/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/240412.mbx T R O U B L E D C O M P A N Y R E P O R T E R E U R O P E Friday, April 12, 2024, Vol. 25, No. 75 Headlines G E R M A N Y ESPRIT: In Talks with Potential Investor After EU Unit Insolvency GALERIA KARSTADT: Takeover Looms, Creditors to Meet on May 28 TECHEM VERWALTUNGSGESELLSCHAFT: Fitch Rates Sr. Sec. Notes B+(EXP) TECHEM VERWALTUNGSGESELLSCHAFT: Moody's Rates New EUR500MM Notes B1 TUI CRUISES: Fitch Hikes LongTerm IDR to 'B+', Outlook Positive ZAIKIO: Goes Into Liquidation I R E L A N D NEUBERGER BERMAN 6: S&P Assigns Prelim B- (sf) Rating to F Notes PROVIDUS CLO X: Fitch Assigns 'B-(EXP)sf' Rating to Class F Notes I T A L Y NEOPHARMED GENTILI: Fitch Affirms 'B' LongTerm IDR, Outlook Stable S W I T Z E R L A N D CERDIA INT'L: S&P Ups Parent's Long-Term ICR to 'B', Outlook Stable T U R K E Y DENIZBANK AS: Fitch Affirms 'B' LongTerm IDR, Outlook Positive ING BANK: Fitch Affirms 'B' LongTerm FC IDR, Outlook Positive QNB FINANSBANK: Fitch Affirms 'B' LongTerm IDR, Outlook Positive TURK EKONOMI: Fitch Affirms 'B' LongTerm FC IDR, Outlook Positive [*] Fitch Affirms 'B' LT IDRs of 7 Turkish NBFIs, Outlooks Pos. U N I T E D K I N G D O M BEATTIE PASSIVE: Enters Administration Following Cash Flow Gap CC & RJ: Enters Administration, Liabilities Totaled GBP355,776 ENTAIN PLC: S&P Cuts Sr. Sec. Debt to 'BB-', Outlook Stable EUROMASTR 2007-1V: Fitch Affirms 'BB+sf' Rating on Class E Notes HALSALL CONSTRUCTION: Set to Go Into Administration After Losses SELINA HOSPITALITY: Releases New Investor Presentation SELINA HOSPITALITY: Reports Updates to Executive Leadership Team SYNTHOMER PLC: Moody's Rates New Senior Unsecured Notes 'B1' SYNTHOMER PLC: S&P Rates New EUR350MM Senior Unsecured Notes 'BB-' X X X X X X X X [*] BOOK REVIEW: The Turnaround Manager's Handbook - - - - - ============= G E R M A N Y ============= ESPRIT: In Talks with Potential Investor After EU Unit Insolvency ----------------------------------------------------------------- P.R. Venkat and Sherry Qin at The Wall Street Journal report that Esprit is in talks with an international private-equity firm regarding prospective investments as the fashion retailer struggles with its European business, after some of its units filed for insolvency. According to the Journal, the potential investor has expressed interest in submitting a non-legally binding framework memorandum of understanding for a possible partnership, Esprit said on April 10. It intends to assist the company in the restructuring and turnaround of its European business, the Journal states. The retailer's European business has been stressed due to high energy and logistics costs and weak consumer sentiment, the Journal notes. As reported by the Troubled Company Reporter-Europe on April 11, Jiahui Huang at The Wall Street Journal disclose that fashion retailer Esprit's Belgium subsidiary filed for insolvency due to rising costs and cash flow difficulties. Esprit Belgie Retail filed for the commencement of insolvency proceedings over its assets at the insolvency court of Belgium on April 8, Esprit said in a filing to the Hong Kong stock exchange, according to the Journal. Esprit Holdings Limited is a global publicly traded retail company incorporated in Bermuda, with headquarters in North Point, Hong Kong, and further major locations in Ratingen, Germany; Amsterdam, Netherlands; and New York City. GALERIA KARSTADT: Takeover Looms, Creditors to Meet on May 28 ------------------------------------------------------------- The Associated Press reports that Germany's only remaining major department store chain is set to get new owners after its third spell in bankruptcy protection in four years, and the company aims to keep most of its stores open, its insolvency administrator said on April 10. According to the AP, Galeria Karstadt Kaufhof is to be taken over by a consortium of U.S. private equity firm NRDC Equity Partners, which currently has investments in Hudson's Bay of Canada and Saks Fifth Avenue among others, and German businessman Bernd Beetz's BB Kapital SA. The deal is still contingent on a court in Essen and Galeria's creditors, who are due to meet May 28, approving the plan, the AP notes. Insolvency administrator Stefan Denkhaus said the intention is to hold on to more than 70 of the chain's current 92 branches, the AP relays, citing German news agency dpa. He said that would make it possible to preserve most of the company's 12,800 jobs, the AP notes. Galeria Karstadt Kaufhof made its most recent insolvency filing in January following similar filings by several companies in the trading and real estate group of Austrian businessman Rene Benko -- including Signal Retail Selection, Galeria's owner, the AP relays. It has already been through two rounds of store closures, the last of which was completed in January, since seeking protection during the first lockdown of the coronavirus pandemic in April 2020, the AP recounts. In October 2022, it again sought protection from creditors, citing a steep rise in energy prices, high inflation and weak consumer spending, the AP relates. According to the AP, Beetz said at a news conference in Essen that the prospective new owners "want to invest, develop and grow in the long term." TECHEM VERWALTUNGSGESELLSCHAFT: Fitch Rates Sr. Sec. Notes B+(EXP) ------------------------------------------------------------------ Fitch Ratings has assigned Techem Verwaltungsgesellschaft 675 mbH's proposed EUR500 million senior secured notes (SSN) a 'B+(EXP)' expected rating with a Recovery Rating of 'RR3'. Fitch has also affirmed Techem Verwaltungsgesellschaft 674's (Techem) Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. Transaction proceeds will be used to refinance part of the company's existing SSN due 2025. The residual notes will be refinanced with the proceeds of an upsized term loan B (TLB) of EUR1.8 billion due 2029. The upsized TLB is being finalised and is also rated 'B+(EXP)'. The affirmation of the IDR reflects Techem's improved operating performance. Fitch expects this trend to continue through September 2026, which would result in EBITDA leverage decreasing to below its sensitivities for a 'B' rating in Techem's sector. Fitch expects Techem's free cash flow (FCF) to be slightly negative due to high capex and increasing interest expenses and working capital outflows. Assignment of a final rating to the debt issuance is contingent on completion of the transactions and the receipt of final documents conforming to information already received. KEY RATING DRIVERS Second Step of Refinancing: The proceeds from the proposed SSN issuance will be used to refinance part of the outstanding EUR1.145 billion SSN due 2025. The remainder will be addressed with the proceeds of a EUR1.8 billion allocated in March 2024 and due in 2029. This loan is the result of the company upsizing and extending the maturity of the existing EUR1.145 billion TLB initially due in 2025. The transaction is leverage-neutral. Techem has not refinanced its EUR364 million senior unsecured notes due in 2026, which upon the closure of the transaction will have a maturity before the secured debt. Adequate Coverage Ratios: Despite a step-up in margins as a result of the executed amend and extend of the TLB and the proposed new SSN, EBITDA interest coverage metrics will remain within Techem's sensitivities for a 'B' rating. The increased interest expenses, due to both higher margins and base rates, will burden FCF generation in the financial year ending September 2024 (FY24) and FY25 in particular. Fitch expects this pressure to ease from FY26, driven by increased EBITDA generation and lower base rates. Margin Expansion Leads Deleveraging: Techem's Fitch EBITDA leverage improved over the last two years to 6.4x in FY23 (adjusted for one-off severance costs) from 7.4x in FY21. This was mainly driven by an improvement in EBITDA, reflecting price increases, new product launches and cost-saving measures. EBITDA growth will allow the company to further deleverage inside its rating sensitivities. Techem's leverage may come under pressure again due to higher drawdowns under the revolving credit facility (RCF), including to finance capex, and shocks to operating margins. Capex Weighs on FCF: Techem plans to increase capex to finance its energy sub-metering and energy contracting businesses. Sub-metering requires a device replacement cycle to start by 2024, while energy contracting is asset-heavy. Fitch expects capex of around EUR200 million per year for FY24-FY26, which coupled with the expected interest cost increases, will drive FCF generation mildly negative. However, Fitch assumes capex to be partially discretionary, leaving the company room to scale back or postpone part of the expenses. Upside to its FCF expectations could be driven by capex savings and better than expected refinancing terms that were already executed for the extended TLB. This may include a refinancing of the outstanding senior unsecured notes with senior secured debt. Continued Strong Operating Performance: In FY23, Techem's revenue increased by 12.5%, driven by higher billing and rental revenue in Germany and abroad, introduction of new products, as well as pass-through of higher energy prices in energy contracting. Fitch-defined EBITDA increased by 6.6% year-on-year, which Fitch adjusted for unusually high severance costs in FY23. In 1Q24, Techem's reported EBITDA increased by 11% on almost flat revenue growth quarter-on-quarter, mainly driven by higher billing and rental revenues in energy services and higher margins in energy efficiency solutions. High Non-Recurring Costs to Reduce: Fitch has adjusted Techem's FY23 and FY22 EBITDA for around EUR17 million of one-off costs. The recognised costs are non-recurring and relate to the Energize-T and operational excellence cost-saving programmes. Fitch expects this amount to be around EUR17 million per year over FY24-FY25, gradually declining year-on-year. For FY23 Fitch also adjusted for an extra EUR20 million of one-off severance costs. Infrastructure-Driven Value Proposition: Fitch expects Techem's medium-term strategy to target wider coverage of dwellings in Germany and abroad and to focus on higher-value cash-generative segments of business in an adverse interest rate environment. Together with technological upgrades to smart readers and product expansions, this may lead to higher cost efficiencies, potentially covering the full energy value chain for homes. Fitch believes that Techem shareholders see more value enhancement in infrastructure development, over maximising cash flow generation in the short term. Favourable Operating Environment: The adoption of sub-metering is supported by the EU Energy Efficiency Directive. However, adoption by member states within the EU is slow and affects the timing of revenue expansion for operators like Techem. Stricter market regulations may require additional investments, including potential technical enhancements to allow inter-operability. Despite the risk of stricter regulation, Fitch views Techem's operating environment as stable and supportive in the medium term. DERIVATION SUMMARY Techem's business profile is similar to infrastructural and utility-like peers and stands in the 'BBB' category. It proved resilient through the pandemic and has shown stability in performance through the cycle. It is constrained by high gross leverage and pressured FCF generation. Compared with smaller sub-metering peers within its private rating coverage, Techem has a stronger business profile but also higher gross indebtedness. Its focus on the expansion of its smart reader network lends itself to comparison with pure telecommunication networks, such as Cellnex Telecom S.A. and Infrastrutture Wireless Italiane S.p.A. (both BBB-/Stable) and TDC NET A/S (BB/Stable). These entities have comparable leverage, and their high capex is demand-driven and led by infrastructural expansion, as is most of Techem's. However, their sector, scale and tenant stability provide for higher debt capacity. Techem is also comparable with highly-leveraged business services operators, such as Nexi S.p.A. (BB+/Stable), which has a similar billing model on a wide portfolio of customers in a favourable competitive environment. Fitch believes Nexi's secular growth prospects are stronger than Techem's. Nexi also has lower leverage and higher FCF conversion. KEY ASSUMPTIONS - Revenue CAGR of 4% for FY23-FY26 - EBITDA margins, adjusted for non-recurring expenses, improving over 44% by FY26, driven by growth in digital services, price revisions and cost-efficiency programmes - Capex on average at about 18% of revenue a year until FY26 - M&A averaging around EUR47 million a year up to FY26 - No dividend paid, in line with stated financial policy - Refinancing of all debt in 2024, with the effective interest rate increasing above 7.0% post-refinancing RECOVERY ANALYSIS Key Recovery Assumptions The recovery analysis assumes that Techem would be reorganised as a going concern in bankruptcy rather than liquidated, based on its strong cash flow generation through the cycle and asset-light operations. Its installed base and contractual portfolio are key intangible assets of the business, which are likely to be operated post-bankruptcy by competitors with higher cost efficiency. Fitch has assumed a 10% administrative claim. Fitch estimates a going-concern EBITDA of about EUR275 million, unchanged from the last review. At this level of EBITDA, Fitch expects Techem to generate mildly positive FCF after actions are taken, in particular on central costs and capex. Fitch assumes a distressed multiple of 7x, considering Techem's stable business profile and comparing it with similarly cash-generative peers with infrastructure and utility-like business models. Its debt waterfall includes a fully drawn upsized RCF of EUR398 million. This results in ranked recoveries of 64% in the 'RR3' band for the senior secured debt, both existing and prospect, with the senior unsecured notes ranking 'RR6' with 0% recovery. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: - EBITDA leverage below 6.0x on a sustained basis - EBITDA interest coverage trending to or above 3.0x - Ongoing commitment to current financial policy of zero dividends or debt-funded M&A - FCF trending towards neutral to positive territory Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - EBITDA leverage above 7.0x with no sign of deleveraging - EBITDA interest coverage trending to or below 2.0x on a sustained basis - Departure from financial policy of debt reduction and zero dividends or debt-funded M&A activity - Reduced EBITDA leading to an inability to return to positive FCF on a sustained basis - Evidence of deterioration in refinancing conditions or opportunities LIQUIDITY AND DEBT STRUCTURE Satisfactory Liquidity: Fitch assesses Techem's liquidity position as satisfactory. It had a cash balance of about EUR105 million at end-1Q24 and around EUR140 million available under the RCF before it was upsized to EUR398 million in March 2024, under the amend-and-extend transaction. Techem uses the RCF during the year to finance intra-year working capital swings. As of the beginning of April, Fitch estimates that the amount drawn under the RCF was less than EUR50 million. Fitch restricts Techem's cash by EUR20 million, the estimated minimum operating cash. ISSUER PROFILE Techem is a Germany-based heat and water sub-metering services operator active in submetering installation and services in Europe. The company also has a presence in energy contracting. ESG CONSIDERATIONS Techem has an ESG Relevance Score of '4[+]' for Energy Management due to the company's role in energy efficiency initiative as a metering service provider, which is one of the drivers of demand for its service in its key markets of operations. Techem has an ESG Relevance Score of '4[+]' for GHG Emissions & Air Quality as the company provides solutions to optimise energy costs, increase energy efficiency and minimise CO2 emissions. This has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Techem Verwaltungsgesellschaft 674 mbH LT IDR B Affirmed B senior unsecured LT CCC+ Affirmed RR6 CCC+ Techem Verwaltungsgesellschaft 675 mbH senior secured LT B+(EXP)Expected Rating RR3 senior secured LT B+(EXP)Affirmed RR3 B+(EXP) senior secured LT B+ Affirmed RR3 B+ TECHEM VERWALTUNGSGESELLSCHAFT: Moody's Rates New EUR500MM Notes B1 ------------------------------------------------------------------- Moody's Ratings has assigned a B1 instrument rating to Techem Verwaltungsgesellschaft 675 mbH's proposed EUR500 million fixed rate senior secured notes. The new bond will refinance the remaining outstanding amount of Techem Verwaltungsgesellschaft 675 mbH's EUR1.1 billion senior secured bond due 2025. All other ratings and the stable outlooks on Techem Verwaltungsgesellschaft 674 mbH (Techem) and Techem Verwaltungsgesellschaft 675 mbH remain unaffected. RATINGS RATIONALE The assignment of the B1 senior secured bond rating reflects Techem's early refinancing of its 2025 maturities. Techem's senior secured term loan B5 (TLB) and new senior secured notes both mature in July 2029, 6 months after the maturity date of its revolving credit facility (RCF). The RCF extension to 2029 can be pulled forward to 2026 if the respective second lien notes are not repaid a month ahead of maturity. The structurally subordinated EUR363.9 million backed senior secured notes that remain outstanding mature in July 2026. The B2 long term corporate family rating (CFR) of Techem reflects the strong profitability of the group, driven by its leading position in the German sub-metering market and growing supplementary services business; good revenue visibility and stability because of the non-discretionary nature of demand for energy services, long-term contracts with customers and a supportive regulatory environment; solid market position, with strong customer loyalty and high barriers to entry because of the significant investment requirements to