured LT B+(EXP)Expected Rating RR3
senior secured LT B+ Upgrade RR3 B
EG Finco Limited
senior secured LT B+(EXP)Expected Rating RR3 B+(EXP)
EG America LLC
senior secured LT B+(EXP)Expected Rating RR3
EG Group Limited LT IDR B Upgrade B-
Senior Secured
2nd Lien LT CCC+ Upgrade RR6 CCC
senior secured LT B+ Upgrade RR3 B
EG Dutch Finco B.V.
senior secured LT B+(EXP)Expected Rating RR3
HYPERION REFINANCE: Moody's Rates New $555MM Sec. Term Loan 'B2'
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Moody's Investors Service has assigned a B2 rating to the proposed
new $555 million backed senior secured term loan being issued by
Hyperion Refinance S.a.r.l., a subsidiary of HGH Finance Limited
(Howden), which is guaranteeing, together with all material
subsidiaries, the loan.
RATINGS RATIONALE
The B2 rating assigned to the proposed backed senior secured term
loan, which ranks pari passu with the group's existing backed
senior secured term loans and backed senior secured revolving
credit facility, is in line with the B2 corporate family rating
(CFR) and Stable outlook of HGH Finance Limited. This reflects the
proposed largely senior debt structure with limited levels of
deferred considerations and other debt obligations ranking behind
the senior debt.
Moody's expects the proceeds of the new issuance to be used to
partly refinance one of its existing facilities and to fund the
locked account, with no material impact on the group's leverage
position or its earnings coverage on interest.
The B2 CFR rating reflects Howden's growing market presence in its
chosen segments, strong geographically diverse business and
significant EBITDA expansion, which has supported healthy EBITDA
margins. These strengths are offset by the company's high leverage,
weak bottom line profitability, and ongoing material cash outflows
related to the group's active acquisition strategy.
Howden has grown significantly in recent years, reflecting the
completion of a number of strategic acquisitions as well as
consistently strong organic growth throughout. Moody's expects that
leverage will continue to trend down steadily as Howden expands its
EBITDA base organically and via bolt-on acquisitions, and as it
realizes synergies related to recently acquired businesses and new
hires.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Factors that could lead to a rating upgrade include: (i) a lower
level of overall leverage, including debt-to-EBITDA ratio
consistently below 5.5x; (ii) free-cash-flow-to-debt ratio
consistently exceeding 6%; and (iii) EBITDA coverage of interest
consistently exceeding 3.0x.
Factors that could lead to a rating downgrade include: (i) an
unsuccessful execution of deleveraging plans, resulting in a
sustained rise in debt-to-EBITDA above 7.0x; (ii) EBITDA coverage
of interest consistently below 1.5x; and/or (iii) a material
deterioration in the group's liquidity position.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Insurance Brokers
and Service Companies published in June 2018.
LIMELIGHT SPORTS: Goes Into Administration
------------------------------------------
Jonathan Rest at SportBusiness reports that UK sports marketing
group LimeLight Sports Ltd has entered into administration after
more than 30 years of trading.
According to SportBusiness, the decision has been taken after
LimeLight sold its mass participation business division LimeLight
Sports Club Ltd to Hong Kong-based investment group Y11 Sport &
Media Holdings Ltd.
LINDSTRAND: Mulls Liquidation Following Skyflyer Problems
---------------------------------------------------------
Owen Hughes at NorthWalesLive reports that the owners of the
company behind Rhyl's Skyflyer aerostat are looking to put the firm
into liquidation -- while creditors Zip World have issued a winding
up petition on the business at the High Court.
The blimp on the seaside town's promenade was created by Lindstrand
Technologies Ltd of Oswestry.
They were working with Zip World and Denbighshire Leisure on the
attraction which was designed to bring tens of thousands of people
to the town each year. Visitors were to be elevated 400ft in the
air to take in the panoramic views of the North Wales coast and
beyond -- with it first inflated in the summer of 2022.
