/raid1/www/Hosts/bankrupt/TCREUR_Public/231122.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Wednesday, November 22, 2023, Vol. 24, No. 234
Headlines
A U S T R I A
SIGNA DEVELOPMENT: Fitch Cuts LongTerm IDR to 'CCC-', on Watch Neg.
F R A N C E
FINANCIERE TOP: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
G E R M A N Y
TELE COLUMBUS: Fitch Lowers Rating on Senior Secured Debt to 'CC'
I R E L A N D
ARBOUR CLO XII: Fitch Assigns 'B-sf' Final Rating to Class F Notes
BLACKROCK EUROPEAN I: Moody's Affirms B1 Rating on Class F-R Notes
KEEP IT REAL: High Court Appoints Interim Examiner
MALLINCKRODT PLC: Completes Financial Restructuring, Exits Ch. 11
PROVIDUS CLO IX: Fitch Assigns 'B-(EXP)sf' Rating to Class F Notes
I T A L Y
INTERNATIONAL DESIGN: Fitch Puts Final 'B' Rating to Sr. Sec. Notes
R U S S I A
UZAUTO MOTORS: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
U N I T E D K I N G D O M
BANNA RMBS: S&P Lowers Class D-Dfrd Notes Rating to 'B- (sf)'
BELLIS FINCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
BIRCH CHESHUNT: Enters Administration Due to Cash Constraints
LIQUID TELECOMMUNICATIONS: Fitch Cuts LT IDR to 'B', Outlook Neg.
LOMOND HILLS: Glenshire Group Buys Hotel Following Liquidation
STUBBS CONSTRUCTION: Creditors Set to Vote on CVA Terms on Dec. 4
VEHICLE CONVERSION: Goes Into Administration
YORK COCOA: Set to Go Into Administration Following CVA
- - - - -
=============
A U S T R I A
=============
SIGNA DEVELOPMENT: Fitch Cuts LongTerm IDR to 'CCC-', on Watch Neg.
-------------------------------------------------------------------
Fitch Ratings has downgraded Signa Development Selection AG's
(Signa Development) Long-Term Issuer Default Rating (IDR) to 'CCC-'
from 'CCC' and placed it on Rating Watch Negative (RWN). Fitch has
also downgraded Signa Development's senior unsecured rating to
'CCC+' from 'B-' and placed it on RWN. The senior unsecured
Recovery Rating is 'RR2'.
The downgrades reflect Signa Development's weak ringfencing
measures, which should have protected its bondholders from wider
Signa group difficulties. Signa Prime Selection (Signa Prime) is
reportedly in some form of standstills with various suppliers, some
development projects have been halted, and its liquidity is
constrained. Fitch believes this may lead to contagion effects on
other Signa entities including Signa Development.
In Fitch's view, Signa Development has also breached financial
separation by significantly increasing its 1H23 and post-1H23
financial receivables to other group entities and activities. The
unwinding of these receivables will take time. Furthermore, Fitch
understands from management that Signa Development and Signa Prime
have appointed the same legal and financial advisers.
KEY RATING DRIVERS
Lack of Segregation: The recent increase in financial receivables
to wider Signa group entities will take time to unwind, and may be
exposed to factors related to group entities' property developments
or investments, which are outside Signa Development's control. Some
of these receivables were cash from recent net disposal receipts
destined for Signa Development creditors.
Bond Covenants: Despite Signa Development's bond covenants
restricting on-lending to affiliates (as defined), financial
receivables to wider Signa entities exist. The company describes
some of these as "ordinary course of business cash management
operations", the most recent being net cash proceeds from disposals
(kika/Leiner, BEAM and others) that were diverted.
1H23 Cash Position: Signa Development 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, is near-completion
and 60% pre-let. Together with fast-tracking the sale of various
D18 assets, Signa Development received significant disposal
proceeds during 2023.
Wider Signa Group Difficulties: News reports have pointed to
property developments ceasing elsewhere in the group particularly
within Signa Prime, indicating constrained liquidity, rising
material and financing costs to complete projects, and real estate
valuation uncertainties, particularly as projects complete in
future years. The European Central Bank has requested banks to
scrutinise the real estate values used for lending to Signa
entities. Signa Development's end-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 realising development profits. Nevertheless, liquidity is
required to fund developments to completion, alongside existing
debt funding (usually procured at a low 40% loan-to-value). In
addition, the contagion effect of unpaid suppliers and bank lenders
on other Signa entities, including Signa Development, may disrupt
near-term and longer-term projects and funding.
Parent & Subsidiary Linkage (PSL): Under its PSL Criteria, although
a stronger subsidiary, Signa Development's rating will be adversely
affected by the weaker parent and other group entities. Both the
(i) legal ring-fencing and (ii) access & control factors are
assessed as 'open', which means a close alignment of Signa
Development's rating with the credit quality of wider Signa group
entities.
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.
Consequently, in Fitch's view, and from Signa Development's
creditors' perspective, transactions with Signa Prime fail to
demonstrate the high degree of transparency to allay corporate
governance risk. Although Signa Development was conserving its cash
with disposal receipts, financial receivables rose EUR215 million
in 1H23 after an EUR155 million increase in 2022, which Signa
Development has described as interest-bearing "loans to indirect
shareholders".
DERIVATION SUMMARY
Across Fitch's EMEA Housebuilder Navigator peers, risk profiles
vary across different residential markets. In France, purchaser
deposits fund capex due to little upfront capital outlay for land.
In contrast, in the UK and Spain, the bulk of the purchase price is
paid by purchasers on completion due to upfront cash outlay for the
land.
Signa Development's residential and office development operations
require upfront land outlay and final payment is made on 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 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
relies on deep market insight.
If Signa Development did not have a schedule of agreed sales and
instead relied on 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 Rating Case for the Issuer
- Management's schedule of agreed and near-term likely-to-be agreed
forward sales, and announced asset disposals (including
kika/Leiner)
- Decrease in percentage-of-completion (POC) EBITDA by 10% in
2024-2026 to represent a stress of increased construction costs
relative to values
- Relative to the POC-adjusted EBITDA, cash flow forecasts are
underpinned by the timing of scheduled receipts (forward sales,
completion of project dates), although such timings may vary
- Subordinated participation capital notes to be refinanced
- External dividends at 4.5%-6% of net asset value
RECOVERY ANALYSIS
The recovery analysis assumes that Signa Development would be
liquidated in bankruptcy rather than reorganised as a
going-concern. Fitch has assumed a 10% administrative claim.
Using the end-1H23 gross asset value (GAV) of EUR2.6 billion, Fitch
deducted the bespoke-financed Optimisation portfolio of EUR0.1
billion. Of the remaining end-1H23 GAV of around EUR2.5 billion,
Fitch applies a standard 25% discount to values. The resultant
liquidation estimate of EUR1.7 billion reflects its view of Signa
Development's GAV that could be realised in a reorganisation and
distributed to creditors.
The total amount of debt claims is EUR0.8 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 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
subordinated to Signa Development's unsecured debt.
In Fitch's recovery analysis no value is attributed to the 1H23
financial receivables nor to the post-1H23 disposal proceeds, which
were diverted into additional receivables rather than cash.
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 issued by Signa Development
Finance S.C.S. and guaranteed by Signa Development.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Clarification of the segregated remit of the announced adviser
appointments to Signa Development's creditors
- Improvement in liquidity (from disposal proceeds and realisation
of receivables, or equity injection) and greater certainty over
allowable drawdowns by existing secured lenders to fund
developments
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Increased likelihood of payment default by Signa Development
- Evidence of a distressed debt exchange or non-payment default at
Signa Development
LIQUIDITY AND DEBT STRUCTURE
Appointment of Advisors: Signa Development has disclosed that it
has appointed 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 the company reports 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 on completion or
assets sold to repay their bespoke loans. In Fitch's view,
refinancing is unlikely given capital market conditions, and the
wider Signa group issues.
The next bulk debt maturity (EUR250 million in 2024) is a
mixed-scheme project in Berlin, followed by an unsecured bond of
EUR300 million in mid-2026. End-1H23 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 with the disposal of relevant projects.
Dividend Payments Uncertain: Fitch understands from management that
Signa Development's deferred dividend (EUR110 million) from 2021
remains unpaid and the decision on 2022 dividend will depend on
progress with disposals and general liquidity.
ISSUER PROFILE
Signa Development is a property development company active mainly
in Austria and Germany. Signa Development is part of the wider
Signa group.
ESG CONSIDERATIONS
Signa Development has an ESG score of '5' for Group Structure
reflecting its complexity, transparency as an unlisted entity and
high levels of related-party transactions including recent cash
outflows. 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 '5' for Governance Structure.
This reflects the previous active participation of the founder
within Signa Development without being a supervisory or management
board member of Signa Development. Fitch understands from
management the founder has now stepped down from this active
participation. 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. Fitch's ESG Relevance Scores are not inputs
in the rating process; they are an observation of the materiality
and relevance of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Signa Development
Selection AG LT IDR CCC- Downgrade CCC
senior unsecured LT CCC+ Downgrade RR2 B-
Signa Development
Finance S.C.S.
senior unsecured LT CCC+ Downgrade RR2 B-
===========
F R A N C E
===========
FINANCIERE TOP: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
---------------------------------------------------------------
Fitch Ratings has affirmed Financiere Top Mendel SAS's Long-Term
Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. Fitch
has also assigned a 'BB-' final instrument rating to the EUR2.3
billion senior secured Term Loan B (TLB) issuance by its subsidiary
Financiere Mendel S.A.S, with a Recovery Rating of 'RR3'/61%,
following the completion of the group's refinancing of its capital
structure in line with Fitch's expectations. Financiere Mendel
S.A.S directly owns Ceva Sante Animale S.A. (Ceva), the
French-based manufacturer of animal health products.
The 'B+' IDR balances Ceva's robust business profile, characterised
by its diversified portfolio of pharmaceutical and biological
animal therapeutic solutions, supported by product innovations and
global market presence, against its leveraged capital structure.
Fitch expects EBITDA gross leverage to trend 4.5x-5.5x in
2024-2026.
The Stable Outlook is supported by its expectations of steadily
growing sales and limited impact from inflationary pressures,
leading to stable EBITDA margins of about 27% and
neutral-to-positive free cash flow (FCF) generation after
investments, leading to gradual deleveraging and aligning Ceva's
financial risk with the 'B+' IDR.
Fitch has withdrawn the rating on the previous senior secured loans
of 'BB-´'/'RR3' following their repayment.
KEY RATING DRIVERS
Refinancing Temporarily Increases Leverage: The refinancing, which
comprises euro and US dollar TLBs totalling EUR2.3 billion, has
been completed in line with expectations and has extended debt
maturities to November 2030. As part of the transaction, the group
upstreamed EUR200 million of cash to pay a shareholder distribution
with additional transaction fees incurred of around EUR40 million.
The final pricing on the TLBs is in line with the margin on prior
debt, resulting in forecast interest expenses of around EUR190
million-EUR210 million per year over 2024-2026, from about EUR180
million previously, with the difference mainly due to its base rate
interest rate assumptions.
This translates into an EBITDA interest coverage of 2.2x-2.8x
through 2026, a slight decline from the above 3.0x levels in the
past three years. Fitch also expects a temporary leverage increase
in 2023 to 5.9x, as the transaction adds EUR250 million of debt to
make a shareholder distribution.
Strong Deleveraging Capacity: Fitch expects the leverage increase
to be temporary, given the group's proven ability to de-lever the
balance sheet organically via consistent growth in earnings, from
an EBITDA Leverage of 7.8x following the latest refinancing in 2019
to about 5.7x by FY22. Based on the group's well diversified source
of earnings, alongside the well-managed cost base, Fitch projects
the group will continue to de-lever towards 4.8x in 2026,
supporting the 'B+' rating.
Excess Cash Flow to be Reinvested: Fitch expects Ceva to maintain
high investment activity through 2026, with annual capex of EUR170
million-EUR220 million, in order to capitalise on growth
opportunities in the animal healthcare market and to sustain high
levels of top-line growth. Consequently, Fitch expects FCF to
remain neutral to negative (as a percentage of sales) over
2023-2024, as Fitch expects excess cash flow to be reinvested in
the business rather than accumulated on the balance sheet.