replicate Techem's business model; and positive free cash flow (FCF) generation, which could be used for debt repayments. Techem's rating is constrained by the group's high Moody's-adjusted leverage ratio of 7.5x debt/EBITDA for the last 12 months (LTM) that ended December 2023, which Moody's expects to reduce to more appropriate levels for the assigned rating on projected performance and EBITDA improvements in FY 2024; modest geographical diversification, with just around 24% of revenue generated outside Germany; the lower profitability of Techem's energy efficiency solutions business and the expected impact of higher interest expense on free cash flow and interest cover. RATING OUTLOOK The stable outlook incorporates the expectation that Techem's leverage will decline well below 7x in the next 12 month in line with Moody's guidance for the ratings. Techem's Moody's-adjusted debt/EBTIDA was elevated at 7.5x as of LTM December 2023, driven mainly by a EUR130 million drawdown of the company's RCF that was substantially repaid post reporting date. LIQUIDITY ANALYSIS Techem's liquidity is adequate. The group's internal cash sources comprised EUR105 million of cash and cash equivalents as of Q1 2024 (ended December 2023), as well as reported cash flow from operations of around EUR363 million for FY 2023 (ended September 30, 2023). The company has access to a EUR375 million senior secured RCF that was drawn by EUR130 million as of Q1 2024. The recent refinancings removed the refinancing risk and part of the interest rate risk for Techem for the next 2 years. Moody's understands that Techem has not entered into hedging for the TLB. After the transaction internal cash sources and the RCF will cover all expected cash needs in the next 12-18 months. Cash uses outside of refinancing needs mainly include capital spending (around EUR162m in FY 2023) and some moderate M&A spending. The liquidity assessment also takes into account that there is one springing covenant (a senior secured net leverage ratio) attached to the RCF, which will be tested if the RCF is drawn by more than 40% and currently has ample capacity. STRUCTURAL CONSIDERATIONS Techem Verwaltungsgesellschaft 675 mbH's amended and extended senior secured EUR1,800 million term loan B5 and its extended EUR375 million new senior secured RCF rank pari passu with the new EUR500 million issue of senior secured notes. The senior secured debt will mature after Techem's backed senior secured second-lien notes due 2026, which creates a time-subordination but does not affect their ranking. The TLB, the senior secured notes and the RCF share the same security and are guaranteed by certain subsidiaries of the group that account for at least 80% of consolidated EBITDA. The calculations exclude EBITDA generated by certain non-German operations, which results in a group-wide guarantor coverage of 74.4% as of December 2023. The B1 rating of the senior secured notes and senior secured bank credit facility instruments reflects their priority position in the group's capital structure and the benefit of loss absorption provided by the junior-ranking debt. The B1 instrument ratings could be strained by further substantial repayments of junior-ranking debt, which provides a buffer to the senior secured debt and thus leads to the uplift of the instrument rating versus the CFR. Techem's EUR364 million outstanding backed senior secured second-lien notes due 2026 are secured by a certain holding company collateral on a first-ranking basis, and share the same guarantors and part of the same collateral as the senior secured bank credit facilities on a subordinated basis. This is reflected in the Caa1 rating. Moody's has considered trade payables to rank at the level of the senior secured obligations and pension obligations, and minimum lease rejection claims at operating subsidiaries at the level of the senior secured second-lien notes. The group's capital structure further includes shareholder loans, which qualify for 100% equity treatment by us and are, therefore, not included in the Loss Given Default assessment and debt calculations for the group. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING Factors that could lead to an upgrade of the ratings -- Leverage (Moody's-adjusted gross debt/EBITDA) below 6x on a sustained basis -- Sustainable solid positive Moody's-adjusted free cash flow -- EBITA/Interest sustainably maintained well above 2x post refinancing -- Track record of a prudent financial policy, illustrated by its available cash flow being applied to debt reduction Factors that could lead to a downgrade of the ratings -- Inability to reduce leverage materially below 7x debt/EBITDA beyond 2024 -- EBITA/Interest sustainably falling below 1.5x -- Negative Moody's-adjusted FCF on a sustained basis -- The B1 instrument ratings could be strained in case of any further repayments of junior-ranking debt, which provides a buffer to the senior secured debt and thus leads to the uplift of the instrument rating versus the CFR PRINCIPAL METHODOLOGY The principal methodology used in this rating was Business and Consumer Services published in November 2021. COMPANY PROFILE Headquartered in Eschborn, Germany, Techem is a leading provider of energy services. Techem operates through two divisions — energy services (accounting for 84 % of group sales in FY 2023) and energy efficiency solutions (16%). Energy services provides the sub-metering of heat and water consumption for multidwelling housing units, energy cost allocation, and billing services, and supplementary services. Energy efficiency solutions offers a holistic management of clients' energy consumption through the planning, financing, construction and operation of heat stations, boilers, cooling equipment and combined heating and power units. In FY 2023, Techem generated total revenue of EUR1,012 million, of which 76% was generated in Germany. Since 2018, Techem is owned by a consortium led by Partners Group, a private investment manager. TUI CRUISES: Fitch Hikes LongTerm IDR to 'B+', Outlook Positive --------------------------------------------------------------- Fitch Ratings has upgraded TUI Cruises GmbH's (TUI) Long-Term Issuer Default Rating (IDR) to 'B+' from 'B'. The Outlook is Positive. It has also assigned its proposed five-year senior unsecured notes an expected rating of 'B-(EXP)'. Fitch has also upgraded TUI's outstanding senior unsecured notes to 'B-' from 'CCC+'. The Recovery Ratings on both notes are 'RR6'. The IDR upgrade to 'B+' reflects Fitch's expectations of continued EBITDA growth, driven by a recovery in occupancy to pre-pandemic levels and the ramp-up of new vessels, as well as price increases offsetting cost inflation. The rating also incorporates the company's solid business fundamentals, with a strong market position as the second-largest cruise line in Europe, a diversified offering, one of the industry's youngest and most efficient fleets, and a significant share of advance bookings supporting high operating margins. The Positive Outlook reflects its expectation that EBITDA leverage will return to below 5x in 2025, after temporarily increasing in 2024 to 6x due to debt raised to finance two new vessel deliveries. Fitch also forecasts TUI's pre-dividend free cash flow (FCF) generation to improve once capex normalises. The 'B-(EXP) senior unsecured rating is two notches below the IDR, reflecting material prior-ranking debt, which is mostly related to secured financing of vessels. The assignment of final rating is contingent on the receipt of final documentation conforming to information already reviewed. KEY RATING DRIVERS Refinancing to Extend Maturities: Proceeds from the proposed notes will be used to partially repay TUI's KfW loan, ECA vessel financing deferrals and a secured term loan, extending TUI's debt maturity profile. The next large maturity is in May 2026, when EUR523.5 million notes are due. Fitch assumes refinancing will be supported by expected deleveraging and business growth. Solid Revenue Recovery: In 2023, TUI demonstrated a strong recovery post-pandemic, with a ramp-up of occupancies, translating into revenue of EUR1.9 billion and Fitch-adjusted EBITDA of EUR599 million, ahead of Fitch's forecast. Fitch expects TUI to maintain this performance, as advance bookings already provide a good level of visibility for revenue in 2024. Improved Deleveraging Prospects: TUI has made significant progress on deleveraging as its EBITDA leverage declined to 4.9x in 2023 (2022: 10.1x), below its positive rating sensitivity of 5x. Fitch expects the spike in TUI's EBITDA leverage to around 6x in 2024 to be temporary as it will be driven by new debt to finance its two vessel deliveries. As new vessels start contributing to EBITDA, Fitch expects EBITDA leverage to fall back to below 5.0x in 2025, which, in combination with TUI's steady operating profile, supports the Positive Outlook. Conversely, a delayed ramp-up of added capacity, occupancies trending below Fitch's assumptions or weaker-than-expected margins could disrupt the deleveraging path and weaken the prospect of the rating upgrade. New Vessels to Support Growth: The Positive Outlook hinges on TUI's capacity expansion with the addition of three new ships for 2024-2026. Supportive demand and constrained global cruise ship supply due to delivery times should underpin TUI's ramp-up of operations in these new additions. Fitch expects these to be as profitable as the current fleet in light of proven synergies, lower fuel consumption and economies of scale. Delayed vessel deliveries or postponed itineraries would, however, derail the deleveraging path and may negatively affect the rating. Strengthened Cash Generation: TUI generated positive FCF of EUR436 million in 2023 and Fitch expects strong cash generation to resume in 2025 after being negative in 2024 due to significant capex related to fleet expansion. Fitch does not rule out that positive FCF could be allocated to shareholder remuneration as dividends have been suspended since the beginning of the pandemic. However, the rating assumes these would be reasonable and aligned with TUI's net debt/EBITDA target of 3.5x-4x. Strong Business Profile: TUI has a strong market position as the second-largest German cruise line with a market share of around 30%. Its concentrated customer base enables it to better adapt its product offering to customer preferences, resulting in a high level of repeat bookings at around 60% of total customers in 2023. This allows TUI to maintain its current market position, while growing via additions of new ships from 2024. Moderated Margin Amid Luxury Integration: TUI's premium product offering enabled it to generate an industry-leading EBITDA margin of close to 40% in 2019. However, due to the integration of the luxury segment (Hapag-Lloyd Cruises acquired in 2020) and ongoing inflation, Fitch assumes EBITDA margins will trend lower to 30%-33%, albeit remaining strong for the industry. Standalone Rating: TUI is rated on a standalone basis despite its 50% ownership each by TUI AG and Royal Caribbean. Both the shareholders reflect TUI as a joint venture in their financial accounts with no relevant contingent liabilities or cross guarantees between the owners and TUI. TUI manages its funding and liquidity independently. Operational related-party transactions with the owners, primarily in marketing and technical operations, are conducted on an arms-length basis. DERIVATION SUMMARY Fitch does not have a specific Ratings Navigator framework for cruise operators. Fitch rates TUI based on its Hotels Navigator due to the similarity in key performance indicators and demand drivers. TUI has a weaker market position than major cruise operators, such as Royal Caribbean, Carnival and NCL Corporation (Norwegian Cruises), whose fleet capacity and EBITDAR are significantly higher. However, TUI benefits from recognised brand awareness and diversification into the luxury segment, where competition is less intense. TUI showed a faster recovery than peers, as it returned to pre-pandemic occupancy levels in 2023 despite exposure to its core German market. TUI has also deleveraged faster than its competitors: it was one of the first cruise operators to resume operations during the pandemic, which led to lower liquidity needs and better sourcing of staff, which benefited margins. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Low single-digit ticket price growth for 2024-2027 - Occupancies of 98.5% for Mein Schiff and 77% for Hapag-Lloyd Cruises in 2024, and improving marginally for 2024-2026 - EBITDA margin at 31.7% in 2024 and improving gradually to 32.8% in 2027 - Restricted cash of EUR40 million - Major one-off capex cash outlay for fleet expansion of EUR1.4 billion in 2024 RECOVERY ANALYSIS The recovery analysis assumes that TUI would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated. Ships can be sold for scrap but this typically does not occur until near the end of its useful life (30-40 years) and at a much greater discount than mid-life ships. This is due to the inherent cash flow generating ability of the ships, even older ones, which can be moved into cheaper/ less favourable locations as they age. Fitch has assumed a 10% administrative claim. Fitch assesses TUI's GC EBITDA at EUR632 million, which is higher than its EUR599 million Fitch-adjusted EBITDA in 2023, as Fitch incorporates the contribution of new vessels. The GC EBITDA estimate reflects Fitch's view of a stressed but sustainable, post-reorganisation EBITDA level on which Fitch bases the enterprise valuation (EV). An EV multiple of 6.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganisation EV. This reflects market M&A multiples for cruise operators of 9x-20x over the last 20 years, though these assets typically do not change hands frequently. TUI's KfW loan, vessel-backed loans (including loans scheduled to be drawn for new vessels over 2024 and 2025) and revolving credit facilities (RCFs including a term loan that will be converted into a new RCF) are secured and rank ahead of the existing EUR523.5 million senior unsecured notes in its waterfall-generated recovery computation. The RCFs are assumed to be fully drawn in a default. Its waterfall analysis generates a ranked recovery for the EUR523.5 million senior unsecured notes in the 'RR6' band, indicating a 'B-' rating, two notches below the IDR. The waterfall analysis output percentage on current metrics and assumptions is 0%. The proposed senior unsecured notes will rank equally with the existing senior unsecured notes. TUI plans to apply the notes proceeds to repay prior-ranking debt but Fitch views this change in debt structure as neutral for recovery prospects of senior unsecured bondholders. Pro-forma for the transaction, its waterfall analysis generates a ranked recovery for senior unsecured notes in the 'RR6' band. As a result Fitch rates proposed notes at 'B-(EXP)', two notches below TUI's 'B+' IDR. The waterfall analysis output percentage on current metrics and assumptions is 0%. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: − Timely and profitable capacity growth with occupancy and cost control leading to growing EBITDA and EBITDA margin trending towards 33% − EBITDA leverage sustained below 5.0x, supported by a consistent financial policy − Positive pre-dividend FCF generation trough the capex cycle Factors that Could, Individually or Collectively, Lead to a Revision of the Outlook to Stable: - Lack of visibility of EBITDA leverage declining towards 5.0x post-2024 Factors That Could, Individually or Collectively, Lead to Downgrade: - Pricing power and occupancy weakness leading to EBITDA margin falling below 28% − EBITDA leverage sustained above 6.0x - EBITDA interest coverage below 3.5x LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: Fitch assesses TUI's liquidity at end-2023 as adequate, despite insufficient Fitch-adjusted cash and cash equivalents of EUR80 million and EUR342 million undrawn credit lines to cover EUR502 million of short-term debt and expected negative FCF. This is because negative FCF is driven by high capex related to new vessels, for which funding has been pre-arranged. TUI plans to draw down EUR1,272 million from the vessel funding in 2024. Fitch also expects liquidity to improve following the bond placement as proceeds will be used to repay part of its near-term debt. The company also intends to convert the remaining part of the term loan into a RCF, thereby increasing the total amount of RCFs to EUR592 million (of which EUR261 million will be drawn post-transaction) until December 2025 (with a one-year extension option). ISSUER PROFILE TUI Cruises is a medium-sized cruise ship business with two brands, Mein Schiff and Hapag-Lloyd Cruises, operating in the premium and luxury/expedition segments of the market, respectively. Its customer base is primarily in Germany. 