But the attraction was beset by problems -- with the latest coming
in September when it was damaged in high winds and ended up
deflated, NorthWalesLive relates. A few weeks later Zip World made
the decision to pull the plug on the seafront venture,
NorthWalesLive discloses.
This month Zip World -- as a claimed creditor of Lindstrand --
submitted a petition to wind up the company, NorthWalesLive
recounts. This signals an intent by a creditor to shut down a
company through the compulsory liquidation route, NorthWalesLive
notes.
ONTO: Owed More Than GBP121 Million at Time of Administration
-------------------------------------------------------------
John Bowman at CarDealer reports that administrators for electric
car subscription service Onto say it owed more than GBP121
million.
Teneo Financial Advisory Ltd was appointed as its administrators in
September, after Onto failed to secure extra cash from investors,
CarDealer recounts.
The Warwick-based company had been struggling after being hit by
the falling prices of EVs during the first half of the year, since
its borrowings are secured against its fleet, CarDealer relates.
Documents newly filed with Companies House show that the amount
owed to all its 144 creditors totalled GBP121,468,606, CarDealer
discloses.
However, ahead of the administration, the group was in a net
liabilities position of GBP9.7 million as of July 2023, comprising
the net of the group's assets, that is, including the vehicles
owned and the amounts owed to creditors, CarDealer states.
The total doesn't include customers whose contracts are ongoing,
said Teneo, CarDealer notes.
Employees with a preferential claim are owed GBP173,123 and those
with an unsecured claim are owed GBP1,842,516 -- a total of
GBP2,015,639, according to CarDealer.
Onto, which has 4,716 BEVs according to the documents, is
continuing to receive subscription income while a buyer is found
and/or there is a sale of its assets, CarDealer relays.
According to CarDealer, Teneo said Onto was historically
loss-making at an operational level and was also badly affected in
the six months to April 2023 when the UK's BEV market deteriorated,
with residual values dropping ‘significantly' because of an
increase in supply, prices of new BEVs being cut and the
cost-of-living crisis turning people off BEV purchases.
Onto Holdings' secured creditors are unlikely to be repaid in full
and there is a glimmer of hope for Onto Holding's unsecured
creditors, as Teneo says there may be enough funds to allow for a
distribution to be made to them, CarDealer notes.
Four subsidiaries, known as special purpose vehicles (SPVs), were
formed for Onto Tech to isolate financial risk.
However, it's unlikely that unsecured creditors within the SPVs
will have much joy, and it's uncertain that secured creditors be
repaid in full, although some GBP53 million was paid to them in
August 2023, CarDealer states.
Teneo said there had been 37 inquiries about Onto and it had
contacted 21 partiesm according to CarDealer. So far, it has
received 15 offers, ranging from bids for all the companies'
business and assets to just certain parts of it, CarDealer says.
It is also pursuing overdue amounts owed to Onto, while BEVs whose
subscriptions haven't been renewed have been sold, CarDealer
notes.
At the time of entering into administration, Onto employed 139
staff, and Teneo made 61 of the positions redundant, CarDealer
discloses.
Founded in 2017, Onto offered cars to customers on a monthly
subscription.
PATISSERIE VALERIE: March 2026 Trial Scheduled in Fraud Case
------------------------------------------------------------
Surrey Comet reports that four people accused of fraud after the
collapse of bakery chain Patisserie Valerie will not face trial
until 2026, a court heard.
Christopher Marsh, a former director and chief financial officer of
Patisserie Holdings, the company behind Patisserie Valerie, and his
wife, accountant Louise Marsh, were charged by the Serious Fraud
Office (SFO), Surrey Comet discloses.
Marsh's former number two, financial controller Pritesh Mistry, and
financial consultant Nilesh Lad, also face fraud charges, Surrey
Comet notes.