Excluding growth investments, Fitch believes that underlying FCF
generation is strong and consistent with the rating.
Robust Business Model: Fitch views Ceva's business model as robust,
given its well-diversified product portfolio across species,
balanced geographic footprint with good representation in developed
and emerging markets and entrenched market positions in
well-defined niche product areas. This is reflected by Ceva's
ability to deliver positive organic sales and solid operating
margins through the cycle. However, in a global context, Ceva ranks
among niche scale pharmaceutical companies benefiting from robust
EBITDA margins projected at about 27% through 2026.
Supportive Market Fundamentals: The rating reflects its view that
Ceva benefits from supportive market trends driving long-term
demand and market propensity for accelerated consolidation. The
animal health market offers many growth avenues, backed by the
rising consumption of animal-based proteins linked to an expanding
global population, increasing incomes in emerging markets, greater
awareness of animal health and wellbeing in developed countries
shifting the focus from cure to prevention, and advanced farming
methods requiring innovative animal therapies.
Larger M&A Event Risk: The IDR supports a limited amount of bolt-on
acquisition activity (up to EUR20 million per year), which Fitch
expects to be funded by Ceva's internal cash flow plus available
on-balance-sheet cash. Fitch expects the company's larger M&A
targets would also be supported by shareholders' equity
contributions. However, larger scale debt-funded M&As are an event
risk and could put Ceva's ratings under pressure.
DERIVATION SUMMARY
Fitch rates Ceva according to its global Ratings Navigator for
Pharmaceutical Companies. Under this framework, Ceva's operations
benefit from a diversified product range, strong product innovation
and broad geographic presence across developed and emerging
markets. However, in the global context Ceva's operations are
constrained by its niche business scale, which combined with
product diversity and innovation would position the company's
unlevered profile on the lower end of the 'BB' rating category. The
rating is affected by Ceva's high leverage, albeit with a healthy
deleveraging trajectory from a post-refinancing total debt/EBITDA
level of around 5.9x towards 4.8x projected in 2026.
Ceva's one-notch lower IDR than its direct peer Elanco Animal
Health Incorporated (BB-/Stable) reflects the former's much smaller
scale albeit a similar leverage profile. Other 'BB' rated peers
such as Grunenthal Pharma GmbH & Co. Kommanditgesellschaft
(BB/Stable) reflect primarily their more conservative financial
policies, combined with versatile product portfolios and strong FCF
generation.
In the 'B' rating category, which is typically populated by small,
generic businesses with concentrated product portfolios and levered
balance sheets, Ceva 's business model shows similarities with
Nidda BondCo GmbH (Stada; B/Stable) and Roar Bidco AB (Recipharm,
B/Stable), although Ceva's comparative lack of scale against Stada
is balanced by greater geographic reach and materially lower
leverage.
Other asset-intensive pharma peers such as European Medco
Development 3 Sarl (B-/Stable) and ADVANZ PHARMA HoldCo Limited
(B/Stable) have weaker business models given their exposure to
higher product concentration and execution risks, in combination
with higher leverage metrics. The asset-light pharma companies
CHEPLAPHARM Arzneimittel GmbH (B+/Stable) and Pharmanovia Bidco
Limited (B+/Stable) exhibit similarly conservative financial
leverage, but stronger operating profitability and FCF generation,
which offsets the companies' limited scale and greater portfolio
concentration risks.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Organic sales growth of around 6.5% in 2023, followed by annual
growth of 5%-6% in 2024-2026;
- EBITDA margins stable at around 27% supported by higher sales
volumes and some price increases;
- Trade working capital outflows averaging EUR40 million-EUR50
million per year to support sales growth;
- High capex intensity at around 12% of sales in 2023-2024,
steadily declining towards 7.5% in 2026;
- Bolt-on acquisitions of EUR20 million per year in 2023-2026
funded by internal cash generation (Fitch's assumption);
- No cash return to shareholders through to 2026.
RECOVERY ANALYSIS
- The recovery analysis assumes that Ceva would be restructured as
a going concern rather than liquidated in a hypothetical event of
default given the company's brand, quality of product portfolio and
established global market position;
- Ceva would have post-reorganisation, going-concern EBITDA of
around EUR250 million, which Fitch estimates would be required for
the business to remain a going concern with potential distress most
likely resulting from product contamination or similar compliance
issues, or due to infectious disease outbreaks affecting various
species in several regions akin to ASF;
- A distressed enterprise value/EBITDA multiple of 6.5x has been
applied to calculate a going-concern enterprise value. This
multiple reflects the group's strong organic growth potential, high
underlying profitability and protected niche market positions;
- After deducting 10% for administrative claims, its principal
waterfall analysis generated a ranked recovery in the 'RR3' band
for the all senior secured capital structure, comprising the TLB of
EUR2.3 billion and a fully drawn EUR100 million RCF, assumed to be
fully drawn prior to distress in accordance with its methodology
with all facilities ranking pari passu. Fitch excludes from the
senior secured creditor mass bilateral facilities of around EUR170
million as these are unsecured financial obligations of the group;
- Its assumptions result in a 'B+'/'RR3' instrument rating for the
senior secured debt with a waterfall generated recovery computation
output percentage of 61% based on current metrics and assumptions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade (for BB-):
- Solid operating performance with turnover growing at high single
digit rates alongside maintenance of EBITDA margins above 26%;
- Reduction in total debt/EBITDA below 4.0x on a sustained basis;
- Commitment to more conservative financial policy;
- FCF margins sustained in mid- to high- single digits.
Factors that could, individually or collectively, lead to negative
rating action/downgrade (for B):
- Evidence of weakening operating performance, operational
breakdowns (product issues/non-compliance) or M&A missteps leading
to EBITDA margins declining towards 24%;
- Total debt/EBITDA at or above 5.5x;
- Opportunistic shareholder distributions constraining Ceva's
ability to invest in business and grow organically at mid-single
digit rates;
- Deterioration in underlying FCF generation.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: Fitch estimates Ceva's liquidity at around
EUR300 million (excluding Fitch-defined restricted cash of EUR25
million deemed necessary for daily operations) following the recent
refinancing transaction. Fitch projects cash balances to stay
around EUR300 million-EUR350 million over the rating horizon,
supported by inherently cash generative operations and adequate to
cover internal cash tax, interest and working capital requirements.
Fitch forecasts most cash flow to be reinvested in the business
with Fitch projected annual capex spend averaging EUR190 million
over 2023-2026, rather than cash accumulating on balance sheet. The
company's new debt facilities are long-dated, with EUR and USD term
loan B facilities due in November 2030 and RCF due in May 2030.
ISSUER PROFILE
Ceva is an animal health company that develops, manufactures and
distributes a large portfolio of pharmaceutical products and
vaccines for poultry, swine, ruminants and companion animals.
ESG CONSIDERATIONS
Ceva Sante has an ESG Environmental, Social and Governance (ESG)
Relevance Score of '4' for Customer Welfare due to regulatory
interventions and end-consumer preferences away from the use of
antibiotics in feed for animals, which has a negative impact on the
credit profile, and is relevant to the ratings in conjunction with
other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Financiere Mendel
S.A.S.
senior secured LT WD Withdrawn BB-
senior secured LT BB- New Rating RR3 BB-(EXP)
Financiere Top
Mendel SAS LT IDR B+ Affirmed B+
=============
G E R M A N Y
=============
TELE COLUMBUS: Fitch Lowers Rating on Senior Secured Debt to 'CC'
-----------------------------------------------------------------
Fitch Ratings has downgraded Tele Columbus AG's (TC) Long-Term
Issuer Default Rating (IDR) to 'C' from 'CCC'. Fitch has also
downgraded TC's senior secured debt to 'CC' from 'CCC+'. The senior
secured debt's Recovery Rating remains unchanged at 'RR3'.
The downgrade follows the missed interest payment on EUR650 million
senior secured notes that was due 2 November 2023. The company has
entered into a 30-day grace period. Tele Columbus continues
discussions with creditors and shareholders about achieving a
sustainable long-term capital structure.
KEY RATING DRIVERS
Coupon Payment Deferral: The company announced it entered a 30-day
grace period after missing a coupon payment on its EUR650 million
senior secured notes. Failure to cure the interest payment within
the 30-day grace period would be likely to result in a further
downgrade to 'RD'.
Continuing Debt Negotiations: TC announced that it was in advanced
negotiations with its debt holders which, in its view, may lead to
deterioration in terms for its creditors. Debt restructuring
negotiations would require the coordination of the sometimes
divergent interests of various groups of debtholders such as bond-
and loan-holders, and any indication of a threat to debt holders'
interests would be viewed as likely to lead to a distressed debt
exchange (DDE).
The company expects those discussions to result in an EUR300
million equity contribution from its shareholder (including amounts
already received) subject to, among other things, an extension of
financial debt maturities at par to 2028. In its view, a
conditionality element in shareholder support may lead to pressure
on debtholders to accept less favourable terms as a prerequisite
for any additional shareholder funding. Should this be the case,
Fitch may view any resulting new terms as indicative of a DDE.
Negative FCF: Fitch expects TC's FCF to remain heavily negative as
the company continues to make investments into fibre infrastructure
upgrades well above its current EBITDA generation. As of the latest
update at end-August 2023, the management guided for 2023 capex to
be broadly on par with 2022 investments (which it reported as
EUR227 million), while its last-12-months-to-2Q23 normalised EBITDA
(company definition) was EUR177 million. Debt refinancing may be
achieved at a significantly higher interest rate, which would weigh
on cash flows.
Modest Overall Growth: Fitch expects TC to continue demonstrating
strong growth in broadband revenue, likely as a high single-digit
percentage annually, supported by growth in the number of internet
connections and up-selling as customers increasingly opt for higher
speed enabled by fibre and DOCSIS 3.1 upgrades. However, such
growth may be insufficient to fully compensate for TV revenue
pressure, at least in 2023-2025.
Lacklustre Operating Performance: Fitch expects TC's operating
performance to remain broadly stable over the next 12 months, with
stable to slightly negative revenue and an only slowly increasing
EBITDA margin as cost-efficiency initiatives may take time to bear
fruit on a net basis. The company reported a 1.9% yoy revenue
contraction in 2Q23, with strong 4.3% internet growth falling short
of fully off-setting the 8.3% decline in TV services revenue.
Bulk TV Revenues Face Uncertainty: Amendments to the German
telecommunication law (in effect from mid-2024) are likely to put
pressure on bulk TV revenue for mass provision of basic TV
programming. Revenue from analogue TV accounted for 37% of TC's
2022 total revenue. With a contribution margin of more than 80%, a
reduction in this revenue stream would inevitably lead to a
commensurate EBITDA contraction. The impact may be mitigated by
up-selling efforts at the time of establishing direct contract
relationships for its remaining customers.
Under the new law, housing associations will no longer be able to
pass on bulk TV fees to end-users by including them in monthly
rental charges. TC will therefore have to establish direct customer
relationships with all its TV users, who should explicitly consent
to continue paying for linear TV programming.
High Leverage: Fitch expects TC's leverage to remain high, at more
than 7x net debt/EBITDA in 2023-2026 (Fitch estimates it at 8.4x at
end-2022) assuming no debt relief from the restructuring.
Deleveraging is likely to be slow, primarily driven by a gradual
EBITDA recovery.
DERIVATION SUMMARY
Unlike many of its larger cable peers, TC is only present in a few
German regions, with access to around 9% of German households. As a
result, it has a significantly smaller operational scale than most
nationwide cable peers who benefit from larger footprints and
sustained strong FCF. However, its market shares in those
territories compare well with those of nationwide operators, while
at end-2022 92% of its customers were tenants in apartments blocks
with a typically superior efficiency profile.
Unlike many of its cable peers (including those mentioned below),
TC does not have any mobile operations and cannot offer bundled
services. Cable companies VMED O2 UK Limited (BB-/Stable), UPC
Holding BV (BB-/Negative) and Telenet Group Holding N.V
(BB-/Stable) are rated 'BB-' due to lower leverage, solid financial
profiles, and stronger market positions and FCF generation.