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 ----------- ------ -------- ----- TUI Cruises GmbH LT IDR B+ Upgrade B senior unsecured LT B-(EXP)Expected Rating RR6 senior unsecured LT B- Upgrade RR6 CCC+ ZAIKIO: Goes Into Liquidation ----------------------------- Richard Stuart-Turner at Printweek reports that German company Zaikio, known for its cloud-based data and app platform, has gone into liquidation. The Heidelberg-owned business had developed an open connectivity platform intended as a more accessible alternative to JDF with true "plug-and-play". According to Printweek, a notice published on April 10 on the Bundesanzeiger (Federal Gazette) revealed Zaikio's liquidation and said that creditors of the Mainz-based business were requested to contact the company. Schultze & Braun, based in Achern, is overseeing the liquidation process, Printweek discloses. On April 11, a Heidelberg spokesperson told Printweek: "Zaikio is currently undergoing an orderly liquidation process. The aim is to find the best possible solutions, taking into account the interests of the customers. "The Zaikio management, including the appointed liquidator, and Heidelberg are currently discussing what the future of Keyline should look like. The start of the liquidation process has not resulted in any immediate changes for existing customers. "In particular, the functions of the Heidelberg services, which currently access the authentication solution provided by Zaikio, will continue to be available to our customers." In its 2022-23 report and accounts, Heidelberg said it had made a writedown of EUR1 million (GBP855,000) related specifically to goodwill for "the Zaikio cash-generating unit", which is part of its Technology Solutions division, Printweek relates. The manufacturer's list of its shareholdings showed that Zaikio had negative equity of EUR5 million for the financial year, Printweek states. ============= I R E L A N D ============= NEUBERGER BERMAN 6: S&P Assigns Prelim B- (sf) Rating to F Notes ---------------------------------------------------------------- S&P Global Ratings assigned its preliminary credit ratings to Neuberger Berman Loan Advisers Euro CLO 6 DAC's class A, B-1, B-2, C, D, E, and F notes. The issuer will also issue unrated subordinated notes. This is a European cash flow CLO transaction, securitizing a pool of primarily syndicated senior secured loans or bonds. The portfolio's reinvestment period ends approximately 4.59 years after closing, and the portfolio's maximum average maturity date is seven years after closing. Under the transaction documents, the rated notes pay quarterly interest unless there is a frequency switch event. Following this, the notes will switch to semiannual payment. S&P said, "We consider that the portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations. Portfolio benchmarks CURRENT S&P Global Ratings weighted-average rating factor 2,741.20 Default rate dispersion 509.74 Weighted-average life (years) including reinvestment period 4.59 Obligor diversity measure 130.62 Industry diversity measure 22.64 Regional diversity measure 1.33 Transaction key metrics CURRENT Total par amount (mil. EUR) 300 Defaulted assets (mil. EUR) 0 Number of performing obligors 159 Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 1.08 'AAA' weighted-average recovery (%) on identified pool 37.69 Actual weighted-average spread (no credit to floors [%]) 4.00 S&P said, "In our cash flow analysis, we modeled the EUR300 million target par amount, the covenanted weighted-average spread of 3.90%, the covenanted weighted-average coupon of 4.25%, and the covenanted weighted-average recovery rates for all rated notes. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. "Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned preliminary ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria. "At closing, we expect that the transaction's documented counterparty replacement and remedy mechanisms will adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "We expect the transaction's legal structure to be bankruptcy remote, in line with our legal criteria. "At closing, we expect the operational risk associated with key transaction parties (such as the collateral manager) that provide an essential service to the issuer to be in line with our operational risk criteria. "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe that our preliminary ratings are commensurate with the available credit enhancement for the class A to F notes. Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1 to E notes is commensurate with higher ratings than those assigned. However, as the CLO will have a reinvestment period, during which the transaction's credit risk profile could deteriorate, we have capped our assigned ratings on these notes. "In addition to our standard analysis, to indicate how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class A to E notes in four hypothetical scenarios. "As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F notes." Environmental, social, and governance S&P said, "We regard the exposure to environmental, social, and governance (ESG) credit factors in the transaction as being broadly in line with our benchmark for the sector. Primarily due to the diversity of the assets within CLOs, the exposure to environmental credit factors is viewed as below average, social credit factors are below average, and governance credit factors are average. For this transaction, the documents prohibit assets from being related to certain activities, including, but not limited to weapons or firearms, illegal drugs or narcotics etc. Accordingly, since the exclusion of assets from these industries does not result in material differences between the transaction and our ESG benchmark for the sector, no specific adjustments have been made in our rating analysis to account for any ESG-related risks or opportunities." Preliminary ratings PRELIM. PRELIM. AMOUNT CLASS RATING* (MIL. EUR) SUB (%) INTEREST RATE§ A AAA (sf) 183.00 39.00 Three/six-month EURIBOR plus 1.47% B-1 AA (sf) 30.10 26.30 Three/six-month EURIBOR plus 2.15% B-2 AA (sf) 8.00 26.30 5.75% C A (sf) 16.80 20.70 Three/six-month EURIBOR plus 2.70% D BBB- (sf) 21.00 13.70 Three/six-month EURIBOR plus 3.95% E BB- (sf) 13.50 9.20 Three/six-month EURIBOR plus 6.67% F B- (sf) 8.10 6.50 Three/six-month EURIBOR plus 8.21% Sub notes† NR 23.50 N/A N/A *S&P's preliminary ratings address payment of timely interest and ultimate principal on the class A, B-1 and B-2 notes and ultimate interest and principal on rest of the notes. §The payment frequency switches to semiannual and the index switches to six-month EURIBOR when a frequency switch event occurs. †In addition to subordinated notes, the issuer will also issue unrated senior preferred return notes, subordinated preferred return notes, and performance notes on the issue date. The senior preferred return notes are paid senior to the class A notes in the interest priority of payments. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. PROVIDUS CLO X: Fitch Assigns 'B-(EXP)sf' Rating to Class F Notes ----------------------------------------------------------------- Fitch Ratings has assigned Providus CLO X 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 X DAC Class A-1 LT AAA(EXP)sf Expected Rating Class A-2 LT AAA(EXP)sf Expected Rating Class B LT AA(EXP)sf Expected Rating Class C LT A(EXP)sf Expected Rating Class D LT BBB-(EXP)sf Expected Rating Class E LT BB-(EXP)sf Expected Rating Class F LT B-(EXP)sf Expected Rating Subordinated Notes LT NR(EXP)sf Expected Rating TRANSACTION SUMMARY Providus CLO X 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 were used to fund a portfolio with a target par of EUR375 million. The portfolio is actively managed by Permira European CLO Manager LLP. The collateralised loan obligation (CLO) has a 4.5-year reinvestment period and a 7.5-year weighted average life test (WAL), with an option to extend the WAL by one year after closing. KEY RATING DRIVERS Average Portfolio Credit Quality (Neutral): Fitch assesses the average credit quality of obligors at 'B'/ 'B-'. The Fitch-weighted average rating factor (WARF) of the identified portfolio is 26.2. 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 63.4%. Diversified Asset Portfolio (Positive): The transaction has a concentration limit for the 10 largest obligors at 21%. The transaction also includes various concentration limits, including the maximum exposure to the three-largest Fitch-defined industries in the portfolio at 40%. These covenants ensure that the asset portfolio will not be exposed to excessive concentration. WAL Step-Up Feature (Neutral): The transaction can extend the WAL by one year on the step-up date, which is one year after closing. The WAL extension is subject to conditions including satisfaction of all the collateral-quality, portfolio-profile, and coverage tests, plus the adjusted collateral principal amount being at least equal to the reinvestment target par balance. Portfolio Management (Neutral): The transaction has a 4.5-year reinvestment period, which is governed by reinvestment criteria that are similar to those of other European transactions. Fitch's analysis is based on a stressed-case portfolio with the aim of testing the robustness of the transaction structure against its covenants and portfolio guidelines. Cash-flow Modelling (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 test 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 default rate (RDR) across all ratings and a 25% decrease of the recovery rate (RRR) across all ratings of the identified portfolio would lead to a downgrade of two notches on the class B and C notes, one notch on the class A-2, D and E notes, to below 'B-sf' for the class F notes and have no impact on the class A-1 notes. Based on the identified portfolio, downgrades 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 B, D, E and F notes have a two-notch cushion, and the class C notes have a one-notch cushion and while the class A-1 and A-2 notes have no rating cushion. Should the cushion between the identified portfolio and the Fitch-stressed portfolio be eroded 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 Fitch-stressed portfolio would lead to downgrades of up to four notches for the 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, except for the 'AAAsf' notes. During the reinvestment period, based on the Fitch-stressed portfolio, upgrades may occur on better-than-expected portfolio credit quality and a shorter remaining WAL test, meaning the notes are able to withstand larger-than-expected losses for the transaction's remaining life. After the end of the reinvestment period, upgrades may result from stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread available to cover losses in the remaining portfolio. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. 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. ESG CONSIDERATIONS Fitch does not provide ESG relevance scores for Providus CLO X DAC. In cases where Fitch does not provide ESG relevance scores in connection with the credit rating of a transaction, programme, instrument or issuer, Fitch will disclose in the key rating drivers any ESG factor which has a significant impact on the rating on an individual basis. ========= I T A L Y ========= NEOPHARMED GENTILI: Fitch Affirms 'B' LongTerm IDR, Outlook Stable ------------------------------------------------------------------ Fitch Ratings has assigned Neopharmed Gentili S.p.A.'s (Neopharmed) senior notes a final senior secured rating of 'B+' with a Recovery Rating of 'RR3'. Fitch has also affirmed Neopharmed's Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook is Stable. The IDR reflects Neopharmed's well-established position within Italy with its asset-light business model supporting strong operating profitability and high cash flow conversion. The rating is constrained by high leverage, limited business size and exposure to one regulatory authority, albeit with some diversification across products and therapeutic area. The Stable Outlook reflects the group's ability to sustain its revenue through a combination of organic product portfolio development and inorganic product additions translating into strong free cash flow (FCF) generation and EBITDA leverage trending to 5x by 2027. KEY RATING DRIVERS High Profitability and FCF: Neopharmed's high profitability and FCF conversion are one of its main rating strengths and its profitability is at the top end of its peer group's, with Fitch-adjusted EBITDA margins forecast to remain at 43%-44% in 2024-2027. Its asset-light business model with in-house distribution capabilities and outsourced manufacturing also supports strong cash generation, with FCF margins likely to be 15%-20%. Fitch assumes this will be fully reinvested into portfolio expansion, as shareholders pursue an asset-development strategy, as opposed to deploying funds towards debt prepayment. Bolt-on M&A Included: Fitch expects the group to remain committed to its established acquisition policy to ensure a credit-accretive impact of new product additions. Fitch factors in EUR50 million a year of bolt-on acquisitions over 2025-2027, to be funded by internal FCF generation and which Fitch expects to aid sales growth and deleveraging. High Leverage: Fitch projects EBITDA leverage at 6.3x in 2024, which is higher than that of most Fitch-rated peers in the sector. The high leverage constrains the IDR at 'B', although Fitch projects steady deleveraging towards 5x by 2027. Fitch believes this will be achieved either through reinvestment of internal funds in portfolio expansion, or through organic portfolio management supported by in-house product extensions. Any deviation from its financial risk profile is likely to put the ratings under pressure. Limited Scale and Diversification: Neopharmed is small compared with Fitch-rated peers, reflecting its concentration on one market and exposure to one regulatory authority. The group has adequate diversification by product area with a focus on chronic diseases and a presence in cardiovascular, neurology and respiratory. Nevertheless, its assessment is constrained by its moderate scale and geographic concentration in Italy. Overall, according to Fitch's Pharmaceuticals Navigator, Fitch assesses the group's diversification score at 'B'. Pharma Representatives Aid Organic Growth: Neopharmed has stronger potential for organic revenue enhancement than its Fitch-rated industry peers, underpinned by a strong brand portfolio where most products command top three positions within their market segments, as well as its large force of representatives, who build relationships with medical practitioners within Italy. The group upholds stringent regulatory standards over the conduct of its representatives, which are in line with industry best practices. To date, it has not registered any cases of misconduct. Strong Market Fundamentals: Structural volume growth in the Italian generic and branded drug markets is driven by an ageing population, the higher prevalence of chronic diseases and an increasing number of drugs losing patent protection. Large innovative pharmaceutical companies are increasingly optimising their life-cycle and tail-end drug management by divesting off-patent drugs to refocus resources in R&D. Such strategic moves present entities, such as Neopharmed, with substantial opportunities for inorganic expansion. Nonetheless, it is anticipated that generic drug penetration and price pressure will continue to rise across Europe. This is likely to drive investment towards achieving greater scale, pursuing diversification, adopting cost-effective production, and focusing on more niche product lines to safeguard both growth and profit margins. DERIVATION SUMMARY Fitch rates Neopharmed using its Global Navigator Framework for Pharmaceutical Companies. Fitch compares its 'B' rating against other asset-light scalable specialist pharmaceutical companies focused on off-patent branded and generic drugs such as CHEPLAPHARM Arzneimittel GmbH, Pharmanovia Bidco Limited (both B+/Stable) and ADVANZ PHARMA HoldCo Limited (B/Stable). Neopharmed's representative-based business model relies on a commercial network supported by scientific information to effectively engage with healthcare providers and promote the group's products, in turn driving sales and increasing its regional market penetration. The group not only focuses on active life-cycle management of off-patent generic drugs, as is the case for CHEPLAPHARM and Pharmanovia, but also leverages its in-house capabilities (co-)development, promotion and marketing of off-patent generics to sustain the organic growth of its drug portfolio. Nevertheless, CHEPLAPHARM and Pharmanovia have a larger scale, a global presence and conservative leverage profile, resulting in a one-notch rating difference. ADVANZ is similar to the aforementioned peers, but its legacy litigation issues are a major rating constraint. In Fitch's wider rated pharmaceutical portfolio, Fitch also compares Neopharmed with a generic drug manufacturing company, Nidda BondCo GmbH (Stada; B/Stable) as well as the Italian contract development and manufacturing organisations (CDMOs) such as F.I.S. Fabbrica Italiana Sintetici S.p.A.'s (FIS, B/Positive) and Kepler S.p.A. (Biofarma, B/Stable). Stada has a much larger scale, strong market position and greater diversification, but these factors are offset by an aggressive financial policy and modest EBITDA margin compared with Neopharmed's. Biofarma and FIS benefit from resilient end-market demand, considerable entry barriers and strong revenue visibility. These are offset by a fragmented and competitive CDMO market with some commoditisation in the simple molecules segment as well as structurally weaker profitability. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Revenue to reach almost EUR350 million in 2027, driven by organic revenue growth and acquisitions - Fitch-adjusted EBITDA margin of 43%-44% to 2027 - Capex at 0.5% of sales a year to 2027 - Moderate working-capital outflow at 1%-2% of sales a year over 2024-2027 - Annual acquisitions of EUR50 million a year from 2025 to 2027 - No dividends or large debt-funded acquisitions to 2027 RECOVERY ANALYSIS The recovery analysis is based on a going-concern (GC) approach. This reflects Neopharmed's asset-light business model supporting higher realisable values in financial distress compared with balance-sheet liquidation. A potential distress could arise primarily from material revenue and margin contraction, following volume losses and price pressure, given its exposure to generic competition. For the GC enterprise value (EV) calculation, Fitch estimates a post-restructuring EBITDA of about EUR105 million, which reflects earnings post-distress and implementation of possible corrective measures. Fitch also applies a 5.5x distressed EV/EBITDA multiple, which reflects the group's strong business model with revenue defensibility and high profitability, but also reflects its limited scale and concentration on one geography. After deducting 10% for administrative claims, and assuming the group's super senior committed revolving credit facility (RCF) of EUR130 million will be fully drawn prior to distress, its principal waterfall analysis generated a ranked recovery in the 'RR3'/52% band for the group's EUR400 million senior secured floating-rate notes and EUR350 million senior secured fixed-rate notes, which rank below the super-senior RCF. RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - An upgrade would require stronger diversification in products or markets, as well as a resilient operating performance and double-digit FCF margins that allow the group to finance in-licensing and M&A - A conservative leverage policy leading to EBITDA leverage at or below 5x on a sustained basis - EBITDA interest coverage above 2.5x on a sustained basis Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Unsuccessful management of individual pharmaceutical intellectual property rights leading to material permanent loss of income and EBITDA margins declining towards 40% - FCF margins declining to low single digits or zero - A more aggressive financial policy leading to EBITDA leverage above 6.5x on a sustained basis - Prospects of EBITDA interest coverage below 2x on a sustained basis LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: Fitch views Neopharmed's liquidity as adequate, based on a projected readily available cash position of around EUR10 million at end-2024 (excluding EUR5 million that Fitch treats as not readily available for debt service), which is further supported by its fully available new EUR130 million RCF. Neopharmed benefits from positive FCF generation and a long-dated capital structure, with no debt repayments until 2030. ISSUER PROFILE Neopharmed is a specialist pharmaceutical company that focuses on the distribution and brand management of a portfolio of established off-patent branded drugs within Italy. 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 ----------- ------ -------- ----- Neopharmed Gentili S.p.A. LT IDR B Affirmed B senior secured LT B+ New Rating RR3 senior secured LT B+ New Rating RR3 B+(EXP) ===================== S W I T Z E R L A N D ===================== CERDIA INT'L: S&P Ups Parent's Long-Term ICR to 'B', Outlook Stable ------------------------------------------------------------------- S&P Global Ratings raised to 'B' from 'B-' its long-term issuer credit rating on Cerdia's parent company BCP VII Jade Topco (Cayman) Ltd. At the same time, S&P raised its issue credit rating on Cerdia's senior secured notes due in 2027 to 'B' from 'B-'. The recovery rating remains at '3'. The stable outlook reflects S&P's view that Cerdia's debt to EBITDA will remain comfortably below 6x and that the company will generate robust free cash flow. Cerdia's EBITDA should remain healthy over the next quarters, following a stronger than initially anticipated 2023. The company's consolidated EBITDA increased by about 110% to $245 million in 2023, driven by higher filter tow selling prices and acetate flake volumes. S&P said, "We anticipate that the company's EBITDA will remain elevated at $240 million-$250 million in 2024. This is supported by good volume visibility, as 100% of 2024 volumes are already contracted and we understand that Cerdia is now focusing on 2025 agreements including multi-year contracts with key accounts. We also note that Cerdia's profitability benefits from an improved cost structure following the recent closure of the French site (Roussillon), which led to annual cost savings of about $25 million. As we do not anticipate a significant decline in selling prices due to the tight supply demand balance in the global filter tow market, margins should remain healthy at similar levels compared with last year (approximately 30%)." Above average profitability and limited large expansion project, support Cerdia's strong free operating cash flows (FOCF). S&P anticipates FOCF will remain elevated at $90 million-$110 million in 2024, compared with $95 million in 2023. S&P said, "We understand that Cerdia will continue focusing on strategic projects to optimize production output and to improve energy efficiency at its plant in Germany, which relies on natural gas. Besides energy efficiency and the biomass power plant project in Germany, Cerdia will also spend on safety and processes as part of its $35 million-$40 million capital expenditure (capex) planned for 2024. Finally, our base case also factors $6 million-$7 million of cash interest savings this year as a result of the partial bond buyback completed last year. "We anticipate that the company's debt to EBITDA will remain comfortably below 6x in 2024-2025. Following strong performance, the $66 million bond buyback, and the $70 million revolving credit facility (RCF) repayment, the company's debt to EBITDA as adjusted by S&P Global Ratings declined to 3x in 2023. We do not net the cash as part of our leverage calculation because of the private equity sponsor ownership. Given the relatively low leverage (consolidated total net leverage ratio stood at 1.88x in 2023) we do not rule out shareholder remuneration over the next quarters. As part of its debt documentation, Cedia is allowed to pay dividends as long as its total net leverage ratio (as defined in the credit agreement) does not exceed 2.5x on a pro forma basis and that dividends do not exceed 50% of the company's net income. "The stable outlook reflects our view that Cerdia's debt to EBITDA will remain comfortably below 6x and that the company will generate robust free cash flows." S&P could lower the rating over the next 12 months if: -- Cerdia undertook a significant releveraging transaction such that adjusted debt to EBITDA increased above 6x; or -- Filter tow prices declined significantly or if Cerdia lost an important customer, leading to a significant pressure on profitability and weaker FOCF declining below $30 million. Upside scenario S&P could raise the ratings if Cerdia's management and financial sponsor builds a track record of, and makes an explicit commitment to maintain, stronger leverage metrics. Under this scenario, Cerdia would maintain adjusted debt to EBITDA below 4.5x. =========== T U R K E Y =========== DENIZBANK AS: Fitch Affirms 'B' LongTerm IDR, Outlook Positive -------------------------------------------------------------- Fitch Ratings has affirmed Denizbank A.S.'s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B' and Long-Term Local-Currency IDR (LTLC) at 'B+'. The Outlooks are Positive. Fitch has also upgraded the bank's Viability Rating (VR) to 'b' from 'b-'. The VR upgrade reflects the upgrade of the Turkish operating environment score and Fitch's view that the bank's standalone credit profile is commensurate with the risks of the operating environment. KEY RATING DRIVERS Intervention Risk Caps IDR: Denizbank's LTFC and LC IDRs are driven by its Shareholder Support Rating (SSR). The LTFC IDR is capped at 'B', one notch below Turkiye's LTFC IDR due to government intervention risk. The LTLC IDR of 'B+', one notch above its LTFC IDR, reflects a lower risk of intervention in LC. The Positive Outlooks on the bank's LT IDRs mirror that on the sovereign. The 'b' VR reflects Denizbank's concentrated operations in the challenging, albeit improving, Turkish operating environment, below sector average asset quality and only adequate capitalisation. It also considers the bank's adequate profitability and reasonable FC liquidity. Its assessment also considers ordinary support from Emirates NBD Bank PJSC (ENBD; A+/Stable). Support Capped: The SSR considers potential support from ENBD , reflecting Denizbank's role in the wider group and potential reputational risks for its parent, but government intervention risk caps the SSR at one notch below the sovereign rating. This reflects its view that the likelihood of some form of government intervention that would impede the bank's ability to service its FC obligations remains higher than that of a sovereign default. Improving Operating Environment: The bank's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and decreased external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite the recent simplification efforts. Mid-Sized Turkish Bank: Denizbank has a moderate franchise (end-2023: 4.3% of sector assets), which underpins its record of adequate profitability, despite only limited competitive advantages. Concentration Risk: The bank has been deleveraging high-risk exposures to reduce concentration risk, while focusing on shorter-term LC loan growth. Credit risks are heightened by still high FC lending (46% of total lending) partly reflecting FC lending by its Austrian subsidiary, as not all borrowers are fully hedged against lira depreciation, and seasoning risks given above-average growth in recent years. Asset-Quality Risks: The bank's impaired loans/gross loans ratio fell to 4.0% at end-2023 (end-2022: 4.7%), reflecting high loan growth (2023: 63%), collections and limited impaired loan inflows, albeit the ratio is higher than peers. The bank has high but falling exposure to the energy, tourism and construction sectors (end-2023: combined 22% of loans. Stage 2 loans are fairly high (8.2% of gross loans; 30% average reserves) and about 48% are restructured. Total reserves coverage of non-performing loans (NPL) is below the sector average (155%; sector: 244%), but coverage of gross loans is solid (6.3%; sector: 4.0%). Asset-quality risks remain high given Denizbank's exposure to economic, market and loan seasoning risks and high FC lending (46% of total lending) amid weakness of the Turkish lira. Margin Pressures: The bank's operating profit dropped slightly to 5.4% of risk-weighted assets (RWAs) in 2023 (2022: 5.6%) as margins tightened due to the increase in cost of funding. Fitch expects profitability to weaken, given regulatory macroprudential measures and higher funding costs, while it remains sensitive to asset-quality risks and economic developments. Adequate Core Capitalisation: Denizbank's common equity Tier 1 (CET1) ratio fell to 12.3% at end-2023 (10.4% net of forbearance) from 13.0% at end-2022 mainly due to a tightening of forbearance in RWAs calculation and loan growth. Capitalisation is supported by high pre-impairment operating profit (2023: equal to 9% of average loans), full reserves coverage of NPLs, free provisions (1% of RWAs) and ordinary support from ENBD but remains sensitive to the economic outlook, lira depreciation and asset-quality risks. Adequate Liquidity; Ordinary Support: Denizbank is mainly deposit-funded (end-2023 loans/deposits ratio: 82%). FC deposit (36% of total deposits) and foreign-exchange (FX)-protected deposits (23%) remain significant. FC wholesale funding comprised a high 23% of total funding. Available FC liquidity mainly comprised FC placements in foreign banks, swaps with the Central Bank of the Republic of Turkiye (CBRT) and unencumbered FC government securities covered FC wholesale debt over the following year, plus 25% of FC deposits. However, FC liquidity could come under pressure from sector-wide deposit instability. Its assessment also considers ordinary support from ENBD. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of Denizbank's LTFC IDR would follow a downgrade of both its SSR and the VR. A downgrade of the bank's LTLC IDR would follow a downgrade of the sovereign rating or an increase in its view of government intervention risk in LC. A downgrade of Turkiye's sovereign rating or an increase in its view of government intervention risk could lead to a downgrade of Denizbank's SSR, although this is not its base case. Denizbank's SSR is also sensitive to Fitch's view of ENBD's ability and propensity to provide support if needed. Denizbank's VR is sensitive to a downgrade of the operating environment, which could result from a sovereign downgrade, although this is not its base case given the Positive Outlook on the sovereign rating. Denizbank's VR could be downgraded due to a marked deterioration in the operating environment, in case of a material erosion in the bank's FC liquidity buffers, for example, due to deposit instability, or capital buffers, if not offset by shareholder support. The bank's Short-Term IDRs are sensitive to adverse changes in their respective Long-Term IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of Turkiye's LT IDRs would likely lead to upgrades of the SSR and LT IDRs. A material improvement in Turkiye's external finances or a marked improvement in its net FX reserves position, resulting in a reduction in its view of government intervention risk in the banking sector, could lead to an upgrade of the bank's SSR and LTFC IDR to the level of Turkiye's LTFC IDR. An upgrade of the operating environment score for Turkish banks combined with strengthening of the bank's capital buffers (including net of forbearance) while maintaining its FC liquidity buffers and business profile would lead to an upgrade of Denizbank's VR. The bank's Short-Term IDRs are sensitive to positive changes in their respective Long-Term IDRs. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS Denizbank's senior debt ratings are aligned with the bank's IDRs as the likelihood of default on these obligations reflects that of the bank. The Recovery Rating of these notes is 'RR4', reflecting average recovery prospects in case of default. The bank's 'AA(tur)' National Rating is driven by shareholder support and in line with foreign-owned peers. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES Denizbank's senior unsecured debt ratings are primarily sensitive to changes in its IDRs. The National Rating is sensitive to changes in Denizbank's LTLC IDR and its creditworthiness relative to other Turkish issuers. VR ADJUSTMENTS The operating environment score of 'b' for Turkish banks is lower than the category implied score of 'bb', due to the following adjustment reasons: sovereign rating (negative) and macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and a high risk of FX movements in Turkiye. The business profile score of 'b+' is below the implied 'bb' category implied score, due to the following adjustment reason: business model (negative). This reflects Denizbank's business model concentration on the high-risk Turkish market. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Denizbank's ratings are linked to its parent bank, ENBD. ESG CONSIDERATIONS The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on Denizbank. Management ability of Denizbank to determine its own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the bank's credit profile and is relevant to bank's rating in combination with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Denizbank A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Viability b Upgrade b- Shareholder Support b Affirmed b senior unsecured LT B Affirmed RR4 B senior unsecured ST B Affirmed B ING BANK: Fitch Affirms 'B' LongTerm FC IDR, Outlook Positive ------------------------------------------------------------- Fitch Ratings has affirmed ING Bank A.S.'s (INGBT) Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) at 'B' and LT Local-Currency (LC) IDR at 'B+'. The Outlooks are Positive. Fitch has also affirmed the Viability Rating (VR) at 'b'. KEY RATING DRIVERS Intervention Risk Caps IDR: INGBT's LTFC and LTLC IDRs are driven by potential shareholder support, as reflected in its Shareholder Support Rating (SSR). The LTFC IDR is capped at 'B', one notch below Turkiye's LTFC IDR due to government intervention risk. The LTLC IDR of 'B+' reflects a lower risk of intervention in LC. The Positive Outlook on the bank's LT IDRs mirrors that on the sovereign. The VR reflects the exposure of INGBT's operations to Turkish operating environment risk, its limited market position, albeit with a business profile that benefits from being part of the ING group, and its weaker profitability performance. The VR also reflects INGBT's better than sector average risk profile that reflects in its good asset quality, adequate capitalisation that considers ordinary support and significant FC liquidity buffers that benefit from ordinary support and fairly limited refinancing risk. INGBT's National Rating with a Stable Outlook reflects its view that the bank's creditworthiness in LC relative to other Turkish issuers is unchanged. The bank's 'B' Short-Term IDRs are the only possible option mapping to LT IDRs in the 'B' rating category. Shareholder Support: The SSR reflects INGBT's strategic importance to its 100% parent, ING Bank N.V. (ING; AA-/Stable), its role within the wider group, and its small size relative to ING's ability to provide support. However, government intervention risk caps the SSR at one notch below the sovereign rating, reflecting Fitch's view that the likelihood of some form of government intervention in the banking system that might impede INGBT's ability to service its FC obligations is higher than that of a sovereign default. Improving Operating Environment: The bank's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite the recent simplification efforts. Deposit Funded; Adequate FX Liquidity: INGBT is largely deposit-funded (end-2023: 77% of non-equity funding). Deposit dollarisation has reduced (end-2023: 32% of customer deposits; end-2022:45%) but remains high, and alongside foreign-exchange (FX)-protected deposits (26%), create FC liquidity risks. The bank's FC wholesale funding (end-2023: 20% of non-equity funding) creates refinancing risks. However, it includes fairly high group funding (end-2023: 9% of total funding), and risks are mitigated by adequate FC liquidity and potential liquidity support from its parent. Available FC liquidity was sufficient to fully cover INGBT's maturing FC debt due within 12 months and 28% of FC deposits atend-2023, but includes a high share of FX swaps with the Central Bank of the Republic of Turkiye, access to which could become uncertain in stressed market conditions. Decrease in Core Capitalisation: INGBT's common equity Tier 1 (CET1) ratio declined to 14.6% at end-2023 (11.9% net of forbearance) from 17.7% at end-2022, reflecting reduced internal capital generation and tightened forbearance. Nonetheless it remained better than mid-sized bank peers. Its equity/assets ratio declined (end-2023:9.7%;end-2022:12.5%), but remained better than the sector average (9.0%). Capitalisation is supported by full reserves coverage of impaired loans and potential ordinary support from ING, but is sensitive to the macroeconomic outlook, lira depreciation, and asset-quality risks. Asset Quality Risks: INGBT's impaired loans ratio improved to 1.1% at end-2023 (end-2022: 2.0%), reflecting limited non-performing loan (NPL) inflows, strong collections, NPL sales and nominal loan growth (2023:25%). Asset-quality risks remain, notwithstanding the bank's generally fairly cautious risk-management approach and below sector-average loan growth, given exposure to macro and market volatility, including a slowdown in the economy and higher interest rates, Stage 2 loans (end-2023:13% of loans, 3% average reserves coverage) and high FC lending (end-2023:43% of loans) amid lira weakness. Weakened Profitability: INGBT's operating profit/risk-weighted assets ratio decreased to 0.6% in 2023 (sector: 5.6%) from 4.8% in 2022, largely reflecting tighter net interest margins resulting from macroprudential regulations. Its profitability also reflects a relatively limited contribution from CPI-linked securities acquired during 2H23, which have been boosting the profitability of most banks in the sector. Fitch expects profitability to be muted by slower GDP growth, and remain sensitive to asset-quality risks and macro and regulatory developments. Limited Market Share: INGBT has a reasonable business profile that benefits from its linkages to its parent. Its market share is limited at 0.6% of sector assets at end-2023 (unconsolidated basis), resulting in limited competitive advantages. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of INGBT's LTFC IDR would follow a downgrade of both its SSR and the VR. A downgrade of the bank's LTLC IDR would follow a downgrade of the sovereign rating or an increase in its view of government intervention risk in LC. A downgrade of Turkiye's sovereign rating or an increase in its view of government intervention risk would likely lead to a downgrade of the SSR, although this is not its base case. The SSR is also sensitive to a change in Fitch's view of the shareholder's ability and propensity to provide support. The VR is sensitive to a downgrade of the operating environment, which could result from a sovereign downgrade, although this is not its base case. The VR could also be downgraded due to a marked deterioration in the operating environment, particularly if this leads to a material erosion in its capital and FC liquidity buffers, if not offset by shareholder support. The bank's Short-Term IDRs are sensitive to adverse changes in their respective Long-Term IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of Turkiye's LT IDRs would likely lead to upgrades of the SSR and LT IDRs. A material improvement in Turkiye's external finances or a marked improvement in its net FX reserves position, resulting in a reduction in its view of government intervention risk in the banking sector, could lead to upgrades of the SSR and LTFC IDR to the level of Turkiye's LTFC IDR. An upgrade of the operating environment score for Turkish banks, while the bank strengthens its capital buffers, and maintains its FC liquidity buffers and business profile, would lead to an upgrade of INGBT's VR. The bank's Short-Term IDRs are sensitive to positive changes in their respective Long-Term IDRs. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS The bank's 'AA(tur)' National Rating is driven by shareholder support and in line with foreign-owned peers. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES The National Rating is sensitive to changes in INGBT's LTLC IDR and its creditworthiness relative to other Turkish issuers. VR ADJUSTMENTS The operating-environment score of 'b' for Turkish banks is below the 'bb' category implied score due to the following adjustment reasons: macroeconomic volatility (negative), which reflects heightened market volatility, high dollarization and high risk of FX movements in Turkiye, and sovereign rating (negative). PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS INGBT's ratings are linked to its parent bank, ING. ESG CONSIDERATIONS The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on banks' credit profiles and is relevant to banks' ratings in combination with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Prior ----------- ------ ----- ING Bank A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Viability b Affirmed b Shareholder Support b Affirmed b QNB FINANSBANK: Fitch Affirms 'B' LongTerm IDR, Outlook Positive ---------------------------------------------------------------- Fitch Ratings has affirmed QNB Finansbank Anonim Sirketi's (QNBF) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B' and Long-Term Local-Currency (LTLC) IDR at 'B+'. The Outlooks are Positive. Fitch has also upgraded the bank's Viability Rating (VR) to 'b' from 'b-'. The VR upgrade reflects the upgrade of the Turkish operating environment score and Fitch's view that the bank's standalone credit profile is commensurate with the risks of the operating environment. KEY RATING DRIVERS Intervention Risk Caps IDR: QNBF's LTFC and LTLC IDRs are driven by potential shareholder support, as reflected in its Shareholder Support Rating (SSR). The LTFC IDR is capped at 'B', one notch below Turkiye's LTFC IDR due to government intervention risk. The LTLC IDR is one notch above its LTFC IDR, reflecting lower intervention risk in LC. The Positive Outlooks mirror those on the sovereign. The bank's 'B' Short-Term IDRs are the only option mapping to LT IDRs in the 'B' category. The VR considers QNBF's concentrated operations in the challenging, albeit improving, Turkish operating environment, moderate franchise, reasonable business profile and record of adequate profitability and asset quality, but also its only adequate core capitalisation and FC liquidity. It also reflects ordinary support from its parent. Support Capped: QNBF's SSR reflects potential support from Qatar National Bank (Q.P.S.C.) (QNB; A+/Stable), given its role as a key subsidiary of the group, potential reputational risks for its parent and legal commitments, but government intervention risk caps the SSR at one notch below the sovereign rating. This reflects its view that the likelihood of some form of government intervention that would impede the bank's ability to service its FC obligations remains higher than that of a sovereign default. Improving Operating Environment: The bank's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and decreased external financing pressures. Turkish banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite the recent simplification efforts. Moderate Franchise: QNBF is a mid-sized Turkish bank with a reasonable business profile, servicing corporate and commercial customers, small and medium-sized companies and retail customers, although its market shares are limited (4% of sector assets at end-2023, bank-only basis), resulting in limited competitive advantages. Asset Quality Risks: QNBF's non-performing loan (NPL) ratio improved to 1.7% at end-2023 (end-2022: 2.5%) reflecting nominal loan growth (2023: 66%), but also collections (30% of end-2022 NPLs), write-offs (15bp of gross loans) and limited NPL inflows (NPL origination: 1.1% of average performing loans). Stage 2 loans were fairly high (10.1% and 17% average reserves coverage) and 33% were restructured. Credit risks are heightened by high FC lending (30% of gross loans), seasoning risks (given above sector-average growth in recent years) and slowing economic growth. Nonetheless, total reserves coverage of NPLs is solid (253%). Margin Tightening: QNBF's operating profit/risk-weighted assets (RWA) ratio was fairly stable at 5.6% in 2023 (2022: 5.5%), as strong trading gains (customer-driven FX transactions and derivatives) and fees offset margin tightening (2023: 5.9%; 2022: 9.4%) amid the higher lira interest rate environment and still-stringent macroprudential regulations. Fitch expects fees to continue to contribute to income growth in 2024, albeit to a lesser extent, as volumes decline, and its net interest margin to rise in 2H24 amid loan repricing. Performance remains sensitive to asset-quality, regulatory and macroeconomic developments. Only Adequate Core Capitalisation: Core capitalisation (end-2023 common equity Tier 1 ratio: 9.7% net of regulatory forbearance; 8% minimum) is only adequate for its risk profile, growth appetite and sensitivity to lira depreciation. The total capital ratio (14.2%, excluding forbearance) is supported by FC subordinated debt, including USD610 million from QNB, providing a partial hedge against lira depreciation. Nonetheless, total reserves fully covered NPLs, free provisions equalled 96bp of RWAs at end-2023 and pre-impairment operating profit (end-2023: 11% of average gross loans) provide a solid additional buffer. Its assessment also considers ordinary support from QNB. Deposit-Funded, Adequate FX Liquidity: Deposits comprised 70% of total funding at end-2023. FC deposits (36% of total deposits at end-2023) and foreign-exchange (FX)-protected deposits (23%) remain significant, creating FC liquidity risks in case of sector-wide deposit instability. Wholesale funding comprised a high 30% of total funding at end-2023 (28% net of QNB subordinated debt). QNBF issued USD300 million in Tier 2 debt in November 2023, while repaying an equal amount to its parent. Available FC liquidity, mainly comprising FC placements at foreign banks, swaps with the Central Bank of the Republic of Turkiye and unencumbered FC government securities, covered FC debt due within one year at end-2023. Its assessment also considers ordinary support from QNB. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of QNBF's LTFC IDR would follow a downgrade of both its SSR and the VR. A downgrade of the bank's LTLC IDR would follow a downgrade of the sovereign rating or an increase in its view of government intervention risk in LC. A downgrade of Turkiye's sovereign rating or an increase in its view of government intervention risk would likely lead to a downgrade of QNBF's SSR, although this is not its base case. QNBF's SSR is also sensitive to Fitch's view of QNB's ability and propensity to provide support if needed. QNBF's VR is sensitive to a downgrade of the operating environment, which could result from a sovereign downgrade, although this is not its base case given the Positive Outlook on the sovereign rating. The VR could also be downgraded due to a marked deterioration in the operating environment, particularly if this leads to a material erosion in FC liquidity buffers, for example, due to a prolonged funding-market closure or deposit instability, or of its capital buffers, if not offset by shareholder support. The bank's Short-Term IDRs are sensitive to adverse changes in their respective Long-Term IDRs. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of Turkiye's LT IDRs would likely lead to an upgrade of the bank's SSR and LT IDRs. A material improvement in Turkiye's external finances or in its net FX reserves position, resulting in a reduction in its view of government intervention risk in the banking sector, could lead to an upgrade of the bank's SSR and LTFC IDR to the level of Turkiye's LTFC IDR. An upgrade of the operating environment score for Turkish banks combined with the improvement of QNBF's core capitalisation while maintaining its FC liquidity buffers and business profile could lead to an upgrade of QNBF's VR. The bank's Short-Term IDRs are sensitive to positive changes in their respective Long-Term IDRs. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS QNBF's senior debt ratings are aligned with its IDRs as the likelihood of default on these obligations reflects that of the bank. The Recovery Rating of these notes is 'RR4', reflecting average recovery prospects in case of default. QNBF's subordinated notes' ratings includes one notch for loss severity and zero notches for non-performance risk relative to its LTFC IDR anchor rating. The one notch for loss severity, rather than default two notches, reflects its view that shareholder support (as reflected in the bank's LTFC IDR) helps mitigate losses and incorporates the fact that the bank's LTFC IDR is already capped at 'B' by its view of government intervention risk. The Recovery Rating of these notes is 'RR5', reflecting below average recovery prospects in case of default. The bank's 'AA(tur)' National Rating is driven by shareholder support and in line with foreign-owned peers. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES QNBF's senior unsecured debt ratings are sensitive to changes in the bank's IDRs. QNBF's subordinated debt rating is sensitive to a change in its LTFC IDR anchor rating. It is also sensitive to a revision in Fitch's assessment of potential loss severity in case of non-performance. The National Rating is sensitive to changes in QNBF's LTLC IDR and its creditworthiness relative to other Turkish issuers. VR ADJUSTMENTS The operating environment score of 'b' for Turkish banks is lower than the category implied score of 'bb' due to the following adjustment reasons: sovereign rating (negative) and macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkiye. The business profile score of 'b+' is below the implied 'bb' category implied score, due to the following adjustment reason: business model (negative). This reflects the bank's business model concentration in the high-risk Turkish market. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS QNBF has ratings linked to QNB's ratings. ESG CONSIDERATIONS The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on most Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on banks' credit profiles and is relevant to banks' ratings in combination with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- QNB Finansbank Anonim Sirketi LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Viability b Upgrade b- Shareholder Support b Affirmed b senior unsecured LT B Affirmed RR4 B senior unsecured LT B Affirmed RR4 B subordinated LT B- Affirmed RR5 B- senior unsecured ST B Affirmed B TURK EKONOMI: Fitch Affirms 'B' LongTerm FC IDR, Outlook Positive ----------------------------------------------------------------- Fitch Ratings has affirmed Turk Ekonomi Bankasi A.S.'s (TEB) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B' and Long-Term Local Currency (LTLC) IDR at 'B+'. The Outlooks are Positive. Fitch has also upgraded the bank's Viability Rating (VR) to 'b' from 'b-'. The VR upgrade reflects the upgrade of the Turkish operating environment score and Fitch's view that the bank's standalone credit profile is commensurate with the risks of the operating environment. KEY RATING DRIVERS Intervention Risk Caps IDR: TEB's LT IDRs are driven by potential shareholder support, as reflected in its Shareholder Support Rating (SSR). The LTFC IDR is capped at 'B', one notch below Turkiye's LTFC IDR due to government intervention risk. The LTLC IDR is one notch above the LTFC IDR, reflecting lower intervention risk in LC. The Positive Outlooks mirror those on the sovereign. The bank's 'B' Short-Term IDRs are the only option mapping to LT IDRs in the 'B' category. The bank's 'b' VR reflects the bank's concentrated operations in the challenging Turkish market and its only adequate core capitalisation. It also reflects its stable profitability through the cycle despite its modest franchise (end-2023: 2% of banking sector assets) and reasonable FC liquidity. SSR Capped: TEB's SSR reflects potential support from BNP Paribas S.A. (BNPP; A+/Stable), given TEB's strategic importance to, and integration and role within, the wider BNPP group and its small size relative to BNPP's ability to provide support. However, government intervention risk caps the SSR at one notch below the sovereign rating. This reflects its view that the likelihood of some form of government intervention that would impede the bank's ability to service its FC obligations remains higher than that of a sovereign default. TEB is 55% owned but fully controlled by TEB Holding, in which BNP Paribas Fortis SA/NV (A+/Stable) has a 50% stake. TEB is fully consolidated by BNP Paribas Fortis, a core subsidiary of BNPP. BNPP ultimately holds a 72.5% stake in TEB, including a directly held 23.5% stake. Improving Operating Environment: The bank's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and external financing pressures. Banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite the recent simplification efforts. Mid-Sized, Domestic Focused: TEB has a moderate domestic franchise (about 2% market shares) and ensuing limited competitive advantage. Lending is split between the corporate (end-2023: 43%), SME (29%) and retail (29%) segments. Below Sector Growth: TEB has historically pursued a fairly conservative growth strategy. The bank also has below sector average FC lending (end-2023: 26%), although this has increased recently and not all borrowers are likely to be fully hedged against lira depreciation. SME and retail exposures (29% of performing loans of each) increase asset-quality risks given the segment's sensitivity to macro-economic volatility. NPL Ratio Expected to Increase: TEB's impaired (Stage 3) loans ratio fell to 1.1% at end-2023 (end-2022: 1.7%; sector: 1.6%), supported by nominal high growth, collections and write-offs, while total reserves coverage increased. Asset-quality risks remain due to macroeconomic volatility, exposure to the SME segment (end-2023: 29% of gross financing), and moderate Stage 2 financing (7% at end-2023, 29% average reserves). Fitch expects the non-performing loan (NPL) ratio to increase to 1.5% at end-2024 given higher rates and a slowdown in the economy. Margin Tightening: TEB's annualised operating profit was 5.8% of risk-weighted assets in 2023 (2022: 7.6%), driven by trading income (customer-driven foreign-exchange (FX) transactions and derivatives) and fees despite below sector-average lending growth and the net interest margin tightening (2023: 7.2%; 2022: 10.4%) due to the impact of the regulations. Profitability remains sensitive to asset-quality risks and macro-economic and regulatory developments. Only Adequate Core Capitalisation: TEB's common equity Tier 1 ratio remained almost flat at 12.3% (10.8% net of forbearance) at end-2023 from 12.4% at end-2022, supported by internal capital generation. Capitalisation is supported by high pre-impairment operating profit (2023: equal to 11% of average loans), full reserves coverage of NPLs, and ordinary support from BNPP, but remains sensitive to Turkiye's economic outlook, lira depreciation and asset-quality risks. Mainly Deposit Funded: Customer deposits comprised 79% of total funding at end-2023, of which 35% were in FC and 16% were FX-protected lira deposits. Wholesale funding comprised 21% of total funding, of which 86% was in FC. Refinancing risks are manageable given TEB's reasonable FC liquidity. Nevertheless, FC liquidity, mainly comprising FX swaps with the Central Bank of Turkiye (access to which could become uncertain at times of stress), could come under pressure from sector-wide FC deposit instability or a prolonged loss of market access. Its assessment also considers ordinary support from BNPP. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade A downgrade of the bank's LTFC IDR would follow a downgrade of both its SSR and the VR. A downgrade of the bank's LTLC IDR would follow a downgrade of the sovereign rating or an increase in its view of government intervention risk in LC. A downgrade of Turkiye's sovereign rating or an increase in its view of government intervention risk could likely lead to a downgrade of TEB's SSR, although this is not its base case. TEB's SSR is also sensitive to Fitch's view of BNPP's ability and propensity to provide support if needed. TEB's VR is sensitive to a downgrade of the operating environment, which could result from a sovereign downgrade, although this is not its base case given the Positive Outlook on the sovereign rating. The VR could also be downgraded due to a marked deterioration in the operating environment, particularly if this leads to a material erosion in FC liquidity buffers, for example, due to a prolonged funding-market closure or deposit instability, or of its capital buffers, if not offset by shareholder support. The bank's Short-Term IDRs are sensitive to adverse changes in their respective Long-Term IDRs Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade An upgrade of Turkiye's LT IDRs would likely lead to an upgrade of the bank's SSR and LT IDRs. A material improvement in Turkiye's external finances or in its net FX reserves position, resulting in a reduction in its view of government intervention risk in the banking sector, could lead to an upgrade of the bank's SSR and LTFC IDR to the level of Turkiye's LTFC IDR. An upgrade of the operating environment score for Turkish banks combined with improvement in TEB's core capitalisation while maintaining its FC liquidity buffers and business profile would lead to an upgrade of the VR. The bank's Short-Term IDRs are sensitive to positive changes in their respective Long-Term IDRs. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS TEB's senior unsecured debt ratings are rated in line with the bank's FC IDRs, reflecting average recovery prospects in a default, as captured in the 'RR4' Recovery Rating of these notes. The subordinated debt ratings of 'B-' are notched down once, rather than its baseline two notches, from the LTFC IDR to reflect its view that shareholder support (as reflected in the bank's LTFC IDR) helps mitigate losses as well as the cap on the bank's LTFC IDR at 'B', reflecting government intervention risk. The notching for the subordinated notes includes one notch for loss severity and zero notches for non-performance risk (relative to the anchor rating of the LTFC IDR). TEB's 'AA(tur)' National Rating is driven by shareholder support and is in line with foreign-owned peers. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES TEB's senior unsecured debt ratings are sensitive to changes in the bank's IDRs. TEB's subordinated debt rating is primarily sensitive to a change in the anchor rating. It is also sensitive to a revision in Fitch's assessment of potential loss severity in case of non-performance. The National Rating is sensitive to changes in TEB's LTLC IDR and its creditworthiness relative to that of other Turkish issuers. VR ADJUSTMENTS The operating environment score of 'b' for Turkish banks is lower than the category implied score of 'bb', due to the following adjustment reasons: sovereign rating (negative) and macro-economic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and a high risk of FX movements in Turkiye. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS TEB's ratings are linked to BNPP's. ESG CONSIDERATIONS The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the bank's credit profile and is relevant to the rating in combination with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- Turk Ekonomi Bankasi A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur)Affirmed AA(tur) Viability b Upgrade b- Shareholder Support b Affirmed b senior unsecured LT B Affirmed RR4 B subordinated LT B- Affirmed RR5 B- senior unsecured ST B Affirmed B [*] Fitch Affirms 'B' LT IDRs of 7 Turkish NBFIs, Outlooks Pos. --------------------------------------------------------------- Fitch Ratings has affirmed the Long-Term Foreign-Currency Issuer Default Ratings (LTFC IDRs) of seven bank-owned Turkish non-bank financial institutions (NBFIs) at 'B'. The Outlook on the LTFC IDRs is Positive. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDRs of two foreign bank-owned NBFI subsidiaries at 'B+' with a Positive Outlook and maintained the Rating Watch Positive (RWP) on the LTLC IDRs of five privately-owned domestic bank subsidiaries, mirroring those on their respective parents'. The foreign-bank owned subsidiaries are Garanti Faktoring A.S, and Garanti Finansal Kiralama A.S. (Garanti Leasing). The privately-owned bank subsidiaries are Ak Finansal Kiralama A.S. (Ak Leasing), Is Finansal Kiralama Anonim Sirketi (Is Leasing), Yapi Kredi Faktoring A.S. (Yapi Faktoring), Yapi Kredi Finansal Kiralama A.O. (Yapi Kredi Leasing) and Yapi Kredi Yatirim Menkul Degerler A.S. (Yapi Kredi Yatirim). KEY RATING DRIVERS Support-Driven Ratings: All seven NBFIs' LT IDRs and Shareholder Support Ratings (SSRs) are equalised with those of their respective parents, reflecting Fitch's view that they are core and highly integrated subsidiaries. The Positive Outlooks and RWP mirror the same on their respective parents', which in turn reflect the impact of the improving operating environment on the credit profiles of their banking groups. Fitch is not able to assess the subsidiaries' intrinsic strength as all companies are highly integrated into their respective parents and their franchises rely heavily on their parents. The ratings are underpinned by potential shareholder support, but LTFC IDRs are capped at 'B' by their parents' LTFC IDRs, due to its assessment of potential intervention risk from the Turkish government. Highly Integrated Subsidiaries: The ratings of the NBFI subsidiaries reflect their close integration with their parents, the reputational risks of the subsidiaries' defaults for their broader groups, and their ultimate full or majority ownership by their respective parents. The subsidiaries offer core products and services (leasing, factoring and investment services) in the domestic Turkish market. High Support Propensity: The cost of support would be limited as the subsidiaries are small compared with their parents and their total assets usually do not exceed 2% of group assets. Together with the other support factors this means Fitch believes the parents' propensity to support remains very high. However, the ability to support is limited by the respective parents' creditworthiness as reflected in their ratings. National Ratings Stable: All subsidiaries' National Ratings and their Outlooks are equalised with their respective parents'. The affirmation of the National Ratings reflects its view that their creditworthiness in local currency relative to other Turkish issuers' remains unchanged. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The subsidiaries' Long-Term IDRs are sensitive to a downgrade of their parents' Long-Term IDRs or to a deterioration in the operating environment, which, for example, could be triggered by a sovereign downgrade. The RWPs on the LTLC IDRs reflect those on the parents' and Fitch will resolve the RWP on the subsidiaries once the RWPs on the parent banks are resolved. A rating action on the parents' National Ratings, including a revision due to National Rating recalibration, would also be mirrored in the subsidiaries' ratings. The ratings could be notched down from their parents' on material deterioration in the parents' propensity or ability to provide support or if the subsidiaries become materially larger relative to the parents' ability to support. The ratings could also be notched down from their parents' if the subsidiaries' strategic importance is materially reduced through, for example, a substantial reduction in operational and management integration or ownership, or a prolonged period of under-performance. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Upgrades of the parents' ratings or a favourable revision of the Outlooks would be reflected in the subsidiaries' ratings. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The entities' ratings are linked to their parent bank's ratings. ESG CONSIDERATIONS The ESG Relevance Score for Management Strategy for all seven NBFIs is '4', in line with their parents' score. The scoring reflects increased regulatory intervention in the Turkish banking sector, which hinders the operational execution of the parent's management strategy, constrains management's ability to determine strategy and price risk, and creates an additional operational burden for the respective parent banks. The alignment reflects Fitch's view of high integration. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Prior ----------- ------ ----- Is Finansal Kiralama Anonim Sirketi LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Rating Watch Maintained B LC ST IDR B Affirmed B Natl LT A+(tur) Affirmed A+(tur) Shareholder Support b Affirmed b Ak Finansal Kiralama A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Rating Watch Maintained B LC ST IDR B Affirmed B Natl LT A+(tur) Affirmed A+(tur) Shareholder Support b Affirmed b Yapi Kredi Finansal Kiralama A.O. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Rating Watch Maintained B LC ST IDR B Affirmed B Natl LT A+(tur) Affirmed A+(tur) Shareholder Support b Affirmed b Garanti Finansal Kiralama A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur) Affirmed AA(tur) Shareholder Support b Affirmed b Yapi Kredi Faktoring A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Rating Watch Maintained B LC ST IDR B Affirmed B Natl LT A+(tur) Affirmed A+(tur) Shareholder Support b Affirmed b Yapi Kredi Yatirim Menkul Degerler A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B Rating Watch Maintained B LC ST IDR B Affirmed B Natl LT A+(tur) Affirmed A+(tur) Shareholder Support b Affirmed b Garanti Faktoring A.S. LT IDR B Affirmed B ST IDR B Affirmed B LC LT IDR B+ Affirmed B+ LC ST IDR B Affirmed B Natl LT AA(tur) Affirmed AA(tur) Shareholder Support b Affirmed b =========================== U N I T E D K I N G D O M =========================== BEATTIE PASSIVE: Enters Administration Following Cash Flow Gap -------------------------------------------------------------- Business Sale reports that Beattie Passive Group Limited, a modular homes specialist based in Norwich, fell into administration after encountering a cash flow gap following delays to major projects. The group, which created the UK's first Passivhaus-certified build system, fell into administration despite solid growth and a strong order book of GBP4.5 million, Business Sale relates. According to Business Sale, Benjamin Wiles and Philip Dakin of Kroll Advisory were appointed as joint administrators of the group, along with four subsidiaries: Beattie Passive Operations Limited; Beattie Passive Build System Limited; Beattie Passive Construction Services Limited; and Beattie Passive Technical Limited. Operations at the group's 10,8000 sq metre factory have been paused since the group filed NOIs to appoint administrators last month, Business Sale notes. In the group's accounts for the year to December 31 2022, it reported turnover of GBP3.8 million, down from GBP9.1 million a year earlier, while it fell from an operating profit of GBP0.58 million to a loss of nearly GBP1.3 million, Business Sale discloses. CC & RJ: Enters Administration, Liabilities Totaled GBP355,776 -------------------------------------------------------------- Business Sale reports that C.C. & R.J. Emerson Limited, a freight transport business based in Leicester, fell into administration earlier this month, amid widespread distress in the UK haulage sector. Miles Needham and John Lowe of FRP Advisory were appointed as joint administrators, Business Sale relates. According to Business Sale, in the company's accounts to March 31, 2023, its fixed assets were valued at GBP3.1 million and current assets at just under GBP1.6 million. At the time, however, its net liabilities stood at GBP355,776. ENTAIN PLC: S&P Cuts Sr. Sec. Debt to 'BB-', Outlook Stable ----------------------------------------------------------- S&P Global Ratings lowered its ratings on U.K.-based Entain PLC and its senior secured debt to 'BB-' from 'BB'. The recovery rating on the debt remains at '3', indicating its estimate of about 65% recovery in the event of a default. The stable outlook reflects S&P's view that Entain will deliver its growth strategy, overcoming regulatory headwinds, such that revenue exceeds GBP5 billion by 2025, and S&P Global Ratings-adjusted margins improve toward 19%, while maintaining adequate liquidity. S&P expects the group's S&P Global Ratings-adjusted leverage to remain higher than 6.0x in 2024 and 2025. Absolute S&P Global Ratings-adjusted debt remains elevated at about GBP5.7 billion. S&P expects leverage to remain above 6.0x over the next 12-24 months due to the high contingent and deferred considerations (about GBP1.3 billion), especially the TAB NZ partnership (about GBP1.1 billion), put options related to Entain CEE (about GBP500 million), and the DPA settlement provision (about GBP600 million and declining each year following the four-year payment plan). S&P said, "In our previous base case, we expected EBITDA to increase beyond GBP1 billion as the group integrated acquisitions, which would have allowed it to deleverage toward 5.0x by 2024. However, we now believe that regulatory headwinds will continue to constrain deleveraging, unless there are changes to the group's capital allocation policy. We expect S&P Global Ratings-adjusted debt-to-EBITDA to be close to 6.5x in 2024 (in line with 2023), only falling toward 6.0x in 2025. If we exclude TAB NZ deferred consideration impact, it will be close 5.0x-5.5x in 2024 and 2025." Regulatory headwinds continue to curb the group's potential in traditional markets. The group has been significantly affected by stricter gambling regulation, especially in the U.K. following the White Paper resolution, in the Netherlands as a result of the deposit limits and advertising restrictions, and enforcement constraints in Germany. S&P said, "We expect these pressures to continue into 2024 and potentially 2025, reducing absolute EBITDA and cash flow generation in some of Entain's core markets. We expect these pressures to be offset by the increasing contribution of the recent acquisitions. Further, we expect the group to report revenue growth of about 2%-4% in 2024 and 2025--to more than GBP5 billion--and a group EBITDA margin increasing toward 19% from 18% in 2023, as the group benefits from cost savings from Project Romer flowing into the group's profit and loss." FOCF absorbed by below-the-line items reduces liquidity headroom and is alleviated by a fully available revolving credit facility (RCF). S&P said, "Despite the decline in FOCF generation in 2023 to about GBP210 million, due to higher interest expenses and capital expenditure, we expect the group's increasing EBITDA to translate into higher FOCF closer to GBP300 million in 2024 and 2025. Nevertheless, we anticipate that large items, such as expected dividends close to GBP200 million (including minority and preferred dividends), as well as the approximately GBP160 million outflow related to the DPA settlement, and cash flow related to previous mergers and acquisitions (M&A), will reduce the group's liquidity headroom in the short term. We acknowledge the group has a GBP635 million available RCF (GBP630 million of this is undrawn with only GBP5 million currently used for letters of credit) following the transaction in the first quarter of 2024. In February 2024, the group completed the issuance of a GBP300 million bridge loan, with an initial tenor of 12 months and the option to extend for up to 30 months, which is used to repay the outstanding amounts under the RCF. In addition to this, it upsized the existing RCF from GBP590 million to GBP635 million. This will allow the group to absorb any potential shortfall in liquidity, which we continue to assess as adequate." BetMGM will expand in the U.S., though it may take longer for Entain to benefit from up streamed dividends. Entain's joint venture in the U.S. with MGM remains a significant opportunity for the group. This is supported by product improvements powered by the Angstrom Sports acquisition, which will allow the