An investigation was launched by the SFO in 2018 into a case which
saw the bakery chain, which had 200 stores, tumble into
administration with a GBP94 million hole in its accounts in 2019,
Surrey Comet recounts.
Christopher Marsh, 49, and Louise Marsh, 55, both from St Albans,
Hertfordshire, Mistry, 41, from Leicester, and Lad, 50, from
Harrow, north-west London, all face charges of conspiracy to
defraud, Surrey Comet states.
Christopher Marsh, Mistry and Lad also face five charges of fraud
by false representation and one of making or supplying an article
for use in fraud, according to
Surrey Comet.
Christopher Marsh also faces a charge of making false
representations as a company director, Surrey Comet says.
None of the defendants were asked to enter any pleas on Nov. 7.
All four were granted conditional bail and ordered not to contact
each other, except for Christopher and Louise Marsh, who live
together, Surrey Comet notes.
They will appear at the same court on April 26 next year to enter
pleas and are scheduled for trial on March 2, 2026, Surrey Comet
discloses.
SAGA PLC: Moody's Lowers CFR to B2 & Alters Outlook to Negative
---------------------------------------------------------------
Moody's Investors Service has downgraded Saga Plc's corporate
family rating and backed senior unsecured debt ratings to B2 from
B1, and the probability of default rating to B2-PD from B1-PD. The
outlook has changed to negative from stable.
RATINGS RATIONALE
The downgrade reflects Moody's view that, although Saga has reduced
leverage and increased profitability over the past 12 months,
earnings and leverage will not recover to historical levels over
the medium term, following pandemic-related deterioration. It also
reflects Moody's view that Saga's financial flexibility has become
more constrained. The negative outlook reflects execution risk in
improving profitability and reducing leverage, as well as weaker
liquidity, following its 2024 bond maturity and elevated
refinancing risk related to its 2026 bond maturity.
Saga came under pressure during the pandemic due to the suspension
of its cruise and travel operations which lowered EBITDA,
increasing the group's leverage. More recently, regulatory changes
and inflation have impacted the group's insurance businesses. The
pace of improvement to earnings has been slower than expected and
while the group's leverage is now below its peak, it is still
high.
While Moody's expect the group's earnings to continue to improve
over the medium term, driven mainly by the travel and cruise
businesses, Moody's do not expect them to reach pre-pandemic levels
over the medium term as broking and underwriting business remain
pressured due to difficult market conditions in UK personal lines
insurance.
Moody's consider Saga to be well placed to meet its GBP150 million
bond maturity in May 2024. The group reported available cash
resources of GBP181 million in July 2023, and also has access to an
GBP85 million backstop loan facility from its chairman. Following
repayment of the bond, the group will likely have access to its
GBP50 million revolving credit facility (RCF). However Moody's
consider Saga to remain exposed to elevated levels of refinancing
risk, with its GBP250 million bonds falling due in July 2026 and
the loan from the group's chairman and its RCF maturing before the
end of 2025.
OUTLOOK
The negative outlook reflects execution risk in improving
profitability and reducing leverage as well as weaker liquidity
following its 2024 bond maturity and refinancing risk related to
its 2026 bond maturity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, there is limited upward pressure on the
ratings, but the outlook could revert to stable over the outlook
period if: (i) Leverage (on Moody's basis) falls sustainably below
4.5x EBITDA; (ii) Profitability and cash generation return to
historical levels, driven by improvement in insurance business and
cruise and travel improving as expected; (iii) Organic cash
generation leads to healthy surplus liquidity with consideration of
pending debt maturities.
Conversely, the following factors could lead to a downgrade of
Saga's rating: (i) Leverage (on Moody's basis) remaining above 6x
EBITDA beyond the year ending January 2025; (ii) Failure of cruise
and travel business to deliver on profitability targets and / or
further deterioration in broking and underwriting earnings; (iii)
Indication that refinancing of 2026 bond maturity will not be
possible.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Insurance
Brokers and Service Companies published in June 2018.
*********
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.
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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.
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