VodafoneZiggo Group B.V. has a similar strong operating profile and
slightly higher leverage, so is rated 'B+' with a Stable Outlook.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
- On average, double-digit declines of analogue TV revenue in
2024-2025 due to the new telecom law
- High single-digit broadband revenue growth in 2023-2025
- EBITDA margin (after leases) gradually recovering to more than
34% in 2024-2025 from an estimated low of 30% in 2022
- Capex at more than 40% of revenue in 2023-2025
- Low cash tax payments at EUR3 million a year in 2023-2025
- Recurring one-off costs of EUR5 million, reducing EBITDA
- No acquisitions or divestments in 2023-2025
- No dividend payments to 2025
RECOVERY ANALYSIS
- The recovery analysis is performed for the existing debt
structure. Its analysis assumes that TC would be considered a going
concern (GC) in bankruptcy and that it would be reorganised rather
than liquidated.
- Fitch assumes a 10% administrative claim.
- Its GC EBITDA estimate of EUR120 million reflects Fitch's view of
sustainable, post-reorganisation EBITDA upon which Fitch bases the
valuation of the company. Fitch would expect a default to come from
a liquidity shortage, heavier-than-envisaged revenue pressure on
bulk TV customer migration, and/or capex overspend without a
commensurate increase in broadband customers and revenue.
- Fitch used an enterprise value (EV) multiple of 5.5x to calculate
a post-reorganisation valuation, which reflects a conservative
mid-cycle multiple underlining the company's strategic challenges.
- Loans at operating subsidiaries of EUR3 million will have
priority over senior secured instruments.
- Fitch estimates the total amount of secured debt for claims at
EUR1,112 million, comprising EUR462 million of senior secured term
loans and EUR650 million of secured notes.
- Fitch estimates expected recoveries for senior secured debt at
53% based on current metrics and assumptions. This results in the
senior secured debt being rated at 'CC', one notch above the IDR,
with a Recovery Rating of 'RR3'.
RATING SENSITIVITIES
Factors that could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Stronger liquidity and progress with addressing the short-term
refinancing risk on terms that are not viewed as a DDE
- EBITDA gross leverage sustainably below 8.0x
Factors that could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Coupon non-payment after expiration of the 30-day grace period
- Indication of debt restructuring on terms that would constitute a
DDE
- Ongoing pressure on liquidity and slow progress with debt
refinancing
LIQUIDITY AND DEBT STRUCTURE
High Refinancing Risk: TC is facing high short-term bullet
refinancing risk with nearly all its debt maturing by May 2025. Its
EUR462 million term loan facility matures in October 2024, followed
by EUR650 million in May 2025.
ISSUER PROFILE
TC is a cable operator in Germany with strong positions in the
country's eastern regions. Overall, the company's network provides
access to nearly 9% of German households. Its footprint is 3.2
million connected households with 2.0 million subscribers as of
end-2Q23.
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
----------- ------ -------- -----
Tele Columbus AG LT IDR C Downgrade CCC
senior secured LT CC Downgrade RR3 CCC+
=============
I R E L A N D
=============
ARBOUR CLO XII: Fitch Assigns 'B-sf' Final Rating to Class F Notes
------------------------------------------------------------------
Fitch Ratings has assigned Arbour CLO XII DAC final ratings as
detailed below.
Entity/Debt Rating Prior
----------- ------ -----
Arbour CLO XII DAC
A XS2688506869 LT AAAsf New Rating AAA(EXP)sf
B-1 XS2688507081 LT AAsf New Rating AA(EXP)sf
B-2 XS2688508303 LT AAsf New Rating AA(EXP)sf
C XS2688508725 LT Asf New Rating A(EXP)sf
D XS2688509376 LT BBB-sf New Rating BBB-(EXP)sf
E XS2688509616 LT BB-sf New Rating BB-(EXP)sf
F XS2688509707 LT B-sf New Rating B-(EXP)sf
M XS2688507248 LT NRsf New Rating NR(EXP)sf
Subordinated Notes
XS2688510119 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
Arbour CLO XII DAC is a securitisation of mainly senior secured
obligations (at least 90%) with a component of senior unsecured,
mezzanine, second lien loans, first lien last-out loans and
high-yield bonds. Note proceeds were used to fund a portfolio with
a target par of EUR425 million. The portfolio is managed by Oaktree
Capital Management, L.P. The CLO has a 4.5-year reinvestment period
and 8.5-year weighted-average life (WAL) test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors to be in the 'B/B-' category.
The Fitch weighted-average rating factor (WARF) of the identified
portfolio is 24.99.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second lien, unsecured and mezzanine assets. The Fitch
weighted-average recovery rate of the identified portfolio is
63.43%.
Diversified Portfolio (Positive): The transaction has two matrices
effective at closing corresponding to the 10 largest obligors at
20% of the portfolio balance and a fixed-rate asset limit at 7.5%
and 15% of the portfolio. It has two forward matrices corresponding
to the same top 10 obligors and fixed-rate asset limits, which will
be effective one year after closing, provided the aggregate
collateral balance (defaults at Fitch-calculated collateral value)
is at least at the reinvestment target par balance.
The transaction also includes various concentration limits,
including the maximum exposure to the three largest (Fitch-defined)
industries in the portfolio at 40%. These covenants ensure the
asset portfolio will not be exposed to excessive concentration
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed portfolio with the aim of testing the robustness of the
transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction's
stress portfolio and matrices analysis is 12 months less than the
WAL covenant. This is to account for structural and reinvestment
conditions after the reinvestment period, including the
over-collateralisation tests and the Fitch 'CCC' limitation test
passing after reinvestment, among other factors. Fitch believes
these conditions will reduce the effective risk horizon of the
portfolio during the stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean default rate (RDR) across all ratings
and a 25% decrease of the recovery rate (RRR) across all ratings of
the identified portfolio would have no impact on the class A to E
notes and would lead to downgrades of no more than one notch for
the class F notes.
Based on the identified portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of defaults and portfolio deterioration. Due to the
better metrics and shorter life of the current portfolio than the
Fitch-stressed portfolio, the class E notes display a rating
cushion of three notches, the class B-1, B-2, D and F notes two
notches and the class C notes one notch.
Should the cushion between the current portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
across all ratings and a 25% decrease of the RRR across all ratings
of the stressed portfolio would lead to downgrades of up to four
notches for the rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would lead to upgrades of up to three notches for the
rated notes, except for the 'AAAsf' rated notes, which are at the
highest level on Fitch's scale and cannot be upgraded.
During the reinvestment period, upgrades, which are based on the
Fitch-stressed portfolio, may occur on better-than-expected
portfolio credit quality and a shorter remaining WAL test, leading
to the ability of the notes to withstand larger-than-expected
losses for the remaining life of the transaction. After the end of
the reinvestment period, upgrades may occur on stable portfolio
credit quality and deleveraging, leading to higher credit
enhancement and excess spread available to cover losses in the
remaining portfolio.
DATA ADEQUACY
Arbour CLO XII DAC
The majority of the underlying assets or risk presenting entities
have ratings or credit opinions from Fitch and/or other Nationally
Recognized Statistical Rating Organizations and/or European
Securities and Markets Authority registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
BLACKROCK EUROPEAN I: Moody's Affirms B1 Rating on Class F-R Notes
------------------------------------------------------------------
Moody's Investors Service has upgraded the ratings on the following
notes issued by BlackRock European CLO I Designated Activity
Company:
EUR39,680,000 Class B-1-R Senior Secured Floating Rate Notes due
2031, Upgraded to Aaa (sf); previously on Jul 8, 2022 Upgraded to
Aa1 (sf)
EUR26,320,000 Class B-2-R Senior Secured Fixed Rate Notes due
2031, Upgraded to Aaa (sf); previously on Jul 8, 2022 Upgraded to
Aa1 (sf)
EUR32,000,000 Class C-R Senior Secured Deferrable Floating Rate
Notes due 2031, Upgraded to Aa3 (sf); previously on Jul 8, 2022
Upgraded to A1 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR266,000,000 (Current outstanding amount EUR215,276,683) Class
A-R Senior Secured Floating Rate Notes due 2031, Affirmed Aaa (sf);
previously on Jul 8, 2022 Affirmed Aaa (sf)
EUR24,000,000 Class D-R Senior Secured Deferrable Floating Rate
Notes due 2031, Affirmed Baa2 (sf); previously on Jul 8, 2022
Affirmed Baa2 (sf)
EUR25,500,000 Class E-R Senior Secured Deferrable Floating Rate
Notes due 2031, Affirmed Ba2 (sf); previously on Jul 8, 2022
Affirmed Ba2 (sf)
EUR10,500,000 Class F-R Senior Secured Deferrable Floating Rate
Notes due 2031, Affirmed B1 (sf); previously on Jul 8, 2022
Affirmed B1 (sf)
BlackRock European CLO I Designated Activity Company, issued in
February 2016 and refinanced in March 2018, is a collateralised
loan obligation (CLO) backed by a portfolio of mostly high-yield
senior secured European loans. The portfolio is managed by
BlackRock Investment Management (UK) Limited. The transaction's
reinvestment period ended in June 2022.
RATINGS RATIONALE
The rating upgrades on the Class B-1-R, B-2-R and C-R Notes are
primarily a result of the deleveraging of the Class A following
amortisation of the underlying portfolio over the last year. The
Class A Notes have paid down by approximately EUR50.6 million
(19.0% of the closing balance) over the last year. As a result of
the deleveraging, over-collateralisation (OC) has increased for
Class A/B, Class C and Class D. According to the trustee report
dated October 2023 [1] the Class A/B, Class C and Class D OC ratios
are reported at 143.7%, 129.1% and 119.9% compared to October 2022
[2] levels of 138.9%, 126.7% and 118.8% respectively.
The affirmations on the ratings on the Class A-R, D-R, E-R and F-R
notes are primarily a result of the expected losses on the notes
remaining consistent with their current rating levels, after taking
into account the CLO's latest portfolio, its relevant structural
features and its actual over-collateralisation ratios.
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers.
In its base case, Moody's used the following assumptions:
Performing par and principal proceeds balance: EUR403.03m
Defaulted Securities: EUR3.7m
Diversity Score: 60
Weighted Average Rating Factor (WARF): 2978
Weighted Average Life (WAL): 3.5 years
Weighted Average Spread (WAS) (before accounting for Euribor
floors): 3.77%
Weighted Average Coupon (WAC): 3.01%
Weighted Average Recovery Rate (WARR): 42.9%
Par haircut in OC tests and interest diversion test: none
The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2021.
Counterparty Exposure:
The rating action took into consideration the notes' exposure to
relevant counterparties, such as account bank, using the
methodology "Moody's Approach to Assessing Counterparty Risks in
Structured Finance methodology" published in October 2023. Moody's
concluded the ratings of the notes are not constrained by these
risks.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Additional uncertainty about performance is due to the following:
-- Portfolio amortisation: The main source of uncertainty in this
transaction is the pace of amortisation of the underlying
10portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
beginning with the notes having the highest prepayment priority.
-- Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes have
defaulted can result in volatility in the deal's
over-collateralisation levels. Further, the timing of recoveries
and the manager's decision whether to work out or sell defaulted
assets can also result in additional uncertainty.
In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
market environment, the legal environment, specific documentation
features, the collateral manager's track record and the potential
for selection bias in the portfolio. All information available to
rating committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors, and judgments
regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.
KEEP IT REAL: High Court Appoints Interim Examiner
--------------------------------------------------
Katie O'Donovan at Limerick Post reports that there have been calls
locally to save 200 jobs that could be at risk due to the owner of
a number of popular Limerick restaurants going into examinership.
According to Limerick Post, the application was made by the group
who run the Cornstore and Coqbull restaurants, which have three
outlets in Limerick, along with a number in Cork.
An interim examiner was appointed by the High Court after one of
the company's debtors, Swedish-based Proventus Capital Partners III
KB fund, made a demand of payment of approximately EUR26.74 million
which the restaurants did not make, Limerick Post discloses.