group to enhance its data analytics. Despite more U.S. states regulating sports betting and internet gaming, we note that significant competitive challenges have led the group to lose market share across both these areas--to 14% from 18%--which is far from the medium-term target of 20%-25%. S&P said, "Although we do not consolidate BetMGM's results into Entain's accounts, we acknowledge that the group delivered net-to-gross ratio (NGR) in 2023 at the top of its guidance--of about $2 billion--and EBITDA turned positive in the second half of 2023. We do not expect BetMGM will require further support from the group, but we anticipate cash generated at BetMGM will be reinvested in the business to enhance technology and customer propositions in 2024, and only upstream minimal dividends to Entain toward 2025. This compares with our previous base case where we expected dividends in 2024. Dividends from BetMGM are included in our adjusted EBITDA metrics, therefore dividend contributions from 2025 will allow for further upside to Entain's EBITDA metrics." Uncertainty remains about the CEO's appointment and resulting strategy as well as capital allocation priorities. Stella David is currently serving as interim CEO after the departure of Jette Nygaard-Andersen in December 2023. S&P understands the group is actively looking for a new CEO, at which point Stella David will become the chair of the board of directors. Additionally, the group has created a new capital allocation committee to review its strategic options regarding potential acquisitions and disposals, as well as shareholder remuneration and investment priorities. At this stage, the group's strategic priorities over the upcoming 12-24 months remain unclear. S&P said "The stable outlook indicates that we expect Entain to continue delivering its growth strategy and offset the regulatory headwinds, leading to revenue higher than GBP5 billion by 2025 and group margins improving toward 19%. We also believe Entain can maintain an adequate liquidity profile, supported by the available RCF and access to capital markets. However, we believe the S&P Global Ratings-adjusted leverage ratio will remain constrained and elevated, higher than 6.0x, over the next 12-24 months. "We could lower the rating in the next 12 months if the company significantly underperformed our base case as a result of further regulatory headwinds or operational challenges. Furthermore, if the group pursued a more aggressive financial policy that resulted in weakening credit metrics." Specifically, S&P could lower the rating due to one or more of the following: -- Adjusted FOCF to debt were to remain below 5%, without a clear sustainable path; -- Adjusted Debt to EBITDA remained above 6.0x for a sustained period; or -- Liquidity fell below adequate or if there were any broader indications of a notable decline in the group's business performance and standing taken in aggregate, such as declining margins, market shares, or decreases in organic earnings. S&P could raise the rating over the next 12 months if the company showed continued deleveraging and strong cash flow generation, further supplemented by clarity on the group's strategic direction. This should reduce uncertainty regarding the CEO's appointment and the financial policy moving forward, such that: -- Adjusted debt to EBITDA reduces toward 5.0x with a certain path to deleveraging; -- Adjusted FOCF to debt continues to improve toward 10%; and -- The liquidity position improves, offsetting outflows from FOCF, including dividends, the DPA settlement, and payments and cash flow related to M&A activity. Social continues to be a negative consideration in S&P's analysis of Entain. Like most gaming companies, Entain is exposed to regulatory and social risks and the associated costs related to increasing player health and safety measures, prevention of money laundering, and changes to gaming taxes and laws. Recent regulatory changes in Germany, Australia, and the U.K. have significantly affected the group's NGR generation in those locations. S&P said, "Governance is a moderately negative consideration in our rating due to regulatory infractions that have resulted in hefty fines for the group. Most recently, the group agreed to pay a GBP585 million DPA settlement following an investigation into failings to prevent bribery in its Turkish business between 2011 and 2017, when they exited and sold the entity. Regarding ongoing investigations, we incorporate a degree of risk into our preexisting business and financial assessments of the group. Entain has a commitment to operate exclusively in regulated markets and strengthen its processes and accountability. Brazil has recently incorporated sports betting regulation, which makes Entain operative in 100% regulated or regulating markets." EUROMASTR 2007-1V: Fitch Affirms 'BB+sf' Rating on Class E Notes ---------------------------------------------------------------- Fitch Ratings has affirmed EuroMASTR Series 2007-1V Plc's notes and revised the Outlooks on the class B and C notes to Negative from Stable. Entity/Debt Rating Prior ----------- ------ ----- EuroMASTR Series 2007-1V plc Class A2 XS0305763061 LT AAAsf Affirmed AAAsf Class B XS0305764036 LT AAAsf Affirmed AAAsf Class C XS0305766080 LT AAAsf Affirmed AAAsf Class D XS0305766320 LT Asf Affirmed Asf Class E XS0305766676 LT BB+sf Affirmed BB+sf TRANSACTION SUMMARY The transaction is a securitisation of owner-occupied (OO) and buy-to-let mortgages originated in the UK by Victoria Mortgage Funding and now serviced by BCMGlobal Mortgage Services Limited. KEY RATING DRIVERS Negative Outlooks Reflect LF Access: The Negative Outlooks on the class B and C notes reflect increasing arrears, which have resulted in a liquidity facility (LF) lock out for the notes. Based on the March 2024 interest payment date (IPD), three-months plus arrears were 25.9%, surpassing the maximum allowable limit of 20% for any notes to access the LF. Fitch believes the elevated arrears levels is driven by lack of repossessions since 2019, which could have reduced the late arrears figures. As arrears are still increasing and the transaction is entering its tail end, Fitch tested a scenario assuming the notes cannot access the LF. This had an impact of one rating notch for the class B notes and two notches for the class C notes. Fitch expects to downgrade the notes in the short to medium term if elevated arrears persist. Any potential rating impact from not being able to access the LF is offset for the class A2 notes by credit enhancement (CE) from the general reserve fund and notes subordination. Asset Performance Weakening: The transaction's one-month plus and three-month plus arrears have increased over the past 12 months and were 36.1% and 25.9% as at the March 2024 IPD (19.7% and 14.9% a year ago). Fitch expects arrears to increase as higher mortgage costs for floating-rate borrowers in the pool are expected to persist. CE Has Declined: The notes benefit from the availability of non-amortising reserves. However, the notes' CE has declined moderately due to drawings on the reserve funds. CE for class A2 notes was 42.7% based on the March 2024 IPD, down from 43.7% at the last review. High Obligor Concentration: The transaction has high obligor concentration risk due to its small pool size (currently 358 borrowers). Granularity is expected to reduce as amortisation continues, leaving the transaction vulnerable to greater tail-end risk. Pro-rata Amortisation Ongoing: The transaction's reserve fund has been below the required amount since the June 2023 IPD and was 80.3% of the target amount based on the March 2024 IPD. Three months plus arrears are higher than the documented 20% that necessitates the switch to sequential amortisation. Amortisation has not switched to sequential contrary to Fitch's expectations. This represents a breach of the notes' amortisation trigger. Fitch tested scenarios where amortisation stays pro rata despite performance trigger breaches (until the allocation switches to sequential when less than 10% of the initial balance remains outstanding) and this had no impact on the notes' ratings. Fitch expect amortisation to switch to sequential from the next IPD following confirmation from the cash manager. Significant Tail Risk: The transaction is exposed to significant tail risk due to interest-only (IO) OO exposure, which accounts for 78% of the loan portfolio. IO OO loan maturity is concentrated between 2030 and 2032, while 4.6% of IO OO loans fall due less than five years before the notes' maturity date. About 3.2% of loans in the pool have missed their contractual maturities. Fitch therefore believes that repayment of class E notes is dependent on the loans meeting the bullet payment at (or shortly after) the contractual maturity date and in full. This is reflected in the affirmation of the class E notes at 'BB+sf' despite a higher model-implied rating. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The transaction's performance may be affected by changes in market conditions and economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce CE available to the notes. Fitch conducted sensitivity analyses by stressing each transaction's base case foreclosure frequency (FF) and recovery rate (RR) assumptions, and examining the rating implications on all classes of notes. A 15% increase in the weighted average (WA) FF and a 15% decrease in WARR indicates a downgrade of two notches for the class E notes. The sensitivity has no impact on the class A to D notes. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE and potentially upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the WAFF of 15% and an increase in the WARR of 15%. The results indicate upgrades of up to five notches for the class D notes and nine notches for the class E notes. The class A to C notes are at the highest achievable rating on Fitch's scale and cannot be upgraded. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool[s] and the transaction[s]. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pool ahead of EuroMASTR Series 2007-1V plc's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. ESG CONSIDERATIONS EuroMASTR Series 2007-1V plc has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to compliance risks including fair lending practices, mis-selling, repossession/foreclosure practices and consumer data protection (data security), which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. EuroMASTR Series 2007-1V plc has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to accessibility to affordable housing, 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. HALSALL CONSTRUCTION: Set to Go Into Administration After Losses ---------------------------------------------------------------- William Telford at DevonLive reports that locals on an unfinished Devon estate say they've been "left in the lurch" after a South West building firm announced it was going into administration. According to DevonLive, Halsall Construction Ltd has filed a notice of intention to appoint an administrator after making losses of GBP2.3 million -- leaving the Silver Hill estate in Tamerton Foliot in Plymouth only half built. The company -- headquartered in Bath but with offices in Exeter -- has been building 38 homes at Silver Hill in a joint venture between its parent company Halsall Homes and Plymouth Community Homes Regeneration Ltd (PCHR), a division of Plymouth Community Homes (PCH), DevonLive discloses. Only 17 of the houses have been completed and residents have complained of problems with the ones that are finished, DevonLive notes. Halsall's most recently published accounts, for 2022, show the firm suffered a GBP2.3 million loss, with revenue down by about a third to GBP29 million, DevonLive relays. According to DevonLive, Andrew Hook, a partner at business consultancy Begbies Traynor, said there had been a notice of intention to appoint administrators and said this was likely to happen by the end of April. He added: "I confirm that Julie Palmer and I are the proposed administrators." At Silver Hill it has been working with PCHR to build 38 homes, of which 28 are for open market sale and 11 for affordable housing, of which five will be rented and six in shared ownership. None of the five intended for affordable rent are completed. Three of the shared ownership homes have been completed and sold, and 14 of the open market homes have been sold. PCH secured grant funding from Homes England to purchase seven of the remaining available open market homes so these could also be made available for shared ownership, DevonLive notes. Residents at Silver Hill have received a letter from PCH saying Halsall is responsible for dealing with any defects in the homes already built. According to DevonLive, Nick Jackson, PCH's executive director of business services and development, said: "We are sad to learn Halsall Construction has filed a notice of intention to appoint an administrator, and for the situation facing staff at both Halsall Construction and its parent company, Halsall Homes. "PCHR is engaged in a joint venture with Halsall Homes on the Silver Hill scheme in Tamerton Foliot to deliver 38 homes for both open market sale and affordable housing. Construction on the 21 units still under construction is at varying stages. "We will work with Halsall Homes to see if there is a solution to ensure work on site at Silver Hill can be completed. In the meantime, we are doing our best to support residents. "The warranty provider for the completed homes at Silver Hill is the National House Building Council (NHBC). The responsibility for resolving any defects in the 17 occupied properties rests with Halsall Homes under the joint venture agreement with PCHR." SELINA HOSPITALITY: Releases New Investor Presentation ------------------------------------------------------ Selina Hospitality PLC announced that it has released a new investor presentation on its website, investors.selina.com. The new presentation has summary information about the company and includes new and updated information, such as: * Updated list of investments highlights * Information on how Selina connects with its guests, including updated net promoter score (NPS) benchmarking * Overview information about Selina's new strategic investment partner, Osprey International Limited * Overview of the recently completed capital raise and balance sheet restructuring * Update on the path to profitability and recent progress "With the addition of Osprey, our new strategic investment partner, and the recent capital funding and balance sheet restructuring transaction completed, we believe we are better positioned to succeed as we look forward to the future," said co-founder and CEO Rafael Museri. "As reflected in our updated investor presentation, we have made progress on our path to profitability and we have strengthened our board and management team. We believe we have a compelling investment case and look forward to meeting new and existing investors over the coming months." A copy of the investor presentation is available at https://tinyurl.com/3adp9t6t About Selina Hospitality PLC United Kingdom-based Selina (NASDAQ: SLNA) is one of the world's largest hospitality brands built to address the needs of millennial and Gen Z travelers, blending beautifully designed accommodation with coworking, recreation, wellness, and local experiences. Founded in 2014 and custom-built for today's nomadic traveler, Selina provides guests with a global infrastructure to seamlessly travel and work abroad. Each Selina property is designed in partnership with local artists, creators, and tastemakers, breathing new life into existing buildings in interesting locations in 24 countries on six continents -- from urban cities to remote beaches and jungles. SELINA HOSPITALITY: Reports Updates to Executive Leadership Team ---------------------------------------------------------------- Selina Hospitality PLC announced recent updates to its executive leadership team. Gadi Hassin has been promoted to Chief Operating Officer, where he oversees the operational, commercial and financial performance of Selina's hotel portfolio. Hassin joined Selina in 2020 as Managing Partner of the APAC region where he was responsible for significant regional expansion and operational excellence. As COO, Hassin will leverage his 30 years of experience in the hospitality industry across 4 continents and 7 countries, including time at Hyatt Hotels Corporation, The Ritz Carlton, and the Ovolo Group. "I am excited to be named Chief Operating Officer of Selina," said Gadi Hassin. "We have an incredible portfolio of hotels and I look forward to supporting and guiding the operations leadership team to drive excellence and improvement. We have the potential to improve the performance of our existing portfolio and we have a clear path on how to do that. My focus will be on driving operational excellence across the organization, ensuring we deliver an exceptional experience for our guests while paving the path to profitability." Rafael del Castillo has been appointed as Selina's first Chief Revenue Officer, where he will be responsible for driving increased revenue performance at Selina's hotel portfolio. His top two priorities will be to continue the traction to optimize occupancy levels and to grow the food and beverage business. Prior to Selina, del Castillo held leadership positions at a number of leisure and lodging companies, including managing marketing, sales, and product development at Valentin Hotel Group, overseeing the hotel product team across Latin America at Expedia Group, and leading market strategy for Marriott International Inc. in Mexico. "I am excited to join Selina at this time. After spending time with Rafael and Daniel, I believe in the enormous potential this brand can have, not only for growth with the existing hotel base, but to eventually open more Selinas in attractive markets once the Company resumes expansion." Emilo Gracia was appointed as Chief People Officer