The examinership concerns a number of companies, namely Keep it
Real Holdings DAC, Rosewalk Ltd, Coal Quay Restaurants Ltd,
Winstore Restaurants Ltd, Burgerchick Cork Limited, Burgerchick
Limerick Ltd, and Burgerchick Castletroy Limited, Limerick Post
states.
It is understood that most of the debt relates to the UK businesses
and that the Cornstore and Coqbull outlets in Limerick and Cork are
viable and profitable businesses, Limerick Post notes.
In response to recent reports, local councillor Olivia O'Sullivan
has written to Ministers Simon Coveney and Neale Richmond in the
Department of Enterprise, Trade, and Employment in order to
safeguard the approximately 200 employees that the companies employ
across their Limerick and Cork restaurants, Limerick Post relates.
The Irish Independent reported that the examinership situation
could see the Coqbull and Cornstore chains survive as going
concerns, and that there had already been an expression of interest
from one potential investor who, it is understood, has a long track
record in the Irish hospitality sector, according to Limerick
Post.
MALLINCKRODT PLC: Completes Financial Restructuring, Exits Ch. 11
-----------------------------------------------------------------
Mallinckrodt plc, a global specialty pharmaceutical company, on
Nov. 14 disclosed that it has completed its financial
restructuring, emerged from Chapter 11 following an expedited
court-supervised process and completed the Irish Examinership
Proceedings.
Supported by an enhanced capital structure, Mallinckrodt will
continue to focus on advancing its business across its portfolio
and executing on recent and planned product launches. The Company
has made meaningful recent progress to stabilize the business,
including achieving year-over-year net sales growth for the second
consecutive quarter and year-over-year adjusted EBITDA growth for
the third quarter 2023.
Recent highlights in Mallinckrodt's Specialty Brands portfolio
include FDA acceptance of its Acthar(R) Gel (repository
corticotropin injection) delivery device Supplemental New Drug
Application submission, positive launch and adoption momentum for
Terlivaz(R) (terlipressin) and a return to growth for Therakos(R).
The Company's Specialty Generics segment benefits from vertical
integration and high-quality U.S.-based manufacturing plants that
have supported strong growth. The Company also recently received
three U.S. Food and Drug Administration abbreviated new drug
application approvals in Specialty Generics, including
lisdexamfetamine dimesylate capsules (generic form of Vyvanse(R)).
"Mallinckrodt has emerged from this process as a stronger company,
better positioned to advance our strategic and operational
initiatives and achieve long-term success," said Siggi Olafsson,
President and Chief Executive Officer of Mallinckrodt. "With a
balance sheet that is now aligned with our business priorities, we
are moving forward with renewed energy to continue strengthening
our execution and performance. Our top priority remains delivering
therapies that improve outcomes for patients with severe and
critical conditions."
"This process over the last several months could not have been
possible without the support of many stakeholders. We sincerely
thank the Mallinckrodt teams for their dedication and continued
commitment to serving our customers and patients during this
process," Mr. Olafsson continued. "We also thank our patients,
customers and partners for their unwavering trust in the business
and our future. Finally, we appreciate the support of our financial
stakeholders to enable Mallinckrodt's future success meeting
patient needs."
As a result of the restructuring process, Mallinckrodt reduced its
total funded debt by approximately $1.9 billion and is moving ahead
with ample liquidity to execute its strategic priorities.
In addition, the Company has satisfied its obligations to the
Opioid Master Disbursement Trust II (the "Trust") on terms agreed
with the Trust, including through a $250 million payment made to
the Trust prior to the Chapter 11 filing, among other
consideration. Mallinckrodt will maintain its robust compliance and
monitoring standards and continue operating in accordance with the
Specialty Generics operating injunction under the oversight of an
Independent Monitor, existing Acthar-related settlement conditions
and Corporate Integrity Agreement.
As contemplated by Mallinckrodt's plan of reorganization, ownership
of the business transitioned to the Company's creditors and all of
the Company's outstanding ordinary shares were extinguished at
emergence.
Board Appointments
In connection with Mallinckrodt's emergence, a new Board of
Directors is being appointed. On Nov. 14 the Company announced that
David Stetson, Executive Chairman of Alpha Metallurgical Resources,
and Jon Zinman, a Managing Director at Silver Point Capital, have
been appointed to the Board, effective immediately. Mr. Olafsson is
also continuing to serve as a director. The new Board will
ultimately consist of seven members, and additional appointments,
including Board Chair, will be forthcoming.
Mr. Olafsson added, "Jon and David are highly experienced leaders
who bring expertise in management, finance and corporate strategy,
and I'm delighted to welcome them to the Board. We look forward to
benefiting from their perspectives as we guide the Company into its
next phase. We also thank our departing directors for their many
contributions and service to Mallinckrodt."
Advisors
Latham & Watkins LLP, Wachtell, Lipton, Rosen & Katz, Arthur Cox
LLP, Richards, Layton & Finger PA, and Hogan Lovells US LLP served
as Mallinckrodt's counsel. Guggenheim Securities, LLC served as
investment banker, and AlixPartners LLP served as restructuring
advisor.
About Mallinckrodt plc
Mallinckrodt plc is global business consisting of multiple wholly
owned subsidiaries that develop, manufacture, market and distribute
specialty pharmaceutical products and therapies. Areas of focus
include autoimmune and rare diseases in specialty areas like
neurology, rheumatology, nephrology, pulmonology and ophthalmology;
immunotherapy and neonatal respiratory critical care therapies;
analgesics and gastrointestinal products.
Mallinckrodt plc and certain of its affiliates sought Chapter 11
protection (Bankr. D. Del. Lead Case No. 23-11258) on August 28,
2023.
Mallinckrodt plc disclosed $5,106,900,000 in assets and
$3,512,000,000 in liabilities as of June 30, 2023. Bryan M.
Reasons, authorized signatory, signed the petition.
Judge John T. Dorsey oversees the cases.
The Debtors tapped Latham & Watkins, LLP and Richards, Layton &
Finger, P.A. as their bankruptcy counsel; Arthur Cox and Wachtell,
Lipton, Rosen & Katz as corporate and finance counsel; Guggenheim
Securities, LLC as investment banker; and AlixPartners, LLP, as
restructuring advisor.
PROVIDUS CLO IX: Fitch Assigns 'B-(EXP)sf' Rating to Class F Notes
------------------------------------------------------------------
Fitch Ratings has assigned Providus CLO IX DAC expected ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
Entity/Debt Rating
----------- ------
Providus
CLO IX DAC
A LT AAA(EXP)sf Expected Rating
B LT AA(EXP)sf Expected Rating
C LT A(EXP)sf Expected Rating
D LT BBB-(EXP)sf Expected Rating
E LT BB-(EXP)sf Expected Rating
F LT B-(EXP)sf Expected Rating
Sub LT NR(EXP)sf Expected Rating
X LT AAA(EXP)sf Expected Rating
European CLO documentation typically requires managers to send a
test request to the collateral administrator prior to entering into
a binding agreement to acquire a collateral debt obligation to
determine the compliance with the reinvestment criteria and tests.
However, this transaction has no defined timeline for the
collateral manager to send such test request, which results in
operational risk as the collateral administrator will not be able
to respond in time for any ineligible trade. To account for this
operational risk, Fitch has applied a stress of 2% on the Fitch
weighted average recovery rate (WARR) analysis.
TRANSACTION SUMMARY
Providus CLO IX DAC is a securitisation of mainly senior secured
obligations (at least 90%) with a component of senior unsecured,
mezzanine, second-lien loans and high-yield bonds. Note proceeds
will be used to fund a portfolio with a target par of EUR375
million. The portfolio will be actively managed by Permira European
CLO Manager LLP. The collateralised loan obligation (CLO) has a
4.6-year reinvestment period and a 7.6-year weighted average life
test (WAL).
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors e in the 'B' category. The
Fitch-weighted average rating factor (WARF) of the identified
portfolio is 25.4.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch WARR of the
identified portfolio is 64.0%.
Diversified Asset Portfolio (Positive): The transaction includes
various other concentration limits, including the maximum exposure
to the three-largest Fitch-defined industries in the portfolio at
40%. These covenants ensure that the asset portfolio will not be
exposed to excessive concentration.
Portfolio Management (Neutral): The expected ratings are based on a
top 10 obligor concentration limit of 20%, a maximum fixed-rate
asset exposure of 7.5%, and a 7.6-year WAL test. The transaction
has reinvestment criteria governing the reinvestment similar to
those of other European transactions. Fitch's analysis is based on
a stressed-case portfolio with the aim of testing the robustness of
the transaction structure against its covenants and portfolio
guidelines.
The transaction WAL can step up one year at one year post closing,
subject to all tests being passed and the adjusted collateral
principal amount being at least at the reinvestment target par
balance.
Cash-flow Modelling (Positive): The WAL used for the transaction's
Fitch-stressed portfolio analysis is 12 months less than the WAL
covenant at the issue date, to account for the strict reinvestment
conditions envisaged by the transaction after its reinvestment
period. These include, among others, passing the coverage tests and
the Fitch WARF and 'CCC' bucket limitation tests post reinvestment,
as well as a WAL covenant that progressively steps down over time,
both before and after the end of the reinvestment period. Fitch
believes these conditions would reduce the effective risk horizon
of the portfolio during the stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean rating default rate (RDR) across all
ratings and a 25% decrease of the rating recovery rate (RRR) across
all ratings of the identified portfolio would have no impact on the
class X, A notes but would lead to downgrades of up to two notches
for the class C notes, three notches for the class B, D and E notes
and to below 'B-sf' for the class F notes.
Downgrades, which are based on the identified portfolio, may occur
if the loss expectation is larger than initially assumed, due to
unexpectedly high levels of default and portfolio deterioration.
Due to the better metrics and shorter life of the identified
portfolio than the Fitch-stressed portfolio, the class C notes show
a rating cushion of one notch, and the class B, D, E and F notes
two notches each.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
across all ratings and a 25% decrease of the RRR across all ratings
of the stressed portfolio would lead to a downgrade of up to four
notches for the class A to D notes, and to below 'B-sf' for the
class E and F notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings in Fitch's stress portfolio
would lead to an upgrade of up to two notches for the rated notes,
except for the 'AAAsf' rated notes, which cannot be upgraded
further.
During the reinvestment period, upgrades, which are based on the
Fitch-stressed portfolio, may occur on better-than-expected
portfolio credit quality and a shorter remaining WAL test, leading
to the ability of the notes to withstand larger-than-expected
losses for the remaining life of the transaction.
After the end of the reinvestment period, upgrades may occur on
stable portfolio credit quality and deleveraging, leading to higher
credit enhancement and excess spread available to cover losses in
the remaining portfolio.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
=========
I T A L Y
=========
INTERNATIONAL DESIGN: Fitch Puts Final 'B' Rating to Sr. Sec. Notes
-------------------------------------------------------------------
Fitch Ratings has assigned International Design Group S.p.A's (IDG)
new EUR425 million senior secured notes a final instrument rating
of 'B' with a Recovery Rating of 'RR4'. This follows the completion
of its partial refinancing of its capital structure, with final
terms in line with its prior expectations. Concurrently, Fitch has
affirmed IDG's Long-Term Issuer Default Rating (IDR) at ´B´ with
a Stable Outlook
IDG's 'B' IDR reflects successful execution of its growth strategy
centred on the integration of eight 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
Rating-Neutral Refinancing: The refinancing is leverage- and
rating-neutral, with slightly higher interest expense and lower FCF
offset by the benefit of longer-dated debt maturities.
Mildly Weaker Interest Coverage: Despite leverage likely remaining
commensurate with the rating, Fitch forecasts IDG's interest
coverage to temporally weaken to below its negative sensitivity of
2.3x in 2024 on a higher cost of debt. The metric should improve to
or above 2.3x from 2025 on projected gradual EBITDA growth and
moderating base interest rates. Fitch sees the overall positioning
of the key credit ratios as consistent with the current rating.
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 its larger scale, stronger brand
recognition better margins and lower leverage than IDG's,
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
- Fitch assumed deferred M&A considerations 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, which is 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.
Under the new capital structure, the revolving credit facility
(RCF) of EUR140 million 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 41%.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, 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, 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
Satisfactory Liquidity: Fitch assesses IDG's liquidity as
satisfactory. Following the refinancing, Fitch expects available
cash at end-2023 to be around EUR61 million, on top of the largely
undrawn upsized RCF. The partial refinancing improves 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
IDG 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 Affirmed RR4 B
senior secured LT B New Rating RR4 B(EXP)
===========
R U S S I A
===========
UZAUTO MOTORS: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
---------------------------------------------------------------
Fitch Ratings has affirmed JSC UzAuto Motors' (UAM) Long-Term
Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. Fitch
has also affirmed UAM's senior unsecured bonds at 'BB-'/'RR4'.
The affirmation reflects Fitch's view that the strength of linkage
with the Republic of Uzbekistan (BB-/Stable) and its incentives to
support UAM remain strong, leading to the equalisation of its
rating and Outlook with that of sovereign, in line with Fitch's
'Government-Related Entities Rating Criteria' (GRE). Fitch assesses
UAM's Standalone Credit Profile (SCP) at 'b'.
KEY RATING DRIVERS
Strong Socio-Political Impact: Its evaluation of the strong
socio-political implications of a possible default of UAM on the
sovereign reflects UAM's dominant market position in Uzbekistan's
car manufacturing industry. In addition, UAM and related parties
have a large domestic workforce of about 30,000 staff, which could
lead to socio-political tensions in case of default.
Strong Financial Implication: Its evaluation of strong financial
implications of a possible default reflects UAM's exposure to
international capital markets after it issued a Eurobond, as one of
the few corporates in the country and establishing itself as a
government-proxy issuer, in its view.
Strong Links with State: Fitch views the status, ownership and
control linkage of UAM with the state as strong due to full state
ownership and operational control by the parent over the company's
capex and operational strategy.
Fitch assesses the support track record as strong due to historical
state support in different forms, including shareholder loans on
favourable terms; and a favourable regulatory environment,
previously supported by high import duties for cars, and income tax
exemption, protecting UAM's dominant position in its domestic
market.
Car Sales Disruption: UAM has a long-term license agreement with
General Motors Company (GM; BBB/Stable), and while there may be
alternative offers from foreign competitors, a default of UAM would
cause temporary disruption to the delivery of new cars. The
regulatory environment has softened over the last two years with
falling import duties, but demand for UAM's cars is still strong
and it remains the dominant seller in Uzbekistan. UAM supplies the
most affordable cars in the local market and Fitch believes that it
would be hard to substitute its cars with other foreign brands in
the short term.
Constrained SCP: UAM's 'b' SCP reflects a weaker business profile
than other Fitch-rated carmakers, with limited scale, a narrow
product range and sales concentration in Uzbekistan. This could be
mitigated by its entry into new markets in the CIS region. Its
business profile is also constrained by the absence of a strong
brand, limiting the company's competitive position in relation to
global auto manufacturers. UAM's operating activity is fully
dependent on its existing long-term license agreement with GM,
which provides access to the latter's technological knowledge.
Margin Erosion: Fitch expect UAM's 2023 profitability to be
squeezed despite an increase in higher-end C-segment and above cars
coming to the market. This is due to sticky raw material and
component price inflation, which is partially off-set by higher
pricing.
Fitch has revised its medium-term EBITDA margin expectation down to
9% from 10.7% for 2025. The United Auto Workers strike against the
Detroit 3, including GM, has minimal impact on UzAuto's operations
as the company does not source from the US and vehicle imports from
the US factory to Uzbekistan are marginal relative to the total
volume.
Inherent Cash Flow Volatility: UAM's cash flow generation has been
highly volatile since 2016 and is one of the key rating
constraints. Yoy cash flow swings from 2020 to 2022 were
attributable to working capital movement, deposits with local banks
to support customers' vehicle lending, as well as the company's
capex programme. Fitch expects capex to stabilise at 2.5% of
revenues beyond 2023, but anticipate free cash flow (FCF)
volatility to continue because of the lingering supply chain issues
across the auto industry resulting in unpredictable working capital
accounts.
Dominant Position: UAM is the main producer of passenger cars in
Uzbekistan and has a dominant position in Uzbekistan. Combined with
high capex in production facilities and favourable regulation, this
provides significant barriers to entry and supports the company's
local market share. Nevertheless, ongoing liberalisation of
Uzbekistan's economy could increase competition from foreign
competitors and erode UAM's sales and profitability as well as its
assessment under the GRE criteria.
DERIVATION SUMMARY
In terms of GREs, Fitch’s view UAM as similar to companies such
as JSC Almalyk Mining and Metallurgical Complex (BB-/Stable) and
JSC Uzbekneftegaz (BB-/Stable).
Considering UAM's 'b' SCP, its business profile is significantly
weaker than that of global automotive manufacturers including GM
(BBB/Stable), Ford Motor Company (BBB-/Stable), or Renault SA (WD).
The company is not fully comparable with Fitch-rated peers as it
does not own the brand of the models it manufactures and the
associated technological knowledge. Moreover, despite its dominant
position in its domestic market, UAM's scale is much smaller than
peers. The company's product and geographical diversification is
also significantly lower than global automotive manufacturers.
UAM's EBITDA and EBIT margins, and partially leverage, are
commensurate with Fitch's expectation for auto manufacturers in the
investment-grade category, but its cash flow generation has been
erratic. The historical FCF margin volatility stems from large
annual working-capital swings and growth capex.
KEY ASSUMPTIONS
- Revenue around USD4.5 billion over the rating horizon
- EBITDA margin of 7% in 2023 before gradually trending toward 9%
by 2025
- Negative to neutral working-capital changes
- Average capex at 2.5% of sales from 2023 to 2026
- Dividend pay-out ratio between 15% and 30%
- No M&A for the next four years
RATING SENSITIVITIES
Factors that Could, Individually Or Collectively, Lead to Positive
Rating Action/Upgrade:
- Upgrade of Uzbekistan's sovereign rating, assuming ties with the
government remain strong
- EBITDA leverage sustainably below 1.3x accompanied by sustainably
positive FCF margin could be positive for the SCP, but not
necessarily the IDR
Factors that Could, Individually Or Collectively, Lead to Negative
Rating Action/Downgrade:
- Downgrade of Uzbekistan's sovereign rating
- Evidence of weaker ties between Uzbekistan and UAM (including,
but not limited to, a change of UAM's protected status in the
market; a decline of government ownership to less than 50%;
weakening of financial and other support)
- EBITDA leverage sustainably above 2.3x or sustainably negative
FCF could be negative for the SCP but not necessarily the IDR
The following rating sensitivities are for Uzbekistan (25 August
2023):
- External Finances: A substantial worsening of external finances,
for example, via a large drop in remittances, or a widening in the
trade deficit, leading to a significant decline in FX reserves
- Public Finances: A marked rise in the government debt-to-GDP
ratio or an erosion of sovereign fiscal buffers, for example, due
to an extended period of low growth or crystallisation of
contingent liabilities
- Macro: Consistent implementation of structural reforms that boost
GDP growth prospects and macroeconomic stability
- Public Finances: Fiscal consolidation that enhances medium-term
public debt sustainability
- Structural: A marked and sustained improvement in governance
standards and an easing in geopolitical risk
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch expects UAM to conclude 2023 with
more than USD100 million readily available cash and cash
equivalents. Fitch deems this satisfactory to sustain intra-year
working-capital swings. UAM has access to a USD75 million
short-term trade finance line with CitiBank and a syndicate loan
facility of USD100 million for working capital needs, which
provides additional liquidity headroom.
Bullet Debt Maturity Profile: The Eurobond is the main borrowing
facility in UAM's capital structure, with maturity in May 2026. The
company also guarantees UzAuto Motors Powertrain's amortising loan
with the Export Credit Agency to fund its capex programme. Although
UAM has no imminent debt maturities, refinancing risk is rising and
its own production capacity expansion could mean additional funding
needs.
ISSUER PROFILE
UAM is the dominant car producer in Uzbekistan, which is more 99.7%
indirectly owned by JSC Uzavtosanoat, the state-owned company that
is the dominant controlling body of the automotive industry within
the Republic of Uzbekistan (BB-/Stable). UAM produces and sells
vehicles and spare parts under the Chevrolet brand, mainly in
Uzbekistan and Kazakhstan.
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
----------- ------ -------- -----
JSC UzAuto Motors LT IDR BB- Affirmed BB-
senior unsecured LT BB- Affirmed RR4 BB-
===========================
U N I T E D K I N G D O M
===========================
BANNA RMBS: S&P Lowers Class D-Dfrd Notes Rating to 'B- (sf)'
-------------------------------------------------------------
S&P Global Ratings lowered to 'A+ (sf)', 'BBB (sf)', and 'B- (sf)'
from 'AA (sf)', 'A+ (sf)', and 'BB (sf)' its credit ratings on
Banna RMBS DAC's class B-Dfrd, C-Dfrd, and D-Dfrd notes,
respectively. At the same time, S&P affirmed its 'AAA (sf)' rating
on the class A notes and 'CCC (sf)' rating on the class E-Dfrd
notes. S&P removed its ratings on the class B-Dfrd to E-Dfrd notes
from CreditWatch negative.
S&P said, "The rating actions follow its June 7, 2023, CreditWatch
negative placements on the B-Dfrd, C-Dfrd, D-Dfrd, and E-Dfrd
notes. Our review reflects the application of our relevant criteria
and our full analysis of the most recent transaction information,
and considers the transaction's current structural features.
"We increased our valuation haircuts for loans in long-term
arrears, and revised our servicing fee assumptions based on
additional information provided by the servicer. We removed some
unsecured loans and also modelled estimated proceeds from the
receivership pipeline, currently standing at 34 properties."
The loan pool has shown a marked deterioration since 2020. For
instance, the proportion of current assets has fallen to 51.4% from
58.6%, while the level of undercollateralization (the sum of the
performing pool and loans up to 90 days in arrears minus the sum of
loans in greater than 90 days in arrears and defaulted loans) has
risen to 46.4% from 35.5%. In addition, defaulted loans and loans
more than 720 days in arrears now account for 27.9% of the total
pool.
The total portfolio amortized from GBP111 million at issuance to
GBP46 million as of November 2023. While the prepayment rate has
been strong historically (with a one-year average of 30.3%), it has
been higher for the performing loans subpool than for the
nonperforming subpool. This could result in a significant long-term
tail risk. S&P said, "The consensual sales strategy adopted by the
servicer has not foreclosed or restructured loans in arrears,
severe arrears, or default, at a pace commensurate with our
expectations for a pool with these credit characteristics
(buy-to-let properties with a low current loan-to-value [LTV] ratio
of 31.8%), resulting in a steady rise in nonperforming assets. The
servicer informed us that the slow pace of progress may be due,
among others, to the impact of COVID, the building quality of some
properties, and a negative disparity between the carrying valuation
and the market valuation. Additionally, the servicer acknowledged
that their ability to restructure loans was constrained by a
history of successive restructures by the originating bank. Our
analysis takes into account these factors."
In addition, the 12-month rolling average collection rate of the
entire pool has fallen steadily to slightly more than 50% in April
2023, from close to 70% in first-quarter 2021, reflecting the
higher interest rate environment. S&P expects this trend to
continue for some time as inflationary pressures will only recede
gradually. Looking at the average collection rate for the last 12
months for loans more than 90 days in arrears (excluding defaulted
loans), only 7.3% have a payment rate above 70%.
The excess spread has been consistently negative over at least the
last year, further exacerbated by the undercollateralization and
the recent rise in our modelled servicing fees to 60 basis points
(bps) over the past 12 months on a rolling basis. Floating fees
have risen as a result of greater rate card fees. These fees are
primarily in relation to receiver appointments. It is worth noting
that the base fee is 11 bps but the legal titleholder fee, arrears
management fees, capital and interest conversion fee, reporting
fee, conditional prepayment rate (CPR) fee, and additional
servicing fees (rate card fees as per the servicing agreement)
increase overall fees to 60 bps.