of Selina. Gracia will oversee Selina's more than 2,000 employee-base, training programs, compensation and benefits, and recruiting of corporate and hotel level roles. Prior to Selina, Gracia served as VP of Culture & Human Resources at the World Travel & Tourism Council (WTTC), where he played a pivotal role in developing strong leadership and coaching cultures in alignment with business objectives. Prior to his role at WTTC, Gracia held key international leadership positions at renowned organizations such as Michael Kors, Christian Louboutin and Value Retail, where he spearheaded strategic global HR initiatives and talent management programs to support business growth. "This is a great time to join Selina. I believe that with my background I can provide immediate value to many core HR processes, which can help get Selina back to a foundation from which it can grow. I found the brand captivating as a guest and look forward to the future." In addition to welcoming new leadership team members, Selina extends its sincere thanks to Lena Katz, former Chief Technology Officer, and Sam Khazary, former Executive Vice President and Global Head of Corporate Development, for their valuable contributions to Selina. Their leadership and dedication were instrumental to Selina's initial growth and development. We wish them all the best in their future endeavors. The existing leadership team will assume these roles and responsibilities. "We are grateful to Lena and Sam for their contributions, and we are excited to see what the future holds for them," said Rafael Museri, CEO & Co-founder of Selina. "The promotion of Gadi Hassin to COO reflects his exceptional leadership and operational expertise. We are confident that Selina is well-positioned for continued innovation and success with Gadi, as well as the new additions of Rafael del Castillo as Chief Revenue Officer and Emilo Gracia as Chief People Officer. Our strengthened leadership team is now set and positioned well to keep Selina moving in the right direction." About Selina Hospitality PLC United Kingdom-based Selina (NASDAQ: SLNA) is one of the world's largest hospitality brands built to address the needs of millennial and Gen Z travelers, blending beautifully designed accommodation with coworking, recreation, wellness, and local experiences. Founded in 2014 and custom-built for today's nomadic traveler, Selina provides guests with a global infrastructure to seamlessly travel and work abroad. Each Selina property is designed in partnership with local artists, creators, and tastemakers, breathing new life into existing buildings in interesting locations in 24 countries on six continents -- from urban cities to remote beaches and jungles. SYNTHOMER PLC: Moody's Rates New Senior Unsecured Notes 'B1' ------------------------------------------------------------ Moody's Ratings assigned a B1 rating to Synthomer plc's (Synthomer, the group or the company) proposed backed senior unsecured note issuance (the new notes) for an amount up to EUR350 million and a tender offer with a maximum acceptance of EUR370 million. The existing B1 long-term corporate family rating and B1-PD probability of default rating of Synthomer and the B1 rating on the EUR520 million backed senior unsecured notes are unaffected by this action. The outlook is negative. The proposed notes will be issued by Synthomer plc and guaranteed by certain wholly owned subsidiaries. The notes will rank pari passu with all of the group's existing instruments rated in line with the B1 long-term corporate family rating and the backed senior unsecured instrument rating of Synthomer plc. Moody's considers Synthomer's new issuance will substantially address the current refinancing risk under the EUR520 million backed senior unsecured debt, a credit positive. The proceeds from the issue of the new notes and around EUR20 million of cash on the balance sheet will be used to purchase notes currently outstanding under the EUR520 million backed senior unsecured notes due in July 2025, as part of a refinancing transaction. The transaction is to be completed no later than April 19, 2024. The new notes will be issued with a 5-year tenor. RATINGS RATIONALE The ratings reflect the company's (1) position as a leading manufacturer of high-performance, specialty polymers and ingredients for coatings, construction, adhesives, and healthcare end markets with the technological capabilities to meet the growing demand for sustainable products (2) a relatively diversified product portfolio and (3) conservative financial policy, with a publicly stated priority to reach a reported net leverage target of 1.0x - 2.0x over the medium term, in favour of shareholder returns and further debt-funded acquisitions. The ratings also reflect (1) the company's relatively modest size compared with peers and a degree of geographical concentration remaining in Europe (2) weak earnings performance in 2023 reflecting challenging trading conditions exacerbated by price-competitive exports from China (3) no visibility for earnings improvement expected for 2024, contributing to high point-in-time leverage with a protracted trajectory to deleveraging and (4) the integration risks associated with the Adhesive Technologies acquisition. The rating agency expects Moody's adjusted leverage for year-end 2023 of around 7x. High point-in-time leverage reflects weak earnings and the acquisition debt related to the Adhesives Technologies business. Moody's expects the company to be Moody's-adjusted negative free cash flow (FCF) of around GBP30 million in 2024, underpinned by full-year capital spending of around GBP80 million-GBP90 million, interest costs of around GBP60 million-GBP70 million, and a very moderate cash outflow associated with working capital in the Moody's base case. This will inhibit any meaningful reduction in debt in 2024. The company has indicated further asset sales and continued implementation of cost savings programmes into 2025. The company has indicated the residual amount outstanding under the EUR520 million backed senior unsecured bond, after the refinancing transaction, will be around EUR150 million and will be repaid at the July 2025 maturity from cash on the balance sheet. Moody's expects these factors will contribute to deleveraging through 2025. LIQUIDITY The company's liquidity position is adequate. The company has reported cash in the bank as of December 2023 of GBP371 million and a fully undrawn $400 million revolving credit facility (RCF) which was subsequently amended to EUR300 million in March 2024, maturing 2027. The RCF and its UKEF facilities contain a net debt/EBITDA covenant that requires no greater than 6x as of June 30, 2024, with covenant step-ups to no greater than 5.75x EBITDA in December 2024, 5.0x June 2025, 4.75x in December 2025. The company reported June 2023 5.5x net leverage (for covenant purposes) and proforma the September 2023 rights issue 4.2x for December 2023. STRUCTURAL CONSIDERATIONS The B1 rating of the EUR520 million backed senior unsecured notes is in line with the B1 CFR as the notes rank pari passu with all of the company's financial debt, including the two committed UK Export Finance (UKEF) facilities of EUR288 million and $230 million respectively, both of which are 80% guaranteed by the UK Government, maturing October 2027 and the EUR300 million RCF. The new senior unsecured notes will rank pari passu with all financial debt obligations of the group. The financial covenants in the UKEF facilities are aligned with the financial covenants in the RCF. OUTLOOK The negative outlook reflects the risk that the company's credit metrics might not remain at levels in line with its B1 rating over the next 12-18 months. Moody's expects end-market demand in 2024 will remain subdued with no visibility for an improvement in trading conditions. The company still faces a refinancing risk on the EUR520 million bond until the issue of the new notes is completed to reduce the bond by around EUR370 million combined with the potential for a negative free cash flow if earnings do not improve. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING Upward pressure on the rating could develop if trading conditions and operational performance improve and profitability is reflected in Moody's adjusted EBITDA margin approaching 10%, lowering its Moody-adjusted debt/EBITDA to 4.5x or below on a sustained basis, generating a positive Moody's adjusted FCF while maintaining a good liquidity profile. Downward pressure on the rating could develop if operating performance fails to improve or if Moody's-adjusted debt/EBITDA remains above 5.5x for a prolonged period, management takes actions that are not aligned with the publicly stated commitment to prioritising deleveraging, a sustained negative FCF, the company's liquidity position deteriorates significantly or the company fails to address the bond maturity in a timely manner. PRINCIPAL METHODOLOGY The principal methodology used in this rating was Chemicals published in October 2023. COMPANY PROFILE Synthomer plc is a leading supplier of high-performance specialty polymers and ingredients for coatings, construction, adhesives, and healthcare end markets. Synthomer operates 36 plants in 24 countries, with a significant presence in Europe, the US, the Middle East, and Asia. Following the acquisitions of OMNOVA Solutions Inc. and Adhesive Technologies, the enlarged group has around 4,200 employees and 6,000 customers. Synthomer is headquartered and listed in the UK with a market capitalisation of £413 million as of April 8, 2024. SYNTHOMER PLC: S&P Rates New EUR350MM Senior Unsecured Notes 'BB-' ------------------------------------------------------------------ S&P Global Ratings assigned its 'BB-' issue rating to Synthomer PLC's proposed senior unsecured notes of up to EUR350 million, due in April 2029. The recovery rating on the proposed notes is '3', indicating its expectation of substantial recovery (50%-70%; rounded estimate: 65%) in the event of a payment default. The transaction addresses the maturity of Synthomer's EUR520 million bond in July 2025 in a timely manner, before the bond becomes a short-term liability. The proceeds of the proposed issuance, along with cash on balance sheet, will be used to partially refinance up to EUR370 million of the existing bond. Synthomer's management has taken decisive actions to reduce leverage and support liquidity, including: a GBP276 million equity raise in 2023; the disposal of its film and laminates business in February 2023; the cancellation of dividends; a cut in capital expenditure; and a focus on working capital, cash conversion, and margin protection measures. S&P estimates that the company will maintain sufficient cash on balance sheet to repay the remaining EUR150 million of the existing bond when it comes due in July 2025. In addition, Synthomer agreed with its lenders under the RCF and the U.K. export finance facilities that are subject to a net leverage ratio covenant, to extend the period of temporary covenant relaxation as follows: -- Not more than 6.0x in June 2024; -- Not more than 5.75x in December 2024; -- Not more than 5.0x in June 2025; and -- Not more than 4.75x in December 2025. The extensions in 2025 are conditional on the transaction. Issue Ratings--Recovery Analysis Key analytical factors -- S&P assigned its 'BB-' issue credit rating to the proposed EUR350 million senior unsecured notes due 2029. -- The recovery rating is based on our expectation of meaningful recovery prospects of 50%-70% (rounded recovery estimate of 65%) in the event of a payment default. -- The improved recovery percentage reflects the lower amount of debt in the structure--pro forma the transaction--as S&P expects that the remaining EUR150 million stub of the EUR520 million senior unsecured notes due 2025 (also rated 'BB-') will be repaid using cash on balance sheet. -- The EUR300 million multicurrency RCF (maturing in July 2027) and the EUR288 million and $230 million export finance facilities (both maturing in October 2027) rank pari passu with the senior notes but are not rated. -- The notes are guaranteed by entities accounting for about 65% of Synthomer's consolidated EBITDA and 56% of its assets. -- The notes and guarantees rank pari passu with any of the issuer's and guarantors' existing and future unsecured obligations that are not contractually subordinated. -- The recovery rating is constrained by about GBP84 million of prior-ranking factoring liabilities, which S&P assumes to be outstanding at default. -- In our simulated default scenario, S&P assumes that Synthomer's operating performance would deteriorate materially in the wake of an economic downturn that causes a structural and protracted decline in end-market demand for the company's products. In this scenario, margins would shrink, and EBITDA would decline to levels insufficient to cover the fixed-charge obligations, including interest expenses and maintenance capex. -- S&P values Synthomer as a going concern, thanks to its leading position in the nitrile butadiene rubber (NBR) latex market and as a provider of coatings solutions, additives, and adhesive solutions. It believes that lenders would achieve the highest recovery through a reorganization of the company, rather than through liquidation. Simulated default assumptions -- EBITDA at emergence: about GBP140 million -- EBITDA multiple: 5.5x -- Year of default: 2028 -- Jurisdiction: U.K. Simplified waterfall -- Gross enterprise value: GBP770 million -- Total collateral value after 5% administrative expenses: GBP732 million -- Estimated priority claims (outstanding factoring program): GBP86 million* -- Remaining recovery value: GBP646 million -- Total senior unsecured debt: GBP972 million* -- Recovery on the senior unsecured notes: 50%-70% (rounded estimate: 65%) -- Implied recovery rating on the senior unsecured notes: '3' *All debt amounts include six months of prepetition interest. Securitization facility assumed 50% drawn at default. RCF assumed to be 85% drawn at default. =============== X X X X X X X X =============== [*] BOOK REVIEW: The Turnaround Manager's Handbook -------------------------------------------------- Author: Richard S. Sloma Publisher: Beard Books Soft cover: 226 pages List Price: $34.95 Review by Gail Owens Hoelscher In the introduction to this book, the author suggests that an accurate subtitle could be "How to Become a Successful Company Doctor." Using everyday medical analogies throughout, he targets "corporate general practitioners" charged with the fiscal health of their companies. As with many human diseases, early detection of turnaround situations is critical. The author describes turnaround situations as a continuum differentiated by length of time to disaster: "Cash Crunch," "Cash Shortfall," "Quantity of Profit," and "Quality of Profit." The book centers on 13 steps to a successful turnaround. The steps are presented in a flowchart form that relates one to another. Extensive data collection and analysis are required, including the quantification of 28 symptoms, the use of 48 diagnostic and analytical tools, and up to 31 remedial actions. (In case the reader balks at the effort called for, the author points out that companies that collect and analyze such data on a regular basis generally don't find themselves in a turnaround situation to begin with!) The first step is to determine which of 28 symptoms are plaguing the company. The symptoms generally pertain to manufacturing firms, but can be applied to service or retail companies as well. Most of the symptoms should be familiar to the reader, but the author lays them out systematically, and relates them to the analytical tools and remedial actions found in subsequent chapters. The first seven involve the inability to make various payments, from debt service to purchase commitments. Others include excessive debt/equity ratio; eroding gross margin; increasing unit overhead expenses; decreasing product line profitability; decreasing unit sales; and decreasing customer profitability. Step 2 employs 48 diagnostic and analytical tools to derive inferences from the symptom data and to judge the effectiveness of any proposed remedy. The author begins by saying ". . . if the only tool you have is a hammer, you will view every problem only as a nail!" He then proceeds to lay out all 48 tools in his medical bag, which he sorts into two kinds, macro- and micro- tools. Macro-tools require data from several symptoms or assess and evaluate more than a single symptom, whereas micro-tools more general-purpose in function. The 12 macro-tools run from "The Art of Approximation" to "Forward-Aged Margin Dollar Content in Order Backlog." The 36 micro-tools include "Product Line Gross Margin Percent Profitability," Finance/Administration People-Related Expenses As Percent Of Sales," and "Cumulative Gross $ by Region." Next, managers are directed to 31 possible remedial actions, categorized by the fourstage turnaround continuum described above. The first six actions are to be considered at the Cash Crunch stage, and range from a fire-sale of inventory to factoring accounts receivable. The next six deal with reducing people-related expenses, followed by 13 actions aimed at reducing product- and plant-related expenses. The subsequent five actions include eliminating unprofitable products, customers, channels, regions, and reps. Finally, managers are advised on increasing sales and improving gross margin by cost reduction in various ways. The remaining steps involve devising the actual turnaround plan, ensuring management and employee ownership of the plan, and implementing and monitoring the plan. The advice is comprehensive, sensible and encouraging, but doesn't stoop to clich, or empty motivational babble. The author has clearly operated on patients before and his therapeutics have no doubt restored many a firm's financial health. ********* 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 2024. 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 * * *