S&P said, "At closing, we applied a 20% property valuation haircut
in our weighted-average loss severity (WALS) calculation. This
reflected differences between the original valuation date and the
loan origination date, issues with the automated valuation method
results, and a marked differential between indexed valuation and
expected sale price. We now apply a haircut of 40% for properties
backing loans in arrears for more than 720 days. The calibration of
this higher haircut is the same as that used by the servicer to
estimate the receivership pipeline proceeds. Our understanding is
that it is based on previous observed sales (versus the original
valuation at closing).
"Of the 65 loans that reported a loss as of May 2023, we calculated
an average loss severity rate of 19.5% (18.0% for properties
following a consensual sales strategy). We regard this as
relatively high, and when considered alongside the lack of
repossessions, we view it as inconsistent with the
transaction-level current LTV ratio of 31.2%.
"We have updated our credit analysis using the August 2023 pool.
The weighted-average foreclosure frequency (WAFF) assumptions for
the performing subpool have increased at most rating levels due to
higher arrears, and a rise in the weighted-average LTV ratio.
However, on the WALS side, the figures have dropped thanks to the
growth in the house price index."
WAFF and WALS levels
RATING LEVEL WAFF (%) WALS (%)
AAA 44.84 5.66
AA 33.07 3.16
A 26.91 2.00
BBB 21.06 2.00
BB 14.76 2.00
B 13.28 2.00
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
Credit enhancement has significantly increased thanks to the
sequential priority of payments, providing further protection
against losses primarily to the class A and B-Dfrd notes. Their
credit enhancement levels (excluding recoveries) are now 32.7% and
5.7%, versus 4.0% and -5.4% at closing, respectively.
S&P said, "In our cash flow analysis, we excluded 13 loans whose
properties have been sold and are de facto unsecured. In addition,
we modelled the estimated receivership pipeline proceeds which will
flow to the issuer in the coming quarters for a total amount of
GBP5.5 million." To put these proceeds amounts into perspective,
the average quarterly principal receipts since second-quarter 2021
have been GBP3.6 million.
The reserve fund has been fully depleted since May 2021 while the
liquidity facility is equal to GBP1.2 million. The principal
deficiency ledger (PDL) on the class Z notes continues to rise and
is currently GBP4.1 million (out of GBP10.1 million). S&P does not
expect the PDL to be cured in the medium term given the lack of
excess spread.
The gross cumulative default trigger is breached at 31%, meaning
that the principal borrowing mechanism is no longer available for
the class B-Dfrd to E-Dfrd notes.
Overall, despite recent progress on receiver appointments and some
loans' nearing resolution, S&P thinks that the transaction remains
highly dependent on active servicing and the monetization of the
current and future receivership pipeline.
S&P said, "The application of our updated credit analysis of the
August 2023 pool and our cash flow analysis indicate that the
available credit enhancement is commensurate with the rating on the
class A notes. We therefore affirmed our 'AAA (sf)' rating.
"Our analysis indicates that the class B-Dfrd, C-Dfrd, and D-Dfrd
notes can no longer withstand our stresses at the rating levels
currently assigned. We therefore lowered and removed from
CreditWatch negative our ratings on the class B-Dfrd and C-Dfrd
notes.
"Our rating on the class D-Dfrd notes does not pass any stress
level but achieves a rating in our steady state scenario (no
commingling stress, contractual fees, average CPR). The rating does
not rely on favorable economic and financial conditions to honour
its obligations. We therefore applied our 'CCC' category rating
criteria, and lowered and removed from CreditWatch negative our
rating on the notes.
"Likewise, our rating on the class E-Dfrd notes does not pass any
stress level and stems from the application of our 'CCC' category
ratings criteria. However we consider repayment of this class to be
highly dependent upon the level of interest rate and the generation
of excess spread (or lack thereof). We therefore affirmed and
removed from CreditWatch negative our 'CCC (sf)' rating on the
class E-Dfrd notes."
Macroeconomic forecasts and forward-looking analysis
S&P said, "We expect U.K. inflation to remain high for the rest of
2023 and forecast the year-on-year change in house prices in
fourth-quarter 2023 to be 6.6% and 4.9% in first-quarter 2024.
Although high inflation is overall credit negative for all
borrowers, inevitably some borrowers will be more negatively
affected than others, and to the extent inflationary pressures
materialize more quickly or more severely than currently expected,
risks may emerge.
"Given our current macroeconomic forecasts and forward-looking view
of the U.K. residential mortgage market, we have run sensitivities
accounting for, among others, extended recovery periods, the
non-receipt of the estimated receivership pipeline proceeds, higher
servicing fees, and higher defaults."
Banna RMBS is a U.K. RMBS transaction that securitizes a portfolio
of well-seasoned U.K. buy-to-let mortgages originated by KBC Bank
Ireland PLC, IIB Finance DAC, and Premier Homeloans Ltd. to their
Irish clients.
BELLIS FINCO: Fitch Affirms 'B+' LongTerm IDR, Outlook Stable
-------------------------------------------------------------
Fitch Ratings has affirmed Bellis Finco plc (ASDA) Long-Term Issuer
Default Rating (IDR) at 'B+' with a Stable Outlook. Fitch has also
assigned a final rating of 'BB'/'RR2' to Bellis Acquisition Company
Plc's new GBP684 million private placement, which is aligned with
its other senior secured debt.
ASDA has completed its acquisition of a majority of EG Group's UK
business for GBP2 billion, paying GBP250 million less than
previously envisaged due to exclusion of - Fitch estimates - around
500 foodservice sites. The reduced acquisition consideration was
funded using less debt and will lead to marginally lower pro forma
leverage at 2023 than under its previous forecast. The pace of
deleveraging and the positive effect of the acquisition on ASDA's
business profile remain in line with the expectations underlying
its May 2023 rating action.
ASDA's Long-Term Issuer Default Rating (IDR) of 'B+' captures its
high pro-forma EBITDAR leverage of marginally below 6.0x, with
potential to deleverage towards 5.0x by 2024. Delivery on this
trajectory would be positive for the rating but is subject to
execution risk on achieving profit growth in a competitive
environment, integrating acquired businesses and delivering
synergies, as well as reducing the debt quantum.
KEY RATING DRIVERS
Acquisition Completed: ASDA has now completed the material
acquisition of a majority of EG Group's UK business for around GBP2
billion. The transaction perimeter was smaller than originally
envisioned (the KFC and Starbucks franchises were excluded), and it
was funded using GBP186 million less debt.
Its revised forecasts incorporate lower incremental pro forma
EBITDA of around GBP140 million (vs GBP180 million previously) from
EG's UK operations in 2023. Fitch expects marginally better pro
forma leverage metrics with EBITDAR leverage slightly below 6.0x
for 2023, which is aligned with the rating sensitivities.
Slightly Revised Forecast: Its overall EBITDA (post rents) forecast
in FY24 is by around GBP60 million lower at GBP1.16 billion than
previously projected. This incorporates a slight uplift in ASDA's
standalone forecast following strong 3Q23 YTD performance, which
partly offsets the smaller transaction perimeter and lower
synergies.
Execution Risk on Profit Growth: Fitch sees moderate execution risk
to achieve continued sales growth, given some loss of customers to
competitors in 3Q23, profit recovery for standalone ASDA and
delivery on around GBP90 million of synergies, to which Fitch has
applied a small haircut. Its forecasts build in a recovery in gross
profit margin, following investment in price during 2022-2023,
despite pass-through on products where raw material costs have
declined and due to increased procurement benefits. Fitch expects
the fuel margin from the EG UK segment to slightly decline,
compensated by an uplift in volumes as pump prices fall. Fitch
assumes margin pressure will persist, with a slight fuel margin
reduction for ASDA within its model.
Deleveraging Potential: Post 3Q23, ASDA has taken the first steps
since the 2021 LBO to reduce debt by repaying GBP200 million bridge
facility it used to fund its acquisition of Co-Op stores. Fitch
continues to anticipate deleveraging to around 5.0x by 2024, but
this is contingent on profit growth and on ASDA allocating cash to
debt reduction, in line with their communicated intentions to
deleverage.
Acquisition Improves Business Profile: Acquisition of EG's UK
operations increases ASDA's scale and broadens diversification by
expanding its presence into convenience and also adding some
expertise in food service. Fitch forecasts 2025 EBITDAR will
approach GBP1.7 billion, which maps to a 'bbb' category score for
scale under its Food Retail Navigator. ASDA has become the
number-two petrol forecourt operator in the UK, with around 800
petrol filling stations (PFS). It now also runs around 500
convenience sites at petrol filling stations and around 400 food
service sites.
Weak FCF: Fitch expects weak free cash flow (FCF) generation in the
next two years due to higher interest, capex and Project Future IT
separation costs, before it recovers to 1% of sales in 2025.
Resilient Food Retail: ASDA has a strong business model in a
resilient, but competitive, UK food retail sector, and high
financial flexibility. It has a good brand and scale, and has
reversed its like-for-like (lfl) sales and market-share declines,
due to its focus on value and investment in price. ASDA holds the
number-two position in online grocery sales in the UK with around
16% of sales in 2022.
DERIVATION SUMMARY
Fitch rates ASDA using its global Food Retail Navigator. The
acquisition of EG Group's UK and Ireland operations increased
ASDA's scale and improved its market position, although this is
still weaker than that of other large food retailers in Europe,
such as Tesco plc (BBB-/Stable) and Ahold Delhaize NV. Fitch views
ASDA's and Market Holdco 3 Limited's (Morrisons; B+/Stable)
business profiles as broadly comparable. However, the EG
acquisition enhanced ASDA's scale and recent lfl sales growth
positions, albeit weakened in 3Q23, puts its business profile
slightly ahead of Morrisons'. Both Morrisons and ASDA's operations
remain focused in the UK only.
ASDA has a larger market share than Morrisons, but the latter has
stronger vertical integration that supports profitability and a
better-invested store format with a higher portion of freehold
assets. ASDA's recent recovery in lfl sales underlines some
competitive advantage at times when consumers trade down and
tighten their spending in the current cost-of-living crisis, while
recent customer losses due to switching to other large full-scale
grocers suggest that the market remains very competitive.
ASDA has had greater access to convenience following the EG Group
acquisition, like Morrisons, which is also working towards
increasing its access to the faster-growing convenience market.
This presents execution risk for both. ASDA benefits from a
stronger online market share than Morrisons and the addition of the
high-margin food service segment.
Fitch expects ASDA's EBITDAR leverage, pro forma for the
acquisition, at around 6.0x at end-2023, before it potentially
declines to around 5.0x by end-2024. This is meaningfully higher
than Tesco's (around 3.5x excluding Tesco Bank) but below
Morrisons' (around 7.0x at FYE23/year-end October), and its
projection for WD FF Limited's (B/Stable) of 6.5x at FYE24
(year-end March).
Fitch expects a recovery in ASDA's profit margins with a funds from
operations (FFO) margin trending towards 3% and FCF margin to 1% by
2025 as one-off separation costs from Walmart subside and synergies
from the EG acquisition materialise.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer:
- ASDA's standalone revenue to remain broadly flat in 2023, as a
strong rebound in ex-petrol revenue (up 6%) is offset by a decline
in petrol revenue (with -15% decline in volume vs 2022). Revenue to
grow on average around 2% in 2024-2026 driven by slowing ex-petrol
lfl revenue growth and incrementally slowly declining fuel
volumes.
- Acquired EG Group UK standalone pro forma estimated revenue of
around GBP2.4 billion (2023) to remain broadly flat during
2024-2026. Fitch expects growth in grocery revenues due to store
conversions to "ASDA Express" format and in foodservice segments.
Fitch expects this to be largely offset by a reduction in petrol
retail prices towards ASDA prices and in oil price movements. The
EG Group UK segment has been consolidated into the ASDA perimeter
as of November 2023.
- Combined revenue to be flat in 2024 (vs pro forma 2023) and to
grow on average nearly 2% in 2025 to 2026.
- EBITDA margin to improve to 3.8% in 2023 and towards 5.0% by 2026
as ASDA increases its gross profit margin and delivers synergies.
- Annual working-capital (WC) inflow of about GBP80 million to
GBP100 million in 2023-2024 on the back of payable day improvements
and WC synergies brought by the Arthur and EG Group UK
acquisitions. WC movements to be marginally positive from 2025
onward.
- Average capex of about GBP560 million p.a. in 2024-2026, on the
back of notably larger operation, larger growth capex and capex to
drive synergies.
- Exceptional costs in total of GBP450 million across 2023 and 2024
to separate IT systems from ASDA's previous owner (Project
Future).
- Debt repayments of GBP200 million (Arthur bridge) in 2023
(repaid) and scheduled debt repayments under term loan A (GBP195
million, maturing in 2025); in addition Fitch has also assumed
additional voluntary prepayments of GBP250 million a year in 2024
and 2025.
- No dividends or major M&A activities over the next four years.
RECOVERY ANALYSIS
Fitch's Key Recovery Rating Assumptions:
Under its bespoke recovery analysis, higher recoveries would be
realised through reorganisation as a going-concern in bankruptcy
rather than liquidation. Fitch has assumed a 10% administrative
claim.
The going-concern EBITDA estimate of GBP825 million (previously
GBP850 million) reflects Fitch's view of a sustainable,
post-reorganisation EBITDA, upon which Fitch bases the enterprise
valuation (EV). The reduction in going concern EBITDA compared to
the May review is due to the change in perimeter from the EG
acquisition. The assumption also reflects corrective measures taken
in the reorganisation to offset the adverse conditions that trigger
its default, such as cost-cutting efforts or a material business
repositioning.
Fitch applies an EV multiple of 6.0x to the going-concern EBITDA to
calculate a post-reorganisation EV. This multiple is aligned with
Market Holdco 3 Ltd's (Morrisons).
ASDA's GBP667 million revolving credit facility (RCF) is assumed to
be fully drawn upon default. The RCF ranks pari-passu with the
company's GBP3,685 million equivalent (as of September 2023, pro
forma for repayment of Arthur-related debt) senior secured debt
issued by Bellis Acquisition Company plc in the debt waterfall. The
new GBP684 million private placement facility ranks pari passu with
ASDA's senior secured debt. However, Fitch has treated as super
senior the ground rent of GBP400 million, which is secured by
specific fixed assets and is not available to the company's
cash-flow backed lenders in debt recovery.
Its waterfall analysis generated a ranked recovery for the senior
secured notes and term loans, as well as the new private placement
facility, in the 'RR2' band, indicating a 'BB' instrument rating,
two notches higher than the IDR. The waterfall analysis output
percentage on current metrics and assumptions is 81% (previously
77%). The senior secured second lien debt (GBP500 million) is rated
in the 'RR6' band with an instrument rating of 'B-', two notches
below the IDR with a zero output percentage.
The difference in recovery percentage to the previous 77% (in May
2023) takes into account the smaller perimeter of the transaction,
repayment of the GBP200 million Arthur bridge facility, downsizing
of the private placement facility (to GBP684 million from GBP770
million) and reduced ground rents transaction (GBP400 million from
GBP500 million previously).
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Upgrade:
- Continued lfl sales growth along with improvement in gross
margin, successful integration of acquired businesses and delivery
of synergies, plus cost savings to offset operational cost
inflation, leading to growth in EBITDAR and FCF with cash applied
towards debt reduction resulting in:
- EBITDAR gross leverage below 5.0x on a sustained basis;
- EBITDAR fixed charge cover above 2.0x on a sustained basis.
Factors that Could, Individually or Collectively, Lead to
Downgrade:
- Lfl sale decline exceeding other big competitors', inability to
grow profits, failure to integrate and generate synergies from
acquired businesses, Project Future cost overruns leading to
low-to-neutral FCF, and reduced deleveraging capacity;
- Lack of debt prepayments;
- EBITDAR gross leverage remaining above 6.0x on a sustained
basis;
- EBITDAR fixed charge cover below 1.7x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Liquidity is adequate with GBP450 million cash
on the balance sheet pro forma for the transaction and GBP200
million bridge facility repayment as at September 2023. ASDA also
has access to an upsized, undrawn revolving credit facility (RCF)
of GBP667 million.
Post-3Q23, ASDA has repaid the GBP200 million bridge loan related
to the acquisition of Co-Op stores in 2023. Fitch assumes the
company will voluntarily prepay up to GBP500 million of debt during
2024 and 2025, in addition to scheduled repayments under term loan
A (GBP195 million due in 2025). Its rating case assumes completion
of ground rent transaction (GBP400 million) to refinance currently
drawn bridge loan (GBP290 million) and replenishing its cash
position.
Fitch projects ASDA's liquidity to remain adequate over the next
two to three years with mildly positive FCF generation, despite
hefty payments related to IT separation one-off costs (Project
Future). Fitch adjusts its readily available cash by GBP190 million
for working-capital purposes from 2023 to reflect the larger scale
of the group. Fitch expects available liquidity ranging between
GBP0.8-1 billion at FYE over the rating horizon.
ISSUER PROFILE
ASDA is the third-largest supermarket chain in the UK, with around
a 14% market share. Bellis Finco is the top entity of the
restricted group, while Bellis Acquisition Company Plc is an entity
one level below the restricted group that issues senior secured
debt.
ESG CONSIDERATIONS
ASDA has an ESG Relevance Score of '4' for group structure due to
the complexity of the group structure with a number of
related-party transactions. This has a negative impact on the
credit profile, and is relevant to the rating in conjunction with
other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Bellis Finco plc LT IDR B+ Affirmed B+
Senior Secured
2nd Lien LT B- Affirmed RR6 B-
Bellis Acquisition
Company Plc
senior secured LT BB New Rating RR2 BB(EXP)
senior secured LT BB Affirmed RR2 BB
BIRCH CHESHUNT: Enters Administration Due to Cash Constraints
-------------------------------------------------------------
Jungmin Seo at The Caterer reports that both Birch hotels have
fallen into administration, three years after the opening of the
first site.
The Birch Cheshunt hotel in Hertfordshire has closed with immediate
effect, while the Birch Selsdon in South Croydon is trading under
the control of administrators, The Caterer relates.
According to The Caterer, Moorfields Advisory Limited said it was
appointed as administrator to the Selsdon hotel on Nov. 17 after
the property ran into difficulty due to "cash constraints".
The 140-room Birch Cheshunt opened in 2020 and featured two
restaurants overseen by chef Robin Gill, as well as a farm, three
bars, 20 event spaces, a bakery, fitness studios and screening
rooms.
An announcement on the Birch Cheshunt website said administrators
at Teneo had closed the hotel, The Caterer notes.
"The Birch hotel group had a unique market proposition, which
fitted with today's health and wellbeing culture whilst still
boasting a Greater London location," The Caterer quotes Milan
Vuceljic, partner at Moorfields, as saying.
"We are currently continuing to trade the hotel whilst we explore
various options, which we believe provides a good opportunity for
potential purchasers."
LIQUID TELECOMMUNICATIONS: Fitch Cuts LT IDR to 'B', Outlook Neg.
-----------------------------------------------------------------
Fitch Ratings has downgraded Liquid Telecommunications Holdings
Limited's (Liquid Telecom) Long-Term Issuer Default Rating (IDR) to
'B' from 'B+'. The Outlook remains Negative.
The downgrade reflects high leverage, and weak Fitch-defined free
cash flow (FCF) and liquidity pressure due to currency
depreciation, eroding liquidity headroom. Fitch expects
Fitch-defined EBITDA net leverage to remain above its downgrade
threshold until financial year ending February 2026 (FY26), coupled
with weak FCF. Fitch therefore views Liquid Telecom's financial
profile and credit metrics as being more consistent with a 'B'
rating.
The Negative Outlook reflects its expectation of limited gross debt
reduction over the next three years without meaningful asset
disposals or shareholder support, raising refinancing risks.
Although the group has strategic options and time to improve its
financial profile, Fitch sees high execution risks under an
uncertain macroeconomic climate.
Liquid Telecom's rating remains supported by its cross-border fibre
network, with limited substitution threat from alternative network
operators, strong recurring revenues and favourable industry growth
dynamics offset by weak operating environments.
KEY RATING DRIVERS
High Leverage: Fitch estimates the group's Fitch-defined EBITDA net
leverage, on a deconsolidated basis (ie. excluding Zimbabwe) was
around 5.5x at FY23. Fitch expects this metric to decline to 4.8x
in FY24, supported by improved operating performance and USD30
million proceeds from the disposal of African Data Centres (ADC),
before remaining within the 'B' rating threshold of 4.5x until
FY26. The consolidated metric was 4.3x and forecast at 3.6x by
FY26. Fitch understands from management that an additional USD133
million of proceeds from the disposal of ADC is expected no later
than March 2031.
Zimbabwe Restrictions: Zimbabwe is a cash-generative and
self-funding segment but suffers from hyperinflation and sharp
currency depreciation limiting its ability to extract cash due to
currency controls. Fitch therefore focuses on credit metrics that
deconsolidate Zimbabwe, and only include its estimate of cash
repatriated to the group. Historically, the group has been able to
extract USD1 million-USD2 million per month although this has
recently increased to USD3 million-USD4 million with a total USD22
million extracted during 1 March to 31 October 2023.
However, Fitch believes that Zimbabwe's operating performance is of
limited additional value for the group's creditworthiness as long
as restrictions on cash repatriation remain and Zimbabwe remains
outside of the guarantor group.
Growing Refinancing Risks: The bulk of the group's debt comprises a
USD620 million bond due in September 2026 and a ZAR3.3 billion loan
(USD220 million) due in March 2026. Fitch expects the group to
refinance all debt given insufficient projected liquidity to repay
debt at maturity. Amid sustained difficult credit market
conditions, Fitch believes material deleveraging and improvements
in FCF and liquidity will be key to a successful debt refinancing.
Fitch forecasts deconsolidated Fitch-defined interest coverage at
around 3.0x, which is weak for the rating.
Equity Injection: Liquid Telecom is in advanced discussions to
introduce new equity into the restricted group by FY24, which in
addition to the ADC proceeds will ease short-term liquidity
pressures and demonstrates shareholder support. Fitch has factored
in USD19 million of injected equity, which may rise to USD56
million, reflecting an upside risk. Equity raised will be used
towards the repayment of the drawn portion of its revolving credit
facility (RCF) and reinvested in the business.
Execution Risks: In addition to equity support, Fitch believes
asset monetisation will be key to a successful refinancing. Liquid
Telecom owns valuable assets although valuation and timing of
possible divestments or monetisation remain uncertain, introducing
tangible execution risk.
Volatile FCF: After a challenging FY23, Liquid Telecom is
experiencing underlying annual revenue growth in South Africa and
the rest of Africa (RoA) (20.5% and 14.5%, respectively, at
end-1HFY24). However, FCF is heavily eroded by sustained
depreciation in local currencies, while high capex and some
operating costs are incurred in US dollars. At end-1H24, the
predominant local currency, the rand, had depreciated 13% yoy.
Fitch forecasts negative FCF on both a consolidated and
deconsolidated basis until FY25, before reduced discretionary capex
and better FX management may improve the visibility and trajectory
of FCF.
Limitations to FX Mitigation: In addition to its rand-denominated
loan, 50% of network revenues from RoA and long-distance and voice
revenues are in US dollar, including some highly dollarised regions
such as the Democratic Republic of Congo (DRC). Additionally, the
C2 segment is pegged to the US dollar on a monthly basis. However,
Fitch estimates around 70% of revenue and EBITDA is currently
generated in local currency, constraining hedging benefits.
Diversified, Operating Environment Risks: Liquid Telecoms derives
most of its revenues in jurisdictions with a weak operating
environment. Benefits from diversification and an integrated
regional network are offset by regulatory, political macroeconomic
risks. Fitch believes future growth will come from economically
weaker countries such as DRC, Kenya (B/Negative) and Zambia (RD).
Its rating thresholds for Liquid Telecom are therefore tighter than
for peers operating in developed markets. The main region, South
Africa, has a Country Ceiling of 'BB' and Fitch applies this to
Liquid Telecom as EBITDA generated from South Africa is sufficient
to cover foreign-currency debt service based on its estimates.
Strong Infrastructure Footprint: Liquid Telecom has a solid
proprietary fibre infrastructure footprint spanning sub-Saharan
Africa. It is a key contributor in cross-border inter-operator
telecommunications connectivity. Fitch sees strong growth
opportunities for telecommunications and data services in Africa.
The group's reported own and leased network spans 107,000km across
20 countries generating recurring revenues of around 90% and
monthly churn less than 1%.
Opportunities in Digital Solutions: Fitch expects network revenue
growth to be supported by investments in and growing demand for
managed services such as cloud and cybersecurity (through the C2
segment) with increasing demand for high-quality enterprise
solutions. Fitch believes the ability to sell value-added services
can support revenue diversification and generate customer loyalty
by offering a full suite of services. Its Cloudmania franchise
enables access into regions where the group has limited or no
infrastructure footprint.
DERIVATION SUMMARY
Liquid Telecom benefits from long-term customer relationships,
strong network coverage, manageable competitive threats and
favourable industry trends. Growth opportunities are greater in
Africa than in most developed markets, but Liquid Telecom operates
in countries in which the economic and regulatory environments can
be unstable. Its FX mismatch between cash flow and debt could lead
to higher volatility in credit metrics. Its exposure to emerging
markets and higher transfer and convertibility risks are key
differentiating factors from sector peers, affecting its leverage
and liquidity.
Liquid Telecom's business profile has some similarities with that
of telecoms network companies that primarily specialise in the
provision of telecoms infrastructure and
cross-border/large-distance connectivity for other operators and
large enterprises, such as Zayo Group, LLC.
Fitch also benchmarks Liquid Telecom's ratings against other
African telecoms infrastructure providers and integrated
operators.
Local peers include integrated operators such as the regional
operations of Airtel Africa plc and Vodacom Group Limited,
subsidiaries of multinational telecoms operators, Bharti Airtel
Limited (BBB-/Stable) and Vodafone Group plc (BBB/Positive), and
South African telecoms group MTN Group Limited. All three benefit
from extensive scale and service line and geographical
diversification but also have greater exposure to direct consumer
services. Although peers across enterprise services, they also
comprise some of the largest customers for Liquid Telecom's
backbone network and international voice services.
Another peer, Axian Telecom (B+/Stable), has tighter leverage
thresholds, reflecting the combination of its presence in weaker
operating environments, exposure to material FX risks and a greater
focus on direct consumer services. Broader peers such as Helios
Towers Plc (B+/Stable) and IHS Holding Limited (B+/Stable) benefit
from higher debt capacity due to lower business risk given the
infrastructure nature of their business and weaker competition.
KEY ASSUMPTIONS
All assumptions are based on consolidated numbers including
Zimbabwe unless specified otherwise.
- Revenue growth in FY24 of around 6.2% on a consolidated and 5.6%
on a deconsolidated basis (excluding Zimbabwe). This is followed by
mid-to-low single-digit growth in FY25-FY27, driven by growth in
network, cloud and cyber security services but constrained by
declining revenues in the voice segment and currency depreciation
- Fitch models a 11.5% depreciation of the US dollar/rand exchange
rate in FY24, 8% in FY25 and 5% to FY27
- Fitch-defined EBITDA margin of around 27% on a consolidated basis
and 29%, excluding Zimbabwe, in FY24. This to remain around 27% and
29%, respectively, for FY25-FY27
- Cash extracted from Zimbabwe of USD35 million in FY24-FY27 and
included in deconsolidated credit metrics
- Working-capital outflow averaging 3% of revenue per year in
FY24-FY27
- Capex of around USD90 million in FY24 and reducing to USD70
million by FY27
- No material common dividends over FY24-FY27
- ADC divestment proceeds of USD30 million to be received in FY24
and USD3 million in FY25
- Equity injection from shareholders into the restricted group of
USD19 million in FY24
RECOVERY ANALYSIS
The recovery analysis assumes that Liquid Telecom would be
considered a going concern (GC) in bankruptcy and that it would be
reorganised rather than liquidated given its extensive pan-African
fibre network providing critical infrastructure and stable
long-term contracts with major public and private sector
customers.
Fitch would expect a default to come from factors such as higher
competitive intensity, increased technological risk, loss of key
contracts, adverse regulatory or political actions or considerable
currency depreciation in key geographies. Fitch believes this would
result in financial loss, reputational damage or prohibitive
regulatory fines or conditions. Post-restructuring, Liquid Telecom
may be acquired by a larger company that will absorb its fibre
network, exit certain business lines or cut back its presence in
certain less favorable geographies, in turn reducing scale.
Fitch estimates that post-restructuring EBITDA, excluding Zimbabwe,
would be around USD125 million. An enterprise value (EV) multiple
of 5.0x is applied to the GC EBITDA to calculate a
post-reorganisation EV. The multiple is broadly in line with other
emerging market telecom operators'.
The recovery analysis includes a USD620 million senior secured
bond, around USD155 million equivalent of outstanding
rand-denominated debt, USD4.9 million of local bank facilities and
a fully drawn USD60 million RCF - all assumed to be
equally-ranking.
Its waterfall analysis generated a ranked recovery in the 'RR3'
band after deducting 10% for administrative claims to account for
bankruptcy and associated costs, indicating expected recoveries of
67% based on current metrics and assumptions. However, according to
its "Country-Specific Treatment of Recovery Ratings Rating
Criteria", the instrument rating is capped at 'RR4' with 50%
expected recoveries due to jurisdictional factors given the African
exposure.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to an
Upgrade
- An improved competitive environment, supporting EBITDA net
leverage consistently below 4.5x on a deconsolidated basis, and
below 3.7x on a consolidated basis
- Pre-dividend FCF margin consistently in low-single digits on a
deconsolidated and consolidated basis and consolidated cash flow
from operations (CFO) less capex/gross debt consistently above
3.5%
- Improved access to funding sources mitigating limited access to
cash in regions with strict currency regulations
Factors That Could, Individually or Collectively, Lead to a
Revision of Outlook to Stable
- Positive pre-dividend FCF (after FX impact) on a deconsolidated
basis by FY25
- Reduction in leverage combined with improved liquidity generated
organically or through asset monetisations or additional
shareholder support
Factors That Could, Individually or Collectively, Lead to a
Downgrade
- Weak operating performance driving EBITDA net leverage above 5.5x
on a deconsolidated basis, and above 4.7x on a consolidated basis
for a sustained period and indicating higher refinancing risk
- Continued negative FCF margins combined with hindrances to cash
flow circulation across key subsidiaries leading to liquidity
pressures
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Liquid Telecom had USD60 million of
unrestricted cash (Fitch treats USD8 million of cash in Zimbabwe as
restricted) supported by a USD60 million RCF (USD30 million
undrawn) as of 1HFY24. In its view, the equity injection and ADC
divestment proceeds help maintain a sufficient cash buffer in the
near-term.
ISSUER PROFILE
Liquid Telecom is a sub-Saharan African telecoms operator with a
fibre network of over 100,000 km generating the bulk of its
revenues from services to other operators and large enterprises.
SUMMARY OF FINANCIAL ADJUSTMENTS
Cash held in Zimbabwe is treated as restricted.
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
----------- ------ -------- -----
Liquid
Telecommunications
Holdings Limited LT IDR B Downgrade B+
Liquid
Telecommunications
Financing plc
senior secured LT B Downgrade RR4 B+
Liquid
Telecommunications
South Africa
Proprietary Limited
senior secured LT B Downgrade RR4 B+
LOMOND HILLS: Glenshire Group Buys Hotel Following Liquidation
--------------------------------------------------------------
Fiona Dobie at Fife Today reports that the former Lomond Hills
Hotel in Freuchie has now been sold on behalf of liquidators to a
regional developer.
The 19th century converted coaching inn had welcomed guests for
almost 300 years, but earlier this year it was placed into
liquidation, Fife Today relates.
Now the business has been sold by property specialists Christie &
Co to regional developer Glenshire Group who are looking to make
the hotel an important village hub yet again, Fife Today
discloses.
When the hotel ceased trading in March, all 17 staff members were
made redundant, Fife Today recounts. Challenges faced by the
business as a result of the Covid-19 pandemic and the cost of
living crisis were among the reasons cited for it being placed into
liquidation, Fife Today states.
The property, which features 24 bedrooms, a restaurant and public
bar, two function suites and a leisure centre with a pool, gym,
sauna and spa, had gone on the market in April, Fife Today
recounts.
STUBBS CONSTRUCTION: Creditors Set to Vote on CVA Terms on Dec. 4
-----------------------------------------------------------------
Aaron Morby at Construction Enquirer reports that Hull-based
builder Stubbs Construction is seeking to enter a Company Voluntary
Arrangement with its creditors.
According to Construction Enquirer, the firm has been struggling to
pay suppliers for several weeks and is understood to be planning to
meet creditors on the Dec. 4 to vote on terms being offered and
decide the fate of the business.
Stubbs is presently involved in two legal actions with two
subcontractors -- Manor Interior Solutions and Reliant Ceilings &
Partitions regarding enforcement of adjudications, Construction
Enquirer discloses.
Established in 1978, the family-run business has developed steadily
over the last 40 years and employs around 40 staff delivering
projects worth around GBP5 million-GBP6 million.
VEHICLE CONVERSION: Goes Into Administration
--------------------------------------------
Michael Broomhead at Bradford Telegraph and Argus reports that
workers face an uncertain future after the companies they work for
went into administration.
According to Bradford Telegraph and Argus, administrators have been
appointed at Vehicle Conversion Specialists Limited, which has a
factory on Staithgate Lane, Bradford, where it makes ambulances and
police vehicles.
Minibus manufacturer Treka Bus Limited, based on Armytage Road
Industrial Estate in Brighouse, is also in administration, Bradford
Telegraph and Argus notes.
Their parent company, Bolton-based WN Vtech Holdings, has also
called in administrators, Bradford Telegraph and Argus relates.
It is understood the businesses will continue to trade while
administrators from insolvency firm Teneo seek to find a solution,
Bradford Telegraph and Argus discloses.
According to Bradford Telegraph and Argus, a statement on the
companies' websites states: "Daniel James Mark Smith and Julian
Heathcote were appointed joint administrators over Treka Bus
Limited, Promech Technologies Limited, Vehicle Conversion
Specialists Limited, WN Vtech Holdings Limited, JM Engineering
(Scarborough) Limited and WN Vtech Limited (together 'the
companies') on November 20, 2023.
"The affairs, business and property of the companies are managed by
the joint administrators. The joint administrators act as agents of
the companies and contract without personal liability.
"For any queries please contact either
WNVTechgroupcreditors@teneo.com or your usual contact at the
companies."
Vehicle Conversion Specialists Limited hit the headlines in 2020
when it produced the UK's first zero emissions electric ambulance,
It is understood WN Vtech employs 600 people and manufactures
vehicles at nine production sites across the country.
YORK COCOA: Set to Go Into Administration Following CVA
-------------------------------------------------------
Miran Rahman at TheBusinessDesk.com reports that a York-based
chocolate maker which was hard hit by the pandemic has filed a
notice to appoint an administrator.
York Cocoa House, set up by founder and managing director Sophie
Jewett, has been trading since 2011 and opened its own production
facility, York Cocoa Works, at a former Job Centre premises in
Castlegate in 2018.
According to Companies House, the business' next accounts made up
to December 29, 2020, are overdue, TheBusinessDesk.com notes. The
firm's unaudited financial statements for the year ended December
31, 2019 reported that it employed an average of 27 staff during
2019, TheBusinessDesk.com discloses.
A compulsory strike off action against the business was
discontinued in 2019 and it entered into a Company Voluntary
Arrangement (CVA) in 2020 to schedule payments to its creditors,
TheBusinessDesk.com relates.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2023. All rights reserved. ISSN 1529-2754.
This material is copyrighted and any commercial use, resale or
publication in any form (including e-mail forwarding, electronic
re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
be reliable, but is not guaranteed.
The TCR Europe subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for
members of the same firm for the term of the initial subscription
or balance thereof are US$25 each. For subscription information,
contact Peter Chapman at 215-945-7000.
* * * End of Transmission * * *